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Executives

Gary Roth - President & CEO

Karen Gallagher - SVP & Principal Financial Officer

Analysts

Shawn Severson - JMP Securities

Michael Prouting - 10K Capital

Anthony Chen - Alc Capital

Syntroleum Corporation (SYNM) Q3 2011 Earnings Call November 10, 2011 11:00 AM ET

Operator

Good morning, and welcome to the Syntroleum third quarter 2011 results conference call. All participants will be in listen-only mode. (Operator Instructions) Please note, this event is being recorded.

I’d now like to turn the conference over to [Karen Power]. Please go ahead ma'am.

Karen Power

Good morning and thank you for joining us today. Remarks for today’s call will be presented by Syntroleum’s President and Chief Executive Officer, Gary Roth, followed by Karen [Power], Senior Vice President and Principal Financial Officer, who will report the financial results for the nine months ended, September 30, 2011.

Before we begin our remarks, I would like to remind everyone that during this call, we will make certain forward-looking statements as well as use historical information. Words such as belief, estimate, expect, intend, plan, anticipate, could or should are intended to identify forward-looking statements. Although Syntroleum believes that expectations reflected in these forward-looking statements are reasonable, these statements involve risks and uncertainties.

Future results may differ materially from those projected in these forward-looking statements. You are encouraged to refer to our SEC filings, including our most recent Annual Report on Form 10-K for a full disclosure of these risks and uncertainties.

Now, I’ll turn the call over to Gary Roth for opening remarks.

Gary Roth

Thank you, Karen. We are excited to announce our most recent 75,000 gallon jet fuel sales to SkyNRG for use in 75 Alaska Airlines flights. Alaska Airlines conducted the first flight yesterday from Seattle to Washington DC. This builds on the successful flight by KLM between Amsterdam and Paris and further demonstrates renewable jet fuels produced at Dynamic Fuels is 100% compatible with petroleum-based infrastructure.

Renewable jet fuels offers the following five advantage compared to conventional fuel. Renewable fuel has more stable fluid properties below freeze point. CO2 emissions are reduced 90% at idle and 74% of at cruise. Engine system carbon deposits are 10 times lower than conventional jet fuel which could reduce engine maintenance. Renewable jet fuel typically has higher energy content reducing fuel consumption and a reduction in life cycle greenhouse gas initiatives in excess to 50%.

In November we’ve received EPA registration for neat renewable diesel. This allows us in onroad engines of upto 100% which means no blending of petroleum based diesel is required. EPA registrations allows us to market our fuels directly to end users such as fleet operators and transit authorities without the cost of blending.

Further an EPA registration will allow Dynamic Fuels to RINs without having to sell to a blender. We are actively marketing to owners of fleet who are interested in a superior sustainable fuel that is just diesel and requires no change to the way they currently procure fuel.

We continue to conduct research with the Department of Energy on our phase change material. Oak Ridge National Laboratory is currently evaluating samples of pelletized phase change material produced using commercial pelletizing equipment.

We are sending pellet samples to Egyptian board manufacturer for evaluation as requested by the manufacturer. Similar PCM products are reported to reduce energy usage in homes and offices by 20% to 30%.

Sinopec continues to operate the SDF demonstration demonstrating Syntroleum’s FT technology. The results have been excellent to date. The SDF has exceeded 2000 hours run time while demonstrating full capacity. Sinopec is currently running our FT catalyst on non-dilute syngas with performance better than that demonstrated on dilute syngas.

We believe that the momentum for coal to liquids in China is building and these encouraging results could lead Sinopec to develop a commercial plant using Syntroleum’s FT technology. FT technology continues to look economically viable using GTL within the US.

Recent gas prices have been approximately $3.50 per Mcf while diesel prices have remained strong at approximately $3.10 a gallon. At current prices the cash margin of a GTL plant will be approximately $70 a barrel. We continue to receive early stage interest from third parties that are licensing our GTL technology. Our priorities are currently focused on optimizing reduction in cash flow from Dynamic Fuels which provides us the financial strength to pursue GTL opportunities for own accounts.

