LSB Industries Inc (LXU) 2012 Q4 法說會逐字稿

Greetings and welcome to the LSB Industries fourth-quarter 2012 conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Carol Oden, Executive Secretary for LSB Industries. Thank you, Ms. Oden, you may begin.

Thank you. Again, we would like to say welcome to the LSB Industries Inc 2012 fourth-quarter conference call. Today, LSB's management participants are Jack Golsen, Chairman and Chief Executive Officer; Barry Golsen, President and Chief Operating Officer; and Tony Shelby, our Chief Financial Officer. This conference call is being broadcast live over the Internet and is also being recorded. An archive of the webcast will be available shortly after the call on our website at www.LSBindustries.com. After comments by management, a question-and-answer session will be held. Instructions for asking questions will be provided at that time. Information reported on this call speaks only as of today, February 28, 2013, and therefore you are advised that time-sensitive information may no longer be accurate as of the time of any replay.

After the question-and-answer session, I will have some important comments and disclaimers about forward-looking statements and our references to EBITDA. We encourage you to view the PowerPoint PDF that is posted on our website at www.LSBindustries.com in the Webcast and Presentations section of the Investors tab. Please note that the presentation starts on page 3 of the PowerPoint. Now I will turn the call over to Mr. Jack Golsen.

Thank you, Carol. Thank you for participating in our 2012 final results conference call. For those of you who follow our Company, I'm going to spend my part of this call primarily discussing our chemical business and what we are planning for the future of the Company. Barry and Tony will go into details about the year and current market conditions. The 2012 year was the second-best year in our history, but it was disappointing to us because of operating problems in our chemical business. I will explain to you what happened in our chemical business, and what we have done and are doing to avoid a repetition of the problems that we experienced during 2012. We believe that many of these initiatives will help us take our chemical business to a new level of reliability and overall profitability.

First, it is important to review the scope of our chemical business and how it is organized. At LSB, we operate four chemical manufacturing facilities, with each one independent of the other chemical plant complexes. These are located in El Dorado, Arkansas; Cherokee, Alabama; Baytown, Texas; and Pryor, Oklahoma. Each facility has its own general manager, plant manager, and full operating and compliance staff to run as an independent business. The operation of one of these plants has no direct connection to the other plants. A chemical business management group oversees these operations and provides services to them.

Each of our chemical facilities are relatively complex, with multiple specialized individual units or plants working together which are dependent on each other to produce our products. When one of the units is down for maintenance, it can interrupt the whole process leading to a finished product. Exceptions to this are our anhydrous ammonia plants, since ammonia can be upgraded to other nitrogen products or it can be sold as ammonia. However, without ammonia, we cannot make our other nitrogen products. Normally, as others in our industry, we expect a limited amount of unplanned downtime. However, during 2012, we experienced serious equipment problems, causing shutdowns in three of these plants at the same time, defying the rules of probability. It is also the first time this has happened simultaneously in 30 years we have been in the chemical business.

So here's specifically what happened. At the El Dorado facility, a reactor vessel of a unique type of nitric acid plant exploded in May, causing damage to four surrounding plants. The plant was unique, because it produced 98% nitric acid. We have repaired the damaged surrounding plants. We have ordered a new 65% nitric acid plant, and a separate concentrator to make 98% acid. The remaining plants, which produce 80% of the nitric acid capacity at our El Dorado plant, are currently running and have been since last summer and fall. We expect that construction of the new acid plant will be completed in 2015, if we receive permits in time from the State of Arkansas.

In our Cherokee facility, we experienced a critical pipe rupture in November, which damaged a major heat exchanger in its ammonia plant. We ordered a new exchanger, but due to the special alloys required to produce that exchanger, it is not expected to be delivered to the plant site until April. To further reduce the chance of a similar pipe rupture, we also replaced carbon steel piping throughout the plant with alloy steel piping, to be able to better withstand high pressures and high temperatures. We expect Cherokee to resume production in May.

Our Pryor facility has struggled to reach its ammonia plant stated nameplate capacity of 700 tons per day. After consultation with outside experts, we concluded that the plant's ammonia converter system, consisting of six small connected converters, of which one or another was frequently breaking down, should be replaced with one large, more up-to-date converter. This was a major undertaking. The replacement converter, which weighed 700,000 pounds and was 60 feet long, had to be moved and installed in one piece. We continued to run the plant at a lower rate with the six converters, while the large converter was being prepared. However, during that time, a main compressor malfunctioned due to undetected vibration of its rotor. This caused us to shut the ammonia plant down, cutting off all production at Pryor. Since then, we have installed a larger converter and repaired the compressor. We have also installed additional vibration detectors on the compressor, to minimize the chance of future similar malfunctions. This week we began the process of commissioning a new ammonia converter at Pryor, which will lead to restarting production at Pryor. We expect to resume production during -- early in March. It takes a few days for the warming of -- for warming up the catalyst when we start production.

Although these events were unrelated to each other, the severity of the separate events at our Pryor, Cherokee and El Dorado chemical facilities required us to undergo a thorough re-examination of our process safety management, also known as PSM, reliability and mechanical integrity programs. As a result, we have recently undertaken a concerted effort to improve the reliability and mechanical integrity of all of our chemical plant facilities. A key component of the improvement program is the implementation of enhanced PSM programs to supplement existing PSM programs. The improvement program includes engaging outside experts and consultants who specialize in risk management, reliability, mechanical integrity and PSM.

We are also recruiting and hiring additional corporate and on-site facility engineering and operation -- operational personnel, and accelerating acquisition of additional spare parts to supplement our existing spare parts program. The program also includes the installation of additional automation and additional plant equipment protective devices. We believe that the implementation of these programs will contribute to improved reliability and more consistent operations with these facilities in the future. We should expect to have less unplanned downtime, and an improvement in our overall production output as these programs take effect. We expect that many of the costs incurred in connection with the El Dorado facility and the Cherokee facility events will be reimbursed under our insurance coverage sometime during 2013. At this time, the exact amount and timing has not been determined.

Our chemical business is continuing to underperform during the first part of 2013, because Pryor has not been in operation during January or February, and Cherokee will not restart until May. However, after that, we anticipate improved results, and a resumption of the growth pattern to our chemical business that we experienced in years prior to these breakdowns. The fundamentals of our chemical business, particularly the agricultural sector, remain strong. We plan to continue to invest in this business to increase capacity, improve its reliability and reduce cost. Fundamentally, our strategy in this business is to invest in equipment and systems that fall into one of four categories. One, are required for regulatory compliance; two, improved plant reliability, product quality and safety; three, can generate significant savings, such as producing ammonia at El Dorado rather than purchasing it from the pipeline; four, increase our capacity and grow this business. Barry will now discuss a planned ammonia plant expansion project at our El Dorado facility, and Tony will discuss the overall plan for capital investment in the chemical business.

Turning to our climate control business, 2012 sales and operating income were lower than 2011. We expected recovery in commercial and institutional construction that did not materialize. However, during 2012 we maintained our leading market share positions and our special products, continued to enhance our product offerings, intensified our marketing efforts and improved operations. This business has historically been profitable for LSB, with a good overall return on investment. We are confident that as an economic recovery does occur and construction increases, our climate control business will resume its pre-recession growth. Now I'll turn this call over to Tony Shelby for a financial review of 2012.

