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

Q4 2013 Earnings Conference Call

March 11, 2014 18:00 ET

Executives

Julie Cafarella - Vice President, Investor Relations

Hunt Ramsbottom - Chief Executive Officer

Dan Cohrs - Chief Financial Officer

John Diesch - President

Marc Wallis - Senior Vice President, Sales and Marketing

Analysts

Adam Samuelson - Goldman Sachs

Tom Ackerman - Credit Suisse

Adam Bredlo - BMO Capital Markets

Brent Rystrom - Feltl

Matt Farwell - Imperial Capital

Cameron Addington - Centralis Capital

Operator

Welcome to the Rentech Nitrogen Fourth Quarter and Year End Conference Call. My name is Janet, and I will be your operator for today’s call. 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 Cafarella - Vice President, Investor Relations

Thank you. Welcome to Rentech Nitrogen’s conference call for the three and 12 months ended December 31, 2013. During this call, Hunt Ramsbottom, CEO of Rentech Nitrogen will summarize the Partnership’s activities during the quarter and the year. Dan Cohrs, our Chief Financial Officer, will give a financial review of both periods and provide our financial outlook. Also 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 March 11, 2014 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 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 that is available on our website.

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

Hunt Ramsbottom - Chief Executive Officer

Good afternoon, everyone and thank you for joining us today. Fourth quarter capped a challenging year for Rentech Nitrogen. Prices for nitrogen products dropped 20% to 30% during the year, which severely affected the Partnership’s results for 2013. Unusually high volumes of low-priced urea exports or exports from China drove down global prices of nitrogen products and a very wet spring application period throughout the U.S. markets delayed and reduced demand for all fertilizer products. In addition to significant planned downtime for a turnaround in major projects, we had to work through some very unusual operational issues that were concentrated in the fourth quarter.

I am pleased to report, but thanks to the tremendous efforts of our employees, both facilities are now operating reliably at full expanded production rates. At East Dubuque, we have completed all the work related to the expansion projects, biannual turnaround and repairs related to the fire on time and on budget. We have also completed Pasadena capacity expansion and reliability enhancements and we are seeing results in higher production, better on-stream time and improved product quality. We are now producing ammonia at 1,020 tons per day and ammonium sulfate at 2,100 tons per day, which are the full, instantaneous rates planned for these expansions. We also installed a 20,000 ton ammonia storage tank at East Dubuque, which brings our onsite ammonia storage capacity to 60,000 tons.

The additional storage will give us the flexibility to store more tons during non-peak sales seasons so that we will have more inventory available for higher priced spring and fall sales. Because of the operational challenges and downtime we experienced last year, on-stream rates were low for both facilities during the fourth quarter, at 35% for the ammonia plant, 39% for the UAN plant, and 60% for the AS plant. As a result, we had lower production volume. Some of this was planned downtime. For instance, the scheduled biannual turnaround at East Dubuque facility resulted in 31 days of downtime. However, we also experienced unscheduled downtime. The fire at the East Dubuque facility caused an outage of 29 days in the fourth quarter.

We filed an insurance claim for approximately $3 million related to the damage caused by the fire and incurred $1 million deductible under 2013 – in 2013 under our property insurance policy. We paid distributions of $0.05 per unit in the fourth quarter which approximates the anticipated net proceeds from our insurance claim. Foundation replacement underneath one of our four syngas compressors at East Dubuque facility took 84 days to complete. Some of which occurred while the plant was down due to the fire. Downtime for repairs and replacement of equipment and infrastructure is common when running large complex chemical plants. Throughout our plant’s history, we have also repaired the foundations of two of the other syngas compressors. The need to repair at this particular foundation was uncovered during the turnaround in October and it’s for this very reason that we conduct bi-annual turnarounds.

Prior to the fire in foundation replacement on-stream rates at East Dubuque were at our targeted levels of over 90% including downtime for turnarounds. Our plant was down for only 17 hours between 2009 and 2011 turnarounds. Our best in class team is always focused on operational excellence at both facilities. At the Pasadena facility the scheduled debottlenecking and reliability improvement projects resulted in 23 days of downtime. In addition we experienced several small unplanned disruptions at the plant last year which in the aggregate contributed to lower production rates and lower gross margins during the quarter.

