CF工業控股 (CF) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2014 CF Industries Holdings earnings conference call. My name is Nicholas. I will be your coordinator for today. (Operator Instructions)

I would now like to turn the presentation over to the host for today, Mr. Dan Swenson, Senior Director of Investor Relations and Corporate Communication. Sir, please proceed.

Good morning, and thanks for joining us on this conference call for CF Industries Holdings, Inc. I'm Dan Swenson, and with me are Tony Will, our President and Chief Executive Officer; Dennis Kelleher, our Senior Vice President and Chief Financial Officer; and Bert Frost, our Senior Vice President of Sales, Distribution, and Market Development.

CF Industries Holdings, Inc. reported its second-quarter 2014 results yesterday afternoon, as did Terra Nitrogen Company, L.P. On this call we will review CF Industries' results in detail and discuss our outlook, referring to several of the slides that are posted on our website. At the end of the call, we will host a question-and-answer session.

As you review the news releases posted on the Investor Relations section of our website at cfindustries.com, and as you listen to this conference call, please recognize that they contain forward-looking statements as defined by federal securities laws. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including those detailed on slide 2 of this webcast presentation and from time to time in the Company's Securities and Exchange Commission filings. These forward-looking statements are made as of today, and the Company assumes no obligation to update any forward-looking statements.

Now let me introduce Tony Will, our President and CEO.

Thanks, Dan, and good morning, everyone. CF Industries reported EBITDA of $613 million for the second quarter and adjusted EBITDA of over $1.1 billion for the first half of 2014, despite the challenges of relatively low nitrogen prices globally and North American gas prices that were higher and more volatile than any we had faced in the past four years.

I am pleased to report that our capacity expansion projects -- both Donaldson (sic - Donaldsonville), Louisiana; and Port Neal, Iowa, remain on time and on budget. I'd ask you to please refer to slides 5 through 8 in our deck for a snapshot of recent progress at those sites.

We also announced the next phase of our ongoing commitment to return excess cash to shareholders with both a new $1 billion share repurchase program and a 50% increase in our regular quarterly dividend. Now I would like to provide some perspectives on the market. The past several quarters have tested and affirmed our views of the global nitrogen cost curve, the long-term structural cost advantage of North American natural gas, and the strength and cash-generating power of our business model.

Given that there remained excess production capacity globally, nitrogen continued to trade based on supply-side economics, where product pricing is set near the cash cost of the marginal producer. In the first half of 2014 there were production shutdowns in several high-cost regions, including Eastern Europe and even some Chinese production, confirming once again the validity of the global cost curve and the rational economic behavior of the industry participants.

In North America, coming into 2014 ammonia inventories were high and related prices depressed as a result of the poor 2013 spring and fall application seasons. Low ammonia prices combined with almost ideal application conditions led to brisk demand. This spring our teams did an excellent job of execution to deliver all-time-record ammonia shipments of 1.1 million tons for the quarter and 1.7 million tons for the first half of the year.

On the natural gas side North America experienced its coldest winter in 30 years. This dramatically increased gas usage for heating and led to record withdrawals from storage, driving gas prices above $5 per MMBtu at times. However, as expected, the natural gas supply response was swift. Gas production increased significantly and led to record levels of injections into storage, contributing to prices today below $4 per MMBtu.

During the first half of this year, we were able to mitigate the worst effects of the high prices with our hedging program, resulting in our realized gas cost of $4.27 per MMBtu compared to the Henry Hub average of $4.81. We remain confident in our long-term view that gas will trade between $3 and $5.

I'll turn the call over to Bert and Dennis to expand on these points in just a moment, but first I want to highlight how we continue to deliver on our capital stewardship commitment to shareholders. Our focus continues to be: increase CF's nitrogen production and cash flow generation per share of stock while lowering the overall cost of financing the enterprise. We are fully committed to the belief that this is the best approach to generate significant value for our shareholders over the long run.

In terms of how we are going about this, first is our investment in high-return growth projects. We continued to make significant progress on our expansion projects at Donaldsonville and Port Neal, which will increase our nitrogen production capacity and potential cash generation by roughly 25%. Both projects remain on time and on budget, and I fully expect that by this time next year, our new urea plant at Donaldsonville will be up and producing product -- that's page 6 of the slides -- with the other operating unit soon to follow.

Second is our share repurchases. Back in 2012 we announced a $3 billion share repurchase program that was originally scheduled to run to the end of 2016. Last night we announced that we had completed that original program in less than half of the time allocated and now are effectively upsizing it by 33%, adding a new $1 billion authorization. Since the Terra acquisition in the first half of 2010, just four years ago, we have repurchased $4.5 billion of our stock, reducing our share count by 32%, which now stands at less than 50 million shares outstanding.

Third is dividends. We announced a 50% increase in our regular quarterly dividend, which is now $1.50 per share. Since our IPO in August of 2005, our annual dividend has increased from $0.08 per share to $6 per share, a compound annual growth rate of 62%. We have demonstrated a consistent track record of increasing our dividend over time.

Until our capacity projects are complete and operational, we continue to target a dividend yield roughly that of the S&P -- something in the range of 1.5% to 2%. We believe this dividend payment will make CF shares attractive to a broad set of investors who share our belief in the sustainable cash flow characteristics of this Company.

Even with the following all true -- one, there is excess nitrogen production capacity globally, and prices therefore are set on supply-side economics; two, China exported over 4 million metric tons of urea in the first half of 2014; three, ammonia inventories were high and prices somewhat under pressure; and four, North American gas cost was higher and more volatile than it has been in four years -- even with all of that true, we still generated over $1.1 billion of adjusted EBITDA for the first six months of the year.

