May 7, 2013
Executives
Carol Oden – Executive Administrative Assistant Jack E. Golsen – Chairman and Chief Executive Officer Barry H.
Golsen – Vice Chairman, President and Chief Operating Officer Antonio M. Shelby – Chief Financial Officer, Director, Executive Vice President and Head-Press Relations Michael Sullivan – Chief Information Officer and Vice President
Analysts
Dan Mannes – Avondale Partners Walt Liptak – Global Hunter Joe Mondillo of Sidoti & Company Keith Maher – Singular Research Bruce Zessar – Advisory Research Gregg Hillman – First Wilshire Securities Rob Longnecker – Joe Street Capital Sean Nicholson – SBH
Operator
Greetings and welcome to the LSB Industries First Quarter 2013 Conference Call. At this time, all participants are in a listen-only mode.
A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Ms. Carol Oden, Administrative Assistant to the Chairman of the Board.
Thank you, Ms. Oden.
You may begin.
Carol Oden
Thank you, good morning. Welcome the LSB Industries Inc., first quarter 2013 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, May 7, 2013, and therefore you’re advised that time-sensitive information may no longer be accurate as of the time of any replay.
After the Q&A, I will have some important comments and disclaimers about forward-looking statements and our references to EBITDA. We encourage you to view the PowerPoint PDF that is posted on our website at www.lsbindustries.com in the Webcast and Presentations section of the investor’s tab.
Please note that the presentation starts on Page 3 of the PowerPoint. And now, I will turn the call over to Mr.
Jack Golsen.
Jack E. Golsen
Thank you, Carol. Good morning.
I think I have a little allergy this morning, so if you have difficulty understanding the – I hope you can understand me. The first quarter of 2013 was the most unusual quarter in our history.
Two most profitable chemical facilities were out of operation during the entire quarter because of this any comparison of operating results to prior quarters is not relevant. So that you would be fully informed during our last quarterly conference call, we advise you that our Chemical Business was continuing to under perform during the first quarter, due to the extended downtime at our chemical facilities.
And we expected that situation to continue for part of the second quarter as well. We also reported that with the exception of El Dorado, our facilities would be back to substantially full operations in the second half of 2013.
That’s the general picture, and now I’m going to give you some details about the status of our – of each of our chemical operations. Our El Dorado Arkansas facilities nitric acid capacity is approximately 80% of the pre May 2012 level and we’ll continue at that level until construction of the new nitric acid plant is completed in 2015.
El Dorado should improve its earnings potential with the addition of a planned anhydrous ammonia plant estimate to be completed an operational during 2015. As the Cherokee, at the Cherokee, Alabama Facility all damaged equipment was replaced and approximately 25% of its process piping has been replaced as a precaution against further pipes breaking.
All piping that could be subject to the type of rupture that occurred in November has been tested from metallurgical integrity. Cherokee Facility started production last week and it’s currently increasing its production rates.
As to Pryor, the Pryor ammonia plant is running and has been achieving near design capacity production rates with the new larger converter that was installed. Our target rate is 700 tons per day.
In starting both Cherokee and Pryor, we took extraordinary precautions by calling in industry consultants to confirm that all repair work and plant start-up protocols were done correctly. They also reviewed our practices and procedures for safety and reliability.
This review caused delays while the consultants reviewed all the work done and workmanship of the repairs and modifications that were made. These steps along with the newly installed convertor should result in more consistent and reliable operations at both Cherokee and Pryor and higher sustained production levels at Pryor than we have experienced in the past.
As previously reported, the events are unrelated to each other. Severity and frequency of the events at our Pryor, Cherokee and El Dorado facilities caused us to undergo a through reexamination of our process, safety management, reliability, and mechanical integrity programs.
As a result, we have recently undertaken a concerted program to attempt to improve the reliability and mechanical integrity of our chemical plant facilities. A key component of the improvement program is the implementation of enhanced PSM programs to supplement existing PSM programs.
The improvement program includes engaging outside experts and consultants who specialize in risk management, reliability and mechanical integrity all part of PSM. We are also recruiting and hiring additional corporate and plant engineering and operational personnel, and we are accelerating the acquisition of additional spare parts to supplement our existing spare parts program.
The program also includes the installation of additional automation and plant equipment protections. With Pryor and Cherokee up in running, we expect that Chemical Business results to dramatically improve of the second half of the year.
Just a word about our Climate Control Business; Our Climate Control Business improved during the first quarter, reporting growth in sales and operating income with all product segments showing an improvement over the first quarter of 2012. The commercial and institutional side of our business continues to grow, although sales of our residential products have been disappointing.
Now for the overall – both of our businesses, considering the strong fundamentals of the agricultural markets we serve, the fact that our chemical facilities are now back in operation. The steps we have taken and will take to improve our chemical facilities reliability and the anticipated rebound in construction.
We’re optimistic about the balance of 2013 and future years for both of our businesses. That completes my comments and I’m going to turn the call over to Tony Shelby, Chief Financial Officer.
Antonio M. Shelby
Thank you, Jack. For the quarter of 2013 compared to the first quarter of 2012, please turn to the Page 4 of the PowerPoint presentation.
Net sales were $151 million, or 21% below 2012. Operating results were a loss of $237,000 compared to operating income of $23 million in 2012.
After interest expense, a $745,000 tax benefit, we reported net loss of $68,000 or $0.02 per share compared to net income of $14 million, or $0.61 in total. EBITDA was $6.5 million versus $28 million in total.
Looking behind the numbers, as Jack indicated the first quarter 2013 was a very unusual quarter. Our Climate Control Business reported improved results including a 12% increase in sales and a 9% increase in operating income.
However as summarized on Page 5 of the Chemical Business, the Chemical Business reported a much different outcome. As a result of the significant issues encountered at certain of our facilities, the Chemical Business sales were $47 million lower than in the prior year quarter and the operations resulted in a pretax loss of $4 million compared to an operating income of $20 million in 2012 – in the 12 quarter a difference of $24 million.
As extensively reported in all of our public documents and press releases, the Pryor facilities primary ammonia plant and the Cherokee ammonia plant were both have operations for the entire quarter. The effect of the downtime at the Pryor and Cherokee facilities is particularly impacted, since these facilities unlike El Dorado and Baytown both use natural gas as raw material feedstock and thereby capture the significant gross margin between the cost of natural gas and the market price for ammonia.
As a result Pryor and Cherokee are normally the most profitable facilities of our Chemical Business, when they are in operation and conversely have a biggest negative impact when the ammonia plants are not in operation. Based on current market conditions and after recognizing $11 billion of business interruption insurance recoveries, we estimate the effect on chemicals first quarter operating income resulting from downtime to be approximately $40 million to $49 million less than otherwise we’ve been expecting.
The question then becomes what are the impact of the downtime in the second quarter? Excluding the recognition of future insurance recoveries, we estimate that negative effect on chemicals second quarter 2013 operating income to be at a rate of $8 million to $9 million monthly for each Cherokee and Pryor until they were returned to full production.
Also as you might have imagined, since the plants have been out of production we are starting to seasonally and with most of our inventory levels are normal. The ongoing negative effect on [rail-to-rail] operating income is estimated to be approximately $1 million to $2 million a month.
