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Rentech, Inc. (NASDAQ:RTK)

F4Q09 Earnings Call

December 15, 2009 1:00 pm ET

Executives

Julie Dawoodjee – VP IR

Hunt Ramsbottom – President & CEO

Dan Cohrs – EVP & CFO

Analysts

Jeremy Sussman – Brean Murray

John Bridges – JP Morgan

Pearce Hammond – Simmons & Co.

Matt Farwell – Imperial Capital

Corey Garcia – Raymond James

[Steve Emerson – Emerson Investments]

Nathanial August – White Eagle Partners

Operator

Welcome to the Rentech fiscal full year 2009 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Julie Dawoodjee, Vice President of Investor Relations. Please go ahead.

Julie Dawoodjee

Thank you. I would like to welcome all of you to Rentech's 2009 fiscal fourth quarter conference call for the period ended September 30, 2009. Before we begin our prepared remarks I would like to cover some administrative aspects of this conference call.

During this call, Hunt Ramsbottom, President and CEO of Rentech, will provide opening remarks highlighting our company progress during the fiscal year and Dan Cohrs, our Chief Financial Officer, will give a financial review of the fourth quarter and full year, provide comments on Rentech’s financial position and discuss initial project economics for our proposed Rialto Renewable Energy project. We will then open the lines for questions and ask that you limit yourself to one question so that we may get to as many questions as possible.

Please be advised that certain information discussed on this conference call will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. 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 statement 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 risk and uncertainties and risk factors detailed from time to time in the company's periodic reports and registration statements filed with the Securities and Exchange Commission.

The forward-looking statements in this call are made as of December 15, 2009, and Rentech 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.

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

Hunt Ramsbottom

Thank you Julie, good morning everyone and thank you for joining us today. This year’s financial results are the strongest in our company’s history. We generated consolidated positive net income and consolidated positive EBITDA of approximately $24 million. This was the result of several factors including record EBITDA of $66 million at our nitrogen fertilizer facility (OTC:REMC) and disciplined cost management. These results were reduced by $6 million of accounting corrections we will talk about more later on the call.

Before those corrections we would have significantly exceeded our guidance for the year. Dan will walk you through those accounting changes later on. I just want to say up front those changes had no impact on cash flow and affected only the timing of expense recognition of our P&L. The one single reason we had to use the words like “restatement” in our SEC filings yesterday was due to an issue about the proper, technical accounting treatment of forward purchases of gas at REMC. Dan will talk about this as well as the projected returns on our Rialto project which we expect to provide attractive returns to our investors.

Fortunately for us with cash flows generated from internal resources and the support of our lenders and investors we have the financial means to execute our business plan this year, resulting in significant commercial progress. We also accessed the capital markets by raising $41 million of equity to continue to build our balance sheet which we believe is a strategic advantage for us.

Customer agreements. Today we took a significant step towards fuel purchase agreements in our Natchez project which is our proposed, large scale synthetic fuels and power project in Mississippi. As we announced in our press release today we signed a Memorandum of Understanding (NASDAQ:MOU) with 13 passenger and cargo carriers, establishing a framework for possible definitive purchase agreements by these carriers for the project’s entire synthetic jet fuel production of approximately 250 million gallons per year. These 13 international and domestic carriers including American Airlines, Federal Express, Jet Blue Airways, Lufthansa German Airlines, United Airlines, UPS Airlines and US Airways have expressed to us their commitment to negotiate a definitive purchase agreement for our jet fuel.

This MOU for the Natchez project follows the multi-year agreement we signed with eight carriers to supply them with up to 1.5 million gallons per year of renewable, synthetic diesel from our renewable energy project in Rialto, California. The diesel would be used for ground equipment operations at Los Angeles International Airport. This definitive fuel purchase agreement to provide multiple domestic airlines with renewable synthetic fuels is the first of its kind.

Product and market demand. With these customer agreements it is clear there is considerable market demand for fuels produced from the Rentech process. Our proven technologies produced certified, drop-in synthetic jet and diesel fuel that work in the existing distribution infrastructure and engines and lower regulated emissions than petroleum derived fuels. We can supply products to the commercial aviation industry and the Department of Defense. In addition we can supply base load renewable power which we believe has significant global demand due to its low carbon profile.

This year synthetic jet fuel including our RenJet fuel was certified in commercial aviation. We are currently the only US producer of certified synthetic jet fuel for the aviation industry. Our jet fuel is also certified by the US Air Force. We have sold jet fuel to the Air Force and sold our diesel fuel for use in a military vehicle to demonstrate the viability of synthetic fuels for the United States military.

Technology. We enhanced our technology portfolio this year with investments in biomass gasification technologies and developed our own patent-pending syn gas conditioning technology. We acquired 100% of SilvaGas Corporation and its commercially proven biomass gasification technology. Prior to our acquisition, SilvaGas had invested approximately $100 million in the development of its technology from sources including private investors and the United States Department of Energy. A SilvaGas gasifier built in partnership with the Department of Energy in Burlington, Vermont commercially demonstrated this process.

SilvaGas’ technology converts a variety of biomass feedstock such as wood, waste streams and energy crops into syn gas which can be used to produce synthetic fuels and renewable electric power or as a natural gas substitute. SilvaGas’ biomass gasification technology can be integrated with Rentech’s patent pending syn gas conditioning and Fischer-Tropsch technologies to offer the only integrated package we know of that can produce certified synthetic fuels from biomass. We plan to deploy this unmatched integrated biomass to energy technology chain at our Rialto project and other renewable fuels and power projects we are developing.

