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KiOR, Inc. (NASDAQ:KIOR)

Q2 2012 Results Earnings Call

August 14, 2012 10:00 PM ET

Executives

Max Kricorian - Director, Finance

Fred Cannon - President and CEO

John Karnes - Chief Financial Officer

Analysts

Patrick Jobin - Credit Suisse

Mahavir Sanghavi - UBS

Mike Ritzenthaler - Piper Jaffray

Vishal Shah - Deutsche Bank

Rob Stone - Cowen & Co.

Pavel Molchanov - Raymond James

Colin Rusch - ThinkEquity

Brian Lee - Goldman Sachs

Ben Kallo - Robert W. Baird

Operator

Welcome to KiOR’s Second Quarter 2012 Conference Call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session, after the speakers complete their remarks. As a reminder, this conference call is being recorded for replay purposes.

The telephonic replay will be available approximately two hours after this call is complete and remain available until Tuesday, August 21, 2012. The number to call for the replay was included in the earnings release issued earlier this morning. This call is being webcast and will also be available on the company's website for approximately 90 days in the Investor Relations Section of the site.

I would now like to turn the call over to Max Kricorian, Director of Finance at KiOR.

Max Kricorian

Good morning. Thank you for joining us to discuss KiOR's financial and operating results for the second quarter of 2012. With me today are Fred Cannon, President and Chief Executive Officer; and John Karnes, Chief Financial Officer.

I would like to remind everyone that statements will be made during this call that are not historical facts and are forward-looking statements. These statements about the company future expectations, plans and prospects include statements regarding the timing for commissioning the company’s Columbus facility, statements regarding the timing for production from the company’s Columbus facility, the company’s plan to build it next commercial facility in Natchez, Mississippi and other the other statements containing the words believes, anticipates, plans, expects, intends, and similar expressions. These forward looking statements are based on current expectations and assumptions that are subject to risks and uncertainties.

The company cautions that a number of important factors could cause our actual future results and other future circumstances to differ materially from those expressed in any such forward-looking statements.

These important factors and other factors that could potentially effect the company’s financial results are described in the section called Risk Factors in the company's most recent annual report on Form 10-K for the year ended December 31, 2011, and in the company’s other filing with the SEC, which are available through the Investor Relations section of the KiOR website at www.kior.com or on the SEC website at www.sec.gov.

The company may change its intention, believe or expectations at any time and without noticed based any changes in such factors in assumptions or otherwise. The company undertakes no obligation to release publicly and relation to any forward-looking statements to affect events or circumstances after today to or to reflect the occurrence of anticipated events. Therefore you should not rely on these forward-looking statements as representing the company’s views as of any date subsequent to today.

Now, I would turn the call over to Fred Cannon.

Fred Cannon

Thanks Max. Good day. I would like to talk to you about another strong quarter of execution and progress for the KiOR team. First, our research and development team has created a new generation catalyst platform that is going to have a substantial positive impact on the economics of future plans.

Next, commissioning of our Columbus facility remains on track and we are getting ready to startup the facility in September. Given the typical startup issues that we expect to face, we remain confident that our cellulosic gasoline and diesel will be an American cars and trucks during the fourth quarter of this year.

We are closing the Columbus construction books and can report that the final actual costs for construction of the facility will come in about 4% less than our previously estimated costs of $222 million.

Let me start by talking about our progress in research and development. I’m excited to announce the development of our new next-generation catalyst platform. For some background, KiOR's two step biomass to fuels technology starts with non-fuel biomass that is fed into a biomass fluid catalytic cracking or BFCC.

Our BFCC is based on fluid catalytic cracking technology from the refining industry, which implies a continuous flow of catalyst in a loop. The catalyst is heated at the beginning of each cycle and is then fed into our reactor at the same time we feed our biomass. The reaction occurs literally in seconds, the catalyst and produced hydrocarbons are separated, and the catalyst is regenerated and reheated to start the next cycle.

The composition of these hydrocarbons is very important in maximizing the efficiency of our process. Without getting into too much detail there are three kinds of hydrocarbons that come out of our reactor, coke or carbon, gasses and a liquid fraction.

Since the liquid fraction is what we upgrade to our cellulosic gasoline and diesel, we want to maximize the volume of our liquid fraction. At the same time though, our facilities do require a minimum level of coke to be able to maintain in overall heat balance.

Our research and development team knows there is an ideal balance between coke, gasses and liquid fraction. They have been working tirelessly on both catalyst design and reactor design to achieve that balance.

