Credit Guide

Card Consolidation Credit Debt For more than two decades, ever since President Jimmy Carter donned a cardigan sweater and challenged Americans to wean themselves of their dependence on imported oil, companies have enjoyed a rich tax credit for investments in so-called synfuels oil alternatives made from America's abundant stores of coal.

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Credit Union Now, though, the government is threatening to rescind billions of dollars' worth of tax credits claimed not just by owners of plants that make synfuel but by their corporate investors like Marriott International, the hotel operator, and the American International Group, the insurer.

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Merchant Credit Guide Co The Internal Revenue Service said last week that it was investigating the synthetic fuel industry, trying to determine whether the credits were justified. Besides Marriott and A.I.G., businesses that have claimed the credit include big energy companies like Teco Energy, the PPL Corporation and DTE Energy; Rex Stores, a consumer electronics retailer; and a host of little-known private partnerships and investment firms, including Carbontronics and Palmer Capital.

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Apply Online For Credit Card One of the largest synthetic fuel producers, Progress Energy, a utility based in Raleigh, N.C., said that it alone had generated $950 million in tax credits since entering the business in 1998.

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By Card Credit Debt Debt Guide Under a 1980 federal law, companies like these that own all or part of synthetic fuel plants can claim a tax credit of about $26 per ton of fuel produced about the price of a ton of regular coal. Without the tax credits, the plants lose money.

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Credit Repair Among other requirements, companies must demonstrate through laboratory tests that their coal-based synthetic fuel has undergone a "significant chemical change" while being made. At the heart of the I.R.S. review is the question of whether such a transformation takes place.

Active Credit Credit Guide The law was intended for producers to transform a byproduct of coal production into usable energy. Few, if any are still doing that, though. Instead, they manufacture synthetic coal typically by spraying regular coal with substances like latex, asphalt derivatives or pine-tar resin.

Credit Score "If the I.R.S. reverses its policy, then the earnings for several of these companies could fall substantially," said Paul D. Patterson, an energy analyst at Glenrock Associates, an energy consulting firm in New York, who has studied the issue.

Bad Car Credit Guide Loan In announcing its inquiry, the I.R.S. said that it might decline to grant future credits Hill & Associates, an energy consulting firm in Annapolis, Md., had projected that about $3 billion in credits would be claimed next year or revoke past credits. Synfuel producers and most analysts said that revoking credits seemed unlikely. But if carried out, that threat could force companies to restate previous earnings and leave them with bills for back taxes totaling hundreds of millions of dollars.

Bad Credit Loan After the tax credits were created, companies found that production with waste coal was not profitable, even with the credits, and output of the synthetic fuel was mostly dormant until 1998 or so. Then, some producers discovered that using regular coal made the business profitable under the credits.

Credit Definition Derivative As tax-credit-hungry companies from outside the energy sector bought or built plants, output soared, to more than 50 million last year from around five million tons in 1999, according to Platts Research and Consulting in Boulder, Colo. About 55 plants mostly in Appalachia, the Midwest and the Southeast manufacture synthetic coal.

Bad Credit Mortgage Critics of the credits, including some traditional coal mining concerns, criticize the manufacturing methods as alchemical chimera that does nothing to improve or substantially change already-usable coal. Nor, they say, do these plants provide the environmental benefits contemplated by the Carter-era legislation.

The Insider Guide To Credit "We're really not generating the benefits that the law intended," said Jim L. Thompson, manager of Coal and Energy Price Report and U.S. Coal Review, two trade publications.

Business Credit Card Producers counter that they are following the letter of the law regarding chemical change, adding that they provide utilities with a good energy source.

Banker Complete Credit Guide The I.R.S. review began with questions over test results at two Kentucky plants owned by Progress Energy's Colonna synthetic-fuel subsidiary. Progress's synfuel output accounted for 15 percent of earnings last year. On Wednesday, the PPL Corporation, an energy company based in Allentown, Pa., disclosed that the review could hurt its future earnings.

Credit Card Application Sharon A. Madden, director of investor relations for Headwaters Inc., an energy technology company based in Draper, Utah, that owns and licenses some synfuel plants, said she thought every such plant in the country would soon come under I.R.S. scrutiny.

Credit Guide Managing Shares of Headwaters have sold off on word of the government inquiry. On June 11, when Headwaters disclosed that it had become aware of the I.R.S. action, the stock fell more than 15 percent, to $16.77 from $19.92 a share. It closed Thursday at $15.04.

