LSB Industries Inc (LXU) 2013 Q4 法說會逐字稿

Greeting and welcome to the LSB Industries Fourth Quarter 2013 conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Carol Oden. Thank you. Go ahead.

Good morning. Thank you and welcome to the LSB Industries Inc. 2013 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 27, 2014 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/or 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 Presentation section of Investors tab. Please note that the presentation starts on page 3 of the PowerPoint.

Now, I'll turn the call over to Mr. Jack Golsen.

Thank you Carol. Thank you all for joining our 2013 Fourth Quarter Year End Conference Call today.

I'd like to start today by providing our top and bottom-line financial results. LSB sales for the fourth quarter were $149 million, resulting in fully diluted earnings of $1.65 per share. LSB sales for the full year were $679 million, resulting in fully diluted earnings per share of $2.37.

Although fourth quarter profitability benefited from insurance recoveries, it was a challenging quarter for LSB. There are a number of reasons why the performance of the business did not meet our expectations, which we will describe on today's call. The greatest impact was that the Pryor plant was not operational during much of the fourth quarter.

On behalf of the Board and management team and as one of the Company's largest shareholders, I assure you that we share your frustration with the operational issues LSB has experienced at our Pryor facility. We expected to have the facility back in operation during November. While we had a few days of uptime in December, performance continued to be impacted by specific issues that developed. We believe we have a very valuable asset and the substantial upgrades that we have made and continue to make will reward shareholders over time.

We are investing in plant reliability enhancements and environmental and safety upgrades at all of our chemical facilities, specifically at Pryor. These changes include hiring new facility general manager, bringing in additional engineering support personnel dedicated to safety and reliability, engaging outside experts in several areas to help us assess our operations and reduce risk, the installation of extensive monitoring and control equipment to enhance plant reliability, re-manufacturing of certain key pieces of equipment and expanded spare parts inventory and the utilization of industry expert consultants to assist in upgrading the operation.

Remember that when we brought Pryor online at the end of 2010, we undertook a process to restart a plant that have been shut down for 10 years. We opportunistically acquired the plant understanding that if we decided to operate it that we would need to invest, update, recruit and train personnel to operate it and problem solve to get it going on a sustainable basis. We have been bringing the plant back to life. We have done that with a net cost of $67 million as of 12/31/13. We believe that a new plant will cost up to $1 billion to replicate the Pryor plant today, if we could secure permits necessary to operate it. While the stops and starts are frustrating for all of us, we are working diligently to minimize them and take the necessary action to build substantial shareholder value. We are a relatively small company compared to the giants in our industry, and so we have had to leverage our entrepreneurial skills to acquire and build all of our chemical operations.

Barry is going to take some time to take you through in detail how the Pryor plant is set up and outline the upgrades and investments we have made and the key pieces of equipment. We hope to give you a clear sense of the work we have been doing to bring the plant up to standard and of the potential we believe Pryor has for shareholder value creation.

With the exception of Pryor and the replacement project at El Dorado, all of our other chemical facilities are operational. At El Dorado, the replacement of the pre-May 2012 nitric acid capacity with a new acid plant and concentrator is well underway. We are also making good progress with the addition of the ammonia plant at El Dorado and that work is not impeding normal operation at the facility. At El Dorado, we expect to have the acid plants fully installed and operational by mid-2015 and the new ammonia plant operational by the first quarter of 2016. Keep in mind that with any new plant there will be a ramp-up time until we get to ideal capacity.

Those of you who are familiar with our industry know that these are large complex projects and we are dependent on contractors and equipment manufacturers to meet our schedules. When fully operational, these projects should provide El Dorado with expanded capacity, improved efficiency and product mix flexibility. We believe that this should eliminate our need to purchase ammonia off of the pipeline, which we also believe should result in a reduction of feedstock costs. In addition, we anticipate producing excess ammonia, which we'll be able to inject or sell into the pipeline. Once again, based on anticipated market conditions, we expect that these projects at El Dorado will contribute approximately $90 million to $100 million of incremental annual EBITDA when they are operational. As we have related in the past to you, LSB is making these investments in our chemical facilities to drive growth in value creation and better position LSB to capitalize on favorable market dynamics.

We also recently finalized the business interruption insurance claims for our Cherokee, Alabama plant. The funds have been received and have been recorded in the first quarter of 2014. Our Baytown, Texas plant is continuing to operate with exceptional efficiency. Baytown has earned the OSHA VPP Star of Excellence Award, the industry's highest award for excellence more than 10 times.

In summary, we are taking a number of proactive steps in our chemical business that should enable us to achieve greater reliability from all of our facilities. The changes in management, additional staffing and equipment upgrades that have already been implemented will underpin any near-term improvement. However, the larger projects, including the capital projects at El Dorado are being performed in sensitive areas on a large scale and therefore will take approximately two years before they are fully complete.

Also, the addition of certain electronic controls and other components require extensive engineering, installation, and training ahead of putting the new plants into operation. From a macro standpoint, agricultural market fundamentals are still historically strong, although not as strong as they have been in recent prior years.

Turning to our Climate Control Business, our Climate Control Business continues to be poised for profitable growth in line with projected gains in construction end markets. We recorded a modest improvement for the year, driven largely by demand in the commercial and institutional end markets that we serve. However, the residential market for our geothermal products has continued to be sluggish, as low natural gas prices have extended the payback of our geothermal HVA systems, which costs more than traditional heating and cooling systems.

It is important to note that we're not waiting for the construction end markets to ramp up. We have been hard at work achieving cost reductions through lean initiatives underway in all of our climate control operations, as well as developing new products and improving our existing units. Aggressive product development has allowed us to be a leader in the markets we serve and to be recognized as a key player in this industry.

Before I turn the call over to Tony to speak in more detail about our financial results, I want to address a significant change we have recently made in corporate governance. In line with best practices in governance, the Board of Directors unanimously voted to change the structure and reduce the size of the Board from 14 to 10. In connection with this decision, four of our Directors who are considered non-independent on The New York Stock Exchange rules and who had been Directors of the Company since inception resigned effective January 17. As of today, our Board has 10 Directors, eight of whom are independent.

As you can see, we have many initiatives underway at LSB. We continue to be focused on positioning the business for growth and profitability as our capital investments take hold and end markets improve. We also continue to execute a multi-year plan in an attempt to improve our EBITDA growth.

With that, I'll turn the call over to our CFO, Tony Shelby. Thank you.

Thanks, Jack. As Jack indicated, the fourth quarter was challenging for a number of reasons, the most obvious being the lack of production from the Pryor facility. The quarter was also challenging as far as comparability to a normalized result, due to a number of factors that require explanation. During this financial review, we will discuss those factors and contrast results for the quarter and the year to a more normal expectation, assuming ordinary plant operation without exceptional unplanned downtime. In that regard, please note that we will frequently discuss the effect of insurance recoveries, unplanned downtimes, their affect on our reported numbers. In order to reduce repetition during financial highlights, the phrase insurance recoveries recognized will be shortened to insurance and unplanned downtime will be referred to as downtime. Included in this financial review are separate tables that summarize the insurance claims and recoveries and the impact of downtime.

