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Rentech Nitrogen Partners LP (NYSE:RNF)

Q4 2012 Earnings Call

March 19, 2013 12:00 PM ET

Executives

Julie Cafarella – VP, IR

Hunt Ramsbottom – CEO

Dan Cohrs – EVP and CFO

Marc Wallis – SVP, Sales and Marketing

John Diesch – President

Analysts

Ted Drangula – Morgan Stanley

Brent Rystrom – Feltl

Lucas Pipes – Brean Capital

Matt Farwell – Imperial Capital

James Campbell

Operator

Welcome to the Rentech Nitrogen Partners Fourth Quarter and Year End 2012 Conference Call. My name is Larisa and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

And I like to turn the call over to Julie Cafarella, Vice President of Investor Relations and Communications. Julie, you may begin.

Julie Cafarella

Thank you. Welcome to Rentech Nitrogen’s conference call for the 3 and 12 months ended December 31, 2012. During this call, Hunt Ramsbottom, CEO of Rentech Nitrogen will summarize the partnerships activities during the year and provide our financial outlook. Dan Cohrs, our Chief Financial Officer will give a financial review of the period. Also in the room with us today are other members of Rentech Nitrogen’s management team including John Diesch, President and Marc Wallis, SVP of Sales and Marketing who will be available for the question-and-answer session at the end of our prepared remarks.

Please be advised that certain information discussed on this conference call will contain forward-looking statements. They can be identified by the use of terminology such as may, will, expect, believe and other comparable terms. You are cautioned that while forward-looking statements reflect our good faith belief and best judgment based upon current information, they are not guarantees of future performance and are subject to known and unknown risks and uncertainties and risk factors detailed from time to time in the partnerships’ periodic reports and registration statements filed with the Securities and Exchange Commission.

The forward-looking statements in this call are made us of March 19, 2013 and Rentech Nitrogen does not undertake to revise or update these forward-looking statements, except to the extent that it is required to do so under applicable law.

In addition, today’s presentation includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures including reconciliations to the most directly comparable GAAP financial measures are included in our 2012 fourth quarter and full year earnings press release that is available on our website.

Now, I would like to turn the call over to Hunt Ramsbottom, CEO of Rentech Nitrogen.

Hunt Ramsbottom

Good morning, everyone and thank you for joining us today. 2012 was a successful year for us. We delivered strong results generating $2.78 in earnings per unit and $3.30 per unit in cash distributions for the year, which exceeded our guidance.

Among our significant accomplishments for the year, the acquisition of the largest producer of synthetic ammonium sulfate in North American and the completion of the Urea/DEF expansion at the East Dubuque facility.

We expect the acquisition of the Pasadena Facility to be accretive to cash distributions beginning this year that provides growth opportunities and diversified products, markets, location and raw materials of the East Dubuque facility. The Urea/DEF product allows us to expand our product offerings at the East Dubuque facility to include high margin Diesel Exhaust Fluid and increases urea production capacity at the plant by 21,900 tons annually.

2012 results benefited from two months of contribution from the Pasadena Facility and from higher ammonia and UAN product prices at the East Dubuque facility. In addition, we locked in natural gas costs more than $1 lower per MMBtu than in 2011. Our ammonia and sulfur purchase averaged $658 and $154 per ton respectively at the Pasadena Facility.

Now taking a closer look at 2012, we secured a very strong spring 2012 forward book in September and October of 2011. In March of ‘12, we experienced an early onset of spring ammonia application due to warm dry weather. This shifted meaningful volumes ammonia deliveries into the first quarter, in the second quarter of 2012. Once we began to see the implications of the drought, we forward sold most of our 2012 UAN production by the end of the second quarter. With little ammonia left to sell as well, we selectively pre-sold our remaining ammonia tons throughout the rest of the year.

In November our market experienced good soil temperatures and moisture levels, which resulted in heavy ammonia fall application. In December we experienced an outage for approximately 15 days at the East Dubuque facility, which shut down production. As a result UAN sales volume declined in the fourth quarter as UAN shipments scheduled for the quarter shifted into the first quarter of 2013.

For the year we achieved on stream rates of over 90% at the East Dubuque facility despite unscheduled outages in the fourth quarter. The largest outage which occurred in December was due to a tube failure in a waste heat boiler in the ammonia plant at the facility.

