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Rentech Nitrogen Partners, L.P. (NYSE:RNF)

National Association of Publicly Traded Partnerships MLP Investor Conference Call

May 22, 2013 14:15 ET

Executives

Hunt Ramsbottom - Chief Executive Officer

Unidentified Analyst

Good afternoon everybody. Our next speaker is going to be Hunt Ramsbottom. He is the CEO of Rentech Nitrogen Partners, obviously, a non-traditional MLP. And he is here to give us the story on Rentech Nitrogen Partners. Hunt?

Hunt Ramsbottom - Chief Executive Officer

Thank you, (Ed), and thanks for joining us today. So, I will talk about Rentech Nitrogen Partners. I am going to talk about the parent corporation works. We are actually building out potentially another MLP, but I will go into that later into the presentation. Let’s talk about Rentech Nitrogen Partners today.

Two facilities today, we are a variable distribution MLP. I think we were the second one to hit the market over a year ago. Our primary location that we started with the IPO is up in East Dubuque, Illinois, those of you that follow us and those of you want to learn about us. So, this facility up in Northwest corner of Illinois is probably the best facility in the United States in terms of its location. And I will go into that more detail as why we say that. Primary products there are ammonia, UAN, although we do have DEF and urea’s products and natural gas is our primary feedstock. And I think everybody understands the natural gas story here in the U.S. and why this has become such a great business for us and others in the U.S.

Our key markets are the Corn Belt in the Tri-State area, Iowa, Illinois, up in that region. And again, everything at that plant is FOB plant-gate. And we have announced and on our way to some organic growth opportunities of that plant, that will increase the capacity of that plant, the fourth quarter this year for distributions in the first quarter of next year. Our recent acquisition down in Pasadena, Texas, different product line, diversifies our product line ammonium sulfate, again great markets for us. Right on the Houston Ship Channel, we now sell about 30% to 40% of that product into South America. We are now shipping product out into New Zealand and other parts of the globe, which really speaks of the quality of the product coming out of that market. It is a new facility for us with a new product line in the Western half in the U.S. also. That is barge, rail and truck out of that facility. We have also announced a growth expansion there that will also take place. We will take that plant down to the end of this year, and those that will be a 20% expansion in the main product line in that facility for distributions in 2014.

So, our product mix, we hit two of the main four ingredients, primarily in the marketplace today, nitrogen which has to be applied every year in our market twice a year, and again, sulfur which has been depleted in the marketplace. So, again, the ammonium sulfate and why we purchase this acquisition going forward, other products, new product lines, DEF, diesel emission fluid, we distribute to the Yara. So, again, we are growing our product lines, increasing our geographic footprint both domestically and internationally. Not only we are increasing our footprint, but are increasing our product line and also the products that we serve as you could see corn obviously – originally were over the Corn Belt, but now with our new slate of products, both at the existing facility and the new facility broad based with cotton, canola, potato, soybeans, and right across the spectrum are the crops today, so diversified products, geography, and the crops that we serve in the U.S. and now outside the U.S.

I think it’s most important to understand our business model. If you could see the margins on ammonia over the last few years have grown significantly, and that’s really because of the explosion obviously of the nat gas and what’s happened in the U.S. When I purchased this plant, gas was $11 and $12 and product prices were much lower than they are today. So, the demand of the product both domestically and internationally and the cooperation of gas over that period of time, it really expanded the margins in that facility, going forward. To offset that, you see that’s more stable margin in ammonium sulfate albeit lower, but you don’t have the volatility that you have sometimes with the other product lineup in up in East Dubuque. So, again nice stable margins in the ammonium sulfate business, growing margins both companies or both units, but also is in a little more volatility in the ammonia side.

I don’t know if you follow the current ag market, but if you do follow the current ag market, you will understand why they call this a variable distribution model. Last year around this time we planted early, it was a warmer season we get out into marketplace early, so we had a very robust first quarter last year. We pulled forward sales into the first quarter just the opposite 12 months later, I am sure you have been reading about in the headlines in newspapers that it was a very late wet cold spring, which didn’t allow the farmers to get out into the fields until really in the last couple of weeks. But due to the equipment they use today in our location if you’re seeing just the last week I think two weeks ago we are 29% planted versus historic average of 69%. And we have caught up literally in the last week at 71% planted and this is probably higher today. This is sort of couple of days ago versus the average of 79%.

So, I think the big worry in the marketplace which is why you are seeing this big volatility in the ag stocks is what will the plant is going to be like this year. We have been pleasantly surprised with the weather and again we have emptied our tanks on prepays and the business looks very, very good for the second quarter here, as we expected, but it was a bit of a nail biter for a little while.