The Pryor ammonia plant resume production in late April, the Cherokee ammonia plant resume production in early May and the El Dorado facilities natural gas capacity will continue to be limited to approximately 80% of the normal until 2015. We anticipate that we’ll receive additional business interruption insurance recoveries during the remainder of 2013 that will compensate for most of our chemical businesses loss profits.
As disclosed in the 10-Q, we also expect to receive property insurance recoveries relaying to El Dorado’s damage that direct strong natural gas plants that amount equal to agree to repair costs when and as agreed. For a bit more detail on our Climate Control Business, please turn to Page 6.
The Climate Control sales were $70 compared to $63 million, most profit as a percent of sales was 31% in both quarters and operating income increased to $6.4 million compared to $5.8 million in the 2012 quarter. Orders received during the first quarter of 2013 and the backlog at the end of the first quarter of 2013 both increased as compared to the same quarter of last year.
To briefly review liquidity and capital resources, please turn to Page 7. Although, we’ve encountered operational issues in our Chemical Business have negatively affected EBITDA and cash flow.
Our balance sheet and financial position continue to be solid. As compared to year end 2012, cash of $69 million is $29 million lower, total interest bearing debt is $33 million higher and stockholders equity is about the same.
Our $50 million working capital revolver loan facility remains undrawn. The $29 million reduction in cash flow for the quarter includes $20 million net cash used by operations, plus capital expenditures of $44 million offset by the $35 million term loan proceeds.
Increase in interest bearing debt includes a term-loan close this year to finance $35 million of last year’s $50 million purchase of natural gas working interest in the Marcellus Shale. As disclosed in our 10-Q, we have extensive, committed and planned capital expenditures.
Committed expenditures are projected approximately $140 million to $160 million including among numerous other expenditures. The 65% nitric acid plant and concentrator and preliminary expenditures for the proposed ammonia plant both at the El Dorado Facility.
The additional planned capital expenditures are in a range – approximate range of $400 million to $450 million for projects including the proposed ammonia plant at El Dorado certain projects related to site reliability, continued development in natural gas leasehold and repair profit improvement expansion projects primarily within the chemical segment. These additional planned projects are subject to number of economic considerations, final review and approval by management and in most cases permitting by the regulatory agencies.
We expect to fund these expenditures from internally generated cash flow, insurance proceeds and third-party debt financing. We’re currently considering various available options for third-party debt financing.
We have addressed our results from operations and financial commitments in greater detail in the 10-Q and so just that you review those disclosures and discussions for additional information analysis. I’ll turn the call over now to Barry to discus the market drivers and outlook for both business.
Barry H. Golsen
Thanks, Tony. Since Tony covered the financial results, I’m going to focus on our sales activity, product backlogs where pertinent, and market drivers as we see them.
I’ll also give you an update on progress with major capital projects primarily at our El Dorado facility. To start, please turn to Page 8, which shows our 2013 first quarter sales mix by the markets we serve.
This is a change from prior periods due to the downtime at our Pryor, Oklahoma and Cherokee, Alabama chemical operations and not typical. On Page 9, we’ve also included the sales mix for the full year 2012, which is more typical of our sales mix with normalized chemical operation.
Focusing first on our Chemical Business, please go to Page 10. Although we have included data about our first quarter sales on this and the next two pages, comparisons to the first quarter of 2012 for the most part are not meaningful because of the Cherokee and Pryor facilities were not operating, were not in operation during the 2013 quarter.
Having said that, total sales in the first quarter were $77 million, down 38% from the first quarter of 2012. Sales in all major product categories were down relative to the first quarter of 2012.
Please turn to Page 11 for sales of our key agricultural products. During the first quarter, sales in tons shipped of UAN and ammonia were lower than during the 2012 first quarter, reflecting downtime at both Cherokee and Pryor.
Sales in tons shipped of ag, agricultural grade ammonium nitrate or AN were lower than the first quarter of 2012, primarily due to the delayed start of the spring application season this year compared to the 2012 spring season, which began somewhat earlier than usual resulting in a drop in sales quarter-over-quarter. In addition imports of AN have been substantially higher this year than in 2012 affecting the sale of domestically produced products.
Turning to our industrial and mining products on Page 12, both sales dollars and tons shipped of the various assets were below the first quarter 2012 levels. Nitric acid sales decreased due to a planned maintenance turnaround at the Baytown, Texas facility during the first quarter and a reduction and also the reduction of strong nitric acid sales, resulting from the loss of El Dorado’s direct strong nitric acid plant that was destroyed in May 2012.
Sulfuric acid sales were lower due to reduced customer demand during the period. Industrial sales were lower as a result of downtime at Cherokee and lower demand for mining products.
On Page 13, are some price trends for both the feedstock we use and the key Ag products that we sell. The cost of natural gas has recently increased but continues to be relatively low, currently about $4 per MMBtu.
This benefits production cost at our Cherokee and Pryor facilities, which is natural gas is our primary feedstock. The cost of anhydrous ammonia, the feedstock we use at our El Dorado, Arkansas and Baytown, Texas facilities continues to be high compared to previous years.
Our current read on the market is that ammonia is about $587,000 per metric ton at Tampa prices. High ammonia prices have increased production cost at our El Dorado and Baytown facilities which used ammonia as feedstock.
Most of the products we produced at Baytown and most of the industrial and mining products produced at El Dorado are sold on a cost plus basis. So high ammonia cost don’t impact our profitability on those sales.
However Ag grade AN also produced at El Dorado is sold at spot market prices. We’ve been fortunate to selling prices of AN fertilizer have been relatively high somewhat mitigated the impact of high ammonia cost.
Turning to other Ag products prices for UAN fluctuated over the past year and are slightly lower at this time than they were a year ago. If you look at the chart on the lower left, you can see that Southern Plains price of UAN decreased from $410 per ton in April of 2012 to $380 per ton in April of 2013.
Based on market indicators, we believe that current UAN pricing is approximately $345 per ton. We do not expect UAN prices to significantly increase during the 2013 season, as they did in 2012 as a result of higher levels of imported urea in North America this year as compared to last year.
In April 2013, Southern Plains prices for high density ammonia nitrate or HDAN that’s Ag grade were $390 per ton compared to $445 per ton 12 months earlier, current pricing is approximately $385 per ton. Our outlook for AN in this season is more or less the same as UAN.
We expect stable selling prices at about the current level unless the delay in starting the planning season last too long and suppliers reduce prices to move inventory. Currently, Southern Plains ammonia is trading at about $70 per ton higher than a year ago, approximately $640 per ton.
This should benefit our ammonia sales. Focus on the outlook for the chemical markets we serve, Page 14 lists several macro indicators for our agricultural products, most of which continue to be favorable.
Grain stock-to-use ratios, both worldwide and the U.S. continue to be low.
As a result, planting levels are expected to be high. Market prices for corn and wheat, although having declined recently remains high, so farmers have an incentive to plant and sell more.
All of this should create strong continuing demand for fertilizers. Finally, low natural gas prices have reduced the cost to manufacture many of our Ag products.
