CF工業控股 (CF) 2016 Q3 法說會逐字稿

Welcome, ladies and gentlemen, and welcome to the third-quarter 2016 CF Industries Holdings earnings conference call. My name is Seth, and I will be your coordinator for today.

(Operator Instructions)

I would now like to turn the presentation over to your host for today, Mr. Anthony Fusco with CF Investor Relations. Sir, please proceed.

Thank you. Good morning and thank you for joining us on the conference call for CF industries Holding, Inc. I'm Anthony Fusco with CF Investor Relations. Along with me today are Tony Will, our President and Chief Executive Officer; Dennis Kelleher, our Senior Vice President and Chief Financial Officer; Bert Frost, our Senior Vice President of Sales, Market Development and Supply Chain; and Chris Bohn, our Senior Vice President of Manufacturing and Distribution.

CF industries Holdings, Inc. reported its third-quarter 2016 results yesterday afternoon, as did Terra Nitrogen Company, LP. On this call we will review the CF Industries' results in detail and discuss our outlook, referring to several slides that are posted on our website. At the end of the call we will host a question-and-answer session related to the Company's financial results for the quarter.

As you review the news release 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 3 of the accompanying presentation, and from time to time in the Company's Securities and Exchange Commission's filings. These forward-looking statements are made as of today and the Company assumes no obligation to update any forward-looking statements.

This conference call will include discussion of certain non-GAAP financial measures. In each case, a presentation of the most directly comparable financial measure, calculated and presented in accordance with GAAP, and coinciding reconciliation of the non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with GAAP, is provided in the earnings release and the slides for this webcast presentation on the Company's website, www.cfindustries.com.

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

Thanks, Anthony, and good morning, everyone. Last night we posted our financial results for the third quarter and the first nine months of 2016, in which we generated adjusted EBITDA of $83 million and $725 million, respectively, after taking into account the items detailed in our earnings release. The third-quarter typically has our lowest volume and lowest realized prices of the year, and this year was no different.

The nitrogen cost curve has widened and flattened, pressuring product prices as a significant amount of new capacity has come online globally. As capacity was increasing, the costs to produce and move nitrogen into market was decreasing due to lower feedstock and ocean freight costs, and currency devaluations in certain production regions.

In addition to low product prices and already seasonably low volume, the situation was exacerbated by a change in buyer behavior. The North American value chain delayed purchasing products given their reluctance to take inventory risks, as the application season was still several months away and additional new capacity, including our own, will soon be online. As such, the channel largely took a wait-and-see approach to the quarter.

The net result was sluggish demand in North America and nitrogen product prices that fell to multi-year lows and were often trading below international parity. Bert will discuss this in more detail, including the moves we made in response to these conditions.

The business generated $83 million of adjusted EBITDA in the quarter despite the challenging market conditions. A welcome new development has been the strengthening market conditions of late. Both sales volume and product prices have increased since the end of the quarter as buyers are finally moving off the sidelines and beginning to prepare for the application season.

On our last call we detailed plans to deal with difficult market conditions that are expected to persist through next year. Our continuing focus is safe reliable operations, reducing our cost and capital expenditures, and maintaining strong liquidity.

At the end of the third quarter we had over $1.5 billion in cash and an undrawn revolver. Additionally, we expect to receive roughly $800 million in cash via tax refund in the third quarter next year, which is almost $3.50 per share. So, we have the strong liquidity position we desire.

We have also made great progress in reducing both SG&A and direct manufacturing costs. In addition to our efforts to reduce cost and conserve cash, we highlighted our focus to complete the major capacity expansion projects at Donaldsonville and Port Neal.

At Donaldsonville, we have done just that. As we announced in October, the new ammonia plant is online and producing. With the new ammonia, urea and UAN plants all running at or above nameplate capacity, the expansion project at Donaldsonville has been officially completed.

At Port Neal we are in the process of starting up the plant. We had a successful test run of a urea granulation plant in September, and gas and steam have been introduced into the ammonia plant, and we're proceeding with the urea plant start up in parallel. As a result, we expect both ammonia and urea production at Port Neal to begin soon.