In addition to our acquisition of SilvaGas this year we made a 25% strategic investment in ClearFuels technology, a biomass gasification project development company. ClearFuels owns proprietary biomass gasification technology platform that converts multiple cellulosic biomass feedstock such as sugarcane bagasse and virgin wood waste into clean syn gas. Our project with ClearFuels was recently selected to receive up to $23 million of grants from the Department of Energy to construct a biomass gasifier at our energy technology center in Denver, Colorado. ClearFuels’ gasifier will be integrated with our synthetic fuels operating facility for the production of renewable synthetic fuels from biomass. This joint demonstration of an integrated bio-refinery will provide the design basis for commercial facilities that are expected to use the combined technologies.

The Colorado plant has been operating successful production campaigns for over a year. This year the plant’s operations confirmed at demonstration scale that our technology can meet important capital and operating cost targets. This is critical as those targets serve as a basis for our commercial scale projects.

Commercial projects. We own technologies that can be deployed today at commercial scale facilities. The Rentech process has been successfully applied at demonstration scale at our Colorado facility for synthetic fuels production. The Rentech SilvaGas gasifier has been successfully applied at commercial scale at McNeil Power Station for syn gas production, replacing solid fuel in the existing boiler. We are progressing on opportunities that would integrate a Rentech SilvaGas biomass gasifier at existing power plants. We are also working on potential green field biomass to power projects to produce renewable electricity. These project opportunities are located internationally and in many of the 28 states that currently have renewable power mandates.

Our commercial scale Rialto project that I mentioned earlier will use woody green waste to produce approximately 600 barrels per day of renewable fuel and export 35 megawatts of renewable power. The project is tracking well against our timeline. When we announced the Rialto project in May we told you that in calendar 2009 we would advance feed stock, permitting and off-take activities including feasibility engineering. I am pleased to tell you the project remains on schedule.

Jacobs Engineering completed the feasibility engineering work last month and Larkspur Associates completed detailed cost estimates, forming the basis for initial project capital costs which Dan will share with you later during the call. The work Jacobs completed with our engineering team also provides us with much of the data necessary to complete the project permit applications. As such, this month we officially launched the permitting process by submitting our environmental information form which assesses the project’s environmental profile to the City of Rialto.

This form is the first step in the permitting process. With respect to feed stock we secured letters of intent from green waste haulers for portions of the project’s feed stock supply and as I mentioned earlier we signed a contract to sell a portion of the diesel output to eight airlines for use at Los Angeles International Airport. In addition, we submitted our responses to several utility RFPs for renewable power.

The next major phase of the Rialto project is front-end engineering and design which we expect to enter into during the first half of calendar 2010. We also expect to file our permit applications during the first half of the year.

For our larger scale Natchez project, calendar 2010 activities are expected to include working toward a definitive jet fuel purchase agreement with 13 passenger and cargo airlines I mentioned earlier, selecting and reaching agreement with feed stock suppliers and project partners and filing permit applications for the project. We also advanced our evaluation of the potential use of biomass gasification technologies for biomass integration at the Natchez project.

Licensing. Licensing discussions continue with companies around the world. These discussions slowed down during the economic downturn but have now gained momentum as the economy rebounds. The continued operational success of our Colorado facility and our acquisition of SilvaGas have also contributed to the pickup in licensing discussions. The sales cycle can be long but we believe we are making good progress globally. So many discussions have already resulted in pre-feasibility engineering work that could lead to long-term licensing arrangements.

REMC. As I mentioned at the start of the call our nitrogen fertilizer facility generated record EBITDA of $66 million and that result was reduced by $6 million by the accounting corrections I mentioned. We have an experienced management team at REMC who have done an exceptional job managing the sales, timing and pricing of products. The plant continues to benefit from low natural gas prices and we have pre-sold a good portion of fiscal 2010 production.

Dan will now provide more details as well on our financial performance for the period. He will also explain to you why we are so enthused about the potential of our Rialto project. Dan?

Dan Cohrs

Thank you Hunt. Good morning everybody. As Hunt highlighted for you we achieved record EBITDA for the company and for REMC this fiscal year. We also generated positive net income for the first time in the company’s history. In order to understand those results you really need to understand the accounting correction and changes that Hunt mentioned.

These changes had no impact on cash flow. They impacted the classifications on the balance sheet and they change the timing but not the total amount of expense recognition. There are two areas in which we are making accounting corrections and changes. First, accounting for forward purchases of natural gas. Second is our accounting for deferred revenue and accounts receivable related to the pre-sales of fertilizer products.

As Hunt said, the sole reason we had a restatement was the correction of the technical accounting treatment of the gas purchase contracts. Both of these accounting methods were consistently applied by the previous owners of REMC and approved by their auditor. When we bought REMC in 2006 our auditor at the time approved the accounting treatment and we carried them forward. We carried them forward. When we changed audit firms to TWC this year we also took a fresh look at the issues. In working with TWC we concluded the gas contract accounting was in fact wrong and we decided to improve the deferred revenue accounting as well.