It is the consistent, reliable, sustainable, ongoing cash flow generation of this Company that enables us to confidently undertake these capital stewardship initiatives. Now let me turn the call over to Bert and Dennis to provide a deeper discussion of our operations during the quarter. Bert?

Thanks, Tony. We had an exceptionally strong spring application season in 2014. We were worried throughout the early part of the quarter that intermittent wet and cold weather would impact farmers' ability to apply nitrogen, but in the end farmers had an extended period of good weather for nutrient application in the latter part of the quarter.

We demonstrated that come what may in terms of weather conditions, the strength of our unrivaled asset base and dedicated employees allow us to perform and serve our customers well. We were able to capitalize on a fantastic North American ammonia season by managing our system of storage and logistical assets to maximize product deliveries to customers. We shipped 1.1 million tons of ammonia in Q2 and reached a six-month record of 1.7 million tons. Shipments were very strong throughout the system, with our Northern and Canadian terminals catching up later in the quarter, as cold and wet weather in those areas subsided and application continued through June.

Pre-planted and side-dressed applications were robust throughout the Corn Belt, but especially healthy in the I states of Iowa, Illinois, and Indiana. The record ammonia sales were due to investments we have made to increase our peak receiving and loading capacity at our end-market distribution facilities. These investments support a continuing trend toward shorter ammonia application season.

We have invested in new loading racks, pumping equipment, and control systems in several of our distribution facilities and plant locations. Among the shipping records set this spring was a new truck loading record at our Medicine Hat facility, where we loaded over 2,300 tons of ammonia in a 24-hour period, surpassing the prior record by 13%.

As Tony mentioned earlier, we've seen rational producer behavior in reaction to global urea prices. Chinese producers exported 4.2 million metric tons of urea for the calendar year through June, a 219% increase over the same period in 2013.

This brought the July to June fertilizer year rate to 11 million metric tons and put pressure on global prices. But our view of the cost curve was proven, as producers in high-cost regions, such as Romania, Lithuania, and Estonia, along with some Chinese production, shut down as prices went below their cash costs.

Last year urea prices moved down beginning in February until settling out in October. During that time period some importers to North America incurred losses as product prices moved down during the time from when they bought offshore product to when they transported and sold that product in market. We believe some retailers saw margin compression after taking inventory positions earlier in the year, only to have lower sales prices when farmers stepped forward to purchase and apply urea. As a result, this led to buyer reluctance in 2014 to hold inventory and be exposed to price risk.

During the first half of 2014, forward prices for urea were lower than spot prices, which discouraged imports into the United States, as traders feared potential losses. As a result North American urea inventories were tight during the second quarter. And when demand emerged in the spring, prices at the US Gulf remained above international price parity.

We chose to accept the inventory carrying risk and were rewarded when we decided to price only spot sales and avoid forward sales to any great degree. We were able to achieve a very attractive average price of $396 per short ton when the average US Gulf price during the quarter was $356 per short ton and the Middle Eastern granular FOB price was $288 per short ton.

We planned for robust UAN demand from late April through June. We stored product in the terminals in the absence of first-quarter demand, and we planned to pick up spot sales in the prompt market. However, the strong and lengthy ammonia season took some demand away from UAN. We managed this change in market conditions by selling into the strong ammonia demand and utilizing our distribution facilities to pick up available UAN sales opportunities.

As a result of capturing these opportunities and due to some production issues during the quarter at our Woodward complex, plus our exports in Q2, our UAN inventories were at normal levels by the end of the quarter. We launched our ammonia and UAN fill programs earlier this year than last. The programs had good demand, and we have built an attractive order book.

We expect the second half of 2014 to be positive, but a little different from 2013. In 2013 urea prices entered July around $300 per short ton at the US Gulf and then moved down to $280 per short ton by mid-October. The outlook last year did not appear very positive due to the abundant amount of Chinese urea stored at the Chinese ports and ready for export.

Urea pricing pulled the overall nitrogen price structure lower, and the general outlook was negative.

In 2014 as we entered Q3, urea prices in North America continued to be above international levels. We expect a large amount of urea imports in August and September will bring the North American price structure toward parity with the world market, and that prices at the US Gulf could be around $310 to $330 per short ton in the fourth quarter.

UAN and ammonia fill programs have already been accepted in the market, and a significant amount of volume has been ordered and will be shipped over the coming months. We believe that the UAN and ammonia fill price structure will provide a solid base for business through Q4. With the size of our order book and the potential for rail and barge system congestion with the expected demand for transporting grain and other products this fall, we will be focused on moving our product into position to satisfy existing orders and expect to have a relatively limited volume available for new orders for UAN and ammonia.

Going out into 2015, even though we have seen a decline in corn prices, we believe that over 90 million acres of corn planted in the United States, which should result in solid nitrogen demand. Corn continues to offer farmers more attractive economics than soybean, and fertilizer costs are projected to be attractive and in line with the 10-year average as a percent of crop revenue.

Even at lower corn prices, North America would still be a significant import region for nitrogen; and with our unmatched portfolio of end-market production, logistical assets, and distribution facilities, we have the flexibility to produce whatever form of nitrogen the market demands and have it in the position at the appropriate time in order to sell every ton we produce.

Now let me turn to call over to Dennis.

