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KiOR, Inc. (NASDAQ:KIOR)

Q3 2012 Earnings Call

November 8, 2012 10:00 AM ET

Executives

Max Kricorian – Director, Finance

Fred Cannon – President and CEO

John Karnes – CFO

Analysts

Ed Westlake – Credit Suisse

Mahavir Sanghavi – UBS

Mike Ritzenthaler – Piper Jaffray

Vishal Shah – Deutsche Bank

Robert Stone – Cowen & Company

Pavel Molchanov – Raymond James

Brian Lee – Goldman Sachs

Chris Kovaks – Robert Baird

Operator

Welcome to KiOR’s Third 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 Thursday, November 13, 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 third 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 production from the commissioning the company’s Columbus facility.

The company’s plan to build it next commercial facility in Natchez, Mississippi, achievement of advances in our technology platform on positive sign including the accuracy of our estimates regarding expenses, construction costs, future revenue on capital requirements and 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 such forward-looking statements. These important factors, and other factors that could potentially affect the company’s financial results are displayed in the section called the brief factors, in the company’s most recent annual report on Form 10-K for the fiscal year ended December 31, 2011 are submitted by the company’s quarterly report from Form 10-Q, for the quarter ended June 30, 2012, and the company’s other filings 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 intentions, relief or expectations at any time, I mean, I would not just based upon any changes in such factors and the company’s assumptions or otherwise. The company undertakes no obligation through release publicly any relations to any forward-looking statements will affect hence our circumstances after to it through respective currents of our anticipated. Therefore, you should not rely on these forward-looking statements also present in the company views as of any rate subsequently today.

Now I would turn over the call to Fred Cannon.

Fred Cannon

Thanks, Max. Good morning and thank you for joining us on our conference call. Today, I want to update you on our successful start-up of our Columbus facility and discuss our progress on the R&D front. Starting first with Columbus. Recall on our last earnings call in August, I said, we plan to commence start-up operations at the facility in September and to make our first commercial shipments during the October, November timeframe. In this regard, I’m pleased to report, that we started production at the Columbus facility in October. Our proprietary technology is operating as designed at commercial scale and producing a high quality renewable crude oil, conforming to our design specs. We have also been building our old inventory and anticipating, commencing, upgrading operations in the next week or so.

All of this gives me confidence, that we will share of the world’s first cellulosic gasoline and diesel fuel products on schedule later this month. I will give you a bit more color on the facility start-up and performance, but first, I want to take stock of what we have accomplished getting to this point and what to add then a production at Columbus means for the U.S. generally and the renewable fuel sectors specifically.

Today, much of the renewable discussion revolves around cellulosic fuels, our second generation biofuels. Cellulosic fuels harness the energy in the non-adjustable cell walls of non-food feedstock for transportation fuel. As opposed to plant sugars to primary source of ethanol or a plan, which used in biodiesel.

The world increasingly views cellulosic fuels as a preferred fuel category, because cellulosic fuels used non-food feedstock, allowing significant societal and cost benefits food-based feedstock. And they achieve greater reductions in life cycle greenhouse gas emissions than traditional ethanol or biodiesel. Including in KiOR’s case, over 80% reduction in greenhouse gas emissions compare the fossil fuels.

Cellulosic fuels would appear to be an obvious choice to fill the growing needs of our nation’s growing demand for cleaned energy. Except or just one hitch, to date no one has successfully innovated our second generation fuels process that scales on par with a well established refining processes used in traditional oil.

And none of the processes has yielded hydrocarbon based fuels, compatible with our multi-trillion dollar fuel infrastructure. KiOR is all about changing that paradigm and just over four years, KiOR conceived, proved, scaled and executed our cellulosic fuel production strategy. So different from other second generation fuel approaches, that it set out to prove its commercial scalability, by building the world’s first commercial scale cellulosic gasoline and diesel facility in Columbus, Mississippi.

Although it seems like a long time ago, in reality this occurred just within the last two years. Since we broke ground in the April 2011, we have built, commissioned and started our KiOR’s first of kind plant in only 19 months. I think, an outstanding level of performance for a project Columbus scale.

As I’ve described before, the Columbus facility can be broken down into three essential components. The woodyard, which employs very standardized processes common in the pulp and paper industry. KiOR’s proprietary BFCC conversion process, the world’s first one step biomass to hydrocarbon technology, which is predicated on thermal catalytic chemistry, used in FCC units around the world for 70 years. And then back end upgrading in fractionation stage, which are nearly identical to that found in most refiners.