As they do, we believe we will see improvements in overall yield increasing the number of gallons of our cellulosic fuels for a ton of biomass, as well as enhancements to our capital efficiency, thereby reducing the capital costs per gallon of cellulosic fuel. That’s what makes the development of our new next-generation catalyst platform so important. This catalyst is a culmination of the tremendous amount of effort by our R&D team and represents a major step toward achieving that balance of hydrocarbons that we discussed.

What we know today is that this platform will significantly reduce the amount of coke we make in our process. A coke reduction like what we see from this platform will allow our facilities as currently designed to handle up to 20% greater volume of feedstock with the same equipment and capital costs.

In essence, what this means is that our standard 1,500 ton per day facility will now be able to process 1,800 tons per day of biomass all without spending significant additional capital above our current $350 million capital cost estimate for each BFCC.

As you might guess this increase of capital efficiency will increase the internal rate of return for our facilities, by as much to 5% to 6% based on our current feedstock yield and costs assumptions. We think this breakthrough will help us as we look to finance the Natchez facility in the coming months.

What we don’t know today, is how much of the hydrocarbons from the reduction in coke will find its way into the liquid fraction, which would mean a yield increase in addition to the capital efficiency improvements. We will continue to test this catalyst platform in our pilot and demonstration units, and we anticipate we will be able to share our initial progress on yields on our next quarterly call.

While our new catalyst platform marks another important step in the progression of KiOR towards its target yields and hydrocarbon balance, it does not mean that we have hit our targets. We believe that our continued investment and the best R&D talent and facilities are essential for KiOR to reach those targets.

Now turning in detail to Columbus, as I mentioned in my opening, the project is on schedule, under budget and nearing startup. During last quarters call, I stated we plan to begin startup operations around September and I feel confident we will hit this milestone. The commissioning process has been moving along smoothly and we have not had any show stoppers.

In the final steps of commissioning, we will be focusing on the last few pieces of equipment of the facility in preparation for the startup phase, which again we expect to begin in September.

From a cost standpoint, it appears we will able to bring the project in for around $213 million, approximately 4% below our prior estimate of $222 million. These savings again reflect on efforts of our construction team in our EPC partner and KBR.

Assuming September startup is planned, we would begin to -- we would expect to begin pure sales during the October, November timeframe. Once production is achieved our Columbus team will focus on lining out the plan to achieve its design rates and operating conditions, which I’ve said normally will take a minimum of nine months.

Having started up numerous plants, unlike lining out a new plant to driving a new car, we all know new cars design to deliver certain miles per gallon under ideal conditions. When you get that new car, there are bunch of things, starts, stops, rates of acceleration and other operating conditions that impact your car’s ability to achieve its peak design performance. Overtime, as you learn how your car performance under these different circumstances, you find that sweet spot, where your car gets the best mileage and performance.

It’s a same principal for an operating facility like Columbus. Our operations team is trained and ready to run the facility, but like any facility, we are going to have startups and shutdowns, which while expected reduce efficiency.

Then once we get that facility to a steady state of operations, we will need to fine tune our operations until we find that sweet spot that lead Columbus facility operate most efficiently. We have clear expectations where we design that sweet spot. However, we won’t get there until we have actually run Columbus in a steady state operation for some time.

Its important to under the startup and early operation process, so that you can understand why I’m hesitant to provide any definitive guidance on our production volumes or every selling prices during the fourth quarter of this year. There are simply too many variables that we just can’t predict. Although, I can tell you that our dedicated team will work to get Columbus to that sweet spot safely and as soon as possible.

Given all of that we are taking a powerful and measured approach to both production and average selling price for Columbus facility. There is a lot of industry data indicating typical refining processors startup at 30% to 50% of nameplate capacity, and line out over the next nine to 12 months.

We don’t see any reason today, why the Columbus plant could not achieve this same startup trajectory, although, Columbus is a first of kind commercial scale facility. As a reserve -- result, we internally are using the production estimate of 500,000 to 1 million gallons for the fourth quarter.

And regulatory matters, our ability to sell product from the Columbus facility has also taken some significant steps forward over the last quarter. We have received the necessary approvals from EPA to manufacture our products under the Toxic Substances Control Act.

And as you saw, we also received EPA's first ever Part 79 fuel registration for our renewable gasoline. We are also expecting our Part 79 fuel registration for our cellulosic diesel from the EPA before we startup the Columbus facility.