Thanks, Bert. With the strength of our ammonia shipments and the effective work of our sales and distribution teams, we generated strong earnings, as represented by $613 million of EBITDA, which was 42% of net sales during the quarter. Our EBITDA was negatively affected by several items in the second quarter of 2014. Our cost of goods sold was higher, as inventory produced during the first quarter, when our physical gas costs were higher, was sold; and those higher gas costs made their way through our income statement.

During the second quarter of 2014 we also had higher fixed cost absorption rates in our cost of goods sold due to unscheduled downtime, particularly at our Woodward complex, where we incurred approximately $20 million in expenses. Other operating expenses of approximately $22 million included $7 million specifically related to the expansion projects. We are separating out these project expenses due to the fact that they will go away when the expansions are complete.

As Tony mentioned earlier, the structural cost advantage of North American natural gas was made evident by what has happened with gas prices over the past two quarters. During this winter, we saw record storage withdrawals and short-term weather-related volatility in gas prices, which at times traded over $5 per MMBtu on the NYMEX.

However, the underpinnings of the enduring advantage of North American gas, a large, proven resource base; increasing producer efficiencies; and an expanding infrastructure of pipelines and equipment to bring gas to market resulted in a quick supply response. Additional supply came into the market, resulting in gas injection levels that have averaged over 100 billion cubic feet during each of the last 12 weeks and near-term gas prices which have dipped back below $4 per MMBtu since mid-July.

With the benefits provided through our hedging program, our realized gas purchase price for the second quarter was $4.19 per MMBtu compared to the average Henry Hub price of $4.58. In May we assessed the natural gas market and determined it would be appropriate to add hedges for the third quarter to mitigate our cost risk from potential short-term summer price spikes.

When the second quarter ended, we had in place hedges for 90% of our gas needs for the third quarter via collars in a range of $4.25 to $4.60 per MMBtu. Since the end of the quarter, as gas prices have declined, we have hedged 90% of our October gas needs with collars between $3.50 and $4.00 per MMBtu.

We continued our growth investments in the second quarter with $209 million of cash expenditures on our capacity expansion programs and $83 million for all other capital projects. The capacity expansion projects are progressing on schedule and on budget. Activity has included the completion of foundation piling; the arrival of certain major equipment; and the erection of structural steel, which is now proceeding at both locations, some of which is highlighted on the photos on slides 5 through 8.

Construction of non-production facilities, including urea warehouse and ammonia storage tanks, is also well underway.

In conjunction with this release we are reducing our full-year capital expenditure forecast from $2.5 billion to approximately $2.2 billion. As the capacity expansion projects have progressed, we have gotten a better view of timing of our expenditures and expect that some of those amounts will be incurred in 2015 rather than 2014.

We also have performance incentives in place with a number of our contractors that we are holding back until the end of the project. So these expenditures won't be made until we reach completion.

We do expect to see a much higher rate of spending in our third and fourth quarters as we take deliveries of additional equipment and hit peak mechanical construction activities. We are confident that we have the liquidity and operating cash flow to fund all of our strategic initiatives. As of the end of the second quarter we had total liquidity of $3.8 billion, including our cash and cash equivalents, restricted cash for the expansion projects, and availability under our revolving credit facility. We are committed to our investment-grade credit rating, as it enables us access to long-term low-cost financing and provides us the flexibility to pursue our strategic objectives.

With that, Tony will provide some closing remarks before we open the call to Q&A.

Thanks, Dennis. As you have heard, our business is running very well. CF is generating strong margins and deploying the resulting cash flow to further increase shareholder value. I would like especially to thank our team in distribution facilities for their exceptional work during the quarter. Their focus on safe and efficient operations enabled us to set all-time ammonia shipping records and serve all of our customers' needs.

With that, we will now open the line to answer your questions. Operator?

(Operator Instructions) P.J. Juvekar, Citigroup.

Hi, good morning. It's Dan Jester on for P.J. today. So I just wanted to follow up on Bert's comments about the urea imports into the US expected to pick up over the next coming months. I guess, are dealers hesitant to restock at today's prices? And can you maybe talk about your order book specifically for urea, today as compared to maybe this time last year?

With the need to import a significant amount of urea, and really all nitrogen products into the United States -- I'd even add P and K -- because of the significant drawdown that we experienced through Q2 and into Q3, we are going to have to be very active. I think there are some challenges to make that happen, due to the rail constraints; and as I mentioned in my remarks, the barge issues, where you are seeing barge pricing go up significantly. That will probably last through into Q4.

And so there is a need; you can't wait until spring for any of these products to put in an order and have it magically appear in a short term. So there is going to be a buildup. We are seeing a positive demand for our products, but we are continuing in the same vein of selling more into the spot market because of the price realization that's available in that market as compared to the forward market.

We have commitments in place, but they are unpriced for future demand. So we see healthy demand and shipping of our products, but we do see imports maintaining in a similar pace.

Regarding imports for urea compared to previous years at this time, year to date -- the numbers we have are through June -- the United States is roughly 600,000 tons behind the previous years' important rate. And what you will see, I think -- again, with the drawdown you had urea going on top for a extra -- as farmers were preparing for yield or applying for yield over costs, you had a lot of urea in UAN going down into July, through July.

So we still believe that the inventory levels are low. And coupled with the 600,000 deficit, you will need to be importing a significant amount.

That's very helpful. Thank you. And then it sounds like you think that the transportation and logistics challenges are going to continue. Does it make sense to invest even more in sort of storage capacity in-market or more truck loading facilities, so that you can be even more flexible going forward? Thank you.

Yes, it depends on the product. And we are investing for -- in terms of the facilities that we have, we are investing on efficiency issues, safety issues. And we will continue to do so as appropriate.

