LSB Industries Inc (LXU) 2015 Q3 法說會逐字稿

Greetings and welcome to the LSB Industries third quarter 2015 conference call. At this time, all participants are in a listen-only mode. A 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. Kristy Carver, Treasurer. Thank you. You may begin.

Thank you, Donna. Please note that today's call will include forward-looking statements, and because these statements are based on the Company's current intent, expectations and projections, they are not guarantees of future performance and a variety of factors could cause actual results to differ materially.

As this call will include references to non-GAAP results, please reference this morning's press release in the investor section of LSBIndustries.com for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results.

At this time, I'd like to go ahead and turn the call over to Dan for opening remarks.

Thank you, Kristy, and good morning to everyone. Thank you for joining this morning's 2015 third-quarter conference call. I will first review the management changes during the quarter and then provide further information on operating status of Pryor as well as an update on the El Dorado construction progress.

I refer you to page 3 in our third-quarter materials. This has been a transitional and transformational period for the Company. The experienced, active Board of Directors has focused on El Dorado completion, securing construction financing, increasing reliability and implementing enhanced governance practices.

As we previously reported, the Company's management team has undergone significant changes during the quarter. I am now serving as the interim CEO, and Richard Sanders has stepped up to serve as Interim Executive Vice President of Chemical Manufacturing. Richard has a very strong history of running world-class nitrogen production facilities. He brings key operating discipline to our chemical facilities, construction and production activities.

Additionally, we have restructured both the El Dorado construction responsibilities and the chemical manufacturing operations. We are implementing further positive changes throughout the Company and driving accountability, a results-oriented focus, and a strong sense of urgency.

We have begun initiatives on sales channel improvements for both the chemical and climate control businesses, as well as reliability improvements for the chemical facilities. Pryor came back online in late September 2015 and has continued to operate very well since then. Cherokee and Baytown continue to have excellent performance.

During the quarter, we had several significant events that will position the Company to improve going forward. First, we have secured key strategic financing to complete the construction of our El Dorado expansion. While it is more expensive than we had anticipated, we hope to see improvements to our capital structure costs within 12 to 18 months as contributions from our El Dorado's new facilities generate significant cash flow.

We've also completed a long-term offtake agreement for the excess ammonia when El Dorado ammonia plant becomes operational in the second quarter of 2016. This should bring steady monthly cash flow and profitability.

In early September 2015, we initiated extensive engineering and cost reviews of the El Dorado construction project and were assisted by outside professional firms. As a result, we identified further cost increases to the project in the range of $108 million to $111 million. This range is related to the construction costs and does not include capitalized interest.

Additionally, we have included a general contingency estimate of approximately $46 million. This represents approximately 20% to 25% of the remaining work to be completed for unforeseen, unanticipated adverse weather, commissioning, and startup complexities on the project.

In order to accelerate the construction of the El Dorado facility, the Company originally decided to bring experienced, large bore pipe -- defined as pipe greater than 4 inches in diameter -- from the Donaldsonville, Louisiana location to El Dorado. The dismantling and relocation was completed in a manner that was not helpful for reassembly in El Dorado.

Additionally, as a result of an initial poor quality piping subcontractor, significant costs were incurred for limited productivity, and time was lost. As you likely know, in early July 2015, we replaced the poor performing piping subcontractor with two well qualified, high quality piping subcontractors.

Further, the Company's approach for the El Dorado expansion was to perform significant engineering work just in advance of construction activities in order to fast track construction efforts. This meant the initial and subsequent cost estimates were not engineered estimates with a high degree of precision. We have painfully learned that fact.

In early September 2015, we engaged Hatch Engineering to perform an independent, detailed cost estimate study on the ammonia piping work. Those estimates are reflected in the revised costs we have provided today and are consistent with amounts forecasted by the current piping contractors.

Additionally, Hatch Engineering has been engaged to serve as our representative and has performed further comprehensive reviews of cost estimates, construction schedules and timelines, as well as key project management activities.

We believe these revised project cost estimates, along with the potential contingency amount, will allow us to complete the project at or below $855 million. This additional cost overrun is extremely disappointing and we are driving the construction teams to complete the project without using any of the $46 million of contingency.

Since early September, both Richard Sanders and I make frequent visits to El Dorado to monitor and assess the engineering work, construction progress and cost management. We will continue to provide intensive oversight until the project is completed, including commissioning and startup.

