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KiOR (NASDAQ:KIOR)

Q2 2013 Earnings Call

August 08, 2013 10:00 am ET

Executives

Max Kricorian

Fred Cannon - Chief Executive Officer, President and Director

John H. Karnes - Chief Financial Officer and Principal Accounting Officer

Analysts

Edward Westlake - Crédit Suisse AG, Research Division

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Robert W. Stone - Cowen and Company, LLC, Research Division

Jerimiah Booream-Phelps - Deutsche Bank AG, Research Division

Mahavir Sanghavi - UBS Investment Bank, Research Division

Brian K. Lee - Goldman Sachs Group Inc., Research Division

Operator

Welcome to KiOR's Second Quarter 2013 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. The telephonic replay will be available approximately 2 hours after this call has been completed, and will remain available until Thursday, August 15, 2013. The number to call for the replay was included in the earnings release issued earlier this morning. This call is being webcast and will also be available on the company's website for approximately 90 days in the Investor Relations section of the site.

I would now like to turn the call over to Max Kricorian, Treasurer at KiOR.

Max Kricorian

Good morning. Thank you for joining us to discuss KiOR's financial operating results for the second quarter of 2013. With me today are Fred Cannon, President and Chief Executive Officer; and John Karnes, Chief Financial Officer.

I would like to remind everyone that statements will be made during this call that are not historical facts and are forward-looking statements. These statements about the company's future expectations, plans and prospects include statements regarding the following: the projected timing of and cost related to production from and generation of revenues at the company's Columbus facility; the company's plans to build its next commercial facility; the company's plans to obtain additional debt and/or equity financing; government policy-making relating to renewable fuels; and other statements containing the words believes, anticipates, plans, expects, intends and similar expressions. These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties. The company cautions that a number of important factors could cause our actual future results and other future circumstances to differ materially from those expressed in any such forward-looking statements. These forward factors -- these important factors and other factors could potentially affect the company's financial results are described in the section called Risk Factors in the company's most recent annual report on Form 10-K for the fiscal year ended December 31, 2012, and the company's other quarterly filings with the SEC, which are available through the Investor Relations section of the KiOR website at www.kior.com, or on the SEC's website at www.sec.gov.

The company may change its intentions, beliefs or expectations at any time and without notice based upon any changes in such factors in the company's assumptions or otherwise. The company undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after today or to reflect the occurrence of unanticipated events. Therefore, you should not rely on these forward-looking statements as representing the company's views as of any date subsequent to today, August 8, 2013.

Now I will turn the call over to Fred Cannon.

Fred Cannon

Thanks, Max. Good morning, and thank you for joining on our conference call. Today, I'd like to talk to you about how we are progressing at Columbus. There are 3 phases that we would view as necessary to go through to bring a first-of-kind facility like this to a first -- to a steady state. First, is the reliability phase, which concentrates on simply running the facility and building on-stream percentage. After that, comes the throughput phase, in which we will build throughput of the facility toward nameplate capacity while maintaining on-stream percentage. The last is optimization phase, during which we will work to increase the process efficiency of the facility which, for us, is reflected in yield. We are still continuing our start-up path at Columbus and lining out the facility, but we have made significant progress on the first phase and are getting greater on-stream reliability. And we are beginning to work on the second phase by increasing throughput to nameplate capacity. I'm going to give you some color on those and I hope that you will see why we are growing more confident every day about this facility.

I presume that you all saw our release on July 1 which we announced the continuous 30-day run of the BFCC and that we made our first shipment of cellulosic gasoline and resume diesel shipments. Getting commercial-scale cellulosic fuel on the road in the U.S. is historic in our view and further validates our technology.

So let me first talk about the BFCC and give you some specifics on what we saw on our run times during the quarter. In all, the BFCC operated for a total of just under 40 days in the second quarter, representing another significant improvement over the previous quarter, more than doubling our quarterly on-stream percentage from 23 -- from 20% to 43%. Our first run was April 22 to April 27. We then started the BFCC backup on May 6 and ran it until May 12. We decided to terminate both of these runs due to feed synchronization issues. Nothing about the KiOR technology prevented the runs from going longer.

With that work completed, we then came back online with the BFCC on May 30 and ran it until June 29, and that 30-day run more than doubled the longest individual run we have had previously. The feed system was now working up to our standards and helped us achieve that 30-day run.

The operation was terminated when we needed to make a repair in the Wood Yard, and that was just to replace some bearings. To reiterate, nothing about the KiOR technology prevented this run from going even longer. These are the types of start-up issues we're experiencing. And while they can be certainty be frustrating, they're all relatively small in nature. As has been the case since we first started the facility, these issues are not related to our core technology. They are simply part of the break-in process. And again, let me reiterate that our goal last quarter was to keep the plant running as long as possible, not to push the plant from a throughput standpoint.