Thanks, Jack. As Jack indicated in his comments, during 2012 our chemical business encountered a number of significant issues, resulting in lost production and an adverse effect on our 2012 sales, operating income and cash flow. However, before addressing the 2012 results, a word or two about 2013. Until the facilities are returned to normal at various points in 2013, production, sales and operating income will continue to be lower than otherwise would be expected. Based on current market conditions, we estimate the monthly adverse effect to our 2013 operating income to be $1 million to $2 million per month at El Dorado until mid-2015, when the new Weatherly nitric acid plant and concentrator are placed in production, $8 million to $9 million per month at the Cherokee facility until the repairs are completed in April or early May, and $8 million per month at the Pryor facility until the ammonia plant is restarted in March and in production. We do, however, anticipate that we will receive additional business interruption insurance proceeds in future quarters to recover a substantial portion of El Dorado and Cherokee losses related to these incidents.

Regarding 2012, the results for the fourth quarter are summarised on page 4 of the PowerPoint presentation. Fourth quarter consolidated results were significantly less than expected, due to the unplanned downtime at our chemical facilities. We estimate the adverse effect of the downtime in the fourth quarter as a -- was a reduction of operating income of approximately $29 million, offset by $7.3 million for business interruption insurance. For the quarter, consolidated sales were $177 million compared to $215 million, an 18% decline. Net income declined 59% to $11.6 million versus $28 million last year. Fully diluted earnings per share were $0.49 compared to $1.19 last year. Earnings for the quarter were down percentage-wise disproportionate to the sales decline, due to the effect of unabsorbed fixed costs that continued during the downtime when there was not any production. The net decrease in cash of $36 million for the quarter included capital expenditures of $31 million, the acquisition of natural gas working interest of $50 million, partially offset by insurance proceeds of $20 million, financing of $8 million and net cash provided by operations. EBITDA for the quarter was $24 million compared to $47 million a year ago.

Turning to page 6, chemical sales for the quarter declined $37 million or 26% to $105 million. Agricultural sales were $28 million lower, mining sales were $11 million lower, and industrial sales were up slightly. Chemicals operating income declined from $38 million to $15 million, a decline of $23 million or 60%. The decline in chemicals earnings was attributable to the lost production, lost sales and margins, and the continuation of fixed costs without corresponding production, all a direct result of the unplanned downtime.

Moving to page 7, climate control sales for the quarter were $68 million or $1 million lower than for the year-ago quarter. Gross profit at 29.6% of sales was approximately the same as last year. New orders during the quarter totaled $67 million or 10% higher than the same quarter last year. Climate control's operating income for the quarter was $5.8 million, compared to $6.4 million in the year ago quarter. The year-end backlog at December 2012 was $55 million, compared to $45 million at year-end 2011. Barry will review the fourth quarter results and current market conditions in more detail.

Moving onto the full year results, please turn to page 5. Our calendar year results were also significantly impacted by downtime incidents and production issues in the chemical business. We estimate that those incidents and other issues accounted -- encountered during 2012 resulting in lost production adversely affected chemicals operating income by $83 million, offset by $7.3 million in business interruption insurance. For the full year 2012, consolidated sales were 750 -- $759 million, compared to $805 million, a $46 million decline or 5.7%. Operating income was $95 million compared to $136 million, a $41 million or 30% decline. After interest expense and an effective income tax rate of 36%, net income was $59 million compared to $84 million. Diluted earnings per share were $2.49 for the calendar year 2012, compared to $3.58 per share last year. The net decrease in cash and short-term investments of $37 million for the year included capital expenditures of $93 million, the acquisition of natural gas working interest, $50 million, offset by insurance proceeds of $20 million and cash provided by operations. Year-end cash was $98 million. EBITDA for the year was $117 million versus $156 million in 2011.

On page 6, chemical sales for 2012 were $478 million compared to $512 million last year. Operating income was $82 million, or $34 million lower than last year, and EBITDA at $99 million was down approximately the same as operating income. On page 7, climate control sales for 2012 were $266 million compared to $282 million last year. Gross profit was $81 million or 30%, compared to $88 million or 31% last year. Operating income was $7 million -- excuse me, operating income was down $7 million to $26 million.

Turning to page 8, our balance sheet is in good shape, with $98 million cash on hand, total interest-bearing debt of $72 million, and an undrawn $50 million working capital revolver loan facility. If we follow through with planned capital expenditures, it is likely that we will undertake a debt financing in 2013. Accrual basis capital expenditures during 2012 were $101 million, including $92 million for the chemical business to replace or rebuild damaged equipment, certain profit improvement projects, and environmental compliance projects. In addition, a subsidiary of our chemical business acquired natural gas working interest within the Marcellus shale, as an economic hedge against a potential rise in future natural gas prices. We currently have committed spending for capital expenditures in 2013 and '14 of approximately $200 million for projects supported by cost-benefit analyses, the construction of the new Weatherly 65% nitric acid plant and the concentrator, and projects to improve reliability.

In addition, as disclosed in the 10-K, we are planning to construct an ammonia plant at the El Dorado facility for an estimated cost of $250 million to $300 million. The final decision to construct an ammonia plant is subject to a number of business considerations, and approval of the Board of Directors. If completed, the ammonia plant will produce all of El Dorado's ammonia feedstock requirements, and a much more favorable projected cost/sales price relationship. We have addressed our results of operations and financial commitments in greater detail in the 10-K that we filed earlier today, and we suggest that you review these disclosures and discussions for additional analysis. Now I'll turn the call over to Barry, to discuss the market drivers and the outlook for both businesses.

Thanks Tony. I'm going to focus on our sales activity, product backlogs where pertinent, and market drivers as we see them. I will also review upcoming key initiatives in our strategies for each business. To start, please turn to page 9 in the presentation, which shows our 2012 sales mix by the markets we serve. The overall mix was approximately the same as 2011. Chemical products were a higher percentage of total sales than in the years before 2011, due primarily to increased volume and sales prices of our products in our chemical business, and the addition of meaningful revenues from Pryor. A higher percentage of the chemical business's sales were derived from agricultural products than in the years before 2011 as well, the result of the addition of sales from the Pryor facility and higher prices for ag products. But for the downtime in our chemical plants that we have discussed, the mix would have been even more heavily weighted toward the chemical business. We expect that will be the case in 2013.

Focusing first on the chemical business, please go to page 10. Total sales in the fourth quarter were $105 million, compared to $142 million in the 2011 quarter. Sales in both our ag and mining products were dramatically lower than 2011 due to plant downtime, and as a result comparison from period to period is not really meaningful. Industrial acids sales were up slightly, because most of those sales are related to production at the Baytown, Texas facility, which was not impacted by downtime during the quarter. Turn the page 11 for sales of our key ag products. Again, comparison of sales from the fourth quarter of '11 to the fourth quarter of '12 is not particularly meaningful, due to downtime in our plants in 2012. Turning to our industrial and mining products on page 12, both sales dollars and tons shipped of industrial-grade ammonium nitrate were lower than the fourth quarter 2011 levels, reflecting decreased demand for our mining products. Sales in tons shipped of nitric acid were 16% and 15% higher, respectively, compared to 2011 fourth quarter, due to higher acid demand.

