CF
#We are constantly looking at all of our costs, as <UNK> has mentioned, whether that be SG&A, production, CapEx.
I think in this type of environment, we're driven to do that.
And obviously, logistics is one of those areas.
And our logistics team has done a great job in terms of leveraging the various platforms that we have.
And what we have done, I'll tell you, the rail rates have gone up, and it's been an impact on UAN.
And we have met with the railroads and we continue to do, whether it's spot situations or looking at the complex as a whole.
One of the things we did last year was we opened up Stolthaven, which allowed us to get on the NS and bypass some of the blocked activity we believe we were experiencing in Donaldsonville.
We've also leveraged and moved up our barge participation on UAN, increasing the level.
And then, like I mentioned earlier, the exports.
So, we are able to achieve a fairly attractive netback, moving our product all over the globe but principally to Argentina, Uruguay, Europe, and some new markets we're developing.
We have moved to France for less than $15 ---+ $14 a ton.
We can't move to St.
Louis for that on UAN.
So, as you see us develop and grow and mature, we're going to continue to leverage those options, and to benefit us.
Other opportunities for what we're doing, we have met with the railroads on shipping out of Port Neal.
We have UP and BN servicing that plant.
But we have built that facility to fully load that product out by truck.
You have to take defensive measures during these times to be able to position yourselves to pull in the attractive pricing for rail and other logistical options, and that's what we're doing.
It depends on where you go.
Obviously, D-ville is a huge plant and we have a lot of urea coming out of there, but most of it moves by barge, and now we have the ability to move that out by vessel.
Some of it will move by rail.
But the product that we have been moving by rail into Iowa, Nebraska, the Dakotas, all of that will come out of Port Neal, and that will all be very competitively positioned.
We can load the trucks with a pup so you can average more tons and lower your freight cost.
We think that will reach 500 to 700 miles by truck outside of the plant.
So, then it's going to have to be: Do the railroads want to compete with that.
We have already worked with our customers to be able to receive this product.
So, we believe that we have linked the system together to effectively serve and move our product at all times at the lowest cost possible.
Good morning, <UNK>.
As I said earlier, in September we tested the granulation part of the urea plant.
We have been stockpiling ammonia into the tanks.
And anyone who is in the Port Neal area has seen the flare stack lit up, so we've got gas and steam going into the reformer front end.
As we work from the reformer through the CO2 removal system, we are going to start sending CO2 over to the urea plant and then be able to pull ammonia out of the tanks.
So, that's what we are planning in terms of the parallel commissioning.
So, it's very likely that urea will actually be online before the ammonia plant is fully up.
It's a simpler plant to commission, and granulation is already operational.
But our expectation is it's a matter of a couple of weeks, maybe three or four, depends upon the number of little issues that you find as you go through it.
But that was fairly consistent with our experience at Donaldsonville.
Hopefully we will be able to improve on that because of the great team we've got from D-ville that's up helping the Port Neal guys.
So, I would say our expectation is urea hopefully here by the end of this month, and ammonia plus or minus a week after.
When you look at our system, as I mentioned, we do have the flexibility first on production.
We can produce ammonia, urea, UAN, and some of the other products.
We will continue to do that and leverage those options up and down as the market necessitates.
Then you go into loading options, where we have pipe, barge, truck, rail, vessel.
Then you go next to terminal opportunities and where those terminals are.
We have taken on some additional terminaling space, which we believe is in our long-term interest in markets that we have not necessarily participated as much in the past, and we can effectively serve now with our logistical options.
But you are right, exports are a great opportunity because you can immediately put 40,000 tons out and load it in a day.
That's a great leverage point when you're looking at inventory at the plant and how you are moving it out incrementally into the interior.
Buying patterns have changed and we anticipate that they will probably be this way for another year or so.
But, at the end of the day, you do have to have your product in place to serve the farmer customer.
You can only move so many railcars per day, and railcars can only make so many trips, and they have to return empty and load out and get in line.
So, we believe that, as that window closes, and every day is another lost shipment day, that will challenge the delivery system.
This is more of a UAN story than it is for urea because I think you can move that out by barge and up through the various terminals.
So we are fairly positive looking forward into 2017.
