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Rentech, Inc. (NASDAQ:RTK)

Q4 2013 Earnings Conference Call

March 11, 2014 6:00 PM ET

Executives

Julie Dawoodjee Cafarella - Vice President of Investor Relations & Communications

D. Hunt Ramsbottom - Chief Executive Officer, President and Executive Director

Dan J. Cohrs - Chief Financial Officer, Executive Vice President, Treasurer and Principal Financial Officer for Rentech Nitrogen Partners LP

Analysts

Matthew Farwell – Imperial Capital, LLC, Research Division

Brent R. Rystrom – Feltl and Company, Inc., Research Division

Matt Niblack – HITE Hedge Asset Management LLC

Operator

Welcome to the Rentech Inc., Fourth Quarter and Year-End Conference Call. My name is Leslie and I will be your operator for today. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

I will now turn the call over to Julie Cafarella, Vice President of Investor Relations. Julie, you may begin.

Julie Dawoodjee Cafarella

Thank you. Welcome to Rentech's conference call for the 3 months and 12 months ended December 31, 2013. During this call, Hunt Ramsbottom, President and CEO of Rentech will summarize the company's activities during the period and provide detail on our strategy for the Wood Fibre Processing business. Dan Cohrs, our Chief Financial Officer, will give a financial review of the period and provide our 2014 financial outlook. During this call we will be referring to a slide presentation that is available within the Investor Relations section of our website rentechinc.com.

Please be advised that certain information discussed on this conference call will contain forward-looking statements. They can be identified by the use of terminologies 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 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 March 11, 2014, 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 laws.

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

Now, I would like to turn the call over to Hunt.

D. Hunt Ramsbottom

Good afternoon and everyone and thank you for joining us today. As we look back in the past year, 2013 was clearly significant for Rentech. Our Board and management team have been working aggressively to transform the company. We’ve taken a number of deliberate actions to transition the business away from alternative energy technologies and strategically repositioned Rentech around opportunities with significant revenue growth and strong shareholder returns.

As a part of this transition, last year we achieved several key milestones, as shown on Slide 3 of the presentation. First, we entered into the Wood Fibre Processing business by acquiring Fulghum Fibres, the leading provider of wood contract wood chip processing services. We also entered into the wood pellet business by initiating the construction of two wood pellet facilities in Eastern Canada, supported by two long-term pellet supply contracts.

The wood chipping business consistently generates approximately $20 million of annual EBITDA, which reliable cash flows from an infrastructure of long lived assets. We contracted revenues of over $1 billion over the remaining terms of customer contracts at Fulghum in the Atikokan and Wawa plants. We’re producing wood chips soon. We plan to be delivering wood pellets to establish customers in very large markets.

Our customers use our chips and we will be using our pellets for diverse slate of products of our wide geography from a wide variety of fiber feedstocks. With these investments, we’re building a solid platform from which to grow this business. Over the coming quarters we will be discussing more about our pipeline of identified opportunities that we expect will drive growth in 2014 and over the long-term.

We also committed last year to exit the alternative energy technology business. Last week we announced an agreement to sell our remaining alternative energy assets. Including the technologies and decommissioned product demonstration unit to Sunshine Kaidi New Energy Group. We expect to complete our exit of the business this year and eliminate our expenses related to the AE business after transition period.

At Rentech Nitrogen, we completed major expansion projects that have resulted and expanded instantaneous production rates of ammonia at 1,020 tons per day and ammonium sulfate at 2,100 tons per day. We also installed a 20,000 ton ammonia storage tank at East Dubuque, which brings our on-site ammonia storage capacity to 60,000 tons.

Going forward, as shown on Slide 4, we’re squarely focused on creating value through our two continuing business segments; Wood Fibre Processing and Rentech Nitrogen. In the Wood Fibre business, we see specific opportunities to invest capital at attractive unlevered returns of the mid-teens or higher.

In the near-term, we’re pursuing opportunities that would result in EBITDA of approximately $55 million, and as an annual run rate by the end of 2015. These investments would enable us to take the fibre business public as a traditional MLP in 2015, of course, subject to market conditions.

In a longer-term, we’ve identified opportunities that could result in over $150 million of annual EBITDA within four to five years in our fibre business. We believe execution of this plan would create substantial value for our shareholders, due to a strong business model, the value of a successful IPO, and the benefits of an MLP structure.

At Rentech Nitrogen, we’re intently focused on bringing the tradition of operational excellence we have established at East Dubuque to Pasadena, and monetizing the capacity expansions completed in 2013. We believe Rentech Nitrogen is well positioned to take advantage of the anticipated strong North American nitrogen demand in the first half of 2014.

As I mentioned earlier, we expect to complete our exit of the alternative energy technologies business this year. We expect the Kaidi transaction to close this summer, which calls for initial cash payment to Rentech of $15 million upon closing and the possibility of success payment of up to $16 million.

I’ll now spend time touching on a few of the more salient points of the Wood Fibre business, including the large addressable market and some of our specific near and long-term growth opportunities, as we move towards a potential IPO in 2015. The global market for wood chip and pellet sales we are targeting is very large. Global wood chip and pellet sales are expected to grow to more than $25 billion by 2020 from greater than $15 billion today.