Turning to market trends on page 13, are some price trends for both the feedstocks we use and the key ag products that we sell. The cost of natural gas continues to be low. This is benefiting production costs at our Cherokee, Alabama and Pryor, Oklahoma facilities, which use natural gas as their primary feedstock. The conventional wisdom is that natural gas will remain low for some time. The cost of anhydrous ammonia, the feedstock we use at our El Dorado, Arkansas and Baytown, Texas facilities, is much higher than it was a year ago, and continues to be high compared to past years. February 2012 and 2013 Tampa prices were $472 per metric ton and $655 per metric ton, respectively. Our current read on the market is that ammonia is about $625 per metric ton. This compares to prices in 2009 that range from about $125 per ton to $355 per ton. The increase has impacted production costs at our facilities that use ammonia as a feedstock. Most of the products we produce at Baytown, and most of the industrial mining products produced at El Dorado, are sold on cost-plus basis, so high ammonia costs did not impact our profitability on those sales. However, agricultural-grade AN produced at El Dorado is sold at spot market prices.

Turning to ag products, prices for UAN fluctuated over the past year, and are slightly higher at this time than they were a year ago. If you look at the chart on the lower left, you can see that the Southern Plains price of UAN increased from $335 per ton in February 2012 to $345 per ton in February 2013. Based on our current -- on current market indicators, we believe that this pricing will remain somewhat stable throughout the upcoming season. We do not expect UAN prices to significantly increase during the 2013 season as they did in 2012, as a result of higher levels of imported urea in North America this year than last year. In February 2013 Southern Plains prices for ammonium nitrate were $385 per ton, compared to $395 per ton 12 months earlier. Our outlook for AN this season is more or less the same as UAN. We expect stable selling prices at about the current level. Currently, Southern Plains ammonia is trading at approximately $100 per ton higher than a year ago. This should benefit Pryor, as its ammonia production resumes.

Focusing on the outlook for the chemical markets we serve, page 14 lists several indicators for our agricultural products, which all continue to be favorable. Grain stock-to-use ratios, both worldwide and in the US, continue to be low. As a result, planting levels are generally high. Market prices for corn and wheat remain high, so farmers have an incentive to plant and sell more. All of this is creating strong continuing demand for fertilizers. Finally, low natural gas prices have reduced the cost to manufacture many of our ag products. North American-produced nitrogen fertilizers are currently the lowest cost, factoring in total cost of production, freight and distribution. The industry consensus is that the positive fundamentals of the ag business should continue in the near to mid-term. Despite general industry drivers, weather can have a significant impact on the fertilizer part of our business. Although many of the markets we serve have generally suffered drought conditions, recent rain and snow have improved the outlook, but may cause a delay in the start of the next season. Overall, we continue to be optimistic about our ag business.

Please turn to page 15. Our industrial products are sold primarily to large customers pursuant to contractual cost-plus and/or minimum take arrangements. The two charts on this page indicate the shift that is occurring in our sales mix from 2011 to 2012. In fact, very little change has occurred, and the shift from mining to industrial acids was primarily driven by plant downtime at Cherokee and high demand for acid. A very significant part of our business continues to be industrial and mining. Page 16 contains some market indicators for this area of the business. Most of these indicators forecast growth for the next few years.

On page 17, we've listed our chemical business's strategies, and some of our key initiatives for 2013. In addition to increased emphasis on operational excellence and plant reliability, discussed in detail by Jack, we continue to emphasize safety and environmental responsibility. We will continue to expand our industrial business by adding new customers and perhaps new products. We will also continue to enhance our agricultural distribution channel. We will work on several projects aimed at optimizing production rates at all of our plants that are currently on line.

The most ambitious and potentially impactful capital project we are working on is an ammonia plant that we are planning to build at our El Dorado facility, mentioned by both Jack and Tony. This should increase El Dorado's capacity and lower its production costs, since the cost spread between purchased and manufactured ammonia is substantial. El Dorado currently purchases the ammonia that it requires from -- for feedstock from a pipeline at a much higher cost than estimated cost of production with an ammonia plant. We are well into the planning stage, and have filed for our permits to start building the plant. We expect that we will use most of the new ammonia that we produce to satisfy our current customers. The addition of the ammonia plant is subject to us receiving permits, adequate financing, reasonable expectations that our customers will continue to take our products, and finally Board approval. If approved, we hope to have an ammonia plant constructed and in the operation during 2015.

Solving the problems associated with downtime at Pryor diverted us from completing our plan to bring Pryor's two smaller ammonia plants to their full potential production capacity of 60,000 tons per year during 2012. However, we should resume this project in 2013, and as we previously reported, permits are in hand. Whether or not we operate those plants -- smaller plants at their full capacity will depend on the output of new primary ammonia converter at Pryor, and the market conditions at the time. We also have several other capital projects on the drawing board, including among others NOx abatement in El Dorado and control system upgrades at various locations.

Turning to our climate control business, please go to page 18. As you can see, sales by -- you can see sales by major products -- product categories on this page. Total sales for the fourth quarter were approximately $68 million, the same as the third quarter, and a slight decrease from the fourth quarter of 2011. Sales of heat pumps for the quarter were down 17% to last year, whereas sales of fan coil products and large customer air handlers increased. This resulted in a small overall decline for the quarter. For the year sales were $266 million, a decline of 5% from the prior year, with sales of heat pumps down 11%, partially offset by an increase in sales of our fan coils and large custom air handlers. Large custom air handlers are included in other HVAC products category.

From a product market perspective, the shortfall in sales during 2012 was due primarily to lower residential product sales, down 21%, while sales of our commercial products declined only 1%. On page 19, you can see that sales of product sold for use in commercial and institutional buildings improved 9% in the fourth quarter, and new product orders increased 20 -- by 24%. As mentioned previously, sales of our residential products, all geothermal heat pumps, were down 21% from 2011, reflecting lower order levels during the year. In aggregate, bookings in the fourth quarter were 10% higher than the prior year, bringing new product orders to $262 million in 2012, on par with 2011. The backlog at 12/31 was $55 million, a 25% increase year-over-year.

During 2012 we maintained our leading market share positions in geothermal and water source heat pumps, and hydronic fan coils. Our January 2013 new product orders were $25 million, a 16% increase over January 2012. However, we do not believe that any single month's orders indicate a trend. During 2012, the gross margin of our climate control business was $30.4 million, declining from $31.3 million -- excuse me, let me make sure I stated that correctly. It was 30.4%, declining from 31.3% in 2011. The principal reasons for the decline were lower sales mix of residential products, which generally carry a higher gross margin than our commercial products, and also it was contributed to by the lower volume.

Moving on to the indicators related to commercial and institutional construction, on page 20 we show that McGraw-Hill has increased their projection for 2013, although the recovery is still slower than previously projected. It should be noted that over the past 12 months, McGraw-Hill has made significant adjustments to their short-term forecast. Their most recent thinking is that the key markets we serve are expected to grow 68% from 2012 to 2017. Further supporting this projection is the most recent release of the Architectural Billings Index by the American Institute of Architects, which is shown on page 21. This is showing the strongest growth since November of 2007, and now -- it's now been several months that this has been in positive category -- in the positive territory.