But we have tons of flexibility today in terms of when you factor in, looking at ammonia, pipeline ability; barge ability; and then we would probably go rail to truck. For urea we rely a lot on our customers' facilities. There had been a significant amount of unit train facilities built.

We sold four of our assets, our dry assets, to GROWMARK several years ago because of that viewpoint that our customers were better utilizers of those assets than we were. We still utilize our Pine Bend facility, which is at the end of the Mississippi, for receiving urea and other products. And so I think that the investments as appropriate, and as we can leverage and use them, we will do that. But it depends on the size and market.

Great. Thank you.

Vincent Andrews, Morgan Stanley.

Just wanted to sort of square the buyback announcement with a few things. You used to have a chart in the deck that sort of went through the amount of excess cash you thought you might generate over the next couple of years, and I think you kind of could eyeball that and it would look close to $2 billion.

Notwithstanding the fact you have bought back an extremely impressive amount of stock so far year to date, just kind of curious where the $1 billion number comes from, and why it isn't a bigger number over a longer period of time, or a smaller number over a shorter period of time? It looks like you have enough cash flow between what's on hand and what's coming in to certainly do it by the end of the year, but you are talking out to 2016. So what are the puts and takes, as well, that will cause you to do it slower or faster?

And then just as a follow-up, there have been some interesting developments in the MLP market in the last months. I'm just wondering if you have any update on your thought processes there? Thanks.

Yes, Vincent, if you go back to what we -- I think that you are referring to this slide that was presented in New York last year. You know, you'll all have your own view as to what operating cash flow will be over time, but I think it's important to understand that that slide talked about a number of priorities.

And one of our key priorities, obviously, is to continue to do what we're doing with our capacity expansion projects, which -- you know, our midteens returns project, which is invest in those things and finish those things on time and on budget, which we are on track to do. We finished the share repurchase program that was authorized back in 2012, as you point out, on an accelerated basis, I think in most people's minds. And then we've also authorized the additional $1 billion.

We will be assessing our operating cash flow and excess liquidity and stuff as we go through time. And we will make adjustments to the things that we do, as we've done in the past. But I think as far as the $1 billion is concerned, I think that represents, like Tony said, an upsizing, really, of the current program.

And it just continues to underline our bias towards share repurchases and our commitment to return excess cash to shareholders. If things develop in a good way and the way we think they are going to develop, there could potentially at some point in time in the future be upside to that. But at this point in time, there's no way we can commit to that or know that. But we are assessing this thing on a real-time basis, and we will continue to do that.

And, Vincent, what I would add to that is: we have historically been and continue to be a reasonably conservative company in terms of our commitments. So we only commit to things that we know that we can accomplish.

And as Dennis said, front and center is our execution and completion of our capacity expansion projects. And they are on time and on budget. But you are never done until they are actually operating, and the place where a lot of the expenditure happens is at the tail end of those things. And we want to make sure that we maintain absolute financial flexibility and liquidity through startup and operation.

And so for us it's not an issue of is there more? It's more just a timing question of do we do it now, or is it after we have got clear visibility to start up; and things are running; and then there's more liquidity to return down the road.

So I think what you have seen from us is a measured, appropriate-paced cadence to this, such that we are not doing anything at all to endanger our investment-grade credit rating and our liquidity position. I think that's consistent with the way that philosophically we want to run this business.

Yes, Vincent, you also asked about the MLP, and I just wanted to let you know we have completed with the two banks our study of MLPs. And not surprisingly, because I think we've talked about this in the past, as we look at the existing assets, it does not make sense for us to sell those things into an MLP. Obviously there is a large tax hit associated with that, because they are low tax basis assets. So the economics of that just in and of themselves doesn't make sense.

I think as far as the capacity expansion projects are concerned, it's worth noting that these capacity expansion projects are at the very core of our business. They are not peripheral activities; they are core to our strategy. And in addition to that, the retention value of those things when we look at the them on a DCF basis is very likely to be well in excess of anything that could be achieved by selling them into an MLP.

So while I can't say with absolute certainty that we would not look at an MLP as an option for those in the future, I would say that it's very unlikely. Because, again, those are assets that are at the core of our business. Those assets will have a very high retention value, and those assets also provide us with additional debt capacity when they come on in 2016, 2017. And as you know, we are able to access the investment-grade debt market in big chunks for yields on an after-tax basis that are very low. So that's where we have gotten to with the MLP.

Okay. Thanks very much. I'll pass it along.

Don Carson, Susquehanna.

Bert, question for you. I was somewhat surprised at the high amount of ammonia sales that you had, especially given that the spring was very wet and very late. Just wondering if you can talk a bit more about that. Was that catch-up from last fall? Was that just sort of a pricing issue? And just wondering what impact on this mix did additional sales to Mosaic have in the Tampa area?

Okay. Yes, there was an impact because of the 2013 fall application season. We estimated there were probably 400,000 tons that didn't go down in the United States, and there was some pickup.

But what you had in Q2 was a pretty favorable price structure. I think ammonia was a good value starting off; we came in -- we at CF and I think the industry came in with high inventory levels. And then the weather was very conducive. We had an open window early in the quarter, and then it was wet and cold for several weeks, which allowed resupply. Again, another burst in May. And again, another wet, cold period and some resupply. And then the Northern system kicked off, which is Velva, Grand Forks, and the Canadian terminals that we purchased last year. And we had an exceptional run up there.

So when you combine and put everything together, it just worked really, really well. And then the side dress season kicked in, where there was abundant -- on our side, at least -- enough inventory remaining that we had good pull, really, into early July.