North American produced nitrogen fertilizers are currently the lowest cost factoring in the total cost of production, freight and distribution. The industry can sensitive that the positive fundamentals of the Ag business should continue in the near to mid-term.
Despise general industry drivers weather can have a significant impact on the fertilizer part of our business. As previously discussed, this year’s planning season has been substantially delayed and is not yet fully started.
Wet and cold conditions in northern markets have delayed the season there. Cold and dry conditions have delayed the season in our southwest markets.
Unless adverse weather conditions persists long enough to reduce planted corn acres, a late season could actually benefit sales of UAN. We continue to be optimistic about our Ag business.
Please turn to Page 15. Our industrial products are sold primarily to large customers pursuant to contractual cost plus and or minimum take arrangements.
The two charts on this page indicate the shift that’s occurred in our sales mix from 2012 to the first quarter of 2013. A very little change occurred and the shift from agriculture products to industrial assets was primarily driven by plant downtime.
A very significant part of our business continues to be industrial and mining. Page 16 contains some of the market indicators for this area of the business.
Most of these indicators forecast growth for the next few years. Please go to Page 17 to review the current status of our various chemical production facilities.
I would like to reiterate Jack’s comments here. El Dorado’s nitric acid capacity is approximately 80% of its pre-maid 2012 levels and we continue and we’ll continue at that level until we complete construction of the new Weatherly 65% acid plant and concentrator during 2015.
Cherokee resumed production last week and it’s currently increasing its production rates. Pryor resumed production during late April and is operating a near design production rates.
The Baytown facility successfully completed a turnaround and is operating at optimum production levels. Moving on Page 18, list our Chemical Business strategies and some of our key initiatives for 2013.
Our primary focus is on plant safety, reliability in key capital projects. Focusing on capital projects, Jack mentioned that our El Dorado facility’s results will improve when it becomes a producer rather than a buyer of anhydrous ammonia based on current market conditions in our forecast for market conditions in the future.
As we previously discussed we’re planning to build an ammonia plant at our El Dorado facility. This should increase El Dorado’s capacity and lower its production cost since the cost spread between purchased and manufactured ammonia is substantial.
We are continuing the planning process and have filed for permits to start building the plant. Anticipating the eventual receipt of permits and to the extent allowed before actually receiving those permits, engineering work is underway, we have ordered certain long lead time items and some equipment has been set to rebuilders.
The construction of the ammonia plant is subject to us receiving permits adequate financing and Board approval, if approved, we hope to have an ammonia plant constructed and in operation during 2015. Also at El Dorado we are progressing on the new Weatherly 65% asset plant and concentrator, engineering work is in process, major equipment has been ordered and we expect the plant to be operational in 2015.
With regard to safety and plant reliability Jack outlined those initiatives to you earlier. Turning to our Climate Control Business on Page 19, you can see sales by the major product categories we report in our quarterly filings.
Total sales were over $70 million an increase of 12% over the first quarter of 2012 with increases in each product segment compared to the 2012, first quarter sales of heat pumps were up 8%, fan coil sales were up 22% and sales of other products were up 15%. On Page 20, you can see that sales of products used in commercial and institutional buildings were up 19%, while sales of our residential products were down 15% compared to last year’s first quarter, total bookings during the first quarter were 7% higher than the 2012 first quarter with commercial bookings up 6% and residential bookings also up 12%.
Our backlog of product orders at March 31 was 2013 was $57.3 million, 21% higher than reported a year ago and 3% above the backlog at 12/31/12. Total new orders in April were $26 million and our backlog of product orders at April 30 was approximately $59 million.
Even though total bookings during the first quarter were the highest since the first quarter of 2011 the commercial recovery has been slower than previously anticipated. In the market for our residential products continues to be soft.
However we continue to maintain leading market shares for geothermal and water source heat pumps and fan coils. The next few pages of the PowerPoint deal with the market outlook for construction.
On Page 21, there is a graph that shows McGraw-Hill’s most recent construction forecast for certain commercial and institutional building types. These are the sectors that are the most important to us as they comprised 63% of our total Climate Control Business sales in 2012.
As you can see from the graph, these sectors all forecast to grow over the next five years. McGraw-Hill is forecasting that in the aggregate they will increase by approximately 9% in 2013 and 67% through 2017.
If this materializes, it should benefit all of our commercial and institutional HVAC product sales. In addition to monitoring construction forecast by sector, we also track the Architectural Billings Index, which is considered to be an indicator for non-residential construction spending nine to 12 months in the future.
On Page 22, is a graph of the ABI. March has scored a 51.9% is the eight month in a row above 50%, indicating expansion in billings, this is the longest run above 50, since 2007 before the construction market collapsed.
We believe the general consensus of most economists and construction industry experts is at the recovery in commercial and institutional new construction will continue albeit at a slower pace than originally predicted. While our new construction remains the greater part of our business renovation and retrofit of existing buildings have been and will continue to be an important market for us as well, fortunately, all of our climate control products are well suited for this part of the market.
During 2012 18% of our climate control businesses sales were geothermal heat pumps used in single family residential applications. Page 23 shows McGraw-Hill’s forecasts for single-family residential construction starts.
To-date McGraw-Hill forecast that housing start with increase from about $517,000 in 2012 to $630,000 in 2013 a 22% increase, into over a million per year in 2015 to 2017. If this occurs it should benefit our residential geothermal business.
However we believe that low and relatively stable energy prices have dampened the consumer enthusiasm for energy saving alternatives. An encouraging positive trend is the increase in green construction that is occurred in the past few years and is expected to continue.
On Page 24, there is a graph that depicts the 2013 Dodge Green Construction outlook published my McGraw-Hill. It forecast that the green construction market will grow from approximately $85 billion in 2012 to between $204 billion and $248 billion in 2016.
This should benefit the sales of our highly energy efficient products. Turning to Page 25, we’ve listed our Climate Control Businesses strategies and some key initiatives.
Our primary initiatives for 2013 are the introduction of several new products and a heavy focus on lean projects, intended to reduce cost, eliminate ways, streamline processes and improve qualities. That concludes the prepared portion of the call.
I’d like to request that during the Q&A you limit your questions to three or four, so that others also have a chance to participate. If you have more questions, you can get back in the queue and ask them later.
Operator, please pause for questions.
Operator
Thank you. We will now be conducting a question-and-answer session.
(Operator Instructions) Our first question is from Dan Mannes of Avondale Partners. Please go ahead.
Dan Mannes – Avondale Partners
Thanks. Good afternoon and congrats for getting both Pryor and Cherokee back up in running.
Jack E. Golsen
Thanks, Dan.
Dan Mannes – Avondale Partners
Sure, thing. So a couple of questions, I’ll try to use all my allotted for.
First as it relates to Cherokee, you noted that it is in the process of ramping back up. Can you give us maybe a frame or reference on how long it takes to ramp?
And secondly, what the targeted ammonia production rate is once it gets back up?
Jack E. Golsen
Based on the current outlook, it will come up rather quickly. We’re running close to 70% and we’ll continue to bring it up and everything looks like it’s moving as projected, coming up slowly and under very careful conditions.