Moving onto sales of geothermal heat pumps used in single-family residential applications, page 22 shows McGraw Hill's forecast for single-family residential construction starts. These products accounted for approximately 18% of all climate control sales during 2012. McGraw Hill's is currently forecasting that housing starts will continue to grow and more than double between 2012 and 2017. If this future growth occurs, it should benefit our residential geothermal business, although we believe this is also influenced by the cost of energy. The continuing low cost of natural gas, which is used as a fuel for heating about 60% of the homes in the United States, has reduced the savings for geothermal heat pumps compared to gas furnaces, and extended the payback period for our residential geothermal products in those markets that use natural gas. Also, we've experienced a reduction in the sale of geothermal heat pumps for replacement applications during 2012, as compared to 2010 and 2011. Finally, we believe that the specific market we serve, which focuses on higher-end housing, has not performed as well as the entry-level and lower-priced housing sectors. We believe that these factors have impacted our sales of residential heat pumps. However, we continue to maintain our market share leadership position with these geothermal heat pump products.

In summary, the general consensus of most economists and construction industry experts is that the recovery will be forthcoming, albeit at a slower pace than previously forecast. One bright spot is that there appears to be a strengthening in all major sectors we serve, especially multi-family housing, which historically has been one of our strongest markets. Another positive trend is the increase in green construction that has occurred the past few years, and is expected to continue. The 2013 green construction outlook, which is also published by McGraw-Hill, forecasts that the green construction market will grow from approximately $85 million in 2012 to between 204 -- excuse me, $85 billion in 2012 to between $204 billion and $248 billion in 2016. This should benefit the sale of our highly energy-efficient products.

Turning to page 23, we've listed our climate control business's strategies and some key initiatives. One significant item of note is our focus on lean initiatives. This is an aggressive program to identify cost savings and process improvements throughout all functions of the organization. During 2012 we developed and released several new products, including the following, which is not a comprehensive list. The rollout of new digital controls and features on most of our water source and geothermal heat pumps; many new heat pump models and sizes, including our Tranquility 22, a low-cost two-stage product targeted to commercial applications, this was a dealer design gold winner; launch of our award-winning, ultra-high efficiency Trilogy Q-mode geothermal products; fan coils with improved efficiency ECM, or electrically commutated motors; a matrix fan monitoring system for our large air handlers; a new line of air-cooled modular chillers; extended -- we extended our offering of simultaneous heating and cooling modular chillers; and we introduced a new line of package make-up air units at the AHR Expo in January of 2013. We will continue to develop and introduce new products in 2013 and future years. Also during 2012, we substantially completed construction on an expansion of our air coil manufacturing facility.

One last point, on March 18 Tony and I will be presenting at the Sidoti Emerging Growth Research Conference in New York. We hope to see many of you there. Before opening this up for questions, I'd like to thank you for listening today, and I would like to request that each of you please limit yourself to three or maybe four questions, so that others will have a chance to ask some questions as well. If you have more questions, you can get back in the queue and ask them later on during the session. Operator, please poll for questions.

(Operator Instructions)

Dan Mannes, Avondale Partners.

A couple questions, but first on chemical. As it relates to the potential expansion of El Dorado, first of all can you remind us on the potential size, and two, can you explain maybe a little bit about if this has any impact on the current contract with the off-taker, or does the contract already assumed that -- is that based on you buying ammonia, so to the extent you produce it yourselves, you'll be able to (multiple speakers) --?

Let me ask those -- answer those in the reverse order that you asked them.

Sure.

Really, the terms and conditions of our contract with our customers is confidential, and we really do not discuss that publicly. But going forward, this plant is not solely dependent on that. As to the capacity, the planned capacity of that plant is about 1,100 tons per day, but that comes out to a practical capacity of about 377,000 tons per year, because you don't run it 365 days a year.

Okay. But going back to the initial question, I'm just wondering if you're going to have to share some of that incremental margin with your off -- with your client?

As I said, our sales price and our conditions of our contract with our customers are confidential, but you can assume that in a contract like that, we're not selling at the full market spot price.

I think the other thing you have to keep in mind is that our off-take agreements have a life. In other words they're not in perpetuity, so when we renegotiate the agreements that will be taken into consideration, in an arm's length negotiation.

Got it, okay. And real quick, if we can put a finer point maybe on the timing for Pryor and Cherokee, and I want to first thank you for all the color you gave us on that, but obviously we always want a little bit more. So on Pryor, it sounds like maybe some point in March, and then on Cherokee, May directionally, is it sort of -- and I don't mean to put too fine a point, but beginning, middle, or end of May, or just not known, depending upon equipment delivery?

I think what we indicated was late April, early May.

On Cherokee, okay.

There again, you can't define it that precisely, and that is a reason that we're trying to give a range.

The reason for the range is we're dependent on outside suppliers. If they keep their promise, they're going to deliver the units, the special units that were awarded in April, early in April. But if they stretch it out then we get stretched out.

Sure, and then even after delivery, you still have an installation period, correct?

We have to install it, but we have everything ready, and that goes relatively quickly.

That is probably a more finite range than depending on the outside vendors, from our standpoint.

Yes, and the other thing to keep in mind, a lot of the delays we've had this year, 2012 and early '13 has been vendor delays, because in the nitrogen expansion side of the business, a lot of these vendors are backed up and are not quite as reliable as they used to be, in terms of delivery dates.

Sure. Two last quick ones, and then I'll turn this over. Given the status of Pryor and Cherokee, is it fair to assume you've done very little pre-selling for Q2 delivery?

That is true. We do have some firm sales commitments on UAN out of Pryor. We have some stock and inventory right now, but we're not doing any aggressive pre-selling.

Got it. Then the last thing, and again thanks for the color on the enhanced management plan at the chemical facilities. Can you maybe give us any color, will there been an incremental cost that will relate to that, that is material, or is that sort of just part and parcel of everyday business?

There will be some incremental cost, but we also think it is part and parcel. Our view is that in the long run, the benefits will outweigh the costs. But there will be some upfront costs.

Everyday of up-time is a significant benefit to the bottom line. I think your shareholders would agree. Thanks, I may come back with some more questions.

Joe Mondello, Sidoti.

Just to continue on with Pryor and Cherokee, I just was wondering if you could give us maybe a clearer understanding on -- I guess the push out at Pryor is largely due to vendors as well? As well as what you talk about at Pryor or Cherokee?

Pryor? There is no push out at Pryor, we --

Well, I am just referring to the fact that we saw six to eight weeks in mid-November, then in January you gave us a four-week update, and now -- I'm just wondering the timing here.

Okay. Let me explain what happened, why this push out is beyond our control. That unit that I told was 700,000 pounds, and it was 60 feet long, one piece, and it had to be moved in one piece. To get railcars that would move it, and get cranes heavy enough to lift it, they had to fly some special crane parts in from Europe in order to have a crane in the United States that could lift it. So, all of that was not known when we set the original targeted timeframe, and every one of those things caused us delays that we could not help. There was nothing we could do. So your question was, will there be more delays? Is that what your question is?

Yes, just trying to get an idea.

We are not anticipating any, but as far as Pryor is concerned, they're all hooked up and ready to go. They are warming up the catalyst now. As far as Cherokee is concerned, I told you, it depends upon the vendor, we picked the top vendor in the industry to supply us the heat exchanger, and they promised delivery in April.

Okay, great, thanks for the color there. And then also, sticking on Pryor, I think you mentioned that there may be in question the 60,000 of additional ammonia that is in question now? Could you just clarify what you --?