So, let’s talk about the plant up in East Dubuque for a little bit. I mentioned earlier that we are right in the heart of the Corn Belt and you can see our market area up there. It’s very high usage of ammonium. We sell in about a 200-mile radius of that plant didn’t always be that way. We do have a barge sell in the Mississippi, we have rail access, but again because of our concentration in the marketplace the customers come to our door, we deliver from there. It’s about almost four times the demand in that market than there is supply, which is why we are now adding capacity in that marketplace, and that’s on nitrogen about 1.5 times for UAN. So, very solid position in that marketplace, we’ve been there for about 40 years.

And you can see also in our marketplace the growth of the product is growing right around that 200 mile radius. So, what does that allow us to do being in such a great marketplace where we are. We have historically had advantage in terms of our product pricing on ammonia of $100 to $120 per ton, which gives us a very nice margin. Our margins are about 55%, 60% up in that plant. But you can see comparative basis of our four-year average of some of the other folks in the business, Terra, CVR Partners, Potash, you can see that trend continuing over the four years and that continuing over the last few quarters, now we get the premium pricing in that marketplace, which really gives us a terrific advantage.

So, if you look at these charts, you see what’s happened the marginal producer as in the Eastern block in Europe with good gas prices over there at $10 plus and what’s happened in North America. So, five years ago, I don’t think I ever expected this to happen, I certainly didn’t when I bought the plant seven years ago at $11 or $12 gas, I would like say I predicted this, but I did not and but you see that what’s happened we got some of the marginal producer is the Eastern Block. And so over time we will see what happens with production over there, but we are advantaged. And you also look at the chart and you are right there and you can see how gas was correlated with the product pricing for a very long time you see how that broke back around ‘09 and ‘10, and it’s not as correlated anymore.

People always ask us well, what happens when gas prices go back up historically that ammonia would trade with that, that’s not the case anymore. Big product demand which keeps the product prices up and gas prices I think everybody for the foreseeable future sees that gas prices cooperating with what we do. So, demand for our product is growing both domestically and internationally about 2%, 2.5% a year for all the reasons that you hear population growth, decrease in farmland per capita, dietary changes around the globe. So, demand is growing and people talk about what’s going on with plant capacity expansions globally. With this type of growth we estimate it would take two world-class plants a year to keep up with this kind of world wide demand in terms of nitrogen usage. So, and we import about 50% of our product into the U.S. This industry over the last 15 years reduced capacity because of gas prices. So, now folks are talking about building back in here, which is we are one of them with our capacity expansions.

Talk about Pasadena plant for a minute, we acquired this facility for some private individuals last November, different product line as I mentioned. This has given us terrific access internationally, global access which we were needing. We do have about almost 3000 feet on the ship channel on Houston. Ammonium sulfate is our product being input at this plant is ammonia and sulfur. We buy sulfur right on the Gulf Coast there and we buy the ammonia at Tampa prices, not much lower than certainly we sell ammonia up in Corn Belt. And again rail service allowing this plant as you can see ship access and barge access and a lot of this interstate highways. So, very nice accretive acquisition for us last year, we traded at a very nice multiple 9 or 10 times. We purchased this about six times current run rate, so very pleased with how it’s going in the integration of that facility.

Our product in that facility as I mentioned is ammonium sulfate. We are the largest producer now in the U.S. ammonium, synthetic ammonium sulfate and you can see our product at the bottom. It’s really is the premium product that we produce, the rest of it is caprolactam product it’s a byproduct of nylon-6. So, it’s really a byproduct. And so we focus primarily on the quality of this product which allows us to produce this product as they’ll apply nitrogen phosphates and other fertilized products. So, we can – it doesn’t segregate and flows very nicely for the farmers and sulfur has been depleted in the soil over the years. So, again, the largest producer of ammonium sulfate synthetic in the United States.

We have displaced this is a new product line for this plant when we purchased it. We have now displaced in the first year about 500,000 tons in the Western half in the U.S. and Brazil, so the product we displaced I think that is probably shipping offshore because its lower quality. So, we are getting a higher product price for again this product line also in the marketplace because of the quality of this product.

So, ammonium sulfate is growing as you can see globally again about 2.5% around the globe. Our primary markets are U.S. and Brazil, Canada a little bit. So, we are focused on the primary markets that are right underneath this and available to us in a market that is growing fairly nicely on a global basis. So, you will see it’s increasing this product line, which is why again we are expanding the capacity in this plant by 20% that will come on stream in 2014.

The cash distributions, this year the guidance is $2.60 per unit. Now, it would be $0.65 higher, but this is a turnaround year for us both plants are coming down for the expansions, so it will be down for up to four weeks, the primary plant in East Dubuque again that will integrate the expansion. And again the Pasadena plant will be coming down also to integrate the expansion for ’14. So, this $2.60 if you just – if you factor back the turnaround will be in the low threes which is about where we were last year. In ’14 is really what we were setting up for very big year of distributions between the two facilities is cooperation. Again, 23% expansion up in Illinois and over 20% expansion down in Pasadena, our current yield is about 8% today based on our 2013 guidance.