If you really look at it, for Texas and Oklahoma, that will start applications in February; the Midwest, March and then April.
So, you are not much more than four or five months away from application.
We are just starting winter and we are already looking to spring.
We think it's going to turn out pretty well for us.
I wouldn't infer too much into that because what we are doing is just creating optionality for the Company.
I would rather have 10 options to take 1 ton than have 1 option to take 10 tons.
So, we would rather create these options, whether they be exports or the coasts.
And we have looked at the coasts throughout the years and participated in various manners.
But today, when you look at the East Coast, that's a 1 million ton market that we probably had 50,000 to 100,000 tons five or six years ago.
And I think that presents a tremendous opportunity for us.
That's why we are getting on the NS, looking to get on the CSX, utilizing Courtright on the CN.
The West Coast, we've got some good agreements and partnerships out there with some of the distributors.
We are able to rail directly from Woodward on the BN, from Donaldsonville and Port Neal on the UP.
And we have been moving product by vessel through the Panama Canal to the West Coast, and that's an attractive opportunity for us.
Yes, new products and new production is coming online in various parts of the country, and we're going to continue to participate in those areas.
We, ourselves, are adding capacity right in the heart of the corn belt and we're just preparing.
<UNK>, the other thing to remember is, as we indicated I think in some of our materials, the nitric acid and UAN plant at Donaldsonville is the largest single train that's out there at 4,500 metric ton a day, which is about, at nameplate, about 5,000 short tons a day.
That plant is running over 20% above nameplate.
We have done several days here, just even this week, at over 6,000 tons a day.
<UNK>'s got a big job in terms of finding a home for all of that product, given how well those plants are running.
And as he points out, what we're trying to do is just try to get the best aggregate netback across the entire system.
That's going to really vary based on market conditions.
The trade patterns are evolving and starting to adjust for where the new capacity comes out.
We certainly have an ability to export as much as 3 million, 4 million tons a year, but that wouldn't probably be our first choice, all other things considered.
The point though that I would like to highlight, just to remind everybody of, and we've got a slide to this effect in the appendix, but even after all of the new capacity that's in flight in North America comes online, North America is still going to be a very import-dependent region where there's about 30% of our total nitrogen demand has got to be met by imports.
When we are exporting here and there, it really is just around the edges and primarily during periods of time when there isn't a lot going to ground in North America and there's demand in other regions.
It's a way to maximize overall system netbacks, not a have-to-do kind of thing.
Sure, <UNK>, this is <UNK>.
You're right, and we said that in our prepared remarks that basically those things were taken out in September as part of financing the OCI deal.
At the time we did that, we weren't in a position to issue registered debt or even 144(a) debt because we wouldn't have had the requisite financial information we needed to issue debt.
So, what we did is we looked at a couple of options.
We looked at potentially taking out a 3- to 5-year term loan to provide the financing.
The reason we rejected that option was because, effectively, if you looked at the post closing of the OCI deal, there would've been, had we done that, around $4 billion worth of maturities occurring between 2016 and 2020/2021.
And that was a concentration of maturities that really was a bit high risk for us.
So, what we did instead is we went to the private placement market where we could basically throw a lot of those maturities further out to 2025 and also to 2027, so that we would have a more laddered effect.
With the business that we intended to have coming out of that deal, which would have included three new operating plants and, through time, significantly less debt, and also the operating environment that we foresaw at that time, the covenant structure in the private placement notes was not perceived to be problematic.
But a couple of things happened since that point in time.
A, we didn't do the OCI deal, so we never got the three additional operating plants.
In addition to that, and certainly with respect to third quarter, things turned out a bit more adverse than we had anticipated.
What that highlighted to us was the need to make sure that, with respect to our long-dated capital, that the long-dated capital that we had in place to finance the Business should be long-dated capital that is consistent with a business that is cyclical, and goes through ups and downs, and is robust to that from a covenant perspective.
And the reason that's important to us is because having a more appropriate set of covenants gives us the flexibility, as I said, with respect to the revolving credit facility, to continue to pay the dividend and do other things on the equity side that would be more difficult otherwise.
So, the actions that we are taking here are really around reducing the risk and uncertainty around that sort of stuff, and putting our capital structure in a framework that's far more appropriate for the type of business that we are today and the environment we are in.
