Rentech reports Drax shipments made early this year in Q4 results

On March 16, Rentech Inc. released its financial and operating results for the fourth quarter and full year ended Dec. 31, reporting the company’s fiber businesses Fulghum Fibers and New England Wood Pellets generated record earnings before interest, taxes, depreciation and amortization (EBITDA) in 2015.

Keith Forman, president and CEO of Rentech, spent much of the investor call speaking about the company’s wood processing segments. He began this discussion by stating the company is pleased with Fulghum’s turnaround in 2015. Fulghum generated a record EBITDA of $21.6 million during the year versus $13.4 million in the comparable period during the prior year. Forman added that revenues for 2015 were essentially flat, while gross profit increased nearly 50 percent from the prior year due to enhanced focus on maintenance scheduling and maintenance expenditures, as well as decreased insurance costs.

Forman shared that in 2015 Fulghum reported asset impairment totaling $11.3 million related to three of the company’s 32 mills. Forman said part of the impairment is attributed to a customer undergoing a product line conversion at a mill that will result in lower wood fiber consumption than expected.  “We wrote down the value of that mill to its estimated fair value based on the lower throughput levels,” he said. “The remaining impairment relates to two of our customers exercising their contractual rights to purchase their respective mills. One of the sales occurred in 2015, and the other sale is expected to occur this year.” According to Forman, Fulghum will continue to operate one of the mills under a continuing operating services agreement, and the other mill will be taken over by the customer.

Forman disclosed that the company’s goal for Fulghum is a model that targets long-term EBITDA in the range of $20 million, driven by continued operational efficiency, contract renewals and new contracts to offset potential margin compression on existing contracts and to offset any contracts the company may lose. “We see potential for new business and we balance this optimism with the fact that our U.S. chipping business relies on wood product demand that is dependent upon continued U.S. economic expansion,” he said. Forman added that the company’s South American business relies heavily on the export chipping market and that demand has been strong so far this year. “We have shipped 2.5 vessels to date, and we are expected to ship another vessel this week. Those vessels are all shipped to Asia, predominantly Japan,” Forman stated on the call.

Revenues were $22.4 million for the fourth quarter of 2015, compared to $27.4 million for the same period last year for Fulghum Fibers. Revenues from operations in the U.S. were $15 million for the fourth quarter, as compared to $14.5 million in the prior year period. Revenues from operations in South America were $7.4 million for the Q4 2015, compared to $12.9 million in Q4 of 2014. According to Rentech, the mills in the U.S. and South America processed 3.2 and 3.8 million metric tons, respectively, of logs into wood chips and residual fuels for each of the fourth quarters of 2015 and 2014.

Gross profit was $5.3 million in the fourth quarter of 2015, compared to $2.9 million in the comparable period in 2014. Adjusted EBITDA in the fourth quarter of 2015 was $6.8 million, compared to $2.8 million for the same period in the prior year.

New England Wood Pellets operations were also discussed during the quarter-four earnings call. Forman said that despite warmer than normal weather in November and December, NEWP delivered strong results for 2015, generating record EBITDA of $12.4 million and gross profit nearly doubling for the year. These better-than-expected results are attributed to higher average sales prices, favorable manufacturing branches and less selling, general and administrative (SG&A) spend. The year also benefited from the addition of the Alleghany plant acquired in the first quarter of 2015.

Forman provided a little bit of foreshadowing, however, when he shared that the warm temperatures which have carried into 2016, along with depressed prices for competing heating oil and propane, have led the company to anticipate a decrease in sales. “We are expecting lower sales volumes in Q1 as NEWP’s customers are still carrying inventory purchased last year, due to slow buying by retail customers as a result of these factors starting in February this year,” he said. “Three of NEWP’s facilities scaled back production from seven days per week to five days per week and one facility scaled its production to four days per week.”

NEWP’s revenues were $12.9 million for the fourth quarter on deliveries of 63,400 short tons of wood pellets, compared to $12.5 million in the comparable period in 2014 on deliveries of 65,400 short tons of wood pellets. Gross profit for the fourth quarter of 2015 was $3.2 million, in comparison to $2.5 million for the same period in 2014. Adjusted EBITDA for the fourth quarter of 2015 was $3.2 million. This compared to adjusted EBITDA of $2.7 million during the same period in the prior year.