Once completed, the El Dorado facility will be a state-of-the-art facility and will lead to significant profitability improvement since we will be producing ammonia as compared to purchasing ammonia for downstream nitric acid and ammonium nitrate production. We will also sell excess ammonia via the ammonia pipeline under a new three-year agreement with Koch Fertilizer.

Turning to the third-quarter results. Consolidated revenues decreased by approximately 8% due to the extended downtime at Pryor. Chemical revenues decreased by approximately 15%, while climate control revenues increased by approximately 2%. Excluding the Carrier business and the climate control revenue comparisons, the year-over-year revenue increase for climate control was 5%.

Referring to page 4 in our materials, we remain optimistic for nitrogen demand going into 2016, although the current demand is not as robust as we'd like to see. Growers have been slower to purchase product in advance this year due to a variety of reasons, such as weather, softening of import prices, lower natural gas prices and lower corn futures.

We do expect fill activity to pick up in the next few weeks. Industrial chemical sales remain steady while demand for low-density ammonium nitrate for explosives remain soft, given our cost disadvantage.

Turning to page 5 in our materials, as I noted earlier, climate control sales excluding the Carrier impact, increased 5% from a year ago quarter. We continue to see pricing pressure in the market but we do have approximately $72 million of backlog. We are improving our rep network and hope to gain additional market presence as we go into 2016. We continue to focus on opportunities to consolidate manufacturing operations and back office functions.

We are initiating a detailed review of our go-to-market activities in climate control with the goal of expanding our product reach. We expect to see improvement in commercial and industrial new construction over the next few years. We believe the construction will continue to focus on higher energy efficient green products.

However, current low natural gas prices are having an impact on residential geothermal products. We're also keeping an eye on the residential efficiency property credit, set to expire in 2016.

At this time, I'd like to turn the call over to Mark Behrman to discuss our financial results and our recent financing activities.

Thanks, Dan. As Dan indicated, our second-quarter results were disappointing compared to last year and what we expected going into the quarter. Page 6 of the presentation provides a consolidated summary statement of operations for the third quarter of 2015 and the first nine months of 2015.

Total net sales were down for the quarter driven by lower chemical sales which contributed to the lower gross profit. And I will go into some detail in the next few slides. Overall SG&A increased $4.2 million in the third quarter versus the third quarter of 2014.

That increase was properly driven by higher corporate expenses of approximately $2.5 million, arising primarily from one-time severance cost for three senior executives; an increase in SG&A at our chemical business of approximately $1.2 million, primarily from higher training expenses related to the incremental staff hired to run the new ammonia plant at El Dorado; increased railcar lease expenses related to low-density ammonium nitrate sales; and an increase in salary and wages at El Dorado for the ammonium plant staff hired; an increase in SG&A at our climate control business of approximately $400,000 related to higher warranty costs for specific claims; and an increase in freight costs as a percentage of sales from a shift in product and customer mix, which was partially offset by lower personnel costs and advertising related expenses.

One thing I do want to point out that included in the third quarter of 2015 is a $39.7 million write-down of our working interest in the Marcellus Shale. This was caused by the continued reduction in natural gas prices and a push out of the timing of our drilling schedule causing slower well development and the movement of several wells from the producing category to the probable category, all causing a reduction in overall reserve value.

Adjusted operating loss, adjusted net loss, and adjusted EPS were all down for the quarter, versus Q3 2014, due to the decrease in sales, gross profit margins, and the increase in SG&A that I just discussed.

Page 7 provides a summary of the chemical business's operating results for the third quarter of 2015 compared to the third quarter of 2014. Sales and gross profit were both down for the quarter primarily as a result of the 45 days of unplanned downtime at Pryor's ammonia plant, which reduced production and sales of both ammonia and UAN; lower low-density ammonium nitrate production and sales versus the third quarter of 2014, where we were still under contract with Orica and they were required to pay for 60,000 tons per quarter, irrespective of the amount they actually took; an increased operating cost largely related to the maintenance and repairs incurred at Pryor; increased depreciation at El Dorado, and increased salary and wages; lower realized natural gas prices and slower well development from our working interest in the Marcellus Shale; and overall lower fertilizer pricing, which were partially offset by lower natural gas prices as feedstock at Cherokee and Pryor. And of course higher on-stream rates at Cherokee due to no scheduled turnaround in 2015. That, combined with the increase in the SG&A, discussed on the previous slide, contributed to the increased adjusted operating loss for the quarter.