Yes, <UNK>, we have been in, as you would imagine, very close communication with the guys at Mosaic.
They have been keeping us abreast of what's going on from a delivery schedule perspective on the vessel.
<UNK> and his counterpart have been working well at coming up with different ways to manage that situation, whether it's giving them ammonia via the pipe or sending some stuff up through their terminal, doing some time product swaps and others things like that.
So, we are on top of it and managing it jointly with the Mosaic guys and don't foresee that as any real issue.
Yes, good morning, <UNK>.
The plant's got to be basically put in service and operational in order for us to be able to depreciate it.
We need the plant to be running.
Now, that said, as I have talked about, it's not an all-or-nothing kind of thing.
We've already tested the granulation plant at urea.
We are ready to put CO2 into the urea melt plant, the synthesis plant, and get that up and running.
The off-sites have all been tested and are operational.
Once we've got CO2 going over to the urea plant, then the front end of the ammonia plant is operational.
Again, this isn't an all-or-nothing kind of thing.
We are putting sections of the plant in operation as we go.
But, again, our expectation here is, based on our experience at Donaldsonville, the urea plants are sister plants from one another.
The one at D-ville started up within a week.
So, we think we've got plenty of time to get it up and operational.
The Port Neal ammonia plant is a lot less complex than D-ville because Port Neal is a 2,200 ton a day plant, where D-ville is a 3,300, and configuration of the syn-loop in Donaldsonville is much more complex.
There's a whole 'nother section to it.
As we look at this, we feel very comfortable in terms of being able to get the plant online here by the end of the year.
That's why we continue to say $800 million in terms of the tax refund next year because we expect to get everything online.
<UNK>, this is <UNK>.
I just want to clarify something that I heard in your question.
The timing of the receipt of the refund doesn't have anything to do with what happens at Port Neal.
The timing of the refund has to do with when you get your tax return in and when that gets processed through.
Given what we see today, we anticipate that will be a third-quarter event next year, that is the refund.
As <UNK> described to you, the Port Neal piece has to do with the amount because it's what drives ultimately for a portion of our depreciation, whether you have depreciation in your tax loss for 2016 that you carry back or whether you don't, and how much.
And like <UNK> said, it's not an all-or-nothing type thing.
There's a continuum of outcomes.
But our strong expectation remains that we'll be fully depreciating those assets this year.
As you point out, this is based on a pro forma simulation of the various spreads that existed for our last full year, which was 2015.
And if there are differences going forward, that's going to change.
The vertical axis is our realized price.
But I think in the third quarter, the published average NOLA price was $180 and our realized price was a little over $200.
We would expect that spread to go up once Port Neal comes online because we are adding about 1.4 million tons in market that's going to have a $30, $40 a ton premium associated with it because that's the transportation cost from the Gulf.
That gives you a general sense of the premium to the Gulf that we would expect.
In addition, although ammonia is a little bit different animal because of the volume that's available out there in the deepwater market, we would expect UAN premium to come back in line with urea.
We can switch back and forth between granulating more or producing more solution depending upon where that premium sits.
And to the extent that you don't get the corresponding bump that you would expect in UAN, we'll just shift the product mix.
I think over the medium to long term, those things have to come back into rough equilibrium, otherwise the producer is going to shift the mix.
And the end values have to trade at a minimum on parity with very likely UAN continuing to command a premium the way it has.
When we mention the weakness, it's more of the weakness in the ammonia price structure and why that was driven more in relation to the contractual structure of our industrial book of business, which is gas-based, as well as Tampa-based, and Tampa is very low.
Demand has been a little bit lower in the industrial segment due to some of the issues around caprolactam and phosphate.
I think it's just more of additional phosphate exports out of China has put a little more pressure on some of the other phosphate producers in terms of overall volumes and possible changes in mix as moving some to micronutrients, as Mosaic has mentioned, away from possibly DAP.
Weakness ---+ I don't think it's anything we are concerned about.
Our volumes are, we think, going to hold steady.
Regarding DEF, we are positive what's going on in the DEF market, continued demand.
We are going to have a record year on DEF volume.
Pricing is holding up.
We are continuing to see the growth of, the 30% to 40% that we have seen year on year.