Lastly, two circumstances in Q4 resulted in revenues being delayed into Q1. Limited UAN inventories at East Dubuque relative to demand resulted in 19,000 tons of UAN deliveries scheduled for the fourth quarter to be postponed until the first quarter of 2014. And at the Pasadena facility a vessel shipment of 20,000 metric tons of ammonium sulfate scheduled to be delivered to South America in the fourth quarter was delayed until the first quarter of ’14 because the vessel arrived late.

Turning to the markets, I am pleased to say that several factors have improved the balance of the global nitrogen supply and demand. China closed its low tariff export window in late October, during the time when urea demand was beginning to strengthen. As a result urea prices began to stabilize entering the ‘13 fall application season followed by increases in the prices of urea and other nitrogen products to their current levels. Nitrogen demand is also widely expected to improve in the first half of ’14 resulting from expectations of strong planted corn acres of at least 90 million.

As we move closer to this year’s spring planting season market activity has picked up, which is a nice contrast to the rather illiquid environment we saw during the growing and harvesting periods last year. We continued to layer in prepaid ammonia tons as product demand stepped up current forward volumes are higher than both the one year and three year averages. And as I mentioned earlier both plants are operating exceptionally well and producing a significantly higher rates than last year. Overall, we believe we are well positioned to take advantage of the anticipated strong North American nitrogen demand in the first half of 2014.

I will now turn it over to Dan for more details.

Dan Cohrs - Chief Financial Officer

Thank you, Hunt. Good afternoon everyone, excuse me, the cost related to downtime and repairs in the fourth quarter at both of our plants distorted comparisons with previous periods. I will give you some comparisons based on pro forma adjusted EBITDA which excludes the financial impact of the costs related to the outages both planned and unplanned. First focusing on the fourth quarter and then for the year, revenues in the fourth quarter were down 41% from the fourth quarter in the prior year due to the lower nitrogen prices that we talked about as well as the impact of the outages which cost us lower production and reduced deliveries and increased costs. Later on we will get to the increased costs.

The revenues at the East Dubuque plant were down 44%, Pasadena was down 37%. Gross profit margin suffered along with revenues which the gross profit margin being 15% in this quarter compared to 31% in the fourth quarter a year ago due to the price pressures as well as the higher input costs and fixed costs during downtime that must be expensed. SG&A was down $2.8 million in the fourth quarter last year and net income was also down at a loss of $17.4 million compared to a profit of $17.6 million in the prior year quarter. For the full year revenues were up 19% that still reflected lower prices and volumes similar to Q4 but it did include a full year’s contribution from the Pasadena plant and we only own that plant for two months of course in the year of 2012.

East Dubuque’s revenue was down 21% for the year. That comparison to Pasadena are not really meaningful but Pasadena’s revenue was $133.7 million for the year. Gross margin in East Dubuque was at 46% this year down from 60% last year due to the factors we’ve discussed. Net income for the full year was $4.1 million. The EBITDA comparisons I’m going to mention are based on pro forma adjusted EBITDA that means the cost of the downtime have been reversed to make the comparison to prior periods more meaningful.

Reconciliations of net income to adjusted EBITDA and the pro forma calculations to back out the unusual costs are in the press release. So focusing on pro forma adjusted EBITDA for the fourth quarter the partnership had $6.9 million of EBITDA in the most recent quarter compared to $24 million last year. For the full 12 months this pro forma adjusted EBITDA was at $82 million for the year versus $124 million in 2012.

We ended the year with $34 million of cash or about $32 million pro forma for the cash distribution related to the fourth quarter. Deliveries of ammonia and UAN in the fourth quarter were each down about 40%. If you look at the quarter over the –fourth quarter over the fourth quarter of last year, ammonia for the full year had deliveries down about 31% while UAN deliveries were down only 8%, all those products from the Pasadena – from the East Dubuque plant.

Ammonium sulfate deliveries were at 98,000 tons in the fourth quarter down from 115,000 tons in the fourth quarter a year ago. For the full year we delivered 428,000 versus 115,000 in the prior year which was a partial year. Prices were generally down sharply from last year. If we look at the specific products ammonia and UAN prices for the fourth quarter were each down 12% to 14% from last year. For the full year ammonia prices were down only 3% because our market – sales and marketing team did a great job of locking in prices for ammonia earlier in the year before we saw the price declines.