Our focus was on reliability, and we typically ran Columbus at 40% to 50% of its nameplate capacity. We were able to build up performance on our upgrading unit independently of the BFCC because it can process oils into fuels even if the BFCC is not running. We produce fuel through July 7, the upgrading oil produced during these 3 campaigns during the quarter. I might add that this run has led to some significant operating improvements that are allowing us to get on spec in less than a day versus twice that previously. All of this then lead us to being able to make our fuel shipments. In total, during the month of June, we shipped over 75,000 gallons of cellulosic fuel, and we have continued to make shipments of fuel during July.

Longer runs in the third quarter are our main objective. With our amount of repair work behind us, the plant is running now. Today, high quality oil is being produced and stored, and I anticipate that the hydrotreater will start up shortly. Meaning, we will have fuel ready to ship in the very near term. We feel that we've addressed most of the issues and are confident that the BFCC will remain in operation through the end of this quarter.

We're gaining a tremendous amount of operating experience at Columbus. We are now able to operate the plant through issues that would have previously resulted in a shutdown of the plant, and we continue to prove that our proprietary technology works consistent with or better than our expectations. For the remainder of the third quarter, we want to build on our progress and increased rates, really stretch the plant's legs, so to speak. We will look to ramp up the throughput while still maintaining a high level of reliability.

Let me be clear, however, that we are not going to focus on process optimization and increasing yield until the fourth quarter, or when we are satisfied with our efforts with regard to building up the throughput. And we may have to bring the plant down from time to time.

Ramping up with what the rest of 2013 looks like. I can tell you that we intend to push closer to nameplate capacity, and we expect to drive operating conditions to greater efficiencies. Given our operational priorities, we are not intending to run the plant towards specific volume targets during 2013. As such, we expect our full year production levels will be in the 1 million to 2 million gallon range. I then believe that we will be in a good position to increase our yields consistent with our expectations.

With this foundation in place, I look for us to achieve normal, steady-state optimal operations at Columbus in the first half of 2014, with the opportunity to enhance this performance beyond our original expectations, which I would like to turn to next.

In parallel, with our efforts at Columbus, we have continued to consider our strategy for the execution of our long-term business plan. As part of that process, 2 important developments have factored into our strategic thinking. First, we believe that we have made some important gains in our research and development efforts that among other things can have a significant impact on the operating efficiency and catalyst performance of our technology at commercial scale. And convert the non-RIN-generating fuel into RIN-generating cellulosic gasoline and diesel.

Second, we are beginning to see traction on the commercial development of feedstocks other than Southern Yellow Pine, including hard wood, energy crops and waste products such as used railroad ties. All of which, we expect to be able to procure at lower prices without negatively impacting the overall growth to drain in the basin. These developments, combined with our learnings at Columbus, have made possible an alternative strategy that we believe may allow us to be cash flow-positive more quickly, more cheaply and with less risk and less dilution for our existing stockholders. In essence, this alternative would involve the construction of a second 500 bone dry ton per day facility adjacent to our existing 500 ton per day facility in Columbus.

While we are still in the early stages of evaluating this option, we are excited about this alternative because it may be able to achieve the following: first, we expect that it would provide the ability to incorporate the most recent improvements to our technology and devote our current facility in Columbus and a new facility, enhancing both reliability and yield for both facilities. Second, we anticipate that we would be able to reduce cost and time for design, engineering, construction of the second facility because we can leverage our experience and existing design from the current Columbus facility. Third, we would expect to achieve synergies and reduce start-up and commissioning risk as a result of shared experience personnel, site infrastructure, equipment and operational knowledge. And fourth, we believe that we can expand the kinds of feedstocks we can run in both facilities, including hardwood, energy crops and waste products such as railroad ties.

Based on these assumptions, we anticipate that these 2 facilities together would be able to produce cellulosic gasoline and diesel, and generate sufficient cash to fund KiOR's entire operations, including our G&A, as well as future R&D efforts, with significantly less capital investment than our eventual standard scale 1,500 ton per day facility. On a preliminary basis, we expect that the total cost of this second 500 ton per day commercial facility in Columbus will range from $175 million to $225 million based upon expected design and engineering savings, combined with our recent experience of building the Columbus facility.

We also estimate on a preliminary basis that the combined Columbus facilities will be able to produce cellulosic gasoline and diesel at a per-unit unsubsidized cost between $2.60 and $2.80 per gallon, at our current yield of 72 gallons per bone dry ton, excluding cost of financing and facility depreciation. This would then decrease to between $2.20 and $2.30 per gallon at our short-term yield target of 92 gallons per bone dry ton. We believe that this reduced capital intensity would also reduce the amount of external financing required to transform KiOR into a profitable business.

At the same time, we have continued to refine the design of our next starts larger standard scale commercial unit which we currently plan to build in Natchez, Mississippi, with a single BFCC unit and a dedicated upgrading unit. These design modifications have incorporated both our learnings from the Columbus facility and the process enhancements developed by technology and R&D groups. This process also has allowed us to update our projections about the capital costs and operating cost per gallon for this facility.