As you can see on Slide 6, we are already have a strong market presence in the U.S., Canada, and parts of South America with product flow to Europe, Asia and the U.S.

Now turning to Slide 7 and 8, Fulghum Fibres was our entry point into the fibre industry, and we couldn’t have picked a better platform from which to grow. Fulghum is the recognized leader in providing high quality, low cost chips to the pulp and packaging industry, processing approximately 15 million metric tons of wood and bark annually at our 32 chipping facilities across the U.S., Chile, and Uruguay.

The business fundamentals in chipping are very strong, stable, and predictable cash flows driven by long-term contracts structured as tolling agreements with the blue chip customer base, including well-known brands such as International Paper, Rock-Tenn in Georgia Pacific.

Flughum has industrial scale operating capabilities, a very strong brand and customers with a diversified portfolio products in a variety of industries and markets. Flughum commands an estimated 70% of the U.S. contract chipping market and is known for its operational excellence across the industry. We see great potential to expand our position as the global leader in wood chipping services.

The wood pulp industry continues to move toward outsourcing of its services. In addition, 90% of our customers’ product portfolio is expected to grow through 2027, providing the potential to grow with our customers. We see a number of opportunities to expand our already diverse and International operations including by leveraging our strong client relationships into other products, expanding sales and trading and pursuing acquisitions of other independent chipping and or woodyard operations.

Turning to Slides 9 and 10, we are applying the same focus on operational excellence to our industrial pelleting business. Rentech is on target to become the largest industrial pellet producer in Eastern Canada and one of the largest in North America. Our approach has been tactical and pointed, starting with the rapid conversion of two former wood processing facilities at Wawa and Atikokan. We expect both of these facilities to commence pellet production in 2014 as scheduled and begin first deliveries this year under contracts with the largest biomass utilities in Canada and Europe.

We are developing a pipeline of projects to address the over 2 million metric tons of additional wood pellet demand from our existing customers. We are well positioned to capitalize on this demand. We can leverage our experience with sustainable government backed timber allocations and our secured logistics infrastructure, which includes a 15-year contract for exclusive terminal facilities at the Québec that can handle over 1 million metric tons of annual pellet flow.

As we’ve said from the beginning, a component of our strategy is to take the Wood Fibre business public as a traditional MLP. And we believe we are on pace to do this in 2015, subject to market conditions.

As shown on Slide 11, our plan contemplates near-term and longer-term opportunities to invest capital with attractive returns. We see specific opportunities to invest in these identified projects and acquisitions that could generate an annual EBITDA run rate of approximately $55 million by the end of 2015. These opportunities would require investments that total approximately $100 million. As part of the financing for these opportunities, we are targeting longer-term capital to repay the $50 million outstanding balance and the margin loan secured by units of Rentech Nitrogen.

Longer-term following a potential IPO, we’ve identified specific opportunities with expected unlevered returns of the mid-teens or higher that we think can generate an EBITDA run rate greater than $150 million in annual revenues of over $600 million within four years to five years. We believe these opportunities would require approximately $600 million of incremental capital in which fuel growth for Rentech and for drop downs into the fibre MLP.

There are a number of potential sources of capital to fund the growth opportunities we have identified. We’re in the process of evaluating our options and we’ll pursue the optimal mix of financing flexibility, cost of capital and capital availability for successful IPO in drop down strategy.

Our goal is to be able to support the Wood Fibre business up to and following the eventual IPO and order ensure the MLP’s capital needs are met. It’s cash distribution growth is strong. Of course one key asset to all of this is our deeply experienced management team.

As shown on Slide 12, the top 24 employees, supervisors and managers in our Fibre business have more than 500 years of combined experience in the Wood Fibre industry. Ranging from procurement to production to delivery. They’ve worked at some of the leading companies in the business, and they include the most senior managers that the Wawa facility when it was operated by Weyerhaeuser as an OSB mill.

We look forward to leveraging their expertise as we grow our platform. We’re very excited about the opportunities we see in the business, we’ve built a strong platform, identified clear growth opportunities, assembled the right management team and began developing the pipeline of assets to make Rentech the global leader in Wood Fibre processing.

I’ll now turn it over to Dan for further commentary.

Dan J. Cohrs

Thank you, Hunt. Good afternoon, everyone. Slide 15 has a brief review of the fourth quarter, Fulghum Fibres reported revenues of $24 million and EBITDA of $5 million each of which is inline with expectations we set back in May, when we acquired the company. Fulghum continues to deliver very stable top and bottom line results.

We still expect our first pellet deliveries from Atikokan in the first half and Wawa in the second half of 2014. The projects remain on scheduled, on budget and on tract to deliver expected returns in the mid-teens with long-term contracts that passed through most costs.

Rentech’s Nitrogen results for the fourth quarter we’re hit by industry and plant level issues lower nitrogen prices across the board and significant downtime at both facilities, both price and volumes suffered.

Planned downtime led the East Dubuque facility to lose 31 days in the fourth quarter for the scheduled turnaround and led the Pasadena facility to be down for 23 days as we completed projects it increase capacity and improved reliability and product quality.

