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

Q3 2013 Earnings Conference Call

November 7, 2013 4:30 PM ET

Executives

Julie Dawoodjee Cafarella - VP, IR and Communications

D. Hunt Ramsbottom - CEO

Dan Cohrs - EVP and CFO

Marc Wallis - SVP, Sales and Marketing

John Diesch - President

Analysts

Adam Samuelson - Goldman Sachs

Thomas Ackerman - Credit Suisse

Ian Bennett - Morgan Stanley

Brent Rystrom - Feltl and Company

Matt Farwell - Imperial Capital

James Bardowski - Sidoti & Company

Lucas Pipes - Brean Capital

Operator

Welcome to the Rentech Nitrogen Third Quarter 2013 Conference Call. My name is Leslie, and I will be your operator for today. At this time, all participants are in listen-only mode, later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the floor over to Ms. Julie Cafarella. Julie, you may begin.

Julie Dawoodjee Cafarella

Thank you. Welcome to Rentech Nitrogen's conference call for the three and nine months ended September 30, 2013. During this call, Hunt Ramsbottom, CEO of Rentech Nitrogen will summarize the Partnership's activities during the period and provide a financial outlook. Dan Cohrs, our Chief Financial Officer, will give a financial review of the period. During the call, Dan will refer to the financial presentation available within the Investor Relations portion of our website. In the room with us today are John Diesch, President; and Marc Wallis, SVP of Sales and Marketing, who will be available along with Hunt and Dan for the question-and-answer session at the end of our prepared remarks.

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

The forward-looking statements in this call are made as of November 7, 2013, and Rentech Nitrogen does not undertake to revise or update these forward-looking statements, except to the extent that it is required to do so under applicable law.

In addition, today's presentation includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures, including reconciliation to the most directly comparable GAAP financial measures, are included in our 2013 third quarter earnings press release that is available on our website.

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

D. Hunt Ramsbottom

Good afternoon everyone and thank you for joining us today. We have generated adjusted earnings of $0.19 per unit during the quarter. Our cash distribution for the quarter of $0.27 per unit, as we indicated last week, was in line with our internal forecast, but our expectations for the fourth quarter have been revised downward, largely based on developments in the ammonium sulfate market.

Before I review the quarter, I am pleased to report that we completed our bi-annual turnaround in major tie-ins related to the ammonium capacity expansion at the East Dubuque facility, safely and within budget. The expanded plant is currently in the commissioning phase, with ammonia production expected this weekend.

As we noted last week, a routing inspection in late October at the East Dubuque plant, identified the need to repair the foundation of one of the three existing syngas compressors, taking that compressor out of service. While we are not anticipating this repair, we are glad we uncovered it during the inspection process, before it became a bigger issue. Since we have multiple compressors at the plant, we will continue to produce at a reduced rate. With the compressor out of service for up to 90 days, we will run the remaining two compressors at full capacity, along with a new fourth compressors installed as part of the expansion project, to bring ammonia production to approximately 790 tons per day, while the repairs are being done.

I will come back to the work we accomplished during the turnaround after discussing our results.

The nitrogen market did not recover from the impacts of the delayed wet spring and significant supplies of competitively priced offshore urea. We saw lower prices for all products relative to last year, and when demand and prices were fairly robust. Still, fill demand for our products was good, and we made up ground from a volume perspective in the third quarter, against a backdrop of disappointing spring.

As is typical for turnaround years, ammonia deliveries were lighter in the third quarter, as we held some inventory back to meet anticipated demand for fall application season. UAN deliveries were higher than expected, with some tons shifting from the fourth quarter into the current period.

As we move into the growing and harvesting period, the market has been relatively illiquid. We believe most buyers have layered in only a small portion of their needs for 2014, taking a wait and see attitude, deferring additional purchases till total harvest is completed. Therefore, buying could take place on the nitrogen front, as we move into the fall and spring application periods.

When looking at the individual performances at each of our facilities, East Dubuque facilities fared relatively well despite lower nitrogen prices and higher natural gas costs compared to last year. The facility operated well, with 100% onstream rates at both the ammonia and UAN plants in the quarter.

In addition, good marketing decisions such as locking in all of our forecasted UAN deliveries for the year in July before the market turned and became illiquid, helped keep gross margins intact at 50% for the quarter.

The story is a little different with the Pasadena facility. Third quarter results reflected a worsening of the ammonium sulfate market, and the margin impact of lower spot prices, negotiated towards the end of the quarter. We also took a significant write-down of inventories, calculated at the end of the quarter.

The Pasadena facility also experienced relatively small disruptions in production that in the aggregate, contributed lower production and higher cost of sales during the quarter. Dan will give you more details on Pasadena in a few moments.

We revised our guidance as a result of reduced performance in outlook for the Pasadena facility, and the impact of the repair work on the compressor foundation at East Dubuque. We now anticipate fourth quarter cash distributions to be as low as zero. Results at the Pasadena facility should improve over the third quarter, but we still expect the plant to generate negative EBITDA in the fourth quarter.