To help make this happen we have brought a seasoned team from Donaldsonville up to assist the Port Neal final commissioning and startup of the plant, allowing us to leverage what we have learned from our experiences.

With the completion of Donaldsonville and with Port Neal starting up, now is a good time to take a step back and assess the good and bad of the capacity expansion projects. I want to start by referring to slide 11 of the materials posted to our website.

The total capital cost to build the new plants at Donaldsonville and Port Neal was $5.2 billion. Those plants are expected to produce roughly four million product tons per year. However, CHS paid $2.8 billion and have the rights to 1.7 million tons of that production. So, that leaves $2.4 billion of capital and roughly 2.3 million product tons for CF's account. Therefore our resulting net capital cost was roughly $1,050 per product ton of new capacity.

As page 13 suggests, while our costs have greatly exceeded our initial estimate, and we're certainly not happy about that, it is an all too common occurrence in the industry as every major North American project we could find reliable data on has similarly experienced significant cost overruns, as well. What is ultimately important now is the capital cost per ton of new production capacity.

As shown on page 13, our new plants at Donaldsonville and Port Neal have an effective capital cost per ton of production that is among the lowest of all the observable plants built recently in North America. And what is really important, as detailed on page 14, is that the effective IRR for the projects remain significantly above our cost of capital, despite the increased cost and lower product price environment. The net result of all of this is that we remain pretty happy with our decision to do the capacity expansion projects, and the fact that we sold an equity interest to CHS.

Now let me turn the call over to Bert who will talk more about the market and our outlook in more detail. And then Dennis will discuss our performance and our work on reshaping part of our debt capital structure, after which I will offer some closing remarks. Bert?

Thanks, Tony. The supply to the market, the seasonal low demand period for fertilizer, and changing buyer behavior pushed ammonia, urea and UAN prices lower throughout the third quarter, hitting multi-year lows for each of the products. In fact, nitrogen prices at the US Gulf remained below international parity for most of the third quarter, as Tony mentioned. Even as of late last week, NOLA urea is trading at approximately $10 per short ton below the rest of the world.

The global oversupply of nitrogen and its pressure on prices is not a new story. As we have said before, we believe 2016 represents the high watermark for urea capacity additions globally, with capacity additions projected to drop off sharply after mid 2017. As an industry, we have yet to see the full impact of the new North American production capacity, but that which has come online has begun to displace imports.

The low global prices have challenged the ability of high-cost producers to operate. The marginal producer, which remains Chinese anthracite coal plants, have also seen production and transportation costs rise. Rail and trucking costs in China have increased. And electricity subsidies for small urea producers were eliminated in April.

Additionally, coal prices have increased due to government-imposed mining restrictions. Anthracite lump coal prices in China had been flat for most of the third quarter but recent published reports suggest that prices have increased 20% to 30%. This has translated to additional plants in China shutting down and fewer Chinese product being offered in the international marketplace via exports. Through the end of the quarter approximately eight million metric tons of annual urea capacity has been shut down in China, and we anticipate that number to continue to increase.

As fundamental economic pressure is affecting pricing, the Chinese port price per metric ton for urea had risen to about $220 as we enter November, up from $194 per metric ton at the end of September. Also, the average US Gulf price for urea barged product was approximately $180 per short ton for the third quarter and today it is $30 to $40 higher.

We anticipate that prices in the coming quarter will also be supported by stronger demand. During the low price environment of the third quarter, customers took a new approach to purchases. While the third quarter typically has the lowest prices and lowest volumes in North America, demand was pressured more than normal.

The trend of lower prices over the last 18 months has increased inventory risk in the mind of the purchaser. Over the last 10 years customers have purchased forward, received the product out of season as inventory, and then delivered the product to their customers for either fall or spring application.

Today this is much less the case. Many domestic customers told us they did not want to purchase products in the third quarter, preferring instead to take a wait-and-see approach to understand how the market will develop, particularly with new capacity expected to come online in North America.