We intend to replace the current boiler tube bundle with a larger bundle in the upcoming fall 2013 turnaround as part of our ongoing project to improve efficiency at the plant. These tubes need to be replaced approximately every 10 years and we purchased the tubes in anticipation of their replacements saving up several weeks of down time in December.

Our team at Rentech Nitrogen has done a great job with integrating the Pasadena facility. We’re optimizing the plant shipments in the regions where we see the highest setbacks, we continue to focus on increasing productivity and improving margins.

I’ll now turn the call over to Dan to discuss the financials in more detail. Dan?

Dan Cohrs

Thank you, Hunt, and good morning everyone. As Hunt mentioned, we delivered solid results for the year, which benefited from strong product prices, lower natural gas cost and two months of results from the Pasadena plant which is included in our results from the closing date, which was November 1 of 2012.

We’ve changed our segment reporting following the acquisition, before we own the Pasadena plant, the partnership and the East Dubuque plant were considered one entity for financial reporting purposes and the partnership had only one segment.

Now, we report two business segments, which reflect operations at each facility. We also separately report expenses for the partnership that are not allocated to either plant. These partnership level expenses include the cost to acquire Agrifos, allocations from Rentech of compensation expense for shared executives and for Rentech’s staff who work on partnership matters, accounting, tax, legal fees, equity-based compensation, board expenses and certain insurance costs. We do not allocate interest expense on the debt used to acquire Agrifos cost.

Let’s look at the fourth quarter results. Revenues were up almost 50% on a consolidated basis from both segments that reflected $37.4 million of revenue from the Pasadena Facility, which of course wasn’t there last year.

Revenues were down at the East Dubuque facility, mainly due to lower volumes, which resulted from the outage we have in the plants in the fourth quarter of last year which delayed some of our product shipments and reduced our production volumes.

Gross profit margin declined from last year’s quarter to this year’s quarter, mainly due to the fact that sales from Pasadena are lower margin sales. If you look at margins just at the East Dubuque plant, they were up from 41% to 55%, even though we had to absorb fixed cost on lower volumes and we had slightly lower pricing on products at East Dubuque. We had a large benefit in this quarter from lower natural gas cost.

Looking at SG&A, we saw an increase from $3.3 million to $6.4 million this quarter that reflects business development expenses of about $2.4 million. $2.3 million of the business development costs were related to the acquisition of the Pasadena Facility. We also had increases in non cash unit compensation, which is equity based compensation of about $400,000 and we brought in $400,000 of SG&A expense as we acquired Pasadena.

Offsetting some of those increases is the fact that we were $1.1 million lower on audit and tax fees which were higher in the prior year, because we did the IPO and change the fiscal year. All that has up to a slight decline in operating income, but net income was up from $10.5 million to $17.6 million. On a per unit basis, we had an increase from $0.27 to $0.44 of net income per unit.

The operating income was down mainly because of we have $4.1 million in acquisition cost related to the Pasadena Facility, which also effected EBITDA. So, EBITDA was down slightly from $25.9 million to $24.3 million this quarter.

Many of the trends for full year were similar. We have a large increase in revenue of 31%. So, we want from of roughly $200 million to $262 million this year, $37.4 million of that increase is due to the acquisition of the Pasadena Facility.

In East Dubuque, we have higher prices for all products across the board and higher sales volumes for ammonia. UAN volumes were down for the year slightly due to that plant outage in the fourth quarter of last year.

Gross profit margins were up from 43% to 50%. We had a slight negative impact from Pasadena, but for the full year that was not enough to pull down the gross profit margins. Remember the sales from the Pasadena plant are always expected to be lower margin sales than the sales in East Dubuque.

Bringing down to year that brought us to a net income increase of $76 million for the year up from $31 million last year to $107 million this year, that’s an increase on a per unit basis from $0.30 up to $2.78.

EBITDA for the full year was – went from $88.6 million last year to $124 million this year and we ended the year with $55.8 million cash on the balance sheet.

Looking at some of the key operating statistics, delivered tons were mix in the periods generally down in the fourth quarter slightly due to that plant outage. For the year, we delivered more tons of ammonia, but UAN was down slightly. So, last year we delivered 135,000 tons of ammonia that increased to 149,000 tons this year whereas UAN deliveries last year were 301, down slightly to 291.

At the Pasadena Facility in the fourth quarter, we delivered 115,000 tons of ammonium sulfate and 27,000 tons of sulfuric acid, all of that of course in the fourth quarter after the acquisition.