By designing our plan in this fashion, we intentionally eliminated any technology or process and our dependencies between the stages. So that our BFCC stage was a gating process and the facilities to step start-up. We start-up the woodyard and then BFCC first and once producing deliberately, didn’t proceed to the upgrading stage, we put prioritized our start-up operations in this fashion for three reasons.

First, we need to demonstrate that our BFCC stage produces renewable crude within specifications for upgrade; second, we need an extended production period in the BFCC to build a stock of renewable crude sufficient to ensure the hundreds of uninterrupted operations; and lastly and most importantly our use of standard hydrotreating equipment in our experience hydrotreating our renewable crude gives our stock confidence in the upgrading stage.

This entailed full-scale deployment of the woodyard and the biomass leaders 100% catalyst circulation, separation and regeneration within the BFCC system, full operation of the cogeneration unit supplying all of the facilities, powers, needs and successful recovery in separation and storage for upgrading. I’m extremely pleased with the performance of our technology at Columbus. Our testing and operations to date have proven that all of the proprietary aspects of KiOR’s production process work on commercial scale.

On proprietary feed system is performing as designed and consistent with our demonstration unit experience. Our BFCC is performing precisely, as we designed at this 50X scale up of our demonstration plan. Likewise, our downstream separation system, is functioning precisely as planned resulting in a very high quality of all, which we are highly confident will refine into on spec gasoline and diesel cellulosic fuels, that will certainly satisfy our customers.

We have experienced only normal start-up issues that have not involved our proprietary process and prioritizing health and safety above all outs. Since we completed commissioning and commenced start-up operations in September, we have not had a single recordable injury or environmental uncertain.

Of all that we have accomplished at Columbus, I’m most proud of our exemplary performance on safety and environmental manners. Going forward, once we began our upgrading stage operations in the next week or so, we are confident, we will start commercial shipments from Columbus later this month. Our upgrading stage comprised of standard hydrotreating and fractionating processes are well established technologies.

We have over 40,000 hours of successful hydrotreating experience upgrading our renewable crude into commercially salable cellulosic gasoline and diesel, which are identical to those we plan to sale from Columbus. In fact, we had our first small scale sale of cellulosic fuel from our demonstration facility in Houston, which will ensure that KiOR fuel will be use and used on the U.S. roads virtually any day now.

Now, let me turn to our progress in research and development. In our last conference call, I talked to you about the development of our next generation catalyst platform. This catalyst platform have major promise for us, because it reduced the amount of coke generated during our BFCC conversion process. A reduction that would increase the capital efficiency of our facilities, while allowing greater capacity of feedstock to be processed with essentially the same equipment.

I’m sure, you recall that at that time, we have seen reduction in coke of up to 20% and we’re conducting further test on this platform, to see whether the reduction in coke added additional carbon molecules to the gases, which would not enhance your overall deal or to the liquids, which would enhance our overall yield. Since that time, our R&D team has put a lot of effort on this platform. Testing different catalyst formulations in both our power and demonstration in small scale units, to determine, which formulation of this platform would provide the audio balance of coke reduction, yield improvements, as well as other characteristics that would enhance the bottom-line performance of our technology.

Here is how we view our progress to date on our technology. In terms of coke make, we now are able to achieve a total reduction of up to 25% and the amount of coke we make in our process. In market improvement over the 20% reduction we announced in August. When implemented in our standard 1,500 ton provide facility in Natchez. This reduction in coke, should allow us to process up to 1,875 tons per day on biomass, all without spending significant additional capital. This is a major impact on the bottom line of our technology.

From our financial and economic perspective for example, the value of a 25% coke reduction and it’s corresponding improvements to capital efficiency have the same bottomline value to KiOR, as that yield improvement of about 15 additional gallons per bone dry ton of biomass. In addition, to the significant potential economic benefits from the reduction in coke and our new catalyst platform, we also believe that we have clear, straightforward path to higher yields of our cellulosic fuels.

Based on our experience at our pilot and demonstration scale facilities here in Houston, we expect that our technology on implement unit at our full-scale commercial plant, in Natchez would achieve a yield of 72 gallons per bone dry ton of biomass. We believe that the progress generated by R&D investments to date, reflect a steady march to our target yield of 92 gallons per bone dry ton. More importantly, as we shift from an R&D company to an operating company, we believe that we must remain committed to continuous improvement in our technology with a singular focus providing the greatest value to our bottomline and in turn to our shareholders.