For Pasadena price of ammonium sulfate was down 37% for the fourth quarter versus a year ago at $190 versus $300 per ton a year ago. For the full year we had an average ammonium sulfate price of $251 per ton. The cost of natural gas which is contained in our cost of sales also increased this year, it’s at 419 versus 344 if you look at the quarter or 416 versus 359 if you look at the full year.

Natural gas was about 37% of cost of sales for the East Dubuque facility for the fourth quarter. For the Pasadena facility ammonia and sulfur the key inputs accounted for about 57% of cost of sales for the fourth quarter. Maintenance capital expenditures in East Dubuque were $3.6 million in the fourth quarter and $9.3 million for the year. The Pasadena facility had maintenance CapEx of $4.4 million in the quarter and $9 million for the year.

For growth capital expenditures in East Dubuque we spend $14 million in the fourth quarter and $7.3 million at the Pasadena facility. For 2014 we project total growth CapEx at about $12 million for East Dubuque and about $15 million for Pasadena. Also in 2014 we expect maintenance CapEx at about $7 million for East Dubuque and about $22 million for Pasadena.

That figure for Pasadena includes $14.5 million for the replacement of the sulfuric acid converter which was pre-funded with proceeds of the notes that were issued in 2013. We expect results for the first quarter at the Pasadena facility to improve over the fourth quarter which suffered from planned and unplanned downtime. As well as the delay in the shipment of 27,000 metric tons for ammonium sulfate. Although volumes will still be seasonably low in the first quarter and weather is still cold we currently are delivering AS at higher prices than we realized in the fourth quarter.

We expect product margins for AS to remain low during the first quarter because most of the tons we expect to sell in the quarter were produced last year. And those tons have inventory costs near the sales prices that we expect. We expect the second quarter of 2014 to be better than the first quarter as seasonal demand picks up and product margins improve. We provided forecast of key operating metrics for the first quarter of 2014 in our press release today. These projections assume a typical spring planting season and normal weather. We all know that deliveries are difficult to predict and even just a few weeks in advance, so quarterly results can vary substantially as deliveries can slip into the following quarter.

Also guidance for the first quarter or any quarter for that matter should not be annualized to gauge our projected annual results because the business is so seasonal. We have fixed prices for 33% of the ammonia deliveries that we forecasted for 2014 at an average price of $520 per ton. We have also fixed prices on 30% of the UAN deliveries forecasted for the year at an average price of $280 per ton both of those as of February 28. We have secured 30% of our forecasted natural gas in cost of sales for 2014 at an average price of $4.96 per a million Btu including transportation costs.

We have locked in 25% of the ammonium sulfate deliveries that we forecasted for the year at an average price of $198 for 168,000 tons as of February 28. Although pricing is firm transportation costs and therefore net backs for about 97,000 of those tons are yet to be determined and that could affect net pricing by a few dollars per ton. For the partnership, we expect improved operating and financial results for 2014 compared to 2013. The investments we have made for years in East Dubuque have led us to on-stream factors above 90% including turnarounds. And we expect similar performance at Pasadena as our investments and operating focus pay off. In Pasadena our sulfuric acid plant is scheduled to be down for about 20 days beginning in mid-July to install a new convertor and to complete final tie-ins for the power co-gen project. AS production will continue as we plan to purchase sulfuric acid to keep the AS plant running. We currently expect positive EBITDA at the Pasadena facility this year due to the improved margins and operating rates.

It’s encouraging to see prices for nitrogen and the corn showing recent increases and natural gas is starting to settle down after very cold winter. Having said that, product prices are still lower than they were in early 2013 and projected corn acres are also lower albeit strong by historical standards. All of these factors can vary substantially due to the weather and other issues as we saw last year, so product prices, margins, deliveries and cash distributions could all be very different than our current expectations. Cash distributions in 2014 may be less than cash available for distribution if our Board elects to reduce distributions in order to replenish working capital reserves that were diminished by about $20 million of negative cash available for distribution in the fourth quarter of 2013.

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

Hunt Ramsbottom - Chief Executive Officer

Thanks Dan. Looking ahead we are intently focused on execution and operational excellence and expect to monetize the capacity expansions completed in 2013. We also continue to look at opportunities to improve production and increasing at both facilities. Our Board recently approved an expansion project at the East Dubuque facility that would increase nitric acid production and significantly reduce power consumption. We are targeting an 8% or 30 tons per day increase in nitric acid production which will allow us to upgrade more ammonia to produce an additional 14,700 tons of UAN annually. We expect this project to cost approximately $7 million with an estimated return of greater than 30%. The project is scheduled to commence in the second quarter with an anticipated completion in the fourth quarter of 2014.