The East Dubuque facility also worked through two unplanned events a crack in the foundation of a compressor that we discovered during the turnaround, and a fire in the ammonia synthesis loop. Each of these events cost us in both expense and downtime and that reduced production. However, the fourth quarter also saw the completion of capacity expansion to each plant. Both plants are now operating at full production of their expanded capacities. The higher volumes we expect this year should have significant product margin.

Turn to Slide 16; in late 2011 the IPO of Rentech Nitrogen led us to a different Rentech. We announced plans to invest in businesses that would generate near-term cash flow with attractive returns. In May of 2013, we carried out those plans when we announced the acquisition of Fulghum Fibres, which is the financial and operating platform on which we are building our fibre business.

On the same day in May, we announced two fully contracted wood pellet manufacturing projects in Wawa and Atikokan. As we expected when we announced that deal, Flughum Fibres generated 8 months of solid results starting on May 1, revenues of $63 million and EBITDA of $13 million were right on target.

We processed nearly 10 million metric tons of wood during the period right in line with the annual rate of 15 million tons, which makes Flughum Fibres one of the largest wood handling companies in the country in terms of volume handled. Our Atikokan and Wawa projects are on schedule, on budget. We’ve completed the majority of outside civil and concrete work in all of the detailed engineering packages. We procured nearly 80% of all necessary equipment. QSL is also on schedule with construction of the port facilities for pellet handling. We expect these projects to meet their deadlines to deliver product to our customers later this year.

We ended 2013, with net operating loss carryforwards applicable to federal taxes of about $136 million at Rentech Inc. Like the rest of the industry, Rentech Nitrogen suffered the effects of product prices that dropped 20% to 30% during the year, and our results were also affected by the production downtime I discussed earlier. But look at consolidated results on Slide 17 and then I will do a briefly review of the business segments.

For Rentech the consolidated revenues for the fourth quarter were $79 million, $54.6 of that was contributed by Rentech Nitrogen and for the first time we had revenues from Flughum Fibres of $24.5 million and, of course, we didn’t own the company in the prior year.

Flughum had a gross profit margin of 22% and contributed $7.3 million of operating income. We also had small operating losses in wood pellets and energy technologies less than $2 million in each cases and those losses represent the expenses of the technology business in one case and the expense of starting up our pellet business and the other.

Net income for the quarter was a loss of $14.5 million. For the full-year, revenues were $375 million, up 43% from the year before that increases because we had Fulghum Fibres for the first time and we had Pasadena for the full-year compared to two months in the prior year.

Of that $375 million Rentech Nitrogen contributed $311 million and Fulghum Fibres contributed $63, gross profit was $83.7 million. For the full-year, Fulghum Fibres gross margins was 19% and contributed $9.9 million of operating income. We had $5.5 million of operating income loss in wood pellets whereas we start that business and $7 million in energy technology, we’ll talk more about how that spending will not be repeated in the future. The net loss for the quarter was $1.5 million.

Slide 18 shows more detail for the results of Fulghum Fibres, which we acquired on May 1, so these are eight months worth of results. The $63 million of revenue is right after run rate of $95 million for the year that we announced when we acquired the company. Same for adjusted EBITDA that $13 million is right on the run rate of $20 million that we expected when we announced the acquisition.

We ended the year with $47 million of debt at Fulghum, and we expect the debt balance to be $39 million at the end of this year and interest expense on this debt to be $2.3 million in 2014. Fulghum processed about 4 million tons of logs in the fourth quarter and 10 million tons in the eight months of 2013 that we owned the company.

Slide 19, the Wood Pellet segment reflects mainly SG&A. The operating losses include the cost of developing the business and costs related to the Atikokan and Wawa projects that we cannot capitalize into the projects.

Slide 20 summarizes Rentech Nitrogen results, which we discussed in detail on the earnings call for the partnership. Briefly for the quarter, revenues were down 41% compared to the fourth quarter of last year as we saw significantly lower nitrogen prices across the board and we suffered from outages that lowered our production and delivery volumes.

The SG&A the partnership was down compared to the fourth quarter of last year. Net income this quarter was $18.4 million. For Rentech Nitrogen for the full year, revenues were up $19 million, which reflected a decline in revenues at East Dubuque about a full-year of contribution from Pasadena compared to two months in the prior year.

The gross profit margin at East Dubuque was 46%, down from 61% in the year ago. Again, SG&A for the full year was down by $1.1 million for the partnership year-over-year, net income was $4.1 million for the year.

Looking ahead to 2014 Slide 21 contains guidance for the non-nitrogen segments of Rentech. We’re expecting Fulghum Fibres to be flat at $95 million of revenue that’s business as usual Fulghum Fibres and does not assume any new development projects there which would be separately announced if they were to happen. We expect $20 million of revenue from wood pellets as we start deliveries to both OPG and Drax this year.

Again we expect $20 million of EBITDA at Fulghum Fibres and we do expect $2 million of EBITDA in our Wood Pellets segment that depends heavily on getting our first shipment out to Drax in December. Maintenance capital expenditures of Fulghum would be 3,000 and nothing material for wood pellets.