In conclusion, we believe net unlocking the value in KiOR, for our shareholders hinges on our successful execution on two short-term milestones. First producing and delivering fuel from the Columbus facility. The world’s first commercial scale on cellulosic gasoline and diesel. And continuing our R&D efforts to confirm the sand and scale, our recent technology investments to drive yields.

We believe that hitting these two milestones, should not only unlock share value for shareholders, but it will also unlock our ability to grow and find that growth in a way that been affects each and every shareholder. Each and every KiOR employee is committed to these goes as well. We look forward to sharing our continued progress with you and we appreciate your support and interest in KiOR.

With that, I’ll turn the call over to John to review the financials.

John Karnes

Thanks, Fred. Third quarter net loss was $47 million compared to a net loss of $23 million for the second quarter of 2012 and a net loss of $14.8 million in Q3 last year. The Q3, 2012 net loss includes $3.6 million of non-cash, stock-based compensation expense, which is essentially flat from Q2 of this year and up $2 million year-over-year. Importantly, now we again booked all of our start-up costs from Columbus to G&A last quarter, since that plants not on line yet.

Q3 start-up costs totaled $10.2 million, an increase of $4.2 million from Q2 of this year and up to $9.5 million year-over-year from Q3 last year. Over $10 million incurred on the start-up in the quarter, approximately $5 million reflects what I would call our normal or routine fixed cost for payroll maintenance et cetera and then about $5 million relates to incremental overtime, extra contract labor and rentals related to the start-up. Given our plans to commence commercial shipments later this month for Q4, we would expect both baseline and incremental start-up costs, to become part of cost of goods sold, beginning in the month of our first shipment.

Out of conservatives among plan on incremental start-up cost to run between $6 million and $7 million, depending on variable costs, again in Q4, while were commissioning the upgrading ops and the facility and handing over the facility to production management. As I mentioned in our second quarter call, our start-up budget call for us to spend between $4 million and $6 million of baseline cost during start-up and an incremental $8 million for a start-up over time contractors an acre right in the second half.

Moving to R&D. Research and development expenses for the third quarter of 2012 were $8.7 million just slightly higher than the prior quarter this year, mainly as a result of increased stock compensation expense. R&D expenses in Q3, were 400,000 higher than a year ago, due largely again to stock-based comp. G&A expenses for Q3, 2012 were $17.4 million, which as I just mentioned include $10.2 million for the start-up of Columbus. This is up $3.7 million from the prior quarter of this year reflecting an increase of $4.1 million in the Columbus start-up, partially offset by decrease in the stock comp.

Year-over-year G&A expenses were $11.5 million higher than Q3 last year, $9.5 million was just the increase related to Columbus and the remainder have related to higher stock comp, increased head count and higher compliance costs and insurance.

Moving to our balance sheet, cash and cash equivalents at September 30, 2012 were approximately $74 million. This represents a decrease of $32.7 million from the amount recorded in the prior quarter, reflecting our operating losses and about $7 million spent in our capital program during the year. Looking ahead, we would expect our Q4, R&D expenses to be in line with our Q3 level and we would anticipate G&A costs excluding Columbus to be around $8 million again.

Turning now to our expectations around Columbus’ performance for the fourth quarter. As I mentioned last quarter, we just do not have sufficient production history from the plant to allow us to formulate guidance on yields or utilization, but we do think our prior guidance of around 500,000 to one million gallons of blend stock sales, seems like a reasonable planning cases something that start-up continued as we got to planned and assuming the EPA promulgates for renewable gasoline pathway, I’ll discuss in a minute.

Likewise for a planning case on ASP, as we finalize the terms of our shipments later this month and gain better information about the quality of the crude oil we’re producing in Columbus, were better able to narrow down that deduct as likely to apply on our Q4 fuel sales from around a dollar to a $1.50, we talked about last quarter to between $0.50 on the dollar today. As I try to underscore our last call, this discount is impacted by fuel allocations and special arrangement, which are typical for fuel sales during start-up when – among other things you’d normally expect shipping show loads of fuel, which impacts your transportation costs and when you would expect to produce at least some amount of all spec product, which of course sales for discount.

We only expect this level of discount to apply during the start-up period, it’s not a structural or permanent element of the business model in the sense that we expect our diesel from Natchez for example to sell within pennies of its counterpart Gulf Coast, ULSD. So no one should refer from the start-up ASP that KiOR’s fuels are somehow intrinsically less valuable than petroleum based equivalents, where that we have to offer discounts off refinery benchmarks, because all of our experience to date tells us this is just not the case.

