Rentech provides update on wood pellet production, plant repairs

Rentech held its Q3 financial earnings call on Nov. 9, reporting consolidated revenues for the Q3 quarter 2015 of $80.3 million, compared to $76.2 million in the prior year period, gross profit for the quarter of $6.2 million, compared to a gross loss of $2.5 million in the prior year period, and overall improvements in its nitrogen, chipping and residential pellet businesses relative to last year.

However, if proceeds from an upcoming merger between Rentech Nitrogen and CVR partners aren’t recognized by early 2016 to fund operating and investing needs, alternative sources of cash will be needed to fund its operations leading to the close of the merger, according to President and CEO Keith Forman, who provided extensive updates to the company’s commercial wood pellet business during the call.

Earlier in the year, Rentech announced production delays at its Wawa, Ontario, pellet plant, as it required modification and replacement of the log in-feed equipment and a significant portion of conveyance systems, construction flaws Foreman said were discovered during ramp up. Previous capex project estimates of approximately $145 million remain unchanged, Foreman said.

Through early November, 21,000 metric tons of pellets have been produced at Wawa. “We now have a total of approximately 28,000 tons of pellets in transit or at our storage facility in the port of Quebec,” Foreman said. “This represents about 61 percent of the capacity of the supramax scheduled to ship to Drax early next year.”

Wawa is expected to complete a four-week outage ending the week of Nov. 13, according to Foreman, during which the company installed equipment to correct the material handling problems. “The new log in-feed system is expected to be become operational this week…once it’s operational, the shippers would be able to run at greater throughput capacity.”

New replacement conveyors that were installed have shown no issues so far, Foreman said, and are expected to operate with no problems during commissioning in the coming days. “The truck dump and its new conveyers are expected to be commissioned later this week,” he said. “We are able to operate the plant either with the truck dump or the shippers, which enhances our fiber supply options.”

Over the coming months, Wawa is expected to operate intermittently, as work to correct the remaining conveyance issues continues into Q1 2016. “We are compressing what was initially conceived as a three-phase remediation process into two phases,” Foreman said. “We have yet to finalize the fabrication and installation contract for the second phase, but anticipate that the cost will fit within our Canadian spending guidance of $145 million.”

Resuming of the ramp-up of Wawa in Q2 2016, the goal is to achieve full operating capacity during the second half of the year. Foreman noted that the conveyance issues have been costly to Rentech, stating that while on the surface they may have only increased aggregate spend to $145 million from the high end of the previous guidance of $131 million to $140 million, but progress delays toward operating capacity has resulted in cash penalties from downstream constituents as well. “The good news is that we are very far along with the construction,” he said. “The change in conveyance providers and the new engineering team that we have in place gives me confidence that we will fix this issue. Keep in mind that the plant has, in fact, operated…it’s made high-quality pellets that have exceeded our specifications. And they have been shipped to our storage facility in the Port of Quebec.”

Once the conveyance at Wawa is fixed, Rentech will then evaluate how the remaining components operate in concert with each other at increasingly higher operating levels and for increasingly longer periods of time, Foreman said, adding that it’s expected the components will perform as they have shown they can in earlier, albeit less stressful, conditions at Wawa and Atikokan. “We’re using equipment that is successfully operating in facilities owned by others…up and running plants. So we are optimistic that we’ll be able to do so as well. Again, my caution here is that we are no longer budgeted for addition of meaningful failure of critical equipment.”

Moving onto Rentech’s Atikokan, Ontario, pellet production facility, Foreman said it has been meeting its contractual obligations, and the plant is ramping up on schedule. Electrical issues that were inhibiting production earlier in the year have been resolved via installation of a larger transformer. “Through early November, we’ve produced approximately 42,000 metric tons of pellets,” he said. “We have delivered to OPG (Ontario Power Generation) under our contract 34,000 metric tons of pellets. The quality of our production remains good, the value of the pellets, supply to OPG, continues to be higher than the minimum requirements of the contract, which actually results in little bit higher revenue to us.”

During the Q3, Rentech began send to excess volumes to its port facility to supplement Wawa’s production as it builds inventory for the first shipment to Drax early next year, Foreman said. Recent repairs have been made to the truck dump hopper and other minor modifications are being worked on currently, he said, noting that Atikokan is not immune from the conveyance issues that have afflicted Wawa. “We used the same vendor for 35 percent of the conveyance there,” he said. “We’ve ordered replacement conveyance parts for two of the conveyers, and are hopeful that the near wholesale replacement of conveyance that’s been underway at Wawa will not be needed at Atikokan.”

He said Rentech is on target to reach full capacity at Atikokan by the end of February 2016, but that the timing could shift by several months depending on the degree of modifications needed to correct any conveyance issues at the facility.

Foreman briefly discussed New England Wood Pellet, saying that it retains its role among the Rentech family as an entity that provides consistent positive results. “We expect NEWP to also exceed the higher end of our $9 million to $10 million EBITDA guidance for the year,” he said, adding that average sales prices, favorable manufacturing variances and lower SG&A spend are contributing to better than expected results.

During the call, Foreman said Rentech will be reorganizing and working on other cost savings measures, including closing its Los Angeles headquarters and relocating to a much smaller corporate center in the Washington, D.C., area by mid-next year. The move will result in smaller job functions and an employment cut of about two-thirds of the number working in Los Angeles, he said.