Operating income at Rentech Inc.’s nitrogen business, Rentech Energy Midwest Corp. (REMC), nearly tripled during the company’s fiscal year ending Sept. 30, 2008, to $46.7 million, up from the prior year’s $13.2 million. REMC nitrogen revenues were $210.3 million, up from the year-ago $131.8 million. Total tons shipped from REMC’s East Dubuque, Ill., plant in fiscal 2008 were 534,000 st, up from the year-ago 468,000 st., with most of these being ammonia and UAN. REMC’s income is plowed into Rentech’s developing alternative energy business and to pay off debt.
REMC gross profit was $50 million, up from $15.9 million. REMC took an $8.7 million write-down due to natural gas inventories that had to be written down as gas prices declined. Rentech told analysts this is due to its policy of locking in margins by buying gas forward against the forward sales of fertilizer. Rentech said it purchased and used some 11.044 Bcf of gas in fiscal 2008, up from the year-ago 9.019 Bcf. Net income at REMC increased from $11.9 million to $45 million.
REMC EBITDA for fiscal 2008 was $53.8 million on guidance of $50 million.
REMC achieved new production records for UAN and liquid urea. For ammonia, the average gross selling price was $539/st in 2008, compared to $343/st in 2007. For UAN, the price was $308/st, up from $209/st.
“Looking ahead at REMC, we have already entered into significant prepaid sales agreements for a significant portion of production for fiscal 2009,” Rentech CFO Dan Cohrs told analysts. “For ammonia, 60 percent of our projected shipments for fiscal 2009 have already been contracted at an average sales price of $816/st. For UAN, 40 percent of our projected shipments for next year have been contracted already at an average sales price of $396/st. On all of those forward sales we’ve locked in gross margins through purchases of natural gas.”
Rentech is not worried about getting the money on its forward contracts, saying that most of it would be through Agrium Inc., its major buyer, and it is take or pay, with customers putting down at least 25 percent up front. “To the extent that there is credit risk in the contract falls at the Agrium level,” explained Ramsbottom. “It doesn’t go through the distributor or the farmer.” In a response to questions, Rentech said it does not have account receivables insurance and does not know if Agrium does. Agrium declined to comment on the insurance, but a spokesman said Agrium is probably Rentech’s strongest customer financially. Rentech says Agrium purchased approximately 81 percent of its nitrogen production in fiscal 2008.
To date, Rentech has not responded to inquiries about a possible production curtailment at REMC’s East Dubuque, Ill., plant. As other nitrogen producers curtail production, sources have speculated that REMC may do likewise.
Company-wide, Rentech reported a net loss from continuing operations of $63 million ($0.380 per basic and diluted share) on sales of $211 million for the fiscal year 2008, versus the year-ago loss of $94.9 million ($.606 per share) and $132.3 million, respectively. Rentech had a fourth-quarter net loss of $8.9 million ($.054 per share) on revenues of $74.6 million, versus the year-ago $59.1 million ($.360 per share) and $29.6 million.
“We are extremely pleased with REMC’s results, as the plant continues to perform exceptionally well,” said Rentech President and CEO Hunt Ramsbottom. “REMC achieved record production volumes and we were able to capture the record prices found in the market. We presently believe our recent corporate cost reductions, in conjunction with the expected continued strong performance of REMC, will enable Rentech to achieve positive consolidated EBITDA for fiscal 2009. This is a significant milestone as it marks the first time in our company’s history that we have projected positive consolidated EBITDA performance.”
Rentech believes that REMC will have fiscal 2009 net income over $33.1 million, with EBITDA in excess of $50 million.
“We are fortunate that we have a profitable operating asset and are able to forecast improved financial results even in this difficult macro-economic environment,” added Ramsbottom. “We believe that these attributes, in addition to operating the only synthetic transportation fuels facility in the U.S., positions us well within the alternative energy sector. In the short time that we have operated the PDU (Product Demonstration Unit at Commerce City, Colo.), we have not only sent samples of our products to potential customers, but through 20 percent greater catalyst productivity and improved catalyst composition, we have identified opportunities to enhance the economic returns of facilities utilizing the Rentech Process by reducing capital requirements and operating costs.”
Rentech noted that it is in discussions with its lenders to make it easier to transfer money within the company. One of the covenants it would like to modify is one in which for every dollar brought in from REMC to the parent that is upstreamed, one is required to pay down on the loan.
As for the new Obama Administration, Ramsbottom said Rentech has folks on his advisory committee that have met with Obama’s transition team. He said Rentech knows incoming Secretary of Energy Steven Chu through its advisors, and feels it has good direct ties into the administration. He added that Rentech is now hearing that the new Administration will pump up to $1 trillion into the economy, and much of that will be into energy. Ramsbottom said the company’s proposed Natchez, Miss., alternative energy plant is well poised to get Administration approval since it can provide jobs within the next 24 months, and it will have a very good solid carbon footprint that would provide renewable diesel and jet fuel.
However, Ramsbottom noted that right now, while it continues to talk to potential partners for the Natchez project, credit is a major issue. “We can have all the discussions we want with partners, but the credit markets have to cooperate.”
In other news, Rentech noted that its poison pill, anti-takeover measure has expired. Ramsbottom said the board has no plans to renew it, and feels it has several other provisions in place to protect shareholder value in case of an abusive takeover attempt.