We are excited to have clear paths to market for our cellulosic gasoline and diesel. We look forward to giving our sustainable non-food based cellulosic fuels into American cars and trucks next quarter.

In conclusion, it's been another busy quarter at KiOR. We continue to get the Columbus facility ready for commercial scale production. We continued to build on our existing progress and our R&D efforts, and we are working to develop our next facility in Natchez, Mississippi. There's still a lot to do. But we believe that we are well on our way to becoming the global leader in the production of cellulosic gasoline and diesel. We look forward to sharing our progress with you.

And with that, I’ll turn the call over to John Karnes.

John Karnes

Thanks, Fred. During the second quarter of 2012, we reported a net loss of $23 million, compared to a net loss of $16.8 million for the first quarter of this year 2012 and a net loss of $21 million last year.

This year's second quarter loss includes $3.7 million of non-cash stock-based compensation expense. This was up $1.6 million from Q1 of this year and up $1.1 million year-over-year from last year.

Also included in this year's second quarter loss, we had about $6 million of Columbus related startup expenses, which were up $4.1 million from Q1 this year and of course, we had only minor Columbus expenses last year.

R&D expenses for the second quarter of 2012 were $8.6 million, up $700,000 from the prior quarter this year, mainly as a result of commissioning our demonstration facility’s fractionator and higher laboratory activities.

R&D expenses in Q2 were $800,000 higher than a year ago, due largely to higher headcount, enhancement of our demonstration unit to include an integrated hydrotreater and fractionator, laboratory facilities and increased laboratory testing activity.

G&A expenses for the second quarter of 2012 were $13.7 million, up $5.7 million from the first quarter of this year. $4.1 million of the increase related to Columbus salaries, training and related pre-startup expenses and $1.3 million related to higher non-cash, stock comp expense.

Year-over-year, G&A expenses were $6.6 million higher than Q2 last year, $5.7 million of the increase related to Columbus and the remainder related to higher stock comp expense, increased headcount and higher compliance and insurance costs.

For the second quarter of this year, while we forecast $8 million of (inaudible) another commissioning startup contingencies, we didn't incur any significant unbudgeted costs. So we are carrying forward a portion of the contingency over into the third quarter. In addition, we are assuming our commissioning and startup costs in the third quarter will be in line with Q2 at roughly $6 million dollars.

Moving on to our balance sheet, our cash and cash equivalents at June 30, 2012 stood at $107 million. This balance represents a decrease of about $45 million from March 31, 2012, which is driven by $28.4 million of our capital program and our operating activities during the second quarter.

Our Columbus facility was mechanically completed during Q2 and we estimate we still have about $6 million of construction costs, yet to flow through in the third quarter as we close out the project.

In terms of guidance going forward, as we think about bridging from -- to first production at Columbus in Q4, reiterating what Fred said earlier, we’re not really in a position to provide precise guidance on Columbus’s initial production or ASP, nor can we really predict the startup yields and utilization for this first in kind plant.

That being said, for purposes of thinking about Q4, we anticipate internally that our fixed costs at Columbus will run around $5 million, excluding amortization and depreciation.

On a variable cost side, we expect our feedstock costs during the startup phase to be in the upper $70 per bone dry ton range since for operational convenience we are using round wood on short-term contracts and shipping arrangements.

Once we move out of this phase and we have Columbus wind out, we’ll move on to lower feedstock costs, which are build into our supplier agreement that we have in place with Catchlight.

As far as feedstock volume for the quarter, here again, we have no real prescient to based our operating plan on, so somewhat arbitrarily we are using the range between 20 and 25,000 bone dry tons for our Q4 planning case. This would include waste non-conforming feedstock and feedstock that will inevitably end up in non-spec product as part of the startup.

In addition to the feedstock, we are estimating another variable cost to run between $300 and $400,000 for the quarter, since natural gas and some other costs are not entirely variable.

Please note, these costs relates specifically to the startup phase of Columbus only, so they can't really be translated to our 1,500 ton a day standard commercial unit at Natchez, which will of course benefit from much more efficient fixed cost absorption.

As far as ASAPs during startup for internal purposes, we are forecasting per gallon discount of between $25 and $50 for Q4, to take into account anticipated startup transportation, customer mix, startup volume and quality deducts, and other deducts and adjustments that will apply in the fourth quarter.

Moving on interest expense, once we entered into the startup phase this September, we will no longer capitalize our interest expense. We anticipate interest expense for Q3 and Q4 of 2012 to be $1.9 million and $5.8 million, respectively.