Dan Mannes – Avondale Partners
And target production is 500 tons per day of ammonia or more the less?
Jack E. Golsen
In that range…
Barry H. Golsen
In that target.
Dan Mannes – Avondale Partners
Okay.
Unidentified Company Representative
Did you say 500 tons per day, Dan?
Dan Mannes – Avondale Partners
Yes.
Jack E. Golsen
Yeah.
Dan Mannes – Avondale Partners
Okay real quick on capital spend $41 million in the quarter, can you break that out between, Pryor, El Dorado and Cherokee?
Jack E. Golsen
Majority of El Dorado as we mentioned in the conference call, part of, the spending on the nitric – the 65% nitric acid plant and some preliminary spending for engineering and so forth only proposed ammonia plant.
Dan Mannes – Avondale Partners
Got it.
Jack E. Golsen
There were other, there were, I think Barry has some information, he will talk about it later that there were some significant spending on reliability and in more.
Dan Mannes – Avondale Partners
Okay. And then on Pryor, you does mentioned on one of your slide an expansion program in Pryor, is that the long discuss $60,000 tons of incremental ammonia or is that something else?
Jack E. Golsen
Yes, Dan, that’s what that is and you’ll know as you remember from the last conference call, we put that on more or less a backburner during the change out of the ammonia converter and we said that we would get back to it this year after Pryor was up and running. So, at this point in time, we don’t have a definite timeframe for that, but we expect to get on that and progress with it as the year goes by.
Dan Mannes – Avondale Partners
Makes sense to me that just works on the bigger unit first.
Jack E. Golsen
Yeah.
Dan Mannes – Avondale Partners
Lastly on El Dorado, certainly on paper the economist looks really compelling giving were ammonia prices or natural gas, but this is a pretty sizeable investment, I mean we are looking at 20% somewhere between 30% and 40% of your current market cap, I was wondering if you could talk at all about anything you’re looking at either in terms of debt financing that’s non-recourse or contractual on the other side noted to reduce your exposure, but what’s, frankly are really large project relative to the size of the company?
Jack E. Golsen
Well, I am hearing you and the way we view it is that right now given the strength and profile of the, the balance sheet and the profile of our company along with current conditions in the debt markets we feel we have numerous alternatives available to finance the plant capital expenditures, and we’re still looking at those alternatives.
Dan Mannes – Avondale Partners
So, but it’s fair to say you haven’t excluded the potential of doing on an asset basis rather than on a parent basis?
Jack E. Golsen
Say that again.
Dan Mannes – Avondale Partners
You haven’t excluded the potential to finance it at the plant level rather than at the parent level as a way to manage your risk?
Jack E. Golsen
We’ve really excluded no options at this point in time.
Dan Mannes – Avondale Partners
Sounds great, and then one last really quick one on the tax rate, obviously tax, the rate was really low this quarter given the loss, any change and maybe the full year outlook on tax rate?
Jack E. Golsen
No, I think the federal rights were in 35% range and states 4% or 5%, and then we have, we’re working on number of credits. You’ll notice in the first quarter, we booked a fairly significant tax credit that was passed in 2013 retroactive to 2012, so I think we have a positive cash and tax provision rather than negative.
Dan Mannes – Avondale Partners
Got it. Thank you so much guys.
Jack E. Golsen
Thanks, Dan.
Barry H. Golsen
Thanks, Dan.
Operator
Thank you. The next question is from Walt Liptak of Global Hunter.
Please go ahead.
Walt Liptak – Global Hunter
Hi, thanks. Good morning guys.
Jack E. Golsen
Good morning.
Walt Liptak – Global Hunter
So one, things in the press release for the overhang on a monthly basis, I wonder if you could, maybe firm up some numbers for us and help us understand how much, as you ramp capacity or how much profitability be coming back in the second quarter and then in the back half of the year?
Jack E. Golsen
Let me, would you summarize that question real quickly? I think what you are asking me is what we see in the way of capacity back and production in the second quarter and in the second half?
Walt Liptak – Global Hunter
Yeah, that’s right. And what that it will mean to revenue and to operating profits?
Jack E. Golsen
Well, the second quarter, we gave some pretty specific information on that is that we’re going to have Cherokee and Pryor up for roughly half of the quarter. And El Dorado is going about 80% of their nitric acid capacity.
So, second quarter is going to be impacted by that and we’re starting the season late because the, the season getting off late start from an ag standpoint, but we’re also starting late because the plants are just come up and we don’t have a lot of inventory in stock. So we’re going to build inventory and hopefully the delay in the season will allowed us to catch up beginning in the second quarter.
The back half is in (inaudible) gas in terms of total demand. But our expectation is that demand will be strong and the plants will all be running with exception of the lower production at the El Dorado facility.
Barry H. Golsen
I think there will be one, this is Barry. I think there will be one difference in the back half of the year for us this year as compared to previous years and that as that usually in the third quarter which is seasonally the lowest quarter for the Ag market we typically have some plant turnarounds in this year because of the heavy maintenance and upgrades and things in the plant that we’ve been doing while they’ve been down we’ll have minimal exposure to turnarounds in the last half of the year, I mean, we really the only plant turnaround at this point in time or at one of our facilities, it will be a small one.
Walt Liptak – Global Hunter
Okay, so as we think about the back half of the year, how much of the property and considering weather as well as this, less maintenance in the back half of the year. How much can you make up from this quarter?
Barry H. Golsen
I am just going to make a general statement and that is that as you know we have a strict corporate policy of no guidance, so other than talking about the plants being in operation and the impact of what that is when they’re down, which we feel that if the investors need a general understanding of we are, we do not give specific guidance on profitability
Jack E. Golsen
That’s correct, well the one of those things I would add to that is keep mind that we’ll have insurance recoveries potentially in the quarter that will flow through either as other income or cost [else].
Walt Liptak – Global Hunter
Okay, yeah, I appreciate that, I wonder if you could just do a real quick review on the plant expansion at El Dorado in 2015, and if you put some numbers on the capacity that that’s going to be producing at and an idea of the type of return level that we might see from it?
Barry H. Golsen
Well, this was the same question we got in the last conference call. And what we said was that and, the plan is still the same that the ammonia plant will produce approximately 375,000 tons per year of ammonia.
As to projecting the level of profitability and/or the return on investment or payback, what we said was essentially the same as the last question to you, the answer to your last question. In other words, we’re not going to give specific guidance on what those numbers are, but what we do know is that if you look at the cost of produced ammonia in today’s market for example and this is always a snapshot, because the market condition is strange that there is roughly 30 tons of ammonia, excuse me MMBtus of natural gas in every ton of ammonia.
And then there are some production costs, let’s say, industry standards are roughly a $180 to $100 a ton, and then you look at that compared to current cost of ammonia. Now, that’s, those are industry numbers, those are not our specific numbers.
And of course, this plant won’t come on line until 2015 and no one knows exactly what their market conditions will be in 2015. However, we did shock our projections and we took down the sales price of ammonia, we took up the sales price of natural gas.
