Rentech, Inc. (NYSE MKT: RTK) has announced the acquisition of Georgia-based Fulghum Fibres, Inc. (Fulghum Fibres) and the acquisition of two facilities for conversion to the production of wood pellets in Ontario, Canada, along with contracts for the sale and transport of more than four million metric tons of wood pellets over ten years. These steps position Rentech to develop a world class wood processing business for production of high-quality wood chips and pellets. Rentech expects these investments to be funded from cash on hand, expected distributions from Rentech Nitrogen, and investments from a joint venture partner. Rentech will host a conference call today at 7:00 a.m. PDT to review additional details regarding today’s announcements as disclosed in its investor presentation posted on its website.
“Today’s announcements launch us into the wood fibre and pellet supply business, with immediate cash flow and significant growth opportunities, and allow us to take advantage of our fibre relationship in the Province of Ontario”
Fulghum Fibres is expected to have approximately $10 million of operating income and $20 million of EBITDA in calendar year 2013, consistent with its stable financial history. The net purchase price, including assumed debt, is $112 million. The company, founded nearly 25 years ago, has been consistently profitable and maintains a solid reputation as a producer of high quality wood chips and other services to a diversified customer base in the pulp and paper industries in the U.S., South America and Asia. The acquisition provides Rentech with immediate stable cash flow with growth opportunities, and a platform to launch into the growing and complementary global wood pellet industry. The acquisition also brings with it a joint venture with Graanul Invest, a large European producer of pellets, for the development and construction of pellet plants in the U.S. and Canada.
Take-or-pay contracts are in place with two utilities to supply a combined total of 445,000 metric tons of wood pellets annually over ten years. To supply the pellets, Rentech plans to convert two decommissioned wood fibre mills in Eastern Canada into pellet mills that will employ a total of approximately 65 full-time employees and help to create jobs for construction and wood supply from sustainable Crown forests in Ontario. These two facilities are expected to generate $3 million of operating income and $15 million of EBITDA when fully operational, with combined total project cost estimated at $70 million. Rentech has contracted for the handling and transport of the pellets. The two plants would make Rentech the largest producer of industrial wood pellets utilizing fibre from Eastern Canada, a source of supply that is highly desired due to its location and wood quality.
“Today’s announcements launch us into the wood fibre and pellet supply business, with immediate cash flow and significant growth opportunities, and allow us to take advantage of our fibre relationship in the Province of Ontario,” said D. Hunt Ramsbottom, President and Chief Executive Officer of Rentech. “Fulghum Fibres provides immediate and steady EBITDA and nearly 25 years of fibre processing expertise that we can leverage for successful execution in the wood pellet industry.” Mr. Ramsbottom continued, “The wood chip and pellet industries, which qualify for an MLP structure, are growth sectors with long-term contracts that should provide stable margins and attractive returns on project investments. With sustainable fibre supply from Crown forests, Rentech will continue to pursue First Nations partnerships and opportunities for economic development associated with our Ontario projects. With our long-term customer contracts, processing expertise, and logistics in place, Rentech is positioned to execute on our objective to be a leader in the rapidly growing global market for wood pellet production.”
Mr. Ramsbottom added, “We expect these new businesses to have stable cash flows. The pellet facilities are structured around sustainably managed long-term fibre supplies and long-term off-take and logistics contracts. Fulghum Fibres’ chip processing business is primarily a fee-based service. The stability of margins we expect here will reduce our consolidated exposure to agricultural cycles inherent in Rentech Nitrogen’s business. We believe this diversification and pricing stability creates a stronger and more valuable entity at Rentech in the short, medium and long term.”
Based in Augusta, Georgia, Fulghum Fibres has approximately 420 employees and is a leader in contract fibre processing services. Fulghum Fibres, which was established in 1989, processes approximately 15 million metric tons of wood and bark annually into wood chips and residual fuels at its 32 wood chipping mills, 26 of which are located in the U.S. and 6 of which are located in South America, where Fulghum Fibres provides chipping services and exports wood chips to customers who are primarily in Japan. Fulghum Fibres operates primarily under long-term contracts and services a portfolio of industry-leading customers such as Georgia Pacific, International Paper and Weyerhaeuser.
Revenues are typically based on per-ton processing fees with minimum volume requirements. Fulghum Fibres commands an estimated 70% of the U.S. contract chipping business and approximately 6% of the total U.S. chipping market that includes in-house chipping operations by large pulp and paper companies. In the U.S., the majority of Fulghum Fibres’ wood chip production is destined for products with the highest expected growth in the pulp and paper market, such as containerboard, boxboard, and tissue.