The Mosaic impact was not that great. We probably moved about -- I think it was 53,000 tons to Mosaic during Q2. Our ag percentage -- normally we are a 70%/30% range. We were more 80%/20%. And the Mosaic -- you can run the numbers -- was probably about 5% of that. So while it's nice volume, and we appreciate Mosaic as a customer, it did not have a big impact on our ammonia movement.

Just to tag on with Bert, I think there's a couple of things that underlie -- drove that, one of which was we now own 100% of the Medicine Hat facility, where a year ago we were just kind of just phasing into that in terms of having closed in the spring, and as Bert said, didn't really have full operational control of the Canadian terminals.

Two is we are seeing annualized full-year effects of some of the debottlenecks we've done at our other operating ammonia plants at Verdigris and at Donaldsonville. And so we've got some incremental production that's online there.

And then third is the inventory starting position coming in. So all three of those things in addition to the Mosaic contract led to a pretty favorable ammonia run for us.

And then just to follow up on your gas hedging strategy, you seem to be much more active in hedging your gas position over the last 12 months. Some quarters it benefits you; some it doesn't. I'm just wondering why you have become more active? And why not just take more of an approach to manage the peaks in the summer and winter months?

Yes, Don, I think that's a great question. Let me just talk a little bit about philosophically how we view this, which is -- we really take hedging positions for one of two reasons. Either we are trying to get rid of negative volatility events, or we really like the pricing in terms of where strip is trading in the forward.

And as we sat in the third and fourth quarters of last year, we took a number of hedged positions for the first and second quarters of this year, really for both of those reasons. We liked where the strip was trading, and we were concerned about potential weather events.

In both of those it turned out to be a great decision at that time, because gas traded substantially above where we had hedged. As we said in May of this year, storage in North America was almost 1 full TCF lighter than it has been over the last five-year average. And we were really concerned with that a hot summer with a lot of air conditioning requirements could have sent the gas market in a very volatile, spiky, northerly direction.

And we wanted to take that risk off the table. And so at the time, we could have locked in swaps at $4.50 or $4.52. We decided to put collars in instead in order to participate in some of the downside if our worst fears weren't realized -- and, in fact, participate down to $4.25. We are delighted in fact that things have moved the direction they did.

I think it was the right decision that we made. And again, if we were sitting in May, what we were really trying to do is eliminate the negative volatility consequences that are potentially out there. And for the year we are still more than $60 million to the good based on our total hedging positions, whether they be realized positions or mark-to-market in terms of where the current strip is.

So I think -- do you get every one of them right? No. But we are not trying to actively be in there trading in order to get every one right. What we are really trying to do is manage the negative volatility so we can deliver results to the shareholders.

Thank you.

Michael Piken, Cleveland Research.

I think you had sort of alluded to this in some of your prepared remarks, but as you think about the UAN market over the next 3 to 6 months, it sounds like you have a comfortable position in terms of your forward book based on summer fill participation. How is that going to impact your export business in the back half of the year? Do you think that you have enough orders sufficiently here that you might not have to ship as much off as you did, maybe, in some other time periods in the past? Thanks.

So the UAN market -- we believe we are very well positioned based on our fill program, the acceptance of the fill program, and our customer activity and desiring to purchase more. We limited it to a certain quantity, and we are still active in the market. We are still selling at various points, both for prompt and for forward.

But we anticipate that this market should continue to improve based on the fundamentals for the other end products. And so exports -- we participate in the export market, really, as a third option, as we have opportunities that are available to us that are attractive. This year we've exported to Europe, and to Argentina, and a little bit into Mexico.

And we will continue to look at that. We believe all three of those markets have continued demand. But there are probably other sources of supply that make more sense than for us to ship at this point.

Okay. Terrific. And then just shifting gears, if I could just talk a little bit about the timing of when you think some of the new capacity is coming online -- you indicated that Donaldsonville urea might be starting up a year from now. Do you think that most of the rest of that facility will be on in time for the spring of 2016? Or should we be thinking that this is more of a back-half 2016 type event?

Michael, in that regard we think that within a year, urea will be up and operating. And approximately kind of three or four months after urea comes up, then acid and UAN will be up. And we are targeting right now to be mechanically complete or close thereto on the ammonia plant by the end of next year, with commissioning and start-up happening in the first quarter, maybe bleeding into the second quarter of 2016 for the ammonia plant at D-ville.

In terms of Port Neal, what we've committed to is 2016. We are certainly trying to manage a much more aggressive time frame than that and ideally would like to really ramp that up and accelerate it. But we are still a little bit earlier phase there. And we've got to make sure we can get through this winter and make good progress, get delivery of all the critical items before we can sharpen the pen in terms of the actual start-up there.

But we are certainly internally managing to a much tighter deadline than the ones that we have committed to on the outside. That's why we are very comfortable saying we are on schedule, because we are well ahead of what we've made external commitments about.

Okay. Terrific. Thank you.

Kevin McCarthy, Bank of America.

You alluded to supply closures in Eastern Europe and various countries as well as China, kind of proving out your view of the cost curve globally. Can you speak to how much capacity might have been shuttered in the aggregate? And has any come back online recently? What is your outlook there?

So in the aggregate I'm uncomfortable giving a specific number, but we do follow these facilities individually as well as in terms of regions -- what is being exported, being produced, and what is online and off-line. And what you are seeing today, for different reasons, different plants are running or not.