From an operating standpoint, the Cherokee ammonia plant ran extremely well during the quarter with an on-stream rate of approximately 100% and record production for the quarter. Pryor completed its scheduled turnaround successfully in the forecasted 25 days before the unplanned downtime occurred. Additionally, excluding plant turnarounds, the Cherokee ammonia plant's quarterly on-stream rate has been 94% or higher for six out of the last seven quarters.

Turning to page 8, we provide a summary of the climate control business's operating results for the third quarter of 2015 compared to the third quarter 2014. Sales increased approximately 2% driven by higher sales of our hydronic fan coil, custom air handler, and construction services, partially offset by a reduction in sales of modular chillers and residential heat pumps.

Gross profit and gross profit as a percent of sales decreased as a result of an unfavorable product mix of our commercial versus residential heat pump sales, which were more weighted towards commercial products in the third quarter of 2015 versus the third quarter of 2014. Commercial heat pump sales generally carry a lower gross profit margin versus residential heat pump sales.

Additionally, we had an increase in sales of other products, primarily custom air handlers, and those products tend to carry lower gross profit margins versus heat pumps and fan coils. As I discussed previously, SG&A increased approximately $400,000 and combined with lower gross profit that reduced operating income and EBITDA for the quarter.

Page 9 outlines our capital structure as of September 30, 2015. Total cash and investments at the end of the quarter were approximately $39 million, of which $3 million is reserved for the operations of the Marcellus Shale working interest, while total debt was approximately $496 million, including $13.3 million drawn on our ABL facility, and $15 million from the financing of the ammonia storage tank at El Dorado, which we closed in the third quarter of 2015.

We are currently in discussions with a certain lender for the financing of the co-gen facility being constructed as part of the El Dorado expansion project, and hope to close on that loan in the Q4 of 2015. As of September 30, we had approximately $57.6 million of availability on our ABL facility and that decreased to approximately $54.2 million at the end of October.

Moving to page 10, we outline our free cash flow. The take away here is that until we complete the expansion at EDC we will have negative free cash flow. That should change significantly when the expansion at EDC is completed and the ammonia plant is in operation in early Q2 2016. Since we are at the tail end of the construction phase of our project, spending on the expansion project is at its highest levels.

Page 11 outlines our expected capital spending for the remainder of 2015. As Dan outlined earlier, the overall cost of the expansion project at El Dorado has increased of a total between $831 million and $855 million, and he will go into much greater detail later in the presentation.

Given our current project schedule that Dan will also discuss shortly, that means that the heavy CapEx spending should occur over the next four months. For the remainder of 2015, we expect CapEx to be between $210 million and $235 million, with $70 million to $75 million of the remaining planned capital additions, all related to the El Dorado expansion project, to be spent in the early part of 2016.

As of September 30, our remaining spend to complete the expansion at El Dorado was between $267 million and $291 million. If you assume that an average monthly spend for Q3 was approximately $47 million and use that for October, that would leave our remaining spend as of November 1 to the project completion at between $220 million and $244 million, including the $46 million of contingency that Dan alluded to earlier.

So, how will we finance that? If we turn to page 12 we will go into some detail. This morning we announced in our earnings release that we executed a commitment for a strategic investment of $260 million from Security Benefit and its affiliates. This investment will provide us with the necessary capital to complete the El Dorado facility expansion.

Page 12 outlines the major terms of the financing. We will issue $50 million in senior secured notes and $210 million in non-convertible preferred stock. Additionally, Security Benefit will receive the equivalent of 19.99% of the outstanding common stock before the closing of this transaction, voting rights equal to the same 19.99% of the outstanding common stock before the closing of this transaction, and the right to appoint three nominees to the Company's Board as replacements for three existing independent directors.

We expect closing to occur on the $50 million of senior secured notes next week and the closing on the $210 million of preferred stock on or about November 20, but no later than the end of this year. We are happy to have found a partner who sees the value of the strategic plan that our Board and management team are executing.

Now, I will turn it back to Dan to discuss the status of our chemical operations and the status of the El Dorado expansion project.

Thanks, Mark. I'm referring you to the chemical facilities operational status on page 13. In El Dorado, the new nitric acid concentrator is completed and began initial production in June 2015. The new nitric acid plant is starting initial production next week and will ramp up to full rates in the near term.

The ammonia plant construction is progressing well for mechanical completion at the end of January 2016. And ammonia production is planned to commence early in the second quarter of 2016.