On Slide 22, we’re providing comparisons for cash operating expenses of Rentech. Again these are the non-nitrogen segments, you can see significant declines in the total spend, as we’ve eliminated all R&D activities over these years. We do not expect any material spending in the energy technologies segment beyond 2014. So the $5 million projected for 2014 as we close the Kaidi transaction and sell this site will not be repeated.

The unallocated expenses blipped up a bit in 2013, reflecting transaction costs for Fulghum Fibres and $1 million of tax and advisory work to evaluate restructuring proposals from shareholders. In 2014, we expect to spend about $3 million for the cost of being a public company which includes audit compliance tax and investor relations expense.

Approximately $3 million is for insurance, travel, rent, telecommunications and other office related expense and we expect about another $2 million for information technology expenses, including the upgrade of our oracle software to the current version.

And with I’ll turn it back to Hunt, and then we'll take questions.

D. Hunt Ramsbottom

Thanks, Dan. As we look toward 2014, we’re very optimistic about our Wood Fibre and Nitrogen businesses, our 2014 commentary is on Slide 23, we continue to expect Fulghum Fibres to drive steady revenue in operating profits, and our wood pellets business we look forward to making our first deliveries to OPG and Darx this coming year, and our Nitrogen business we believe that are number of factors will contribute to better operating results and financial results in 2014 compared to 2013.

Completed expansion projects should increase production at both facilities and we finished additional projects at the Pasadena facility to improve reliability. Both East Dubuque and Pasadena are forecasted to operate an upgraded capacity in 2014 with no scheduled downtime for East Dubuque and no scheduled interruptions to production of ammonium sulfate other than normal scheduled maintenance at the Pasadena facility.

We currently expect positive EBITDA for Pasadena this year due to improved margins and operating rates. Longer-term, we’re focused on consistent and efficient operations and on monetizing the capacity expansions completed in 2013. As discussed in more detail on the Rentech Nitrogen call, we are also investing an additional organic growth projects as outlined on Slide 25.

These include the urea and nitric acid expansion projects at East Dubuque, which have an estimated return over 20% and 30% respectively. We’re also working on completing the co-gen project of Pasadena, which is estimated a return of approximately 20%. In addition, we’ve identified several opportunities for additional cash flow, utilizing our existing infrastructure at the site.

We’re focused today on execution and operational excellence in our two businesses Wood Fibre and Rentech Nitrogen. I encourage everyone to spend time with our posted materials that we reviewed on the call and follow up with us if we can answer any questions.

I’m very pleased with the strategic progress our Board and Management team have made to create lasting value for shareholders. We are in the midst of transitioning and repositioning our business to create significant value. We are all confident that we’re laying the groundwork for growth and long-term profitability.

I’d also like to take the opportunity to thank all of our dedicated employees who have worked endlessly constructing our two pellet mills, developing a strong pipeline of projects in offtake demand, and seamlessly integrating the Fulghum acquisitions. We are very pleased with the team we have in place to grow Rentech going forward.

As always Rentech’s leadership is focused on execution, growth, and shareholder value. This is why our Board of Directors has chosen to take all of its fees and stocks beginning April 1, of this year. The management teams compensation is also closely tied with shareholder returns. We’re proud of the governance mechanisms we have in place that align our leadership to shareholder interest.

With that, we’ll turn it over to the operator for questions.

Question-and-Answer Session

Operator

Okay, thank you. We will now begin the question and answer session. (Operator Instructions) Our first question is from Matt Farwell with Imperial Capital. Please go ahead.

Matthew Farwell – Imperial Capital, LLC, Research Division

Hey, good afternoon, again.

D. Hunt Ramsbottom

Hi, Matt.

Dan J. Cohrs

Hi, Matt.

Matthew Farwell – Imperial Capital, LLC, Research Division

Some questions on the Pellet business, what do you think we should be looking for in the coming quarter in terms of the developments with that business, in terms of just getting the assets closer to shipment date?

D. Hunt Ramsbottom

Well, I think, we’ll provide the market the relevant updates that we think the shareholders should know about. And as you know, Atikokan is due deliveries first half of 2014. So that means, we will be providing the requisite update as we get close to those delivery dates. So in terms of Canada, you will see updates certainly around.

Matthew Farwell – Imperial Capital, LLC, Research Division

I’m still here.

D. Hunt Ramsbottom

Okay, sorry. So Canada will certainly be giving the updates on Atikokan, but those deliveries are going to happen in the first half of this year, and we’ll provide the requisite updates on Wawa as that proceeds through the construction. You will hear more from us than you have historically just because of those projects, as like I said and they are nearing completion. And we will also update the market on any new opportunities that we’ve got in the pipeline as we proceed throughout the year and certainly next quarter too.

Matthew Farwell – Imperial Capital, LLC, Research Division

You gave some interesting information about additional investments required to ramp up the EBITDA $55 million. Okay, can we first just review what have you invested thus far in the Pellet business in terms of CapEx purchasing the plants and what is your guidance at this point in terms of what the final completion cost will be?