This approach was a deviation from historical purchasing patterns but we responded to this environment in a few specific ways. First, we delayed the launch of our UAN fill program. Then we capitalized on our flexibility to export from Donaldsonville, particularly for UAN.

Our sales team has put in a great deal of work in recent years to open up new markets for our product and that effort is benefiting the Company now. In the third quarter we exported a record amount of UAN for the first nine months of the year. UAN exports have increased 143% over the same period last year, and have risen from under 100,000 tons in 2012 to more than 700,000 tons year to date in 2016.

We have also increased shipments of UAN to the East and Gulf coast by way of a new vessel commissioned earlier this year, allowing CF to compete with imports. In the past we have not participated in these regions in a significant way as farmers in the corn belt consumed the vast majority of our UAN and cost-effective freight options were limited.

We also have a significant amount of end-market storage for our products, with over 1.2 million tons of ammonia storage, 1.3 million tons of UAN, and over 500,000 tons of urea storage across our network. Even if buyers sat for a while on the sideline, historically we have been able to fully operate our plant and position product for when demand materializes.

As we have said many times, nitrogen is a necessary nutrient. It has to be applied every year. Additionally, despite the record or near record corn and soybean crops expected this year, 2017 futures prices suggest continued profitability at the farm level for corn and soybeans. We are forecasting 88 million acres of corn, and for wheat to acres to remain flat at 50 million acres. Assuming that the weather cooperates, when demand for fall application season begins, we expect to be strong.

At the same time we believe that North American downstream inventory of ammonia, urea and UAN is low following the spring application season. Urea imports were down 55% year over year in the third quarter, as well, suggesting that purchasing activity will have to accelerate to be ready for spring. With buyers holding off purchases, we expect there to be robust just-in-time demand during the application season, which, as I have outlined, we believe we are uniquely positioned to provide.

We have also seen tremendous progress in our UK operation. Since CF purchase the plants at Ince and Billingham, the manufacturing teams have set a number of products records. The team there also delivered a record amount of fertilizer to UK farmers in July as their season began, and they continue to move all of their product.

We have also benefited from a continued decline in UK natural gas prices, which had an average price in the third quarter of 2016 of $4.08 per MMBtu compared to $6.44 per MMBtu in the same quarter of 2015. For the North American natural gas market, the December NYMEX contract started the quarter near $3.36 per MMBtu and is currently trading at around $2.79 per MMBtu. During the third quarter of 2016 we did not enter into any additional natural gas hedges, and we remain confident in the long-term outlook for low-cost North American natural gas.

With that, let me turn the call over to Dennis.

Thanks, Bert. In the third quarter of 2016 the Company reported an EBITDA loss of $6 million and a net loss per diluted share of $0.13. Included in these results on a pre-tax basis were approximately $21 million in unrealized net mark-to-market losses on our natural gas derivatives, a $22 million unrealized mark-to-market loss on an embedded derivative associated with the CHS strategic venture, $24 million of expansion cost for our Donaldsonville and Port Neal facilities, $18 million of startup cost for the Donaldsonville ammonia plant, $3 million of net foreign currency losses related to intra-Company loans, and $2 million of fees associated with the amendment of the private placement notes, partially offset by $1 million gain on foreign currency derivatives.

When taking these items into account, our adjusted EBITDA for the third quarter was $83 million and our adjusted net earnings per diluted share was $0.13. Included in these results is a realized loss of $11 million or $0.17 per MMBtu on our natural gas hedges for the third quarter of 2016.

Our gross margin per ton of urea and UAN was affected by the commencement of depreciation of our capacity additions at Donaldsonville, which increased depreciation expense in the quarter by $19 million. Including this amount, total depreciation for the quarter amounted to about $83 million for the two segments and about $30 per ton and $43 per ton for urea and UAN, respectively. As we bring up the remaining plants our depreciation will again increase.

In 2017 we expect to receive a refund of approximately $800 million related to the carryback of certain US tax losses from the current year to prior years, primarily related to the bonus depreciation provision in the PATH Act. The amount of this refund is dependent in part on the timing of the completion of the expansion project at Port Neal.

