Jan. 2--Synthetic fuels, made from coal, are helping Marriott International improve its profits as demand for hotel rooms drops. 

In October 2001, Marriott paid $46 million for four synthetic fuel plants. In this year's third quarter, ending Sept. 30, the hotel chain made $54 million more than it would have made without federal tax credits for producing synfuels. 

Marriott International reported third-quarter profits of $103 million, a slight increase from $101 million for the same three months a year earlier. Synfuel production served to offset a travel slump that saw hotel revenues drop. 

Federal synthetic fuel tax credits were designed to encourage the production of alternative fuels to decrease dependence on foreign oil imports. 

Congress passed the Crude Oil Windfall Profits Act in 1980, after the Arab oil embargo of the mid-1970s and the start of the Iran-Iraq war. 

The act encouraged entrepreneurs to make synthetic fuels from "unconventional sources." Some companies began claiming synfuel credits for producing ethanol from corncobs or oil from shale deposits in the West. 

Then, beginning in the fall of 1999, a handful of electric utilities and coal companies began spraying already-usable coal with latex, diesel and pine-tar sprays to qualify for the credits. 

Today, 55 coal synfuel facilities operate in the United States. To qualify for credits, those facilities had to be in operation by June 30, 1998. Many companies, such as Progress Energy, purchased existing synfuel plants in western states and moved them to West Virginia and Kentucky. 

Synfuel credits are based on the energy content of the final product, measured in British Thermal Units. Coal mined in the Appalachian region is a better raw material, since its BTU content in higher than that of western coals. 

Today, a ton of coal sitting in a barge on the Kanawha or Big Sandy River is worth between $21.50 and $24. If that coal is used to make a synfuel, it qualifies for a tax credit of about $26 a ton. 

Synfuel production alone allowed Marriott to increase earnings by 9 cents a share during that quarter. Similar earnings from synfuel credits are likely to be reported in Marriott's new filings with the Securities and Exchange Commission next month. 

Marriott's most recent 10Q report filed with the SEC revealed the company claimed $91 million in tax credits from synfuel plants by Sept. 6. If that rate continues, Marriott could claim about $120 million for the whole year. 

"We began operating these facilities in the first quarter of 2002," Marriott reported to the SEC. 

Ironically, the facilities actually lose money by turning coal into "synthetic fuel." 

The SEC report stated, "Although we expect that the facilities will produce significant operating losses, we anticipate that these will be offset by the tax credits generated under Section 29, which we expect to reduce our income tax expense." 

In the third quarter of 2002, Marriott sold $55 million worth of synfuels, but lost $35 million on those sales. During the first three quarters, Marriott sold $113 million worth of synfuel products and lost $81 million at its synfuel plants. 

But Marriott International's "effective income tax rate" dropped from 36.5 percent to 9.9 percent, largely due to synfuel production, according to the 10Q report filed in October. 

Marriott International celebrated its 75th anniversary in 2002. Today, the company operates nearly 2,600 facilities in United States and 64 facilities in foreign nations. 

Its hotels include the Marriott, Ritz-Carlton, Renaissance, Residence Inn, Courtyard, Towne Place Suites, Fairfield Inn, Spring Hill Suites and Ramada International. 

Marriott also operates furnished corporate housing facilities, senior living communities and conference centers, as well as a whole food distribution business. 

This year, it is likely that more than $1 billion in coal synfuel credits will be claimed. Progress Energy, based in Raleigh, N.C., produced more coal synfuels, and claims more credits, than any other company. 

Progress operates seven synfuel facilities in West Virginia, Kentucky and Virginia. About 80 percent of the company's synfuel is made at three plants in West Virginia, located in Quincy, Ceredo and Cyrus Dock. 

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(c) 2003, The Charleston Gazette, W.Va. Distributed by Knight Ridder/Tribune Business News. MAR, FAIRC, CD, PGN,