We are currently installing a fourth CO2 compressor in the urea plants at East Dubuque. Recall that we expect this project to improve reliability and yield of 5% increase in urea production rates bringing total urea production to approximately 484 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 return well above 20%. The project is scheduled to be completed this year.

Now turning to Pasadena facility, the team there has made significant strides to position it for improved performance in 2014. Specifically, capacity has increased and reliability has improved. We expect on-stream rates for the AS plant to increase from 60% in the fourth quarter to over 85% in the first quarter ’14 and close to 90% by mid year which is the targeted maximum on-stream rate for the plant. An improved downstream rate should reduce maintenance expense, increase production and improve margin on a per ton basis. Product quality has also improved significantly following the AS expansion. We also improved product testing procedures, operator training and overall operations management. Marketing efforts are also reaping benefits.

We see an improved forward order book of 97,000 tons of AS, up from 20,000 tons at the same time last year. We are concentrating on premium markets such as New Zealand and Australia. Distributors from the region have recently visited our facility as part of their supplier diligence. We expect to supply AS to New Zealand again this year, which is important as sales for that region generate high netbacks. Additionally, we are in the process of obtaining approval as a supplier into Australia, which would broaden our market reach.

We are working very closely on these marketing efforts with IOC, our mutually exclusive AS distributor in increasing their incentives to maximize our netbacks. For those of you not familiar with them, IOC is one of the largest fertilizer distributors in the U.S. managing the sale and distribution of over 1.6 million tons of fertilizer per year. We have strong relationships with key accounts, specifically in Brazil, New Zealand and Australia. They recently opened an office in Brazil headed by a seasoned veteran in Brazil’s ag industry to work directly at the dealer level. IOC also added terminals across the U.S., located near end users, providing us with storage of nearly 60,000 tons.

On top of our operational improvements, AS prices are stabilizing. Forecast show that we are more likely to see prices move up and down. And while we can’t control commodity prices, we are working on improving the terms of our purchases of inputs. Last year, we entered into a new two-year contract for the majority of our ammonia supply that improved our formula to purchase ammonia’s feedstock for the Pasadena facility. This quarter, we restructured our largest contract for sulfur supplies to significantly reduce transport fees.

We have also been developing new income opportunities. We are continuing to make progress on the co-gen power project at Pasadena facility, which has an estimated return of approximately 20%. The EPC work is 60% complete. The project is on budget and on schedule for completion by the end of 2014. We have also identified opportunities to capitalizing the value of our location on the Houston Ship Channel, including terminaling, docking and other related prospects that could generate additional EBITDA for the Pasadena facility. We have accomplished a great deal at the Pasadena facility over the last year to position the plant to improve operationally and financially this year. Over the next few years, we will also be implementing a number of programs involving operational stewardship, sustainable engineering in maintenance and repair that we expect to further improve performance.

The Pasadena facility reminds me of when we purchased the East Dubuque facility in 2006. At that time, the plant was only slightly profitable and product prices were within a relatively low range while natural gas prices were very high. The plant was also an orphaned asset with little investment and attention from its previous owners. After we acquired the plant, we invested in maintenance, operations, plant reliability and safety among other things and the plant has never operated better.

The East Dubuque facility has survived the ups and downs of several fertilizer and natural gas cycles and has generated substantial cumulative EBITDA of just under $0.5 billion since we bought it. We have also invested approximately $100 million to increase capacity by 23%, which should benefit EBITDA beginning this year. Although these businesses can be affected by fluctuations based on commodity cycles and weather patterns, they have sound long-term fundamentals and we continue to focus on those opportunities to improve efficiency and manage input costs while operating at high on-stream rates.

With that, I will turn it over to the operator for Q&A. Operator?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from Adam Samuelson of Goldman Sachs. Please go ahead.

Adam Samuelson - Goldman Sachs

Hi, thanks. Good afternoon everyone. I mean first from me maybe just some clarification on the issues in the quarter and the $20 million working capital drawdown that you saw. Is it fair to say that really the $18 million after the insurance recovery is the magnitude of the potential hit to the 2014 distribution? I just wanted to clarify from the prepared remarks that the sulfuric acid expansion at Pasadena, the $22 million that was maintenance CapEx that would reduce cash available for distribution?