For a comparison a fourth quarter 2013 results to 2012, please turn to page four. Net sales were $149 million or 16% lower. Operating income was $70 million, including a $76 million of insurance compared to $18 million, including $7 million of insurance in the prior year. Sales and operating income were significantly lower than otherwise would have been expected, due to the downtime at the Pryor facility. In addition, margins in our Chemical Business segment were lower due primarily to market conditions in the nitrogen fertilizer sector. Sales and operating income in our Climate Control Business segment were approximately the same as in 2012.

Interest expense was $7.3 million, net of $1.8 million capitalized during the development and/or construction of capital projects, compared to only $437,000 in 2012. This increase reflects the higher level of debt incurred to finance the capital expansion underway. After provision for income taxes of approximately 40%, net income was $37 million or $1.58 per share compared to $12 million or $0.49 per share. Total cash, including non-current restricted cash and investments, was $435 million. Because we have these construction projects underway that are long-term construction projects, the cash designated for these projects is classified as non-current.

The full year 2013 results compared to 2012 are highlighted on page five. Net sales were $679 million or $80 million lower than 2012. Climate Control sales increased $19 million, offset by a decline in Chemical. Operating income was $105 million, including $95 million of insurance, compared to $96 million last year, including $7 million of insurance. Our Climate Control Business reported increased sales and operating income. A significant decline in consolidated sales and operating income was concentrated in our Chemical business and was attributable to the loss of ammonium production at the Cherokee Facility in the first half of 2013, the downtime at our Pryor facility throughout the year and most recently in the fourth quarter, as well as the effect of less robust market conditions in the nitrogen fertilizer sector. We'll address these other issues in the Chemical financial review later.

Interest expense was $14 million, net of $4 million capitalized during the development and/or construction of the capital projects. After provision for income taxes at an effective tax rate of approximately 39%, net income was $55 million or $2.33 per diluted share compared to $59 million or $2.49 shares per diluted share. EBITDA was $133 million versus $117 million in 2012. Cash increased $337 million, including cash provided by operations $54 million, property insurance recovery $66 million, net proceeds from the senior secured notes, net of payoff of secured term loan $351 million, and other items totaling $32 million, less capital expenditures of $157 million and the acquisition of natural gas interest $9 million.

Turning to page six for a review of Chemical results. For the fourth quarter of 2013, sales were $78 million or 26% lower than the fourth quarter of 2012. Operating income was $68 million, including $76 million of insurance, compared to $15 million, including $7 million of insurance in 2012. Excluding the insurance effect in both quarters, operating income was $16 million less than (technical difficulty). The $16 million -- excuse me, less in 2013. The $16 million difference is primarily due to the lack of ammonia production at the Pryor Facility, lower nitrogen fertilizer market prices and higher natural gas prices in 2013 compared to the year-ago period. Ammonia and UAN production were also below capacity in 2012 due to downtime in both periods. We will address the effect in both years in the summary on page nine.

As noted on the bottom of this slide, there's a reference to downtime at Cherokee. It should be noted that when the repairs were complete in the second quarter of 2013, Cherokee has operated efficiently at a normal rates of production for the remainder of the year.

For the calendar year 2013, sales were $381 million or 20% lower than 2012. Operating income was $88 million, including $95 million of insurance compared to $82 million, including $7 million of insurance. The significant decline in sales and operating income, excluding insurance, was primarily attributable to the loss of ammonia production during the first half of the year at our Cherokee facility and throughout the year at our Pryor facility, as well as less robust market conditions for the nitrogen products that we did produce. EBITDA was $111 million and capital expenditures were $151 million.

Now turning to page 7 for a review of Climate Control results. For the fourth quarter, Climate Control reported net sales of $68 million or approximately same as in the fourth quarter of 2012. Gross margin was 33.1% compared to 29.6% last year, due to improvement in raw material cost and production efficiencies. After SG&A cost increases to support growth, operating income and EBITDA were approximately the same in both the 2013 and 2012 fourth quarters. For the full year, Climate Control sales increased $19 million or 7%, primarily as a result of an 8% increase in industrial and commercial products with an increase in the number of units sold and higher unit pricing.

The gross profit in dollars and as a percent of sales both increased for the year as a result of higher sales volume and an improvement of all material costs, including copper, steel and aluminum. Year-over-year operating income and EBITDA both improved by approximately $4.6 million.

Turning to page 8 is a summary of the insurance recoveries recognized in the Chemical financial statements in 2012 and 2013 that we discussed throughout the review of these highlights.

Page 9 presents downtime, lost production, extra expenses, insurance recoveries related to the Chemical business together as a summary format. In all of our 2012 and 2013 quarterly filings, we discuss the specific downtime issues at the El Dorado, Cherokee and Pryor facilities and the effect on our financial results. In the summary on this page, we're using the mid range of the disclosed earnings impact of lost sales, unabsorbed fixed overhead costs and extra expenses, all related to the downtime at the individual facilities. Also shown are the insurance recoveries for the same period. The summary adds back the estimated impact of the downtime to reported operating income and subtracts the insurance to arrive at a non-GAAP normalized number, as though neither were included in either year.

The difference between 2012 and 2013 after those adjustments to normal production levels, to adjust it to normal production levels, is due to lower selling prices for agricultural ammonia, UAN and ammonium nitrate and to a lesser degree, higher natural gas costs.

On page 10 is a summary of our cash and capitalization. The significant increase in interest bearing debt will result in a negative interest spread during the construction period of 2014 and 2015, which will impact earnings. However, the expansion underway at our El Dorado facility will position our Chemical business to be more competitive after 2015 as we bring the ammonia production and expanded natural gas capacity online.

Moving to page 11, shown on this page is a summary of the committed and planned capital spending plan. The committed expenditures are the capital projects that have been approved by management and include projects already in progress, including those at the El Dorado facility broken out separately in the table on the lower half of the page. As you can see, we expect higher capital expenditures over the next two years and is therefore crucial for management to focus on execution of the plan.

We estimate the internal rate of return on the El Dorado expansion to be 15% to 17%, based upon our estimated product mix, a market price for ammonia of $500 per metric ton and $5 natural gas. We believe that these are a reasonable [self] assumptions, but they are variable and subject to future market conditions.

Before we conclude the financial review, a word or two about the first quarter 2014. Although we do not provide specific earnings guidance, I think there are a few issues affecting the first quarter in a typical situation that are somewhat obvious, but probably deserve a comment by management including. Due to the downtime at the Pryor facility for most of the fourth quarter and during most of the first quarter of 2014, a period when we would normally be building fertilizer inventory and entering into firm sales commitments for the spring season, Pryor will enter the season with very low inventory and no significant orders booked at current sales prices. Number two, we are incurring significant extra one-time expenses during the first quarter at Pryor, includes consulting and outside third-party contractors. In addition, as well, we have extra expenses we're incurring for professional services at the corporate level.