At Pryor, the ammonia plant is running at full rates of approximately 700 tons per day. Cherokee's ammonia production is running at approximately 515 tons per day. These levels of production are historical highs. Baytown continues to run at planned rates with excellent safety results.

Turning to the El Dorado construction timeline on page 14, we have included a construction timeline on the ammonia plant, which indicates that we plan to be mechanically complete at the end of January 2016. We plan on producing ammonia in the second quarter of 2016. Page 15 shows aerial shots of the facility.

Turning to page 16, the El Dorado expansion capital spending. As I noted earlier, the project engineering work was performed just in advance of the construction teams, and the ability to accurately estimate and manage cost was limited.

We believe we have resolved both of those issues with the assistance of Hatch Engineering, Performance Contractors, and ParFab Contractors. The additional cost increases, without the onerous contingency amount of $46 million, total approximately $111 million.

To summarize, categories of cost increases consist of the following. Piping and mechanical labor and materials, $70 million. Engineering and project management, $14 million. Scaffolding and crane rentals, $11 million. Electrical installation, $5 million. And additional equipment, weather delays and other miscellaneous costs, $11 million, which aggregate to the $111 million.

We are working aggressively to reduce these costs and bring the project to completion with limited or no use of the contingency amounts. We believe the completion of this project will provide significant value creation for shareholders.

Referring to page 17, remaining El Dorado project costs. This page only includes construction costs and does not include the general contingency of $46 million or capitalized interest. Costs incurred to-date aggregate to $531 million.

From October 2015 through project completion in the second quarter of 2016, we expect to spend between $201 million and $224 million. The majority of the work to be completed consists of labor and materials associated with piping and mechanical activities.

Page 18 provides a volume outlook for the fourth quarter of 2015 for our chemical business. Page 19 shows key aspects that we are focused on to create value for our shareholders. We believe with strong Board support and focused management we can accomplish meaningful change in the remainder of 2015 and beyond.

That concludes our prepared comments, and now I'd like to open it up for questions and answers. Donna?

Thank you. The floor is now open for questions. (Operator instructions). Roger Spitz; BofA Merrill Lynch.

Thank you. Good morning. Regarding the 12% $50 million secured notes of 19, will they be pari passu with the first lien, the 7.75 first liens of 19, meaning will they be secured by exactly the same collateral?

Yes, they will.

Will there be any differences in the incurrence covenants from those 7.75 or will there be any maintenance covenants in those notes?

No, none at all. They will be the same.

Okay. Same. Presumably, you incurred that under the $50 million -- these bonds under the basket of incurred liens, under the $50 million general debt incurrence basket, so I am assuming that -- if that is true, I'm assuming that basket is done. Does that mean the only other basket that didn't incur any liens at all would be the, say, $60 million liens related to the capital leases, though that would not be on any collateral?

Yes.

Perfect. In the past you talked about the $21 million related to the El Dorado co-gen facility. Has that been separately financed yet or is that included in what you're talking about today?

No, Roger, as I mentioned earlier, we have a commitment from a lender so we do expect to close that this quarter.

Okay. Would that be under that capital lease carve out?

Yes.

Lastly for me, the preferred stock, the 14% cumulative preferred stock, can that be paid in cash or not be paid in cash at the Board's sole discretion? And if not paid in cash, would they -- it's cumulative -- would they be paid at some point in the future if they would be paid at that level, or would they pick up?

The Board has an option to pay in cash or in-kind. They'll elect that every six months. If for some reason the Board elects to not pay anything, then they would just be cumulative and they would be --.

Compounding if --.

It would be picking. It would be picking.

Effectively yes.

Okay. I'm sorry, one last one. Just so I've got it straight, the Q4 2015 CapEx and 2016 CapEx?

Yes, if we go back to page 11 in the presentation, the Q4, as I said, should be $210 million to $235 million, in total.

In Q4?

Yes. Then there's another $70 million to $75 million of EDC project costs that will come in the first half of 2016, mostly in the first quarter.

First quarter. What would be the total 2016 CapEx expectation guidance?

We haven't come out with that yet.

Thank you very much.

David Deterding; Wells Fargo Securities.

Just on Eldorado, I mean, you were talking about Pryor and Cherokee running at record rates. I think last quarter you told us that you'd expect EBITDA negative until you guys got the new ammonia plant up and running at El Dorado. Is that still your expectation?