Forman also turned his focus to the Canadian Atikokan and Wawa facilities during the investor call. According to Rentech, the capital expenditure estimate for the Atikokan and Wawa plants of approximately $145 million remains unchanged, with approximately $21 million remaining to be spent as of the end of 2015. Forman noted that this capital expenditure forecast does not include contingencies for any additional problems that could be identified during the continued ramp-up of the facilities.

During Rentech’s quarter-three earnings call, Forman shared that through early November, 21,000 metric tons of pellets have been produced at Wawa, with a total of approximately 28,000 tons of pellets in transit or at a storage facility in the Port of Quebec awaiting shipment to Drax. In the first quarter of 2016, Rentech made two shipments of wood pellets to Drax, totaling approximately 48,000 metric tons produced from both Wawa and Atikokan facilities. “Our ability to continue to fulfill the volume requirements under the Drax contract will largely depend on the success of the next phase of conveyer replacements at the plant and there being no new, significant issues during ramp-up,” Forman said.

In addition to the Drax shipments, Rentech has shipped a total of almost 66,000 metric tons of wood pellets to Ontario Power Group since Atikokan began producing, which has fully satisfied the contractual obligations to OPG. Forman added that all of the truck dump hopper modifications at Atikokan have been completed and it is performing as expected. “The first group of faulty conveyers at Atikokan was replaced at the end of 2015 and the conveyer’s performance is currently being evaluated as part of the plant’s operations,” Forman said. He added that the remaining work to address problems with Atikokan’s conveyor systems is expected to continue through mid-2016.

The Atikokan facility is expected to reach full capacity this year once the conveyer work is completed and the ramp-up resumes unimpeded. As for the Wawa facility, it isn’t expected to reach full capacity until 2017.

All of the equipment at the Wawa facility has been commissioned and the plant has been producing an increasing quantity of wood pellets, according to Forman. The modifications of the front-end system and the first phase of modifications to the plant’s conveyer systems were completed in late 2015, the remaining work to the conveying systems is scheduled to be completed by mid this year. Forman said, that in light of the setbacks experienced at Wawa, the company is evaluating the production capacity of the plant. They are investigating whether there are design shortcomings similar to those that surfaced with the plant’s wood infeed and conveyance systems that might limit or inhibit it ever reaching its full capacity, as well as evaluating uptime and operating efficiency rates achievable for full capacity.

Forman said that in discussions with other pellet producers and engineering firms over the past year, they’ve realized there is wide disparity in operating efficiency rates across established industrial pellet manufacturing plants in North America. At this time, Forman said, it’s premature to revise Wawa’s capacity until they have fully tested the design assumptions of the major processes of the plant, remediated all of the material handling issues and completed ramp-up. “However, if we apply a range of assumed operating efficiencies typical for the industry, Wawa’s annual production capacity could be between 400,000 and 450,000 metric tons,” Forman shared. He adds the low end of this capacity range will still allow the plant to meet its contractual obligations to Drax and generate positive cash flow.

Forman estimated that Atikokan and Wawa will generate stabilized annual EBITDA in the range of 13 to 16 million Canadian dollars using the production range of 400,000 to 450,000 annual tons and based on today’s economic variables, including the cost of diesel fuel reimbursements in the company’s contracts and exchange rates. This estimate does not include revenues from possible opportunities to aggregate pellets for resale, which Rentech has done on a historical basis.

Revenues for the fourth quarter of 2015 were $2 million earned by delivering to OPG 11,100 metric tons of wood pellets produced at the Atikokan facility. Revenues of $1.4 million for the prior year period reflect 7,300 metric tons of wood pellets sourced from a third-party and sold to OPG. Gross loss for the fourth quarter of 2015 was $5.7 million, compared to a gross profit of $200,000 for the prior year period. Adjusted EBITDA for the fourth quarter of 2015 was an $11.7 million loss, compared to adjusted EBITDA loss of $4.5 million for the same period in 2014.

Across all of the Rentech’s segments, consolidated revenues for the fourth quarter of 2015 were $68.9 million, compared to $73.9 million in the comparable period during the prior year. Consolidated revenues for 2015 were $295.8 million, compared to $269.2 million in 2014. Gross profit for the fourth quarter of 2015 was $3.7 million, compared to $3.4 million in the prior year period. Gross profit for 2015 was $22.6 million, compared to $4.9 million in 2014.

Consolidated adjusted EBITDA for the fourth quarter of 2015 was $10.6 million, compared to $3.9 million in the fourth quarter of 2014. For all of 2015, EBITDA was $87.6 million, compared to $36.1 million in 2014.