This is really all the guidance we are in a position to give for the fourth quarter until we get some actual operating history later this year. If things go according to plan, we should be able to provide a lot more information and a better update on our next call.

So, with that said, this concludes our formal comments and I'll turn the phone back over to the operator, and open up the lines for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Edward Westlake with Credit Suisse.

Patrick Jobin - Credit Suisse

Hi. Good morning. This is actually Patrick Jobin on for Ed Westlake this morning.

Fred Cannon

Hey, Patrick.

Patrick Jobin - Credit Suisse

So I guess it seems like the 20% throughput improvement is just scratching the surface with -- as you get the yield improvement up as well. I guess, how should we think about kind of the target economics or target yield that you're working on internally?

Fred Cannon

Yeah. I think, Patrick, what we said, very consistently, we would set internal target of 92 gallons per ton of biomass. And of course as, why we are so excited about is our capital efficiency with the reduction in coke also allows us to put more feedstock into our existing design plans and essentially no additional significant capital.

Patrick Jobin - Credit Suisse

Right. Would you expect to be able to introduce these next-generation catalysts to Columbus eventually after it’s been lined out or is it more of a not just type of timeframe?

Fred Cannon

No. Patrick, we would certainly expect after some period of time and I’m talking months here, because we still have lot of work to do still on its catalysts platform, that we would have this catalyst in Columbus.

Patrick Jobin - Credit Suisse

Great. And then just last question from us, as far as not just the timing is concerned, any update there, internally what are you thinking about for when you kind of shift your internal focus away from Columbus, I know you are laser focused there, but moving onto Natchez?

Fred Cannon

Yeah. Patrick, we are working of course, Natchez in parallel with Columbus and at this time, we still believe we're on the path that we've laid out very consistently, starting Natchez in the first quarter of next year, begin construction and have it on line in late 2014.

Patrick Jobin - Credit Suisse

Great. Congratulations again.

Fred Cannon

Oh! Thanks, Patrick.

Operator

Your next question comes from the line of Mahavir Sanghavi with UBS.

Mahavir Sanghavi - UBS

Hi. Thanks for taking my question. Hi, Fred and John. Just a question on the 20% improvement, Fred, if I understood what you said right is, you are seeing clearly a 20% reduction in the coke, but it gets converted into hydrocarbons and gasoline. You're not sure, the spilt in terms of how that 20% goes into gasoline versus hydrocarbons. Is that right?

Fred Cannon

No. That’s exactly right, Mahavir.

Mahavir Sanghavi - UBS

Okay.

Fred Cannon

What we do is think about in this way, we produced the coke make or the carbon make in the process? That carbon can go into the gas phase or can go into the liquid phase and what we don’t know today, is how much of that we will get into the liquid phase and we will certainly keep you posted on each quarterly call as to our progress and giving the liquid yield.

Mahavir Sanghavi - UBS

Got it. And then, so Fred then, just a question on the CapEx saving, is that really coming from the lower waste feed recovery costs because of the lower coke production, I guess?

Fred Cannon

Well, the way to think about it, we design a plant to burn X amount of coke, very similar to fluid catalytic cracking unit in the refinery. The regenerator can burn so much coke to regenerate the catalyst.

And so it can do, think about that is X tons per day. So if we get a 20% reduction, for instance in the coke make then we can put 20% more feed and 20% more biomass into the process with existing equipment of waste designed.

Mahavir Sanghavi - UBS

Got it. And then one question for John. John, you had talked about 60 to 90 days of operations -- operation at Columbus to kind of look at capital market, is that sort of the odd process behind going to the market for further arrays?

John Karnes

Yeah. We would still hope that 60 to 90 days of successful operating history from Columbus would be sufficient to allow us to go raise capital. I mean, again, a lot remains to be determining in terms of how the plan starts up end market conditions, but as Fred mentioned that’s still our plan. We intend to try to raise capital at the end of the year and break ground on Newton still in Q1.

Mahavir Sanghavi - UBS

Got it. Great.

Fred Cannon

On Natchez, I apologize.

Mahavir Sanghavi - UBS

Got it. Great. And then just one last question about the ASP that you talked about for the fourth quarter, John, I missed that. Did you say the EBITDA for the fourth quarter would be roughly $1.25 to $1.50?