Yes.

Yes.

Okay, and then the last one I had is in the press release you said we are still pursuing previously disclosed strategic alternatives. Does that mean that you guys are still, once you get this thing up and running, strategic alternatives, meaning potentially splitting or selling these -- one of these businesses?

Well, I think you said it correctly, our primary focus is to get it up and running, so that is our number one, number two and three objective is the same. I think the Board, once that's done, the Board will continue to look at value creation opportunities for shareholders and will consider all types of different options.

Great. Thank you guys.

Dan Mannes; Avondale Partners.

Thanks. Good morning, guys. I guess this is mostly for Dan. I was hoping maybe to go back a little bit more over the timeline as it relates to the cost increases. I guess my question to you, you highlighted some of the challenges in terms of the engineering plan, but that wasn't new. That's not something you guys learned about now, that's been the case since this project originally embarked.

I guess maybe I had thought that you guys had already hired Hatch at the time when you put out the Q2 cost increase. I wonder if you can go back through the schedule and help me out on those two topics because, again, I think myself and obviously everyone else is a little surprised by another increase here.

Sure, I mean, we had hired Hatch earlier to -- they were originally hired to help with commissioning activities. Part of their scope was expanded in July to include some other project management activities. But when I came on the first of September, I engaged them specifically to do detailed cost studies and activities surrounding the overall project cost. They did do very detailed cost studies, P&ID looks, all the cost estimates. And then they went through and scrubbed all the other areas of all contractors and timelines, project management, things like that. When I came on board we engaged them to do a very detailed piece of work. Prior to that it wasn't that detailed.

So then how did the July cost -- I mean, where was the estimating coming for that? Because, again, I'll have to go back through the exact script, but it was certainly indicated there were a lot of third-party resources that were engaged in order to make that estimation. I guess I'm trying to understand why these consultants are better than those consultants, or -- it's a little bit troubling from the outside.

Keep in mind, I think around the first of July, we had terminated one of the piping contractors that was not performing. And in the first of July we brought on two new piping contractors, Performance and ParFab. At that point in time, the detailed engineering wasn't done and they were making, I would say, their best estimates at that time based on the information they had. We had not engaged Hatch to do that detailed cost study.

Those cost estimates at that time were based upon Leidos's information as a general contractor. And with the new guys, ParFab and Performance just coming on site, been on-site less than a month, and probably didn't have as detailed information as they could have. We subsequently in September launched on that to get very detailed estimates to go down to the individual pipe runs, estimate each individual pipe run. So a much more detailed and thorough cost review was done in very early September.

Okay. Maybe we'll take it off-line because I feel like we're missing a step. I guess the other thing I'll ask, since you guys have been on the Board for over a year, was there a recognition of maybe the challenges with the engineering plan? Which it sounds like in hindsight was pretty obviously wasn't going to work, but was that something you guys were aware of earlier? I guess I'm wondering why it was not addressed until more recently.

I mean, I think we were aware of it, certainly when we had the initial $50 million cost increase, the Board was aware of it. We were certainly aware of the July increase and the effort that went around that. I think the level of detail that we recognized was not there in the August estimate. The Board was not comfortable with that and, clearly, as a result we made changes to the management, the senior management, and I immediately launched on detailed cost estimate work. That's the sequence of events and that's what occurred.

Okay. Following up real quickly on El Dorado and the current operations, I think in your press release you say it was about a $15 million drag on the quarter. Can you break that out? How much of that, if at all, relates to training expenses and things like that for the expansion versus the under absorption, given the low production levels currently?

Yes, I would say about $500,000 is training and then there's probably another $500,000 related to the staff that we brought on related to the ammonia plant. Then we had probably another $500,000 to $600,000 of additional railcar lease expense, as I talked about last quarter, and that's just going to carry through every quarter.

Then we had probably lower high-density ammonium nitrate -- sales and selling prices was probably another $800,000 with about $4.5 million of the loss related to lower low-density ammonium nitrate tons that we sold versus last year when we had the Orica contract.

The $15 million is year-on-year, or is that the absolute loss of the facility?

No, I'm talking year-over-year.

I guess I'm just trying to find out how much of a get back we have just by having even breakeven production where the ammonium nitrate actually covers the cost of the ammonium nitrate plant and you're basically able to get the ammonia margin. I guess I'm wondering what the get back is versus where we are right now. Because, I mean, you've talked about the $80 million to $90 million on El Dorado, but that doesn't count just the recovery of the current losses, and I want to be sure we understand that point as well.

