Rentech offers update of ongoing ramp-up at Ontario plants

By Katie Fletcher | November 11, 2016

On Nov. 10, Rentech Inc. released its operating and financial results for the third quarter of 2016, reporting that the company completed the previously announced replacement of problematic conveyors and conducted other maintenance and repair work at both its Wawa and Atikokan industrial pellet plants in Ontario.

Keith Forman, president and CEO, began the conference call with an update on these facilities, announcing that the company is pleased with Atikokan’s performance, and they’ve identified and employed additional engineering, technical and operating resources for Wawa, which they believe will be able to overcome any remaining operational challenges that may arise as it is ramped up to full capacity.

Wawa is operating “more consistently,” according to Forman, but it’s currently only producing around 35 to 40 percent of its annualized capacity. The plant did just recently complete the startup and commissioning of new conveyors last month, however, following an approximately five-and-a-half-week shutdown that included other maintenance and perform work. The plant is achieving operating rates essentially at the level achieved prior to the conveyor project of approximately 150,000 metric tons of production.

“The consistency has moved the clog further down the pipe,” Forman stated when asked about the ongoing ramp up of the facility. He added that they’ve been operating about five mills at the facility, but “what we haven’t done is pressed our foot to the pedal and ran all 12 pellet mills at once.”

According to Forman, they’re working on addressing a number of operating and equipment challenges before ramping up to full capacity, such as fixing green screens, aspiration on pellets, shoots and the log-in feed system on the equipment side. On the operating side, Forman said, it’s about getting the proper fuels in the furnace and making sure that the chemistry of the plant is right by ensuring certain types of feedstock come in at certain moisture levels.

Rentech expects the plant to reach approximately 60 percent of production capacity within the next couple of quarters, and reach full capacity in the range of 400,000 and 450,000 metric tons in late 2017. Forman said that an annual production capacity of 400,000 metric tons would enable the company to fulfill its yearly obligations under its Drax contract and generate positive cash flow at Wawa based on current economic variables. However, given that operating costs at Wawa have been higher than expected and may continue to be so, this could negatively impact profitability of the contract with Drax. Deliveries to Drax have also been negatively impacted by oil prices and Canadian diesel prices. Rentech revised its delivery schedule with Drax for this year and next year in October to be consistent with its ramp up expectations for Wawa at that time. New contract terms include the delivery of 188,000 tons to Drax in 2016, which includes 95,000 metrics tons delivered through the end of September and approximately 93,000 tons to be delivered during the remainder of this year.

During 2017, Rentech agreed to deliver approximately 336,000 metric tons. According to Forman, the company will not incur any monetary penalties to Drax if it meets the revised delivery schedule for 2016 and 2017, but the schedule may be subject to further change, including penalties, if Wawa does not ramp up as expected.

As for the Atikokan facility, it’s now consistently averaging daily operating rates of just under 90 percent of capacity, or approximately 100,000 metric tons of the annualized production, following the planned seven-day outage that included replacing two conveyors. Forman said that Rentech considers the plant to be fully operational and will continue to operate around 90 percent of capacity until they can economically justify replacing the remaining bottleneck conveyors.

Rentech has already met its annual contractual obligation for Ontario Power Generation, delivering approximately 46,000 metric tons of pellets produced at Atikokan, and any additional production from now until the end of the year will be used to meet Rentech’s contractual obligation to Drax.

On the domestic side, New England Wood Pellet year-to-date revenues were down 60 percent compared to last year, while third quarter revenues were $9.4 million on deliveries of 49,000 tons of wood pellets, down 47 percent from $17.6 million on deliveries of 88,000 tons of wood pellets in Q3 2015. As reported in earlier earnings calls, results were impacted by abnormally warm temperatures in the Northeast during the most recent winter months, as well as depressed prices for competitive heating fuels that impacted consumer demand.

Forman noted that the trend the company has experienced over the last few years of consumers buying pellets in the spring and summer months for the upcoming heating season has shifted to many waiting until fall or winter. Big box stores began buying pellets in June, but the warm summer and lack of cool nights to prompt customers to begin thinking about the upcoming fall and winter has slowed purchases from big box stores. As a result, they’ve pushed a majority of their pellet shipments that were planned for the last half of August through October to the remainder of the fourth quarter and the first quarter of 2017. “As cold weather is starting to arrive we are beginning to move more product to big box stores,” Forman said. He added that while NEWP continues to operate at reduced production rates at three of four mills, it’s prepared to ramp up production if demand exceeds current expectation.