Because it was determined the gas contract accounting was wrong, we had to restate earlier periods in a 10-K we filed yesterday. We also were required to file an 8-K pointing out the financials in the earlier filings are no longer accurate. You should look at yesterday’s 10-K for consistent and accurate financial statements. All of this is about the single issue of proper accounting for forward purchases of gas so let me walk you through for one second the change in accounting for gas contracts and inventory.

The old treatment, which was incorrect, went like this. As we contracted for gas purchases we were required to pay cash deposits. Then as gas prices declined on all of these contracts we were required to put up cash margin; essentially cash deposits. Those deposits were recorded in inventory. Then as we walked forward through continued reductions in gas prices we looked at that component of inventory and we reduced inventory to that extent. So we had inventory impairments calculated with respect to that specific component of inventory.

In some periods during the year we took some write downs of that inventory which were expensed through cost of goods sold. Then as we discussed at that time in subsequent periods cost of sales were reduced by the amount of the inventory impairment. So we wrote it off in one quarter but we benefited in subsequent quarters as the gas costs went through at that lower, written down cost of inventory.

The new treatment will go like this. We will record the deposits on gas contracts and the mark to market cash margin requirements as the deposits and they will be labeled as deposits on gas contracts in the current assets account on the balance sheet. We will recognize gas costs at the contracted prices as gas flows through production, into inventory and then cost of goods sold as the product is shipped or occasionally sold. We occasionally sell excess gas on the market or to take advantage of pricing opportunities.

As the inventory impairment, that will be tested only on finished goods; not on the gas or the gas deposit component of inventory. So we will look at our finished goods inventory regularly and perform an impairment test; that test being can we sell the product at a normal margin or not. Only in the event that we conclude the finished goods inventory is impaired would we ever have an inventory write down. We will no longer look specifically at gas components of inventory and then write them down as gas prices decline.

Again, all of this change affects the timing of the expense recognition but it doesn’t affect the total expense over the entire time period and it does not affect cash flow. The net effect of this change is that we increased earnings last year in 2008 by approximately $6 million when we did this restatement and this year in 2009 we reduced earnings by approximately $6 million when we did the restatement. So the restatement was to reverse the original write downs as well as to reverse that subsequent benefit to cost of goods sold that flowed through the P&L in the periods following the write down.

Now let’s quickly go through the change of accounting that applies to deferred revenue and accounts receivable. The old treatment which you are accustomed to for our pre-sale contracts is best explained with a simple example. If we signed a pre-sale product contract for $100 that is a take or pay contract. We booked the entire $100 as deferred revenue, a liability on the balance sheet. On the other side of the balance sheet we would record cash deposits and receivables. So in my example, the $100 contract is deferred revenue and then if we had a $25 cash deposit we would record cash for $25 and receivable for $25 to reflect the full amount of that take or pay contract.

The new treatment reflects the concept that the account receivable should not be booked until product is shipped. Because of that, when we book the contract the new treatment will go like this. Deferred revenue will equal the cash deposits. So in my example we would book $25 of deferred revenue and $25 of cash and we would book zero for accounts receivable. We would expect going forward we would report to you the total volume of pre-sale contracts as you are accustomed to seeing that on the balance sheet. With this new treatment you will see only deferred revenue to the extent of cash deposits received and so you can no longer look at deferred revenue and make conclusions about the volume of pre-sales we have booked.

The current status of pre-sales as of today, which is not as of the September 30 balance sheet but as of today if we look at our forecasted shipments for fiscal year 2010 we have currently shipped and/or pre-sold slightly more than half of our ammonia shipments and slightly more than half of our ammonia shipments and slightly more than a quarter of our UAM shipments. That is based on our expectations for fiscal year 2010 at this point.

So let’s take a look at the numbers for the fourth fiscal quarter of 2009. First looking at the consolidated picture. Revenues were down substantially from the fourth quarter a year ago and that reflects really economic weakness and weak demand for fertilizer products. It also reflects significantly lower price for fertilizer products as in the year-ago period we were still delivering very high priced tons that had been pre-sold when the fertilizer market was very strong.

Net loss increased slightly from $2.9 million to $6.4 million, an increase in the net loss of $3.5 million. Net loss per share increased from $0.01 to $0.03. SG&A continued to decline. We very consistently have been reporting approximately 25% decline in SG&A. The quarter-over-quarter comparison here shows a 26% decline in SG&A. R&D also continued to come down. It was down by more than 50% from last year as we roll through the prior periods that did reflect some expenses of the PDU construction. R&D in the fourth quarter of 2009 was running below $5 million per quarter.

For the full fiscal year, the picture is similar. Revenues were down. In this case the full year revenues were down 13% as we reported $183 million of revenue. All of that at REMC. Net income increased substantially. Last year we had a large loss of almost $57 million and this year for the first time in the company’s history we reported positive net income of $3 million. Income per share was moved from a loss of $0.34 last year to a positive $0.02 per share this year. The picture for SG&A and R&D is similar. On a year-over-year basis SG&A was down 28%. R&D was down 57%.

So let’s compare the EBITDA results to the guidance we had given you earlier. At the REMC level we had guided to $65 million plus of EBITDA. We said we would easily exceed $65 million plus. If we start before the accounting correction we would have hit $71.5 million of EBITDA. Giving effect to the correction that is a $6 million adjustment which puts us at our reported EBITDA of $65.5 million of EBITDA at REMC, still slightly higher than the guidance of $65 million. That compares to $55.1 million in fiscal year 2008; the earlier period.