The Company now projects a 2016 pretax loss excluding non-controlling interest. As a result, we recorded an income tax benefit of $131 million on a pretax loss of $131 million. The amount recognized represents the reversal of tax provisions that we recorded in prior periods this year.

Interest expense for the third quarter was $31 million with another $53 million of interest being capitalized in the quarter. As the capacity expansions are completed, interest capitalization will decrease dramatically, increasing reported interest expense on the income statement.

As you know, CHS is entitled to semi-annual distributions resulting from its minority equity investment in CF Industries Nitrogen LLC. The estimate of the partnership distribution earned by CHS but not yet declared to the third quarter 2016 is approximately $22 million. For the full year the Company expects to have total capital expenditures of approximately $2.3 billion, of which approximately $1.8 billion will be for capacity expansion projects and $450 million to $475 million will be for sustaining improvement and other projects.

The total completed capital cost of all capacity expansion projects, both at Donaldsonville and Port Neal, is estimated to be approximately $5.2 billion. For 2017, we continue to expect capital expenditures to be in the range of $400 million to $450 million, returning CapEx to maintenance levels that continue our commitment to safe, compliant and reliable operations.

Let's turn now to our liquidity profile and capital structure. As we indicated in the release, due to the uncertain duration of the current low price environment, our Company is taking steps to maintain strong liquidity and has made -- and is making certain changes to part of the debt capital structure to put in place financing more appropriate for the current business and operating environment. As of September 30, 2016, the Company had a balance of cash and cash equivalents of nearly $1.6 billion, an undrawn revolver, and was in compliance with all applicable covenant requirements and all debt instruments.

In addition to maintaining strong liquidity, our intention is to put in place a capital structure for the business we are as opposed to the business we thought we would be a year ago. We recently obtained required lender consent for an amendment of our revolving credit facility subject to the satisfaction of specified conditions that would, among other things, change and add financial covenants, reduce the facility size from $1.5 billion to $750 million, and add security interest to provide credit enhancement to the lenders. We believe this security enhancement gave the lenders confidence to give us the appropriate flexibility to continue paying our dividend.

We expect to fund the prepayment of the senior notes due 2022, 2025, and 2027, and the related make-whole amount with the issuance of new long-term secured debt, borrowings under the Company's revolving for credit facility, cash on hand, or a combination of any of the foregoing.

As many of you recall, we issued the private placement notes when we were in the middle of the proposed combination with certain businesses of OCI. Because of that we were unable to issue traditional registered investment grade debt. Instead we opted to issue private placement notes with longer maturities that were spread out over time to meet our capital needs.

However, the private placement covenant package is not appropriate for a standalone CF in the current operating environment. The intent of prepaying the private placement notes is to replace them with financing that has a long-term covenant structure more consistent with traditional debt capital for a cyclical industry.

Before I hand the call back to Tony, I would like to end by discussing our capital allocation philosophy, which has not changed. While the current pricing environment has impacted our ratings in the near term, we remain committed to investment grade over the long term. We will continue our prudent approach to managing the balance sheet in order to be in a position to retire $800 million of debt coming due in 2018 and again in 2020.

If you look at our slide 19, what you will see is that we have returned to shareholders more than twice as much as we have net invested in large projects and assets. Looking at slide 20, you can see that since 2010 our approach has resulted in our shareholders having greatly increased exposure to our underlying business, as measured by nitrogen nutrient tons per 1,000 shares.

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

Thanks, Dennis. As we've tried to lay out in our slides on pages 22 through 26, we believe CF is exceptionally well-positioned to benefit from recovery in the nitrogen sector. Although there is currently oversupply in the industry, global nitrogen demand is expected to continue to grow at roughly 2% per year.

There is a lack of new plants scheduled to come online post 2017, and, as a result, the global supply/demand balance should tighten, leading to an increase in product prices. As this price recovery begins in 2018 and continues thereafter, CF should benefit disproportionately.