The senior management team of Fulghum Fibres has signed employment agreements, and is expected to remain in place for the foreseeable future. Fulghum Industries, which manufactures wood handling and chipping equipment and has been under common ownership with Fulghum Fibres, is not being acquired, but will continue to supply equipment and expertise to Fulghum Fibres on favorable terms.
Fulghum Fibres Transaction Highlights
Rentech will acquire all of the equity interests of Fulghum Fibres for $60 million, to be paid from cash on hand. Rentech will acquire approximately $10 million of cash, repay $3 million of debt, and assume approximately $59 million of Fulghum Fibres’ debt, for a total net purchase price of $112 million. The acquisition price equates to 5.6 times 2013 forecasted EBITDA for Fulghum Fibres’ business.
Fulghum Fibres is forecasted to have revenues of approximately $95 million, operating income of approximately $10 million and EBITDA of approximately $20 million in calendar year 2013, which are consistent with Fulghum Fibres’ stable historical financial performance. Further explanation of EBITDA, a non-GAAP financial measure, and a reconciliation of Fulghum Fibres’ forecasted EBITDA to operating income have been included below in this news release.
Fulghum Fibres as Platform for Pellet Business
Fulghum Fibres provides Rentech with a stable operating and financial platform with inherent growth opportunities within the sector. The Company intends to use this platform to launch into the complementary, growing wood pellet industry, a natural extension of chip production. Fulghum Fibres brings operating and processing expertise to the front end of the Company’s wood pellet business, as each pellet mill requires wood handling and production of chips. Fulghum Fibres also brings a joint venture with Graanul Invest, a European company that is one of the largest pellet producers in the world, to develop and construct pellet projects in the U.S. and Canada.
Entry into the Wood Pellet Supply Industry
Global demand for wood pellets is projected to triple by 2020, to 50 million metric tons. Rentech has secured the key elements to quickly become an industrial scale supplier of wood pellets from Eastern Canada to the Canadian and European utility markets with:
- Deep experience in wood handling and production of chips with the acquisition of Fulghum Fibres,
- A joint venture for development, construction, and investment in the U.S. and Canada with a major European producer of pellets,
- Two take-or-pay ten-year off-take contracts for combined pellet deliveries averaging 445,000 metric tons annually,
- Two decommissioned facilities in Ontario, Canada for conversion to pellet production,
- Exclusive priority access to the only large scale pellet handling facility in Eastern Canada through a 15-year agreement with Quebec Stevedoring Company Limited (Quebec Stevedoring), which provides deep water access at the Port of Quebec and short shipping distance to European pellet consumers,
- A strategic relationship with Canadian National Railway Company (CN) (TSX: CNR) (NYSE:CNI) for the inland transportation of pellets to the port,
- Job creation, including new employment opportunities for First Nations,
- Sustainably managed fibre supply from Ontario Crown forests, and
- In-house management expertise in forestry and pellet supply.
Contracts to Supply Pellets
Two ten-year take-or-pay contracts are in place for the sale of industrial wood pellets totaling over four million metric tons of production over the life of the contracts.
Drax Power Limited (Drax)
Drax has signed a ten-year off-take contract for the delivery of approximately 400,000 metric tons of pellets annually to be supplied by Rentech’s Wawa and Atikokan facilities (see below), with prices indexed for inflation, fuel and fibre supply costs. The contract establishes a strategic relationship with Drax, which plans to invest approximately U.S. $1 billion through 2017 to transform the largest coal-fired power station in the U.K. into an electricity generator fuelled predominantly by sustainable biomass. With the conversion of three of six generating units from coal to biomass, Drax is expected to demand approximately seven million metric tons of pellets per year by 2017.
Dorothy Thompson, Chief Executive of Drax, said, “We are delighted to have entered into an agreement with Rentech for the supply of sustainable wood pellets. Forming an integral component of our fuel supply arrangements and supporting the diversification of our supplier base, this agreement helps to underpin the transformation of Drax into a predominantly biomass-fuelled generator, providing low carbon, cost effective and reliable renewable power.”
Ontario Power Generation (OPG)
OPG, which is phasing out the use of coal to produce electricity at its power plants, has signed a ten-year off-take contract for the Atikokan project (see below) for the supply of 45,000 metric tons of pellets annually FOB plant gate. The OPG contract is the first long-term pellet supply agreement for a domestic utility in Canada. OPG has the option to expand the contract to 90,000 metric tons annually. Rentech will acquire the OPG contract as part of the acquisition of the Atikokan project.
Conversions of Fibre Mills to Pellet Production
Rentech expects to convert two decommissioned fibre mills in Ontario, Canada with significant existing re-usable infrastructure into pellet mills to fulfill pellet deliveries required under the Drax and OPG contracts.