Now, as I mentioned earlier, one of the factors that could affect those sales in volumes for the fourth quarter it is the timing of EPAs promulgation of the renewable gasoline pathway, necessary for our gasoline or our Natchez blend stock to generate wins in our RFS2. We understand the pathway resides at OMB for final approval, where it’s expected to be acted on in the very near future.

However, given that the win for our map contribute some of the $1.80 per margin, per gallon. To the extent of that gasoline pathway is not available part for our shipment. We’re making plans to store our gasoline, our cellulosic gasoline until the EPA takes action. As a reminder, we expect gasoline represent around 35% of our total production stream for Columbus.

Moving on to variable costs, in the absence of actual yield and utilization inputs, we again think it’s a reasonable planning case for feedstock, natural gas and other variable costs for the quarter to come in somewhere between $1.8 million and $2.8 million depending on actual production. As I mentioned earlier, we anticipate fixed cost at Columbus, our baseline fixed costs, to run around $5 million for Q4, this is excluding start-up expenses, amortization and depreciation. Again these are our baseline costs primarily comprised of routine maintenance, personnel, insurance leases, taxes, et cetera.

In addition to all these for planning purposes we’re anticipating on having approximately $4 million of start-up related to continuing over time contractors and may provide throughout the fourth quarter.

Moving on to interest expense. Again once we start production at the Columbus facility later this month, well no longer capitalize interest expense at the rate we have been using to date. On that note, assuming production this month, at sales this month, we anticipate interest expense for Q4, 2012 would be around $3.8 million. As we move along the front-end engineering and design phase of our flagship facility, and certain key R&D projects, we expect our CapEx for Q4 to come in as much as $10 million for the quarter.

And I guess that concludes my formal comments and I’ll turn the phone back over to the operator for questions and answers.

Question-and-Answer Session

Operator

Thank you. Your first question comes from the line of Ed Westlake of Credit Suisse.

Ed Westlake – Credit Suisse

Congratulations on getting the plant up in running. Well done to everyone involved. Just a quick question, a couple of quick questions. Just in terms of some color perhaps around utilization of the plants since it’s been up on running appreciate in start-up mode. Is there been lot of variability?

Fred Cannon

Yes, and it has been it’s very typical, very normal start-up where the plant runs in few days and when you shut down in correct normal start-up issues and then start to plan up again. I think, we’re very pleased with what we see and we’re just working through those normal start-up, ups and downs, but of course the great news is we’ve run the plant, the qualities are all is we’re very excited and pleased with that.

Ed Westlake – Credit Suisse

And there is nothing in terms of what you’re seeing that, that would mean that there is anything difference you just normal startup, you still pretty confident that you can run at a decent utilizations (inaudible)?

Fred Cannon

Yes, once as we work through these, yes as any start-up once you work these out in the plant utilization comes up a very high, over 90% of that.

Ed Westlake – Credit Suisse

Okay. And then in terms of the learning’s that you could potentially apply to Natchez again appreciate that it’s early, but any implications for that sort of CapEx budget for not just from what you’ve seen so far at Columbus and maybe a discussion of the lead items, long lead items for not just in terms of pricing?

Fred Cannon

Okay. Sure. And we’ve learned tremendous amount and we have to remind our sales also this is still a portion of can facility. But we’ve learned a lot in the start-up and operation so far. I think you said, we could certainly improve that will translate to the lower CapEx for our next facility, as well as increase lot reliability cash restored. On the long lead items, we have made great progress in compressing the time, a long lead time. So that we feel very, very good about our progress there, things like carbon, I’ve seen carbon was typically the longest lead item and now it’s not, we’ve found alternative shares, so that we can even accelerated it, if we would like to the carbon. So we’re very pleased there, we continue to make progress, we don’t see those on a high level impacting our schedule at this point.

Ed Westlake – Credit Suisse

And in terms of the overall CapEx budget still on track for the Natchez progressions versus initial progression?

Fred Cannon

Yes, this time that’s we would say yes.

Ed Westlake – Credit Suisse

Okay. Thanks very much.

Operator

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

Mahavir Sanghavi – UBS

Thanks for taking my question. Hi, Fred and Mark. First question, Fred, just wanted to get a sense of what was the longest continuous operation at Columbus and maybe you could talk about some of the start-up issues and also gives a sense of, it seems like the proprietary parts are working, as you had expected. So could you maybe give us some sense of where the yields are coming, you expect the yields to be in next 12 months or so.