The facilities I mentioned on the expansion side, we commenced the manufacturing – the construction of the facility in ’11. This is going to come on stream at the end of ‘13. I will mention that they are fully financed, they are on-time and they are on-budget for third quarter of this year distributions hitting the first quarter of ‘14. Nitric acid plant up in East Dubuque same thing beginning of ’14 Q1 for next year and these are fully funded. We recently did a high yield offering a few weeks ago to fully fund these projects and that’s in place and ready to go. Same thing Pasadena facility, the ammonia sulfate expansion is commenced at the end of ‘12 and that will be done at the end of ‘13 for ‘14, again fully funded with the notes that we started two or three weeks ago.

And again there is a power generation project. I think we just announced – it was just announced two to three weeks ago. Again this is a cogen project down in Pasadena, preventing steam down there. And this will be a project that comes on in ’14 for ’15 distributions. All of these projects that have been announced are better than a 20% return for us. And that is our target for each one of these expansions in our organic growth.

So, in summary on the fertilizer business, we talked about the ammonia hedge that Pasadena buys about the same amount of ammonia at Tampa just based on Tampa prices, which is lower cost down there versus how we sell it up in the Corn Belt, so we have a hedge on our ammonia. We have attractive margins we have the best product prices in the marketplace both for ammonium sulfate and our products up in East Dubuque, Illinois, now with diversified crops in markets that we sell into multiple locations, we continue to look for further acquisitions much like we did down in Pasadena that are accretive growth opportunities both internally and looking for acquisitions, so it’s very nice growth model going forward as you head into ’14 and ’15.

The market capitalization today is on $1.3 billion on this business, we now have about a $154 million in the balance sheet after the debt offering tax shield 60%. Our distribution policy is to – every quarter out and again this variable, so you have to get used to that in the marketplace last quarter because always first quarter is a little slower than because of the delayed plantings and second quarter obviously better than the first quarter. So, as a variable covering you have to look at more of an annual basis and that’s how we try to guide our investors today. The general partner, the parent the public company no IDRs for us, so we are on par with the rest of the unit holders on a go forward basis and it’s a non-economic general partner.

So, let’s talk about the general partner for a minute what we are doing at the parent again C-Corp parent, we recently announced some acquisitions there and this is what we call in the wood fiber processing business. We recently bought a company called Fulghum Fibres based Valdosta, Georgia with 32 mills both in North America and South America. This is all qualifying income for yet another MLP. So, this is our first entrée with Fulghum Fibres essentially it’s a tolling arrangement very stable margins, the customers deliver the timber to the door. We process the chips send it over to the packaging mills and this is a growth opportunity for us because they have focused on the packaging industry which is growing about 3% or 4% a year in soft tissue market.

So, these mills are tied to their mills and we do it a much lower costs fashion than they are allowed them to do. Along with that we entered into the wood pellet business again qualifying income from another MLP. We acquired two closed mills up in Canada. We received the largest wood allocation that was given by the province Ontario, Canada. So, this has allowed us to now contract long-term with utilities and we have 10 year contracts with Drax Power in the UK. A 10 year contract Ontario Power and this allows us now to launch into that wood fiber business. These two businesses combined run by the same management team about 500 people strong and again this will reside at the parent until we drop it down. And we, our legacy businesses in the energy technology businesses and I will show you how it lays out now and of course we own 60% of the parent or Rentech Nitrogen, the fertilizer business.

So, here is the structure Rentech is the parent C-Corp you see the wood fiber business on your left with wood chipping and wood pellet, Fulghum Fibres I just recently talked about energy technologies. We basically shut it down all of our R&D and that will be licensing that with very small group of folks, but really focusing on the MLP growth both core and acquisition. On the fertilizer side and a big push now in what we call wood fiber business processing to launch our second MLP. So, the structure will be three public companies on a go forward basis very simple structure with the fees coming up to the parent.

And that’s all I have. Thank you. Any questions?

Question-and-Answer Session

Unidentified Analyst

(Question Inaudible)

Hunt Ramsbottom

Well, first of all, CF isn’t right across the river from us.

Unidentified Analyst

(Question Inaudible)

Hunt Ramsbottom

No, so it’s a quite away, so the plant is – OCI is probably the only Greenfield plant in our view is going to get built and that’s underway and that’s about 200 miles away. Our current take on the 30 plants, so about two years ago we are started seeing everybody announcing that they want to be in the fertilizer business. Our view is that the folks that are in the business in their current expansions would probably get done. CF’s Brownfield expansions will probably get done. OCI will probably build a plant. Our expansion obviously is going to get done this year.