On the capital cost for this facility, we have updated our factored estimate by multiplying the expected price of equipment to be purchased for this facility by a factor that is designed to reflect current market conditions. It takes into account a number of variables, including the impact of increased plant construction activity in this region since our original invest -- estimate, inflation, competition for labor and class, availability of vendors and manufacturers of equipment. In determining the appropriate factor, we have used our own experience in the petrochemicals and refining industry, sought guidance from professionals in the engineering procurement and construction industry and our historical experience in constructing the Columbus facility. For those few parts of the plant for which we do not have a definitive equipment list of factor, we have made reasonable estimate of the total installed cost of the portions of the facility.

Based on this process, we currently estimate that cost to build our standard scale commercial facility in Natchez will be approximately $560 million to $600 million, of which $30 million represents site specific costs necessary to build in that particular location, which is driven by the increased scope required to incorporate our current technology into the larger facility in a much more conservative factor that I described earlier. We also estimate that this facility will be able to produce cellulosic gasoline and diesel at a per-unit unsubsidized cost between $2.25 and $2.48 per gallon at our current yield of 72 gallons per bone dry ton, excluding cost of financing and facility depreciation. This would decrease to between $1.81 and $1.96 per gallon at our short-term yield target of 92 gallons per ton. The actual anticipated operating cost per gallon within that range will be dependent upon the equipment we actually build on and operate, that is, at the higher capital number, our operating cost would be at the lower operating cost number.

While these revised estimates of capital and operating costs are within the expected range, contemplated by our original estimates, we are redoubling our efforts to find both technological and process engineering efficiencies to reduce our capital and operating costs below what we have provided here today. Even with these revised base economics, we still believe that our standard commercial scale facilities will provide very attractive returns, given our ability to take advantage of the preferred status of our fuels under RFS2.

As I did on the last call, I would like to draw attention to the significance of Renewable Fuel Standard and what weighs in the balance when we start hearing talk about changing it. Nearly every summer in the United States, we hear concerns about the cost of fuel at the pump, Americans hit the road to enjoy their summer vacations, and one of the most widely discussed topics is, why is gas so high? This summer is no different. There are a number of factors that impact the cost of fuel and they are even more evident during the summer.

In addition to the normal taxes transportation, distribution, marketing and locational costs, we now have significantly more travelers on the road, along with a seasonal fuel shift impacting the cost. Committees in both houses of Congress took this up recently, which happens almost annually. And we saw hearings in July that included much discussions on the Renewable Fuel Standard and so caused to modify or completely do away with RFS2.

There are a number of myths in the media now about biofuels. Biofuels are driving up prices at the pump. Biofuels production has cost consumer price, food prices to rise. Biofuels damage engines and can't work with current fuel infrastructure. Biofuels aren't needed because of the boom in domestic oil production. The cellulosic fuels produced by KiOR debunk every one of these myths. KiOR's fuels can be cost competitive with conventional fuel and don't require transportation from foreign sources. KiOR uses only nonfood feedstocks and doesn't contribute to the food or fuel controversy. KiOR's fuels are true hydrocarbons. A drop right into our existing fuels infrastructure and do not face the blend wall limits of ethanol. In fact, we now have registrations from EPA to blend both our cellulosic gasoline and our cellulosic diesel at up to 25%.

KiOR fuels are needed now more than ever and can be an additional source of domestic fuel production, with a carbon footprint that is significantly better than conventional fuels. They are fueling American cars and trucks as we speak, invigorating the economies of rural communities like Columbus, Mississippi.

Our elected officials need to be urged to stay the course, similar to the continued affirmation we saw for cellulosic fuels from EPA this week. Investment has been made, men and women are working and more and more American-made cellulosic fuel is being put on the road. Companies like KiOR are producing real fuel that have brought real jobs, no different than our competitors who produce conventional fuel. However, we are achieving a better carbon footprint with cellulosic fuels, and we've lessened the dependence on foreign sources of petroleum. In short, we are keeping our end of the RFS2 bargain, given the jobs and national interests at stake. And we expect Congress to do the same.

I will now turn the call over to John to cover our financials.

John H. Karnes

Thank you, Fred. Well, during the second quarter we reported a net loss of $38.5 million compared to a net loss of $31.3 million for the first quarter of 2013, and a net loss of $23 million for the second quarter of 2012, year-over-year that is. The Q2 2013 loss includes $3.5 million of noncash stock-based compensation expense, which is roughly $200,000 lower than the previous quarter and year-over-year.

The second quarter total revenues were $239,000 related to sales of cellulosic gasoline and diesel produced from our Columbus facility. This includes both hydrocarbon and RIN value. Also, as I mentioned during our last conference call, as a resort of recording our first commercial sales at Columbus last March, we began booking all fixed-costs plant -- for the plant, including depreciation, variable costs to cost of product revenue, as opposed to G&A. The Columbus plant costs incurred prior to the operational phase were included in G&A, but now they're cost of product revenue going forward.