Fred Cannon

Okay. Sure. We’ve run a few days, three days in a continuous production where we’ve run everything in the plant from windshields to high-quality overall. And then a portion to start-up, which is extremely normal you run in the short periods and you find things that need correcting, we’ve had normal kind of start-up things, it’s all and all bound on the cogeneration unit went out and shut us down.

Things like that we have leads, which is on the full gas, which is very typical of start-up, pumps sales and other things, yes, very, very typical. As far as secure proprietary technology, we’re extremely pleased that we have a converter that circulates catalysts extremely well, we’re extremely pleased with that and we’ve tested the whole plant, we’ve run the whole plant on our own generated power from the cogen that’s fully operational.

So it’s been more the normal start-up things, whether this was a cure plant our refinery or a petrochemical plant, which says normal start-up things. And as far as the yields we’re not focused on yields right now. So I don’t really have anything to say there, I can tell you our focus now is to bring the plan up to give its stable to make high quality all, that’s been our focus and that’s what we’ve done. As I’ve said many times before we should not expect to get up to design rate and design yields until the late next year.

Mahavir Sanghavi – UBS

Fred understood. That’s what I was send to get out that, would you be able to hit your yield in next 12 months that you had line them.

Fred Cannon

Oh, yes. Yeah, we feel very good about the cure process at this time.

Mahavir Sanghavi – UBS

Got it.

Fred Cannon

We still had a lot of work to do with static with the performance of the converter and the cure technology.

Mahavir Sanghavi – UBS

Great. And then second question just about the catalyst develop, you talked about, you said additional 15 gallons yield, with the new catalysts roughly.

Fred Cannon

Yeah.

Mahavir Sanghavi – UBS

What I’ve certainly understand is you said 72 million gallons that you could do at Natchez. Could you use the same catalyst at Columbus and should we maybe is it easier to think about Columbus as 72 minus that 15, that kind of a yield in the near term?

Fred Cannon

Okay. Let me just frame that up again. What I was saying is that the same thing, if you go back to our RPO, where we said, hey, at this time, we think we can design in. For us commercial 1,500 ton a day plan like Natchez, it’s 67. Now we just think that based on what we’ve seen in R&D, we believe that number would be 72. We would Natchez up at 72 gallons of yield per ton feed.

Reduction in coke, I was just trying to make a point at this technology is still on the very steep part of the S curve. And that means to me that it’s not just a yield that we can increase our profitability and the value of the technology, but there are things like coke make and bottom’s reduction and many other things that our R&D people work on to increase the value of QR.

And I was given an example, well, we talk about the coke make up to 25, we believe from what we’ve seen in small scale that we could design in Natchez and take advantage of that. With this new catalyst platform, and I was just given an example a 25% reduction in coke make that gives us same bottomline benefit, as a 15 gallon increase per ton and yield, per ton of feedstock. So a significant is my whole point.

Mahavir Sanghavi – UBS

Okay. Got it. And then one question for John. John, thanks for all the details on in the fourth quarter, it seems like you have a really descent invisibility, I would assume in terms of what your costs are going to be and ASP will be dependent on the EPA’s approval. Just to get a sense, when do you think you can see some kind of EBITDA, the breakeven at the first facility. Do you have us any visit already into that? Thank you.

John Karnes

Yeah. Again, all we can do because this is the first in time facility, as make estimates about yield and utilization. As Fred mentioned, that will be later next year before the plan gets up to the 90 plus percentage utilization, that’s been designed for and then the yield starts to come up to baseline. I’d like to extrapolate and it’s like everyone else can and it is roughly smooth and mid-year or next year, the company should turn EBITDA positive better run rate. Based on our current pricing scenarios for our off take and based on our current feedstock.

Mahavir Sanghavi – UBS

And I will be at the plant level just want to make sure.

John Karnes

Oh, yeah, that’s just a plant, just Columbus.

Mahavir Sanghavi – UBS

Yeah. Thank you so much.

Operator

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

Mike Ritzenthaler – Piper Jaffray

Hey, guys. I just want to add my congratulations to get the plants started up and it’s incredibly great.

Fred Cannon

Hello. Thanks, Mike.

Mike Ritzenthaler – Piper Jaffray

Yeah. How the $2.5 million in inventory at the end of September, how much of that is things like catalyst and woodchips versus work-in process, is it half or something like that.

Fred Cannon

Yeah. It’s almost all low wood and woodchips...

Mike Ritzenthaler – Piper Jaffray

Okay.

Fred Cannon

Of our feedstock.