Credit Card Offer Twice over the last 10 or so years, the I.R.S. announced similar or related investigations but backed down. Still, some producers have revised their earnings and dividend forecasts downward in recent months. Equity and credit analysts have downgraded the ratings of some operators of synfuel plants, including Teco, and several companies have attracted short sellers, who bet that stocks will fall.

Merchant Credit Guide Company A less-noted effect of the new I.R.S. scrutiny is that the once-booming market for sales of synthetic coal plants or interests in them has frozen up. Producers often generate more tax credits than they can use, and so they have sought in recent years to sell portions of their interests, a process known as monetization.

Bad Credit By increasing revenues, such sales also allow producers to use more of the credits generated by their remaining interests. Perhaps half of all tax credits are for sale, Mr. Thompson, the trade publication editor, said.

Collection Collection Complete The halt in sales of plant interests has come because the I.R.S., in its announcement last week, said it was not going to issue so-called private letter rulings, or P.L.R.'s, to synfuel producers during its investigation. Such letters certify that a plant performs "substantial chemical change" on coal, as required by law, and is eligible for the credits. Though a letter is not required for a company to claim the credit and while far from all producers have one no potential buyer now wants to be without one.

Credit Counseling Among the companies hardest hit is Teco Energy, an electric and gas utility based in Tampa, Fla., that operates two synthetic coal plants in Kentucky.

Complete Credit Guide Higher Teco reduced its tax bill and bolstered its earnings by some $250 million over the three years that it has run the plants, according to its latest annual report. Of that amount, it carried forward $166 million to be applied against its future taxable income. Last year, the tax credits accounted for 23 percent of Teco's $298 million in net income, according to Laura D. Plumb, a company spokeswoman.

Chase Credit Card Wanting to raise cash fast to help pay its substantial debt, the company planned in April to sell about 90 percent of its interest in the Kentucky plants, Ms. Plumb said. Instead, money from one unnamed buyer with a deal for a 49 percent interest is languishing in escrow while the I.R.S. conducts its inquiry. Ms. Plumb acknowledged that an imminent sale of the remaining 51 percent was unlikely.

Complete Credit Guide Hedging Other companies face similar hurdles to selling interests to raise cash.

Bad Credit Home Loan "We cannot close sales until the I.R.S. has agreed to issue the P.L.R.'s," said Peter J. Pintar, director of investor relations for DTE, a power company based in Detroit that owns seven plants, has interests in two others and is trying to sell stakes in up to five of them. DTE has generated some $256 million in tax credits since 2000 from the plants.

Bad Credit Personal Loan Keith Poston, a spokesman for Progress Energy, said, "We've been trying to monetize our synfuel interests in the past year, but now that's an impossibility."

Credit Score Guide Marriott International said last week that it had completed its previously announced sale of a 50 percent stake in its synthetic-coal interests to an unnamed financial institution for $25 million and a cut of any future profits.

Online Credit Report But that deal could be reversed. As in many similar transactions, the buyer has the option to return the stake, in this case by December, if it cannot obtain a favorable private letter ruling from the I.R.S.

Credit Guide Marriott, which paid $46 million in 2001 for four plants in Alabama and Illinois, sought to sell the interest to raise cash amid a slump in the hotel business. The plants generated $159 million in tax credits for the first quarter of 2003 and accounted for $19 million, or 11 percent, of the company's $166 million in earnings for the period.

Bad Credit Debt Consolidation Charlotte B. Sterling, a spokeswoman for Marriott, which is based in Bethesda, Md., said the company had "total confidence in the scientific validity of its production processes" but declined to comment on the potential impact of the I.R.S. review.

Credit Guide Process But scientists say there was debate in their ranks over what might constitute "significant chemical change."

Online Credit Card Application "Coal chemistry is very complex," said Craig N. Eataugh, president of Combustion Resources, a fuels consulting and testing company based in North Provo, Utah. "Different tests will look at different parts of the chemistry. If certain parts of the coal chemistry are changed more than others, then the test will show it."

Boston Credit First Guide The problem, he added, "is there's no definition of `significant' " in the tax code provision covering the credits.

Credit Card Debt But at least one top executive at a producing company said that some companies might not be following the law on chemical change.

Back Credit Foreclosure Across all producers, "there is wide range as to whether or not they actually effect a change," said Larry L. Weyers, chief executive of WPS Resources, a power company based in Green Bay, Wis., that partly owns a synthetic fuel plant in Kentucky. "There's difference in complying with that requirement."

Credit Card Processing By Lynnley Browning
New York Times - 7/5/2003

Topic: Petroleum Industry

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