I can clarify that. It is not in question, it is just deferred. Because when we -- the main game there is the number one ammonia plant -- the number four but the primary ammonia plant that produces most of the ammonia, the larger plant, the way to characterize that. When we start to develop these issues, all hands on deck focused on that and they had to essentially set aside the progress that they were making.

We have had some production output from those, but they have not finished what I characterized earlier as a debugging process. They are going to have to get that -- they're going to the turn back to that and start working on that again this year, and that will be a 2013 project instead of a 2012 project. But the benefit to be gained from what they have been working on the last few months far overshadows that, and so that is why they've worked on that.

Okay. So do you think we can see some of that capacity come on by mid-year? What kind of timing are we talking about?

[Technically], but I don't want to make a specific commitment at this time. What I said also in my presentation was that we expect that the new converter, ammonia converter, will have much higher output than the old one -- the old ones. So whether or not we run the 60,000 tons per year on a continual basis, along with the output of the new converter, is going to depend on the market conditions and the demand at that time.

It could be that we pick those plants up in town, depending upon when there is market demand. So at this point in time, I don't want to predict, and I don't want to give you the impression that with that new converter, that we will be running those 100% of the time even when they are finally fully online.

Okay, so just to finalize, there is a lot of moving parts here, and it's hard to model with all of these moving parts. So I am trying to get an idea what kind of ammonia, total ammonia capacity per day that you see yourself running at, say in the second quarter or mid-year?

We cannot give any guidance on that, but I think it is safe to say that we would expect with the new converter, that the main ammonia plant will run close to its rated capacity of 700 tons per day, and we never figure in much more than 330 days a year, and we're not suggesting that we're going to bring the 60 -- additional 60,000 tons up at any particular time.

Okay. Then just one last bastion, in terms of CapEx, you give a pretty detailed explanation in the 10-K regarding CapEx, and I'm just wondering a couple things. First off, the $110 million to $120 million associated with the new nitric acid plant at El Dorado, do you see that almost, or largely, financed through the insurance recovery that you are expecting or --?

No, we originally thought that it would be for the most part financed by recovery, but there is a difference of opinion between we and the insurance company about whether the old plant is repairable. We think it is not, and plan to bring on the new. They took the position that it is repairable, and gave us less than the full -- what we thought the full replacement cost was. So probably long term -- when the dust settles, we'll probably get about half of that.

Okay. And then also in that CapEx, you talked about $10 million to $15 million of CapEx related to other expansion projects? Wondered if you could clarify what that is regarding?

I don't think we have a detail of those, they're a lot of other smaller projects. You have a list of all the projects?

The big one is enhancement of the Cherokee ammonia plant.

That is right.

And that is that nitric acid at Cherokee?

As -- plant one there but there is also an ammonia plant expansion that we could do the next step after we get the project underway at El Dorado. Acid plant 1.

Acid plant 1 there, but there is also an ammonia plant expansion that we could do as the next step after we get the project underway at El Dorado.

And that would be additional capacity beyond what you originally were running at?

Yes, but we're holding back on that until we get everything else worked out.

Okay.

Is that all? Next questioner?

Joe, anyway back to the insurance question, the amount we get back on the El Dorado plant is one piece of it, we also have business interruption insurance on top of that, and it would be quite substantial.

Right. Is anyone on the line?

Joe is not on the line, but the next question comes from Keith Maher of Singular.

Kind of touching on the business interruption insurance, I see at $7.3 million this quarter, where does that show up in the P&L? And also just want to understand how that -- does that flow in, are you getting payments on a monthly or quarterly basis, since it is business interruption insurance?

I wish I could tell you it comes in on a monthly and quarterly basis. It comes in when you encourage the insurance companies to send it. Typically what we will do, if it is recovery of costs incurred for repair, we will take it to other income. If it is reimbursement of losses due to business interruption type of coverage, it will go as a reduction of cost of sales.

Okay. And so can you tell me then, the amount that came in this quarter, was that in -- was that offset in cost of goods sold?

$7.3 million of it was in cost of sales.

So, I guess I'm wondering, when would you anticipate getting -- starting to see some payments from --?

Well, you know, what we do is we prepare a claim with all the details in it and all the backup, and then they audit it, and if there's any discrepancy or disagreement you discuss it and work it out, and then they pay.

Okay.

But that is a process that does not happen quickly. They take their sweet time about it.

But the relationship is very good. You have to just take your time to get the --

Okay. Could you give us a little bit more data on the $7.3 million, could you tell us what time period that was for?

On the what?

What time period was that for?

What he is asking, let me restate your question. Was the $7.3 million business interruption that we received in the fourth quarter, what time period was that business interruption for? Is that what your question is?

Yes, I assume it came back in May, June, July, like how many months, what time period?

Here's the situation. We get advances, and we have to make allocations of that, so it is not a precise insurance recovery on a precise period. So it would have covered -- it would have covered the first, the most early period, and then subsequent amounts we receive will cover the more recent periods. But it's not specifically identified with any particular quarter, because the advance is not -- they don't direct it as to exactly what they are paying.

All right, I think that covers that pretty well. So I will ask a question about the Climate Control business. Obviously the low gas price is bad for that business, good for your Chemical business, but it seems like they are going to be here for the foreseeable future, I mean low gas prices that is. So is there anything you can do, I mean obviously your product gets more expensive, it goes into higher (multiple speakers) --?

Let me answer that question. What you really -- you have got to remember, the whole climate control business is not geothermal.

Sure, sure.

[Both] natural gas prices affect the geothermal part of that business. The don't affect the standard hydronic -- they don't affect the hydronic fan coils, they don't affect air handlers, they don't affect our chillers, and they don't affect water source heat pumps that are not geothermal heat pumps. It is a small part of the overall business.

But addressing that part of the business, this is a complex question because there are really several factors that affect the geothermal business. First, you have new construction, which traditionally has been the primary market for residential geothermal products. Even though the residential construction was up last year, it was about 517,000 starts, but it was up from an all-time low of about 400,000, but it was down from 1.7 million a few years ago.

So this is a really big factor in the geo business, because that has been the primary market historically for geo. So we hope that as residential construction increases, if it gets over 1 million, which is what it is forecast to get to in the next few years, that this will really benefit the geo business.

As for natural gas prices, although they are near an all-time low, we believe that in the medium and long-term there will be some rise, and that could benefit the Business. The current low gas prices have also really led us to adopt a more focused approach, in other words focus on markets where natural gas is not the primary use for heating. You have got about 40% of the country where you have got either electric or propane, or some other -- fuel oil, or some other type of heating source.

You have also got parts of the market where even though natural gas is the heating -- is used for heating, they're really not a heating dominant market, so you get more savings in the summertime from cooling than in the wintertime and get -- natural gas is less of a factor. The bottom line is, it has forced us to be more focused in the way we approach the market with geothermal.

There is one more thing that affects the business, and that is the fact that on the come commercial side of geothermal, the low natural gas prices have not had necessarily as much of a negative effect, because typically when you are doing in engineering analysis for a commercial building, the horizon is much longer. Homeowners looking at -- he wants a really fast payback the next two years, because he doesn't know how long he is going to be living in that house necessarily, but building owners who are typically investing in these type of projects are typically long-term owners, and they're looking at total life-cycle cost over a long period of time. Does that answer your question?

That was great. I appreciate it. Thanks a lot. That was all I had.

Bruce Zessar, Advisory Research.