Dan Cohrs

Yes, hi, Adam, it’s Dan. Couple of questions there. Let me start with the second question. The sulfuric acid plant is maintenance CapEx but it’s a major project that we pre-funded. When we did the notes in 2013 we set aside cash to fund that project. So even though it’s maintenance CapEx because it doesn’t expand the capacity of the plant but it’s a major project, but we pre-funded it. So the answer to your question is it will not affect the distribution going forward because it’s already been pre-funded. On the $20 million in the fourth quarter that simply saying that – if you run the cash available for distribution calculation in the fourth quarter you’re going to get about negative $20 million and so that essentially used up working capital, because we had a negative cash flow in that quarter.

Adam Samuelson - Goldman Sachs

Okay. That’s helpful. And I appreciate the color on the maintenance CapEx point there. On Pasadena and in the marketing of the ammonium sulfate, how much are you selling domestic versus international at this point and with the new relationship with IOC, what do you expect that to look like in the year or two or three years from now?

Hunt Ramsbottom

Hi, it’s Hunt speaking. It’s still about a 60:40 ratio domestic versus international and I don’t think we see that changing dramatically over the next two, three, four years. I think you may see this in different markets internationally but I think it’s still going to be the same ratio.

Adam Samuelson - Goldman Sachs

And did the netbacks domestically still, are they still above the international netbacks or is there something evolving there that we should be mindful of?

Hunt Ramsbottom

No, they’re still above the netbacks.

Adam Samuelson - Goldman Sachs

Okay. And then finally at East Dubuque you talked about a slow spring but the momentum building in the order book I mean how far away from kind of spring applications in your market area do you think you’re at this point?

Hunt Ramsbottom

I’m going to turn it over to Marc since he is in the room and let him expand a little bit about the market area in East Dubuque.

Marc Wallis

Good afternoon Adam. As you know it’s been a cold and frosty winter and we’re starting to thaw out a little now with 73 days. Talking to the dealers in our trade zone we feel like we’re running about a week behind normal. So for our ammonia application usually we target April the 5th as a kick-off date when we’re moving more production than we’re putting in the tank. So right now it’s looking like April the 12th estimate basis the weather we see today.

Adam Samuelson - Goldman Sachs

Alright. That’s very helpful. I’ll pass the line. Thanks very much.

Hunt Ramsbottom

Thank you.

Operator

And our next question comes from Christopher Parkinson of Credit Suisse. Please go ahead.

Tom Ackerman - Credit Suisse

Good afternoon. This is actually Tom filling in for Chris.

Hunt Ramsbottom

Hi, Tom.

Tom Ackerman - Credit Suisse

So as we look ahead to the planting season sticking with what Adam was saying. What sort of buyer behavior are you seeing versus last year in terms of the product mix?

Hunt Ramsbottom

Again I’ll turn it over to Marc and John and if you want to add any color, go ahead.

Marc Wallis

Chris, as we kind of highlighted we’ve got a pretty good forward book on both ammonia and UAN. Our ammonia book is actually a little larger than we’ve seen in the last couple of years, part of that is due to the marketing strategy and the addition of the tank that we have. We have more capacity to hold the ammonia and we’re more aggressive taking prepay. Right now the dealer trade is at a bit of a standstill. They want to see how the weather opens up, is it going to be a good ammonia spring or is it going to be a little tepid and lean towards additional UAN?

From a corporate standpoint we’re ideally positioned to move either way. We have a nice forward book on ammonia still have plenty of room to work on UAN but comfortable with where our book is. So today I’d categorize it as a bit of a wait and see and for the weather to open up and kind of point the direction. Ammonia is still the best value in the nitrogen chain. And I’d expect to see good movement early but it’s going to be weather dependent and then if UAN picks up behind that we’ll have to see.

Tom Ackerman - Credit Suisse

Okay. And then sticking to that topic what sort of inventory levels are you seeing some of your key market channels? And are there any differences due to the weak fall application season?

Marc Wallis

Actually, I think I am going to guide you back towards inputs – our inputs into the U.S. both for urea and UAN down for the first half of the year. So I think when we look at upstream inventories even though folks I think the dealer trade in general not just with our business unit but with what our competitors too have reasonably strong forward books on, I think that the total amount of nitrogen upstream has a little light. And I am actually looking for some additional appreciation once things kick off. And we saw that in the ammonia last week there was a nice bump in pricing.