So we didn’t forecast it today’s close to optimum kind of market conditions, we forecasted at a somewhat degraded market conditions. Having said that, we feel that it will probably, that it will reach our own internal hurdle rates every way we look at it, based on justifying the investment, but we are not prepared to give a specific ROI or a specific profitability.
Walt Liptak – Global Hunter
Okay. I understood.
Got it. It’s a moving target.
Barry H. Golsen
Right, exactly.
Jack E. Golsen
Right, one other factor is that we’re going to product 375,000 tons at El Dorado based on the forecast and currently we’re only purchasing and processing about 250,000 tons, so there will be some additional capacity and some potential growth.
Walt Liptak – Global Hunter
Okay. And then if I could switch gears to climate, the revenue growth year-over-year was very good considering some of those construction statistics that you cited.
So the growth rate is I think above the 9% that that you showed. Is that something that you think is sustainable throughout the year an easy, easy comparison?
Jack E. Golsen
Well, I am not, in this business, the only absolute visibility you have is backlog and beyond that its anyone’s guess, but we look at indicators, we look at the, as I said we look at the architectural billings index, we look at the general, construction forecast, we have specific input that we get from our sales force and the various subsidiaries of that large projects and even medium size projects. So, we have activities that’s on that boards, design boards that we now of our future projects and they are not up for bit yet.
Having said all that, it’s really hard to predict and it use to be before 2008 or 2009 before the collapse of the construction market it was, we are more confident about projecting the outlook for the year. We are still very, even though that there tends to be an uptick in construction, we thought there was going to be an uptick a couple of years ago and it never happened.
So, we are somewhat reluctant to throw specific numbers out, having said again that and kind of closing this out, we are optimistic about the balance of the year and we hope that the activity, the bookings level that we’ve seen in the last few quarters continues.
Walt Liptak – Global Hunter
Okay, got it. Okay, well yes, good luck on the back half and the second quarter, thanks.
Jack E. Golsen
Thanks a lot.
Operator
Thank you. The next question is from Joe Mondillo of Sidoti & Company.
Please go ahead.
Joe Mondillo of Sidoti & Company
Good morning guys.
Jack E. Golsen
Good morning.
Barry H. Golsen
Good morning Joe.
Joe Mondillo of Sidoti & Company
First question have to deal with the climate control and the, I was just wondering if you could expand on the lean initiatives that you mentioned and what kind of cost savings that we’ll see in the future?
Jack E. Golsen
Well, lean initiatives are, the concept of lean is a comprehensive organizational effort that really questions why you do everything you do in the operation in an attempt to reduce anything that’s not value-added in the eyes of the customer. And ultimately, what it’s geared to do is to streamline your processes, reduce waste, reduce non-value added labor, and to improve quality and increase your throughput time which has a corresponding reduction in cost.
It’s not an initiative that occurs in six months or 12 months, it’s an ongoing change of the lifestyle for a business. And typically when you look at an initial lean initiative in the business, it’s usually a five-year process but you keep going forever and you keep refining.
You see a lot of benefits typically from the studies that we’ve seen in other companies that have run or undertaken this in the first three years, you see a lot benefit, you continue to see benefit in the fourth and fifth year we have internal targets for what we expect to achieve, but those would be equivalent to forecasting in projecting income and so since we don’t give guidance I’m not going to really address that, but we think that there is some substantial progress that we made in our operations and there’s things that we should benefit the business going forward.
Joseph Mondillo – Sidoti & Company
Okay, and then in terms of the gross margin that you saw in the quarter it seem like a bounce back a little – pretty nicely compared to the back half of 2012, anything unusual like an unusual product mix or anything like that or does it seem like maybe profitability sort of firming up?
Jack E. Golsen
Well, at the gross profit line, I don’t think there was anything unusual.
Joseph Mondillo – Sidoti & Company
So do you guys feel like maybe things are firming up and improving on that level at least in the near-term?
Jack E. Golsen
Well, the number is pretty much speak for themselves. We can’t predict on a going forward basis what level of profitability there will be because we don’t know how competitive the market will or will not be.
We can only control our internal cost, we can’t control where the market goes.
Joseph Mondillo – Sidoti & Company
Okay. And then also regarding your natural gas exposure, I was wondering if you could first off tell me what was the contribution to the Marcellus Shale royalties and then also where are you in terms of being hedge to natural gas.
Jack E. Golsen
I will take that one. We don’t get royalties.
We get production income.
Joseph Mondillo – Sidoti & Company
Could you inform us what the production income was for the quarter?
Jack E. Golsen
Yeah, we don’t break that up.
Barry H. Golsen
The way we would characterize that Joe is that based on what we have we’ll produce about 20% of – number of approximately 20% of our MMBtus, we purchase each month – each quarter, each month and our average cost have to calculate all the leasehold cost and depletion, appreciation et cetera is about $1.50 per MMBtus. And so that’s the way we’re looking at this as that it’s offset to our purchases.
It’s a hedge.
Joseph Mondillo – Sidoti & Company
Okay. Is this the first quarter with the contributions of that?
Barry H. Golsen
Yes.
Jack E. Golsen
No – not well actually, we did not benefit that too. This quarter was an anomaly, since we did not produce our ammonia plants than produced in the first quarter and we still produced and sold the gas, we did have income from it, but starting with…
Joseph Mondillo – Sidoti & Company
You’re not…
Jack E. Golsen
Starting with the use of the gas, we will buy that much less gas, I mean it will bring down our average cost of gas by the spread between our actual cost of 20% of that gas, and what we pay for the other 80%.
Unidentified Company Representative
Right
Joseph Mondillo – Sidoti & Company
Okay, and the production income that you saw this quarter, should it be sort of similar over the next three or four quarters?
Barry H. Golsen
No, it’s not going to show as an income item, it’s going to show as a reduction in our cost of gas.
Jack E. Golsen
Right.
Joseph Mondillo – Sidoti & Company
Okay.
Jack E. Golsen
You know [Steve] it would be in terms of any other kind of hedge, it’s going to show our reduction of the cost of the commodity you are hedging.
Joseph Mondillo – Sidoti & Company
No, I completely understand that you are receiving an income or you are receiving cash, and I was just wondering what the cash contribution for that was, or what’s it going to look like over the next, three, four quarters, because it’s a centrally new revenue or cash or income however you look at it for the first four quarters until you sort of thereafter, seems like will be a hedge?
Jack E. Golsen
No, it’s not that, it was just and not only in the first quarter, because we weren’t using the gas, when we started using the gas that means the – offsetting 20% of our gas purchases were $1.5 gas rather than $4 gas.
Barry H. Golsen
So, Joe based on what Jack just told is similar to derivative, you estimate what you want to [fixed] cost of gas instead of doing a derivative we just made it direct purchase and that will reduce the cost of our purchase and concern gas moving forward when we are in production.
Joseph Mondillo – Sidoti & Company
Okay. All right, thanks.
Unidentified Company Representative
No, Michael I just don’t understand I want to make sure I understand – did I said it correctly, that’s what I’m saying?
Barry H. Golsen
Very good.
Joseph Mondillo – Sidoti & Company
Okay.
Barry H. Golsen
Well, thanks Joe.
Operator
We get the next question from Keith Maher of Singular Research. Please go ahead.
