Karen L. Gallagher, Principal Financial Officer & Senior Vice President, Finance
Edward G. (Gary) Roth - President, Chief Executive Officer & Director
Jeffery M. Bigger - Senior Vice President, Business Development
Ronald E. Stinebaugh - Senior Vice President, Finance & Acquisitions
Gary Rumple – Shareholder
Richard Kolpeck - Private Investor
Syntroleum Corporation (SYNM) Q3 2008 Earnings Call November 10, 2008 11:00 AM ET
My name is Michelle and I will be your conference operator today. At this time I would like to welcome everyone to the Syntroleum Corporation conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions) I will now turn the call over to Karen Gallagher, Syntroleum’s Principal Financial Officer.
Karen L. Gallagher
Good morning and thank you for joining us on today’s Syntroleum conference call. Remarks for today’s call will be presented by Syntroleum’s President and Chief Executive Officer, Gary Roth; followed by Jeff Bigger, Senior Vice President of Business Development who will provide an update on our Dynamic Fuels Geismar plant; Ron Stinebaugh, Senior Vice President of Finance and Acquisition who will provide an update on the Geismar plant economics and our financing efforts; and Karen Gallagher, Senior Vice President and Principal Financial Officer who will take you through the financial results for the third quarter of 2008.
For Mr. Stinebaugh’s comments on the geismer plant’s economics he will refer to the slides that are posted to the home page of our website at www.Syntroleum.com. Before I turn the call over to Gary I would like to remind everyone that during this call we will make certain forward-looking statements as well as use historical information
These forward-looking statements include but are not limited to statements regarding cash flows, renewable synthetic fuel projects, raising cash, the Catoosa Demonstration Facility, the Tulsa pilot plant, projects under development, business relationships with potential industry participants and service providers, requirements for and timing of project financing, the amount and timing of license and other project revenues, the characteristics of synthetic, renewable and other fuels, lubricants and chemical feedstocks and technology improvements currently under development.
Words such as believe, estimate, expect, intend plan, anticipate, could or should are intended to indentify forward-looking statements. Although Syntroleum believes that expectations reflected in these forward-looking statements are reasonable these statements involve risks and uncertainties. Future results may differ materially from those projected in those forward-looking statements
You are encouraged to refer to our SEC filings including our most recent annual report on 10K for a full disclosure of these risks and uncertainties. I will now turn the call over to Gary Roth, President and Chief Executive Officer of Syntroleum for opening remarks.
Edward G. (Gary) Roth
For the nine months ended September 30th, 2008 we reduced our cash use and operating activities to $1.7 million from $16.1 million for the same period in 2007 an 89% reduction. We remain on track with our original restructuring plan set in place at the beginning of this year. The status of the Geismar facility, the first plant developed under our Dynamic Fuels joint venture with Tyson Foods, is a solid.
Total project costs remains at $150 million the same as our original estimate developed in 2007 with startup scheduled in early 2010 again consistent with our original plan. Dynamic Fuels has received $100 million in GO Zone Bond funding. The parties have contributed $28 million in equity to the construction of the Geismar facility. We therefore have $22 million of equity required to fully fund the project, $11 million each from Tyson and Syntroleum.
Each party will fund $6 million by year end of 2008. We will fund our $6 million from existing cash balances. The remaining $10 million will be funded in 2009 if required, $5 million from each party. On our last call we told you that Sinopec the China Petroleum and Chemical Corporation remains interested in utilizing our coal to liquids technology and that we continue to have active ongoing discussions with Sinopec.
The process continues to be measured but negotiations are promising and we expect to finalize our activities in this area by year end. Regarding our May 2007 site reservation agreement for the Pacific GTL project we have executed a technical service agreement to support a pre-feed study. We have recognized $220,000 of revenues from this project in the third quarter of 2008 and we expect to recognize an additional $130,000 in revenues for the fourth quarter of 2008.
We have completed our $1.2 million contract with the US Air Force for renewable jet fuel by delivering 600 gallons of on-spec fuel utilizing our Bio-Synfining technology. As of September 30th, 2008 we had recognized $990,000 in revenue associated with this contract. We will invoice the final amounts in the fourth quarter of 2008.