Last week, we announced that our Board of Directors recently changed the timing of the payment of cash distributions, after the end of each quarter. Payments will now be made on or about 60 days at the end of each quarter, rather than 45.

Going forward, you can expect us to declare our quarterly cash distributions at the same time we announced quarterly results, except for the fourth quarter, when we require additional time to complete the full year audit.

I will now turn it over to Dan. Dan?

Dan Cohrs

Thank you, Hunt, good afternoon everyone. As Hunt mentioned, we continue to feel the impact of lower nitrogen prices, following the wet spring season and supply pressures from Chinese exports this year. After I summarize the results of the quarter, I will spend some time showing you how these rapidly declining prices are affecting the results and outlook for the Pasadena facility. For that discussion, I will be referring to a set of slides that we posted earlier today on the Investor Relations section of the Rentech Nitrogen website, so you might want to look for them now.

For the third quarter, consolidated revenues were up about 55%. If you focus on the East Dubuque plant, we did see a 16% decline in revenue due to those lower product prices and deliveries. Pasadena contributed $42.7 million this quarter and of course, in the third quarter last year, we had not yet purchased the plant.

The gross profit margin at East Dubuque dropped somewhat from 58% which is very strong last year to 50% this year, which is still pretty good. The Pasadena gross margin in the third quarter was a negative 19%, and that reflected the write-downs that we took $5 million on inventory write-downs. Combining those, we recorded an 18% gross margin for the Partnership.

SG&A for the Partnership dropped by $1.4 million. At East Dubuque, we saw a decline in SG&A of about 41%, mainly due to lower legal and consulting fees. Pasadena's SG&A, which is new in this quarter, is $1.2 million, and at the Partnership level, we saw unallocated SG&A drop by about 50%, mainly due to lower development expenses and unit based compensation.

In the quarter, we recorded a $30 million goodwill impairment related to the Pasadena plant. I will discuss that in more detail later, as we discuss the performance of the Pasadena plant. That brought us down to an operating income of $18.3 million loss, and a net income per unit of negative $0.57. Adjusting for the loss on goodwill impairment $30 million, and also adjusting for a small gain, because we changed our estimate of earn out consideration, the normalized earnings per unit were a positive $0.19 for the quarter.

EBITDA for the consolidated Partnership was $16 million for the quarter. East Dubuque recorded $25.8 million, which was a decline from about $37 million in the third quarter last year. Pasadena in the third quarter had an EBITDA loss of $7.8 million, which includes the $5 million inventory write-down, it does not include the goodwill impairment. We ended the quarter with about $85 million of cash or pro forma for the cash distribution that we announced, about $75 million.

Ammonia deliveries were down about 23% from the third quarter of last year, whereas UAN was up by 6% on deliveries. We sold about 162,000 tons of ammonia sulfate from the Pasadena facility, and we sold 330,000 tons year-to-date. We saw ammonia prices drop by 15%, and UAN prices drop by 9% compared to the third quarter of last year, that reflects some of the decisions we made earlier this year, to lock in prices and margins on those products, when prices were still relatively strong.

The cost of gas and cost of sales has gone up since last year, as we have seen the price of gas go up, our reported gas and cost of sales has increased from $3.14 to $4.29 per million BTUs.

Natural gas comprised about 49% of cost of sales for the East Dubuque facility, and for Pasadena, ammonia and sulfur accounted for about 55% of cost of sales during the third quarter.

In the third quarter, if we look at maintenance CapEx, the East Dubuque facility recorded $2.2 million, up a little from the $1.7 million last year. The Pasadena facility also had $2.2 million of maintenance CapEx.

Growth CapEx in East Dubuque were $16.4 million, as we came towards the end of our ammonia expansion, that was up slightly from the $13.3 million last year. Growth CapEx for Pasadena were $7.7 million in the third quarter. For the rest of the year, the remaining growth CapEx figures are $16.8 million for East Dubuque, and $6.9 million for Pasadena.

The expansion projects at both plants have already been funded, and we still have $35 million of undrawn capacity on our revolving credit facility, and $85 million of cash as of September 30.

For the East Dubuque facility, we have locked in and/or delivered about 90% of 2013's forecasted ammonia deliveries, at an average price of $649 per ton, and 99% of forecasted UAN deliveries, at an average price of $293 per ton. We secured 100% of our forecasted natural gas to be consumed in the production of these deliveries, at an average price of $4.10, including transportation costs. For the Pasadena facility, we locked in and/or delivered about 83% of AS deliveries at an average price of $254 per ton.

Let's focus on the results and outlook for the Pasadena facility, and you can refer to the slides that we posted earlier today, on the website in the Investor Relations section.

Slide 2 summarizes the reasons that 2013 has been disappointing, compared to what we expected at the time of the acquisition one year ago. We, along with the entire industry, did not forecast a rapid drop in nitrogen prices during the past year. Although our input prices moved down with product prices, as we expected, the lower level of product prices generates less cash, at the same percentage raw material margins.