Keith Maher – Singular Research
Good morning gentlemen and my apologize that joining to the end of your presentation so if I ask something early talked about you still needed a replay, my first question was just about what happens when we have a situation like rather this year where the spring is kind of cold. Does this ultimately affect the amount of see if it gets spread or its really just going to get delayed further into the year?
Jack E. Golsen
I think it’s planted, but what happens is like the first planning usually captures anhydrous ammonia and if the season is late it’s too late for ammonia. They go to UAN and I think that’s what happening this year.
Keith Maher – Singular Research
Okay. And then on insurance proceeds I see that come from Cherokee, should I take to mean you didn’t get anything related to El Dorado this quarter.
Jack E. Golsen
I am sorry, say it again.
Keith Maher – Singular Research
Yeah, you mentioned you’ve got some insurance proceeds business interruption in terms of proceeds related to Cherokee, but you didn’t mention El Dorado is that because this quarter nothing came in for El Dorado?
Jack E. Golsen
Let’s say
Barry H. Golsen
We got – we got some chances, but not the class of clean up I guess. Then we…
Jack E. Golsen
We receive primarily from El Dorado
Barry H. Golsen
No, it’s Cherokee.
Jack E. Golsen
Cherokee, Cherokee, yeah.
Barry H. Golsen
Yeah.
Jack E. Golsen
We got in this quarter we got fifth the way we recorded $10 million on Cherokee.
Keith Maher – Singular Research
Okay.
Jack E. Golsen
Cost of sales.
Keith Maher – Singular Research
Can you give us any other details with like how much more insurance do you think you are get and like how long this payment…
Jack E. Golsen
Yeah, we covered that in the script…
Keith Maher – Singular Research
Okay
Jack E. Golsen
(Inaudible) that we’ve received some of the business interruption but most of what we’ve relieved so far has been allocated by the insurers, so we’ve had to make some assumptions but we still have yet to receive the recovery on the direct strong nitric acid plant and we disclosed what the range of likelihood is that. We – in the 10-Q, we disclosed the likelihood of that like somewhere between $48 million and $73 million.
We haven’t received that and we still expect to recover most of our lost profits going forward.
Keith Maher – Singular Research
Going forward. Okay and a question on the potential El Dorado ammonia expansion.
Earlier, I think you…
Jack E. Golsen
Excuse me a second, Tony needs to give an update, $48 million to $73 million, that’s an old number. It’s actually $48 million to $60 million, excuse me.
Keith Maher – Singular Research
Okay, all right. And then just we’re moving on to El Dorado.
Just another way to answer to your [question], I think you said that you have a need at that facility for that 250,000 tons of ammonia and the expansion of 375 and then you are taking about potential growth, and I just understand is that mean you might try to some of that production internally by producing more fertilizer and chemicals or you would sell the ammonia on the market?
Antonio M. Shelby
Joe, it’s the way it will work.
Jack E. Golsen
(Inaudible).
Keith Maher – Singular Research
Yeah.
Jack E. Golsen
Here is the way it will work, the first ammonia we’ll use to make the product so we sell directly, the downstream products, then there will be some excess ammonia and we will have contracts to sell the excess ammonia on the market. And that will go something close to market price.
And if the products we make if that market grows, then it will – into the surplus ammonia that we have to sell in the market.
Keith Maher – Singular Research
Okay.
Jack E. Golsen
I don’t know, if I am being clear or not.
Keith Maher – Singular Research
No, that’s definitely helpful, that was helpful. And then finally just on the natural gas hedging, you don’t want to get back into detail, but when we’re implying about 20% of your cost is hedged, exactly how should we think about that?
Antonio M. Shelby
We are currently, our capacity out there, as is we use about a million Mcf a month, and this leasehold investment is about 20% of that million per month and we have an average cost, we sell about a $1.5. So when we are in production that will just reduce about 20% of that purchase each month, each quarter.
Keith Maher – Singular Research
Okay, thanks. That’s all I had.
Jack E. Golsen
The reason is it’s difficult to understand is it comes off a one pipeline but we can’t take it direct from that pipeline, so you have to sell on a one pipeline and buy it on another, if we had a direct hookup from Marcellus to our plant, then you wouldn’t even have this conversation.
Keith Maher – Singular Research
All right. Thanks a lot.
Antonio M. Shelby
Thank you.
Operator
Thank you. The next question is from Bruce Zessar of Advisory Research.
Please go ahead.
Bruce Zessar – Advisory Research
Thanks. Hi, guys.
I first had a question similar to on the February call, if you look at all the plants, assuming they have been up and running instead of having the downtime, you say in the press release that there was about $40 million to $49 million adverse to operating income in the Chemical Business because of the different plant issues. So, I guess my question is you showed an operating loss for the Chemical Business of roughly $4 million in the quarter, if you had backed that $40 million to $49 million that would effectively mean your operating income would have been somewhere in the range of $36 million to $45 million positive in the Chemical Business in the quarter if all the plans were up and running correctly, is that right?
Antonio M. Shelby
Well, we had extra cost that is insurable cost, and we had downtime which precluded us from producing gross profit, so we looked at what we had in a way of extra cost unabsorbed overhead and loss profits on sales that we’re unable to make, and I gave up the range of $44.9 million. Now keep in mind that we had some insurance recoveries in both periods, but we have this if it’s a range and it’s based on estimate, so we’re not really forecasting what we can do in the future, but we’re just using…
Bruce Zessar – Advisory Research
Yeah, Tony, I’m not asking about what you may do in the future.
Antonio M. Shelby
Okay.
Bruce Zessar – Advisory Research
But that $40 million to $49 million you wrote in the press release was net of insurance recoveries.
Antonio M. Shelby
Correct.
Bruce Zessar – Advisory Research
But what I’m saying is that if you literally read what you wrote on Page two, for the first quarter of 2013, we estimate that the cumulative of negative effect on our pre-tax income from these incidence and issues, net of insurance recoveries recognized was in the range of $40 million to $49… So, what I am saying is that if you add that back into the $4 million dollar operating loss you reported, what you are effectively saying is if these plants were operating correctly that the business estimated in the first quarter would have probably owned operating income in the range of $36 million to $45 million isn’t that right?
Antonio M. Shelby
That’s correct if our assumption through record.
Bruce Zessar – Advisory Research
Right, that’s what I just want to know, I’m doing the math right. So then if you compare that, alternative universe for everything operating correctly and you would – reported estimating $36 to $45 million and operating income in the Chemical Business compared to $20 million in the first quarter of 2012 that’s a significant improvement and I guess my question is that largely due to ammonia prices being significantly higher than they were in the first quarter 2012?
Antonio M. Shelby
Well, there is two things that are one is we had, if you look back at last year’s first quarter we announced $13 million adverse impact due to the fact that the Pryor urea retainer was being replaced or it was being [retired]
Jack E. Golsen
Convert to…
Antonio M. Shelby
Convert to it, excuse me…
Bruce Zessar – Advisory Research
Both the assets 2007 when you see that I think…
Antonio M. Shelby
Hey well, we had $13 million impact on the first quarter last year, so it equalized to you, you got add that back to [24.3]
Bruce Zessar – Advisory Research
All right, so that’s fine, so then…
Antonio M. Shelby
The answer to continue with it that we’re better processing a cost relationships in this quarter than we were last year.