And thank you for your time. I will now turn it over to Barry to discuss operations and our key initiatives.

I think before I address the operational initiatives, Jack had another quick comment and he wanted the mike.

Yes, I did. When I opened my -- the conference, I was reading the wrong column, and I got the wrong numbers on our results for the quarter and for the year. They were $1.58 per share, where I said $1.65 and they were $2.33 per share, where I said $2.37. So I'd like to correct that in the record.

Okay. Thanks, Jack. I'm going to focus on our sales activity, product backlogs, [where we're putting it] , and the market drivers as we see them. And also during this presentation, I would like to review the status of our chemical operations, the major capital projects in our Chemical business and initiatives that we believe will increase LSB's value going forward.

To start, please turn to page 12 in the presentation, which shows our 2013 sales mix by the markets we serve. The overall mix shifted significantly towards the Climate Control business during the year, reflecting the lower sales of our chemical operations due to unplanned downtime in the first half of the year at our Cherokee facility and throughout the year at our Pryor facility. We did not believe that 2013 was typical and expected our future sales mix will become more heavily weighted toward our Chemical business, as the operations, increased uptime and our new investments come online.

Please turn to page 13. Total sales for our Chemical business in the fourth quarter and full year were $78 million and $381 million respectively, compared to $105 million and $478 million in the prior year. Sales of all three of our principal product categories were lower than 2012, primarily due to plant downtime, as a result -- and as a result comparison from period-to-period is really not meaningful.

Turning to page 14 for sales of our key ag products in the fourth quarter and full year. Again, comparisons between periods is not particularly meaningful due to downtime at our plants in 2013. In addition to lower volumes caused by downtime, market prices were lower, driven by high Chinese urea exports during their low tariff period, before firming later in the year. I will cover market pricing later.

Turning to our Industrial and Mining products on page 15, tons shipped of nitric acid were 7% higher compared to the 2012 fourth quarter, due to higher acid demand, however sales dollars were lower by 16%. This was primarily due to lower ammonia feedstock costs, which are passed through to our customers pursuant to cost plus pricing arrangements. Both sales dollars and tons shipped of industrial grade ammonium nitrate were lower than the fourth quarter 2012 levels, reflecting decreased demand for our mining products.

Turning to market trends on page 16, are some price trends for both the feedstock we use and the key ag products that we sell. The cost of natural gas continues to be relatively low on a historical basis, but has been exceptionally volatile, caused by the extreme winter weather. The Tennessee 500 pricing point, first of month index for January 2014 was $4.36, about $1 above January 2013. February 2014 was $1 over January at $5.57. The Tennessee 500 daily prices in February varied from $4.82 to $8.01. Gas prices affect production cost at our Cherokee, Alabama, and Pryor, Oklahoma facilities, which use natural gas as their primary feedstock. The conventional wisdom is that with the exception of extreme seasonal weather spikes, such as the one that we're currently experiencing, continuously increasing shale gas production will not allow natural gas prices to increase substantially for some time. The NYMEX gas price futures for the remainder of 2014 are in the mid $4 range.

The cost of the anhydrous ammonia, the feedstock we use at our El Dorado, Arkansas and Baytown, Texas facilities, has declined steadily over the past year. January 2013 and 2014 Tampa prices were $637 and $432 per metric ton respectively. Currently, ammonia is $460 per metric ton in Tampa, approximately $210 lower than a year ago. The decrease has lowered production costs at our facilities that use ammonia as a feedstock, although most of the products we produce at Baytown and most of the industrial mining products produced at El Dorado are sold on a cost-plus basis. So ammonia cost fluctuations do not impact our profitability on those sales. However, Ag grade AN products produced at El Dorado are sold at spot market prices. We believe current low ammonia prices have been affected by delayed ammonia applications this year, due to cold or frozen ground conditions, resulting in higher than usual ammonia inventories and therefore lower prices.

Turning to Ag products, prices for UAN fluctuated over the past year and are below a year ago. If you look at the chart on the lower left, you can see that the green markets price of UAN decreased from $320 per ton in January 2013 to $280 per ton in January 2014. Based on current market indicators, we believe that prices are firming and will be in the $320 to $340 per ton range during the upcoming planting season. We do not expect UAN prices to significantly increase during the 2014 season.

In January 2014, green market prices for ammonium nitrate were $340 per ton compared to $385 per ton 12 months earlier. Our outlook for AN this season is more or less the same as UAN, in other words, no significant increases. Summing up this page, over the past year, prices of natural gas have increased and the market prices of our fertilizer products have declined, resulting in reduced margins per ton in this part of our business.

Focusing on the outlook for the chemical markets we serve, page 17 lists several indicators for our agricultural products, most of which continue to be favorable. Planning levels are generally high; market prices for corn and wheat remain favorable to growers, so farmers have an incentive to plant. Grain stock to use ratios both worldwide and the US, although higher than the past few years, are at or below historic levels. We believe all of this is creating strong continuing demand for fertilizers. Finally, generally low natural gas prices have reduced the cost to manufacture many of our Ag products relative to past periods. 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 some of the markets we serve have suffered drought conditions, recent rain and snow have improved the moisture outlook, but may cause a delay in the start of the next planting season. Cold or frozen ground conditions could delay the application of ammonia, but could also benefit the sales of other nitrogen products, such as AN and UAN later in the season. Overall, we continue to be optimistic about our Ag business.

Please turn to page 18. 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 slight shift that occurred in our sales mix from 2012 to 2013. The shift from mining to industrial assets was primarily driven by plant downtime in the first half at Cherokee and lower customer demand.

A very significant part of our business continues to be industrial and mining. Page 19 contains some market indicators for this area of the business. Most of these indicators forecast growth for the next few years.

On page 20, we've listed our Chemical business' strategies and some of our key initiatives going forward. In addition to increased emphasis on operational excellence and plant reliability, we continue to emphasize safety and environmental responsibility. We continue to expand our industrial business by adding new customers and perhaps new products. We will also continue to improve our agricultural distribution channel. We will work on several projects aimed at optimizing production rates at all of our plants that are continually online.

On page 21, we discuss the status of each of our chemical facilities. El Dorado continues to run well with the exception of the capacity lost in May 2012. Cherokee is also operating well. Baytown operation is performing at optimum levels. I will come back to Pryor in a few minutes for a more detailed discussion.

Page 22 addresses our chemical business systems-wide reliability improvement program. In addition to the pre-existing elements listed at the top of the page, we've implemented and continue to implement significant changes in our Chemical business that we believe will result in improved plant safety, reliability and output.

At this point, I'd like to focus on the Pryor Facility. First I will familiarize you with the facility and it's various components. Then I'll discuss the measures we have taken to improve Pryor. Finally, I will update you on Pryor's current status.