The slow spring pushed product sales into the later months of the year, when prices had already declined, reducing our average prices for the year disproportionately. This hurt us even more, because we were selling inventory that has been produced from raw materials purchased earlier in the year at higher prices. These lags had big impacts on our realized margins, and cost a total of $7.3 million of write-downs of the value of inventories.

When we closed the acquisition, we knew we were buying an old plant that had just been converted to produce ammonium sulfate, and it was in need of operational improvement and maintenance.

Given our excellent operating record at East Dubuque, we had confidence and still do, that we can improve reliability and output at the plant. During 2013 however, we had more downtime and more expense than we forecast, which also hurt our results. We expect these operational issues to improve, as we complete the capacity expansion and reliability enhancements project later this year.

As we look forward, we expect to benefit from those projects, through increased volumes and increased costs. Higher nitrogen prices will be necessary for us to achieve the level of EBITDA we expected a year ago. Although forecasts for 2014 are not as high as a year ago, we know that nitrogen goes through cycles and rapid price increases are just as common, as the rapid declines we have seen this year.

Let's look at all these effects in more detail; slide 3 shows the decline for key nitrogen products this year, with the various products falling by 20% to 30%. When we brought Agrifos, we did extensive analysis of historical data, that showed high correlations with some lags, between prices for ammonium sulfate and the prices of our key inputs, ammonia and sulfur. These relationships largely continued this year.

Slide 4 recreates an example that we posted at the time of the acquisition, showing how we calculate the domestic raw material margin for a ton of AS, subtracting the cost of the raw material inputs from the selling price. Note, that this example, with the raw material margin of $108 per ton or 34%, was consistent with an EBITDA forecast for 2013 of $25 million less transition costs.

Slide 5 shows the raw material margins that we could have achieved so far in 2013, if we could instantaneously buy inputs and sell our products. Call this the instantaneous raw material margins. It eliminates the effects of the lags, between the purchase of raw materials and the sale of products that I talked about.

You can see the effect of the strong correlations between input and product prices. The percent margins are fairly steady, averaging 42%, and varying only three to four percentage points up or down through 2013. Every month reported here had an instantaneous percent margin, higher than the 34% we forecasted at the time of the acquisition. Raw material dollar margins per ton were mostly higher than the acquisition assumptions until September, when the instantaneous dollar margin dropped to 81%, and we also wrote down inventories.

Why are these instantaneous margins important to understand? First, because they are much more stable than reported margins, in periods of rapidly changing prices, when we live in a world that includes lags between the purchase of raw materials and the sale of products.

Looking at the instantaneous margin, confirms that market prices of our products and raw materials have actually moved together. Also, the instantaneous margins are what we would expect to achieve in a stable pricing environment, even if lags exist. If prices are stable, lags don't matter. This analysis also helps us understand, that we should benefit from the lags in a rising price environment.

Slide 6 shows the actual margins achieved, displaying the serious impacts of the lags between purchase of raw materials and sale of products that are in our reported numbers in 2013. The percentage margins and the actual results with lags average 30%, and range from 18% to 40%. The dollar margins range from $38 to $122 per ton. Even these actual dollar margins were largely consistent with our acquisition forecast, until we got into the third quarter.

Slide 7 shows additional examples similar to the one on slide 4, to illustrate how the changing level of prices could affect our cash flow, even when the raw material percent margin does not vary. The numbers on this page are not forecast, they are examples to illustrate the sensitivities. We show scenarios using a constant margin of 34%, the margin at the time of the acquisition, as well as scenarios using a margin of 42%, the average instantaneous percent margin year-to-date in 2013.

The simple point of these examples is that 42% of $230 is a lot less cash than 42% of $315. Applying these constant margins and using our current forecast that will sell 670,000 of AS in 2014, that price differential alone would have an impact of $22 million on our EBITDA. Again, that's with constant percent raw material margins, which means perfect correlation of input prices and product prices.

We noted at the time of the acquisition, that the Pasadena facility's other costs were estimated at about $46 million, which means that we would have to generate enough raw material margin to cover that, and any excess then shows up as EBITDA. I should also note that we sell other products that generate smaller but meaningful amounts of raw material margins, that would need to be factored in to a more realistic analysis.

Pricing lags and margins are not the whole story, although they account for the majority of the shortfall from our forecast from a year ago. Slide 8 shows the impacts of those and other factors. Instantaneous raw material margins in 2013 were actually higher than we had forecast, although product prices have been lower. We produced and sold fewer tons than we planned, and product sales were delayed into lower price months later in that year. The delay also increased storage and handling costs.

We had higher costs due to the additional maintenance and other factors. On slide 8, we are showing these impacts for the first nine months of 2013, comparing our forecast at the time of the acquisition to actual results. You can see that $13.4 million of the total variance of $21.4 million was purely due to lags, netting out the benefit of higher instantaneous raw material margins and lower prices actually helped us by $1.7 million. The $5 million inventory write-down booked in the third quarter, which really relates to product that should be sold in the fourth quarter, reflects both higher maintenance costs, and another cost of the lags.