I wanted to focus on the business interruption insurance, and the adverse effects on operating income from the different events. You said in the press release that there was $83 million adverse to operating income from the events at the three chemical plants, and you said $7.3 million of that was offset by insurance. Do you have any estimate of the remaining $76 million, how much will be recoverable in insurance?

No, I do not. Part of that $83 million was due to the earlier quarters where Pryor was underperforming before we put the new converter in. So there's a number there, but we have not disclosed that.

Okay. And then if I look at the paragraph on page 7 that talks about the monthly adverse effect from each of the plants in 2013, it looks like if you add those up, it could be anywhere from roughly $68 million to maybe $90 million adverse this year?

Are you referring to the 10-K?

No, I'm referring to page 7 of the press release in note 3. So if you add up $1 million to $2 million a month at El Dorado, that is $12 million to $24 million for the year, and then you add up $8 million to $9 million for Cherokee over 4 to 5 months, and $8 million for Pryor over, let's call it 2 to 3 months, you could come up roughly in the same range as the $83 million adverse to 2012. Is that the way you see it as well?

Would you repeat that question again, I'm sorry.

Okay. The question is, you had $83 million adverse hit to operating income from the incidents at El Dorado, Cherokee and Pryor in 2012. If you look at your paragraph in note 3 on page 7, you disclose monthly negative effects to operating income at each plant. What I'm trying to say is, if you add those up for the whole year you will have -- you are saying $1 million to $2 million a month at El Dorado, that equals $12 million to $24 million for a whole year. And then you say $8 million to $9 million at Cherokee, so that will go four to five months until Cherokee is back in May. And then you have got $8 million a month at Pryor, so that is two or three months until Pryor is back on in March. When I add this all up, I am coming up with somewhere between, let's just call it $68 million and $89 million as potential adverse affect on operating income in 2013. Does that sound about right to you?

Yes.

Yes, that is one way to look at it, but I would not want to represent to you that would be the amount, because we still have to go through and look at the terms of the insurance policy and make sure that we can justify their claims.

No I understand that, I am just giving that as a gross number. Insurance is going to be my second question.

Okay.

All right. So then the question is, supposing you have, let's just say somewhere between $68 million and $89 million in this adverse effect on operating income this year, do you have any estimate, even if it is a range, of what percent of that will be recoverable from the business interruption insurance?

I would prefer not to make an estimate on that, except I can tell you that the numbers that we have in this footnote are pretty close to what we actually calculate the downtime is costing us.

So then that is what you're going to claim from the insurance policy?

We don't have insurance coverage at Pryor, because that was a event that -- took down because of a maintenance issue and then we -- to put in a converter.

Okay, so forget Pryor, but Cherokee and El Dorado, your monthly estimates here are in the ballpark of what you're going to try to submit for business interruption?

That is what we're going to try to submit, and I would also caution you that the $1 million to $2 million at El Dorado is for an indeterminate number, because we have to agree with the insurance company on how long the coverage will be in place, since we have to base it upon the repair of the old plant timeline versus the timeline to purchase a new one.

Okay. So then coming back, a question on 2012's results, the net effect after insurance is $76 million roughly, $83 million minus the $7 million from the insurance, is that right?

That is what we're saying is the effect of the issues that we encountered, the various maintenance issues we encountered, plus the downtime.

Okay. So if I take that $76 million and I tax effect it at 35% or 36%, and divide by your shares outstanding, that is about a $2 hit per share in earnings per share, is that what you would calculated it as?

What did you use as a tax rate?

35%, 36%.

You could calculate it a number of different ways. I wouldn't want to comment on the exact calculation, but the theory is there.

My theory is that if you did not have these problems, and didn't have this 83 -- this net $76 million adverse effect, you would have had $76 million more in operating income, right?

Correct.

Okay. So then if you take $76 million after tax, and divide by your shares outstanding, that would be some amount you could add, and say this is what we could have had in earnings per share in addition to what we actually reported?

That is one way of looking at it. That is more or less the message that was in there.

I just want to make sure I'm on the same page with you.

That is the message, and originally before we had all these problems we were looking for a better year in 2012 than we had in 2011. You can see in 2011 we had 3.5 -- 3.59 or something like that for this year.

You just have to be careful, though, we don't comment on theoretical pro forma calculations.

Okay. And then when do think you're going to make the go or no-go decision on the ammonia plant at El Dorado?

As soon as our Board approves it.

Okay, and then what do you envision, what type of debt financing are you going to get? Are you going to tap the public markets, private place --

We have not finalized exactly what kind of financing. We are in the process of doing that at this time.

That is one of the conditions.

But I will say to you that the public markets are very good now, and we don't have any intention of issuing the equity, or any debt with equity features at this point.

Okay. No intention to issue equity, all right. Then the other question I had would be, is there some maximum amount of debt that would take on, just to have some sense as to how far into debt you would go for this?

Right now what we are doing is we're looking at the various models of potentially how to structure our balance sheet with combinations of different types of debt that might be available out there, and we're also looking at other options as -- in addition to debt. But we are -- at this point in time we have not really firmed up on that. But we can tell you this, that probably within the next month to two we will make that decision, and when we do, what we will do is we will notify the shareholders.

Right. I think you're asking is what our target debt to equity ratio is, but I don't think we are prepared to comment on that, but we are doing some very significant modeling on a five-year basis to determine what we're going to do.

So the short-term and the long-term question is, you take the debt out, you have debt divided by equity at that point, but then looking out as you construct that new plant, assuming you go forward with it, and you are out five years, would it be your intent to pay that debt down pretty rapidly? What would your intent be with the debt?

We haven't got to that point about what our intent would be. It depends on what else is on the horizon.

Our operating margin right now requires us to carry something close to $100 million in liquidity -- in cash at all times.

And how much capacity do you have on your current borrowing agreements?

On our working capital revolver, $50 million.

Do you have any others or is that the only thing that you have?

We have a term loan.

We have a term loan. How much do you have on the term loan?

We have about $70 million in a term loan, and it's being amortized now, no additional capacity.

No additional capacity on the term loan, you are saying?

We don't have capacity because you have to pay for it. We can have all the capacity we want if we're willing to make commitments.

Yes. Okay. That's everything had, I really appreciate it, and hope to see you guys at the Sidoti conference.

Okay, good. We're looking forward to it.

David Kaizer, Robotti & Company.

I have a couple questions on the climate control that I think are pretty brief, but before that I want to clarify one thing with Tony. When you said $200 million in --

Could you speak up please, were having trouble hearing you?

Tony, with the $200 million you said in CapEx for '13 and '14, that's an aggregate for '13 and '14 or is that an average for both?

That is the total amount that we have committed to date. It is not everything that we might plan to do, but we have committed $200 million right now, and the majority of that is the Weatherly 65% acid plant that we talked about, along with the --

Right, okay. I just wanted to make sure we weren't talking $400 million over the time period initially. Okay, that is fine, I just wanted to clarify. The other thing is, we have talked in the past on the geothermal heat pumps, and the ratio of a retrofit to new construction, and I was wondering if you could comment on that?

Before the recession -- I kind of have to give you a little bit of history. Before the recession, generally we looked at that business as being about 70/30, 70% new construction and 30% replacement and retrofit. And by the way, that was generally the case across our entire Climate Control business, the commercial side, and the non-geothermal as well as the geothermal.