Tom Ackerman - Credit Suisse

Okay, it’s very helpful. Thank you.

Operator

And our next question comes from Joel Jackson of BMO Capital Markets.

Adam Bredlo - BMO Capital Markets

Hey, it’s actually Adam Bredlo for Joel.

Hunt Ramsbottom

We have got lot of replacements this afternoon.

Adam Bredlo - BMO Capital Markets

Yes, he is marketing Western Canada. He sends his apologies.

Hunt Ramsbottom

Welcome.

Adam Bredlo - BMO Capital Markets

I have a quick question. So in your guidance for gas consumption this year, it lowered last – your last guidance you were guiding to 12.5 million tons of - 12 million MMbtu and now you are doing 11.8 million that’s your guidance currently, I mean what really drove the better efficiency for ammonia production?

Hunt Ramsbottom

Yes, let me clarify are you looking at what’s in cost of sales or what’s in production because…

Adam Bredlo - BMO Capital Markets

Volume and cost of sale you are now guiding to 11.8 million MMbtu and before you are at 12.5 MMbtu and you are going to produce the same amount of ammonia…?

Hunt Ramsbottom

Yes, obviously – I think the previous guidance was production and the current guidance is what’s in cost of sale.

Adam Bredlo - BMO Capital Markets

Really, okay.

Hunt Ramsbottom

Sorry for the confusion, but just to really clarify it, when we put out the guidance last time, we put out what’s in production, so what we actually run through the plant. And of course what’s in the cost of sales it’s what’s flowing through in cost of sales as we deliver product. Those two numbers are very similar but in order to help you get to calculations of earnings and EBITDA, we thought it’s better to put in there the cost of sales as opposed to production.

Adam Bredlo - BMO Capital Markets

Yes, okay sorry I missed that. Okay, maybe just another question on the Australia – yes, on the Australia opportunity for ammonium sulfate and how big is that opportunity and when do you expect those approvals to happen?

Hunt Ramsbottom

There is a process called the (indiscernible) qualification that we are jumping through those hurdles right now and are targeting approval at some time in the June window. The demand in Australia for granular is pretty substantial with only one producer, (InstTech) producing 200,000 tons plus or minus of product a year and as we quantify demand it looks to us that granular demand in the country is approximately 500,000. So we see a gap there. It’s a marketed, likes premium quality which is exactly where our material fits and I think we will be very successful there.

Adam Bredlo - BMO Capital Markets

Okay that’s all I have. Thanks a lot.

Hunt Ramsbottom

Thank you.

Operator

And our next question comes from Brent Rystrom of Feltl. Please go ahead.

Brent Rystrom - Feltl

This is Brent for Brent.

Hunt Ramsbottom

Very good, welcome.

Brent Rystrom - Feltl

Couple of quick ones for you guys. About a month ago you put out kind of a range expected variabilities if fertilizer prices were to go up or down 20% and natural gas were to go up or down, how does your guidance today relates to what was in that preview about a month ago?

Hunt Ramsbottom

It’s very similar because the guidance today is only for the first quarter, right. And it’s essentially the same that was in – contained in that table. Of course, the reason we put that table in there was to illustrate that this business number one is hard to predict and number two it’s pretty sensitive to changes in those prices, so that’s why we put the table in. But included behind those annual numbers in that table was guidance very similar to what we put out today.

Brent Rystrom - Feltl

Would you say right now that pricing has been similar to slightly better than the midpoint?

Hunt Ramsbottom

I am not 100% sure exactly for the first quarter, let me double check on that, I think it’s probably similar but I don’t want to say something it’s not quite completely accurate here.

Brent Rystrom - Feltl

I mean if I recall, it seems like natural gas went higher than the midpoint, but is now below kind of where it’s kind of back at the midpoint. From a simplistic perspective, corn has rallied about 20% here in the last 45 days and lower acres then obviously some global issues. From a philosophical perspective, do you think there maybe an optimal number of acres for your market in the sense that the price of corn being margins that farmers can create and in the translation of those margins into optimal pricing for yields, do you think that is closer to 90 million than 95 million. It seems that 95 million was very disruptive because of the supply dynamics putting corn into oversupply. Any thoughts on where maybe the optimum number of acres might be?