I would like to review the current plant production performance in detail. Previously we reported July production of 5.4 million gallons or 87% of capacity. In August we produced 4.6 million gallons or 74% of capacity. In August we encountered a mechanical issue with our solid recycle pump. Prior to this issue, the pump experienced a record run time of 3765 hours or 157 days.

Our previous run time before that was 528 hours or 22 days. The issue encountered with the pump in prior run is related to seal failures. The new seal design continues to perform to expectations. The current event was not caused by seal failure but by a long-term build up of corrosion debris. We noted this upon inspection of the pump in August and we’ve been working on mitigating solutions to be installed at our September turnaround.

During turnaround in September we had installed additional corrosion inhibitor injection points to mitigation corrosion. The pump ran from August 20 to October 24 resulting in a runtime of 995 hours. In October we encountered similar corrosion debris using our solid recycle pump as we encountered in August.

During the post turnaround, restarted the plant, the strainer filter systems were insufficient to handle startup-related corrosion debris that remained in the system. We solved this issue, we designed, built and installed a high guard bed to protect the pump.

The new system has a holding capacity in excess of 100 times the prior holding capacity of the original strainer. The plant was down from October 24 to November 7. As of November 7, the plant was running at approximately half rates. The pump was serviced at the vendor and reinstalled on November 8. We expect to increase rates during the remainder of this week.

In summary, we have significantly improved the reliability of this pump as evidenced by the record runtime and good seal performance. We encountered a new issue related to corrosion debris and have identified and implemented solutions that we believe will mitigate these issues in the future.

On October 19, we encountered a mechanical failure of the acid injection pump on the pretreatment system. The pump ran from March to October with no issues. When the pump failed, we immediately installed a warehouse spare which took two hours to install. The new pump subsequently failed after 12 hours. Two alternative spares were sourced and installed and failed to pump at design requirements. We then installed a lobe-style pump versus the prior diaphragm style pump on October 22 and this pump has run without issues since installation.

Total loss time to this event was four days. Feedstocks have solids that are removed in order to process them into fuel. The plant has a system of strainers and filters to design to remove solids which must be removed to ensure reliable operation of the reactors. We initiated a supplier requalification program in which we prequalified suppliers out of spec feed which include solid content.

On October 22nd we have prequalified 21 suppliers, disqualified 57 and are evaluating 71. However on two separate occasions during October we encountered higher than normal level of solids. This overwhelmed our existing filtering capacities. When excessive solids are found in the feedstock we must re-filter until the solids are removed. This causes a bottleneck in our plant limiting production. The plant was down for four days, October 18 to 21 as a result of this bottleneck.

We are evaluating design enhancements in order to debottleneck our feed pretreatment system which includes augmenting our solids handling capacities. In September the plant was taken down for 14 days turnaround focusing on servicing HDL reactors.

Turnaround services scheduled for these reactors annually to change our catalyst related material to renew the build up of a particulates and debris as is typical for process reactors such as these. During the turnaround we installed a new guard bed design to optimize holding capacity of debris that naturally builds up during the conversion reaction.

We continue to focus on improving plant reliability. For example, our prior run time on Generation II hydrogen compressor valve was 737 hours. As of the end of October, our Generation III valves have logged 3602 hours of runtime. In September turnaround, we noticed trends on the valves that indicate 8,000 hour run times will not likely be achieved.

Therefore, we are redesigning Generation IV valves. We have achieved 98% reliability up time in the hydrogen compressors since May. On October 29, we changed up the hydrogen (inaudible) charge pump at 5312 hours due to high vibration. Previous best run time was a 168 hours. We own a complete warehouse spare for this pump and changeout was completed within 48 hours.

Subsequent shop test determined the pump and gearbox were in as design condition and a likely cause of high vibration was the coupling between the electric motor and pump gearbox. We’ve successfully run times with our HDL charge pump as of October 31 run time was 4,152 hours as compared to a previous run time of 1200 hours.

In July and August, we achieved an average of 80% of plant capacity producing 10.1 million gallons. We produced 1.9 million gallons as of September primarily due to our 14-days scheduled turnaround and two-day disruption of hydrogen supply.