The company recorded deferred revenues of $3 million as of September 30th, 2008 for the receipt of an advance payment to be credited against the total purchase price for the transfer of certain technology documents and facilities subject to certain limitations including further negotiations. The process leading to this advance payment remains active but measured and we will keep you apprised of further developments as they occur.
Now I will turn the call over to Jeff Bigger who will provide an update of our Dynamic Fuels Geismar project.
Jeffrey M. Bigger
Dynamic Fuels remains on budget and on schedule for startup of our first plant in Geismar, Louisiana in early 2010. Dynamic Fuels is our 50/50 joint venture with Tyson Foods to build and operate renewable synthetic fuels plants in the United States. We formed the venture in June of 2007 to use Syntroleum’s Bio-Synfining technology to convert low grade animal fats and greases supplied by Tyson Foods into ultra-clean renewable diesel and jet fuel.
Since the formation of Dynamic Fuels we have formed an exceptional project team combining the strengths of both Syntroleum and Tyson Foods. The project team has focused on building a safe and environmentally responsible facility on schedule and on budget. Let me review with you some of the milestones achieved in the past few months.
The project cost estimate and economics were confirmed at the completion of our preliminary engineering in June and formal approval to build the plant was granted on July 11th by Syntroleum and Tyson Foods. The project construction was bid out and the contract was awarded to L-Con Constructors on August 21st. We applied for Gulf opportunities on bonds as a means of providing low cost financing for the project.
We submitted our application to the Louisiana State Bond Commission on March 19th. We received Bond Commission approval to issue $100 million of bonds on June 19th. SunTrust placed the full bond amount on October 21st. These are tax free municipal bonds with a 25 year maturity and an initial interest rate of 1.3%. Interest only is due annually with all principal due at maturity.
As of November 7th, the interest rate on the bonds were 0.85% and the interest rate has averaged 1.01% since issuance. We submitted our air quality permit application to the Louisiana Department of Environmental Quality under the expedited review process on June 16th. The permit was granted on September 9th.
Also we held the groundbreaking ceremony at the Geismar site on October 6th to commemorate the beginning of construction and to thank the many people that have helped us achieve this milestone including Governor Bobby Jindall, Don Cazayoux, US Representative for the Louisiana Congressional District No. 6 and Mike Strain, the Louisiana Agriculture and Forestry Commissioner.
The total installed cost for the plant in Geismar is $150 million which includes $138 million for the project plus $12 million for financing costs and working capital. To maintain the project schedule we have ordered 23 pieces of long lead time equipment including three reactors, 14 heat exchangers, three separators, one membrane unit and two compressor packages.
This represents approximately 50% of all the dollar value of the equipment to be purchased for the project. Then to pay for the project, funding comes from the following sources, we have $100 million in GO Zone bonds, $28 million already invested by Syntroleum and Tyson Foods, $12 million to be invested by Syntroleum and Tyson Foods by the end of 2008 and $10 million, if needed, to be invested by Syntroleum and Tyson Foods by the end of 2009.
Therefore, we have made significant progress since our last call. We have confirmed the plant cost estimate, the schedule and the economics. We raised $100 million in debt financing through issuing tax free municipal bonds with an average rate of 1.01% since issuance. The parties have provided a total of $28 million of equity capital. We have applied for and received our air permit and storm water general permit.
We have let the construction contract to L-Con to build the plant and they have mobilized onto the site. We have ordered all long lead equipment on schedule and we’ve hosted the Louisiana Governor and other dignitaries at our groundbreaking ceremony. So, the project remains on budget at expected margins and on schedule for startup in early 2010. We look forward to reporting on construction progress in the months ahead.
Now I’d like to turn the call over to Ron Stinebaugh.
Ronald E. Stinebaugh
For my comments on Bio-Synfining Economics I am going to refer to the slides that we have posted to our website which is www.Syntroleum.com. The link is near the bottom of the home page entitled Bio-Synfining Economics November 10, 2008. Please scroll to Slide Number 2. Here you will see a summary table for the Geismar plant margins. As you can see the Geismar plant economics as of November 4th continue to be robust.