EBITDA margin actually increased during that period from 26% to 36% even though revenues were down. Consolidated EBITDA, again comparing to the guidance, we had given you guidance of greater than $25 million. Before the accounting correction we would have reported $29.6 million compared to that $25 million. After the accounting correction of $6 million we reported $23.6 million of EBITDA as a consolidated entity. That is up from a negative $47 million last year. We ended the quarter and year with $69 million of cash on the balance sheet.

Looking forward, for our budgeted activities we are currently funded at least through fiscal year 2010. That allows us to continue to operate the PDU, conduct our technology development and develop both Rialto and Natchez with relatively low levels of spending. In order to enter the next major phase of these projects, which is permit, engineering and design, we will need to raise more capital either at the corporate or project level or some combination of those.

We recently passed a milestone in the development of the Rialto project with the completion of the engineering feasibility study by Jacobs Engineering Group combined with a detailed construction cost estimation study performed by Larkspur Associates. Before I get further into that discussion, you may like to refer to the slides we have posted on the Rentech website within the Investor Relations section under Presentations. There are a few slides that summarize the numbers I am about to go through.

With these studies completed by Jacobs and Larkspur we have a high degree of confidence in the technical feasibility of the projects and we have now confirmed our internal construction cost estimates through the cost estimation study that included bids for 90% of the equipment that Jacobs specified in its engineering study. Larkspur Associates performed detailed estimates of engineering and installation costs to complete the estimate of total installed costs.

We currently estimate total installed cost for the Rialto project to be approximately $430 million. That includes a 40% contingency factor to reflect the uncertainty which is naturally inherent a feasibility phase estimate which this is. We estimate the construction costs will be incurred during the years of construction as follows: Year one, which we expect to be 2010, 10% of construction costs. 2011 55% and 2012 35%. The project is designed to produce approximately 640 barrels per day of synthetic fuel. 470 barrels of that would be diesel fuel and 170 barrels would be naphtha along with 35 megawatts of renewable, base load power.

We expect naphtha to sell at a about the cost of crude or about the price of crude. We expect to sell the uncommitted portion of our diesel fuel at a premium to commodity diesel prices as we expect it to be low carbon fuel and have very low regulated emissions. Distributors of diesel fuel will be required to meet the low carbon fuel standards in California which requires a 10% reduction by 2020 in the carbon intensity of transportation fuel compared to conventional petroleum fuels.

Bio-diesel has 30-40% of the life cycle carbon content of petroleum versus our estimate of near zero carbon content for RenDiesel from the Rialto project. Because of that, RenDiesel from the Rialto project should be a much more valuable blend stock to achieve the goal of reducing the carbon content of fuel in California.

To model fuel prices we have used the EIA forecast for crudes and product prices which was just updated yesterday. Commodity diesel sells for a premium over crude of about 20% and we assume we can get 50% of the theoretical premium that we believe we can get because of the California Low Carbon Fuel Standard when this plant comes into operation and we are selling near zero carbon fuels.

We expect the power to be produced by the project to be attractive to the utilities in California who now have a mandate to produce 33% of their power from renewable sources by 2020. The Rialto project is expected to produce power 24 hours per day, unlike solar or wind projects and it is located close to existing transmission facilities. We expect the renewable power to sell in a range of $0.11 to $0.13 per kilowatt hour.

The feedstock for the product will be green waste which is currently going to landfills. Waste haulers pay landfills tipping fees to take the green waste. Similarly, we would take the green waste and collect tipping fees which will offset the bulk of the cost of goods sold. The project will require about 1,500 wet tons which equates to about 1,000 dry tons per day.

As you move down the forecast that we showed on the slides, the largest components of operating expense in this model are labor and maintenance. We expect the plant to have about 70 employees when it is operating. The other components include G&A, rent, insurance and taxes. Other key assumptions we have shown on these slides includes our assumption about the financing for the project. We are eligible for an up to 80% of the total project costs in the form of a DOE loan guarantee. For purposes of this projection we have assumed that we receive an 80% loan guarantee.

However, that amount needs to be reduced by the amount of the Treasury Grant in lieu of production tax credits which is also shown on the slide. That grant is available to us in cash after the project goes into operation in an amount equal to 30% of the costs related to the power production facilities. We estimate that cost to be approximately 1/3 of the total installed cost. So to summarize, 1/3 of the total installed cost is power production cost. 30% of that is eligible to us as a cash grant. That cash grant lets you net against the 80% loan guarantee provided by DOE that we are assuming in this analysis.

As I mentioned, for commodity price forecasts we are using the new EIA, Annual Energy Outlook Forecast and we are using the reference case which is neither the high nor the low but the one that goes down the middle on that new EIA forecast. I mentioned we are assuming between $0.11 and $0.13 per kilowatt hour for RPS power rates. The feed stock at 1,000 dry tons per day. Diesel and naphtha output 470 barrels for diesel; 170 barrels for naphtha and power generation capacity at the plant is 35 megawatts.

We are building in federal tax credits and incentives that we know about. There is an available tax credit of $1.01 per gallon. We have assumed that continues for 10 years in our modeling. We also have available to us renewable identification numbers which are credits that are available for producing renewable fuels. In this case we expect our fuel to be eligible for 2.5 [wins] per gallon and we assume the market price of those [wins] is approximately $0.13.