Please go to page 23. This is a simplified process flow diagram of Pryor. At Pryor, we convert natural gas to ammonia and further upgrade ammonia to nitric acid and ammonium nitrate solution. We also use the ammonia we produce to make urea and CO2. Ultimately, the urea and ammonium nitrate solution are combined to produce urea ammonium nitrate, or UAN, which is used as a nitrogen fertilizer, and this is by the way Pryor's primary product. We also sell ammonia by itself, primarily as a fertilizer and CO2 as an end product, although the ammonia we sell can also be used for industrial uses as well.

On page 24, you can see an aerial view of the entire Pryor Facility. The various plants within the facility that produce the products I just listed are outlined. Note the number four ammonia plant at the top of the photo.

On page 25 is an inset of that ammonia plant, which is the most complex part of the facility. Particularly note the ammonia synthesis converter in purple and the compressors in dark green, will mention those later.

On page 26 and 27, we've listed individual sections of the four key plants at Pryor. The ammonia plant, the urea plant and the two acid plants. I am not going to review each and every section. But if you read this carefully, you'll see that we have performed extensive maintenance on, refurbished or replaced most sections of these plants.

When we restarted Pryor in 2010, it was an old facility that had been idled for about a decade. Pryor pre-dated the advent of current state-of-the-art controls. Restarting an old idle plant is never as easy as starting a new or completely refurbished plant. We made the decision to opportunistically acquire the plant and to update it in a manner that would get it going on a sustainable basis while also bringing the plant online. The magnitude of the project and time that would be required to get Pryor up to speed extended beyond our initial expectations. Although there are no guarantees, we believe that we are close to achieving reliability at Pryor.

We still have work to do on control systems and have a plan in place to install controls over the next -- new upgraded controls over the next two to three years. To do it right, there are certain engineering studies which must be completed that take considerable time before those new controls can be installed, plus lead times and the installation itself, which can be a lengthy process. I want to walk you through at a high level, the improvements that have been made to Pryor to upgrade it since we restarted the facility during the fourth quarter of 2010. For the most part, areas that we invested in are in good condition. We replaced the primary reformer in the ammonia plant. We updated the C1 air compressor. We replaced the liner of our urea reactor. We also replaced the old [Critcher] ammonia converter, which was a bottleneck and installed a more current and improved design converter. After installing the new converter, we ran the plant for the next five months at improved production rates.

The next major area was upgrading the second stage of the C4 compressor in October of 2013. Because of the vibration detection devices we installed, we quickly realized that the compressor was not working properly and we stopped the plant before any serious damage to people or equipment occurred. During the fourth quarter of 2013, from October to December, we had an industry expert rebuild the second stage of the C4 compressor and it was reinstalled. That is when we brought the facility back on line and briefly resumed ammonia production in late-December, early-January. However, in January, a power surge or a power outage rather in the industrial park where Pryor is located caused the plant to suddenly shut down, resulting in a surge of synthesis gas that damaged the third stage of the same C4 compressor.

As a result, we rebuilt the third stage using the same industry expert and are currently in the process of restarting and testing the plant. After the removal and the re-installation of a significant component, rebalancing of the entire three-stage compressor was required and this process takes additional time and patience. While the third stage was being repaired and the plant was down, we took this opportunity to install certain equipment to minimize the effect of surges in the future. As soon as it's available, we will install a complete anti-surge system to the C4 compressor. Timing will depend on vendor lead times.

At this time, Pryor is in a start-up mode. It is producing ammonia, however at lower than targeted rates. Pryor's management team is focused on safety and reliability and over the next several weeks it will be monitoring all facets of the facility's performance and will increase those production rates at the appropriate time.

I would now like to take a moment to review with you the status of the capital investments that we're making in El Dorado. Page 28 summarizes the key information related to the two major capital projects occurring at the site. The most ambitious and potentially impactful capital project we're working on is an ammonia plant that is under construction at the El Dorado facility. This should increase El Dorado's capacity and lower its production cost significantly, since the cost spread between purchased and manufactured ammonia is substantial. El Dorado currently purchases ammonia that it requires for feedstock from a pipeline at a much higher cost than the estimated cost of production with an ammonia plant. Our cost to produce ammonia at our Cherokee and Pryor plants, as well as our analysis of the El Dorado plant support these projected reduced costs. We expect that we will use most of the ammonia that we produce to satisfy our current customers and we'll also sell some via the pipeline that we're currently purchasing ammonia from.

In addition to the ammonia plant, we are adding a 65% Weatherly nitric acid plant and concentrator to replace the direct strong nitric acid plant that was destroyed in 2012 while adding additional capacity.

We expect that the total cost of these projects will be between $428 million and $498 million. We expect them to generate from $90 million to $100 million of incremental annual EBITDA. We also estimate the internal rate of return of these projects to be between 15% and 17%. Of course, these numbers are subject to market conditions at the time the plants are brought on line in 2015 and early-2016. We are using Leidos, which was formerly SAIC, as our primary engineering procurement and construction contractor for the projects and many other industry-recognized experts and suppliers. The parties that we're working with on this investment have many years of experience and outstanding reputations in the industry, as well as long histories with LSB. In fact, Leidos was part of the construction team, which led to the successful completion of the Baytown plant.

Page 29 shows a site plan of the El Dorado Facility and the location of the ammonia and nitric acid plants, plus new ammonia storage and facility control room. We commenced construction on both plants in November 2013 and at this stage have installed foundation pilings.

Page 30 shows an inset of a comparable sister plant for the ammonia plant with all the key components identified. I would like to talk to you about the major components of this plant and our approach to ensuring the reliability of this plant when we bring it up in its new home at EDC.

Page 31 lists all the key sections of the ammonia plant, which are color-coded to the previous page. Essentially, all of the major components will be new or re-manufactured to like-new condition and specifications. For example, the internal working components of both reformers will be completely new. We're only using the external shells, which were previously in service. Waste heat recovery and CO2 removal will be re-manufactured to like-new condition. All compressors will be re-manufactured to new specifications. The ammonia converter will be re-manufactured to like-new condition. Every part of the plant will be completely inspected and tested for mechanical integrity. All electricals, plant automation and controls will be new and state of the art. We expect that this will be an industry best practices plant.

Page 32 and 33 show the major phases and milestones for both the ammonia plant and nitric acid plant at EDC. At this time, we are on schedule and on budget. However, due to the magnitude of work to be completed in 2014, the next 12 months are critical to ensure that these projects hold to both time and budget. Although completion of projects of this magnitude is dependent on many suppliers and contractors, at this time, we do not know of anything that will prevent on-time completion. Again, please keep in mind that there is always a ramp-up of production at the start-up phase anytime a plant is brought online. We will keep you advised of the status of these projects on future calls.

Turning to our Climate Control business, please go to page 34, which summarizes sales by major product category. Total sales for the fourth quarter of 2013 were approximately $68 million, the same as the fourth quarter of the prior year. Sales of heat pumps and fans coils for the quarter were both up 16% to last year, however sales of other products were down considerably, primarily shipments of large custom air handlers and revenues from our engineering and construction services. Management expects that both of these sectors will grow in the future.