So cost of product revenue for the second quarter of 2013 was $15.1 million and of course, this consisted of expenditures for baseline operating costs like repairs, maintenance, utilities, feedstock inventory, labor and depreciation, as well as the continued cost expended to achieve steady-state operation at the facility. Excluding depreciation charges of $2.2 million recorded this quarter, the Columbus-related cost were $12.9 million, up $1.7 million sequentially from the previous quarter this year. This increase includes $1.3 million of feedstock and inventory consumption costs, and $400,000 of maintenance cost and other costs spent to get to steady state. This is within last quarter's guidance as we made progress on stabilizing the facility.

Outside contractor costs continue to decrease quarter-over-quarter, as we maintain the trend of relying more heavily on our internal operators, KiOR employees, to handle the facility on a day-to-day basis. We expect this trend to continue as Columbus continues to stabilize, and these costs should wind down as we progress toward steady-state operation in the months ahead.

Research and development costs for the first quarter were $8.6 million, which is about $600,000 lower than the prior quarter of the current year and about $800,000 lower than the same quarter year-over-year. The prior quarter variance is mainly due to lower stock comp expense, as well as lower operating expenses at our demo facility in Pasadena. The year-over-year decrease was largely due to reduced R&D activity related to the Columbus plant, as well as lower operating and maintenance costs at the Pasadena demo facility overall.

G&A expenses for Q2 2013 were $7.9 million. This is a decrease of approximately $400,000 from the previous quarter, excluding Columbus costs to get to steady state, which we've talked about, that those were in G&A in Q1. But the Q2 costs were lower due to payroll benefit adjustments and higher audit fees. Year-over-year, G&A expenses were about $100,000 higher than Q2 in 2012, due mainly to higher payroll and related expenses. Interest expense for Q2 was $7.6 million, virtually all of which related to PIK notes, warrants and other noncash items. Approximately $400,000 of interest expense was capitalized during the quarter.

Moving to our balance sheet. Cash and cash equivalents, along with restricted cash at quarter end, totaled $11.7 million. This is a $600,000 increase from the prior quarter, reflecting a $30 million draw on our secured facility from Q2. During the month of July, we drew $10 million under the new loan facility that I just referenced, leaving an additional $10 million available for our request under that secured facility.

Looking ahead, as to our pricing assumptions, until we settle into a normal inventory delivery schedule with our customers, we expect our ASP will continue to be reduced by somewhere between $1 and $1.50 per gallon. Again, as we talked about before, these discounts are not structural, they do not reflect a lower value proposition for our fuel as compared to petroleum-based fuels, and we expect them to taper off in the future as we achieve regular delivery schedules with our customers.

As far as product revenue, we continue to plan on fixed costs -- I'm sorry, cost of product revenue, we continue to plan on fixed costs of around $5 million per quarter, excluding costs related to getting a steady state, amortization and depreciation. Again, these represent our baseline costs comprised primarily of feedstock consumables, maintenance, personnel, insurance and related baseline expenses. In addition, we anticipate between $4 million and $5 million of continuing costs to get to steady state in Q3 related to over time contractors and, call it, make right, declining ratably over Q4 and tapering off completely, we would expect, by the end of Q1 2014, as the facility lines out.

We expect variable costs in Q3 to be between $2 million and $3 million, ramping up almost linearly with our production outlook to the $4 million to $5 million range per quarter based on our current expectations for our run rate toward the end of the year.

Depreciation and amortization expense for Columbus should run around $2.2 million a quarter. R&D expenses in Q3 are expected to be in line with our Q2 level, and we would anticipate G&A to be around $8 million for the quarter, as we no longer record Columbus' start-up costs as part of G&A.

Moving to interest expense. Since March, we are no longer capitalizing interest at the same rate we have been now that the Columbus facility is online. We now anticipate net interest expense for Q3 to be around $9 million, most of which should be noncash related to PIK interest, amortization of warrants and discounts and amortization under our non-interest-bearing loan from the MDA.

As we continue to progress the front-end engineering design of Natchez, we would expect our capital expenditures in Q3 to be around $3.5 million per quarter. As Fred mentioned, a portion of this may be dedicated to the alternative we were exploring related to Columbus 2 plant.

I think that confirms -- that concludes my formal comments. I'll now turn the phone back to the operator, and Fred and I will be glad to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Edward Westlake with Crédit Suisse.

Edward Westlake - Crédit Suisse AG, Research Division

I guess, just turning to the Columbus plant. I appreciate -- I mean, it was very clear in terms of how you laid out the 3 phases, which obviously makes sense. But I mean, maybe if you could comment on the peak throughput that you've reached on a ton per day basis and the peak yield that you have seen in the plant thus far, just sort of give us some sort of data points to kind of get some color overall in terms of the longer-term duration of lining out the plant.