Rentech has exclusive rights to acquire, at a fixed price, a former oriented strand board processing mill from Weyerhaeuser in Wawa, Ontario, which Rentech expects to convert for production of approximately 360,000 metric tons of pellets annually. The full output of pellets from this facility will be sold under a long-term contract to Drax, with the first delivery under the contract scheduled for the fourth quarter of 2014. The facility is expected to consume approximately 710,000 metric tons of certified sustainably managed Crown fibre annually and is anticipated to employ approximately 40 full-time employees.
“I am pleased to see Rentech’s investment in Northern Ontario coming to fruition and bringing critically needed jobs to Wawa and surrounding areas. This project will help to diversify the local economy. I look forward to continuing to work with Rentech in the future,” stated Michael Mantha, Algoma-Manitoulin Member of Provincial Parliament.
Rentech has entered into an agreement to acquire a former particle board processing mill from Atikokan Renewable Fuels in Atikokan, Ontario, located just 18 kilometers from the OPG power station, which is expected to be converted for production of approximately 125,000 metric tons of pellets annually to supply 45,000 metric tons annually under the OPG contract, with the balance to be sold under the Drax contract unless OPG exercises its option on the additional 45,000 metric tons. The first delivery of pellets under the OPG contract is scheduled for the first quarter of 2014. The facility is expected to consume approximately 250,000 metric tons of Crown fibre annually and is anticipated to employ approximately 25 full-time employees. Rentech has formed a partnership with Great North Bio Energy to continue to work with First Nations in the development and operation of the Atikokan project.
Financial Forecast for Wawa and Atikokan Facilities
The facilities are expected to generate revenues and EBITDA beginning in 2014, with a ramp-up to approximately 80% of stabilized EBITDA in 2015 and forecasted stabilized operating income of $3 million and stabilized EBITDA of $15 million in 2016. The total cost to acquire and convert the two mills is estimated to be approximately $70 million and is expected to be funded by cash on hand, expected distributions from Rentech Nitrogen, cash generated by Fulghum Fibres, and anticipated joint venture investments from Graanul Invest.
Contracts for Transport and Handling of Pellets
The transport arrangements secured by Rentech are central to the Company’s strategy to become a prominent manufacturer and exporter of wood pellets in Eastern Canada. The long-term contracts described below establish the costs to transport pellets from the Wawa and Atikokan facilities, and are structured to reduce per-ton expenses as pellet volumes increase through future expansions and/or developments.
Port of Quebec
The Port of Quebec, which is located along the Saint Lawrence Seaway and provides a direct and expedient route from Eastern Canada to Europe, is an inland port suitable for large Panamax vessels that provides important economies of scale. Rentech has entered into a long-term contract with Quebec Stevedoring at the Port of Quebec to provide stevedoring, terminalling and warehousing services. This agreement is designed to support the term and volume commitments of the Drax contract as well as future pellet exports through the Port of Quebec. Quebec Stevedoring will invest an estimated $20 million to build handling equipment and 75,000 metric tons of pellet storage exclusively for Rentech’s use at the port, with the same amount becoming a lease obligation of Rentech. Offering year-round terminal access, the Port of Quebec is expected to become the largest bulk pellet terminal in Eastern Canada as a result of this contract.
Rentech has secured a long-term contract with CN, whose freight railway network spans Canada and mid-America, to transport the wood pellets approximately 1,110 miles from the Wawa facility, and 1,500 miles from the Atikokan facility, to the Port of Quebec. Rentech expects to lease more than 200 covered hopper rail cars from third parties to transport wood pellets to the Port.
CWT Commodities (USA), a leading solutions provider of integrated logistics and supply chain management, is providing market intelligence and logistics advisory services in support of Rentech’s Eastern Canadian wood pellet projects under a long-term strategic relationship with the Company.
Wood for Pellets Sourced from Crown Timber
Rentech intends to utilize Canadian Crown fibre, which is highly desirable due to Ontario’s long-term forest management regime, which supports fibre availability, security of supply, and industry-leading sustainability practices. In addition, mixed hardwood trees in Northern Ontario have chemical properties that allow for the production of top-tier quality pellets.
The Honorable David Orazietti, Minister of Natural Resources, said, “Our government is committed to continuing to improve the competitiveness of Ontario’s forestry industry and are encouraged by early signs of growth and progress in the sector. We look forward to working with Rentech on their proposals, which are expected to achieve economic benefits for northern Ontario and First Nation communities in the Atikokan and Wawa areas.”