Today, right now, in Egypt we've gone through a gas shortage where they are having to bring in LNG. That is impacting the urea, UAN, and ammonia supply. With the unrest in Russia and the Ukraine, focused on the Ukraine, you are seeing a significant amount of capacity off-line. And today that represents 7% to 8% of the ammonia traded supply -- so pretty big impact that wasn't expected probably six months ago.

And the Eastern European locations is more gas related, gas cost related. So those plants flex on and off when it's attractive for them to produce and above their cash costs. After an exhaustive study, an internal study we did of China, segmenting the different levels of cost of production for an anthracite, thermal, or gas producer; and then laying on the logistical costs -- ports costs, labor costs -- it was interesting to us how that actually functioned in real time with several of the outlying plants in the higher-cost, smaller-capacity facilities shutting down this year in May and June, when we hit the levels of around $260, $255 for prilled product coming out of China.

That market has since improved. We've seen some pricing improvement out of China for both granular and prilled. But you can go around the world -- whether it's Pakistan, Argentina, Trinidad -- you have got gas issues. And so the capacity is out there, yes, but our opinion on the market and how people choose to produce or not -- it has been proven correct that these high-cost facilities do shut down, and we seem to find a floor and then march back up until we hit the marginal producer, and they come up. And as we mentioned, Q4 urea could be in a range of $310 to $330 at the US Gulf, which is an attractive range for us.

Just on that front, Kevin, our urea cost at $4 gas -- and we are below $4, currently, but our urea cost for Gulf production is -- call it a $1.50 on a cash basis. If Gulf urea is trading in the kind of $3.20 plus or minus range, that's still pretty healthy margins for us. So we are not -- we look at that as being a pretty favorable, soft landing, if that is kind of as bad as the fourth quarter is potentially shaping up to be.

I think the question for that -- and it's a good price for what Tony just put out there -- the question for some of these new builds that are coming or being discussed in the market, that's a pretty skinny margin for a $2 billion to $2.3 billion investment for a greenfield operation. As we bring on our new capacity and other capacity we think the other producers that are currently in the business are bringing on, we think that's a logical place for the US market or the North American market to settle, and there won't be probably a lot of new announcements based on that operating range.

That's helpful. The second question, if I may: corn acreage obviously was down this year, and you had the Woodward outage. So your production was flat, it looks like, on a year-over-year basis in the quarter; and yet your volumes, if I add up all the product lines, looked like they were up about 5%.

Can you speak to your inventory levels at this point? It looked like the number on your balance sheet was down quite a bit -- 36% year over year. How lean are you relative to what you would expect for this time of the year?

On the corn acre number on a percentage basis, we are not down that much. And what we are projecting for 2015 at 90 million acres is still healthy. The corner on corn might be a little bit negative compared to soybeans, but the corn against soybeans -- you are going to have a lot of soybean acres transitioning into corn -- one, economically; but two, agronomically -- that makes sense.

When you look at the Woodward outage, our exports and our hold book on our very positive Q2 performance, our inventories are low. Our inventories for all products.

And when you look, that in conjunction with the lower import numbers that we've received on all products -- ammonia, urea, UAN, and ammonium nitrate -- and from what our interaction with our customers on their low inventory levels, it really sets up a pretty positive operating environment through, I believe, 2015.

Thank you.

Mark Connelly, CLSA.

Thank you, Tony. I wonder if you could just give us an update on your thoughts about the new nitrogen plants coming up -- whether you think that there has been any shift in what's likely to get built. You have talked about in the past about some of the logistical challenges, and I'm wondering if any of the near-term logistics have reinforced that view, or whether the pressure on the rails to expand capacity might make those projects more viable?

Thanks, Mark. I think the issue is not just accessibility of power on the rails or power on the river for barge, which is also under pressure right now, as Bert said. Barge rates have gone through the roof. But building the tanks and the terminal systems, and buying the railcars, and developing the rolling stock.

So as we look at the Port Neal project on a fully loaded basis, as we fold it into our system, based on having announced it in 2012, we are very comfortable we can deliver that project all-in for $1.7 billion. If you were announcing that project today, because of exchange rate fluctuations, lead time, and other cost escalations -- labor and so forth -- it would probably be close to about $2 billion.

And if that project were a greenfield, we think it's more likely to be about $2.3 billion, $2.4 billion. And as Bert mentioned earlier, with urea pricing in the Gulf, call it, in a $320 range through the fourth quarter, the return profile that's available for a $2.4 billion project is pretty skinny.

So we think that there are some people that are likely to go out there and continue to evaluate these projects, but the number of them that are likely to come online is less than what North America imports. So we don't see North America going into a structurally long or export position by 2018 or even 2020.

Greenfield costs are so much more, because you don't have the logistics systems to feed into. You don't have the direct ties to the rail systems, the gas pipelines, the utility lines, and so forth.

So it really is a tough thing to do on a greenfield basis. So we feel very comfortable having the brownfield position that we do and having started the projects when we are. I think it's possible that you could get a Yara/BASF kind of plant being built and a few others like that. But the number of brand-new, greenfield end-market plants, we think, is pretty challenged. And in particular the one that was announced in Indiana for what was claimed to be $1.6 billion -- I would take the over on that one.

Okay. If I could just look out a little bit further, you've obviously got your hands full with expansions. And people like your current expansion and buyback thing, but we are hearing more and more CEOs as we look around the world talk about opportunities outside the US. It's been a long time since CF has talked about looking outside the US. Is that something that is on your longer-term list of interest?