I mentioned we are assuming we can obtain 50% of the theoretical value of the premium that we believe we can get by selling low carbon fuels under the California Low Carbon fuel standard. Finally, we are estimating that we can obtain approximately 500,000 tons per year of carbon equivalent credits and we are evaluating those credits at the EIA forecast. They have also provided a forecast for carbon. We should all be cautious when we look at CO2 credits because there is no established protocol for calculating carbon credits in the US but there are various approaches to doing this and we believe that 500,000 tons per year is a reasonable estimate of the carbon credits we can capture on this product given what we know today.

Well with all of that, in summary on the Rialto project, I would like to turn the call back over to Hunt to wrap up and then we will take questions.

Hunt Ramsbottom

Thanks Dan. I would like to turn it back to the operator for questions.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Jeremy Sussman – Brean Murray.

Jeremy Sussman – Brean Murray

I appreciate all the data. Certainly there is a lot to go over here. If I can start on the Natchez announcement first. Can you give us a broad sense maybe of the potential timeframe or maybe upcoming events at Natchez and what we can look for?

Hunt Ramsbottom

As I mentioned, this coming year we will be working with the airlines on a definitive agreement over the next few months. It is certainly a priority for us. We will also be working on feedstock supply agreements; coal, petroleum, coke and investigating the biomass input for the project. So that will happen hopefully in the first half of this year. It may go into the second half a little bit. In parallel with that we will be submitting our permit applications probably first quarter of calendar 2010. I think those will be the big milestones you can shoot for or be looking for in the upcoming months here. Assuming all that goes well we are still expecting a 2014 timeframe.

Jeremy Sussman – Brean Murray

As a start up?

Hunt Ramsbottom

Yes.

Jeremy Sussman – Brean Murray

Both areas of the DOE, first your $23 million grant in relation to your activity with ClearFuels, what is the timing of the demonstration you are going to be putting on after your PDU? Secondly, as it relates to the 80% DOE loan guarantee for Rialto, what is the status there? What is the process for hearing back from the DOE in terms of that?

Hunt Ramsbottom

First, ClearFuels, ClearFuels still expects assuming everything goes along with their planning to have the PDU at the gasifier by the end of 2010. They have got to work along with the DOE to make sure they stay on their timeframes and in terms of their feed, they are already in feed on the gasifier progressing along and there should be an announcement on that very shortly. So they are still expecting 2010 and we are certainly engaged at the PDU with our engineering team expecting that to happen this year.

In terms of the DOE loan guarantee I think what I can say generally is we are in the process of submitting the application in the next few weeks. It is going very well. We recently had meetings at the DOE. This last grant from the DOE I think tells us and certainly should tell the investor base and our partners and our stakeholders that the DOE recognizes the benefits of our technology. We view this as very positive. We have recently had meetings at the DOE and I think the feedback they are getting is they are looking for solid projects with proven technologies such as Rialto. We are getting encouraging signals but you never know but we are progressing with our teams to get the application in.

Operator

The next question comes from the line of John Bridges – JP Morgan.

John Bridges – JP Morgan

Thanks for all the information. Having that follow-on from the accounting I feel quite numb.

Hunt Ramsbottom

Dan has repeated it a few times between the board meetings and this so he knows it pretty well but it is still hard to follow.

John Bridges – JP Morgan

You talk about getting 50% of the benefit of the zero carbon emissions. Why not 100%?

Hunt Ramsbottom

We are just really trying to be a little conservative there. First of all, this market doesn’t exist yet. We are very bullish about the value of low carbon fuels. Low carbon fuel standards in California is law. We put ourselves in the position of the fuel distributor who must meet this mandate. That fuel distributor needs to figure out a way to lower the carbon content specifically of diesel fuel. So we perform a mathematical calculation that says if I am a distributor and I have to get my mandate I can do that by blending about 3-4 gallons of bio-diesel into about 6 or 7 gallons of regular diesel to hit the mandate because the carbon content of bio-diesel tends to be about 30-40%.

If you look at the cost of doing that and trade that off against the cost of buying approximately one gallon of our fuel to blend in with 9 gallons of regular diesel you can save a lot of money. So we do that calculation to figure out the maximum theoretical savings and then we are effectively saying we will be splitting that premium somehow with the distributor. That is not an offer. That is just an assumption. We are trying to not take full credit for that full premium when we are doing our financial projection. We are just trying to be reasonable about how much of that premium we will be able to capture as a practical matter when this fuel is available for sale.

John Bridges – JP Morgan

You spoke about this being a requirement by 2020. Presumably there is some benefit for companies that fulfill this requirement ahead of time?

Hunt Ramsbottom

These requirements phase in. It gradually phases in between now and 2020 in sort of a straight line phase-in.

Operator

The next question comes from the line of Pearce Hammond – Simmons & Co.

Pearce Hammond – Simmons & Co.

My first question would be on an update on the licensing strategy. Obviously there was some news during the quarter from Australia. What is happening with the licensing strategy?

Hunt Ramsbottom

Generally as I said on the scripted part of the call that did slow down. This is a 2-3 year sales cycle and I think what we are seeing right now is a lot of activity domestically and globally where you see carbon regimes being put in place. The activity in Australia is I think one example of something we have been working on for now well over a year. I think a lot of issues come into play there. Some of the working plant in Colorado. I think the acquisition of SilvaGas. So the activity levels right now both on fuels and power worldwide we are very bullish on right now. Quite honestly it was very quiet a year ago when the economy worldwide hit the skids. But that has now picked up. We have hired a couple of new folks in that department and we have a very aggressive approach there right now both in terms of our sales efforts and engineering staff to back it up. So just about every continent around the globe we have activity right now.