During the recession, we saw that -- in general we saw that change, and it got to be more like 50/50 for the Commercial business for a few years there, because there were not a lot of large objects, and it dragged the average down. What we saw was a bubble that occurred in '10 and '11 -- really '09, starting in '09 and happened in '10 and '11 to a certain degree, where we saw a huge increase in the replacement side of the geothermal business, and that got up to a much larger part of the business. I can't give you an exact number, because since we go to the market three-step, we don't exactly know where all of our products go, whether they go to new construction, so some of that is anecdotal.

But the percentage got much higher for a couple of years there on retrofit and replacement of geothermal. What happened this year was, we saw it more or less revert back to its traditional percentage, primarily focused on new construction, something like 70/30, or something in that range.

So when you look at the geothermal --?

When I say this year, I mean '12.

No, I understand, thank you. So when you talk about that ratio in the geothermal heat pumps and in the commercial, are you thinking that 70/30 range roughly is a healthier range for growth, that is more indicative that -- I'm try to figure out what that means to the Business and the growth potential, and what that says about the market? Maybe I'm doing it in reverse, but that is what I'm getting at. Because if -- it seems that when things were very bad you were more 50/50, and they're starting to return, that would seem to me to potentially indicating a growth phase?

I think there's two answers to your question. First of all, I think they are really separate considerations, that we wish that the market for replacement was bigger than it was, because if you look in the United States at -- across-the-board at all air conditioning and heating that is sold, most of it's sold for replacement. The vast majority of all the air-conditioning that's sold is replacement units.

So there is a big market out there to tap into. But when it comes to growth from where we are now going forward, historically because of the nature of geothermal it has done better in new construction, so as we see new construction starts of houses increase, we still should see that benefit the business going forward.

Okay. Then my last question is, you talked about expanding on product offerings across-the-board. I was wondering if there was one area you were particularly focused on, whether it be commercial, or if you could break it down by fan coils, modular chillers, that kind of thing, what you're looking at in terms of expansion that --?

I think I covered some of the products. I mean we're -- the answer is we are expanding all of those areas of the business. We've got new products coming out in the future in every one of those areas. We have a very comprehensive list. I really -- in talking about new products, I really hate to talk about them until they are announced and released to the market, because is not really good for us to give our competitors a heads up as to exactly what our product plans are. That doesn't help us any in the market.

No, I understand. I guess what I'm trying to understand is a lot of focus is on the geothermal heat pumps, and actually as a company as whole, there's a huge focus now on the chemical side. It seems to me there's a lot of room for growth and expansion in the Climate Control business, especially on the non-geothermal heat pumps. I'm just try to understand how you're looking --

Here's how we're looking at it. We think the Climate Control business, we've been in that business since 1960. It is a core business for LSB. We have leading market positions for our key products. We continue to develop new and innovative products. Before the recession, it had quite a bit of growth. That growth was stifled during the recession, but we consider the business to be very well positioned for recovery as construction comes back.

So what we have done during the recession, instead of cutting it to the bone to maximize the bottom line, and perhaps stunting future growth, we've continue to invest in developing the products, the marketing side of the business, which is integral to getting that growth when the market is there. And in certain cases for example we know that in future years even though many of our plants are operating at lower than full capacity, we know that in certain selected areas we're going to need more capacity in the future. That is why we just added on to our air coil manufacturing facility.

So we continue to invest in this business, albeit the investments in this business pale by comparison to the investments in the Chemical business. It's just the nature of the business.

Right. No, I appreciate that color. I appreciate that you take a longer-term perspective with that business.

Before you go, let me make sure, let me clarify. The $200 million that we are talking about is not all the spending that we will see in '13 and '14, it's only what we have firm commitments to spend as of the end of 2012.

I understood that, but do I appreciate the clarification. Thank you guys for the time, and look forward to speaking with you soon.

Gregg Hillman, First Wilshire Securities.

Barry, can you talk about the ammonia industry just a little bit in general, in particular permitting, and the capacity in the industry, how you see that changing over time?

Would you repeat the last part of that? It came through a little garbled on this end.

Sure, I wanted to ask you about the ammonia industry, I guess the United States and worldwide. Do you have any handle on capacity that is being added in the United States in terms of the permitting for new ammonia plants?

We do have a handle on that. This is a question that we have looked at carefully. Generally, in the United States there is something like about 20 million consumed tons per year of ammonia. Historically, about half of that has been imported.

About 8 million.

Slightly less than half of that, 8 -- 40% of that has been imported. What's happening is, as you probably know, is there is a rush due to low natural gas prices to get into ammonia production. So there is a lot of -- there have been a lot of announced plants. All of the announced plants will not necessarily actually get built. Some are announced in early stages and will not materialize. I think there's a general consensus that based on the announced new capacity, that what will happen is that it will pretty much pushed the imports out of the market. That is the general market dynamics.

In our particular case, we are unique in that our ammonia addition is a for a plant that is currently buying ammonia off the pipeline, so we're not building a plant and hoping that someone comes and buys the ammonia from us. We are building a plant that primarily will be used, the ammonia, to feed the production that we already have with long-standing customers that we already have. There will be some excess capacity, but the vast majority of the capacity will be for existing business that we already have, and it will reduce the cost of operating that plant.

And we also, based on what Barry said about backing out the imports, we expect the economics, in other words the spread between the cost of gas and selling price of nitrogen products, to stand up. It's hard to say how strong that spread will be, but there is no reason to believe that the industry will over-expand to the point that the margins will shrink substantially.

But what we have done, I can tell you this, is in looking at the long-term justification for the plant, we have not necessarily assumed the extremely favorable conditions that we have got today. So what we have done is we have shocked our pro formas going forward, pulling down ammonia, taking up gas, to make sure that even if we see the dynamics in the market change somewhat, that we will have the kind of payback on the investments that we are looking for.

Okay, that's good. Just one follow up, Barry. Does it make sense for you to invest in more transportation and infrastructure, such as tank cars or something, so you can get the ammonia somewhere else, or the fertilizer?

We have tank cars now, and we have some tank cars on order, because there is a long lead time. But I think we have an adequate number of cars to handle our production going forward, and as we need them we can add them.

Okay. Do think there will be an export market for your fertilizer products going forward, outside the United States?

That is a thought I've had. We had it many, many years ago in the 80s, but I don't know if that will return or not. I'm just -- I'm not that smart, there are geniuses out there that can tell you the answer to that.

Okay. Thanks very much guys.

Robert Longnecker, Jovetree.

Thanks for the color on the facilities. I had a question, what is the capacity or what is the production you guys are expecting out of Cherokee when it is back online?

We have capacity -- we have ammonia capacity there and urea capacity that pretty much sets the upper limit of what we can produce out of Cherokee. They produce about 190 -- they have the capacity for roughly 190,000 tons a year of ammonia.

Don't forget that a lot of that gets upgraded to a lot of products, so we don't -- most of it does, so we don't sell it as ammonia per se, it gets upgraded.

You can make a little over two tons of UAN from one ton of ammonia. We have -- of course you make urea from -- as you're making ammonia, you're using the CO2 to make urea. So we have a capacity for urea, let's see what is that capacity? I think you have to really focus on the ammonia capacity, because that is what drives the other products. You have the option of selling it as ammonia, or producing urea and UAN.

You do what is most profitable.

So how come -- you know, you guys are talking about Cherokee and Pryor are both maybe $8 million a month in operating income, how come Cherokee -- is Cherokee more profitable as a plant, because it has less capacity but you guys are saying it's going to earn as much or more than Pryor?