John Karnes

No. What I said was we would expect startup deducts from our sales price here. If you remember the - for example in our corporate introductory presentation, we walk you through how our ASP is built up comprised of hydrocarbon component and then RIN value component and what we are saying is all that’s -- all about the sales contracts indexed.

So of whatever index valuation people are using their own price outlook for Q4. Whatever that is we are saying that there will be structurally probably about our $1.25 to $1.50 discount related to our startup in terms of our realize price for the quarter.

Mahavir Sanghavi - UBS

Great. Thanks for that. Thanks, guys.

Operator

Your next question comes from the line of Mike Ritzenthaler with Piper Jaffray.

Mike Ritzenthaler - Piper Jaffray

Good morning, guys.

Fred Cannon

Good morning, Mike.

Mike Ritzenthaler - Piper Jaffray

Excuse me. If you can just minus on the RIN values that go into the blended ASP, if you can just remind us on a various types of RINs you help for and maybe other tax credit that would apply for this year or other special depreciation allowances that type of thing and then how the prices have been acting here recently on our per gallon basis?

John Karnes

Sure. What we will have -- just one first we already expecting the tax credit for very, very small period of time. The cellulosic tax credit we believe will sunset this year and there is nothing legislatively they would make us think that it would be expanded or extended. In terms of the cellulosic as we’ve spoken about before we get a C-RIN, a cellulosic RIN for both our diesel and our naphtha.

For diesel, we think we get something like 1.7 RINs per gallon for our gasoline. On naphtha, we think its more like 1.5 just in terms of energy content.

So just in terms of pricing, there is no market today for C-RINs. There are no C-RINs trading today. So the way we encourage people to think about it is look at A-RIN plus cellulosic waiver. For the first quarter, pardon me, for the second quarter, A-RINs average $0.79 and the cellulosic waivers were $0.78.

So again depending on what you’re applying that against the diesel product or naphtha product that would be a 1.7 or 1.5 multiplier on that and if you are referring to what we’ve seen sort of fallout in advanced RIN prices since the end of Q2 they are down about $0.25. And we are just watching that model care that those numbers in terms of what’s in that. But at the end of the day, those should begin production - would again selling our cellulosic fuels. We think here we will set the market for cellulosic RIN values and where they actually come out its hard to predict.

Mike Ritzenthaler - Piper Jaffray

Yeah. Okay. And then on R&D successes that you highlighted, the 20% potential for capacity creep in reduction CapEx on a per gallon basis. Are there savings, is there a potential for savings in OpEx as well given that the mix of fuel from co-gen can make that up from cheap natural gas?

John Karnes

That’s certainly are, Mike. Yeah, its one really nice thing about this process is we continue to reduce the coke. We can get more liquid yield and we can save - have some substantial OpEx savings the rest of the plan as well as of course better fixed costs absorption.

Mike Ritzenthaler - Piper Jaffray

And then finally for me, you mentioned in the past about completing the front end design for Natchez by the end of the year. And has there has been any change to approximately $12 million that you set aside for doing that front-end engineering?

John Karnes

No. I think the number is actually $30 million and $40 million but we are still on track we think to try to finish it around at the end of the year.

Mike Ritzenthaler - Piper Jaffray

Okay. Perfect. Thanks, guys.

Operator

Your next question comes from the line of Vishal Shah with Deutsche Bank.

Vishal Shah - Deutsche Bank

Yeah. Hi, thanks for taking my question. So John, Fred, on the timing for capital raise you guys have set 30, 60 days, 60 to 90 days actually. What is the timing around getting some of the yield data from this new catalyst. Are we talking about same timeframe or will you not have the data before you need to raise them capital, so I mean quite understand the economics for Natchez?

Fred Cannon

Yeah. We would expect to have data certainly at our next earnings call, which is mid November let’s say. So we would be -- our plan would be to update to at the next call and we will certainly have initial progress on yield improvement at that time.

Vishal Shah - Deutsche Bank

Great. And then I know you had over engineered the Columbus facility. So even if you exclude some of the throughput on yield improvement from this new catalyst, the CapEx is expected to be much lower. So do you have any updated thoughts on how we should think about the Natchez facility economics, what kind of CapEx improvement do you expect even with the modest yield improvement and then we’ve raise ready think some of the operating expenses are going to be like with some of the recent moving parts? Thank you.

Fred Cannon

Yeah. We still in terms firstly -- in terms of the capital cost we are not guiding down on the $350 million of construction costs that we’ve used since our IPO. We do think that’s conservative for the reasons we’ve talked about in prior calls. And we do hope we will have along with yields update in November that we will have an update or at least a better estimate in terms of what that $350 million will look like.