For the year, sales were $285 million, a 7% increase over the prior year, with sales of heat pumps up 13% and sales of our fan coils up 16%, although sales of our other products were down by 23%, primarily due to the decline in sales of (technical difficulty). This was generally driven by better product mix, lower raw material costs and improved overhead absorption related to the higher sales volume. From a product market perspective, commercial product sales increased 8% during 2013, while residential product sales increased by 3%. However, on page 35, you could also see that orders declined in both product markets by 2% and then in the aggregate, our backlog declined 28% from 2012 year-end. Throughout the third quarter of 2013, new orders were about the same as 2012.

Our Climate Control sales team believes that the Q4 2013 and January 2014 booking levels were impacted by the extreme weather conditions and are optimistic about the pipeline of future business. Through February 2014, our year-to-date bookings, including product orders and process, were on par with last year.

Moving on to the indicators related to commercial and institutional construction, on Page 36, we show that McGraw-Hill expects 2014 will increase 9% over 2013 in the major vertical markets we serve, and double-digit growth in 2015 and 2016. Their most recent thinking is that the key markets we serve are expected to grow by almost 50% through 2017 and 2018.

The most recent release of the Architectural Billings Index by the American Institute of Architects is summarized on page 37, coming in at 50.4 in January, indicating growth. The ABI is a leading economic indicator for non-residential construction spending expected in the next nine to 12 months. Kermit Baker, the AIA's Chief Economist commented " There is enough optimism in the marketplace that business conditions should return to steady growth as the year progresses."

Moving on to sales of geothermal heat pumps used in single-family residential applications, page 38 shows McGraw-Hill's forecast for single-family residential construction starts. These products accounted for approximately 17% of all climate control sales there during 2013. McGraw-Hill is currently forecasting that housing starts will grow by 85% from 2013 to 2016. If this occurs, our residential geothermal business should benefit. As pointed out previously, we continue to maintain our market share and leadership position with these geothermal heat pump products.

In summary, the general consensus of most economists and construction industry experts is that a recovery will be forthcoming, although the timing is by no means certain or easily determined. We believe that there will be a strengthening in all of the major sectors we serve, especially housing and education. Another positive trend is the increasing green construction that has occurred in the past few years and is expected to continue.

On page 39, we've provided a summary of the 2013 green construction outlook, which is also published by McGraw-Hill, and which we've shown you before. It forecasts that the green construction market will grow from approximately $85 billion in 2012 to between $204 billion and $248 billion in 2016. We believe that this should benefit the sales of our highly energy-efficient products.

Turning to page 40, we've listed our Climate Control business strategies and some key initiatives. One significant item of note is our focus on operational excellence and lean initiatives. This is an aggressive program to identify cost savings and process improvements in our products and throughout all functions of the organization. We initiated this program during early 2013 and although it will be a multi-year effort, we are optimistic that it will improve the operating metrics and profitability of our Climate Control business.

During 2013, we developed and released several new products, including the following, which is not a comprehensive list. A Tranquility series digital split system geothermal heat pumps. This is the first geothermal split system incorporating variable water flow for higher efficiency and quicker, easier installations, and iGATE communicating controls for control monitoring and diagnosing the system in plain English on a thermostat or service tool. New vertical stack water source heat pumps, which have the industry's highest efficiency for these type units. They also contain iGATE controls and are targeted to high-rise apartments or condominium in hospitality industries. We also introduced highly energy efficient packaged rooftop make- up air units in sizes from 6 to 40 tons. We also introduced packaged air cooled chillers, including expanded capacity offering up to 70 ton modules. Features it includes free cooling, economizers, pump packages, heat pump and simultaneous heating and cooling versions.

We also introduced ultra quiet air handlers designed for 4x4 cooling in office towers. These are designed to be used in both conventional overhead, as well as under-floor air distribution systems. And finally, we introduced a new vertical four series fan coil units with higher efficiencies and enhanced indoor air quality features. We will continue to develop and introduce new products in 2014 and future years.

Throughout this call, we tried to cover in detail the key value drivers that we're focused on in which we expect will increase LSB's value in the near and mid-term. They are recapped on Page 41. At the risk of being repetitious, at the end of an already lengthy call, I believe they are worth reviewing again. We are comprehensively upgrading our Chemical business' reliability systems, equipment and personnel, to improve safety, plant uptime and minimize unplanned interruptions. We have made significant investments to improve Pryor, and we believe we have made important progress. We have major capital projects underway at El Dorado that will improve its profitability substantially. We will support the growth of our Climate Control Business as the construction markets it serves grow over the coming years, and expect to achieve operating leverage as that occurs. And finally, we're striving to increase efficiency and reduce operating costs in our Climate Control Business through lean operational excellence initiatives.

Before opening this up for questions, I'd like to thank you for listening today and I'd like to request that each of you please limit yourself to three 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. Also we would like to limit questions to the subjects we've covered today relating to the Company's performance, future plans and market conditions et cetera. We do not intend to answer questions relating to the recent letter published by Engine Capital.

Operator, please poll for questions.

(Operator Instructions) Joe Mondillo, Sidoti.

Hi, good morning guys.

Good morning, Joe.

So my first question is following, a lot of information to digest, is my interpretation of Pryor overall, is that obviously you've done a lot. And lot has gone over the last six months to 18 months to 24 months. And it sounds like, with your prepared remarks and going through sort of the pictures and the maps that you've shown, it seems like you had every single part of that property, you seem like highlighted, whether it was repaired or if it was brand new equipment, it seems like the plant it's nearly brand new at this point almost. My question is your best guess, knowing that there is always a chance of a step back, especially considering last two to three years, what is your sort of best guess, when talking to especially talking to this new manager of the plant, where we are in terms of getting to consistent production?

First of all, I don't want to you misinterpret the -- I know we present a lot of information to you, we presented it quickly, and if we gave the impression that the entire plant was new that was not our intention. Significant parts of the plant have been replaced and upgraded and refurbished and there are some new components in the plant. So it is still a plant, that is an older plant, but with significant improvements and investments that we made over the past three years.

Moving on, our strategy has been to -- we believe we are close, as we said, to achieving reliability. At this time -- and in the past, we have been asked about specific rates, when do you expect to see -- achieve X rate or Y rate. At this time, we are not going to do that, we are not going to speculate. We've instructed our plant management to take it slow, to stress safety, stress reliability and that's what they are doing and over the next few weeks and maybe even months they will be monitoring very, very carefully, every aspect of the plant, along with helps from outside experts that we brought in and will bring it up in due course, as we believe to achieve that reliability. And at this time that's the best guidance I can give you on that. And really don't want to attempt to through out a specific time.

Okay. Fair enough. Just to clarify, where exactly we are, the plant is now being slowly brought up to speed at a very slow rate and they are going to continue to slowly do that over the next several months. Is that essentially the --

(multiple speakers) is operating at a reasonable rate now, but we're going to be -- when you're bringing up a plant, there could be some increase in rates, there could be some decrease in rates, while they monitor it, to make sure that everything is working according to the way it's supposed to work. And so that will occur in due course and we'll keep you apprised of that and when we believe that it's achieved sustained production, that's been operating long enough to feel confident, we will certainly advise our shareholders of that.