Despite the issues we encountered in October, we were able to produce a 54% of capacity with a total of 3.4 million gallons. In addition, we supplied 75,000 gallons of renewable jet fuels to SkyNRG for using Alaska Airline flights. Solutions were implemented in late October and early November and the plant is currently operating at 50% of capacity.

We plan to take the following steps to continue to improve reliability. First, increase and improve our filtration capacity, that design review is ongoing. Second, we need to refine our corrosion program in the plants specifically around our solvent recycle move.

Third, reactor (inaudible) where we can specify a spare solvent recycle pump that meets the operational and debottlenecking needs of the plant. These pumps are typically 8 to 12 months delivery. Finally, we need to optimize and debottleneck our feed pretreatment system.

We’ve contributed 19.25 million to Dynamic Fuels since October 2010. From October through June, we contributed at a rate of 1.6 million a month. From July to November, we contributed at a rate of 800,000 per month, a reduction of 50%. This reduction is attributed to two primary factors. From October 2010 through June 2011, our plant utilization was 25% and from July to October, our plant utilization was 62%, an improvement of a 147%.

Over the last four quarters, our operating expense decreased from $6.52, $3.27, $2.14 to $1.05 per gallon. This is an 84% reduction over the year. Our current revenue and cost structure for the quarter ended September 30 results in a breakeven in approximately 80% of capacity, and we achieved full end values for our diesel production, our breakeven would have been approximately 30% of capacity.

Next, review Dynamics Fuel’s financial performance for the quarter ended September 30, 2011 compared to the prior. For the quarter ended September 30, 2011 our average feedstock costs were $4.26 a gallon and our blended revenue was $5.19 per gallon resulting in a gross margin of $0.93. This compares to the quarter ended June 30, 2011 with feedstock cost of $4.11 and a blended revenue of $4.84 per gallon resulting in a gross margin of $0.73 per gallon.

In summary, over the past 12 months we've averaged $1.10 per gallon gross margin with a projected operating expenses of $0.55 per gallon, Dynamic Fuels would have achieved a cash margin of $0.55 per gallon or $41 million a year design capacity.

As we discussed last quarter, there remains considerable revenue upside. Prices during the quarter ended September 30, 2011 were as follows. SME Biodiesel was $5.46 per gallon, Dynamic diesel sales was $5.70 per gallon therefore Dynamic Fuels received a $0.24 per gallon premium over SME. Full RIN value pricing was $6.52 per gallon. We define full RIN value pricing as the sum of Gulf Coast ULSD diesel price plus 1.7 times of RIN price, plus a $1 subsidy. Therefore Dynamic Fuels received an $0.82 discount to full RIN value pricing.

As I mentioned, above we have marketing plans for 2012 to maximize fuel sales directly to fleet customers enabling us to capture full RIN value for greater portion of our diesel sales. That strategy was enabled by obtaining EPA registration of neat fuel on November 1st.

Let us exam the amplification of our achieving EPA registrations and overall margins. And we’ve been able to receive full RIN value of $6.52 for our diesel for the quarter ended September 30th. Our blended revenue per gallon would have been $5.92 per gallon compared to $5.19 realized an increase of $0.73 a gallon. With feedstock cost of $4.26 and OpEx with $1.05 would have made an operating cash margin of $0.61 a gallon.

RFS-2 was implemented by creating a traded compliance commodity known as Renewable Identification Number or RIN. Each obligated party must purchase sufficient RINs to satisfy its annual mandate.

Since the beginning of the year, RIN prices have increased from $0.74 to a high of $1.99 per RIM on September 14th. RIN value subsequently declined to $0.96 on October 26th and has since rebounded to $1.44 as of yesterday November 9th. There appears to have been two events that caused RIN prices to fall.

In October and November, EPA posted biomass based diesel production for August and September of 100 million gallons and 119 million gallons respectively which implied a 1.4 billion gallon per year production exceeding the mandate level of 1 billion gallons for 2012. However, EPA announced enforcement actions against two bio-diesel producers for the creation of $9 million and $40 million worth of fraudulent RINs respectively.

