Rentech reports delays at Atikokan, Wawa pellet plants

By Katie Fletcher | August 11, 2015

On Aug. 11, Rentech Inc. released its financial earnings for the three and six months ended June 30, reporting a revenue increase compared to the prior year period, but combined output, losses for its Canadian pellet plants worse than expected.

Keith Forman, president and CEO of the company, said “Combined output and losses for the Canadian pellet plants are worse than we expected due to significant problems in the material-handling equipment installed at the Wawa facility and the need for some corrective actions at Atikokan.”

He added, New England Wood Pellets continues to perform well and exceed expectations, with the Allegheny acquisition contributing as expected. The company’s Fulghum Fibers’ business cost controls have reduced the company’s per-unit costs, which together with improved performance in South America, has improved the results and outlook for Fulghum compared to 2014 periods and compared to expectations for 2015. Forman also stated that Fulghum received an insurance settlement related to the fire in Woodland, Maine, that created a gain of $1.6 million during the first six months of 2015.

The Fulghum plant had a strong quarter, largely due to cost controls and improved performance in South America. “We expect this segment to finish the year at the high end of our indicated range for EBITDA (earnings before interest, taxes, depreciation, amortization) of $16 million to $17 million, NEWP continues to perform well and the business is tracking to full year EBITDA guidance of $9 million to $10 million,” Forman said.

The company’s Atikokan plant has been generating a positive EBITDA since May, and is in the ramp-up phase. The facility experienced a transformer failure and the company has been temporarily using a smaller transformer, which has caused the facility to operate at reduced rates. Next quarter, Rentech expects to install the larger permanent transformer that will allow the plant to operate at full rates. Despite this setback, the company reported that Atikokan has been proceeding better than forecasted. Modifications were identified during ramp up including the need to replace or repair the truck dump conveyor and hopper at the facility, and the need to modify some of the conveyors at the plant. Depending on the degree of modifications needed, Atikokan may not reach full capacity by the original timing of February 2016.

At Rentech’s Wawa facility most of the equipment has been commissioned and is producing a limited quantity of pellets. “We will need to modify and replace the log in-feed equipment and a significant portion of conveyance systems at the Wawa plant this fall and into next year to address the construction flaws we discovered during ramp up,” Forman said. Current estimates of these modifications are expected to increase the total project spending to approximately $145 million, which is $5 million above the high-end of the prior guidance range. These problems are expected to be corrected during the coming months and the first half of next year. The Wawa plant is now expected to operate in the second half of next year, instead of mid-2016 as Rentech reported in its first quarter financial results.

In response to this expected delay, Rentech modified its delivery commitments under contract with Drax. “In August, we cancelled all 240,000 metric tons of wood pellet deliveries in 2015 that we had agreed to in the February amendment,” Forman said. “The August amendment provided for a comprehensive settlement amount of approximately $2.6 million to compensate Drax for all cancelled deliveries under all amendments.”

In addition, due to the delays at Wawa, Rentech announced it does not expect to fully meet its 2015 commitments under contract with Canadian National Railway Co. “The estimated amount of penalties could be as much as $2.4 million under the terms of the contract; however, we are negotiating with Canadian National to amend the contract to allow us to make up for the shortfalls in future contract years with additional volumes in lieu of paying any penalties in cash,” Forman said.

In order to increase the company’s cash position, Rentech announced the closing of the merger of Rentech Nitrogen and CVR Partners would enable the company to repay debt and redeem preferred stock held by GSO Capital.

Rentech also plans to restructure its non-fertilizer businesses to focus on operations and execution, while significantly reducing corporate overhead. The company estimates that at least $10 million in reductions in annualized selling, general and administrative (SG&A) expense run-rate exiting 2016.

Consolidated revenues for the second quarter of 2015 were $149.8 million compared to $139.2 million in the second quarter of 2014. These revenues were comprised of $25.7 million from Fulghum, an increase of $6.6 million from the prior year period; $11.7 million from NEWP, an increase of $5.9 million from the prior year period; $2.5 million from Wood Pellets: Industrial, an increase of $1.9 million from the prior year period; and $109.9 million from Rentech Nitrogen, a decrease of $3.8 million from the second quarter in 2014.

The increase in revenues from Fulghum Fibers was primarily due to higher biomass product sales domestically and chip sales to Asia in the second quarter of this year compared to the prior year period. The U.S. and South America mills processed 3.6 million metric tons of logs into wood chips and residual fuels for each of the second quarters of this year and the previous year.

Gross profit for the quarter was $48.5 million from $31.4 million in the comparable period during the prior year. Gross profit was comprised of $4.3 million from Fulghum, an increase of $2.3 million from the prior year period; $2.6 million from NEWP, an increase of $1.5 million from the prior year period; a $3.1 million loss from Wood Pellets: Industrial, a decrease of $3.2 million; and $44.7 million from Rentech Nitrogen, up $16.5 million from the prior year period.

Rentech’s consolidated adjusted EBITDA for the second quarter this year was $41.2 million, up from $21.3 million for the same period in 2014. Consolidated EBITDA includes $5.5 million from Fulghum, an increase of $3.3 million from the prior year period; $2.5 million from NEWP, an increase of $1.5 million from the prior year period; a $9.6 million loss from Wood Pellets: Industrial, a decrease of $6.4 million from the prior year period; and $47.7 million from Rentech Nitrogen, an increase of $16.9 million in the comparable period in 2014.