Specifically the current cash margin of $1.08 per gallon in the second column is greater than our original base case margin of $0.82 per gallon when the project was approved by the Syntroleum Board in June, 2007. Crude oil prices at $70 per barrel are lower than original projections as are feedstock prices the net effect of which is an increased margin. In the third column poultry fat is now more expensive than other animal fat feedstocks.
If choice white grease is processed instead of chicken fat in the Tyson Blend the cash margin is $0.10 per gallon higher or $1.18 per gallon. Tyson is one of the largest producers of beef tallow, chicken fat and choice white grease in the US. In the fourth and fifth columns we show the impact if the diesel from the Geismar plant was sold at bio-diesel prices.
If the Geismar plant receives soy pricing in the Northeast margins would have been $1.76 per gallon and if exported to Europe margins would have been $1.53 per gallon not including the $1 per gallon US subsidy. Please scroll to Slide 3. This slide is the daily margin for the Geismar plant dating back to December, 2006 compared to crude oil prices and shows that the Geismar plant’s margins are not tied to crude oil prices.
As crude oil has fallen from $145 per barrel to $70 per barrel currently the Geismar plant’s margins have averaged $0.86 per gallon. This is because crude oil prices and feedstock prices are highly correlated such that when crude oil prices fall, feedstock prices fall and vice versa and the margin remains relatively constant.
Slide 4 shows current feedstock pricing. The Tyson Blend is the dotted red line and it has fallen with crude oil which is the dotted black line. Slide 5 shows several new trends for the components of the Tyson Blend. Chicken fat is now more expensive than inedible beef tallow and choice white grease which is a reversal from historic trends. We believe the new ASTM cold soap test for bio-diesel has raised demand for chicken fat because chicken fat has better cold flow properties.
If this trend persists it opens up larger potential feedstock volumes for Dynamic Fuels because US inedible beef tallow production of 3.8 billion pounds per year is more than double that of chicken fat production of 1.4 billion pounds per year. I remind you that we are indifferent to feedstocks and that the quality of our output is decoupled from the quality of the feedstock.
Slide 6 shows palm oil product pricing. Global oversupply continues to impact pricing leading the palm oil prices at a substantial discount to soy. This oversupply is impacting beef tallow prices in the US as globally cheaper palm stearin is being substituted for tallow leading to lower exports from the US.
Finally Slide 7 and 8 show that both in the US and in Europe bio-diesel continues to be priced at a premium to the underlying low sulfur diesel price. In addition higher quality bio-diesels with superior cold flow properties are worth more than lower quality bio-diesels. The current premium to diesel fuel in the US is $1.87 per gallon for soy based bio-diesel and in Europe $1.77 per gallon for rapeseed based bio-diesel.
The Geismar plant’s typical renewable diesel grade will have a 13 degree below zero Fahrenheit cold filter plugging point which is superior to the best bio-diesels. Renewable diesel should come in better than the premium pricing received by soy and rapeseed based bio-diesel because of superior cold flow properties and a nearly 10% increase energy content of renewable diesel relative to bio-diesel.
You can see this comparison of renewable diesel to bio-diesel and petroleum diesel on Slide 9. Now, I’m going to review our financing status. We have made significant progress with regard to financing. By the end of this year we will have completed the financing of 93% of the plant through the GO Zone Bond debt issuance and through equity contributions by both parties.
We began this process in 2007 stating we needed financing of $75 million for our contribution to the plant. At the time we believed this would come in the form of equity financing. In 2008 Dynamic Fuels investigated alternative means to finance the plant in conjunction with site selection. A significant portion of the financing was achieved through the issuance of $100 million in GO Zone Bonds.
After obtaining low interest rate debt with the GO Zone Bonds our equity requirement was reduced to $25 million. These Bonds are interest only for 25 years which greatly reduces the debt service obligations of the Geismar plant compared to more traditional financing. We have funded $14 million of this equity requirement from our own cash reserves and have earmarked an additional $6 million in funds for committed contributions at the end of 2008.
Due to prudent spending and steady engineering related revenues for cash inflows we are able to fund or commit $20 million of our equity requirement from our own cash reserves in 2008. We will have therefore achieved funding of 93% of the plant with minimal dilution to our shareholders. An additional $5 million, if required, remains for completion of funding the Dynamic Fuels plant.