Joint Venture for Development, Construction and Project Investment
In connection with the acquisition of Fulghum Fibres, Rentech has entered directly into a joint venture (JV) agreement with Graanul Invest (Graanul), a European company which is one of the largest pellet producers in the world. Graanul has designed, built, and operates, six pellet facilities in Europe, which produce 830,000 tons of pellets annually. The JV is an equal equity partnership between Rentech and Graanul to develop and build wood pellet facilities in the U.S. and Canada. Under the JV, Graanul will provide EPC services to projects developed by the JV. Graanul will also provide marketing services for excess pellets produced by the JV, and allow the JV to acquire pellets from Graanul’s European plants in the event the JV needs to supplement pellet supplies.
Wood Pellet Industry: Forecasted for Growth
According to independent industry reports, the global demand for wood pellets is forecasted to reach 50 million metric tons by 2020, which is nearly three times the current global demand. Wood pellets provide a clean energy source for power generation. Much of the global wood pellet production is consumed in Western Europe by large utilities to reduce reliance on coal, reduce carbon emissions and avoid regulatory penalties. Japan, Korea and China are expected to represent growth opportunities as a result of increasing demand for pellets to be used as fuel for reliable and diversified power generation. The U.S. and Canada are seen as the best export supply markets for wood pellets based on fibre supply availability, logistics capabilities, and distance to market.
Wood Fibre Strategy: Summary of Benefits
Rentech believes its investment in the wood fibre industry will create value for its shareholders because of the following key attributes of the sector, which are consistent with Rentech’s announced criteria for new investments:
- Stability of cash flows,
- Long-term customer, supply, and logistics contracts,
- Diversification of products and markets,
- Targeted returns on capital in the mid-teens and higher,
- Commercially available technologies,
- Global and growing markets,
- Capital requirements to execute on the strategy are within Rentech’s anticipated resources,
- Leverages Rentech’s expertise and resources, and
- Income qualifies for a Master Limited Partnership (MLP) structure.
Sean Ebnet as Business Lead
Sean Ebnet joined Rentech in October 2012 in the role of Senior Vice President of Business Development. Mr. Ebnet is responsible for growing and managing Rentech’s wood fibre business. He began his career with the United States Forest Service before moving into the private sector, where he worked as a consultant to numerous forest products companies, power utilities and government agencies. In 2000, Mr. Ebnet became Executive Director of Alternative Energy Investment Group where he was responsible for the screening, research and development of privately funded renewable power projects. In 2008, he joined Drax, operator of the largest coal-fired power station in the U.K., as Director of New Business and spearheaded the company’s development of the largest biomass co-firing facility in the world. Mr. Ebnet holds a B.S. degree from the University of Washington.
Rentech’s objective is to increase shareholder value through the development of a world class wood processing business. This objective will be achieved, in part, by adopting best practices of sustainable forest management, and ensuring that the feedstock supplies to the Company’s facilities meet the rigors of independent certification of environmentally sound practices and procedures for the sale and export of wood pellets to Europe.
Conference Call and Investor Presentation
The Company will hold a conference call today at 7:00 a.m. PDT to discuss the transactions. The slide presentation to be used in conjunction with the call will be available on Rentech’s website, www.rentechinc.com, within the Investor Relations portion of the site under the Presentations section. By dialing 1-866-294-4838 or 1-847-944-7303 and entering the pass code 9069023, callers may listen to the live presentation, which will be followed by a question and answer segment. An audio webcast of the call will also be available on the same web page as the presentation. A replay of the audio webcast and teleconference will be available from 9:30 a.m. PDT on May 2, 2013 through 9:30 a.m. PDT on May 12, 2013. A replay of the teleconference will be available by dialing 1-888-843-7419 or 1-630-652-3042 and entering the pass code 9069023.
Disclosure Regarding Non-GAAP Financial Measures
EBITDA is defined as operating income plus depreciation expense. EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors and commercial banks, to assess:
- the financial performance of a company’s assets without regard to financing methods, capital structure or historical cost basis; and
- a company’s operating performance and return on invested capital compared to those of other publicly traded companies, without regard to financing methods and capital structure.
EBITDA should not be considered an alternative to net income, operating income, net cash provided by operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. EBITDA may have material limitations as a performance measure because it excludes items that are necessary elements of Rentech’s costs and operations. In addition, EBITDA presented by other companies may not be comparable to Rentech’s presentation, since each company may define these terms differently.
The table below reconciles Fulghum Fibres’ forecasted EBITDA to operating income for the twelve months ending December 31, 2013 (unaudited estimate, stated in millions).
12 Months Ending
The table below reconciles the estimated stabilized EBITDA to operating income for the Wawa and Atikokan facilities (unaudited estimate, stated in millions).