Dan J. Cohrs

Yes, Matt, our – for Atikokan and Wawa the total cost including acquisition of both sides and construction is about $90 million. And so when those projects are completed, we’ll have about $90 million invested. When we talk about $55 million of EBITDA, we’re talking about the two projects, we’re talking about Fulghum Fibres. And then we’re talking about $100 million of incremental investment beyond that. So assuming Atikokan and Wawa are already completed then Fulghum Fibres the acquisition price of Fulghum Fibres was a total capital value of a $112 million. We’re talking about a $100 million beyond that to achieve 55 of run rate.

Matthew Farwell – Imperial Capital, LLC, Research Division

Now if you just do the math it seems like additional projects are going to come at a slightly higher cost or multiple in terms of original CapEx and projected EBITDA, what’s the, is there any rationale for that?

Dan J. Cohrs

Well, these are approximations and this is public guidance this is not a statement about a particular deal that we’re doing, when we do a particular deal we’ll let you know what the economics look like, but this is an approximate guidance.

Matthew Farwell – Imperial Capital, LLC, Research Division

Got it. Now you stated that you’d be potentially ready for an MLP in 2015, what is practically speaking how much sort of track record will you need to at least begin the process? Will you be looking for a couple of quarters of progress in Canada before you do that?

D. Hunt Ramsbottom

No, I think this is Hunt, what we’ll look for certainly Atikokan will be on stream in the first half of this year. And at least what we are hearing in conversations with advisers as certainly we want to be up and running, but we don’t have to be necessarily at nameplate, so I think you'll see Atikokan running very well and then you will see Wawa getting up to speed in the fall, but that will not preclude us from getting ready, getting the S1 ready doing all the prep work we need to do. And as soon as we feel we’re operationally ready to go then we’ll go, but that’s not going to stop us doing the preparation.

Matthew Farwell – Imperial Capital, LLC, Research Division

You’ve mentioned in the past retaining the GP6, but would you be looking to sell larger share of the pellet business then say you did for RNF or would you do a transaction roughly similar where you sell roughly 40% of the LP units, can you give us any color there.

D. Hunt Ramsbottom

Matt, it’s just too hard to say right now, this is a, it’s a little out in the future and we got to design the deal, I think our objective would be to own the majority of this MLP and certainly control the general partner, but being anymore precise than that is just too early.

Matthew Farwell – Imperial Capital, LLC, Research Division

And just last question, you just review what – for the current pellet project.

D. Hunt Ramsbottom

I’m sorry, you dropped off a little bit there…

Matthew Farwell – Imperial Capital, LLC, Research Division

Can you just review what the maintenance CapEx projected will be for the current – for the pellet projects once they are up and running and you get that for the normalized EBITDA number?

D. Hunt Ramsbottom

The benchmark I think you can use is Fulghum Fibres is roughly for their 32 mills, about 2 million a year. So I don’t think you are going to be…

Dan J. Cohrs

We have – yes, that’s the chipping business, but in the EBITDA guidance we’ve given on these pellet projects, we have all the maintenance that we think we need, built into those EBITDA numbers.

Matthew Farwell – Imperial Capital, LLC, Research Division

Right.

Dan J. Cohrs

There – in the real world there maybe some maintenance CapEx both from a cash flow point of view we’ve accounted for everything in that EBITDA guidance that we’ve given in the past.

D. Hunt Ramsbottom

Correct.

Matthew Farwell – Imperial Capital, LLC, Research Division

Got it. It’s very helpful, thanks.

D. Hunt Ramsbottom

Thank you.

Operator

Our next question is from Brent Rystrom with Feltl. Please go ahead.

Brent R. Rystrom – Feltl and Company, Inc., Research Division

Hello, guys, just bunch of questions here so I am just going to clip through them quickly. The pellet revenue in your guidance of $20 million, is that based on, say, and 130,000 tons or do you have a number of tons you’d guide us to?

Sean Ebnet

This is Sean speaking. The pellet contracted positions we have – we have 45,000 tons in the contract to Ontario Power and 400,000 under contract to Drax Power. And I think for this year, we are targeting by year end to have delivered about 80,000 tons. This has been the year of construction and commissioning. And then approaching 2015, we hope to be close to a stabilized run rate, which we will achieve in 2016 is our guidance.

Brent R. Rystrom – Feltl and Company, Inc., Research Division

Okay. Are you the sole supplier at Atikokan?

Sean Ebnet

No, Ontario Power that Atikokan generating facility released two contracts, one of them is the contract that we have and there is a second contract that they issued to resolute forest products for 45,000 tons. And in our contract, we also have an option that OPG can call on to increase the 45,000 tons to 90,000 tons, so…

Brent R. Rystrom – Feltl and Company, Inc., Research Division

And then that just for Atikokan, because I know OPG is talking about converting all of their other plans as well. So is the 90,000 so far just with Atikokan?

Sean Ebnet

Correct. There is some guidance they’ve initiated about – what they might do with Thunder Bay generating station, but that is a separate project and separate contract tender that they will be issuing on fuel supply. Everything we have contracted is going to the Ontario – sorry to the Atikokan generation station.