Product prices were slightly down in the fourth quarter compared to last year, but up for the full year. Ammonia for the full year increased from $652 to $659 and for the quarter the decline was from $684 down to $676, a small decline in that fourth quarter. UAN prices for the full year increased from $297 to $326. In the fourth quarter, they declined slightly from $307 last year to $301 this year.

In Pasadena, our ammonium sulfate prices averaged $300 per ton in the fourth quarter and we sold sulfuric acid at an average of $94. In East Dubuque, we got a very benefit from lower natural gas prices in the fourth quarter and for the full year.

If you look at the price of natural gas which is included in our cost of sales, that price improved from $4.75 last year now to $3.44 in the fourth quarter of this year. So, that improvement brought about $6.9 million of benefit in the fourth quarter. Year-over-year, pricing on natural gas included in cost of sales dropped from $4.76 to $3.59.

At the Pasadena facility, input costs were as follows, $658 per ton on average for ammonia as a feedstock, and $154 per ton for sulfur.

Looking forward, we expect maintenance CapEx at the East Dubuque facility to be about $9 million in 2013, which would all be funded from operating cash flow. We also expect to have about $55 million of growth CapEx for expansion projects in East Dubuque, which will be funded by our debt facility.

At Pasadena, we continue to expect about $7 million of maintenance CapEx to be funded from operating cash flow in 2013 as we said when we announced the acquisition. In addition to that, we expect maintenance CapEx to include the replacement of the sulfuric acid converter during 2013 and 2014 if our board approves the project. The converter replacement should cost between $15 million and $20 million, but we expect it to be funded by debt, not from operating cash flow, so that CapEx would not reduce cash available for distribution.

That converter has been in service for over 30 years, we knew we would have to replace it when we did the acquisition and we included it in our CapEx guidance at the time of the acquisition, but we’ve now decided to accelerate the project to improve the reliability of the plant.

Note, that we can operate the ammonium sulfate plant on purchase sulfuric acid in the event of an outage or during any downtime at the sulfuric acid plant.

About 60% of the spending for this converter project will be in 2013 for the fabrication of the converter and we’ll need additional debt funding and board approval before we undertake the project. The expansion CapEx for the Pasadena Facility is expected to be about $22 million in 2013 for the ammonium sulfate de-bottlenecking project and the power generation project, both of which will be funded by debt, not operating cash flow.

And now I’ll turn it back to Hunt.

Hunt Ramsbottom

Thanks Dan. Now, turning our focus to 2013, we believe we’ll benefit from strong nitrogen market dynamics. We expect 2013 planted corn acres to exceed 96 million acres, with drought conditions moderating, we anticipate yields in the range of 155 bushels to 160 bushels per acre and a multiyear recovery of corn inventories from last year’s drought.

For these reasons, we expect corn prices to remain strong, incentivizing farmers to plant, and apply nitrogen to maximize yields and profits.

With farm income remaining very strong, and fertilizer cost remaining as a percentage of corn revenues at historical low levels farmers are well positioned to purchase nitrogen. We expect cash available for distribution to be around $101 million or $2.60 per unit. Our guidance includes the impact of two scheduled outages at the plant, at the facilities this year, which I’ll discuss in a moment.

Excluding the effects for these outages, and approximately $6 million in loss profits, 2013 is due to unscheduled December 2012 outage, we distribute 2013 consolidated cash for distribution would have been $0.65 per unit.

Our 2013 EBITDA guidance for the Pasadena Facility of approximately $24 million is consistent with the guidance previously provided at the time of the acquisition in late 2012. We continue to believe that the product margins will be better for the Pasadena Facility it’s been at the time of the acquisition.

Our 2013 EBITDA at the East Dubuque facility is expected to be approximately $114 million. Both of these projections exclude partnership level expenses. I encourage you to review today’s press release for the calculation of the forecasted cash available for distribution and key 2013 operating metrics we provided for each facility.

We’ve secured 81% of our 2013 spring book, forward book at an average amounted price of $769 per ton and UAN price of $361 per ton. With 37% of our natural gas commitments secured for the year at an average price of $3.87 per MMBtu, which covers our forward purchase commitments.

The East Dubuque Facility will undergo as scheduled by annual turnaround during the fourth quarter of this year. The turnaround is anticipated to take up to four weeks, which is longer than the typical 18 to 25 days, due to the installation of the final tie-ins for the ammonia production capacity expansion.