We lost $6.3 million of margin due to lower production. SG&A was slightly higher than expected, due in part to transition costs after the acquisition, and we beat our forecast by $2.6 million on sulfuric acid margins and other items.

As we look ahead, we expect to benefit from the expansion of capacity to 2,100 tons per day, which leads us to our forecast of 670,000 tons of AS sold next year. The investments we are making in reliability of the plant, as well as the prevented maintenance practices and culture that we are importing from East Dubuque should bring the operational issues under control.

We have been seeing instantaneous percent raw material margins a bit higher than we had assumed for the acquisition. With margins in that range, we would need levels of nitrogen prices higher than we see today, in the forecast that are available, in order to get to the EBITDA levels that we forecast for the acquisition. Although the available forecast are for modest improvements over current price levels, we know that nitrogen prices have a history of rapid and unpredictable change, both up and down.

We also know that in a rising price environment, we should benefit from the kind of lags that have hurt us in 2013, as prices fell. Nevertheless, given the results for 2013, especially the third quarter's rapid decline in reported AS margins, and the forecast environment we see today, our expectations are currently materially below the forecast that supported the acquisition value. That's why, we decided to impair the value of goodwill on our books by $30 million, that's an estimate that may be refined, as we go through our year-end accounting.

And I will turn it back to Hunt, and then we will take questions.

D. Hunt Ramsbottom

Thank you, Dan. In the market area for East Dubuque, as most of you know, ammonia demand is nearly four times local supply. So we expect approximately 80% of the additional 70,000 tons of annual ammonia production from our [expense] to be sold as merchant ammonia. The remaining 20% is anticipated to be used to produce additional urea, UAN and DEF.

Our new 20,000 ton ammonia storage tank will bring our total on-site storage to 60,000 tons. While it has the flexibility to store more tons during non-peak seasons for higher price spring and fall sales. We also expanded our ammonia loading capabilities by 50%. Our customers are often willing to pay a premium to receive product on a nearly just-in-time basis, so the additional throughput can be valuable. We expect to reduce our average energy consumption at the East Dubuque facility also.

MMBtus per ton of ammonia should drop from approximately 35.5, comprised of 35 of natural gas and 0.5 of electricity, to 33.3, comprised of 32 of natural gas and 1.3 of electricity.

During the 23 months, between the end of 2011 turnaround and the start of the 2013 turnaround, we achieved the following improvements compared to the previous (inaudible) turnaround period at East Dubuque. Total ammonia plant energy usage per ton was 3% lower. The average daily ammonia production rate was 4.5% higher for ammonia and 7% higher for urea. The improvements were due to process optimization. In addition, we completed a urea debottlenecking project, associated with the installation of a DEF processing facility late last year. In total, these improvements had a $13 million positive impact on margins, during the periods between 2011 and 2013 turnarounds.

As we look forward, we continue to work on new opportunities to improve production, and increase EBITDA. Our board recently approved the following two projects for the East Dubuque facility. The first project is designed to install four CO2 compressor in the urea plant. The project should improve urea production in the event of an outage, and yield a 5% increase in urea production rates, bringing total urea production to approximately 485 tons per day.

We plan to upgrade the additional urea tons to UAN and DEF. We expect this project to cost approximately $4 million, with an estimated IRR well above 20%. The completion date is scheduled for the end of the second quarter 2014. We will initially finance the project with cash or draws on our revolver and consider longer term financing, when that makes sense.

The second project, is to voluntarily reduce N2O facility. We expect this project to be completed this quarter, and would cost approximately $530,000. The anticipated pay back is less than two years. This would be our second voluntary N2O abatement project at the facility. The last project was completed in 2012, and we sold the credits generated by that project.

Now, turning our focus to the project at the Pasadena facility; the ammonium sulfate expansion project is on schedule for the fourth quarter, with the cost estimate remaining at $6 million, which is pre-funded. As part of the expansion project, the ammonium sulfate plant is expected to begin scheduled down time for approximately two weeks in early December. $3 million of the total estimated costs is allocated to increase nameplate ammonium sulfate production by 20%, from 1,750 tons a day to 2,100 tons per day beginning January 1, 2014. The remaining $3 million of the expenditures will be spent on improving production reliability. The incremental tons of ammonium sulfate are expected to generate significant variable margin.

Work continues on the other pre-funded projects at the Pasadena facility, including the cogen project, which is expected to be completed by the end of 2014. The replacement of the sulfuric acid converter and a waste heat boiler, is expected to be completed in third quarter next year.

The AS efficiency projects, our anticipated increased plant reliability and on-stream time in 2014 for the AS plant by approximately 5% over 2013. The improved on-stream rate should reduce maintenance expense and increase production, helping our profits of that facility.

During the quarter, we negotiated a new multiyear marketing agreement with IOC, our ammonium sulfate distributor, that should reduce our distribution fees. We are arranging access to an additional 30,000 tons of warehouse space that IOC is adding across the US. The additional storage should allow us to increase our market footprint, and help improve netbacks with better production positioning, in anticipation of customer's demand within key market regions.