Brent R. Rystrom – Feltl and Company, Inc., Research Division

Okay. Long-term can you give a sense of what the EBITDA profile on the Wood Pellet segment will be relative to revenue, say, 20% EBITDA margin business, 15%, 25%, how would you characterize it?

D. Hunt Ramsbottom

Well, I don’t – if you think about we haven’t given guidance on the revenues, but….

Dan J. Cohrs

No, it’s probably in the neighborhood of 20% to 25% depending on the project. In the Pellet business, the margins really depend on where the project is. And so there is a trade off between capital costs and margins and location, because that has a big impact on your transportation cost. Feedstock also is very important. If you are using residuals you’ll tend to have higher margins than if you are using coal logs. So just very roughly use 20% to 25%, but project-to-project they can vary a lot.

D. Hunt Ramsbottom

I think it is also how you structure your contracts, which will affect your margins and what we took to our contracts. The approach we took to our contracts was to provide indexation and passthrough below the variable cost components associated with our logistics, hauling, diesel price than labor, so that the margins that we do model in should be fairly stable over the light of the contract.

Brent R. Rystrom – Feltl and Company, Inc., Research Division

Thank you. The first wood logs you put in the site showed up Wawa, excuse me that Atikokan in February, are these logs were just test runs or you actually building log supplies prior to kind of the frost-out road bands.

Dan J. Cohrs

A bit of both, it is the volume that we will be using during the commissioning of that plant. But we are starting to accumulate our inventories now for both projects.

Brent R. Rystrom – Feltl and Company, Inc., Research Division

The overview says that there is $15 billion in purchases in 2014 for wood chips and pellets. Can you give us a sense how that %15 billion breaks down?

D. Hunt Ramsbottom

You are talking about the market $15 billion of the…

Brent R. Rystrom – Feltl and Company, Inc., Research Division

Yes. You have that total addressable market right now at $15 billion growing to $25 billion and I’m just curious, of the $15 billion how does it breakdown?

D. Hunt Ramsbottom

You are looking at the global chipping market I think is around $13 million – $10 million to $13 million, I mean there is a couple of different sources that we are using to reference, but essentially the market – it’s close to half between the two you can think it that way. Yes, there is about $16 million tons of pellets, so you multiply that x2 that you get to your green short times of about $35 million tons of wood chip going into the pellet production market. And that’s for both industrial pellets as well as [Indiscernible] forecast.

Dan J. Cohrs

And those numbers are more or like today’s market, if you look out to 2020, the Pellet business is expected to grow much faster than the wood chipping business.

D. Hunt Ramsbottom

Yes.

Brent R. Rystrom – Feltl and Company, Inc., Research Division

All right. Then so that going to make question…

Dan J. Cohrs

Yes, that mix is going to change over time as the Pellet business grows.

Brent R. Rystrom – Feltl and Company, Inc., Research Division

And that kind of leaving my next question, you are saying 35 million metric tons for Western Europe and 50 million to 80 million tons total Europe the total EU by 2020. How does that translate? Is that 7.5 billion then roughly I guess would triple?

D. Hunt Ramsbottom

I think of in terms of pellet tons is in terms of the forecast that you will see published and it ranges, but by 2020 the market is expected to exceed 30 million tons of pellets into the European market alone. That does not account for growth that we are starting to see in the Asian markets for pellets or any domestic home leading markets as well. And keep in mind that while pellets is a lot of growth that we see going forward, there's a chipping component to a pellet mill as well so indirectly we’ll will see some growth in the chipping business associate with that.

Brent R. Rystrom – Feltl and Company, Inc., Research Division

All right and then from a simplistic perspective, when you show where all of Fulghum operations are in the South and then thinking back to our call just an hour ago with Rentech Nitrogen and talking about Pasadena is there an opportunity to convert some of Pasadena's port facilities to an export facility for the Wood Pellet business.

D. Hunt Ramsbottom

That is an opportunity.

Dan J. Cohrs

Yes, we've looked at that. We've looked at product flow between South America, North America on the products that we sell beyond fertilizer products. No commitments but we are certainly looking at it.

Brent R. Rystrom – Feltl and Company, Inc., Research Division

From a simplistic perspective when you look at where the largest, what I would call fixed source projects are so when I look at the market that you are developing for the Wood Pellet business, a lot of your competitors are developing markets where they have fixed sales contracts, but they are going to have fixed supply issues because they are buying stumpage in areas in which you’ve got two [disparate of] ownership it is too spread out and there is no ability to contract for a million tons per year for example with an entity.

Looking at a lot of the buyers they are telling us that they really like what you are doing in Canada. Not you specifically, but anybody in Canada and they also like a few other markets in the world because you can get that 1 million, 2 million tons a year of fixed supply of pulp for a 15 years to 20 years. The other markets that seem to pop up all the time is Russia. Is the situation with Russia and the Ukraine right now, are you seeing any tactical advantage in seeking contracts as people reassess the risk of Russia as a supplier for wood pellets?