Mike Ritzenthaler – Piper Jaffray

Okay. On the bids or are there and then, I mean it, excuse me, on the RINs and the CWC, so they’ve been acting any better since the RVO was announced the drop at the beginning of 2Q, they can have their recover at all.

Fred Cannon

We haven’t seen much. We expect it to be weak to the remainder of the year, but hopefully, once RFS 2 begins to get steam next year on and people started looking at billion dollar RVO obligation for cellulosic and they kind of burn through their carryovers, we’re hoping to see that firm up next year, but that’s just our outlook at the end of the day, since this is a essentially a brand new instrument that we’re trading in.

Mike Ritzenthaler – Piper Jaffray

Yeah. Absolutely. And then, I guess as a follow-up to the RIN question there, all of the – depending the EPA’s action, all of the sales that would happen in November and December would be RIN eligible, right. So I guess my point is, even though there may be a modest discount on the fuel value for these first gallons before force of the RINs will be behind the ASP given the EPA and the gasoline pathway.

Fred Cannon

Right. Once we have a gasoline pathway, we have everything we need for the diesel – RINs for the diesel and the RINs for the map work.

Mike Ritzenthaler – Piper Jaffray

Okay. And then, just one final question from me. The Navy and the DoD have been working diligently on a DPA project, that’s their $500 million so program, is there any comment that you’re able to make with KiOR’s involvement in that potential involvement in that DPA, does that to kind of stand on reps until next year when the beneficiaries are made public.

Fred Cannon

Yeah. I think at this time, it would stay on the route and for KiOR, it’s I think, we look at what brings the most shareholder value and take opportunities as it come. But we don’t count on that.

Mike Ritzenthaler – Piper Jaffray

Sure. Absolute. Okay. Well, thanks guys.

Operator

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

Vishal Shah – Deutsche Bank

Hi. Thanks for taking my question. Two questions, first, I just want to clarify, you haven’t changed the catalyst since you started Columbus guided that to the right and you haven’t changed the catalyst recently and because you broke on the number of different catalyst over the last couple of months and is this the first generation catalyst you’ve been using, right?

Fred Cannon

Yeah. So it’s at the first generation catalysts. Well, it’s the last generation catalyst, let me say it that way. And of course that catalyst, which is still there and as you know within the FCC unit, we don’t change about the cattle issue add a little bit each day and take a little bit out and so now it’s last generation.

Vishal Shah – Deutsche Bank

And when you expect to retrofit this facility, but the new address catalysts. Is this going to be once you can get the yields and the utilization levels to....

Fred Cannon

Yes, right. It will come after we get the utilization rate, we get the plans to be very stable and we commercialize that catalysts and that (inaudible).

Vishal Shah – Deutsche Bank

Cadence in terms of winning off how do you when you bring the next facility up or do you still haven’t seen from the timeline?

Fred Cannon

No, we entrenched.

Vishal Shah – Deutsche Bank

Okay. And then, one last question. When you think about the next set of properties, fairly getting this plant up and running this grade that was the first upon. We’re just thinking about additional customer engagements and sort of experiencing and getting the next facility fully committing our off take agreements?

Fred Cannon

As far as customers for Natchez, is that the question. I wish, I had 10 Natchez today, of course this quarter pulled from the market to play set volume, but as we’ve said before that we will put that volume, where it brings the most value took over. So it’s a little bit premature to talk about that right now.

Vishal Shah – Deutsche Bank

Okay. Great. Thank you very much.

Operator

Your next question comes from the line of Robert Stone, Cowen & Company.

Robert Stone – Cowen & Company

Good morning, gentlemen. Thanks for the very comprehensive update.

Fred Cannon

Thanks Rob.

Robert Stone – Cowen & Company

I want to just follow-up a little bit on what you said about that three sort of independent such as the plant and you can run that the front end of the process and buffer up before you upgrade. Can you give us a sense of – so what is the buffer size relative to a typical day we throughput. How much in process or quantity, can you keep on the side and so forth.

Fred Cannon

Yeah. We can store one to two weeks kind of numbers that full capacity is our design basis to have that is a storage for the upgrade section. So it’s a call, which you go when the confidence level is high, you can go earlier when it’s – it just we’ll call on how to build on that, as we move forward.

Robert Stone – Cowen & Company

So that means if you’re making these minor corrections on the BFCC that the hydrotreater and fractionation are seeing effects that auto run at a pretty high utilization and seamlessly acts...