Fred Cannon

Okay. Sure, Ed. We have run the plant at -- close to capacity for short periods of time, just to really test equipment and so forth and so on. And we do that just for short terms. And our focus, as I've said, is really been on just keeping the plant going. So that 40% to 50% is kind of where we're focused, just to test out all the equipment, all the instrumentation, control systems and just make sure everything is good on -- and of course now, we will start ramping that up and structurally take steps.

Edward Westlake - Crédit Suisse AG, Research Division

And then on yields -- yes, I'm sorry.

Fred Cannon

Yes, on yields, we really haven't focused on yields. They are very much in line with our expectation. We have 3 generations ago catalysts which is kind of our base catalyst in the plant. And the yields we see are kind of what we expected, but we really hadn't done very accurate mass balances and so forth to determine. They're very much within our expectation.

Edward Westlake - Crédit Suisse AG, Research Division

Okay. And then switching to Columbus 2. If you did go down that route, which obviously makes sense when you see the amount of capital that you need to keep the business moving forward. When do you think you could get back the plant on stream?

Fred Cannon

Ed, we've talked about Natchez as 18- to 24-kind-of-month schedule from whenever we have it financed and break ground. We think we could beat that several months. As you recall, we did a mechanical completion of Columbus 1 in 13 months. But it has a lot of appeal to us, and we're really excited about evaluating this alternative because what it does for the company, it allows us to reach cash flow positive position on the path to real profitability for the entire company. Several months at least quicker than we could going down and building that full scale commercial unit. It also allows us to get the -- our latest innovations that have come out of technology and R&D into commercialization much faster. And of course, more importantly, also, it minimizes the dilution a lot less capital needs to get the company cash flow-positive. So that's the way we're looking at it now.

Edward Westlake - Crédit Suisse AG, Research Division

And for John, I mean, in terms of project financing appetite for Columbus #2, maybe some color there in terms of how much you think you could get project finance?

John H. Karnes

I think on the financing, I can't really comment in detail. But I can say, this is very compelling, and we believe every day we're giving a more compelling investment thesis. And we have a very high degree of confidence that we could fund that project.

Operator

Your next question comes from Mike Ritzenthaler with Piper Jaffray.

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

Fred, in your comments about Columbus 2, you had laid out 4 pretty compelling points, but one of them wasn't equipment -- sort of the equipment synergies or other operational type of synergies. Is there something that is on that part of the equation that's appealing as well or [indiscernible] separate?

Fred Cannon

Oh yes. Yes, thanks, Mike. I think the way we are thinking about it, there are a tremendous amount of synergies. Columbus even has a lot of oversized equipment in it currently. And so -- but we just took a high-level look, and you say, if you just replicate the plant, of course, you don't have the engineering costs that would be associated. We already have a detailed engineering. And now what we'll do is look at all of the synergies for equipment, shared equipment, et cetera, shared innovations that we've developed out of R&D. And those numbers are really not in the estimate that we put. So we think there's a lot of upside, but -- and it only makes it more compelling to do this.

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

Yes. Okay, that makes sense. On the RIN revenues, as a percent of blendstock revenues, it's a bit lower, I guess, than we would expect, especially given the run-up in RIN values in June. In the way that you're kind of looking at 2013 production, is there a way to sort of estimate how much non-RIN eligible fuel there will be? Or is that -- is it a timing issue or something else?

Fred Cannon

Yes, Mike, there is -- we have, let's call it, around 90% fuel that we make out of the oil. There's 10% -- or a little less or more bottoms that is considered fuel oil. And that fuel, we will not get RINs on under the current regulation. There's some efforts to make that rentable under RFS2, but we certainly don't count on it. That's one of the innovations that we've just come out of R&D, but we can convert virtually 100% of the oil into gasoline and diesel and eliminate those. So that would mean we get RINs on all of the oil that's converted. As far as forecasting, as John mentioned in his earlier comments, look, we're still in the startup intermittent shipments and so forth. We have some product that may be on spec on one parameter kind of things from the startup phase. So I would just wrap it up to hydrocarbon plus RIN starting in the next few months.

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

Okay. That makes sense. Just one quick one for John, if I could, on the startup costs. I was writing feverishly, but I don't think I quite caught everything. It looks -- so the part of the cost of goods that, in a normal rate, wouldn't be there was -- it sounded like $1.7 million in 2Q, and I couldn't quite figure out what it might be in 3Q.

John H. Karnes

I'm sorry. I didn't get the question. One more time?

Michael J. Ritzenthaler - Piper Jaffray Companies, Research Division

Yes, the startup-related costs, contractors and that type of thing in 2Q and then what might it be in 3Q.

John H. Karnes

Bear with me one second. I thought we were about -- between $2 million and $3 million. Let me check that, Mike. Yes, I think between $2 million and $3 million is our [indiscernible]. No, I'm sorry, the -- so we would expect our baseline to continue to be around $5 million, I'm sorry, and that we would expect the cost to get to steady state in Q3 to continue to be between $4 million and $5 million. On top of that, we would have -- we would expect to have variable costs for Q3 probably between $2 million and $3 million. And we would expect that to kind of ramp up to the $4 million to $5 million range as we have an exit rate at the end of the year closer to baseline.