And again we think 350 is conservative. We certainly don’t see it being higher than that and we will hope it would be lower but we are not changing our guidance on that right now. In terms of OpEx at Natchez, we feel very, very comfortable with sort of $1.80 cash cost per gallon including both fixed and variable costs for Natchez on lined out basis.

So there again we’re not changing that guidance again based on anything that’s happened today. The way to think about today is variable costs obviously what it is and it fluctuates with the throughput, the fixed cost will just get better, fixed costs absorption but we are still in that $1.80 a gallon range for Natchez.

Vishal Shah - Deutsche Bank

Great. That’s very helpful. Thank you very much.

Operator

Your next question comes from the line of Rob Stone with Cowen & Co.

Rob Stone - Cowen & Co.

Hi, guys. I wonder if you give us a little more color on the things that are left to do before turning on the plan in the next couple weeks to six weeks, I guess, would following side of September?

Fred Cannon

Yeah. Sure, Rob. We’re just finishing up the last commissioning -- majority of plant is commissioned now is complete. So we are just finishing out the last few pieces of equipment to get -- to being fully commissioned and then we’ll start the startup phase, which means we will start heating up the circulating catalyst, heating catalyst up and preparing to put the biomass down. And so that’s kind of where we are.

Rob Stone - Cowen & Co.

So what drives the timing from starting to feed wood before getting to actually shipping product. Is there a meaningful lag time from - going from the front end to the back end to what you start to recognize for first shipment?

Fred Cannon

Right. Rob, it’s has more to do with just unexpected with startups and shutdowns and just lining the plant out, getting the plant online. So that we are lined out and making sellable product or on-spec product. So that has more to do with that and pulled up time in the plant.

Rob Stone - Cowen & Co.

Okay. A couple quick question for John. You mentioned I think $6 million of startup costs for anticipate for Q3 for Columbus is that right?

John Karnes

Yeah.

Rob Stone - Cowen & Co.

Okay. Could you comment on where you see the run rate of non-startup-related OpEx in Q3, Q4?

John Karnes

Of non-startup well…

Rob Stone - Cowen & Co.

And SG&A, x startup cost?

John Karnes

Okay. Well, yeah. From a company - from a corporate standpoint, setting of our Columbus that’s what you’re referring to and we’ll still think we are in that $13 million to $14 million a quarter run rate which is about $11 million a cash if exclude non-cash stock-based compensation.

Rob Stone - Cowen & Co.

Okay. So the one-off maintenance stuff related to the lab was in Q2 is relatively small?

John Karnes

Yeah. It was.

Rob Stone - Cowen & Co.

Okay. And any comment on updated local incentives or local arrangements you need to make for Natchez?

John Karnes

Well, Rob, we’re still in the process of negotiating and finalizing those in terms of agreements and things like that. So we’re not really in a position to comment on those until they are actually all wrapped up.

Rob Stone - Cowen & Co.

Okay. Final question for Fred if I may, so if the bottleneck is coke make, how much headroom is there in terms of throughput, in other words, how far about the 1500 ton per day nameplate could you actually increase the feedstock amount?

Fred Cannon

Yeah, Rob. Here we talk about the 20% reduction. There is at least that much more potential reduction in the future that we will certainly be focusing on.

John Karnes

So in terms of the processing the wood in the reactor any other loops to the plant, you’ve got that much on…

Rob Stone - Cowen & Co.

Fine.

John Karnes

On the…

Rob Stone - Cowen & Co.

Okay.

Fred Cannon

Yeah. We could double this as one like to think on that. The way we designed our plants, this 20% improvement for instance at Columbus our initial design of coke of the Natchez facility’s standard 1500, it has a 20% excess capacity in woodyard already built in. The only thing I would say there is a lot of potential there to continue to increase this but we would have to spend some on our capital to de-bottleneck woodyard after this step.

Rob Stone - Cowen & Co.

That the reactor is still has another 20% of…

Fred Cannon

Yeah. Yeah. To get back to that, yeah, overall heat balance I will talk about where you have to have enough carbon or coke to regenerate the catalyst and run at heat balance, that’s another 20%, even little over 20% potential.

Rob Stone - Cowen & Co.

Great. Thank you.

Operator

Next question comes from the line of Pavel Molchanov with Raymond James.