As page 26 indicates, a $25 per ton urea equivalent increase translates roughly to $350 million of additional EBITDA on an annual basis. Bert indicated that average published Q3 urea prices at NOLA was $180 per ton. However, prices are already $30 to $40 higher than that today. With our new plant starting up and improving market conditions we are very excited about the future.

With that, operator, we will open the call to questions.

(Operator Instructions)

Chris Parkinson, Credit Suisse.

Thank you. As you mentioned, you've seen a nice little move in urea prices due to what's going on in China. But global UAN and ammonia hasn't really moved that much despite higher feedstock costs and some curtailments in Eastern Europe, and even some extended maintenance in the Middle East. Do you just simply believe it's a matter of time before prices rebound or is demand still really that sluggish? Any color on UAN and ammonia would be greatly appreciated. Thanks.

Good morning, Chris. This is Bert. We are seeing UAN prices already move. Egypt just closed a tender this week, and that was closed at $140 per metric ton, and that's up from the $125 level from the previous tender. We are seeing that prices increased in Europe, in France, as well as other locations, and in the United States. So we have seen activity step up in North America over the last several weeks and pricing correspondingly is increasing.

Ammonia, we have not seen the big move yet for fall applications in North America, but we have a pretty positive weather pattern in front of us and we expect that to go fairly soon. Around the world, I think with ammonia specifically, with the additions in Asia, the SABIC plant and some of the new capacity that has come online, that did pressure pricing in Q3, but we expect moderating prices on the upside as we roll into 2017.

Perfect. And just another question on ammonia: Can you comment on just what degree or what effect the competitor ammonia supply coming online during 3Q in the US you believe affected your netbacks? And how do you think this is going to evolve over the next year or two, especially in the context of what we're still seeing from Trinidad? Thanks.

I think the ammonia situation for us, it is just a lower quarter on demand. You really don't have ag demand during Q3, so it's an industrial-focused quarter. And with Tampa pricing at a low level, with contracts either based on Tampa or on gas, that drives a lower price for the product. So, for our specific price realization and demand, we do expect that obviously you're going to see an improvement in Q4 with ag and then rolling into next year.

Over the next year or two, you are right, there is additional capacity coming online. We expect most of that North American capacity to be converted into upgraded products. And you have two new plants coming online that are probably net losses for ammonia.

The current capacities coming on in the Gulf outside of CF is pretty much committed to Dyno and Cornerstone and some other movements. So, we feel fairly good about the ammonia market, as well as our ability to move and continue to participate through our terminal and distribution system in the ag, as well as industrial, market.

That's helpful. Thank you.

Michael Piken, Cleveland Research.

I was wondering if you could talk a little bit about some of the impact that the higher rail rates have had on your operation, and specifically when some of the new capacity comes on, what type of savings might be available, and if the rail companies are willing to renegotiate some of those rates? Thanks.

We are constantly looking at all of our costs, as Tony 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.

Great. Could you give any quantification in terms of how much money it might save you once the urea is fully up and running in Port Neal in terms of trucking it out of Port Neal to other locations in the Midwest versus what you're currently paying out of D-ville? Thanks.

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.

Vincent Andrews, Morgan Stanley.

Thank you, and good morning, everyone. Wondering if you could just put a little more context or frame around how soon, soon might be at Port Neal? And what I'm trying to get at is the market dynamics seem to be a bit in flux over how much incremental imports are going to be needed this year going into spring as a function of when new facilities start up. So, just curious what soon means, and how that fits into your marketing strategy with the balance of your product.

Good morning, Vincent. 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.

Okay. Just as a follow-up, Bert, you talked about changing customer buying patterns. It sounds a little bit similar to me as to what's happened in some of the other nutrients. So, just curious your view on total amount of storage capacity you have and whether you want to be or need to be more opportunistic with storage capacity. And, also, you mentioned the 1 million tons of UAN, the vessels, how we should think about the incremental ability going forward to use vessels, both for urea and UAN, to be more flexible around changes in customer buying patterns?

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.

Okay. Thanks very much for all the detail, appreciate it.

Steve Byrne, Bank of America.