Okay. How long has that been sort of operating, has it been just a couple of weeks or --?

It's been brought up recently within the last week.

Okay. The other thing I want to ask was related to Pryor. Obviously, there is some one-time cost related to maintenance and I guess consultants. I was wondering if there is any way to quantify sort of the one-time cost, so that when you do reach a reliable, consistent production over a period of time, on a quarterly basis, what are the sort of one-time, if you will, type costs, costing you at this point in time?

Well, Joe, we don't want to drill down too far in specifics, but in the downtime numbers that I reviewed with you in the conference call, we include those actually, maintenance costs. Now the comments that we made about the first quarter of 2014, we have consultants there that are working with the management team and so those will be temporary. But for the most part, once we achieve this reliability and sustained production, most costs will go back to normal.

Okay. So I guess my follow-up to that would be the $23 million to $29 million if you add that back and subtract the insurance -- I'm sorry, if you only add back the insurance, you get to a negative $9 million number. So if Pryor is completely shut down and you add back the insurance, the overall chemical business is at negative $9 million. So does that imply the rest of your plants, El Dorado and Cherokee are running at a negative profitability?

No, that's not correct. If you look at the downtime that we had in 2013, we've had downtime in the Cherokee plant in the first half and throughout the year at Pryor with a lot of additional cost. But the Cherokee plant, as we indicated in prepared remarks, has run very efficient at normal levels and efficiently and is converting natural gas and capturing nice spreads.

So, the only difference between the normalized numbers that you see on that, I think it was at page 11, we gave you a calculation, normalized results, if you add back the downtime and -- I mean that pretty much is a normal calculation and the difference between 2013 and 2012 is the result of primarily the sales market prices of ammonia, UAN and ammonium nitrate in the agricultural sector.

I guess the only thing that I'm confused is on slide number nine. If you take that $18 million, take out the $26 million, so assuming Pryor is completely shut down, you get to a negative $9 million, which assumes, I'm interpreting that that's the rest of the plants, Cherokee, El Dorado. So that negative $9 million is related to Cherokee and El Dorado and such. And I guess maybe some corporate costs on top of that. That's where I'm just a little confused.

I think you have -- the only difference there is that you've got a very -- you're talking about the fourth quarter?

Yes, the fourth quarter.

You had a very late start to the ammonia application season, in fact it hasn't really started yet, so you had a fairly significant market conditions in the fourth quarter. But the other -- the Baytown plant and the Cherokee plants are operational and profitable. The El Dorado plant, as you know, is buying ammonia from the pipeline and converting it into nitrogen products. So there, because of the lower capacity that they're running at now before we bring on the new acid plant and the ammonia plant, they're running at pretty much a break-even right now and in the fourth quarter.

Okay. All right, good enough for now. I'll hop back in queue.

Dan Mannes, Avondale.

Thanks. First of all, good afternoon. Secondly, appreciate all the detailed insight on Pryor and El Dorado, as well as the disclosures on price and volume on the Ag stuff, so thanks for doing that. And then secondly, I wanted to follow up on Joe's question. I guess I want to phrase it a little differently. So when you look at the $24 million for Pryor in the fourth quarter, that isn't just the profit on the plant, that's also recovery of unabsorbed overhead. So just so I make sure I understand, when you're looking at EBITDA effectively being flat in the Chemical Business in the fourth quarter, part of that when you add back the insurance recoveries, I assume that's because Cherokee and El Dorado and Baytown are positive, while at the same time, Pryor has some amount of unabsorbed overhead, given that it basically didn't do anything in the quarter. Am I thinking about that correctly?

That's correct, Dan.

Okay. And so that $24 million is both recovery of the unabsorbed overhead as well as positive margin of some amount during the quarter?

Yes.

Okay. Got it. So as we look forward, we don't have a ton of operating history on Pryor in the last couple of years. The last period where it operated really well was the early part of 2011. Can you talk about maybe any changes in the operating cost structure? How much higher will cost be if at all going forward, both G&A and O&M, or maybe given some of the efficiencies maybe that won't be as big of an issue?

Well, we have increased the staff at Pryor significantly in the engineering and reliability areas. However, we believe that the improved reliability as achieved will more than overcome those to result in improved bottom line.

Okay. The next question also on Chemical, you probably saw one of your competitors signed a long-term agreement with Orica for supplying ammonium nitrate. It's certainly a lot greater than what I think you supplied of El Dorado. I'm wondering if that has any impact or is it all related to maybe what you're going to do at El Dorado going forward post the ammonia expansion?

Well, we currently -- Orica, we currently have a contract with them that runs through April of 2015. And one of the characteristics of that contract has historically been that it is an exclusive, in other words, we are limited to exclusively selling that product to them. Although we -- as you know, we used to sell directly into that market before we had that arrangement and we are approached by customers on a continual basis, wanting product, wanting to set up arrangements. But because of the limited capacity we've had in the past and that exclusive arrangement with Orica, we've had to decline to move forward with any of those. However, we expect -- we're not sure exactly what arrangement we will have with Orica after the end of the contract. But if it's not an exclusive arrangement that satisfies our volume requirements, we expect to go out and build it with those other customers that are available out there in the market, and that's the approach that we're taking to it.

So, you don't view this is as a competitive threat. You feel there's ample demand for either ammonium nitrate to that end market or whatever end market you decide to sell to?

Yes, and diversifying the existing products.

That's correct.

Okay. And then my last question on the Climate segment, this is a little bit kind of newer opportunity, but one of your large competitors on geothermal heat pumps are emerging the better is Bosch, signing arrangement with basically utility that would own the geothermal heat pumps and they're looking to expand utilization through that route. It's an exclusive agreement, but I imagine this is just the front end. I wonder if you've looked at things like that as a way to defray or reduce the installation cost to the end-users as a way to get broader utilization of this type of product or is it maybe too immature for you at this point to look at it?

We'll, always look at anything that we think will increase our markets. Now we actually tried something similar to this about two to three years ago. And it did not really have the positive impact that we expected. However, as I said, we're always open to looking for ways to increase our market, and as you know our products are the most efficient in the industry, and could easily be used in such an arrangement with either that company or if they have an exclusive, there are other companies, it's essentially a financing arrangement for the product and we're willing to explore that and will explore that.

But do you view that as a way to maybe break open the market, to create more ubiquity for this? I'm contrasting it perhaps with solar, which given the advent of solar leasing by people like Solar City, you're seeing much more mass adoption of the product. And I'm wondering if this might break the logjam a little bit for geothermal?

Well, I think it's possible, and as we -- but I hate to prognosticate on that, but as we get into it and explore it, I'll have more information. I hate to forecast or give guidance on what I think the market will do as a result of this, because I do know that in the past this was attempted and as I said, there wasn't the kind of traction that we expected at the time.