Pearce Hammond – Simmons & Co.

What would you perceive to be your timing to raise more capital and then as well what is your preference more the project level or the corporate level?

Hunt Ramsbottom

I think as Dan indicated, right now we are funded for our corporate needs through 2010 and I think we will have better visibility once we progress at Rialto and it will probably be at the project level going forward. I don’t know if you want to add anything to that?

Dan Cohrs

That is right. Incremental funding really will be driven by project needs. As we get into the feeds basis of these projects we start to get into higher levels of spending at the projects. We are looking at all of our options. We would like to do financing at the projects and we are also looking at options for raising money at other levels in the organization but nothing specific to announce right now.

Pearce Hammond – Simmons & Co.

Rentech originally was a gas to liquids company obviously focused in a bunch of different areas now whether it be biomass to liquid or what not. Exxon agree to buy XEO. We have a much more abundant shale gas picture here in the US. Are you seeing that kind of come full circle whereby you are seeing some US natural gas producers potentially contacting you or other entities to take natural gas and convert it into liquid fuel?

Hunt Ramsbottom

It is funny you mention that. We are looking at it absolutely. As you know, some of those folks on their conference calls are saying they want to replace coal at some of the utilities in the US and to do that you have to have long-term contracts. Our view, and we are studying this right now, is if they are willing to enter into long-term contracts that can get closer to the price of coal on an MMBTU basis we would certainly entertain gas to liquids projects. I think frankly that would be something in Washington that would be welcomed to work on projects domestically. So the question is what would be the pricing? Two, will they enter into long-term contracts? We are certainly going to explore that and we will talk about that at our next board meeting.

Operator

The next question comes from the line of Matt Farwell – Imperial Capital.

Matt Farwell – Imperial Capital

You mentioned a 30% contingency factor. Does that imply the cost estimate from Larkspur came out at approximately $330 million and you incremented that up by 30% to $430 million for this analysis?

Dan Cohrs

Yes that is exactly right. The 30% contingency factor, at this stage of the feasibility cost estimate is usually something we get added to an estimate like that. We are trying to be somewhat conservative but realistic here about putting our project cost numbers.

Matt Farwell – Imperial Capital

In the model you show sort of negative cost of goods sold. What is the assumption for tipping fees per ton and what are some of the other costs that would actually be negative to EBITDA within the cost of goods sold line?

Dan Cohrs

On the tipping fees we have actually decided we are not going to be too specific about the tipping fee assumptions because of the negotiations that are ongoing with haulers for tipping fees. What we can say is generally the market for those tipping fees tends to be in a range of $25-30 per wet ton. That will give you an idea. We just don’t want to be too precise about that as we have ongoing negotiations. Other factors in the cost of goods sold are catalysts, power and water. There is a number of other expenses that run through there through the SG&A line below cost of goods sold. The two biggest components as I mentioned by far are labor and maintenance. Much smaller items would be things like G&A, rent, insurance, taxes and things like that.

Matt Farwell – Imperial Capital

When you mention energy, is the actually production capacity that you have to build greater than 35 megawatts so you can supply the plant with energy to run or how does it work when you are calculating the revenues from electricity sales?

Dan Cohrs

It can work one of two ways. Either we fulfill more capacity and use of power, actually what we have assumed here is that we are producing 35 megawatts and also buying some power off the grid. The cost of buying that power is running through our cost line in this model and we are producing the 35 megawatts of clean power and selling it at the RPS rate.

Matt Farwell – Imperial Capital

On the fertilizer sales, I see the volumes were lower in the fourth quarter and generally they were lower in 2009 than they were in 2008. What is your outlook for 2010? What factors are going to influence capacity utilization at that plant?

Dan Cohrs

Capacity utilization should be pretty good on the plant in 2010. The general outlook is right now fertilizer prices are starting to firm up. There was quite a bit of weakness in sort of that late 2009 period. The economy was weak. Fertilizer prices were down. Corn prices were down. We are starting to see some firming now. Spring deliveries are starting to shape up. I gave you the statistics in terms of the pre-sales. We are starting to see some price firming. The delivery volumes should be what you are used to seeing. We are not putting out specific guidance right now but the volumes out of that plant for the year 2010 should be what you are used to seeing.

Operator

The next question comes from the line of Cory Garcia – Raymond James.

Cory Garcia – Raymond James

Last month we came across a release related to the Clinton Project by SynGas out in Australia, a $3 billion project which you have a participating interest in. I guess you are performing some preliminary engineering type work. Just hoping you could provide a little additional color. What exactly that entails and sort of what the economics could look like for your participation and some other opportunities around this?

Hunt Ramsbottom

That is exactly what the MOU said, or the agreement said, this is a preliminary engineering services agreement for the project. We have really just begun scoping and the engineering services work. So the economics, all of that they have not published. This is exactly what has been stated. This is a project they have been working on for a couple of years down there with major partners. So again, until they release numbers we are certainly not going to release numbers.

Operator

The next question comes from the line of [Steve Emerson – Emerson Investments].