Yes, I would say, you are right, we talked about $90 million which was really a comparison of 2014 when we had Orica, versus 2017. If you look at 2015 versus 2017 that $90 million probably goes to about $130 million. We end up at the same place but we're starting from a bit deeper in the hole.

Got it, that's helpful. Then, lastly, you mentioned on the climate side some of the pricing pressures. On the other side you should be getting some tailwinds from -- on the raw side. I mean, we are seeing lower steel, lower copper, all kinds of lower raws. Is that maybe contributing to the pricing side and are you able to maintain margin, or is there something else going on we should be thinking about?

No, I think it's just a very competitive market. Yes, we are getting benefits of raw material decreases, but I think it's a very competitive market out there and all manufacturers are looking for the additional effort. I think the weakness in geothermal sales for homeowners, it has maybe a small result of that, but it's just competition.

What's the pacing as it relates to margin enhancement? And that will be my final question. Because you guys laid out a longer-term plan to get to 15% EBITDA margins at climate. We saw some sequential improvement, but can you maybe walk me through any steps that have been taken or where we are in that process?

Sure, there's several. We're intensifying our OpEx, what we call our OpEx plan, and hitting that harder. In addition to that we are bringing in some folks, some outside help to look at our sales channel and our go-to-market process.

I think we're looking both on the manufacturing side and on the sales and distribution side of how we can enhance those margins and what we can do to, A, add more reps and, B, look at our go-to-market activities and see what changes may or may not be needed there.

Okay, thank you.

Joe Mondillo; Sidoti & Company.

Good morning, guys. Dan, you've been on the Board for over a year now. You've been in the CEO spot for a few months. Can you give us a sense of changes going on in upper-level management and how we can be a little more confident on this story going forward, just considering the numerous missteps over the last couple of years?

I mean, look, I think there's been a significant change at the Board level initiated last year with Bill Murdy and myself and Richard Sanders coming on the Board. Both Richard and I have significant nitrogen experience, him from the operational side, me more from the financial and business side.

Then Bill Murdy came on with extensive experience in the HVAC business. Then this past year there were five new members who came on the Board, all with significant experience. Two of those from the nitrogen and fertilizer space, and a couple of others from -- one other from the chemical space and then two other highly qualified directors.

I mean, I think when you see the quality of the new directors that have been added over the last year and change, you've got a significantly enhanced Board and a very, very active and thoughtful Board. In addition to that, we've changed quite a few different governance practices. We tightened those up, and you have what I call an energetic, highly involved and very helpful Board.

I think you'll continue to see that as you, as Mark pointed out in our release today, Security Benefit is going to get three Board seats, so they will have high quality folks on the Board as well. So we are looking forward to them joining this Board.

From a Board perspective, I think you've got good things in place. From transitioning the CEO position and other senior executive positions, I think the Board took a look at where we thought the business needed to go, what we need to do to drive accountability, to drive performance improvements, and to drive a sense of urgency.

I've been tasked with that along with Richard Sanders and Mark to drive all of those activities. I think here in very short order, while the cost increases are very, very disappointing, I think we've put process in place that we probably should have had in place earlier, and it wasn't as robust as we would have expected.

We've tackled that, we're tackling reliability issues head on, we're tackling go-to-market activities. We're looking at the financing. Mark has driven the financing process very, very well here in tight, tight circumstances, and we have a very good partner in Security Benefit. We've built a good relationship with them in a short period. They're long-term focused, they believe in the opportunity for value creation once the El Dorado plant is completed, and they like the strengthened management team and the Board team that they saw. They like our value creation story and we're looking forward to them as a valuable partner.

I think, summing it up, you have a very engaged Board, a highly energetic Board. You have, I call it a quicker step, a faster step in the management team, higher expectations from the Board placed on the management team, and that's something we intend to deliver. I think in a very short period of time we've delivered a heck of a lot to move this Company forward and position it for growth and for increased shareholder value.

Okay. What is the risk of closing on the deal with Security? Is that pretty much a done deal?

We have a full commitment letter, so it's just completion of doc. As Mark said, I believe, we expect the $50 million to be closed today and likely funded very early next week. Then on the preferred, we just have to get the definitive document. There's probably some HSR, hopefully get early termination of HSR, and that should fund very shortly after that, but no later than December 31. No, there are no contingencies out there other than HSR review that really could hold us up on it.