Got it. Thank you very much.

Roger Spitz, Bank of America.

Thanks; good afternoon.

Hello Roger.

Looking at page 9, the normalized earnings page, you've given us the fourth quarter of 2013 of the El Dorado, Cherokee and Pryor downtime. We have Q1. Is it possible to get the Q2 and Q3. Do you have that handy by any chance or can be provided at some point?

Roger, I would have to refer you back to our previous filings. I don't have a summary of that in front of us for this particular call, but we outline that in our -- in our quarterly financials. We've outlined in each one of the first three quarters, the insurance recoveries that have been recognized and the downtime effect on earnings.

Okay, the downtime -- I'll look to that --

But I'd be happy to supply that to you on a separate spreadsheet, since it's public knowledge.

Roger, I just will remind you, when you're looking at this and comparing that to the filings, Tony mentioned this before, for purposes of this page, this slide to simplify, we took the mid-point of the ranges, and you're going to see range is when you look back at those filings.

But I'd be happy to prepare something and show it to you, since it all public data.

Thank you for that. Looking at page 11, the capital spending, the additional planned column, is that -- would that all occur in 2015 and beyond or could some of that occur in 2014?

Both.

Can you just sort of give a range of what 2014 and 2015CapEx that we should just plug into our models?

Well, I think that we will not spend that money unless there's a payback on it.

They're subject to -- the additional planned is subject to review and approval specific AFEs.

Okay.

I think he is asking for a number.

I understand, but --

I don't think we have that breakout right in front of us right now.

Right. Let me come back to that or we can go with what you have on this page. I guess, lastly, am I correct that subject to post January 2014 $28 million insurance recovery for Cherokee, all the insurance proceeds that might come in the door have now come in the door. Is that right or is there something else?

The $28 million that is coming in, in the first quarter, I think, includes the -- it's in already -- it concludes the insurance recoveries.

Thank you very much.

Roger, I will tell you that I believe that upon approval, the majority of the additional plan will occur in 2014 and 2015.

Okay, thank you for that.

Bruce Zessar, Advisory Research.

Yes, thanks. I had a couple of questions. First on Pryor. I know you don't want to pin yourself bound with time when you think normalized production will happen again. But is it fair to say that you're confident that you'll reach normal production at Pryor sometime in 2014?

Yes.

And Bruce, I think you should also assume that when you bring a plant like this up, there is a normal flow of product through a plant that is in efficient level of production. And from that point forward, then you will bring it up to the higher level. So you could assume that while we are running the plant, when it's running, it's running at an efficient level.

I wanted to turn back to capital spending, I guess, tab 11 and I was also looking at page 35 of the 10-K, and there is a line item in there for El Dorado that wasn't there before, which is other support infrastructure for outside battery limits. And I'm just wondering why that $50 million to $60 million is getting added in now and wasn't there before?

Outside battery limits consists of tankage and pipeline connections, primarily, those that connect to the pipeline and to have sufficient storage capacity.

I think if you look at this schedule that was in the current 10-K that we filed yesterday, and the one that's in the schedule are consistent. We've expanded the disclosure in the current 10-K from what we've had in previous 10-Ks. And then more -- I think the definition has changed somewhat in terms of the way we show the planned and additional planned. But it's consistent with all the information that we've had in our Investor presentation during the road show that's on our website.

And let me just ask you, though, because I'm looking at your third quarter 10-Q and I'm comparing the disclosure in that, you can look at page 11 of the presentation, the page 35 of the 10-K. And the total amount of CapEx committed in planned capital expenditures in the third quarter 10-Q was $465 million to $520 million. And now the number is $511 million to $594 million, which is an increase of $46 million to $74 million, and most of it seems to fall into that new line item for support infrastructure at El Dorado. And I'm just asking why it is in the last three months that that's suddenly getting added to the bottom line on CapEx, because it wasn't there in your third quarter disclosure and it's significant, that's why I am asking?

I don't know that it's broken out -- I don't know that it's not included in the third quarter number. I'd have to check back with the way we calculate it, but I think it's more definitional in total. I think it's more of a total level that it is a OSBL, because the OSBL has been in our planned and approved spending since day one as far as the infrastructure at El Dorado.

Bruce, why don't we pull those after the call -- pull those out and look at them and look at the work papers just specifically and get back to you with a more specific answer after we have a chance to study them.

Yes, I would just tell you, just write this down. Look at page 40 of your third quarter 10-Q and then look at page 35 of the 10-K or page 11 of the presentation and there is a difference there, an increase of $46 million to $74 million, most of it is in that OSBL line that wasn't there before.

We'll reconcile for you and come back to you.

Okay. All right. Thanks. That's everything I have for now. Thanks.

Keith Maher, Singular Research.

Good morning. I had a question, just a quick follow-up on that insurance recovery in Q1. In addition to the $28 million would that $13.4 million in the insurance receivable will also be coming through GAAP earnings?

I think we collected that in 2013. It just did not flow through as income, it was charged against the receivable.

Okay, got it. Also, you'd mentioned that you'd invested $67 million in Pryor, was that kind of an all-in number over the years and is that just included in the physical infrastructure?

I'm sorry, I didn't understand the question.

You'd mentioned -- I think that to make the case that Pryor, if you build it from scratch it costs $1 billion, and yet you've only invested like, as you mentioned, $67 million and I'm just trying to understand what that $67 million included.

I can tell you, that's all are cost from the day we acquired it till 12/31.

Our net cost.

Our net cost.

That's net off income that's been generated by the operation to-date. So in other words, since we've been repairing it, as we went and encountered issues and made additional capital investments, so that was offset by income that was being generated at the operation from time to time. So that's -- today that's our net investment.

Okay, fair enough. And in terms of -- I mean, the IRR, the 15% to 17% you're mentioning for the El Dorado expansion, the one exception is missing and I don't know if you're going to be able to share it, would be just the timeframe for that. And I assume it's a pretty long timeframe, just because the assets have a long life.

That's correct.

If you can tell me how long?

We cannot -- you're talking about the terminal value calculation?

Yes.

He's asking about the calculation of the terminal value. I believe that's 20 years or 30 years. I'm going to take a look at it.

Okay, all right. And then a final question just on the Climate Control Business. I understand your backlog provides you a ton of visibility, but it looked like -- I mean the trend for 2013 just seemed to be declining orders and then quite a big backlog was following that. Should we read anything into that in terms of what was causing that?

Well, I think if you look at the orders quarter by quarter, through the third quarter we were approximately level with 2012 and where we saw the big fall-off in orders was in the fourth quarter. And a lot of that, we believe, was impacted by the winter weather conditions. And so that we don't believe that any one quarter necessarily indicates a trend. Okay?

Now what I also mentioned at the call was that when we look at our year-to-date new orders that we've actually booked, plus what we call in our business, float, which are orders that are being processed through that haven't officially hit the backlog yet and which varies up and down from time to time that it's on a par with last -- when you add those two things together, the order level is on a par with last year. And that we have a nice pipeline of business that our sales team is looking at and they feel good about that pipeline of business.