[Steve Emerson – Emerson Investments]

In terms of your fertilizer, I get a little confused if the real EBITDA was $66 million or $72 million before adjustment so a better way to ask the question is what is your net upstream cash flow before interest, etc. expenses and how much did you take out of it for maintenance, CapEx and perhaps admin at the division level? What is the cash flow contribution and what would be a normal, if you could also identify if there were extraordinary expenses at the division level?

Dan Cohrs

I will start from the end. There were no extraordinary expenses other than the accounting adjustment we ran through of $6 million. One way of answering that question is what I was trying to do was give you an apples-to-apples comparison with our guidance. The guidance was assuming the old accounting treatment so the guidance of the $65 million plus is an apples-to-apples comparison with the $71.5 million I mentioned. Of course the accounting there we determined should be adjusted. So the reported number goes down by $6 million and we reported the $65 million. It is just no longer apples-to-apples with the guidance we gave you. The best indication of EBITDA would be provided under that new accounting I would say. That is the correct accounting.

[Steve Emerson – Emerson Investments]

What was your upstream cash flow?

Dan Cohrs

When you say upstream…

[Steve Emerson – Emerson Investments]

Of that EBITDA, let’s say apples-to-apples $71.5 million what was maintenance CapEx and how much was available for the rest of the business? What was your provisional cash flow that you could use for Rentech parent and assuming that interest would be paid out of parent?

Dan Cohrs

If you start with EBITDA, we had approximately $10 million of CapEx. I am talking at REMC now. There was about $10 million of CapEx and there would be approximately about $4.5 million of interest paid at REMC based on the term loan. That term loan had an outstanding balance of $37 million at year-end. The balance changed a little during the year and the interest rate on that is about 12.5%, LIBOR plus 1,000 basis points. I’m doing this in my head right now but approximately $4.5 million of interest should have been paid on that loan.

[Steve Emerson – Emerson Investments]

The EBITDA do we use the $71.5 million or the $66 million? In other words…take $14.5 million from $71.5 million and that is about $56 million. Would that be about the upstream contribution?

Dan Cohrs

I am going to try and give you a quick answer to that. First of all, I want to emphasize this accounting change does not affect cash. What that means is I am going to say the correct accounting gives you the $65 million of EBITDA. Now if you run all the way through the cash flow statement that $6 million will get adjusted out as you go through your change in inventory. Because the $6 million adjustment to the P&L shows up as lower inventory. Therefore, it is all going to wash through. So when I am trying to answer your question about cash I am going to say start with $65 million of EBITDA we are going to have to go all the way through the changes in working capital and adjust back out the changes in working capital and you get to the same place. If want to call me we can try and work this through.

[Steve Emerson – Emerson Investments]

Let’s do this offline. Let me go into your Rialto estimates. I thought the conforming RES electricity was selling for $0.25 or $0.30 per watt. You are using what appears to be an ultra conservative $0.12 to $0.13. Please correct me.

Dan Cohrs

These are the numbers that are currently in the marketplace today. I think you are probably citing numbers before some of the downturn. They are a little off here. These are wholesale.

[Steve Emerson – Emerson Investments]

Could you perhaps break down, my apologies for the rings. Could you break down somehow the government incentives as to what proportion the CO2 credit, carbon fuel standard and renewable fuel tax? Or just proportional?

Hunt Ramsbottom

We’ll try and break that out for you in a side call. We tried to give you enough information here that people who want to model this could take a crack at it. We can try to give you some guidance on that if we get on that call to talk about cash flow.

Operator

The next question comes from the line of Nathanial August – White Eagle Partners.

Nathanial August – White Eagle Partners

When you talk about being fully funded for the year does that include the CapEx you didn’t intend to spend for Rialto and paying back your credit facility in May of 2010 or are those excluded and potentially additional uses of cash?

Dan Cohrs

With respect to the credit facility we currently have the option to extend that facility. We can pay a 3% fee and extend it for one year. We are not, in that statement, assuming that we pay it off.

Nathanial August – White Eagle Partners

With regards to the 40-ish million of CapEx you think you are going to need to spend on Rialto?

Dan Cohrs

I’m sorry; you are talking about the 10% in the slides. What we said are currently budgeted activities. Our board has not yet approved the capital spending for Rialto. We will be looking for project funding some combination of DOE funding and third-party funding and project partners. As it stands today the board hasn’t approved that level of funding for Rialto. We were saying that the fully funded status is for what we have currently budgeted. In our disclosures we said as we spend further development funds and get into more expensive phases of development we would require outside capital for those activities.

Nathanial August – White Eagle Partners

I noticed you amended the covenants on your credit facility down to I think needing EBITDA at REMC of about $24-25 million for the 12 months that would end your fiscal year 2010. I also noticed your current volume adjusted run rate Q4 would suggest EBITDA around $30 million for this facility in 2010. Do you think the $25-30 million based both on your amended covenant as well as your current run rate is a reasonable amount for us to be using given the state of the current fertilizer market?

Dan Cohrs

We are not giving guidance on REMC today but as you can imagine when we adjusted those covenants we gave ourselves plenty of room to make sure we can hit them in a downside case.

Nathanial August – White Eagle Partners

I also noticed you amended the exchange terms for your convert such that it looks like you can actually issue up to 50 million shares to redeem the convert when it matures or maybe even a bit before then. Can you explain to us the rationale behind that and how you are thinking about that at this time?