Joe, there were no due diligence outs or anything like that. It's a firm commitment. Just subject to final documentation.

Okay. I know Dan asked several questions, I know you gave some prepared commentary. Just a little unclear regarding the last four months, how this thing spun out of control, several different increases in estimates of the total value of this project.

I am not a construction guy, I am not an EPC analyst. Just trying to get a better idea of how hundreds of millions of dollars have gotten lost in the estimation. Who is at fault here? I know you had some problems with the subcontractor. Is it largely that? Is it more so prior management? Any color on this in addition would be helpful, because obviously it's very frustrating.

Sure. No, and I understand your frustration. Let me step back a minute and talk about when we originally put these project cost estimates together, that was not an engineered estimate. What I mean by that is the engineering work, you have a very, very high level of engineering work. The detailed engineering work was not there.

It was not a plus or minus 10% estimate. It was not. I think we probably didn't do as good a job as we should have or could have on that, and the costs should have been probably a plus or minus 50% estimate at that time with the level of engineering work that was done.

Now, let's take that piece and move to the next piece. We decided to bring the large bore piping up from Donaldsonville. That was dismantled, as I said in my prepared remarks, in a manner that did not allow efficient reinstallation at the new facility.

So what has occurred is a significant amount of additional labor, materials, scaffolding costs, manpower, candidly, to reassemble that pipe. That's something that we clearly did not anticipate in these cost estimates early on. We anticipated some of it in the August estimate, but the fact of the matter is, it's taken us significantly more time.

I think early on in the project there were a lot of weather delays, we talked about that earlier, and then, clearly, the contractor. I mean, just that point on the engineering, of not having an engineered estimate. If you look at the components of our, in our materials, when we talk about the ammonia plant, the nitric acid plant and concentrator, and then what we call the OSBL or outside battery limits work, and you look at that nitric acid plant construction concentrator, that was a fully engineered, detailed project that was built, that was completed and pretty well on budget.

We did have good success with that project that was engineered up front at a detailed level. All that was taken care of and the installation and construction went very well. I think it points to the fact that when you have high-quality engineering, thorough and complete engineering, it sure as heck reduces your construction risk profile, and we've painfully learned that.

What we've done since the two earlier cost estimates is, in late August, mid to late August, we began as a Board to get uncomfortable with where we were on this project. And, as I said, we made some management changes and then immediately initiated full, detailed cost reviews and cost studies to get our arms around this thing. And we have.

We've changed significant management, we've changed construction responsibility and reporting, we have a clear line of sight to it. We're down there frequently, every week, and we participate in all those management activities for that plant construction commissioning and startup.

In my view, we've done the things we need to do now. The news was unfortunate. We have our arms around it. And our focus is getting this plant completed and up and running. That is, as I said on the call, the number one, number two and number three focus is get that plant up and running.

Mark has been able to raise the funding to do that, and it is more expensive than we had hoped, but we have it, we're going to get the plant running. And it's going to be a world class plant and it's going to generate significant cash flow for the Company. Yes, we have cost overrun. We're going to work ourselves through that and get that up, and then once we do that I think you'll see significant value creation for shareholders.

Okay. Thank you for that. Then in terms of cash flow, regarding once you get the plant up and running and dealing with the balance sheet and everything, how do you tackle that off the bat? Are you planning on paying back the preferred stock immediately? Is that the plan in terms of cash flow and winding down the leverage on everything? Would that be where you start? Walk us through what your plan is on a cash flow basis over the next year or two on the balance sheet.

I think I will answer that two ways. Any excess cash flow that we have I think we'd look to try and de-lever. That would be the primary focus. As Dan alluded to in his prepared comments about improving the capital structure over the next 12 to 18 months, the reality is when the plant is up and running and producing in the way we think it can produce, our first call date on our senior notes is August of next year. And we also have the ability to call the preferred at any point in time at par plus accrued and unpaid dividends. I think it is very likely that when we get to the end of next year you'd see us refinance all the debt, assuming that the debt markets are acceptable and open to that.

Okay. That does it for me. Actually, one last question. The Koch agreement, is that a similar agreement that you have with the Pryor plant?

It's a different agreement. Obviously, we're not going to talk about the pricing but, no, it is a totally different agreement in the way the product is priced.

It's contracted by price then and not just volume?