Yes. You know, I think this is the way we view it, which is: the global nitrogen market is incredibly fragmented. The largest players in the industry only represent 4% to 5% of the total capacity in the marketplace. So it's really, really fragmented. Traditionally, capital-intensive process businesses tend to consolidate over time.

We believe we are in a great position to do it, but we have no interest in going into places that don't have great return profiles for our shareholders. We think our stock represents an incredible value, and deploying that capital against high-growth -- high-return growth projects in North America, where there is low political risk and a long-term, stable gas availability, and/or buying our shares back, we think is a pretty compelling proposition. So I wouldn't say never, but it's not something that we are out there doing at all costs.

Anything that we'd do in that regard would have to have a great return profile. Otherwise, we are just not interested in doing it.

That's super. Thank you.

Mark Gulley, BGC Partners.

-- project, at least in the Farm Belt, is proceeding; and that's because of substantial grants from the state. So for those people that still want to build a greenfield plant, Tony, and given the fact that you still have available land -- let's say, for example, Port Neal. Would it make sense even at this juncture to be looking at partnering with somebody, putting the capital on your site, and then having a big risk offtake agreement?

Hi, Mark, it's Dan Swenson. The first part of your question didn't come through on the line. Would you repeat the beginning of it?

Yes. I was just asking that -- there are some people out there that still want to build greenfield plants, yet the economics don't look good. So connecting the dots, would it make sense to put another ammonia urea train -- perhaps at Port Neal -- and partner up with someone who wanted to build a greenfield, but just couldn't make the numbers work?

We have no interest in helping facilitate others' entry into this marketplace. If capacity is needed in the market and there's good economics, we think we are fully able to justify building the project on our own and for the benefit of our own shareholders.

And as Dennis said, each one of these things just further enhances our ability to fund it with or take on some additional debt servicing capital. So we think we can do it if the marketplace desires it. It's really a question about -- does the market need it? And is the return profile attractive for us to do it?

And we are fully committed right now. We don't have the bandwidth to be chasing those things. So we are going to finish what we have started, and then reevaluate where we are at and be very thoughtful about it. But I'm going to turn it over to Bert and let him talk a little bit about the market.

I think with a market perspective of -- we have a very solid customer base, and we work closely with our customers based on their requirements for the products that we produce. And we have contracts in place and take patterns to make sure that our product moves seamlessly through the end of the market.

On top of that, we have talked about our distribution system for UAN and ammonia that works very, very well that our customers are able to utilize. But if we had to make a move into the market and acquire or build storage into some of the key markets to move our product, we are willing to do that. That's a very inexpensive way to move our product, if we had to do, let's say, urea into certain markets.

Port Neal is targeted towards some very attractive urea consumption market in the Dakotas. We think Donaldsonville will come up into the lower part of the United States. And then you have Medicine Hat. So we are well positioned to supply all areas of the major consumption regions. And through debottlenecks or whatever else, we can add additional capacity fairly inexpensively.

And kind of a housekeeping question: to what extent did the Woodward outage affect production or, more importantly, shipment? Could you have shipped more had the Woodward outage not occurred?

Yes, we could have. We lost several months of production. It went down in mid-April, didn't come back until late June, really, for only July shipments. So it did negatively impact on our ability.

That product would have gone into the market. And so we tend to run our plants full speed all the time and move that product into the market on a ratable basis.

Yes. We lost that plant for almost the entire quarter, and that directly affected results, both on the expense line side and the fact that we didn't have the revenue coming out of it. Even that said, though, we did run our entire system at 96% of rated capacity on the ammonia side.

We target closer to 98% or 99%. We think that that's what's readily achievable quarter in and quarter out, because there's always going to be some amount of turnaround activity and/or some amount of just unexpected outage. So it was a couple of points below.

But the good news, I guess if there is any there, was that -- one, Woodward is one of our smaller ammonia plants and facilities; two, we didn't have any injuries or other kind of problems, and we were able to bring the plant back up. And it's in full operation now. So we are back up and running on all cylinders.

Thank you.

Tim Tiberio, Miller Tabak.

In light of your forecast for lower year-over-year corn acreage, is there any appetite or interest in trying to layer in more industrial exposure as we head into 2015 to maybe smooth out what could potentially be increased volatility in ag chemical prices?

Tim, we look at industrial business as an important part of our platform. I'm going to turn it over to Bert here a little bit to jump into more detail. But I'll tell you, we like the ag market. It generally trades at a premium to industrial. Now, you have to have the logistics and distribution infrastructure; you have to have the expertise in your sales force and your other people to be able to participate in that.

And some competitors say, oh, they prefer industrial, because they don't like the volatility. Well, the volatility is all on the positive side relative to industrial; it doesn't go the other direction.

So all you have to do is look at what some of the other people who like industrials price realization is versus ours, and you see the benefit of being in the ag marketplace. So I would much (technical difficulty) there. But we do do some baseloading of industrial business, because it's part -- helpful in building an overall book of business.

This is Bert. I think as you have seen us transition since the Terra acquisition from a very low level of industrial business to, I would say, an appropriate amount today, it's really -- as we look at the business, and you are always rationalizing your opportunities, and looking at them, and choosing what is the best medium- and long-term for the Company. So that's a mix of ag, industrial, and exports.

And we've exported all four of our nitrogen products. We have industrial customers for all those products also, except UAN. We enjoy our Mosaic contract and look forward to building and growing into that. Our Orica contract that will grow beginning in 2017 is a very good contract. And then our various agreements for ammonia shipments throughout the United States and -- or North America.

And so it's a good mix for us. We are able to leverage our assets and, we think, achieve a healthy return on our investment because of that mix.