D. Hunt Ramsbottom

There's a couple of questions in your statement. I think I'll answer the last one first which is -- we see so much good opportunity which is North America, that's a market we are able to capitalize on so we are not really looking outside to the Russian market, for example for pellet production, but…

Brent R. Rystrom – Feltl and Company, Inc., Research Division

If I can clarify that I'm not talking about you guys growing outside the Russia I am talking you competing with somebody from Russia as a potential supplier with somebody in Western Europe.

Dan J. Cohrs

I think that’s probably a question better answered by the – purchasers but from our standpoint we are getting awful lot of interest in the feedstock out of our market. One because the sustainability that we can demonstrate in the Canadian market. Crown certified feedstock its also from a chemistry standpoint its quite advantageous to use in terms of combustion fuel and from transparency of costs, labor, transportation the logistics infrastructure is in place all those things go to the benefit of developing pellet projects in the North American and it gets a little more challenging as you start looking to some other regions, but I think most of the demand side of pellets is probably going to be looking for diversification of their own portfolio so but we think we have a really strong competitive advantage in the Eastern Canadian market we are building on that.

Brent R. Rystrom – Feltl and Company, Inc., Research Division

Sean, are you working at all port of time in the UK they are putting $400 million port facility to import wood pellets into the UK any involvement there?

Dan J. Cohrs

Well, my history with Drax yes, the port of time we built a terminal there but from Rentech’s perspective our current contracts or FOB means we load on the vessel at the port of Quebec and then Drax takes care of their own logistics from there.

Brent R. Rystrom – Feltl and Company, Inc., Research Division

Any particular thoughts on future abilities to deliver and then you’d be great to answer this future needs for black pellets versus white pellets, particularly considering carbonized pellets.

Dan J. Cohrs

There is a lot of potential benefit to some of the kind of advanced bio fuels or [indiscernible] or black pellets but I have not had any direct experience in terms of any commercial quantities either in production or in utilization.

Brent R. Rystrom – Feltl and Company, Inc., Research Division

Yes, if Rentech were the deal of black pellet then would you most likely license that technology to complete that aspect of the contract if required.

Dan J. Cohrs

I don’t have the interest in the technology side as much as I am on the supply relationship with the customer on volume and specifications on the fuel.

Brent R. Rystrom – Feltl and Company, Inc., Research Division

One other things on the Rentech sources of funding slide that I noticed you had and this goes to both Rentech Nitrogen and Rentech you’ve got a lot of municipal financing, OCI is raising municipal bonds to finance their projects you know IOF for the nitrogen market, German pellets just at a municipal issue for Louisiana did want to year back on Texas any opportunity for Rentech in its wood pellet business to use something similar in Canada is there such a market?

Dan J. Cohrs

We are looking at various forms of government support up there, I don’t know that there is a direct analogy to the deal that German pellets did for example. But we are discussing with the provincial governments up there different types of support, but it’s just too early to really announce anything.

Brent R. Rystrom – Feltl and Company, Inc., Research Division

All right. And then just looking at from my timber background and myself looking at a lot of the R&D projects going in place on both eucalyptus and sweet gum, plantations in either subtropical, tropical or very temperate climates, essentially they may be able to reduce harvest cycle from – I think right now if you look at what you are harvesting or what the Crown is harvesting it’s a 40 to 50-year harvest cycle they are looking at seven to 12-year harvest cycle with the eucalyptus and sweet gum, any thoughts on how that may change, if those products, if those seed technologies or tree technologies come before would that be something that would cause you to look at pushing more into tropical areas we would have a much higher return, much faster return on growing trees.

D. Hunt Ramsbottom

Possibly, you are correct that there is an advantageous growth cycle – plantation hardwoods in those regions. And there is some compelling end market that could utilize that feedstock, but we don’t have any – we have not explored hat in the near-term here, but…

Dan J. Cohrs

Although Brent, one of the things that did come with the Fulghum acquisition, of course, is operations in South America, so we are very familiar with the eucalyptus markets down there, we have operations not in Brazil, but in Chile and Uruguay. And so we’re very familiar with the markets and there maybe growth possibilities now.

D. Hunt Ramsbottom

Maybe Sean’s has got deep relationships down there, Sean give - what you saw on down in Drax little bit.

Sean Ebnet

I had spent a fair amount of time looking at the production on eucalyptus and the points you made are accurate, the growth cycles really compelling sustainability of plantation managed forestry and there is some good companies down there that are looking to expand their markets into other products. So that is a real possibility for the future for us.

Brent R. Rystrom – Feltl and Company, Inc., Research Division

All right. That’s it from me. Thanks, guys.

D. Hunt Ramsbottom

Thanks, Brent.

Operator

Thank you. And our last question comes from Matt Niblack with HITE Hedge. Please go ahead.

Matt Niblack – HITE Hedge Asset Management LLC

Thank you. I will start off by apologizing, I just stepped off the call, so if I repeat I do apologize, but going back to the extension projects in wood pellets, I think in the earlier comment you suggested that the getting from the $35 million EBITDA for the entire wood products business up to 55 involve external deal or deals rather than internal organic growth, did I interpret that correctly or not?

Dan J. Cohrs

Well, when I said I think I may have used the word deals, but that would be achievable by developing new projects or possibly deals which you would think of the acquisitions, but we could get to that level of EBITDA either way, if we do it all through development it might take a little longer, if we do it through acquisition of existing assets it might take a little shorter.