As we exit the current year, with corn prices lower than last year, forecasters expect plantings of 90 million plus acres in 2014. The forecast is below this year's anticipated record projection of 97 million plus acres, but higher than the five and 10 year averages of 89 million and 84 million respectively.

Chinese prilled urea prices have risen recently, with the outlook for demand for urea from India and Pakistan improving for the rest of this year. Additionally, China's low tax rate of 2% on urea exports ended on October 31, and reverted to 77% for the period November 1 through July 2014, leading to expectations for potential decline in Chinese exports during the window of higher tariffs.

With all that said, today's nitrogen fertilizer prices are below 2013 average levels and down 20% to 30% year-to-date, making year-over-year comparisons challenging for next year, especially in the first half of 2014.

The US continues to be among the low cost producers of nitrogen. We expect this trend to continue, with the current NYMEX strip averaging below $5 in MMBtu through 2019. Higher coal and natural gas costs forecasted for China could increase the floor, at which China is willing to sell urea, when the low tariff window is anticipated to open in July of next year.

We expect production at our facilities to increase in 2014 over 2013, driven by expansion projects and no scheduled turnarounds next year. We expect 2014 production increases as follows; for ammonia, 34%, UAN 10%, for urea, liquid and granular, 8%; and ammonium sulfate, 36%. Our expectations are for 2014 deliveries to increase as follows; for ammonia 61%, for UAN 8%, for urea 10%, and for ammonium sulfate, 39%.

Third party forecasters show modest improvements in prices for ammonium sulfate in 2014 over today's prices, and we are currently seeing the benefits of lower prices for our key inputs, leading us to expect improved margins and positive EBITDA for the Pasadena facility in 2014.

Overall, we are focused on continued operational excellence at both plants as we have demonstrated during our years of ownership at the East Dubuque facility. These are businesses with sound long term fundamentals, that are subject to fluctuations based on commodity cycles and weather patterns. While we can't control those factors, we will continue to focus on opportunities to improve efficiency and manage input costs, while operating at a high on-stream rates.

With that I will turn it over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will take the first question from Adam Samuelson with Goldman Sachs. Please go ahead.

Adam Samuelson - Goldman Sachs

Thanks. Good afternoon everybody. So a question on Pasadena and on the sales and marketing. Clearly, the inability to forward sell and/or lock in your raw material costs, [like you can do] for natural gas, East Dubuque has impacted the margins at the plant, and you went through in some good detail on the call here, how -- on the other end, in a rising commodity environment, you will benefit. But have you thought about other ways that you could put that product into the marketplace, particularly internationally, where I would imagine the lags on product pricing are greater than they are domestically?

D. Hunt Ramsbottom

I will first chat a little bit and turn it over to Marc, but we have met with our distributors, I have mentioned in my prepared remarks. We are looking into sales in other international markets. We have sold a fair amount into Brazil, and we are now moving into the other markets in South America. We did sell some nice products into New Zealand at some good margins last year. Other markets will pay a premium as you know, and we are penetrating, and I think that's the message we want to get across to people today, is that this is a new product in the marketplace, and a new plant that we have owned and it takes time to penetrate these markets.

We have had some good success in Brazil and New Zealand, and we have now been pushing product into Canada, which as you know, you get better products sales up there also. So we certainly think, again it's only our first year into it, and we believe we can penetrate those markets, and there is a focus on those markets, both internally and through our distribution network, and I don't know Marc if you want to add any more to that.

Marc Wallis

Well just a little bit Hunt. Adam, good afternoon. The offshore market does give us, what's called spot liquidity most of the time. There is usually somewhere in the world that we can sell. Hunt mentioned some of the markets that we are going to right now. We have identified one other key market that is a good granular market, that's willing to pay the premiums that we need, but as far as forward selling and being able to lock-in those values, it's still difficult for us to do. We have talked about it internally, some of the different mechanisms that we might employ, but none of them are giving us the kind of results that we'd like to see right now. So when we go offshore, it's liquid and we are selling (inaudible) and collecting the money at that time. But we still are struggling with a good plan or good way to forward pricing and forward secure -- the sales. The market is just not that type of market right now.

Adam Samuelson - Goldman Sachs

Okay. And maybe on that point and the performance in the quarter, on the 2Q call, you had alluded to having already sold 160,000 tons firm pricing in July. You ended up shipping 162,000 tons or so in the quarter. Were the netbacks realized on those sales in 3Q consistent with the expectations that you had in July, or was there something there in terms of the transportation costs or freight or some other factors that would have impacted the netback to the plant?

Marc Wallis

The business that we took coincided with a little action that was taking place in the domestic market, and it's one of the few times. So we have had some seasonal visibility periodically since we have owned the plant, that was a period where were seeing action in the fill market, we are able to forward so, with identifiable price levels. Pricing and volume was right in line with what we had expected.

Adam Samuelson - Goldman Sachs

Okay. I guess, the movements in pricing in the quarter, relative to kind of the comments in July and comments -- what you actually realized in terms of shipments, I think there is a little bit of a disconnect there, that I am still struggling with. But appreciate it.