Pavel Molchanov - Raymond James

Okay. Thanks for taking my question. First about Q4 and then maybe Q1 of next year as well, in those two initial quarters, do you expect to sell product to all three of your existing offtake partners for Columbus?

Fred Cannon

Yeah. For during the startup period just for competitive reason, we can’t comment on pricing arrangements of our allocation for the first couple of quarters. Once we lined the plant out again the next year that we may have the ability to do more of that.

Pavel Molchanov - Raymond James

Okay. Understood. And then kind of a bigger picture thinking about 2013 you probably within a few months, the EPA was going to waive the cellulosic target or cut it by 90 plus percent for next year. Is that something that you’re taking into account in your pricing assumptions for next year, just internally.

Fred Cannon

Economically we are -- economically what we do, we would expect the EPA to lower the cellulosic targets next year. We would not expect them to lower them below forecast volume but should include we think the full forecast volume for the Columbus plant and as long as the mandates don’t fall substantially below, the country’s forecast production that there is no reason to think that the value to see them would be impacted.

Pavel Molchanov - Raymond James

Okay. Appreciate it guys.

Operator

Your next question comes from the line of Colin Rusch with ThinkEquity.

Colin Rusch - ThinkEquity

Thanks so much. So understanding that you’ve engineered a couple of woodchip feeder systems at Columbus, is there any reason to think that you might not need a backup system as you go forward and increase the throughput on these facilities?

Fred Cannon

Yeah. I think for the 20% improvement that we talked about our reduction in coke, the woodyard in Columbus can handle that the way it is. And of course, with Columbus when we originally designed it, we designed it with redundancy systems. So there is 200% excess capacity at the Columbus.

Colin Rusch - ThinkEquity

Okay. Great. And then just so we’re 100% clear, with the new catalyst platform, is there any risk to liquid fraction actually coming down versus your previous estimates or are we only thinking about offset at this point to the little ground?

Fred Cannon

I would only think about upside at this point.

Colin Rusch - ThinkEquity

Great. And then the last question from us is about the API lawsuit over RFS. Are you guys tracking that closely or are there any concerns creeping out in terms of, the API actually making some progress and adjusting the rules for RFS too?

Fred Cannon

Yeah. Of course, we follow it very closely and yeah we do a lot of work also to find out. And really what that lawsuit is about is the API is really asking to have EPA reduce the volume. It’s not below any production, actual production but just to get the actual mandate and actual production more in line. And of course, even if that happens, it would have no -- we believe it would have no effect on the cellulosic written value for Q1.

Colin Rusch - ThinkEquity

All right. Perfect. Thanks a lot, guys and well done.

Operator

Your next question comes from the line of Brian Lee with Goldman Sachs.

Brian Lee - Goldman Sachs

Hi guys. Thanks for taking the question. I might have missed it but could you provide a little bit more detail on the ASP guidance for Q4 just around what’s driving these deducts and also if you are assuming that’s only prior to Q4 with that extent beyond the quarter?

John Karnes

They will apply until the plant begins to line out and we start to ship sort of conforming volumes and on-spec product. So anytime you’re shipping partial shipments and you’re shipping off-spec product, you’re going to have a discount above and beyond in terms of transportation and then of course, you’re going to have quality adjustments and things like that.

And again this is why the feedstock we intend to use for the quarter, we really don’t know until we get some experience on how the plant is landing out. How much off-spec product we’ll have, how much sub-spec product we’ll have. What the current composition will be. I mean, at least initially, for example, it will be much more fuel well than once the plant is lined out.

So at this point, all we’ve done internally for our planning purposes is what we told you, we assume that, take the hydrocarbon value, take the written value on sort of our composite picture, just like we’re using our investor presentation, they help people understand our ASP and assume that our realization for the quarter will be a $1.25 or $1.50 les than that.

Brian Lee - Goldman Sachs

Okay. Fair enough.

John Karnes

And I guess, the trade-off is, the volume as trade mentioned, they are only talking, we would encourage people to be conservative, paying 500,000 to maybe a million gallons for the quarter. So - and we will know a lot more about ASP, part of our next call once we have some experience with the plant.

Brian Lee - Goldman Sachs

Okay. That’s helpful. And then on the yield, I know you are not talking specific metrics for Columbus, just given that it’s a little bit premature but can we talk to yields that you’re currently experiencing at the commercial facility and just kind of what’s sort of improvement you’re seeing, since the data you’ve provided, you’re not clear?