Matt Niblack – HITE Hedge Asset Management LLC

Okay. Certainly it would seem that those two options would have very different returns implying a very different level of capital required. So I guess how specific are the plans currently that you have internally in your road map is this really hammered out there is a lot of opportunity.

Dan J. Cohrs

No, the opportunities that we have are very specific, so if you look at the let’s take it in two pieces. We said we can invest in incremental $100 million to get to a total run rate of 55 of EBITDA. All right by the year end 2015. What we are saying is, we have specific opportunities where we are engaged with people who can get us there. If we can consummate those deals, okay.

We also said longer-term that we have the opportunity to invest up to $600 million to get to a EBITDA run rate of $150 million, now that’s longer term, but that’s built from again very specific opportunities that we already know about. I mean we’re actually in dialogue with enough people on enough projects and transactions to get us to those numbers if we can execute those deals. Nothing is guaranteed. But what we want to convey here is these are specific with names where we are talking to people. This is not theoretical.

D. Hunt Ramsbottom

In all of that one more on that, I mean we talked a little bit about renewal over the last few months, and renewals it certainly very much in the picture in developing their pipeline with us, and I think that somewhat Dan is referencing here along with others, but Graanul has been working on development projects with Fulghum for two years plus – some late stage project there that are clearly identified in getting ready to go.

Matt Niblack – HITE Hedge Asset Management LLC

Okay. And when you look at the projects that sort of have the potential to be consummated in time, so what percentage of these specifically identified opportunity needs to be realized to hit that #$55 million target.

Dan J. Cohrs

Well, I think, if you look at – I mean if you look out what we put out there and we were, I think we’re pretty clear we said, we’ve lined up opportunities that can get us to a $150 million of EBITDA within four years or five years. Right I mean those are specifically identified. So we need – we don't need too much incremental to get us to that $55 million of run rate. We got $20 million of run rate at Fulghum. We’ve given guidance on the Canadian projects that the EBITDA up there will be 18 to 20. So, using round numbers that puts you pretty close to 40 and that doesn’t take you too much more to get from there to 55.

Matt Niblack – HITE Hedge Asset Management LLC

Okay. So this feels like the major constraint is your ability to – you have the capital to deploy that there's so much opportunity out there that’s sort of the capital to go after and the – I guess the management capacity to go after it are the constraints more so than the opportunity?

D. Hunt Ramsbottom

Yes, I would put it at – there is plenty of opportunity. Sean and the team, and the rest of the team has done a great job building the pipeline. You’ve got to have a pipeline, so it’s not – it’s not just the pipeline to get public, it’s building the pipeline post public.

And so you really get some growth as apparent to drop down in the MLP, so we are not just focused on the EBITDA today, we’re not lacking opportunities for that or post IPO, it’s really, making sure we got the human capital on that to execute and, of course, Dan and his team are working on ways to fund this, which there are opportunities to do both. So those are the two constraints, but we’re working diligently to fix both of those, we can grow the business.

Matt Niblack – HITE Hedge Asset Management LLC

All right. And then in terms of the MLP IPO, it sounds like that's more a latter part of 2015, do we expect that?

D. Hunt Ramsbottom

It’s always so hard to forecast how long it takes to do an IPO. I mean, we’ve done it before, we know how to do it. The Rentech Nitrogen IPO took six months, but there are no guarantees when you start going through SEC review and looking at how the market is behaving.

Matt Niblack – HITE Hedge Asset Management LLC

All right. What's the minimum on the EBITDA that you think you need to?

D. Hunt Ramsbottom

Well, we've seen MLPs go out at mid-20s.

Matt Niblack – HITE Hedge Asset Management LLC

All right.

D. Hunt Ramsbottom

Our preference is to do something bigger than that. So we certainly have plenty advisors working with us, and but there has been recent IPOs and $25 million EBITDA, I think we’ll get better value for our shareholders at the MLP and apparent if we wait a little bit, let the projects in Canada move along a little bit and continue to build a pipeline. But you can go out as small as $20 million, $25 million.

Matt Niblack – HITE Hedge Asset Management LLC

Great. And then last question once the MLP is public and can – always sharing the burden of financing these growth projects, is that the point at which we can look at a regular dividend with some sort of defined payout ratio or other regular dividend policy?

D. Hunt Ramsbottom

You know, I've always said hard to predict the future but we would certainly look at those things if we are in that enviable position once we get Stage 1 done here. Then we will certainly do what's best for the shareholders post IPO and build the business, but we will certainly take a look at that. I think we met recently and I told you the same thing that we would certainly look at that after we get through Phase 1.

Matt Niblack – HITE Hedge Asset Management LLC

Well, certainly as I am sure you are aware that, as soon as the guidance is available you put out there it would certainly do good things for the share price. We look forward to that and also wish you the best of luck as you continue to execute the strategy. Thanks.

D. Hunt Ramsbottom

Thanks so much, thank you.

Operator

Thank you. And thank you, ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.

D. Hunt Ramsbottom

Thank you.

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