Yes, there's a minimum volume in the contract and there's a negotiated pricing formula that, as Dan said, we are not going to get into the pricing, but it is for all excess ammonia that is produced at that plant.

Right, but just looking at the spot markets on ammonia, if we're looking at those spot prices next year, where are we going to be able to think about where your pricing falls in?

I mean, I'm going to give a general comment. I mean, typically Tampa is often referenced in price contracts. That's at least a starting point. There may be some pricing formula we have. I don't know, I just don't want to go into the detail of the pricing.

You should get competitive pricing, though, relative to the spot markets?

Yes, we will get market-based pricing.

Okay. Then just lastly, the El Dorado plant for the fourth quarter, should we expect those losses to decline in the fourth quarter relative to the third, just given seasonality of demand and -- or I know prices have come down but natural gas prices have come down also, so how do we think about the losses in the fourth quarter El Dorado relative to the third quarter?

I would tell you that I would think that they would be the same.

Okay.

Keep in mind, we aren't producing ammonia there in the fourth quarter so natural gas prices have no impact on --.

Right. That's right. Right. You're right. Okay. All right. Thanks.

Gregg Hillman; First Wilshire Securities.

Mark, when you were picking a financing partner, did you use an investment banker, and bid it out to look at multiple ones? Or how did you arrive at Security Pacific -- I mean, Security Benefit Corporation?

As you probably know, we've worked with CS on multiple occasions over the last two years, and so we did work with CS and there was a process that was run. We did have a number of people that were interested. I think we ran an efficient process to try and figure out what were the best terms for us. Ultimately, we decided that these were the most appropriate terms that management and the Board were comfortable with. And we were extremely comfortable, as Dan said, with Security Benefit as a partner.

Okay. Did they have the best -- I'm just wondering could you have gone all debt? Why did you have to bring in the equity piece? Was there somebody willing to go all debt with you?

If there was someone willing to do it, we would have done it.

Okay. So you feel this is the best deal that was on the table? There wasn't a better deal available to you at this time? You didn't just pick them because of relationship? Well, I guess -- on what basis did you choose Security?

Look, they had a combination of about three things. Number one, they came with a total financing package, which in our mind and the Board's mind was an important component. Then they put the two components together with us that we thought served as a good basis, either individually or in the aggregate, they were very competitive.

We did that. We went out and we looked at, as Mark said, Credit Suisse, went out and helped us look at multiple different sources. Number one, the total package was the best total package and that was something that we were looking for. And it, quite frankly, came late in the process but it was a good package. That was number one.

Number two, they believe in the opportunity and value creation for the Company and that was attractive to them, so they showed a strong interest in wanting to participate. Number three, we look at them as long-term focused partners. And during the process of their due diligence they visited every single location and had discussions with plant management and the like. We just felt like that that was a type of long-term financing partner that we wanted to have, and their rates were the most competitive when you look at it on a total package basis.

Okay. Also, Mark, in terms of just any other inequity dilution that's out there. You mentioned the warrants from Security, but what other warrants or management options are there at this point that would result in further dilution?

Well, there's nothing other out there in the form of warrants other than what we've disclosed this morning.

Okay.

There are management options out there that have been issued and are outstanding, and that's outlined in our public filings. There's nothing significant that has changed this quarter, so you'll be able to see that.

Okay. That's fine. Just from the top of your head, what are management options right now, what is the average exercise price?

They're in the 30s.

Okay. What's the number of them?

You can look at our public filings. They're out there available in the public filings on the most recent 10-Q. There haven't been any material [additions] since then.

I wouldn't know off the top of my head the exact number.

Okay, okay. That's fine. Thank you.

Thank you. At this time, I would like to turn the floor back over to management for any additional or closing comments.

Great. Thank you, Donna. First of all, thanks, everyone, for participating in this morning's conference call. I think we've outlined things and tried to provide as much clarity as we can. We're optimistic that completing the project. The construction schedule at El Dorado is progressing very, very well. We're pleased with the weekly progress they make. We measure it on a weekly basis at a detailed level in every area. We have a robust process around that.

I think the financing that we've secured is going to put us in a good position to complete that construction. As Mark and I both indicated, we look to improve our capital structure cost as soon as we possibly can and we will focus on that. Then again the Board is also focused on creating the best shareholder value for the shareholders, and that's something that we'll continue to do and something we're actually looking forward to delivering.

Once again, I appreciate your time, and have a good day.

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time and have a wonderful day.