Last week, the EPA posted to its website that, “Invalid RINs cannot be used to achieve compliance with the renewable volume obligation of any obligated party or exporter, regardless of the party’s good faith belief that the RINs were valid at the time they were required.” Additionally, regulations prohibit the creation or transfer to any person of the RIN that is invalid.

Implication of these actions by EPA could be as follows: Obligated parties with questionable RINs may need to step back into the market and purchase valid RINs driving up RIN prices. And secondly, obligated parties are more likely to pay greater scrutiny on the RIN custody chain in the future, enabling them to trace RINs directly back to recordable producers.

The Supreme Court on Monday declined to hear request from the oil and chemical industry to strike down the renewable fuel standard. We believe that the fundamentals of the RIN market remain intact.

With respect to feedstock prices, yellow grease and animal fat prices have softened recently. Tallow prices are currently $0.43 down from $0.50 a pound and yellow grease is currently $0.41 down from $0.46 per pound compared to September. Oil prices remain steady at $0.52 a pound.

Based on the yesterday product, RIN and feedstock prices together with operating cost from September quarter Dynamic Fuels full RIN value operating cash margins are approximately $1.30 per gallon. Therefore we believe the intrinsic economic of the business remain very favorable.

I will now turn the call over to Karen.

Karen Gallagher

For the nine months ended September 30, 2011 the company reported an operating loss of $2.3 million resulting from total revenues of $3.2 million and operating expenses of $5.5 million.

Revenue related to engineering services provided to Dynamic Fuels and customers, the process design and research support. We also recorded revenues or royalties from Dynamic Fuels commercial production which began in October 2010.

The total net loss for nine months ended September 30, 2011 was $14 million. $12.3 million of this loss relates top Dynamic Fuels operations for their nine months ended June 30, 2011. The loss reflected in our income statement represents a loss incurred for Dynamic from October 1st of 2010 to June 30, of 2011.

Our 10Q filings include Dynamic Fuels financials for their nine months ended June 30th in the footnote to the financial statement. We do not consolidate Dynamic Fuels; instead we report using the equity method of accounting. Income or losses under the equity method are reported below operating income as income or loss in equity of Dynamic Fuels.

For Generally Accepted Accounting Principles we do not report gross revenues associated with Dynamic Fuels, because the entity is not consolidated. We will only report our share of the total net income or loss.

As reported in our 10-Q, Dynamic Fuels had revenues of $63.1 million and operating expenses of $88.1 million, resulting in a net loss of $25 million for the nine months ended June 30, of which we reported 50% in our Syntroleum financials.

During this time period, 30 million gallons of renewable fuels were sold and 14 million gallons were produced. Our limited production levels during the start up in commissioning period resulted in losses at Dynamic Fuels. As of September 30, 2011 our cash balance is $28.4 million. Since July, we’ve provided $4.2 million in additional working capital funds to Dynamic Fuels which includes $2.5 million in October and an additional $1 million in November.

In summary, we produced renewable jet fuels flown commercially by Alaska Airs in the US yesterday. We received EPA approval for the use of renewable diesel in on-road applications. Our FT technology is being demonstrated by Sinopec versus the SDF in China and Dynamic Fuels has demonstrated reduced operating costs for the most recent quarter ended September 30 and continues to focus on achieving higher production rates.

Thank you for your attendance today. We will now open up the call for questions.

Question-and-Answer Session

Operator

Thank you. We’ll now begin the Question-and-Answer session. (Operator Instructions) Our first question comes from Shawn Severson, JMP Securities. Please go ahead.

Shawn Severson - JMP Securities

I was wondering if you could maybe take a little bit more about you know other customers that might be in the pipeline. You know obviously Alaska Airlines are a key benchmark for you, but just kind of the status of who else you might be talking to or what looks like just open airline (inaudible) diesel side.

Gary Goth

On jet fuel typically we are under CA with the client. So we are not allowed to divulge but obviously we've got it into Europe now. We've got our first customer in the US, so we can continue to work with other airlines as we develop these technical endorsements from these various clients.