Bruce Zessar – Advisory Research
Okay, that’s fair enough and then the next question was, looking at 10-Q is there any – I was looking at each of the insurance recovery estimates, is there any prospect for additional recovery at El Dorado or you done with the insurance on that.
Jack E. Golsen
No, no. As we said, we still have the property damage claim for the direction on nitric acid plant that was destroyed.
So we still have that property claim. We see – hopefully we see sometime in 2013.
Bruce Zessar – Advisory Research
Okay. Mike, you still have…
Jack E. Golsen
Yeah, ongoing BI and the way it works is, you have a claim which is the policy says, we’ll cover you for your losses and or the cost of repair. And so that means that, first of all the decision to be made do they agree that it shouldn’t be repaid or not.
And then if you decide you want a new one, because you don’t want to take a risk of repairing, then it becomes a negotiation, it’s still the number still comes out what supposed to be fair, but that means we don’t know the exact number, it’s a negotiation.
Bruce Zessar – Advisory Research
Okay.
Michael Sullivan
So we know the new one will cost, but the question is will they accept that number and sometimes they do and sometimes they don’t, all of that ends up on these big claims ends up being negotiation in the end.
Bruce Zessar – Advisory Research
All right, so then…
Michael Sullivan
In the end.
Bruce Zessar – Advisory Research
Right, great. So I just want to make sure, I understand on Page 34, the 10-Q there is a one line paragraph that says as of March 31 there was no insurance claim receivable balance relating to this event, referring to El Dorado, so that just means that you didn’t have an existing claim going, but you will have another one?
Michael Sullivan
The reason that commence there is as we incurred cost rather than expense then we would put them on the balance sheet as a receivable, but that doesn’t mean that we don’t have a claim, we just don’t record the claim, we never it would be considered contingent income. So we have to wait until the claim has actually agreed to by the insurance company before we can set it up as receivable.
So I know what you like on the balance sheet has nothing to do with the actual claim on the repair cost as do with clean ups and other costs that we incurred that were insurable.
Bruce Zessar – Advisory Research
Okay, all right. And then last question I had was to better understand the hedge or getting out of the working natural gas interest you have in the Marcellus shale.
How much natural gas do you – does LXU consume in the typical quarter or a range would be fine? How many…
Michael Sullivan
The Pryor and Cherokee plants which both produce ammonia from natural gas consume roughly $1 million Mcf per month and when we do that – and that of course when we do the El Dorado plant that will all change but right now we use about a million Mcf a month, consume about a million per month and that’s consumed to produce ammonia, now we also have other gas requirements for that are considered to be production of gas.
Bruce Zessar – Advisory Research
Okay, is that a million at prior and another million it’s here.
Michael Sullivan
No, a $1 million combined.
Bruce Zessar – Advisory Research
All right. So…
Michael Sullivan
At sometimes it goes a little higher, sometimes.
Bruce Zessar – Advisory Research
Okay, so you’ll buy more, and then you can actually buy more to go forward with the El Dorado plant.
Michael Sullivan
Actually, the Pryor is up and running the way it should be, the way we expect it to be, it will use more than Cherokee, so it will probably go to a $1.2 million. We don’t know what are all those.
Bruce Zessar – Advisory Research
Okay. All right, that’s all, the questions I had.
Thank you.
Michael Sullivan
Thanks, Bruce.
Jack E. Golsen
Thanks, Bruce.
Operator
Thank you. The next question is from Gregg Hillman of First Wilshire Securities.
Please go ahead.
Gregg Hillman – First Wilshire Securities
Yeah good morning gentlemen. I’m having some questions concerning about safety.
I’ve heard that 90% of heavy accidents in the petrochemical industry are caused by operator error. I was wondering if you think that’s correct, and also I don’t know whether simulators available for your plants, that you could train people on, having to go through different scenarios where they had and kind of like in the nuclear industry.
I know there are simulators for the nuclear plants and also whether you’re trying to get such simulators?
Jack E. Golsen
Well, first of all, the first question if you asked. Frank are you there?
Gregg Hillman – First Wilshire Securities
Yeah I’m here.
Jack E. Golsen
Okay. The first question you asked was about the petrochemical industry and you asked us to verify that.
Gregg Hillman – First Wilshire Securities
Yeah.
Jack E. Golsen
I don’t have petrochemical industry numbers to be able to verify that or not. So I can’t, answer, no one here can really answer that question, okay.
Because this is not considered petrochemical, okay.
Gregg Hillman – First Wilshire Securities
Okay.
Jack E. Golsen
As to simulators, the training process for operators includes many different aspects we are just talking about something kind of like a flight simulator, is that what you’re talking about, it’s basically…
Gregg Hillman – First Wilshire Securities
Yeah.
Jack E. Golsen
Well, there are various protocols that are used for training where operators are given certain fact circumstances and they say, if this happens what do you do? If it goes, if that range, if a certain piece of equipment goes into a range, what’s your first reaction, what’s your second reaction et cetera?
And so, this is part of the training process as to whether they’re actual simulators or not, I can’t answer that question right now.
Michael Sullivan
If you happen to find one, let us know.
Gregg Hillman – First Wilshire Securities
That’s great.
Michael Sullivan
Okay. I never heard of one.
Gregg Hillman – First Wilshire Securities
Okay. Thanks, Mike.
And then finally continue the disclosure, if you heard anything about, I don’t know it’s really early anything about potential fall after that will something in terms of proposed rigs that might come out of that?
Michael Sullivan
Well, right now there is a lot of talk about different things there is no definitive costs, and what I have seen going around have to do more with the fertilizer institute talking about complying with having some type of sales compliance type of standards. Although in our operation, lot of these operations like the West Texas operations are small independent operations.
So there is really no oversight of those operations. And this is distinguished significantly from our operations where we have corporate oversight and we require that our operations comply with all applicable rigs, et cetera.
So, if there was industry oversight that basically came in and say, we’re going to make sure that you’re in compliance with all applicable regulations, it would probably have minimal impact on us, since we already comply with all applicable regulators. That we know about.
Now, as – whether there will be any new regulations on top of the various ones that are out there, we really don’t know at this time.
Gregg Hillman – First Wilshire Securities
Okay. Thanks.
Michael Sullivan
Thank you.
Operator
Thank you. The next question is from Rob Longnecker of Joe Street.
Please go ahead.
Rob Longnecker – Joe Street Capital
Hey, guys. I showing you little more detail on the insurance, I was looking to the notes in the queue.
First on El Dorado, I think you guys said you’ve gotten $40 million paid out and you allocated a $28 million into property insurance, and $11 million to BI. Does that mean, in your range of $48 million to $60 million, the estimated cost of repair that you’ve already received $28 million of that $48 million to $60 million?
Michael Sullivan
No, we still have that claim to receive.
Rob Longnecker – Joe Street Capital
So when you talk about you allocated I think $28.6 million the property insurance claim what was that referring to that?
Michael Sullivan
Referring to cost to repair the other damages to the location.