Fred Cannon

Yes. That’s exactly right, Rob. As you know hydrotreaters and refineries from two to five years will continuously 100% utilization. And so what you want is enough inventory, so that you have an opportunity to correct these manner sort of doing issues and keep the upgrade online.

Robert Stone – Cowen & Company

Okay. With respect to the – up to 25% throughput improvement from the next generation catalysts, you mentioned that this would require sort of only minor incremental CapEx. Can you just put a little more color on that in terms of what things you might need to invest interchange to take full advantage of that increased capacity?

Fred Cannon

Yeah. Sure, Rob. Only really to – only say significant at all part of the plant that it effects is it woodyard. And we generally designed the woodyard with 20% to 25% excess capacity, anyway. So it just means that you have to make sure that you can condition the feedstock to fit the process. The BFCC and hydrotreater are well within the design capacity already.

Robert Stone – Cowen & Company

So it’s really a very minor CapEx increment, I guess?

Fred Cannon

Yes, yes. That’s the message.

Robert Stone – Cowen & Company

Okay. The high level question for you. How are you thinking or what are you hearing with respect to any or new discussion on the composition of the RFS2. Now that the election’s over, how is that Q2 is to get me any sense of potential changes there?

Fred Cannon

Yeah, it’s – it may be too soon, but I’ll tell you what we’re hearing and what we’re thinking. Both the Republicans and the Democrat parties came out with strong support of RFS2 and our energy policies. Now the general perception is personal or will certainly continue to support RFS2. And so we feel very good about that and what we’re hearing from all our sources and especially fuel brings the first Cellulosic gasoline and diesel and Cellulosic RINs on the market this quarter, should only strengthen that. So we’re feeling very strong support for us to stand.

Mike Ritzenthaler – Piper Jaffray

Okay. Finally just a housekeeper for Joe and I’m not sure, if you may have already mentioned it. Do you have sales for stock-based compensation for Q4?

John Karnes

Should be flat from where we were for Q3, I mean, it could be up a couple out of thousand dollars, but it’s roughly flat we haven’t made any changes.

Mike Ritzenthaler – Piper Jaffray

Okay. Thanks very much.

Operator

Your next question comes from the line of Pavel Molchanov from Raymond James.

Pavel Molchanov – Raymond James

Hi, guys. Thanks for taking my question. At the time of the IPO, you were talking about costs of $72 a ton for which base case, which should feedstock. Can you give us an update on where those have been trending and also what the timeline would be for sourcing more economic sources of feedstock?

John Karnes

Yeah, shorter-term, just in terms of what was that $72 is still a good price, we think from a macro level, what certainly is obviously varies from basin to basin, but the basins that were focused on the short term, we think that’s a very good number, based on our – even our most current feedstock studies. Having said that, what I mentioned last quarter didn’t touch on at this quarter is, it’s very common to have special arrangements during startup when you’re going to have interruptible sides of supply if you will.

As you know, we have a long-term contract with Catchlight, the joint venture between Chevron and Weyerhaeuser that were very excited about, where they will supply us longer term, all of our requirements of the plant. Today we’re using sort interruptible contracts through a variety of vendors. And as a result, we don’t get the pricing, we would expect to get under Weyerhaeuser. So, today for the startup we’re using something in the higher ‘70s, but we certainly think in the – over the near term, 72 as we use clean wood chips at the Columbus plant is a good working assumption.

Longer-term and I think, what Fred is said is you would expect to use clean wood chips up to a year, until the which in total year until the Columbus flat is lined out and then we’ll begin to move into a whole tree chips and login slash. And I’ll have a very appraisable price on our – excuse me, impact, our feedstock costs, but that will be until late in 2013.

Pavel Molchanov – Raymond James

Okay. I also want to follow up on one of the prior questions about the kind of that the post-election political climate? What do you think that regards that deal we might resume the loan guarantee program that gets expired over a year ago?

Fred Cannon

I’ve really don’t have any real opinion or insight into whether DOE may or may not – we see in the long program.

Pavel Molchanov – Raymond James

Nothing you’re hearing from Washington, I guess?

Fred Cannon

No, not yet – not yet.

Pavel Molchanov – Raymond James

All right. I appreciate it, guys.

Operator

And your next question comes from the line of Brian Lee, Goldman Sachs.

Brian Lee – Goldman Sachs

You’ve talked a lot about Columbus, I appreciate the updates there, could you dig into the status of Natchez, are there any potential updates to timing, scope, cost anything you can talk to you?