Shawn Severson - JMP Securities

Are there any specific barriers in talking with the other customers or just kind of where are they in the process in working with you?

Gary Goth

Typically these are very technical sales, obviously you have to have buy in from the airplane and the engine manufacturer as well as the instrumentation manufacturer who measures the fuels and the various components of the fuels. Additionally you have to have buy in from the logistics train, typically rail pipeline or truck and then as well as the terminal managers.

So once we get products, we therefore we shifted all the way now of course to the Alaska Airlines as we developed our, we've demonstrated our ability to put it all the way through the logistics train, all the way through the airplane manufacturers and engine manufacturers, the acceptance continues to grow but it is a technical sale and those technical sales have a lot of stakeholders that need to improve the process.

Shawn Severson - JMP Securities

Sure, understand and in terms of mechanical fixtures obviously it’s been, a lot going on in the last few months. I was wondering if you have any sense of internally what your target is going forward for being at the production levels then and efficiencies that you want?

Gary Roth

Obviously we want to get to design capacity. We had a little bit difficult time in the quarter. Although those areas that we have focused on I thought we demonstrated to you that we have improved significantly the runtimes on our solid recycle pump, the compressor valve issues. What we’ve seen this time is from the restart we’ve had some difficulty in a couple of pieces of equipment. So it is a little more difficult on the restart after the turnaround, but what we are very pleased about is doing the turnaround, we didn’t see anything negative in the reactors.

We didn’t see anything negative in the guard beds or the catalyst itself. Those items have performed, those major key components have performed as we’ve designed. The issue has been primarily lately around the solvent recycle pump. Now we do understand how that pump runs, this allow us an opportunity to specify and work with the manufactures is on a stand by pump, but we needed this year of run life to allow us to customize the specification for a spare pump.

Shawn Severson - JMP Securities

Have you considered kind of the higher quality feedstocks as an option. I mean assuming that you win a couple of more contracts out there in terms of the supply I mean is that something that you could do if need be?

Gary Roth

We’ve used all feedstocks all the way from yellow grease, beef tallow we have run some soy oil. So we do consider them depending on the economics. Now as we explained to you in the conference call, RINs took a dive this quarter and recently but they have recovered nicely. So that once the RINs have recovered, that opens the feedstock, that’s we considered quite a bit.

Shawn Severson - JMP Securities

Great, thank you and just one last question. In terms of the capital been spent for the gas to liquids, can you just give an update on that and where you think that is and where it might be as we go into the next quarter or two?

Gary Roth

We think there’ll be minimal capital in next quarter, most of it is internal. There are some minor external capital expenditures we make, when we work with third-party engineering to do some design work.

Operator

The next question is from [Chin Ming Lu] Ardour Capital. Please go ahead.

Unidentified Analyst

Good morning, thanks for taking my question. Gary, first can you share with us more details regarding your direct sales efforts with your renewable diesel since you are getting the certification from EPA like you say whether you will charge your customers some price and than you have to sell RIN separately and also regarding your potential customers whether you are targeting large corporations or municipalities, especially given the current economic conditions and (inaudible) difficulties some municipalities are facing?

Gary Goth

Okay, so there’s three components to the price of renewable diesel. Component one is from where we are is ULSD or Ultra Low Sulfur Diesel Gulf Coast price. So when we talk about selling direct, we sell at ULSD price so the clients sees the same price where the diesel that he sees for petroleum diesel; so he is indifferent. Then, we take the reins and we sell them and typically that can be back to back and then we collect the dollar directly from the government.

So in these sales, the client sees no different from our fuels than he does from his regular diesel.

Now prior to the hundred percent approval we were limited to a 20% blend and the clients typically don’t want to try to keep track of that they are below 20% blend in their taste, neither the client or the wholesale. So now that we have a 100% approval, the client doesn’t need to keep track.

So he is burning as far as he sees, it’s just diesel and that’s what he wants. If he wants fuel which he sees in that commodity, that he can use anywhere any time just like he uses regular diesel, and so to you point the municipalities and clients don’t see any price difference when they do from their current suppliers without collecting the RIN values and the dollar a gallon directly from the government.