You're going to have to repeat. For some reason, that did not come through.

So you talked about Cherokee doing $8 million to $9 million a month and Pryor doing $8 million a month, but Pryor is actually bigger than Cherokee in terms of capacity, so I'm wondering why Cherokee seems to be more profitable?

We have approximately -- I mean, there is a little more ammonia capacity at Pryor than there is at Cherokee, but they are both somewhat comparable in terms of their overhead costs and their ammonia capacity.

Right, so if Pryor is 20% bigger, how come you guys in the number you talk have Cherokee actually potentially earning as much or more than Pryor?

Why are we projecting $8 million at both locations, is that what you are saying?

Yes, exactly.

You have the ability at Cherokee to produce other products while your ammonia is down, in terms of -- we have been purchasing ammonia and producing other products, so there are a lot of different variables in there, but it just happens to be approximately the same.

Okay. Then if I look at -- just putting Pryor aside for a second, I'm looking at El Dorado and I look at Cherokee, and the numbers you guys put, and it sounds like on the low end those two facilities together can be doing $9 million a month in operating income, which would be $27 million a quarter. When I look back for the last couple of years, it doesn't look to me like you guys have done any quarters where, you take Pryor out, you have actually done any quarters where you did $27 million excluding Pryor. I'm wondering, if you agree with that, is there something that is changing going forward?

A lot of it depends on the economics month-to-month, and you have to keep in mind also that a lot of the numbers that we are talking about is, as I mentioned in the presentation, part of this $8 million is unabsorbed fixed costs that continues while you're not producing product. So that is basically just cost that you are paying every month to stand there and keep your workforce together and depreciate the property.

So it is not necessarily indicative of what you're going to earn, but it increases your loss of both, just your lost margins. You're planning to absorb the fixed cost, you are standing there expensing that off month after month when you are not producing ammonia.

Another way saying what he said is that the -- what is costing us a month not to operate a plant is not the same as the profits that you're going to make when the plant is operating. What we have given you are the costs that it is costing us when the plants are not operating.

That is correct.

So wouldn't the profits be even higher? Now there's $8 million --?

Not necessarily.

We have financial statements out there of our profitability in periods where we are producing and where we are not producing. What we are telling you is that in the periods that these ammonia [prices] were down, we continue to expense off a fixed cost, and we were unable to generate the sales that we would have otherwise generated in those particular markets in those particular months. So we aren't asking you to attribute -- to try to recalculate what the earnings are going to be going forward but -- and as I mentioned in the presentation, the effect on income is disproportionate to the lower sales because you've got those fixed costs that are going on.

So you're not saying that, let's say going forward we have a quarter where all of those -- Pryor is running, Cherokee is running, El Dorado is running, can we expect a quarter where that is, call it $8 million, $8 million and $1 million, so $17 million, so that is a $51 million quarter? That is not what we should expect?

We are comparing it to what we did in 2012. We are talking about what we did in 2012 versus what we would have done if the plants had been running, based on our estimates.

And we are not forecasting what is going to happen in the future.

Okay. When you are talking about on the new ammonia plant, you said you are buying ammonia at the pipeline. Do you know where that is coming from? Is that Trinidad ammonia?

The pipeline is fungible. Some people put it on and some people take it off.

All right.

We have contracts with certain suppliers to put it on, and we take it off, but it is basically like a gas pipeline.

Right. Okay, thank you.

Dan Mannes, Avondale Partners.

One last follow-up question, and I think is his response -- this is sort of a follow-up to something Tony said. When asked about the financing on the prospective El Dorado ammonia expansion, you commented there wouldn't be equity but you said debt or something else. I guess I was wondering if you could sort of give us some color of what something else could be?

I was talking about public debt versus maybe private debt. So you may have some public -- like a strip of public debt and then maybe a Term A bank line in there in addition. So there will be some combination. As Barry indicated, we are working with quite a few people to try to structure our debt capital going forward on the optimum basis.

So it will be debt of some sort, just the flavor has not been decided yet?

That is right.

Got it. Thank you.

We have no further questions in queue at this time. I would like to turn the floor back over to management for any additional or closing remarks.

At this time, we will turn the meeting over to Carol Oden.

Thanks again for listening in today. The comments today contain certain forward-looking statements. All statements other than statements of historical facts are forward-looking statements. Statements that include the words expect, intend, plan, believe, project, anticipate, estimate, and similar statements of the future or forward-looking statement nature identify forward looking statements, including but not limited to all statements about or any references to the Architectural Billing Index or any McGraw Hill forecast, including those pertaining to commercial, institutional and residential building, increases in industry growth in McGraw Hill forecasts regarding the total green retrofit renovation market, and energy efficient market.

The forward-looking statements include but are not limited to the following statements. We believe that many of these initiatives will help us take our chemical business to a new level of reliability and overall profitability. We expect that construction of the new asset plan at the El Dorado facility will be completed in 2015. Industrial mining sales are expected to be a lower percentage until a new acid plant is rebuilt at El Dorado. The major heat exchanger is not expected to be delivered to the Cherokee plant site until April.

We expect Cherokee to resume production in May. We expect Pryor to resume production during March. Implementation of these programs will contribute to improved reliability and more consistent operations of these facilities in the future. We should expect to have less unplanned downtime and improvement in our overall production output as these programs take effect.

We anticipate improved results in resumption of the flow pattern for the Chemical business. We plan to continue to invest in this business to increase capacity, improve its reliability and reduce costs. Until the facilities are returned to normal at the various points in 2013, production, sales and operating income will continue to be lower than otherwise would be expected.

All statements regarding the estimate of the monthly adverse impact on our 2013 operating income. We anticipate that we will receive additional business interruption insurance proceeds in future quarters to recover a substantial portion of the El Dorado and Cherokee losses related to these incidents. It is likely that we will undertake a debt financing in 2013. We have committed capital expenditures for 2013 and 2014 of approximately $200 million. We are planning to construct an ammonia plant at the El Dorado facility for an estimated a cost of $250 million to $300 million. The outlook for AN this season is more or less the same as UAN. We expect stable selling prices at above -- about the current level.

We will continue to expand our Industrial business, and continue to enhance our agricultural distribution channel. We will work on several projects aimed at optimizing production rates at all of our plants that are currently online. If this future growth occurs, it should benefit our Residential Geothermal business, although we believe this is also influenced by the cost of energy. Increases in green construction should benefit the sale of our highly energy-efficient products. We will continue to develop and introduce new products in 2013 and future years. All items listed as a strategies and major initiatives and planned initiatives.

You should not rely on forward-looking statements because actual events or results may differ materially from those indicated by these forward-looking statements, as a result of a number of important factors. We incorporate the risks and uncertainties being discussed under the heading Special Note Regarding Forward-Looking Statements in our annual report, and Form 10-K for the fiscal year ended December 31, 2012. We undertake no duty to update the information contained in this conference call.

The term EBITDA as used in this presentation is net income plus interest expense, depreciation, amortization, income taxes and certain non-cash charges unless otherwise described. EBITDA is not a measurement of financial performance under GAAP, and should not be considered as an alternative to GAAP measurements. We will post on our website reconciliation to GAAP of any EBITDA numbers discussed during this conference call. Thank you, and that ends our conference call.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.