During the turnaround, the plants ammonia and UAN units will be offline and therefore ammonia and UAN production and sales volume during 2013 are expected to be lower than in 2012. The impact of the turnaround in 2013 cash distribution is anticipated to be approximately $0.40 per unit. This includes approximately $4 million of costs for work related to the turnaround anticipated to be included in cost of sales in the fourth quarter.

The Pasadena Facility is scheduled to be down for approximately 14 days in the fourth quarter due to work related to the ammonium sulfate de-bottlenecking project. The impact of the schedule outage on 2013 cash distribution is anticipated to be approximately $0.11 per unit.

As an LP, we’re focused on increasing cash available for distribution. We have three growth opportunities underway at both facilities, which will result in benefits being recognized beginning in 2014 or sooner. In addition, 2014 will benefit from the fact it will be a non-turnaround year at the East Dubuque Facility.

Also keep in mind that 2013 results are negatively impacted by the unscheduled December 2012 outage. Assuming products and input prices are equal to those expected in 2013. The annual incremental contribution from increased production from our expansion projects, scheduled to come online, by the end of 2013, would be approximately $0.90 per unit cash distributions and approximately $41 million in EBITDA.

Now, I’ll walk you through the expansion projects. I’m pleased to report that we continue to expect to complete the ammonium expansion project and East Dubuque facility on schedule and within budget. The project is designed to increase production capacity of ammonia for sale or upgrade of products by approximately 23% or 70,000 tons annually and to increase on site ammonia storage capacity by 20,000 tons.

The estimated $100,000 million expansion project, which is being financed by a multiple drawer CapEx facility is, scheduled to be completed by the end of 2013. After this schedule by annual turnaround, the additional 70,000 tons of ammonia production is expected to contribute to per unit CapEx distributions beginning in 2014.

In the third quarter of 2013, we intend to commence the construction of a new $2 million efficiency improvement project that’s designed to increase nitric acid production at East Dubuque facility, by approximately 1,200 tons annually. And reduce the amount of ammonia required for nitric acid production by about 350 tons annually.

Now, I’d like to do discuss the expansions of the Pasadena facility. I’m pleased to report that we’re accelerating the previously announced de-bottlenecking project of the plant. Project, which is anticipated to increase increasing ammonium sulfate production capacity by approximately 20% or 115,000 tons annually, is now expected to be completed in the fourth quarter of this year, sooner than we previously anticipated completion of mid-2014. The process improvements to the ammonium sulfate plant will be installed during a 14-day outage in November 2013.

During the outage, sulfuric acids and ammonium thiosulfate production will be uninterrupted, the additional AS production to begin contributing on a per-cash unit per cash distributions in December 2013. The project is expected to cost approximately $6 million and be funded from our existing CapEx facility.

In addition, in 2015 results could benefit from a 15-megawatt power project that we’re engineering for the Pasadena facility. We intend to install steam turbine generating set that would use excess steam produced in the sulfuric acid plant of the facility to produce electrical power. As expected, a portion of the power will be used in the Pasadena facility, reducing electricity expenses, and the remaining power would be exported and sold in a deregulated Texas power market, creating an additional revenue stream.

We expect this project could cost approximately $30 million and would be completed in the fall of 2014. The project is expected to be funded under the 2012 credit agreement, which has a $35 million accordion facility.

As you can see, we have several projects underway to increase our incremental cash available for distribution. Beyond these growth projects, we have an M&A team working on a prioritized list of opportunities to further enhance our growth prospects.

So in summary, I’m very excited about Rentech Nitrogen’s outlook and we’re well positioned for solid growth in a very strong market.

I’ll now turn the call over to the operator for Q&A. Thank you.

Question-and-Answer Session

Operator

Thank you. We’ll now begin the question-and-answer session. (Operator Instructions). Ted Drangula from Morgan Stanley is online with a question.

Ted Drangula – Morgan Stanley

Hi, guys.

Hunt Ramsbottom

Good morning.

Ted Drangula – Morgan Stanley

Great year, and good ramping outlook for 2013 and to 2014. I guess a couple of questions on demand as it goes through the, I guess the first half and into the second half, could you just give us some good color on your spring book of business, as the, I guess the cadence or the speed of orders picked at all for the second quarter or how are you guys and maybe your customers looking at the demand kind of the demand outlook across UAN and ammonia for 1Q and going into 2Q?