Fred Cannon

Yeah. We’ve not said anything about the 67 gallons that we talked about. And what I have said is that we really want to run demonstration plant as well as our power plant for certain - for a very long period of time to make sure that we know exactly where we are and that’s why we are very confident today to talk about the coke reduction and we will be talking about the yields improvement -- of our yield improvement and giving up, they had shown the quarterly calls from now.

Brian Lee - Goldman Sachs

Okay. And last question from the sort of a follow-up to the prior caller. On the RFS2, obviously there has been a lot more noise and chatter around opposite. Can you help us better understand what it would actually take the mechanics of changing the scope of RFS2, you will see something that EPAs were unilaterally decide upon or is it -- I think that something applies to active congress or is that just depends on what ultimately change if anything in terms of its scope. Thank you.

Fred Cannon

Sure. To repeal EPA RFS2, EPA does not have that story. That would take an active congress. What EPA does have, latitude with, it’s shedding the volume and how steep is the layout between now and 2022 for this - for all the four categories of RFS2. Of course, cellulosic is the one that today there is no production. And we hope and we plan to produce cellulosic fuel next quarter, which - that's the way we think about it. Of course, I remind people that RFS2 was part of the energy independence and security act of 2007, which was in the former administration, republic administration asked this. So we don’t see repeal as really an option.

Brian Lee - Goldman Sachs

Okay. Thanks a lot, guys.

Operator

Your next question comes from the line of Ben Kallo with Robert W. Baird.

Ben Kallo - Robert W. Baird

Thanks for taking my question. Thanks for the information. First on the hydrotreater, can you update us there with the size that you guys are thinking now and does it changes with the improvements in yield and just give us an update on CapEx for that?

Fred Cannon

The hydrotreater upgrader part of the plant is designed already at Columbus and for Natchez to handle 20% more volume even more. We design that early on because - of course, we anticipate it, we would continue to make improvements in both the yield as well as the capital efficiency and normal creep of this process.

So it’s already R&D designed. The capital allocated to one plant, BFCC type would be about 55 million and we talk about Natchez being central upgrader. The hub and spoke design and we built it for two plants, should be $110 million. So we’d allocate $55 million for each BFCC.

Ben Kallo - Robert W. Baird

Have you decided to build it for two plants or just the one plant?

Fred Cannon

We’re still looking at that. We would -- it's more capital efficient to do two plants and then you just continue to bring trains online, which the cost of the next - hydrotreater goes down substantially because of the infrastructure OSB out is already there.

So we’re still looking at that. That’s the part of our feed process that we talked about those type of decisions.

Ben Kallo - Robert W. Baird

Okay. And then could you just give us an idea of while you expect to run the round wood at feedstock and then what’s the decision point to move over on your contract?

John Karnes

Yeah. What we said before is we would expect it to run for probably 12 months on clean woodchips and not to say that we’ll use the round wood that we’re using now but we have it determined and really, again it will depend, in large part on the plant startup.

I think I would assume at least six months of round wood and potentially nine months and nine months against what Fred said, his expectation for lining the plant out and just for operational convenience would be, there is a strong case to be made for just using round wood.

If you -- economic, the difference between the upper 70s for round wood and the lower 70s that we’re talking about is just not, is not a big deal in the short-term economics of the plant and we always have the opportunity later to move down on clean woodchips later in 2013, I’m sorry, excuse me, the whole tree chips later in 2013.

Ben Kallo - Robert W. Baird

Okay. Great. And then finally, can you just maybe update us on a discussions you have with bringing in investor at the plant level for Natchez maybe for future plans? Thanks.

John Karnes

We had them really -- given any update or any specifics on any potential investors in Natchez other than the ones we disclosed in our RS1, which would be primarily Alberta Investment Management Company where we’re still working under the letter of intent at the project level. We’re not reliant solely on them. We are exploring a number of different options public and private plant and corporate level financings to be perfectly honest, the whole management team right now for the next 30 to 45 days is focused so much on Columbus.

We feel like we’ve done enough work on the financing that once we get operating data from Columbus, we’ll be able to talk very, very quickly about how Natchez will be financed. But right now, everything kind of comes back to Columbus as the condition persists, excuse me.

Ben Kallo - Robert W. Baird

Okay. Thank you.

Operator

And that concludes today’s question-and-answer session. At this time, I would turn the call over to Mr. Fred Cannon for any additional closing remarks.

Fred Cannon

I would like to thank you again for your interest and support of KiOR and we look forward to update you again in our early November call. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s conference call. Thank you for your participation.

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