NEWP generated $2.1 million of EBITDA, and Rentech anticipates to generate EBITDA between $5 and $6 million for the full year. “EBITDA projection this year is significantly lower than what we expect the business to generate in an environment with normalized weather patterns,” Forman noted.

Revenues were up 4 percent for Rentech’s Fulghum Fibers business line for the first nine months of the year compared to the prior year period, due to strong South American sales that offset lower domestic processing revenues.

Fulghum’s third quarter revenue was up 12 percent at $26.3 million compared to Q3 2015. South American sales rose by 27 percent during the first nine months of 2016 in comparison to 2015. In Q3 of 2016, South American sales were $13.1 million compared to $7.8 million in the corresponding quarter in the prior year, due to higher biomass product sales in South America and chip sales shipped to Asia.

U.S. sales, however, were down 10 percent year-to-date compared to the prior year period, due to the continued impacted of the previously disclosed sale of one of the company’s mills. In addition, Forman mentioned that one of the company’s customer’s mills experienced considerable unplanned downtime in Q3 this year, which resulted in lower ship demand. These two factors were the primary reason why U.S. sales declined to $13.2 million in the third quarter, 15 percent lower compared to the prior year.

EBITDA of $13.4 million was reported for the first nine months of this year, and full-year EBITDA is expected to generate in the range of $16 to $17 million.

For the third quarter of 2016, Fulghum Fibers mills in the U.S. processed 2.8 million green metric tons (GMT) of logs into wood chips and residual fuels; its mills in South America processed 800,000 GMT of logs. For the third quarter of 2015, its mills in the U.S. processed 3.3 million GMT of logs into wood chips and residual fuels, and its mills in South America processed 500,000 GMT of logs.

Jeff Spain, Rentech CFO, provided a rundown of the company’s earnings, sharing that Rentech’s revenue for the third quarter of 2016 totaled $38.6 million, down 10 percent compared to the third quarter last year. “The decrease in revenue is due to significantly lower sales at NEWP, partially offset by increased sales at Fulghum and our industrial pellet plants in Canada,” he said.

Total gross profits were down $6.5 million this quarter compared to Q3 of last year, and all three business units experienced unfavorable gross profit comparisons for the quarter.

Rentech’s industrial Canadian plants gross loss was higher this quarter at $6.1 million compared to $3.3 million in the third quarter of 2015, which reflects higher sales volumes at inventory costs that exceed sales prices as the Atikokan and Wawa facilities were ramping up, including the related write down by $6.2 million during the third quarter of 2016. Gross loss margins were also higher due to lower average sales prices for the third quarter of 2016.

NEWP’s gross profits were down $2.6 million in the third quarter at $1.5 million compared to last year as a result of lower sales volumes, and NEWP’s largest customers, notably the big box stores, delaying pellet purchases this third quarter unlike in recent years until closer to the heating season.

Fulghum’s gross profit declined by $1.1 million to $3.9 million in Q3 compared to last year, reflected by the aforementioned sale of one of the company’s mills in April.

Rentech’s cash balance as of Sept. 30 was $39.7 million. Total debt applications as of Sept. 30 were $121 million, including $52.3 million in debt owed to GSO, $38.5 million at Fulghum, $16.3 million of debt at NEWP, and $14 million of debt related to the port facility in Quebec City.

Estimated remaining capital expenditures for Rentech’s Canadian plants as of Sept. 30 are approximately $14.5 million, including approximately $5 million for potential additional conveyor replacements at Atikokan and other potential improvements that are on hold until the investment can be justified.

It was Spain’s last day as CFO of Rentech, and the company’s new CFO is Paul Summers.

During the Q&A, Rentech was asked if the company is looking at strategic alternatives as the global pellet market is doing quite well.

Forman stated that the company’s current operating environment is not really conducive to jumping right into new capacity and pellet shipments, but that it is possible longer term. “I still think we have access, connections and contacts in the greatest wood basket in North America,” he said. “It’s favorable from an environmental, political and also cost basis standpoint, so I don’t want to say never.”