Rob Longnecker – Joe Street Capital
Gotcha, okay, thank you.
Michael Sullivan
It is not a peripheral damage to the asset plants that we have to fix.
Rob Longnecker – Joe Street Capital
Gotcha and then you mentioned that there was a $11 million was allocated to a business insurance claim, what time period does that cover?
Michael Sullivan
Well it’s more a matter of the fact that the making advance payments on allocates we’ve add to make that assessment ourselves but it’s the other – the accidents didn’t occur until November of 2012.
Jack E. Golsen
On May 15.
Michael Sullivan
On May 15 at El Dorado and the Cherokee orders November 2012.
Rob Longnecker – Joe Street Capital
So is that just from the accident through the end of 2012, a better on at this point for…
Michael Sullivan
It’s not purely allocation based on everything that we’ve incurred up to that point. So you will – we’re still looking at accumulative – an accumulated amount of business interruption claim modest what we have thought against it.
Rob Longnecker – Joe Street Capital
Okay. And then on Cherokee, you talked about that you got payments of $15 million approved.
What time period does that cover?
Michael Sullivan
So, again that was just an advance payment. It was covering for the most part of recoverable costs.
Rob Longnecker – Joe Street Capital
Okay. And then it’s looking like it denotes look like that the Pryor claim got rejected, so is there no insurance you expect to get on Pryor?
Michael Sullivan
We didn’t claim on Pryor.
Rob Longnecker – Joe Street Capital
So, there is no BI expected on Pryor, it’s just on Cherokee and El Dorado?
Barry H. Golsen
That’s right, that’s correct.
Rob Longnecker – Joe Street Capital
Okay. And then when you guys talked about that the new ammonia plant and you are talking about stretched out and things like that, you said it clear your internal hurdle rate, what is that hurdle rate, how do you think of that?
Barry H. Golsen
Our internal hurdle rate is not a specific number, it has to do with in all facts and circumstances evaluation of the plant, the plant’s competitive nature were exists in the market, benefits of having the production of ammonia, additional capacity, et cetera as well as specific financial numbers. And so in other words maybe the hurdle rate could be a mis number it meets our all facts and circumstances test which has made a better answer than me answer that I gave before.
Rob Longnecker – Joe Street Capital
Gotcha. Okay.
Jack E. Golsen
As Barry indicated, when we did our forward look we sharp the projection on both sides, the cost side and the sales side.
Rob Longnecker – Joe Street Capital
Gotcha. Okay.
Thank you very much.
Jack E. Golsen
Thanks Ron.
Operator
Thank you. The next question is from Sean Nicholson of SBH.
Please go ahead.
Sean Nicholson – SBH
Great, can you guys hear me, right?
Jack E. Golsen
Yes.
Sean Nicholson – SBH
Okay. Just a quick question on the prior understanding that where we are at in the season here, would you guys be running full out on the UAM side at this point and then using the leftover ammonia to sell in the open market, or is it more economical right now as you guys ramp the ammonia to utilize that?
Jack E. Golsen
You know it really depends on marketing conditions at the time, but the idea now is to get the – to convert as much of the ammonia to UAM is possible.
Sean Nicholson – SBH
Okay. And if you just run at 600 tons per day, say on average, that leaves about 50,000 or so tons of ammonia, I think.
Jack E. Golsen
Let me see, just a minute. That’s right, that’s pretty close.
Sean Nicholson – SBH
Okay. And then the next, 60,000 ton addition, when that comes on obviously that’s just additionally you can sell them to the market, would you guys need another permit for that, I know you have to permit to run up the (inaudible).
Jack E. Golsen
That one has already permitted.
Sean Nicholson – SBH
Okay.
Jack E. Golsen
That one, we got a quick permit on that.
Sean Nicholson – SBH
Okay. So that’s just more of once you get thing to it.
So once you get comfortable with the current production…
Jack E. Golsen
Yeah.
Sean Nicholson – SBH
You not always add that in as the season…
Jack E. Golsen
Well, it’s a question of – those small plants are – you have to – it’s a specialize knowledge, and so for training for those little plants as different in the training for the large plant.
Sean Nicholson – SBH
Okay.
Jack E. Golsen
And so we have to train the people on those small plants.
Sean Nicholson – SBH
And if you guys put – started putting in the new control rooms yet or where we at in that process and with Pryor? I know you guys are going to upgrade the control rooms.
Is this what you really do want?
Jack E. Golsen
You’re thinking about the probs and centers and so forth.
Sean Nicholson – SBH
Yeah. I mean I visited there a while ago time.
You guys were talking about basically revamping the control rooms to get it more up to the speed.
Jack E. Golsen
Yeah, they won’t be revamped. They’ll be operating with a dashboard.
Barry H. Golsen
Yeah – and to answer your question specifically, some of those have been installed already and some of those will be installed on a going forward basis.
Sean Nicholson – SBH
Okay
Jack E. Golsen
It takes several years to get everything installed.
Sean Nicholson – SBH
Right, right, okay, thank you.
Jack E. Golsen
Thanks, Sean.
Operator
Thank you. We have no further questions in queue at this time.
I would like to turn the floor back over to management for any additional remarks.
Jack E. Golsen
Well, I’d like to thank everyone for having interest in LSB and participating today and we appreciate that interest. If you’ll stay on the line Carol Oden will review certain important information about the content of our presentation today.
Carol would you take it.
Carol Oden
Yeah. We’ll do that thank you for listening today; the comments today contain certain forward-looking statements.
All statements other than statements of historical facts are forward-looking statements. Statements that include the words expect, intend, plan, believe, project, anticipate, estimate and similar statements of a future or forward-looking statement nature, identify forward-looking statements, including, but not limited to all statements about, or any references to the Architectural Billings Index or any McGraw-Hill forecasts, including those pertaining to commercial, institutional, and residential building increases or industry growth and McGraw-Hill forecasts regarding the total green retrofit renovation market and energy efficiency market.
The forward-looking statements include, but are not limited to, the following statements. El Dorado has improved its earnings potential with anhydrous ammonia plant addition, Cherokee production rates are increasing with petrochemical businesses result dramatically improved for the second half of the year.
We are optimistic about the balance of 2013 and future years, ongoing negative effects on El Dorado’s operating income is estimated to be approximately $1 million to $2 million a month. We will receive additional business introduction recoveries during the remainder of 2013.
We expect to receive property damage insurance recoveries, additional plant project, third party financing, UAN and AN prices, El Dorado’s Facility results will improve; planning to build ammonia plant; increase El Dorado’s capacity and lower its production costs; at El Dorado Weatherly 65% nitric acid plant and planned ammonia plant should be operational in 2015. You should not rely on forward-looking statements because actual events or results may differ materially from those indicated by these forward-looking statements as a result of a number of important factors.
We incorporate the risk 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, 2012 and Form 10-Q for the period ending March 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 to GAAP of any EBITDA numbers discussed during this conference call presentation, which is touched on our website. Thank you again that ends our conference call.
Operator
Thank you. Ladies and gentlemen, this does conclude today’s teleconference.
You may disconnect your lines at this time. Thank you for your participation.