Marc Wallis

I'd be happy to address that offline, but I think we had indicated 1.60 and that's right at what we have delivered.

Adam Samuelson - Goldman Sachs

Okay.

D. Hunt Ramsbottom

We will follow-up with you on that part if that's helpful?

Adam Samuelson - Goldman Sachs

Okay. I will pass it on. Thank you.

Operator

Our next question comes from Christopher Parkinson with Credit Suisse. Please go ahead.

Thomas Ackerman - Credit Suisse

This is actually Tom Ackerman filling in for Chris.

D. Hunt Ramsbottom

Oh, hey Tom.

Thomas Ackerman - Credit Suisse

So in anticipation of lower production in 4Q resulting from the turnaround, you mentioned you are holding ammonia inventory to inventory the fall application demand. Could you provide any more detail surrounding the actual product volume that you are keeping in reserve?

Marc Wallis

What we are referencing in holding back some production, because this is a unique period where we were down for turnaround for about 30 days, and normally, we would end up having production available for sale in the peak Q3 shipping window that starts November 1 this year, because we didn't have that October production, we didn't take as much fill business intentionally, holding back additional tons to sell in the market, that's going on right now.

Thomas Ackerman - Credit Suisse

Okay great. Thank you. And so regarding urea imports from China, you are speaking on the export window for next year, what level of imports are you actually expecting for 2014?

Marc Wallis

What we were indicating on that, the 2014 exports out of China, as we see it, may be very similar to what we saw in 2013. What did occur in our view, an onslaught of product that shipped in the third quarter, and severely drag global nitrogen prices down. As we look at production cost over there in the current market level, pricing and production costs are somewhat in line. We have taken up production in other parts of the world because of that. So China specifically, we would expect to be about where they were in 2013, but that may be a little bit smoother delivery, and also we don't feel like the market is -- from a price point that we are at right now, and in our view, the market has upside, not downside.

D. Hunt Ramsbottom

This year was about double last year, so I don't think we expect any less coming into the marketplace, we think the pricing is going to better, or higher if you will.

Thomas Ackerman - Credit Suisse

Okay great. Thanks for taking my questions.

D. Hunt Ramsbottom

Yes.

Operator

Our next question comes from Vincent Andrews of Morgan Stanley. Please go ahead.

Ian Bennett - Morgan Stanley

Hi, this is Ian in for Vincent.

D. Hunt Ramsbottom

Hi Ian.

Ian Bennett - Morgan Stanley

So in ammonia sulfate, how much raw material days of inventory are generally carried?

Dan Cohrs

Well I think the point of the lags there is how many days or months passed before we can actually pass that through cost of sales, and in 2013, we saw some pretty long lags. Effectively, because of the way the season developed with wet spring, sales were pushed later into the year, we saw lags between pricing of the raw materials and sales of the products that averaged over four months for the year. So that's what's really driving those results, is that lag between when we buy the product or price the raw material and then produce store and then deliver the product, and I think that was an over four month average this year.

Ian Bennett - Morgan Stanley

And just so I understand clearly, is that related to -- you are not physically holding that inventory for four months, but you contract to buy it two months in advance, then you hold it for a few months or something like that. Is that the right way to think about it?

Marc Wallis

This is Marc, if I can jump in just a bit. Our on-site storage for both sulfur and ammonia is fairly limited. So we are cycling that inventory throughout the month. The sulfur market trades on a quarterly basis. So as Dan mentioned, there is a significant lag there that can come into play, and the way our ammonia agreement is structured, I think we have indicated there is a lag on that too. So that and then when we look at the -- not so much on-site inventory, but the physical sales, then we have an additional lag that Dan tried to explain in broader detail in the comments.

Ian Bennett - Morgan Stanley

Understood, understood. That's very helpful. Then thinking about the production and delivery guidance for 2014, can you talk a little bit about what type of utilization rate, any type of unplanned outages that are based into that number, and kind of how you are thinking about that in light of recent results?

D. Hunt Ramsbottom

Are you talking about East Dubuque or Pasadena?

Ian Bennett - Morgan Stanley

Both.

D. Hunt Ramsbottom

Pasadena ran below our expectations this year, and this year we are expecting to achieve about 90% on-stream time at the plants in Pasadena, and as I mentioned earlier, a lot of the issues just because the plant was not maintained. We anticipated some of this coming into it, and through this de-bottlenecking project and the work that we will be doing, we expect the on-stream time to be approximately 90%, and that's what we were hoping to get to this year over time, but we just didn't get there. We expect that will happen at Pasadena and East Dubuque is, right now we are looking at 97% on-stream time in East Dubuque.

Ian Bennett - Morgan Stanley

Perfect. Thank you very much.

Operator

Our next question comes from Brent Rystrom with Feltl and Company. Please go ahead.

Brent Rystrom - Feltl and Company

Yeah, just a couple of quick questions. Have you had any updated thoughts on how the seasonality of the ammonia sulfate might look over the course of the year?