Dan Cohrs

I didn’t catch the tail end of your question. It had to do with the convert exchange?

Nathanial August – White Eagle Partners

It looked to me like you had made some amendments such that you could actually exchange the convert or shares if the stock price was below the conversion price of about $4 per share. I was wondering if you could explain to us why you thought that was the right thing to do and maybe whether that changes your strategy with how you are going to deal with the convert at maturity?

Hunt Ramsbottom

Actually this goes back several months. We were entertaining some proposals from the marketplace regarding those converts. We have no plans and have made no offers, but we did look at our loan agreement and we decided we wanted the flexibility to execute some transactions if we decided to. We simply made sure we had the ability in our loan agreement to do that and we continue to watch those converts and monitor the market and we occasionally get proposals to do things but we have no plans today.

Nathanial August – White Eagle Partners

And I noticed you added an additional covenant in your credit facility for October 2010 talking about trailing 13 month EBITDA of about $60 million. Based on your current run rate profitability that looks like a real stretch to me. Can you help me understand? Is that just sort of another way for the lenders to bring you back to the table ahead of maturity or how you are thinking about that additional covenant?

Hunt Ramsbottom

We are thinking about that additional covenant by developing a plan to actually replace that debt. So once we extend it under the amendment you are referring to the covenants adjust and we expect we will be refinancing that debt before we hit the October deadline.

Nathanial August – White Eagle Partners

I know you have sold between 25-50% of your overall production out of REMC forward. Can you tell me at what point your pre-sales ended? Is it the second fiscal quarter or the third quarter? Do some of them actually extend all the way through the fiscal year?

Hunt Ramsbottom

The pre-sales we have on the books right now would mostly be for spring deliveries.

Nathanial August – White Eagle Partners

Which I guess would be your third fiscal quarter I guess? Your fiscal quarter ended June 30, 2010?

Hunt Ramsbottom

They would take place either in the second or third quarter. That is correct.

Nathanial August – White Eagle Partners

According to your 10-K your natural gas hedges as of today only extended through March 31st and I know you had a really big benefit from a mismatch of natural gas hedges versus pre-sales last year. Are you taking an implicit short-bet again on natural gas and could we see some real volatility in the P&L of REMC again next year depending on how natural gas turns out?

Hunt Ramsbottom

No. We are doing what we always do with natural gas which is after we pre-sell product we lock in natural gas in the volumes that we believe we need to produce that product. Our natural gas hedging activities are hedging against product prices and we don’t go out and speculate or take implicit or explicit short positions against natural gas.

Nathanial August – White Eagle Partners

When I think about the CapEx requirements for Rialto given that your PDU is about 200% over budget and your money spent at REMC was a complete write off do you think you are being conservative enough at 30%?

Hunt Ramsbottom

Yes we do. This is based on a very detailed feasibility level cost estimate. That is one reason we hired Larkspur. We hired Jacobs to do the feasibility engineering study and we specifically went to a professional cost estimating firm. Larkspur specializes in this and they spent a lot of time and effort going through detailed analysis of bids on equipment costs as well as a very detailed analysis of installation costs, labor rates and it is a very specific set of estimates. So we think we have gone through the proper discipline here so we have our arms around this cost estimate.

Dan Cohrs

I will add to that and that is one of the reasons you do build pilot plants so you understand your cost structure going into your commercial stage.

Hunt Ramsbottom

I think we have to limit your questions.

Nathanial August – White Eagle Partners

I only have one more after this one so we will wrap it up quickly. The bio waste going into Rialto can you give us an idea of how many tons a day you are going to be looking at and how much the SilvaGas reactor is going to need to be built up relative to the plant that was operating in Vermont?

Hunt Ramsbottom

On the slides we posted it said we need 1,000 dry tons per day and we have been quite public about the fact the Burlington gasifier operated at about 400 tons per day.

Nathanial August – White Eagle Partners

My last question, when I look at project return assumptions from other companies that spend hundreds of millions of dollars in CapEx like big energy companies for example, they tend to use very conservative forward curve estimates that are substantially below spot prices much less use an upward sloping price assumption. I was wondering if you could give us some sense as to how much your IRRs at the project level and the equity level change for let’s call it each $10 change in either refined product output or $10 change in price per megawatt?

Hunt Ramsbottom

No, EIA, which is an agency of the federal government, put these forecasts out yesterday. We took the middle case. I can’t comment on forecasts done by other companies on their projects but we wanted to use a third-party forecast. It is the freshest one I know about. It is produced by the US government and we simply used that so we would have an easily understood forecast that everyone can go to the DOE website and look up. I am actually not really prepared to do sensitivity analysis in my head on this conference call.

Operator

Mr. Ramsbottom, I will now turn the call back to you. Please continue with your presentation or closing remarks.

Hunt Ramsbottom

Thank you. During fiscal 2009 we thrived during a time when many other companies in this space either faltered or stagnated as a result of the economic downturn. Our commercial progress demonstrates significant market demand for our fuels and power. Our successes this year with customers, our renewable energy projects and their projected attractive returns and the enhancement of our technology portfolio has well positioned us as a leader in this space. We look forward to sharing more of our commercial progress with you and we will speak with you when we announce our results for the first quarter of fiscal 2010. Thank you very much for your time.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day everybody.

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Source: Rentech, Inc. F4Q09 (Qtr End 09/30/09) Earnings Call Transcript
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