Thank you. Bert, you mentioned you are looking at the opportunity to ship out of D-ville UAN to both east and west coasts; just curious about that. Does that reflect your view that post the startup of OCI's Wever and your Port Neal plants that UAN in the corn belts will become net balanced on UAN and you need to find new homes for the UAN out of D-ville?

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.

Steve, 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. Bert'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.

And just to follow up on that, Tony, given D-ville's effective capacity is going to be greater than nameplate, what would you say longer term is the fraction of production out of that plant that will likely be exported?

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.

Thank you.

Joel Jackson, BMO Capital Markets.

Hi. Good morning. I want to talk about the $1 billion of maturities debt you're taking out in the 2020s. Maybe you could elaborate a little bit more. I guess you had some pressure from the lenders on that with the covenants. And I think some of that was related to the OCI deal. Could you just talk about some of the decisions around that and how soon you will be prepaying? Thanks.

Sure, Joel, this is Dennis. 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.

Okay, that was helpful. And the second question I'll ask is on the ammonia contracts with Mosaic starting January 1. Mosaic obviously disclosed last week -- or was it this week, sorry -- that the barge is late, so they will be taking product from you on a different way, maybe rail. Can you talk about, during this interim period for the barge, will you be getting the same netbacks and the minimum volume, any payments changes? Maybe talk about anything going on in the interim. Thanks.

Yes, Joel, 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. Bert 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.

Thank you.

Adam Samuelson, Goldman Sachs.

Thanks. Good morning, everyone. Maybe, first, I want to go back to, I think it was Vincent's question about Port Neal, a question around the impact on the tax refund next year. Can you just talk about what actually has to occur by year end to ensure the receipt of that cash tax refund next year, and if the plant, presumably, is not fully operational by December 31, how that would impact the timing and scope of the tax refund?

Yes, good morning, Adam. 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.

Adam, this is Dennis. 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 Tony 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 Tony 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.

That's helpful. And then just a follow-up, slide 26 of your deck that has the EBITDA sensitivity to gas and urea prices, I just want to be clear, the urea prices, as you've laid them out, those are CF realized urea prices, not a NOLA benchmark? And as I think about the current environment, and maybe the environment over the next 6 to 12 months, where you are finding the value of ammonia and UAN on an end-ton basis, the spreads are a little bit different than they have been historically, and I presume how you would envision them prospectively. Your results over the next, call it, 2017, wouldn't necessarily mirror this table, given differences in spreads on product prices.

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.

That's really helpful. Thanks.

Sandy Klugman, Vertical Research.

Hi. I was hoping you could comment on the weakness in industrial demand that you cited in your release. I assume some of that is phosphates. But is there anything worth highlighting in the DEF market? And on DEF, do you have any updated thoughts on how that market demand evolves over time?

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.

Okay, great. Thank you. And just a follow-up question on ammonia's significant nitrogen equivalent discount to urea and UAN that you were discussing: Do you see this having any meaningful impact on how growers choose to apply nitrogen? Are there any early reads on direct application demand for ammonia versus demand for urea and UAN resulting from the lower prices?

There is something important to remember here, which is, the ammonia price, when it's weak, primarily affects the industrial demand that Bert 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.

Great. Thank you very much.

John Roberts, UBS.

Thank you. You talked about getting back to investment grade. I'm sure your creditors pressured you on the dividend here through these discussions. Can you get back to investment grade without adjusting the dividend? And then, once you get back to free cash flow-positive again, is that a priority over buybacks, or how do you think about the priority?

John, 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 Dennis 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. Dennis, do you have a --?

No, I think that's right.

And then, secondly, the industry, obviously, has a very high level of M&A activity under way. You've been a participant in the past. What are your current thoughts around the industry consolidation?

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.

Good pivot away from the M&A question (laughter).

At this time, I would like to hand the conference back over to Mr. Anthony Fusco for closing remarks.

Thank you, everyone, for joining us this morning. If you have any additional questions, please feel free to reach out and we will respond accordingly. Thank you.

Ladies and gentlemen, thank you for participating in today's event. This concludes our program. You may all disconnect, and have a wonderful day.