Operator

Your next question is from Pavel Molchanov with Raymond James.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Can I just clarify which plant are you going to build first, Columbus 2 or Natchez?

Fred Cannon

Sure, sure. We're evaluating both alternatives right now because of some of the R&D and technology improvements that have -- that we've recently developed are very innovative, we're quite excited about. They've opened the door, really, to do this Columbus 2 alternative. So this quarter, our goal is to make a decision that we do Columbus 2 first, gets us to a cash flow positive position in the company much sooner, then do Natchez or do we do Natchez first. And we will evaluate both those alternatives and have a clear plan forward by the end of this quarter.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Okay. But you plan to eventually build both?

Fred Cannon

Oh, yes, yes. Our overall business strategy has not changed. As I said, some recent innovation from the KiOR R&D group has made this -- has opened this opportunity to do a Columbus 2, if you will. So -- but it does not change our overall strategy to build Natchez and then plant 3 and plant 4 and plant 5 of our standard commercial units.

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Okay. Can I also ask a question to John? What is the current value in the marketplace at cellulosic RINs that are applicable to you guys?

John H. Karnes

The current value of RINs?

Pavel Molchanov - Raymond James & Associates, Inc., Research Division

Yes, cellulosic RINs, yes.

John H. Karnes

Well, the way we look at them, because they're not on a market, I mean, so at least they're not quoted now, and the RINs that we're selling now, again, we don't get into our commercial relations, but again, the products that we've always spoken about is the value of the advanced and the cellulosic waiver, which should be the compliance equivalent of a C-RIN traded at market at least in the short term. So I think the advanced RINs for the second quarter, we average about $0.93. Cellulosic waiver, of course, for the year is around $0.42. We're getting 1.5x that for our gas and 1.7x that for our diesel. So you can -- it's $2.10 to $2.15 in that range.

Operator

Your next question comes from Rob Stone with Cowen and Company.

Robert W. Stone - Cowen and Company, LLC, Research Division

I'm intrigued by your comments, Fred, about being able to source cheaper feedstock. Is there a ready source of supply for these things and logistics and so forth? Obviously, the Southern Yellow Pine is all set up to serve paper and construction materials, but is there a ready source of those other things you mentioned?

Fred Cannon

Yes, actually, there is, Rob. And all the numbers I have talked about were based on Southern Pine, just for clarity, but we see a way to drive the feedstock costs down substantially. Of course, hardwood is less expensive than pine, especially the hardwood residuals. Plenty of that, depending on the location, Natchez, a great hardwood basin. We -- you think about energy crops, there are thousands of acres already planted in the U.S. now and growing a miscanthus, as well as wheat grass. A lot of developments going on there. And then you get into municipal solid waste or things like railroad ties. There are lots and lots of railroad ties that could feed multiple KiOR plants just on railroad ties that are generated every year, that are currently a waste product. So those are -- we're quite excited about it. Some of the recent developments in R&D have given us much higher yields on these things, on these feedstocks. So that's why we're excited about them.

Robert W. Stone - Cowen and Company, LLC, Research Division

Okay. A question related to offtake on Columbus 2. As I recall, your original agreements with the 3 offtakers for the Columbus, as it stands now, each would have taken more than is available with 1 per share each, roughly. So could those agreements, as already contemplated, then cover the output from the second phase?

Fred Cannon

No. It would not, Rob. Our agreements would only cover Columbus 1. So in Columbus 2, we've had offers to cover Natchez and Columbus 2 and 3 more Natchez. So plenty of demand out there. But we have no commitments for the volume for Columbus 2.

Robert W. Stone - Cowen and Company, LLC, Research Division

Okay. And a question on operations. You mentioned, I guess, that you expect to be running continuously now through the end of the year and focusing on ramping up. If you do have to make an orderly shutdown as opposed to the unplanned type, where you had to deal with plugging and so forth, how much time does it take now for an orderly shutdown and restart of the plant?

Fred Cannon

We've made good progress there, and our last few shutdowns have all been very orderly. It takes a few days to take it down safely and then reheat the plant and start it back up. That's 5, 6 days kind of time frame. So -- and then, of course, whatever time it is to do whatever improvements that we would do during that period.

Robert W. Stone - Cowen and Company, LLC, Research Division

But did I understand correctly that you've been essentially running continuously since the end of the quarter? Or what's in the uptime since the end of Q2?

Fred Cannon

Yes. The plant is running now is what I said, Rob, and we were making some improvements and so forth. We would expect for this quarter to show another improvement, certainly, another improvement in our onstream factor. We went from 20 to 40. We would expect to make that same kind of step again in third quarter.

