Rentech to idle Wawa, curtail Atikokan and explore strategic alternatives
Rentech has announced that it is to idle Wawa, its troubled Canadian wood pellet plant, while it explores “strategic alternatives” for the facility and the company as a whole.
In November 2013, US-headed wood pellet and woodchip producer Rentech Inc., announced that it was building a 450 000 tonne per annum capacity wood pellet plant at a former oriented strand board (OSB) mill in Wawa, Ontario, Canada. The plant, which was scheduled to come online late 2014, has been dogged by design and equipment issues ever since. Issues that continue to persist and, according to Rentech in a statement February 21, would require “additional unbudgeted capital investment” to rectify.
According to the statement, the decision by the Board on February 16, to idle the Wawa facility results from “continued uncertainty around profitability on pellets produced at the facility, making additional investment in the facility uneconomic for Rentech at this time”.
The decision is undoubtedly compounded by Rentech having a 10-year “take-or-pay” off-take contract with UK power utility Drax for around 400 000 tonnes per annum, which its other Canadian plant, the 110 000 tonne per annum capacity Atikokan facility can only partially fulfil given that 45 000 tonnes is under a similar long-term contract with Ontario Power Generation (OPG).
According to Rentech, idling the Wawa plant and curtailing production at Atikokan to fulfil the OPG contract will allow it to “conserve liquidity” as it formally explores strategic alternatives for the plant, which includes ongoing discussions with third parties as well as exploring strategic alternatives for the company as a whole. As a result the company will stop pellet exports via Port of Quebec.
Focused on the US residential and light commercial markets, Rentech’s US pellet business, New England Wood Pellets (NEWP), has still managed to remain profitable during 2016 despite being “negatively impacted” by relatively warmer weather than in previous years, continued low-cost heating oil and propane, and changes in consumer buying patterns. However, Rentech expects NEWP to return to historical levels of profitability going forward.
Rentech also revealed that a client of its Fulghum Fibres business unit has indicated its intent to exercise its option to purchase two wood chipping mills that Fulghum is operating under a processing agreement. If exercised it would stymie cash flow further from the latter half of 2017 onwards although it would also result in a US$ 5.5 million one off payment. Fulghum is to continue its focus on efficiently operating its remaining 25 mills in the US and 5 mills in South America and explore opportunities to generate additional cash flow.
Expensive project experience
It appears to be a precarious situation that Rentech now finds itself in. Not only has Wawa drained resources in terms of additional capital investment, it is also costing in terms of revenue loss on pellets not produced along with the cost of sourcing third party pellets to fulfil contracted volumes and, presumably, a few contract default penalties. It also serves to highlight the difference in acquiring well functioning pellet plant operations, such as NEWP, and building a well functioning operation.