Hunt Ramsbottom

So, right now, this is Hunt. Right now, we are seeing so relatively quiet in the marketplace. And as you know all things being equal around April 5 for ammonia we’ll start going and around April 20 for UAN, but it is still relatively quiet in the marketplace. I don’t know if Marc, if you want any more color to that?

Marc Wallis

Yes, Ted, the market has been real quiet on the ammonia front since the first of the year. We had a nice forward look on as we reported. UAN is tight and I think there’s upside in that particular product line, but buyers right now have positioned their self good with inventory prepaid for spring, I think we just need the weather to improve and get a little get some tonnage on the ground and see where the market starts living from there. But I’m optimistic on UAN, it will see additional appreciation and ammonia looks a little bit flat right now.

Ted Drangula – Morgan Stanley

Okay. And I guess that the follow-up on that, it seems like the weather maybe hasn’t been too cooperative in general if that will continue you see maybe a change in the mix or change in how the market dynamics work as we move through March and April and would that change anything on your outlook for maybe UAN and ammonia as well?

Marc Wallis

It could, right now I think I’d like to point out that as Hunt mentioned April 5 will be the typical kick off day for us on ammonia where we are moving more than we’re actually producing and as a fact that right now, we still have every opportunity to move on what I would refer to as a normal season versus the early start we had in the last few years.

As the – if the weather would not cooperate, we say wet, obviously UAN becomes more attractive, but actually I think that there can be some limitations on how much UAN is available for sale and can service the market. So, part of that’s why we’re bullish on UAN, I’m not bearish on ammonia, but ammonia just looks a little flat, and so the kind of the dollar the nitrogen arena is urea, unfortunately we’ll not heavily have been on that particular product line.

Ted Drangula – Morgan Stanley

Right. And I guess just one more on this angle is I have heard some things and just the trade commentary out there that UAN is very tight and some suppliers are not able to fulfill all of the demand right now. But in your region, it’s not, I guess it’s not the higher level of demand comes a little bit later because you are further north is that. Am I reading that the right way?

Dan Cohrs

Well our season kicks off later as Hunt mentioned normally sometime in the early days of May. But, the tightness is in the entire market, as product starts to move, it’s going to move south to north. I’ve seen more tightness in supply of UAN the farther north you go.

Ted Drangula – Morgan Stanley

Got it.

Dan Cohrs

Canada is very tight.

Ted Drangula – Morgan Stanley

Yeah. And then if I could have one last follow-up on the natural gas front guys. It seems like the prices are going up every day. You gave us some good disclosure on what you thought so far as of February 28, is there any – do you have any view on gas or is it just sort of matching purchases of gas to your book of business, and your forward book of business?

Hunt Ramsbottom

Right now, we’re matching our purchases with our book of business. We’re watching the same run up. And I think that’s all due to a late colder spring frankly. We anticipated a little bit of a pullback I think I mentioned when I saw your, earlier in the year. And so I think this weather out there is creating a little bit of a rise in gas prices. But I think as we move towards the summer, we’ll see a pullback and if it does, we’ll probably get more aggressive on gas at that point. But right now, we’re just matching our purchases with fall book.

Ted Drangula – Morgan Stanley

All right. Thanks.

Hunt Ramsbottom

Yeah.

Operator

The next question comes from Brent Rystrom from Feltl.

Brent Rystrom – Feltl

Hi, good morning.

Hunt Ramsbottom

Good morning.

Brent Rystrom – Feltl

Yeah, a couple of quick questions. Can you tell us maybe give us some quick thoughts on how to think about SG&A and costs, if you look at the couple of tough months in the fourth quarter implies kind of an annualized run rate of the $6 million, is that a reasonable way to look at it?

Dan Cohrs

Brent, this is Dan. So we had about $400,000 for the two months. I think that’s – that’s pretty much of a run rate, there are few unusual items in there, but it’s a pretty much of a run rate at the plant level.

Brent Rystrom – Feltl

Was it $400,000 each quarter was it $400,000 for the two months or $600,000 per quarter?

Dan Cohrs

No, its $400,000 total for the period that we owned it. So that’s $400,000 for two months.

Brent Rystrom – Feltl

All right.

Dan Cohrs

So, I think, yeah so the run rate would be lower than what you were saying.

Brent Rystrom – Feltl

So somewhere in the mid-2s.

Dan Cohrs

Right.

Hunt Ramsbottom

That’s right.

Brent Rystrom – Feltl

All right. And then from a simplistic perspective, could you Hunt, just breakdown again real quickly the dynamics of how you get the $0.90 of upside from the projects going on in 2014, how that will translate?