Operator

Your next question comes from Vishal Shah with Deutsche Bank.

Jerimiah Booream-Phelps - Deutsche Bank AG, Research Division

This is Jerimiah calling in on behalf of Vishal. I was just hoping we could get a little more clarity around cash burn for the rest of the year, particularly as the production sounds like it'll be a little bit lower as you go through the ramp-up.

Fred Cannon

John, will you take that, please?

John H. Karnes

Sure. Sure, Fred. Well, the way to think about it is on a cash-on-cash basis, our SG&A has been running between $12 million and $13 million a quarter, and we would expect that to continue. As far as the Columbus plant, the way to think about it is we've got your baseline costs, it's going to be around $5 million a quarter. Then on top of that, we're going to have -- at least in Q3, think about costs spent to get to steady state of $4 million to $5 million. That should decline over the next, call it, Q2 quarters and Q3 quarters, Q3, Q4, and be gone, we would expect, at the end of Q1, which we would expect to be a steady state. Then on top of that, we're going to have increasing variable cash costs, $2 million to $3 million in Q3, probably $4 million to $5 million in Q4 going forward. Then on top of that, we've got our interest expense, which is probably predictable. It's roughly $2 million every 6 months for MD&A, don't have that cash interest obligation, as you will recall. And right now, we would expect to pick all the rest of our interests.

Operator

Your next question is from Mahavir Sanghavi with UBS.

Mahavir Sanghavi - UBS Investment Bank, Research Division

First question about -- John, going back to your comments from last quarter, about achieving certain milestones to go to public or private markets. I was wondering if you think you met some of those milestones in 2Q. Or are those in the second half of this year?

John H. Karnes

Well, we can't really get into a lot of details about our financing activities right now, but I can -- separate apart from the financing, we can tell you that we do view the shipment of fuel in Q2 as a very significant milestone, even though it was only 75,000 gallons. Again, the issues that the Columbus plant has been working through are not at all related to our technology. So the plant, I think, has proven, it's fair to say, that it can produce at commercial scale. And as Fred mentioned, we more than double our operating time, Q1 to Q2. We would expect to run the remainder of Q3. So certainly, there's the increase in operability and there's the fuel shipments. We also had some R&D developments that, again, sort of allow us to have this whole conversation about Columbus, which is, I think, a milestone that people have been looking for. And then lastly, we view the EPA approval of our fuel, up to 25% blend, to be very, very significant as well because it further differentiates KiOR from ethanol and some of the other biofuels that are under attack from a regulatory standpoint. So, yes, I think we're -- overall, we have achieved milestones in Q2. I think Q3 will achieve more, particularly if we're able to run for the remainder of the quarter and begin to put the, as we keep talking about, points on the line going up into the right in terms of production and revenues, which is what we would expect to see in Q3 and Q4.

Operator

Your next question comes from Brian Lee with Goldman Sachs.

Brian K. Lee - Goldman Sachs Group Inc., Research Division

I know you haven't decided on timing of Columbus 2 versus Natchez, but assuming you were to go with Columbus 2 first, what would be the implications for the size and timing of the capital raising? And also, what would be the implications related to timing on Natchez there after?

Fred Cannon

Yes. John, will you comment on that, please?

John H. Karnes

Sure. So assuming we go with Columbus 2 first, and you assume that it takes us 13 months, which is what it took for Columbus to build Columbus 2, you're talking midpoint of the construction estimate between $175 million and $225 million, so you call it $200 million. We would expect to raise a substantial portion of that in equity. It's always been the plan, as you will recall. It's been roughly 1/3 equity, 2/3 debt. And I think that's probably going to hold true, whether it's Columbus or whether it's Natchez. And, again, I can't comment on financing. Then on top of that, we would just need, call it, our normal burn rate of $50 million a year cash for corporate, and we would expect along the lines we've spoken about now, as Columbus begins to come on and be steady state, begin to work on yields in Q4 and into Q1. Around mid-year next year, Columbus would start to be at least neutral, if not generate cash. So on top of the $50 million, there would be a component needed to fund the operating losses, but we would expect those to cease before Columbus 2 comes online. So we're still working through the numbers, don't have an exact number yet in terms of financing, but you would be $50-plus million whatever you projected operating losses might be for Columbus 1 for the next year or so.

Brian K. Lee - Goldman Sachs Group Inc., Research Division

Okay. And then, I guess, in that scenario, assuming Columbus 2 does go first, what would you think, even ballpark-wise, feasible timing on Natchez following that would be?

John H. Karnes

Fred, did you want me to handle that?

Fred Cannon

Oh yes.

