The majority of Fulghum’s customers are large pulp, paper and packaging
manufacturers who use wood chips from our mills to manufacture products such
as: boxboard, containerboard, fluff, kraftliner, dissolving pulp, paper and
medium density fiberboard for building products.
Fulghum generates revenue primarily from fees under exclusive processing agreements.
Each of our United States mills typically operates under an exclusive processing
agreement with a single customer. At these mills, Fulghum is paid a processing
fee based on tons processed, with minimum volume base rates and a reduced fee
rate for higher volumes. In most cases, if the customer fails to deliver the
minimum contracted log volume for processing, it must pay a shortage fee to
Fulghum, which is typically lower than the base rate. Under our processing agreements,
the customer generally has the opportunity to make up for any shortfall below
minimum volume requirements with additional volumes in subsequent months before
it is required to pay a shortfall fee. Shortfall fees are typically settled
quarterly. Fulghum’s Chilean operations include chipping services that
earn fees based on a per ton processing fee structure similar to that described
above. Fulghum’s Chilean operations also involve the sale of wood chips
for export and the local sale of bark for industrial heat and utility applications.
In Chile, we purchase raw material and sell products through two subsidiaries.
Forestal Los Andes S.A., or FLA, purchases logs from the market to fulfill an
order from a customer that is typically for a specific vessel of wood chips.
Forestal Pacifico S.A., or FP, provides de-barking services for FLA and several
of our customers. FP processes bark into a biomass fuel that is sold to local
power utilities and industrial customers for heat and electricity applications.
We also operate one mill in Uruguay under a chipping services-for-fee contract.
NEWP’s facilities and customers are located in the Northeastern United
States. NEWP sells its wood pellets to big-box retailers and specialty retailers,
including lawn and garden centers, heating supply stores, hardware stores, markets
and convenience stores. It also sells pellets in bulk to large institutions,
including schools, universities and governmental agencies to heat buildings.
In the aggregate, NEWP’s top two big-box retailers, Lowe’s Home
Improvement and Tractor Supply Company, represented approximately 25% of NEWP’s
total sales for the year ended December 31, 2016. As is typical in the retail
wood pellet industry, NEWP’s sales to its customers are primarily made
on a purchase order basis, and NEWP generally does not have long-term orders
or commitments.
In 2013, our subsidiary that owns the Wawa Facility (the “Wawa Company”)
entered into the Drax Contract, which originally called for annual wood pellet
deliveries of 400,000 metric tons from the Wawa Facility beginning in 2016.
Due to the issues we experienced in ramp-up and commissioning of the facility,
the Wawa Company amended the Drax Contract to adjust the required delivery quantities
to reflect expected delays in production at the Wawa Facility. The amendments
resulted in contract adjustments for reduced volumes in 2014 through 2017, including
penalty payments from the Wawa Company to Drax for delivery shortfalls in 2014
and 2015.
The Wawa Company delivered approximately 134,000 metric tons of pellets to Drax
in 2016. The Wawa Facility did not incur penalties in 2016 for the shortfall
in delivered pellets from the originally contracted volumes because the spot
market prices for wood pellets were less than the contracted price with Drax.
The Wawa Facility has not made any additional shipments to Drax since January
2017, and its remaining inventory of approximately 12,000 metric tons of pellets
is not sufficient to fill a vessel to ship to Drax in the near term.
Prior to our decision to idle the facility, the Wawa Company agreed to deliver
approximately 336,000 metric tons to Drax in 2017. In January 2017 we shipped
48,000 metric tons of pellets to Drax and in March 2017, Drax and the Wawa Company
agreed to cancel the next two shipments of 2017 without any penalties, leaving
the Wawa Company with an obligation to deliver approximately 193,000 metric
tons to Drax later in the year. Further amendments to the delivery schedule
under the Drax Contract may occur based on the Wawa Company’s determination
to idle the facility. At this time we cannot make a determination if any penalties
will be associated with future changes to the contract; under the Drax Contract,
any potential penalties would depend upon whether Drax incurs additional fees
and expenses in connection with finding replacement pellets. Such penalties
could include, without limit, an inability of Drax to fulfill its replacement
pellet needs at an equal or lesser price than the Drax Contract price. Rentech,
Inc. has guaranteed the payment obligations of the Wawa Company under the terms
of the Drax Contract up to a maximum amount of CAD$20 million, including potential
penalty payments.
Our subsidiary that owns the Atikokan Facility (the “Atikokan Company”)
entered into the OPG Contract in June 2013 under which it is required to deliver
45,000 metric tons of wood pellets annually. OPG has the option to increase
required delivery of wood pellets from the Atikokan Facility up to 90,000 metric
tons annually. During 2016, we delivered an additional 5,000 metric tons at
OPG’s request for a total of 50,000 metric tons of wood pellets.