Hunt Ramsbottom

Yeah, so if you, I think it’s on the table and if you essentially take the 260, which we’ve guided to and then you add back the outages for this year.

Brent Rystrom – Feltl

So the $0.90 include the outages, okay.

Hunt Ramsbottom

Yeah, you add back that gets you to the low 3s, you just normalize this year 2013, which gets you on to I think a 3.25 range. And then if you just take all of these things equal which they probably won’t be, but you never know on prices inputs and product prices in the marketplace with against the tons that we’re talking about that would get you to the $0.90.

Dan Cohrs

Just to be clear that the $0.90 we’re calculating the $0.90 as the incremental benefit of the expansion.

Hunt Ramsbottom

Correct.

Brent Rystrom – Feltl

Right. So, all things being equal, it would be 3.25 plus the $0.90 if everything held static.

Hunt Ramsbottom

That’s correct.

Dan Cohrs

That’s correct.

Brent Rystrom – Feltl

All right. And then from a simplistic perspective, maybe Dan, can you tell me how to think about the 4Q 2013 volume, when I look at your on stream rates for the 4Q 2012, and assume you lost high-teens percentage of your revenue because of the lost production days, should we kind of take that on stream in order that production rate that you could have had, have you not lost lots of downtime and then essentially takeaway a third of that into the fourth quarter of 2013 for the four weeks of production outage?

Hunt Ramsbottom

Yeah. The production – the production will fill up in the fourth quarter. The decline in production will fill up in fourth quarter. The product delivery, of course, may spillover into affecting the following year.

Brent Rystrom – Feltl

Okay. But with a rough math from a production perspective can we take the production this year roughly increased that by 27% because of your on stream rated E1. And then take whatever that number is and at least we take a third of that off?

Hunt Ramsbottom

I’m afraid I’m just not following your math we can talk tomorrow.

Brent Rystrom – Feltl

Your on-stream production in the fourth quarter of ‘12 was about 81% between the two major products at East Dubuque 80% to 81.5%. I’m assuming you lost you would have normally been on-stream into the high 90% I would assume in that quarter?

Hunt Ramsbottom

In 2012?

Brent Rystrom – Feltl

Yeah.

Hunt Ramsbottom

Yeah.

Brent Rystrom – Feltl

So a normalized production rate of 2012 would have been maybe 20% higher than what you did considering the outage, so when we think about 13’s production, we would adjust higher first, so account for the loss because of the outage, and then discount that four weeks off that higher base, does that make sense?

Hunt Ramsbottom

Yeah, that logic makes sense. So in other words, just to repeat to be clear. In 2012, we had some downtime. So first, you would need to adjust for the downtime in 2012, and then at that run rate you would say another plant will be down for one month due to the turnaround, and take that offset increase base. I agree with that logic.

Brent Rystrom – Feltl

And then final quick question, you maintained a little bit on the previous…

Hunt Ramsbottom

That’s our calculation.

Brent Rystrom – Feltl

All right. And then a final quick question getting back a little bit to the previous person’s questions, obviously in the upper mid-west, we’re having the wetter, rainier, cooler year. When you look at the second quarter are there changes in applications that you think will occur mixes between ammonia and UAN given what might be a later planting season, and actually will be a later planting season could be reasonably later than normal planting season?

Hunt Ramsbottom

Right now, we’re not seeing any change in the marketplace based on our current forecast, and if we’ve had this discussion internally nothing, there’s nothing out there that would change what we’re seeing in the marketplace.

Brent Rystrom – Feltl

All right. Thank you very much guys.

John Diesch

Just to add one little last comment on that, following up on Ted’s question earlier. There is a limited supply of UAN that I think meet the market needs, which would be the product that would be shifted to if the market was successively wet, so you look at wet pattern, and still needs the nitrogen with a really large corn base looking at it. And I think the choices are going to be of ammonia or UAN would have to ammonia or urea has to bridge the gap because there’s not enough UAN on-stream in our opinion.

Brent Rystrom – Feltl

Thank you.

Hunt Ramsbottom

There is one more I think was in the script, but you make sure they understand that last year we did have that warm early spring, which Q1 was stronger than what we expected the Q2 would be stronger than Q1 this year just because I don’t think we’re going to get that warm early season that we had last year.

Operator

The next question comes from Lucas Pipes from Brean Capital.