We expect to fund this remaining equity requirement at the end of 2009. We require $13.4 million in financing to fund our remaining commitments to Geismar as well our cash burn rate through 2010. We do not require that all of this capital be funded at once. We are pursuing the following avenues for the funding we require, technology license sales, debt and/or convertible debt and common equity.
Despite the credit crisis we are having active discussions with potential financing sources that include lenders and potential investors. Equity and debt are very expensive in today’s environment so we are working to minimize the amount of capital we will have to raise and our deferring until funds are needed before we have to raise capital. Now I will turn the call over to Karen.
Karen L. Gallagher
On October 31st, we announced our results for the third quarter ended September 30, 2008 reporting a cash balance of $11.2 million compared to a cash balance of $18.4 million at December 31st, 2007. This change in our cash balance is primarily due to the investment of $14 million into Dynamic Fuels, the collection of $8.7 million from the sale of asset from discontinued operations, collections of $3.7 million from continued revenues for engineering services and a continued reduction in cost and expenses.
Our net cash used in operating activities was $1.7 million for the nine months ended September 30, 2008 compared to $16.1 million for the same period last year of $14.4 million reduction. We attribute this reduction to increased revenues from engineering services and lower administration expenses. Due to the significant reduction in cash used in operations we were able to invest $14 million in Dynamic Fuels.
After our additional $6 million investment in December we expect our 2008 year end cash balance to be $3.5 million. For the nine months ended September 30, 2008 the company reported a net loss of $3.3 million or a loss of $0.05 per share compared to net income of $2.1 million or $0.04 per share for the same period last year. Excluding the Marathon non-cash transaction we would have incurred a loss of $21.7 million for the nine months ended September 30, 2007.
Revenues for the current nine months were $3.9 million compared to $1.6 million for the nine months ended September 30, 2007 again excluding the non-cash Marathon transaction. Operating expenses for the nine months ended September 30, 2008 were $9.5 million compared to $22.8 million for the same period last year. This decrease is a result of lower overhead and general and administrative expenses as well as non-cash stock compensation expenses.
We reduced general and administrative expenses by 68% for the nine months ended September 30, 2008 compared to the same period last year. Thank you for your attendance today. We will now open up the call for questions.
(Operator Instructions) We’ll pause for just a moment to compile the Q&A roster. Our first question comes from Gary Rumple – Shareholder.
Gary Rumple – Shareholder
I think you were saying that you were bring it online in the beginning of 2010, that a statement on the computer here said that it was like the second quarter of 2010. How soon would you expect that to get to full production capacity of an annualized rate of 75 million gallons per year in the first year? What’s your estimate ramp that up?
Jeffrey M. Bigger
Our schedule calls for mechanical completion at the end of the year 2009 then we’ll begin the commissioning and startup phase and we’ve put in our schedule that we will hit full rate operation by mid-year.
Gary Rumple – Shareholder
On the Chinese plant, does it look like there could be a possibility of multiple plants in China that you’re talking about or just one?
Edward G. (Gary) Roth
We’re still in negotiation so we’ll just have to see how it sorts out hopefully by the end of this year.
Our next question comes from Richard Kolpeck – Private Investor.
Richard Kolpeck – Private Investor
Have you submitted any unsolicited proposals or had any discussions with the Department of the Air Force or Department of Energy about a CTL plant in Montana?
Edward G. (Gary) Roth
We have not solicited any proposals to the government related to the Montana CTL project.
Richard Kolpeck – Private Investor
Also your partner Great Northern Properties, do they have any active producing coal mines in Montana and can they help in financing the first CTL plant?
Edward G. (Gary) Roth
I don’t know about Great Northern Properties production status. You’ll need to ask them if they can assist in project financing.
At this time there are no further questions. I will now turn the call over to Miss Gallagher for any closing remarks.
Karen L. Gallagher
Thank you for joining us today on today’s conference call. If you have any additional questions please call Geralyn DeBusk or Casey Stegman at Halliburton Investor Relations at 972-458-8000. We appreciate your interest in Syntroleum. Thank you.
Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may all disconnect.
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