I do think, just due to the slight slowdown in shipments, you have probably seen the Class VIII truck volume, the new truck volume, slowing down a little bit on that end, but you do have additional demand coming from off-road, as well as different segments.
So, we are positive on the DEF front, and continue to invest and grow and build the team and participate in that business.
There is something important to remember here, which is, the ammonia price, when it's weak, primarily affects the industrial demand that <UNK> was talking about.
In order to be able to get ammonia into the farmers' fields you have to have a place to move it to.
It's not like urea where you can just leave it on a rail car, put it in a shed kind of thing.
And UAN, there's a lot of availability of tank space.
With ammonia, you have to have the big cryogenic storage tanks.
There's principally only three companies, and they are the producers that own those.
CF's got the largest network of ammonia tank terminal system.
Coke has got some, and Agrium has got some.
And then there's onesies, twosie tanks here and there that are owned by other people, like [Tramino], and so forth.
If you don't have the storage terminals, then you can't take Gulf ammonia up into the marketplace and get it in the hands of the farmers because you've got no place to move it through.
So, even though there is some impact in terms of agricultural prices for ammonia, it's not directly tied to Tampa ammonia the way urea price in the Midwest is tied to NOLA urea price.
That's one of the reasons why the distribution and terminal system that we've got in ammonia is so valuable because it allows us to capture a pretty sizable spread between the value of agricultural ammonia versus relatively cheap deepwater ammonia.
Relative to your question on demand and changes in demand patterns, we have experienced two falls, 2014 and 2015, that were below expectations and below normal, but that was weather driven.
And then we experienced two record springs in 2015 and 2016.
As I mentioned earlier, when you look out on the 10- to 30-day forecast, we see some positive developments in all of our terminal regions, even up in Canada, which receives snow in October.
In limited applications, we see that drying out and temperatures staying in the 50s in the afternoon, allowing probably the applications to accelerate.
When you look at, as a farmer for corn, you have a number of options for N and applications thereof.
For ammonia, traditionally in the past was 180 pounds per acre.
You put it on in the fall and you plant in the spring and off you go.
That has changed with different agronomic prescription.
So, we have seen a little bit less applied in the fall and then pick up an additional application in the spring, two-, three-, and four-stage applications, a combination of ammonia, maybe side-dress ammonia, or UAN top-dress, or even flying over with urea.
Each of those are positive for us.
We do see ammonia in the fall as a component to good agronomic corn practices, and we see that continuing.
<UNK>, on the dividend, if you look at our balance sheet, we had almost $1.6 billion of cash on the balance sheet.
We've got an undrawn revolver and we've got $800 million of cash coming to us next year in the form of a tax refund.
That's before dollar one of operating profit.
So, the problem is not, from an investment grade standpoint, the dividend or our liquidity situation.
We've got plenty of cash.
The issue is all around, in the near term, the pricing environment and the EBITDA generation relative to the aggregate amount of debt that we've got outstanding on the Business.
So, change the dividend, don't change the dividend, it doesn't have a meaningful impact in terms of that particular metric.
And that's why we've worked really hard on the secured credit facility to make sure that we've got the flexibility that allows us to continue paying the dividend going forward, because that's an important element for the equity holders.
Our focus is to get back to investment grade.
And we are planning, as <UNK> articulated earlier, to retire the debt that comes due in 2018.
That's $800 million.
So, we will be delevering at that point.
That will certainly help.
And then as we move into price recovery in the sector, about that time, we expect that will help as well.
We are going through a short-duration situation here, but it's not really dividend dependent.
<UNK>, do you have a ---+.
No, I think that's right.
I think consolidation, generally speaking, is a constructive force.
It allows for rational behavior.
In general, there's synergies to be had.
So, I think it's the natural consequence of things when you go through these cyclical trough periods like we're going right now.
Let me go back to one question, the second half of the question you asked earlier, which is, is our preference dividend or share repurchase.
As a general theme, we like to maintain the dividend.
We don't want to be in a situation where we are reducing that.
But I think, on a day-in, day-out basis for consistent and timely return of capital back to the shareholders, our bias is towards share repurchase.
We think that tends to be a more efficient vehicle to do that with.