Marc Wallis

Brent, this is Marc again. Our view is constantly changing in this one year time window that we have owned the plant. We have seen the South American plant, not quite merely, all periods that we had in North America, as we originally thought. We went through to the spring season, movement wasn't what we had liked to see, a lot of it driven by wet weather. So we know the business does have some seasonality to it, but to have a good solid view at this point, with the variations that we just went through, I don't think we have a good clear picture on how the cycle is going to go yet.

Brent Rystrom - Feltl and Company

The fall application season you had mentioned, kind of gearing up for that on November 1. I think we are probably just starting to get Indian sales, and it's low enough. Any particular read on how it's just getting started?

Marc Wallis

Yeah. Brent, actually we started putting ammonia last week in our trade zone, and would have been running fairly strong today, had that rain not moved in over those past two days, and even in this damp period, we still loaded about 400 tons a day, the last two days. So we are seeing some action in our trade zone, and also a little bit further south.

Brent Rystrom - Feltl and Company

All right. And final thought, thinking about this spring, I know acres are forecast by most down a little bit, 3 million, 4 million, 5 million acres lower. In your particular market, particularly to the west of your plant, you had a lot of acres that didn't get planted or didn't get fertilized at normal levels. Any particular thoughts on how spring may evolve for you in East Dubuque, particularly in Iowa, northern Iowa?

Dan Cohrs

We are looking forward to, I think particularly on a raw material purchase basis and business still left to cover for the fall, our prepay book was not as high as it has typically been for fall ammonia, and that's consistent with, I think our peer group as I spoke with them. So we are expecting to see solid buying coming in from now through the end of November. I also look at our forward book, and which is near zero today, I think we are going to see action coming in late November, early December, and have a lot of business yet to cover. The present plant acres that you are referencing, I think impacted our AS business, and we look forward to better times next year in that region.

Brent Rystrom - Feltl and Company

Great. Thank you guys.

D. Hunt Ramsbottom

Thank you.

Operator

Your next question is from Matt Farwell with Imperial Capital. Please go ahead.

Matt Farwell - Imperial Capital

Hey good afternoon.

D. Hunt Ramsbottom

Hi Matt.

Matt Farwell - Imperial Capital

Just some questions on Pasadena. Could you give us better idea of what the fixed cost structure looks like over there? You talked a lot about variable margins with respect to ammonia and ammonium sulfate, but is there a label force that are either fixed costs that may impact the financials, should the margin environment not improve?

Dan Cohrs

We actually disclosed this at the time of the acquisition. We said the estimate of the other costs, call them fixed costs, were $46 million. I wouldn't necessarily call all those costs fixed, there are things like power consumption and reagents that we use and things like that, but these are the other costs that we need to cover through the raw material margin, in order to generate EBITDA. So that number was forecast at $46 million at the time of the acquisition, and in 2013, that would have run a little higher than $46 million, but pretty close to that.

Matt Farwell - Imperial Capital

So within that $46 million number, I mean, could you wager a guess as to what percentage of that is related to the actual operations, is that a variable number? And what percentage what be more fixed?

Dan Cohrs

Well if we are running the plant, then we are going to have to bear most of those costs. Things like power are not going to vary all that much, if you produce fewer tons. You got labor and maintenance which are pretty much fixed as long as you are running the plant. There are somewhat variable costs in there, on a per ton basis, because we have a fair amount of expense for other reagents, which are essentially raw materials, other than ammonia and sulfur.

So I would say, at least three quarters of those costs I just quoted are truly fixed costs, maybe roughly one quarter. I am taking a little bit of a guess here, but about may be one quarter of those costs might be somewhat related to volumes.

Matt Farwell - Imperial Capital

Got it. That's very helpful. So another question on East Dubuque, could you just give us a little bit more background about how you encountered the foundation issues, and give us a better idea of what's wrong, and as well as when you might be able to begin repair work?

D. Hunt Ramsbottom

Yeah, I will first start and then I will turn over to John. But I think these, as we said in my prepared remarks, this is why you do turnarounds first of all, because you take the plant down, because these issues are usually out there, and this is when you have to discover them. I think we will go into a little more detail exactly what it is John, and what we are doing about it.

John Diesch

Yeah hi Matt, this is John. Yeah, that's exactly the reason when we take turnarounds. We can't do these inspections with the plant operating. We do some very detailed alignment checks and inspection, and that's how we found, we found some bit misalignment in the compressor, the actual crankcase had some stress on it that we identified, and we did further inspection and we found that there is some settling on one end of the unit itself, and after further inspection, we actually saw some cracking on the concrete near the anchor bolts, and so what that does is, if you don't have a stable base, you get movement, and with that movement, you can have a broken crankshaft, which will take you down for up to six months to make a repair there.

So that's why we do these, that's why we have turnarounds do internal inspections to identify issues, then we take care of them, rather than have something more severe take place due to an unscheduled outage. So right now, work will start here within the next three or four days. We are going to have to completely remove the foundation and then rebuild it. So our expectation is, it's going to be somewhere around 80 days, I believe the total outage for that unit.

Matt Farwell - Imperial Capital

I see. So work about to begin?

John Diesch

Yes.