Lucas Pipes – Brean Capital

Hi, good morning everyone.

Hunt Ramsbottom

Good morning.

Lucas Pipes – Brean Capital

I think you’ve alluded to this earlier, but I just wanted to follow up in terms of the bridge for 2013 versus 2012. So if you look at the 260 distribution and if we normalize with outage of $0.65 it would get roughly 325 which is still a little bit lower than 2012. Could you walk us through, what the difference is there?

Hunt Ramsbottom

Well, you are going to find most of that is due to increased gas prices. What we tend to do is use NYMEX strip, we’re not trying to be big forecasters of gas, but when we look at the NYMEX strip, we see gas prices higher than last year. So you’re right that would put us slightly below last year, and that impact is really due to higher gas prices.

Lucas Pipes – Brean Capital

Thank you for that clarification, and now you have a lot going on in terms of expansion projects, and just kind of wanted to go back to your CapEx plans for 2013 and 2014. Could you summarize again what you are seeing on the CapEx side and the growth side for a various projects?

Dan Cohrs

Yeah. We laid out a fair amount of detail in the release and in the script we are looking at about $55 million at East Dubuque for expansion, most of that is the ammonia expansion. We have about $9 million of maintenance CapEx expected in East Dubuque.

In Pasadena, we have about $7 million of maintenance CapEx that we expect to fund from operating cash flow and then there is about $22 million for the ammonium sulfate expansion that would be funded from debt. And then we said that the COGEN project which would be growth capital would also be expected to be fund from that, and we expect that to be about $35 million project, but it’s not yet approved.

Hunt Ramsbottom

And that should, we should think about that later on, the last component?

Lucas Pipes – Brean Capital

Okay.

Dan Cohrs

And so the ammonium sulfate expansion project I just misspoke was, we said it’s between $15 million and $20 million.

Lucas Pipes – Brean Capital

Great, fantastic. And then lastly on, in terms of the, your pricing outlook, which you said you’re using essentially the strip for the gas – on the gas side for ammonia, what how we should be think about your embedded price assumptions?

Dan Cohrs

Well, all we can do is we said earlier, right now, posted prices and again, we’ll all know a lot better in a few weeks here, but posted prices right now in our market areas is $770 of ammonia and $390 to $400 for UAN. So, all we can do is go out with what we’ve already booked, which we described, and then what’s posted in the marketplace and I think it was certainly have a better view in three weeks from now.

Lucas Pipes – Brean Capital

Well, good luck with everything and I appreciate the update.

Hunt Ramsbottom

Thank you.

Operator

Matt Farwell from Imperial Capital coming with a question.

Matt Farwell – Imperial Capital

Hi, good morning.

Hunt Ramsbottom

Good morning, Matt.

Matt Farwell – Imperial Capital

Just some questions about the guidance, I’m looking at the, first of all on the pro forma guidance for the expansion, does the pro forma number for the Pasadena facility with the COGEN project, or does it only include the de-bottlenecking in the expansion to ammonium sulfate? I’m referring to the $0.15 of cash distribution per unit.

Hunt Ramsbottom

No, there’s no benefit in there for the COGEN project.

Matt Farwell – Imperial Capital

Okay. So, on the COGEN project you are projecting $30 million to $35 million in CapEx which is roughly 2,000 per kilowatt. Do you have any –are you providing any guidance in terms of the profitability of that project?

Hunt Ramsbottom

Not yet. No we are just saying, we are in the early stages of planning that project, it’s now in engineering, we have estimated the capital cost. The capacity is 15 megawatts but that’s all, we haven’t given any specific guidance yet on the operating income impact.

Dan Cohrs

But I will tell you Matt, it’ll go through the same rigor that we go through with all of the projects for RMP. And we’ll be viewing through the same lens that we look in terms of return thresholds for those projects because it’s competing for capital. So, I think you can take comfort in the fact that we are going to look at same way we look at these prior projects.

Matt Farwell – Imperial Capital

Okay, and just big picture, is it going to be highly utilized 15 megawatts, and it was high capacity factor, or would it be operating intermittently?

John Diesch

This is John Diesch. Yeah, it will be high capacity, we are utilizing waste steam of the sulfuric acid plant, which is currently being vented that plant was originally phosphate plant, and the steam has been utilized in the phosphate operation, today it’s just being vented. So what we really will do, reduce our actual purchase of power roughly 6 megawatts and the rest of it will go into the market the local Houston market.

