Selective Cuttings

U.S. tax credits continue to pay out: CBPC and AFMTC

June 21, 2013

Firms with U.S. kraft pulp operations are continuing to benefit from the ‘black liquor’ tax credit 4 years after the original credit was discovered.  Currently, U.S. firms are reaping additional revenues through swapping credits between various tax programs.

The original Alternative Fuel Mixture Tax Credit (AFMTC) was worth $0.50 per gallon of black liquor (a by-product of wood pulping process) produced in 2009. At least 21 publicly traded companies received a total of $6.5 billion under AFMTC at the time.  Including an estimate for the benefits to private companies raises this total to around $9 billion. On July 9, 2010, the IRS Office of Chief Counsel released legal advice concluding black liquor also qualified for the Cellulosic Biofuel Products Credit (CBPC) at $1.01 per gallon. However, unlike the AFMTC the CBPC is a credit against a company’s federal tax liability, rather than a direct payment, though the credit may be carried forward through 2016. Furthermore, it remains unclear whether the CBPC contributes to federal taxable income.

Further IRS rulings in 2010 determined that firms may qualify for both AFMTC and CBPC in a given year, but the same gallon of black liquor could not receive subsidy under both programs. If a company chooses to apply for CBPC credits, it must re-pay AFMTC funds corresponding to the same volume of black liquor, with interest. This enables companies make the optimal use of the two credits, taking into account of uncertainties around future federal taxable income, the taxability of the AFMTC, future liquidity and cash flow.

As of end of 2012, two of the firms that originally received AFMTC support (SmurfitStone, Temple-Inland) have been acquired by other companies, so only 19 of the original publicly traded beneficiaries remain. Out of these 19 publicly traded companies, 12 have reported either receiving CBPC credits or converting part of their AFMTC funds to CBPC, leveraging an additional US$800 million.  When extrapolating this figure out to include privately held firms, the total benefits to date from CBPC are likely to be well over $1 billion. But this total has not yet stopped rising.  Several firms have yet to disclose their intentions for their CBPC opportunity.  And firms have until 2016 to continue to swap AFMTC credits for the higher-priced CBPC credits. However, given the large losses that some firms have accumulated in recent years (which they can also use to offset future federal taxes) it is likely that only firms that have been consistently profitable will apply. Companies tend to treat the net benefits of CBPC as net after-tax revenue and blend it with other net income. Therefore they could use it at their will, including but not limited to, investing to improve efficiency or capacity, paying dividends, and paying pension obligations.

Four years later, the original U.S. black liquor subsidies continue to have an impact on global pulp and paper markets.

Table displays the total AFMTC credit and the net CBPC benefits of publicly traded companies1

Publicly traded company Total AFMTC credit (US$) Net CBPC benefits (minus AFMTC, income tax, interests, other costs)
AbitibiBowater Inc. 276,000,000  
Appleton 17,700,000  
Boise Inc. 207,600,000  
Buckeye Technologies 131,900,000 76,000,000
Clearwater Paper Corporation 170,600,000 46,000,000
Domtar Corporation 498,000,000 127,000,000
Glatfelter 107,800,000 27,000,000
Graphic Packaging International 134,800,000  
International Paper Co. 2,100,000,000 123,000,000
KapStone 164,000,000 84,000,000
MeadWestvaco 375,000,000 33,000,000
NewPage Corporation 304,000,000  
Packaging Corp. of America 185,400,000 48,000,000
Rayonier 205,200,000 42,000,000
RockTenn Co. 55,400,000 28,000,000
Sappi Fine Paper 136,000,000  
Smurfit-Stone2 654,000,000 N/A
Temple-Inland Packaging3 218,000,000 N/A
Verso Paper Corp. 238,900,000  
Wausau Paper 16,200,000 14,000,000
Weyerhaeuser Co. 344,000,000 149,000,000
Sub Total 6,540,500,000 797,000,000

1Numbers are quoted from companies’ financial reports. As companies are still making tax adjustments, as well as conversion between AFMTC and CBPC, the numbers will keep evolving over time.
2Acquired by Rock-Tenn in January 2011 for $3.5 billion.
3Acquired by International Paper in February 2012 for $3.7 billion.