John H. Karnes

Okay. Well, consistent with our growth planning, it's our desire, particularly on the RFS2, to roll the plans out as quickly as we can. Longer-term, we're designing these plants to be economically viable, standalone and profitable without RFS2. But in the short term, as we just talked about, RFS2 offers us more than a $2 per gallon incentive, at least between now and 2022. So I think the financial markets are going to dictate how quickly we can roll things out. The Columbus facility, we already have such a jump start on Columbus 2 because the engineerings done, everybody involved, both on our side and KBR, as we built this plant before. So we thought that we can do it pretty efficiently and without a lot of corporate distraction. So we feel that we can keep the front-end engineering and design kind of going on both projects at the same time. And then the issue is when can we raise the financing. As we've said, we want to break ground on Natchez. We're probably 60 to 90 days from the time we closed financing, whenever that is. I think Columbus 2 would hold true. I mean, we would break ground on Columbus 2 very soon after raising financing, and we would keep Natchez on a parallel track. And if we could raise the financing for Natchez, we'd like to go forward again with them both. Overall, long-term plan hasn't changed. We want to break ground on Natchez. We still think that, overall, 1,500 bone dry tons a day is the right size, and we'd like to build 1 every other quarter, if we can, subject to the market conditions and subject to RFS2.

Brian K. Lee - Goldman Sachs Group Inc., Research Division

Okay, great. Yes, actually, I wanted to ask you about that because I know you've always said 1,500 tons was the optimal scale to value engineering and other cost benefits. It doesn't sound like that view has changed, but when I hear your commentary around the motivation for Columbus 2, you're covering your costs, accelerating cash flow positive, but, I guess, how should we think about the returns on that smaller scale facility relative to your expected cost of capital since even by your own admission, it's still going to be suboptimal?

John H. Karnes

Sure. Well, Columbus 2 will be -- will not have the cost efficiency that a Natchez plant would have. And a Natchez plant wouldn't be as efficient as a refinery. I mean, in refining, it's all about scale, bigger is better. Our constraint right now has been predicated on Southern Yellow Pine. We think 1,500 bone dry tons a day is about as big as you would build and know that you're not going to tip or stress the wood basin that you're in. We're beginning now with the R&D developments we've made to look at how we can factor in other feedstock types that Fred has mentioned. And that may or may not have a near-term impact on the 1,500 ton a day size. But I think by the time being on the inside, we're continuing to work on that 1,500 bone dry ton a day assumption. And we think when you have the efficiencies or the synergies captured between Columbus 1 and Columbus 2, that does not make up certainly for the fact that it's not a 1,500 ton a day plant. No matter how you cut it, you're going to have roughly 1/3 less efficient fixed cost absorption. So we think there's enough efficiencies there that it can cash flow the company. So we're not saying that we think 500 bone dry tons a day is the right plant or that we build them in parallel. 1,500 is still probably the long-term way to think about it. But one of the things we're hearing from the market is the market wants KiOR to be cash flow positive or at least self-sufficient. And we think that there's real merit in looking at this Columbus 2 as a possibility for making that happen a lot sooner with a lot less dilution.

Operator

You do have a follow-up question from the line of Ed Westlake with Crédit Suisse.

Edward Westlake - Crédit Suisse AG, Research Division

Yes. Actually, 2 follow-ups. Just on the higher cost for Natchez. I mean, obviously, we all know there's like $150 billion of investment going on in the Gulf, all sorts of different projects using the same type of skills. So was most of that sort of just updated cost guidance? Or has there been a change in scope relative to what you thought when you were talking about the numbers last quarter?

Fred Cannon

Okay, Ed. Yes, you're exactly right. There's a lot of activity going on in the Gulf. And I can kind of break it down for you, just on high level. All the improvements that I've talked about to convert all of the oil into rentable cellulosic gasoline and diesel and a lot of the other improvements that we've made, the price tag for that on a TIC basis, let's call it $50 million, maybe a little bit less. And then we have about -- almost $90 million is -- of the delta is because of the more conservative factor, because of all the construction and just -- and, of course, this is all forecasted, who knows what's going to be real. But that $90 million of the increase, which is, by far, the majority, is that. And then I mentioned in the script, there's about $30 million of that number which only pertains to Natchez because of the soil there and just construction cost at Natchez, which is not a structural cost, like Columbus 2 would be essentially 0 for -- on a comparative basis.

Edward Westlake - Crédit Suisse AG, Research Division

Right. Okay, good. And then in your opening remarks, you kept talking about the short-term yield target of 92, but I'm just intrigued by the short-term components of that conversation. Is that due to stuff that you've done at the lab scale already?

Fred Cannon

We're -- let me say, Ed, we're getting more and more confident and more and more excited about our yield trajectory. Some of the recent -- I can't go into detail about them now because they're brand-new, and we're, of course, very focused on protecting our IP and doing that correctly. But I'll be giving updates very soon. In the lab scale, we're making good progress, let me say that, and I'll look forward to updating you soon.

Operator

And that concludes today's question-and-answer session. At this time, I will turn the conference over to Fred Cannon for any additional closing remarks.

Fred Cannon

Well, I just want to thank everyone for joining us on the call today, and we will certainly look forward to keeping you updated and talking next quarter. Thank you.

Operator

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation.

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