Matt Farwell - Imperial Capital

Got it. Great, that's all I have for now. Thanks.

D. Hunt Ramsbottom

Thank you.

Operator

Your next question comes from James Bardowski with Sidoti & Company. Please go ahead.

James Bardowski - Sidoti & Company

Good afternoon guys.

D. Hunt Ramsbottom

Afternoon.

James Bardowski - Sidoti & Company

Most of the questions were already answered, but a couple remaining. I know you mentioned that the degrees of urea ammonium nitrates were a bit higher than expected, which (inaudible) some of the revenue. Is there any way you could provide us a little indication as to how much of this revenue has been shifted? Is this material, can we expect as far as next quarter?

D. Hunt Ramsbottom

I am sorry, which product are you talking about?

James Bardowski - Sidoti & Company

For UAN.

D. Hunt Ramsbottom

Okay.

Dan Cohrs

Yeah James, we disclose the actual deliveries, and we actually have in the press release, essentially the tons that are already locked for the year, so you can derive from that. I don't have the number off the top of my head here, for fourth quarter deliveries, but you can actually calculate that based on what's in the press release.

James Bardowski - Sidoti & Company

Okay, excellent. Real quick, do you know what you guys are allocating for maintenance CapEx?

D. Hunt Ramsbottom

For 2014?

James Bardowski - Sidoti & Company

For fourth quarter as well as 2014, if you don't mind?

Dan Cohrs

We didn't give that out. We can probably help you little with that, but we didn't put that in the disclosures.

D. Hunt Ramsbottom

2014 will go back to our typical --

Dan Cohrs

In 2014, it will be a non-turnaround.

D. Hunt Ramsbottom

It will be a non-turnaround, which we have always indicated in the $8 million to $10 million range.

James Bardowski - Sidoti & Company

Okay. And this reflects about the 90% on-stream rate?

D. Hunt Ramsbottom

97. Are you talking about Pasadena or East Dubuque?

Dan Cohrs

East Dubuque will be 97, and should be 8 million to 10 million in a typical year. Pasadena, remember in Pasadena, maintenance CapEx will be high because of the sulfuric acid plant project that we have already announced. Even though as maintenance CapEx though, it's already financed. So all of the money we expect to spend on that sulfuric acid plant has been financed, and we also do expect to turnaround in Pasadena next year.

James Bardowski - Sidoti & Company

Okay. All right. Thank you gentlemen. Appreciate it.

D. Hunt Ramsbottom

Good. Thank you.

Operator

Our last question comes from Lucas Pipes of Brean Capital. Please go ahead.

Lucas Pipes - Brean Capital

Good afternoon everybody.

D. Hunt Ramsbottom

Hi Lucas.

Lucas Pipes - Brean Capital

I was just wondering how you were think about M&A in light of the Pasadena acquisition and if you have any targets out there that you are considering, or the focus is more on your existing assets?

D. Hunt Ramsbottom

I think the easy way to look at it right now is, we are clearly focused on that asset and making sure that it does hit our expectations for 2014, certainly East Dubuque. We are very pleased with the way that expansion project is going up in East Dubuque. So we will make sure that those products get placed, and we run that facility as well as we always have, and make sure that Pasadena hits our expectations for next year. That being said, we want to get the price units back up, as the market stabilizes here a bit, and we will continue to look out there for opportunities. But I think the priority right now in the near term, is to make sure that Pasadena hits the mark that we set out for in 2014, and continue to have conversations with folks out in the marketplace.

We are not deterred, we are in for the long term.

Lucas Pipes - Brean Capital

That's good to hear, and just to follow-up, in terms of 2014 distribution guidance, do you have a sense on a timeframe, when you expect to issue that or?

D. Hunt Ramsbottom

It will be consistent with last year, which is around February-March timeframe.

Lucas Pipes - Brean Capital

That's helpful. Then maybe lastly, do you have a sense for how much of the global urea capacity is not economical at current prices?

D. Hunt Ramsbottom

In terms of global capacity in urea, we don't have a number on that, but I will say, we have had some discussions internally with what's occurred in the marketplace on a global basis. There has been plants in the eastern bloc that have come offline. So positive things do occur, when you have these downturns, and this just sets up North America again as being the low cost producer, to be not only a survivor, but thriving in this environment over the long term. So we know of plants that have come offline, and we think there will be more of that as this continues. So I can't answer your question directly, what I can tell you is we are monitoring these high cost producers, and we think that they will stay offline and more will come.

Lucas Pipes - Brean Capital

Appreciate it. Thank you very much.

D. Hunt Ramsbottom

Yup.

Operator

At this time, I would like to turn the call back over to Julie for final remarks.

Julie Dawoodjee Cafarella

Thank you. We are now into the 2014 fertilizer market year. The indicators today for planted corn acres, nitrogen demand and input costs are encouraging; and while we are subject to fluctuations in commodity prices, we are focused on maximizing our operations to high on-stream time, making good product marketing decisions, and good purchase decisions for our inputs.

This concludes our call. Please feel free to reach out to me, if you have any questions about our results. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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