International Paper Says MLP Adoption Is ‘Theoretical’

International Paper Co., the world’s largest maker of office paper, said the adoption of a new tax structure as advocated by a hedge-fund firm is “theoretical” without a letter from the Internal Revenue Service on the matter.

The Memphis-based company is investigating the creation of a master limited partnership, Chairman and Chief Executive Officer John Faraci said today in a phone interview. MLPs, which first emerged in the U.S. in the 1980s, have surged in popularity as an energy boom spawned investment opportunities in oil-and-gas exploration, production and pipelines.

Shares of International Paper and other U.S. containerboard makers soared July 24 after Bloomberg News reported that Perry Capital took stakes in the companies. Those companies can create MLPs for their paper mills and boost earnings, according to a letter sent to the hedge-fund firm’s investors.

“This isn’t a concept we would dismiss out of hand, but it is a somewhat theoretical discussion right now because there isn’t a letter from the IRS that says you could do this,” Faraci said. “We look at anything and everything that we think might create some shareholder value.”

MLPs, commonly used in the oil and gas industry, pay no federal tax as long as they distribute most of their cash to shareholders.

In recent months Perry Capital concluded that MLPs may be used for domestic mills which process logs and wood chips into containerboard used to produce corrugated boxes, according to the letter.

No Precedent

Perry commissioned PricewaterhouseCoopers LLP to research whether containerboard companies could use the MLP structure. The accounting firm found that factories using less than 25 percent recycled fiber, based on annual input weight, would be eligible, and that such assets could be contributed to an MLP.

Still, there is no precedent for MLPs in the containerboard industry, and there is a moratorium on new IRS rulings, Carol Roberts, International Paper’s chief financial officer, said today on a conference call.

“For us it just remains unclear as to whether this concept would really be value-creating for the company,” Roberts said. “We’re somewhat far from convinced that this would be a good idea.”

International Paper’s second-quarter net income fell to $161 million, or 37 cents a share, from $259 million, or 57 cents, a year earlier, the company said today in a statement. Profit excluding one-time items was 95 cents, more than the 83 cent average of 15 analysts’ estimates.

International paper fell 2.2 percent to $48.86 at 4 p.m. in New York. The shares have climbed 1.1 percent this year.