Fred Cannon

Yeah. Surely. In terms of timing, I think we are on track, we’re committed to breaking ground on Natchez as early as March of this year subject to our financing, given that timetable, we still think we’re on track to deliver commercial production added facility in late 2014. In the next quarter or so, we’ll have a much better handle having done more on our front-end engineering and design on the exact cost and scope of the project, but all the work we’ve done so far is, as you know, we’re using KBR again, is very, very consistent with the $350 million overnight capital cost that we’ve been talking about, really since the IPO.

So in terms of the actual project itself, I mean, we’ve done substantial clearing on the site. We’ve done all of our geoscience work on the site. The county has raised the funds through a bond offering for their portion of the infrastructure that we’ve agreed upon, and we’re going through engineering and technical now on designing for the future. So the project is moving forward and we’re continuing to design it and right now, again subject to financing, we think the project is still on track for breaking ground as early as the latter part of Q1.

Brian Lee – Goldman Sachs

Okay. Great. That’s helpful. And any updated thoughts around potential alternatives for the hydrate change design or is that still expected to be kind of the – I think, you guys talked about $110 million of CapEx, but maybe being able to put that out in stages, I don’t know if you had any updated thoughts there?

Fred Cannon

Yeah, I don’t really have an update on that. We’re still evaluating whether we build a dedicated operator or – and leave room to hope future expansions or we go ahead and build it for two conversion units. So we’re still doing and that will be a part of what John spoke about the fee that we’re doing that decision will be made during that time.

Brian Lee – Goldman Sachs

Okay. Great. And then, just a follow-up on some of the policy questions, any thoughts on potential expansion in this cellulosic tax credit given the recent election results?

John Karnes

We’re not counting on any – we never counted on that in any of our economics or a model. If it happens, I think it’s little premature to see this administrations path forward. They expire it into this year, as we all know the cellulosic tax credit. So we’ll see.

Brian Lee – Goldman Sachs

Okay. Last one for you, John. You mentioned the cellulosic RIN value of about 80 per gallon, I think you said. Can you elaborate on how you get that value, I would’ve thought would be lower given current RIN values and we’re also gas pricings today?

John Karnes

Yeah. The way we look at it is, I think the sue ran on our map it should be about $1.28, that’s program and as you know, the EPA based on the energy density excuse me, energy density allows me 1.5 RINs per gallon of biofuel, as opposed to a gallon of ethanol equivalent. Well, I get the 128 plus roughly 60.

Brian Lee – Goldman Sachs

Okay. Maybe the 128, just given the spread between how is our gasoline pricing and kind of how that’s calculated in the CWC formula. Maybe I’m missing something, I would’ve thought it’d be a little lower than that?

Fred Cannon

Right now, what we’ve calculated is based on the earlier quarter of $0.50 our GDE and the cellulosic waver of $0.78, that’s all I get to my 128 and then again, I get 1.5 times up.

Brian Lee – Goldman Sachs

Okay. I think, I’ll follow up with you and find it, makes arrange for that. Thank you.

Fred Cannon

Sure.

Operator

And your question comes from the line of Chris Kovaks, Robert Baird.

Chris Kovaks – Robert Baird

Hi, guys. Thanks for taking my question. Congratulations again the plant started up. Can you maybe give us a sense of how many gallons you produced so far plants up and running now on and if familiarly if you’re not comfortable in going to detail. Can you give us maybe a sense of the proportion of what you produce has been inspect versus how much is kind of being throw just quantities?

Fred Cannon

Yeah, I don’t have those numbers as to the percentage, obviously, when we first started up, several processes, we have many sub processes in this plant and we maybe on-spec coming out of the reactor early, but then we go through our oil separation and recovery in it. And then we start making good at all. So, I don’t have those, I would say from my experience to be on spec and have the quality role that we’ve made is outstanding. I’m sorry, I don’t have the percentages for you.

Chris Kovaks – Robert Baird

Right. And then, most of my other questions have answered, but I have a question on the catalyst, so obviously, you have the region, in the SEC, you don’t necessarily have to bringing tons of new volume, but who is manufacturing a catalyst, you guys doing all better, I would assume that especially when you put to larger facility that you would need to have somebody else takeover there?

Fred Cannon

I can’t – for confidentiality reasons, I can’t comment on that right now.

Chris Kovaks – Robert Baird

Is that a third party?

Fred Cannon

Yes.

Chris Kovaks – Robert Baird

Okay. Okay. Thanks, guys.

Operator

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

Fred Cannon

Thank you, and thank you for joining us on our call, and we look forward to an exciting fourth quarter and continuing to share our progress with you. Thank you.

Operator

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

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