Rentech, Inc., a NYSE-listed international supplier of wood chips and nitrogen fertilizer, announced its acquisition of Georgia-based Fulghum Fibres, Inc. and the acquisition of two facilities to produce wood pellets in Ontario, along with contracts for the sale and transport of more than four million tonnes of wood pellets over ten years. The acquisition provides Rentech with a platform to launch into the growing and complementary global wood pellet industry. The acquisition also brings with it a joint venture with Graanul Invest, a large European producer of pellets, for the development and construction of pellet plants in the U.S. and Canada.
Take-or-pay contracts are in place with two utilities to supply a combined total of 445,000 tonnes of wood pellets annually over ten years. To supply the pellets, Rentech plans to convert two decommissioned OSB and particleboard manufacturing mills in Eastern Ontario into pellet mills that will employ a total of approximately 65 full-time employees. These two facilities are expected to generate $3 million of operating income and $15 million of EBITDA when fully operational, with combined total project cost estimated at $70 million. The two plants are expected to make Rentech the largest producer of industrial wood pellets utilizing fibre from Eastern Canada, a source of supply that is highly desired due to its location and wood quality.
Based in Augusta, Georgia, Fulghum Fibres has approximately 420 employees and processes approximately 15 million tonnes of wood and bark annually into wood chips and residual fuels at its 32 wood chipping mills, 26 of which are located in the U.S. and 6 of which are located in South America, where Fulghum Fibres provides chipping services and exports wood chips to customers which are primarily in Japan. Fulghum Fibres operates primarily under long-term contracts and services a portfolio of industry-leading customers, such as Georgia Pacific, International Paper and Weyerhaeuser.
Revenues are typically based on per-tonne processing fees with minimum volume requirements. Fulghum Fibres commands an estimated 70 per cent of the U.S. contract chipping business and approximately 6 per cent of the total U.S. chipping market that includes in-house chipping operations by large pulp and paper companies. In the U.S., the majority of Fulghum Fibres’ wood chip production is destined for products with the highest expected growth in the pulp and paper market, such as containerboard, boxboard and tissue.
Contracts to supply pellets
Two ten-year take-or-pay contracts are in place for the sale of industrial wood pellets totaling over four million tonnes of production over the life of the contracts.
• Drax Power Limited (Drax)
Drax has signed a ten-year off-take contract for the delivery of approximately 400,000 tonnes of pellets annually to be supplied by Rentech’s Wawa and Atikokan facilities (see below), with prices indexed for inflation, fuel and fibre supply costs. The contract establishes a strategic relationship with Drax, which plans to invest approximately US$1 billion through 2017 to transform the largest coal-fired power station in the U.K. into an electricity generator fuelled predominantly by sustainable biomass. With the conversion of three of six generating units from coal to biomass, Drax is expected to demand approximately seven million tonnes of pellets per year by 2017.
• Ontario Power Generation (OPG)
OPG, which is phasing out the use of coal to produce electricity at its power plants, has signed a ten-year off-take contract for the Atikokan project (see below) for the supply of 45,000 tonnes of pellets annually FOB plant gate. The OPG contract is the first long-term pellet supply agreement for a domestic utility in Canada. OPG has the option to expand the contract to 90,000 tonnes annually. Rentech will acquire the OPG contract as part of the acquisition of the Atikokan project.
Conversions of fibre mills to pellet production
• Wawa Facility
Rentech has exclusive rights to acquire, at a fixed price, a former oriented strand board processing mill from Weyerhaeuser in Wawa, Ontario, which Rentech expects to convert for production of approximately 360,000 tonnes of pellets annually. The full output of pellets from this facility will be sold under a long-term contract to Drax, with the first delivery under the contract scheduled for the fourth quarter of 2014. The facility is expected to consume approximately 710,000 tonnes of certified sustainably managed Crown fibre annually and is anticipated to employ approximately 40 full-time employees.
• Atikokan Facility
Rentech has entered into an agreement to acquire a former particle board processing mill from Atikokan Renewable Fuels in Atikokan, Ontario, located just 18 kilometres from the OPG power station. The mill is to be converted for production of approximately 125,000 tonnes of pellets annually to supply 45,000 tonnes annually under the OPG contract, with the balance to be sold under the Drax contract unless OPG exercises its option on the additional 45,000 tonnes. The first delivery of pellets under the OPG contract is scheduled for the first quarter of 2014. The facility is expected to consume approximately 250,000 tonnes of Crown fibre annually and is anticipated to employ approximately 25 full-time employees. Rentech has formed a partnership with Great North Bio Energy to continue to work with First Nations in the development and operation of the Atikokan project.
Contracts for transport and handling of pellets
Rentech has entered into a long-term contract with Quebec Stevedoring at the port of Quebec to provide stevedoring and warehousing services. This agreement is designed to support the term and volume commitments of the Drax contract as well as future pellet exports through the port of Quebec. Quebec Stevedoring will invest an estimated $20 million to build handling equipment and 75,000 tonnes of pellet storage exclusively for Rentech’s use at the port, with the same amount becoming a lease obligation of Rentech. Offering year-round terminal access, Port of Quebec is expected to become the largest bulk pellet terminal in Eastern Canada as a result of this contract. Rentech has also secured a long-term contract with CN to transport the wood pellets approximately 1,786 kilometres from the Wawa facility, and 2,414 kilometres from the Atikokan facility to the port of Quebec. Rentech expects to lease more than 200 covered hopper rail cars from third parties to transport wood pellets to the port.
Joint venture for development, construction and project investment
In connection with the acquisition of Fulghum Fibres, Rentech has entered directly into a joint venture (JV) agreement with Graanul Invest (Graanul), a European company which is one of the largest pellet producers in the world. Graanul has designed, built, and operates six pellet facilities in Europe, which produce 830,000 tonnes of pellets annually. The JV is an equal equity partnership between Rentech and Graanul to develop and build wood pellet facilities in the U.S. and Canada. Graanul will also provide marketing services for excess pellets produced by the JV, and allow the JV to acquire pellets from Graanul’s European plants in the event the JV needs to supplement pellet supplies.
Wood pellet industry: forecast for growth
According to independent industry reports, global demand for wood pellets is forecast to reach 50 million tonnes by 2020, which is nearly three times the current global demand. Wood pellets provide a clean energy source for power generation. Much of the global wood pellet production is consumed in Western Europe by large utilities to reduce reliance on coal, reduce carbon emissions and avoid regulatory penalties. Japan, Korea and China are expected to represent growth opportunities as a result of increasing demand for pellets to be used as fuel for reliable and diversified power generation. The U.S. and Canada are seen as the best export supply markets for wood pellets based on fibre supply availability, logistics capabilities, and distance to market.