Marc Wallis

Yes. Brent, this is Marc. And just this is purely an opinion on I guess on my behalf. I think corn acres in the 92 million range would be ideal and seems like when we especially look at the demand is taking place this year with the ending stocks continued to be ratcheted down from the $2 billion mark that was initially targeted. It seems to be telling us that demand is very strong for corn and where we might have had some concerns if we continue to produce above the 90 million mark that the inventories would eventually be burdensome. Right now it’s feeling like the market can handle 90 million to 92 million pretty consistently.

Hunt Ramsbottom

And Brent, I think what you are saying is actually a very good point, because in our trade zone, everybody plants corn every year. You are not going to see so many marginal acres going in and out in Iowa, Illinois, Wisconsin, which is our trade zone. So that’s a very stable environment for corn acres. So when you start to see 95 million acres in a single year, you are looking at marginal acres outside our trade zone that increased overall supply, tend to take corn prices down, but don’t really affect our demand. So I think what you are making a very good point there.

Brent Rystrom - Feltl

Very good. From a simplistic perspective, can you give us a sense of what the AS is used for in Australia, about what it would be used for and what’s it been used for in New Zealand, I am just curious what crops, is it….

Hunt Ramsbottom

Actually, Brent, primarily it’s on New Zealand it’s pasture. They are very cognizant about placement nutrient management runoff.

Brent Rystrom - Feltl

Do they sell to Fonterra then or somebody or do you know if they sell directly to somebody like that?

Hunt Ramsbottom

Well, our principle customer is a co-op and they have a multitude of growers that are affiliated with them.

Brent Rystrom - Feltl

Alright. And then from again kind of a philosophical perspective, the international component of sales, it doesn’t sound like it’s going to change. It’s going to stay at about 40%, is there a quality of aspects that’s shifting to some of these sort of buyers as opposed to maybe more opportunistic sales when you can get them previously? Will that drive margin or something? Is there a model change that is focused on Australia and New Zealand might provide?

Hunt Ramsbottom

Well, I think that we wouldn’t say a model change, but when you look at the markets that want high-quality product and that are willing to pay for that quality, there is the three key markets that we kind of highlighted in our release it’s Brazil, Australia and New Zealand outside the North American market. And we are very – if you look at the way global freight moves around the world, the cost to move cargos from the Texas Coast to Australia, New Zealand and other parts of the world is very, very competitive and especially when you look at Australia in its entirety, broad country, lot of different ports, productions located in the specific region. So those markets should give us a good return. We think it’s going to give us a return that is above the Brazilian market right now. Brazil still gets a lot of product from Europe, but so as we look forward, I think as we manage our export business we are going to try to drive tons towards the highest returning market that we can. And that market right now first is U.S. then the New Zealand, Australian market and Brazil comes in at the latter side of that.

Brent Rystrom - Feltl

Great. And final question the virus that’s basically attacking newborn pigs, I have heard it’s been very aggressively going through Northern Iowa, Northern Illinois, have you guys been picking up anything? I have heard that latest litter of pigs that lost has been some place between 5% and 10% of the herd. Have you guys heard anything as far as relative demand because of that?

Hunt Ramsbottom

I haven’t seen anything on corn right now, but it’s the PED virus and I am sure it may have some impact, but the U.S. is pretty good about quarantining things pretty fast and getting their arms around it, so no impact that we can identify today, Brent.

Brent Rystrom - Feltl

Alright, thanks guys.

Hunt Ramsbottom

Thank you.

Operator

And our next question comes from Matt Farwell of Imperial Capital.

Matt Farwell - Imperial Capital

Good afternoon. Could you give us some better idea of timing and accounting for the insurance proceeds at East Dubuque?

Dan Cohrs

Are you asking about accounting or when we will get the cash, because we will get the cash very shortly? The accounting of course we recognized the expenses already in the fourth quarter.

Matt Farwell - Imperial Capital

Okay. Well so nothing will flow through the income statement in 2014 related to the insurance proceeds?

Hunt Ramsbottom

There might be a small entry but I mean we’ve already accrued for all of that expense in the fourth quarter. So there maybe some adjustments going forward but they’d be small.

Matt Farwell - Imperial Capital

Okay. And then following up on some of the questions around Pasadena, could you give us an idea of what sort of what kind of pricing from ammonium sulfate you’re seeing right now and as well as what kind of cost for ammonia you’re seeing at the plant?

Hunt Ramsbottom

Marc, you want to take that?