Okay, thanks. That was all I had.

Gregg Hillman, First Wilshire Securities.

Hey, Gregg.

David Deterding, Wells Fargo.

Good morning guys. Just a couple quick ones from me. It looks like in your last presentation that you had in Q3, you had roughly $40 million to be spent kind of on a go-forward basis in the climate control business. And now we're down to $5 million to $11 million. It looks like in the presentation here on page 11. Can you just kind of talk about what got cut out of there and is that $5 million to $11 million is that purely pretty much just a maintenance level of CapEx there?

On climate control, in a previous presentation, we had close to $40 million in planned spending and this one it's $5 million. He was asking what might've been cut out?

Yes, we did. But one of the things is we had a planned addition that was earlier plan that we have cut out because we believe that through our lean efforts that we'll be able to get more utilization out of our existing facilities. So that's been taken out from previous. And as far as the -- that's the major item. That's the major item.

Okay, perfect. And then it looks like going through the K that you had some spending on natural gas working interests in the fourth quarter. Can you just kind of comment on that and will we see anymore of that going forward in 2014 or 2015?

We had an opportunity to increase our working interest percentage in the Marcellus Shale, in those working interest that we are already in and we took advantage of it, because we think it is working out to be a very efficient hedge for us.

Okay. And then my final question is just with respect to the $90 million to $100 million in incremental EBITDA. Could you just kind of break down the mix as you guys think about that $90 million to $100 million versus Ag versus Mining versus Acid?

I think it's probably more Ag related than it is industrial and mining. But it's actually had benefited -- benefit that coming from the nitric acid capacity, as well as the ammonia, because we'll be able to upgrade and diversify our product mix and we'll have more product available to upgrade versus what we've had in the past. So it's the combination of stronger margins in the Ag business, because we're able to capture that spread between natural gas and the purchase price of ammonia that we've been having to bypass, because we're buying the ammonia.

On the other hand, a lot of the ammonia that we have excess will either be able to upgrade it or sell it into the pipeline to a couple of large customers. So we expect that that will be a significant part of it also and that will be there -- we'll classify that as industrial, but it could go to Ag.

When you think about that plant currently, if you were running at full capacity, would you say that's 50% Ag and how would you break out the rest?

The way it's operated in the past is about 40% Ag, 40% Mining and 20% Acids, but that product mix will change over time with the additional capacity that we have for ammonia and nitric acid.

Perfect. That's all from me guys. Thank you.

Thanks David.

Bruce Zessar, Advisory Research.

I just had a quick follow-up question. Looking at the assumptions on the payback, the IRR of 15% to 17% where you're assuming for the sake of modeling, ammonia at $500 per metric ton and $5 natural gas. Did you model it out assuming, say ammonia at $400 per metric ton with $5 natural gas and what kind of IRR that generated?

I really can't disclose a lot of different internal ranges or internal rate of return, but, Bruce, we model ammonia down to $400. We also model higher natural gas and in every case, we still had a reasonable internal rate of return. We did a number of models with a lot of different assumptions and the range I've given you is one that we feel very comfortable with that is conservative. There are models from both sides, but all the modeling we did taking ammonia down to $400 and gas up to $5 still gave us a reasonable return.

And we also did some models that actually have higher internal rates of returns. As Tony said, we kind of confine the range to what we felt was more a logical range.

There's one other very important factor. The prices that you're hearing are not the prices that are going in our market, because you have high transportation costs that have to be added to the price that you see in the market depending on where they are. So our ammonia sells for more here in the markets that we're in, because of the transportation. So a $460 -- a $450 price on ammonia is $5 here or maybe a little more, I'm not -- I haven't kept up with the tariff changes occurring lately.

The short answer to your question is yes, we did model at that level, Bruce.

All right, fair enough. One other question, turning to the balance sheet. Since you've issued the debt, you've had a relatively modest amount of net debt because a lot of the cash is still on the balance sheet, but have you modeled out looking out say 12 to 18 months when you've put out a lot of your money invested in these projects, but they haven't come on line? Where does your net debt position get to at that point in time?

I think that the models that I've looked at, and we run a continuous model on this, is that we continue to have an undrawn revolver and we have roughly $50 million cash on the balance sheet.

So that's the low point before you bring these projects on line and they start generating cash?

Within $50 million to $75 million. I mean there are a lot of variables, but we've run a number of models. In some cases, we have an undrawn revolver, sometimes we're drawing partially against the revolver.

Okay. That's everything I had. Thank you.

So I'd like to jump in here. This is Barry again. We've been at this an hour and a half now and the call has been very long, much longer than usual. I think at this point we're going to cut off questions. I know that some of you probably have more questions and we'll be glad to talk to you on an individual basis and we can arrange one on one calls afterwards. But we appreciate your participation today and we appreciate your continued interest in LSB. At this time, I'm going to turn the call over to Carol Oden who's going to give you some important Safe Harbor language.

Thank you, Barry. Information reported on this call speaks only as of today, February, 27, 2014 and therefore you are advised that time sensitive information may no longer be accurate at the time of any replay. The comments today and the information contained in this presentation materials contain certain forward-looking statements. All the 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 are forward-looking statement nature identify forward-looking statements, including but not limited to all statements about or in references to the architectural building index or any McGraw-Hill forecast, any references to natural gas costs, ammonia costs, fundamentals of the ag business and basic inorganic chemical trend.

The forward-looking statements include but are not limited to the following statements: the substantial upgrades we'll award reward shareholders over time, achieving price potential, expected timing to have asset plants and new ammonia plant fully installed and operating, elimination of our need to purchase ammonia off of the pipeline should result in a reduction of feedstock cost, production of excess ammonia, which we wont' be able to sell into the pipeline projects at -- projects at El Dorado will contribute approximately $90 million to $100 million of incremental annual EBITDA. We will continue to execute our three-year plan, plans to fund high capital expenditures over the next two years, our future sales mix, UAN prices, demand for our fertilizers achieving liability at Pryor, uses of most of the new ammonias that we produce, inventory and order level at Pryor, we expect that the total cost of these projects will be between $420 million and $490 million. We expect them to generate from $90 million to $100 million as incremental annual EBITDA. We also estimate the internal rate of return on these projects to be between 15% and 17%. Condition of the major components of the ammonia plant, growth in sales in the Climate Control Business, the lean initiatives will improve the operating metrics and profitability of our Climate Control Business. We will continue to develop and introduce new products in 2014 and future years.

You should not rely on the 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 Form 10-K for the fiscal year ended December 31, 2013. 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. The reconciliation of GAAP and any EBITDA numbers discussed during this conference call are included on the Q4 2013 Conference Call Presentation which is posted on our website. Thank you. This ends our conference call.

Thank you for your participation. Ladies and gentlemen, you may disconnect your lines at this time and have a wonderful day.