Unidentified Analyst

Okay. Thanks for the clarification. Regarding your renewal trajectory is there only a productivity difference between the renewal (inaudible) and the renewable diesel o are you there annulated production cost difference?

Gary Roth

There is a production cost difference and they are manufactured in two ways. When we make jet fuel we typically make more Naphtha and LPGs those are lower values, and then when we make jet fuel, there is a third-party distillation cost.

So, when we consider jet fuel sales, we price accordingly to recover those incremental costs.

Operator

The next question will be John [Dunlea] JWA CPA. Please go ahead.

Unidentified Analyst

Yes, I was wondering if we can get an update on the grand opening that we heard was going to happen at some point, I thought over the summer in one of the last conference calls?

Gary Roth

Yes. That’s an excellent question. We continue to work on the grand opening. We went through our turnarounds, so I would suspect it’s going to be -- which is a not a good time to have a grand opening. I suspect we see sometime in the first quarter or the spring of next year.

Operator

The next question will be Michael Prouting, 10K Capital. Please go ahead.

Michael Prouting - 10K Capital

Yeah, good morning and thanks for taking my question. And also good work on all these mechanical issues you’ve been facing. First question is that, once you resolved the -- mechanical issues, is it realistic, do you think to achieve a 100% design capacity or what’s your current thinking there?

Gary Roth

Yes, we do. We run the reactors of about 120% of design. So, we think a 100% design is achievable. We need to finish working through these mechanical issues, and we need to finish the qualification work on the feedstock. So we have a more definitive handle on that design data.

Michael Prouting - 10K Capital

Okay. And then, do you have any sense of the timeframe of when you might get back to, you know those second quarter production rates or say 75% to 80% of design capacity?

Gary Roth

We would help this quarter -- we are about 50%. We are limited by the sovereign recycle pump which is being re-installed and we are currently heating it up, and actually presenting a balanced (inaudible) clinic in there, so we should be able to see sometime this week.

Michael Prouting - 10K Capital

Okay, that’s fantastic. And then and there's a big question following that, any sense then of when you potentially might hit that full design capacity throughput. Does that take longer or…

Gary Roth

Well, we continue to solve these problems as we get our run lives out. We run into other difficulties or other plant problems. We don't like to predict, but we are significant -- we have significantly improved run lives of major components of the plant, and so, therefore we feel like we can solve these problems and we can solve them with meaningful extensions of run time. But after a year, we continue to learn things about the plants and the process which is part of technology development, unfortunately.

Michael Prouting - 10K Capital

Yeah, sure understood. And then actually going back to some product questions on diesel, at what point do you think, or is it realistic to think that through that -- you could capture the full diesel pricing at some point, and if so, when do you think you might be in a position to do that?

Gary Roth

Well, we’ve got our 100% approval, so, I don’t see any reason why we can’t capture. We -- there is a market price for RINs, we see it, it’s published, I know this. The dollar we’ve already collected and the clients buy ULSD, they buy just diesel. So with our 100% certification there is -- that the client just sees diesel and that’s been one of our primary goals. He doesn’t have to have any compromises with the product quality versus petroleum and diesel.

Michael Prouting - 10K Capital

Okay. So we cannot reason essentially that going forward from here that you shouldn’t be able capture that for ULSD pricing?

Gary Roth

Yeah. I think we’ll develop that over time, but, yeah, I see no reason why we should not be. We are just diesel, the 100% registration sets were just diesel, and that’s the key to the client. The clients don’t want to differentiate themselves from plain petroleum diesel.

Michael Prouting - 10K Capital

Okay. So just to clarify then, I mean let’s say average hourly for the month of December, there shouldn’t be any difference between the pricing that you realize and the full ULSD pricing?

Gary Roth

I didn’t say that’s correct; we just received the certification, registration it will take time to finish building out those markets with the clients, but now there is nothing to stand in the way. Our regulatory wise technically, obviously, you know Alaska Airlines flying on our jet fuel says abundance about the quality of the product.

Michael Prouting - 10K Capital

Well let me as the question a different way, so how long do you think it will take you to build those customer relationships to the point where you’re able to capture that for ULSD pricing?