Marc Wallis

Well – yes. We can’t disclose our ammonia cost to you. We kind of try to guide and critique it as Tampa based. On the netback or pricing out of Pasadena it – I want to – I’m going to kind of broad brush it because we sell into a lot of markets that have different FOB selling prices, but upstream value today published in the kind of Corn Belt, East of the Rocky Mountains are ranging between $270 and $285 at the terminals. And then when we look at the FOB Pasadena market itself today that markets referenced at about $250. And then those values do – depending on the buyer discount levels will vary.

Matt Farwell - Imperial Capital

And that’s for domestic?

Marc Wallis

That’s still the domestic sales yes sir.

Matt Farwell - Imperial Capital

Okay. And then international sales I assume $30 to $40 discount to that?

Marc Wallis

We’ve tended to guide towards a premium over Black Sea standard. And I think you could use that as a benchmark, also there are some referenced prices in Brazil out of the publications. For an example today the granular market FOB Brazil I think they’re citing and this is coming out of CRU and the $250 to $260 range metric.

Matt Farwell - Imperial Capital

Got it.

Marc Wallis

You need to back vessel freights off and that would put you at a Pasadena range.

Matt Farwell - Imperial Capital

Okay. And you had mentioned the quality improvements at Pasadena. How does that – can you explain the benefits of the customer and if there any additional benefit on pricing or is that just the demand issue?

John Diesch

Yes, Matt, this is John Diesch. Specifically, where our earmark is consistent size it’s more about having a consistent size. So when you’re applying it you’ll get segregation or you’re blending with other products like phosphates or potash. So you want a consistent size to size and you want the same size as those products as well. So that’s the thing that we really see improvements reducing, dusting and consistent size, you don’t have taking problems, those are the things the handling issues associated with the product is really, it’s just really very, very premium. Since our expansion and upgrade we’ve really seen some positive benefits coming out of that work we just completed.

Matt Farwell - Imperial Capital

Got it. Okay. That’s all I have for now. Thanks.

Hunt Ramsbottom

Thank you.

Operator

And our last question comes from Cameron Addington of Centralis Capital.

Cameron Addington - Centralis Capital

Hey, guys. Thanks for taking my question. Just to touch on the distribution again, what was the rationale and kind of paying the distribution in 4Q given there wasn’t the available cash?

Dan Cohrs

Yes, hi, Cameron. We especially wanted to protect the distribution for our unitholders and give them at least something. We had the insurance proceeds coming in and so we just decided to make a small distribution which is immaterial to liquidity but good for our unitholders.

Cameron Addington - Centralis Capital

Got it. Okay. And then regarding liquidity kind of what’s the current liquidity position look like and how do you plan to fund the 2014 kind of CapEx program?

Dan Cohrs

Well we don’t – we’re saying that we need to replenish our working capital but the CapEx should be fine. We pre-funded the major projects. And so…

Cameron Addington - Centralis Capital

In that pre-funded, is that cash currently on the balance sheet?

Dan Cohrs

That’s right. Yes. So..

Cameron Addington - Centralis Capital

Got it.

Dan Cohrs

Well remember there is cash on the balance sheet and of course positive cash flow coming in during the year. But that the cash for that sulfuric acid converter project and the co-gen project were raised in the note offering. So as we go through the year of course we’ll collect positive cash during the year which will determine our cash distribution but those projects were pre-funded and of course the maintenance CapEx we expect to fund from operating cash flow.

Cameron Addington - Centralis Capital

Okay, okay. That’s helpful. So reading into that we should not expect to have to access the equity markets in 2014?

Dan Cohrs

We are not really saying whether we would or not, what we are saying is there is plenty of operating cash flow. Our Board might elect to not pay all of the cash out this year in order to replenish working capital, but that’s a decision that the Board will have to make based on what we see in liquidity going forward at the end of each quarter.

Cameron Addington - Centralis Capital

Okay. Then last one for me, that’s helpful, can you kind of remind me of how your various debt covenants and maybe where you stand at 12/31?

Hunt Ramsbottom

Well, we are in compliance and I mean I don’t want to run through all the ratios here, but we are in compliance.

Cameron Addington - Centralis Capital

Okay, okay. Well, thank you very much.

Hunt Ramsbottom

Alright.

Operator

Thank you. This concludes the question-and-answer session and today’s conference. Thank you for participating. You may now disconnect.

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