Coke and also urea expansion, so I think the folks that are in the business today understand the permitting process, had the balance sheets to build out probably well the capacities there we import 50% into the U.S. today. So, I think the folks that are in the business are taking a cautious approach and a well-intentioned approach, and I think it will be fine that the – I’ll call it the developers that are building projects out there today. I think it’s going to be tough. I mean as you saw OCI’s announcement, their capital was $1.2 billion, and I think they are just up to $2.8 billion in the last week. So, these are not inexpensive undertakings. You have to have a very strong view on gas to layout a couple of billion dollars in production and then you have got to understand where the market is going to go long-term. So, you got to have a balance sheet and you got to have a long-term view. So, our current view on that and we have studied this a lot is the folks that are in the business will probably get something, but my guess is the developers are going to have a pretty especially in light of the West Texas situation, I think that’s going to be even tougher from a permitting standpoint with the EPA.

Unidentified Analyst

(Question Inaudible)

Hunt Ramsbottom

Primarily, it’s about with its total production views but….

Unidentified Analyst

(Question Inaudible)

Hunt Ramsbottom

It’s about 85% ammonium in the marketplace, that’s our primary product up. And we are an ammonia-based company up there if you look where we are located it’s ammonium that’s what the farmers want in that market area. That’s helpful. Yes.

Unidentified Analyst

(Question Inaudible)

Hunt Ramsbottom

We certainly have. So, our business strategy historically has been, purchased our gas, lock in with our presales and our presales can go out four to six months, and we’ll match the gas with those sales. We have always said and I have instructed the guys was not try to out-trade the gas markets. So, our job especially at 55% margins is to make sure we maintain those margins and that cause problems with the balance sheet. That being said this facility years ago under prior owners bought gas assets. So, there is different ways, we are looking at it today. We have got some folks working with us, consultants. We are looking at a great way to lock in, let’s call it, lock in the advantage going forward. And we see there are some interesting opportunities that we may have to do that. And so it’s all qualifying income, so we are looking at it for sure, if you think it’s an interesting dynamic. Yes.

Unidentified Analyst

(Question Inaudible)

Hunt Ramsbottom

So, the question, I don’t know if you heard this on the wood fiber business, our growth model there. So, today, there are some platforms out there formed by private – we are the only public company now in that business, which is a bit of a challenge for us, because now you have got to educate the market on business, but we like it. We have studied it for about two years before we entered into it. The growth in that business just in the Europe demand is about 50 million tons, and it’s right now annually it’s about 10 million, 12 million tons, the utilities needed over there. So, our business model is to acquire platforms much like we did with Fulghum Fibres. And also do some Brownfield conversions.

What we did in Canada is a great example. We went up in Canada and about two years ago we acquired that wood basket from the government, actually we have given the wood basket. We have about 1.2 million metric tons a year of wood fiber allocated to us for 20 years. That’s very unique. And we can get more from the Canadian government, why? We can take over these mills up there that have been shutdown for long periods of time buying for essentially pennies on a dollar. We just recently bought one from warehouse for $5 million a day and put $200 million into that mill in the fiber baskets around these mills. So, it’s going to be a two-pronged approach by platforms, by independents, and take some of these Brownfield mill conversions reconvert them and ship the pellets. Once we have the long-term contracts and these are all indexed for commodities, we are not taking commodity risk in these contracts.

We have hired the lead person on the Drax Power, who was doing all their contracts for six years to run that business and he knows how to construct these contracts. It’s all about the contracts in the fiber and we have got both. So, there is platforms to buy, there is independence to buy, and there is good growth in the business. So, the Fulghum Fibres business, very stable business that we bought for 25 years of tolling business, there is some business we can buy and build underneath that, but the real turbo boost in that business is going to be the pellet growth long-term, so but what we’ve acquired now is 25 years of expertise from Fulghum. They process today about 15 million metric tons a year of fiber for the packaging industry both North America and South America. So, a combination of acquisitions and conversion of mills, it’s how we are going to grow that business. Yes.

Unidentified Analyst

(Question Inaudible)

Hunt Ramsbottom

It is, which is one of the reasons that we went after it, it’s qualifying income and there is not a public comp out there today. So, that’s the good news and the bad news, but we are used to that and but we are going to pursue it very aggressively. And we are now the first public company although it resides up into C-Corp, but we want to be first mover in that space.

Unidentified Analyst

(Question Inaudible)

Hunt Ramsbottom

Packaging products and soft tissue, if you look at some of the stats, that’s the market that Fulghum intelligently focused on with their mills. Okay, thank you very much.

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