Matt Farwell – Imperial Capital

And it’s essentially producing steam 24 hours a day?

John Diesch

Yeah, I mean we’re producing, utilizing steam that’s currently not being used.

Hunt Ramsbottom

It’s being vented today.

Matt Farwell – Imperial Capital

Okay. And local prices, local electricity prices in that region are I believe in the $30 to $35 per megawatt hour range?

Hunt Ramsbottom

We’ve looked at little higher than that in terms of pro forma but yes, we are not far off.

Matt Farwell – Imperial Capital

Okay. And then another question on the guidance under the partnership level, you show an EBITDA of $9.7 million, which I calculate as $0.25 per unit loss, and then you have a cash distribution per unit loss of $0.55. So I’m missing $0.20 there, is that related to interest or amortization on term loans or can you explain the differential?

Hunt Ramsbottom

Why don’t we call you Matt? Because I don’t want to try to reconcile these numbers in real time, but we will be happy to work through that with you, to make sure you understand it.

Matt Farwell – Imperial Capital

Okay, sounds good. All right that’s all from me.

Hunt Ramsbottom

Okay. Thanks a lot.

Operator

The last question comes from James Campbell from (Inaudible).

James Campbell

Hi. Thanks for taking the call. Governor Branstad said last week at the Alaskan plant that’s going to save farmers $740 million in fertilizer cost when it was completed. I was wondering how you think that figure is real, and if so how you think that will affect you guys?

Dan Cohrs

I’m sorry which, OCI Iowa, it’s hard to believe $740 million is going to produce a world-class. I think most numbers for that weight class plant is well north of a $1 billion to $1.5 billion. So I mean that’s, yes.

James Campbell

I’m not talking about the cost of the plant. What the Governor said is that if the plant gets completed, it was going to save farmers $740 million of annual having to purchase fertilizer, I would say is that really going to happen if the plant is there at least a year?

Hunt Ramsbottom

I can’t tell you what assumptions the Governor is using on that. I mean that’s a we’ve got to look at assumptions and look at that model. But that’s a tough one to sit here and reconcile, to be honest with you.

James Campbell

All right.

Dan Cohrs

That I think James, what the Governor might be doing is putting a pretty good spin on it I can’t OCI selling product at levels that are different than the market value. And so, the nitrogen market in general, we feel like has a pretty, a pretty stable outlook over the next several years, and I think that that particular number is a little misleading.

Hunt Ramsbottom

Which wouldn’t be the first time coming out of it.

James Campbell

When do you think that that plant will be completed in your view?

Hunt Ramsbottom

I think if it goes through, our estimate is probably 2016. I think we’ve seen some delays already. So, if it goes through, I think we’ll estimate somewhere around 2016.

James Campbell

And your view on what would happen to the market if anyone that came on in 2015?

Hunt Ramsbottom

We’ve looked at a number of ways. I think it depends on what product slates are going to be producing in the marketplace, and I think we’re going to wait and take a view when we see what product slates they will put out in the marketplace and so forth. But, if it does produce products similar to ours, that’ll have some impact on our premium pricing at our marketplace.

But that depends on what prices look like in 2016 also. So, it’s very, very, we’ve certainly looked at it at a management team level, at a board level and we’ll continue to track it. But, I just don’t think it’s going to be material and I just don’t think it’s going to be material, and I think it’s the question whether it’s going to built.

James Campbell

How do you guys look at whether it happens at all?

Hunt Ramsbottom

Our view is that like I said, we are watching very, very carefully and these things are very difficult to complete which is why you have seen a number of announcements fade away publicly. So I think all we like to say publicly is, we are watching it and, we’ll see how it goes and we are handicapping it.

James Campbell

Okay. If you guys do have any better intelligence than we do on what you think is going to happen please let us know, I’d certainly be interested.

Hunt Ramsbottom

Yeah. We will.

James Campbell

Thanks again.

Operator

Julie do you have any final remarks?

Julie Cafarella

Yes. To sum up the call, the Pasadena facility has diversified the business and it adding to incremental cash distribution. As Hunt outlined, we expect the year to benefits from strong nitrogen market dynamics.

As we look beyond this year the additional ammonia, nitric acid and ammonium sulfate tonnage will be accretive to 2014 results. 2014 will also benefit from a non turn around year at the East Dubuque facility.

This concludes our call. Thank you for joining us today and please contact me if you have any questions. Thank you.

Operator

Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating, you may now disconnect.

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