Gary Roth

I really can't say how long it’s going to take. Our marketing efforts is focused on that. We have our certifications and we will continue to report our numbers and our pricing and we will be able to talk to you quarterly on what those differentials are.

Michael Prouting - 10K Capital

And then with Sinopec and GTL, what do you think – what do you see is being the next step if you will in that process or relationship at this point?

Gary Roth

We understand they want to run between 4,000 to 6,000 hours total. There is a couple of technical components they have it run primarily catalyst regeneration; they want to run that. And then we would do – typically we would do a technical review with their engineers and our engineers early next year. And then based on that and there’s four plants of CTL going forward currently. In China, we are hoping they’re going to commercialize our technology.

Operator

Your next question is from Anthony Chen, Alc Capital. Please go ahead.

Anthony Chen - Alc Capital

With regards to the certification from the EPA, does that allow you guys to inject your fuel in to the colonial pipeline system as product 61 [undergo] low sulfur diesel?

Gary Roth

We already have that.

Anthony Chen - Alc Capital

Even though you have, I think colonial had some regulations that only allowed your product to ship as 63; it’s a separate code where it couldn’t be [fungal 3] mixed with the 61 product?

Gary Roth

Anthony this is a wrong sign, but you are correct. There is a fungible fuel stack where if its 5% or less the renewable diesel can be in the line, otherwise it has to be sent to segregated batches if it’s greater than 5%. Those restrictions are related to the FTC Labeling Law and not related to the EPA registration we received.

Anthony Chen - Alc Capital

So with the EPA registration is that – do you anticipate that colonial will make a decision that will allow you to do that?

Gary Roth

No I don’t think any registration…

Anthony Chen - Alc Capital

That’s a separate division, okay. And then secondly, it seems like you are getting your operating costs in the plant down which is great, can you sort of repeat what those numbers were the few months and give us some color as to what actions it was that brought down those costs from I think $2.96 a gallon that you had talked about last conference call?

Gary Roth

So the last four quarters those numbers were $6.52, $3.27, $2.14 and $1.05.

Anthony Chen - Alc Capital

So $1.05 is the last two months is that for September or August-September or do you say that’s last quarter?

Gary Roth

Ended September 30, 2011.

Anthony Chen - Alc Capital

And what were some of the major things that happened at the plant to get that – and that’s quiet a dramatic decrease?

Gary Roth

Obviously, one is we got the production up, so that helps a lot. And then I think we just come out of commissioning mode where we have quite a bit of expenses associated with the commissioning mode and we moved more into an operating mode where we have more steady state and defined events within the plant.

Operator

Your next question will be [John Kvale] with JK Capital.

Unidentified Analyst

Just a few questions around the jet fuel; can you talk about if you have any contracted sales with SkyNRG going forward? Also we saw a Wall Street Journal article that quoted $17 per gallon price. Can you talk about the profitability of those sales and the way you expect pricing to go on to jet fuel? And thirdly, can you talk about any plans for upgrades distilled jet fuel onsite by Dynamic Fuels rather than go into a third-party? Thanks.

Gary Roth

We are under CA with SkyNRG. Unfortunately, we can’t talk about pricing or volume. As far as upgrading the plant, what we think we do is continue to penetrate the market with the jet fuel volumes and then look for contracts that would support making additional capital invested in the plant. But as we discussed earlier, you know, these are highly technical sales with many stakeholders all the way through from the trucking company to the engine manufacturers and it’s typically very – and for us to get those stakeholders before true commercial firms are discussed and overseeing in the industry in both Europe and the US that the product meeting and technical hurdles all the way through to commercial demonstration.

Unidentified Analyst

And just one follow-up, you can't discuss pricing, can you just discussed whether it’s being profitable for you or not or whether you are taking a loss on the jet fuel sales?

Gary Roth

It is profitable.

Operator

This concludes our question and answer session. I would now like to turn the conference back over to [Karen Power] for any closing remarks.

Unidentified Company Representative

Once again, we would like to thank you for your attendance today and we greatly appreciate your interest in Syntroleum. Thank you.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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