Great. And just one last question, if I may -- a more detailed question on mid-Corn Belt ammonia pricing. If you go back to 2009 and kind of a similar corn price environment, obviously acreage was well below 90 million acres that year -- but we still saw several quarters where that premium in mid-Corn Belt ammonia really collapsed almost near urea prices. As we look out, is there any reason why that would not reoccur from your perspective? And if so, why not?

I don't see that happening. You have just got a different market today than 2009. If you want to go back to 2009, ammonia traded in the US Gulf at $125 a ton, because people were desperate to get rid of their ammonia. That was more of an economic and a wholesale collapse in the commodities segment. I don't see that happening today.

And the Corn Belt has actually held firm, and it will continue to do so. And why that is is the freight structure has changed in North America. You can no longer move ammonia for $30 a ton on a rail car halfway across the United States. It's more like $200 a ton.

So the ability to move your product and have the terminals -- and, again, going back to our system, of the percentage that goes up by pipe that is very safe; and through our system that is shipped out by truck directly to a local market; and then it's moved by barge, which we have barge ability directly into our terminals that are on the river systems as well as out of Palmyra to shuttle product back and forth during peak demand.

What we are doing is moving products off the rails of ammonia. So I think that there is a demand for ammonia. It is an agronomically very good product when you are utilizing the four Rs, which the TFI and the CFI have been propagating and communicating to our industry. So I see ammonia continuing as a very strong product in our product portfolio.

Tim, the other thing that I would say is there has been some shifts in terms of how the market is operating. So you have seen a number of industry participants -- some of our competitors that have done upgrade projects, and other things like that, that have in fact shrunk in the amount of available ammonia there is in the corn belt. And so -- because that product now shows up in terms of urea or UAN.

So the number of tons that are available in the marketplace are actually less. And it's not really possible for importers to come in and bring in ammonia, because they don't have end-market storage. It's only really three producers that have a significant end-market storage. And therefore, when end-market production goes down the way it has, because more of it is being upgraded, it really means that there is not the opportunity for that price collapse.

Thanks, guys. That's very helpful.

Matthew Korn, Barclays.

I'll just ask the one. Tony, I remember comments you made last year about how you saw CF as really a global company that was fortunate to have its assets located in North America. So thinking globally, among Ukraine instability, Russian sanctions, Middle East conflict, Argentine turmoil -- maybe your typical summer, but what do you see as having the biggest potential geopolitically to maybe disrupt your business over the next few years? Is it some kind of Chinese/Russian natural gas agreement? Would it be trade barriers that pop up somewhere? Or all of this do you really see as having the potential for continued prolonged constraints on effective supply? Thanks.

I actually think it's more the second part of that, which is at the end of the day, people need to eat. Plants require nitrogen. It is not a discretionary nutrient, and farmers understand that and apply it every year.

We see nitrogen demand continuing to go up about 2% per year. And in fact, all of the things that you are talking about, which create various supply disruptions at different points in the world, really just help us. One of the benefits of being a global participant but with a North American production base is we are not prone to the same kind of instability and disruption that those other areas are.

And if the Brazilians need to import more nitrogen and are willing to pay a premium for it, we are in a prime position to be able to ship it to them. So we really like our asset base and where our new production is going to start coming online here pretty soon. And it gives us the flexibility of either serving North American farmers' needs, or Latin American, or other places. So a lot of the stuff that is going on out there is actually, I think, pretty helpful for our business over the long run.

Operator, I think we have time for one last question. Then we will conclude the call.

Adam Samuelson, Goldman Sachs.

Maybe just one question on the dividend, Tony. You talked about kind of targeting a dividend yield in line with the S&P; you just took it to $6 a share. Actually gets it a little bit above the S&P today.

But just philosophically, on a long-term basis, once the capacity expansions are done, what is the planned dividend payout? How are you thinking about expanding the payout ratio over time?

I think it's more -- at that point more of a payout ratio that we'll be kind of focusing at right now. As Dennis mentioned earlier, we think our shares continue to be a screaming value. And so we think we need to be kind of in the right range.

Again, I'm targeting sort of 1.5% to 2%. Because, look, we've got 25% additional capacity that's going to be coming online here in the next -- you know, beginning within a year from now. So we think there's an awful lot of runway for our shares to move and put us back into that range. Again, given that we think that our shares are a big value, we want to make sure that we have a bias in the short-term towards share repurchase.

As the capacity comes online, and as we start generating these really significant increases in cash flow generation, I think with the drop-off on CapEx, it warrants a reevaluation of how we've positioned this with respect to both industry peers and the marketplace, and what our shareholders are looking for.

But I think the important point here is we are not doing anything stupid. We are returning all of the shares, and the people that are long-term holders are very thankful that we are heavying up on the share repurchases, because it's benefiting them pretty substantially.

So we are going to go ahead and continue to keep the dialogue open with shareholders. But our focus is return excess capital.

All right. Thanks very much.

Ladies and gentlemen, that is all the time we have for questions today. I would like to turn to call back to Tony Will for closing remarks.

Thank you. I just wanted to give a little perspective on the last few years. So we have and we continue to increase the capacity of our business through high-return investments.

We completed the sale of our phosphate segment. We've lowered the cost of capital through our investment-grade bond offerings. We've grown our dividends by a compound annual growth rate of 62% since our IPO, and we've reduced our share count by 32% since funding the Terra acquisition just four years ago.

That's a terrific set of accomplishments -- one we are committed to continuing on behalf of our shareholders. Thank you for your time today.