CF Industries Holdings, Inc. (CF) Q3 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2014 CF Industries Holdings Earnings Conference Call. My name is Grace, 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 Communications. Sir, please proceed.

Good morning, and thanks for joining us on this conference call for CF Industries Holdings, Inc. I'm Dan Swenson, Senior Director Investor Relations and Corporate Communications. And with me 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, Distribution and Market Development; and Chris Bohn, our Vice President, Supply Chain, Gas and Logistics. CF Industries Holdings, Inc. reported its third quarter 2014 results yesterday afternoon as did Terra Nitrogen Company, L.P. On this call, we'll review the 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'll 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 in 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 $338 million for the third quarter and adjusted EBITDA of over $1.4 billion for the first 9 months of 2014. Revenues were $921 million for the quarter, with nitrogen sales volumes 3% higher year-over-year on a comparable basis. Our top line performance was solid, and we were pleased with both our volume and pricing for the quarter. EBITDA results were lower than the prior year period due to a few distinct items. While Dennis will get into more specifics about these items, a primary factor was the higher cost of fiscal gas during the early summer of 2014. Those higher gas costs made their way through our income statement in the third quarter, along with losses we incurred on derivative positions that settled during the quarter. This combination resulted in gas costs that were $36 million higher than the year-ago period. Although there is period-to-period variability in our results, it is really the longer-term nature of this business, as measured over the full year, that is important. Quarterly comparisons vary for many reasons, including weather impacts. Is the spring early or late? Is the ammonia application window Q1 or Q2? When does planting occur? And how does the crop mature? And among others, gas cost. A lot of analytic horsepower is spent on dissecting quarterly results and trying to define what those results suggest about the trends and health of the business and what that portends for the future. However, in this business, quarterly comparisons hold little insight. Our top line was solid, while period EBITDA was impacted by gas and other costs. Higher gas cost from early summer hold no bearing on where the market is today. In fact, November NYMEX gas settled at $3.73 per MMBtu. Although I'll ask Bert and Dennis to dive into the details of the quarter shortly, I want to spend a few moments to reflect on the big drivers of our business, those that affect full year results and also the longer-term outlook: One, demand for nitrogen; two, pricing dynamics; and three, cost structure. The fundamental demand characteristics for nitrogen are strong. We estimate 90 million acres of corn will be planted in North America in 2015. Farmers have strong balance sheets and are generating solid cash flow based on high yields this year. As they look forward to 2015, corn provides a positive return over variable cost and also over soybeans. Analysis from leading agricultural schools shows that U.S. farmers have the lowest delivered cost basis and the most attractive returns over variable cost of farmers anywhere in the world, including compared to Argentina, Brazil and the Ukraine. With U.S. farmers positioned at the low end of the corn production cost curve, we are confident in the long-term associated nitrogen demand in North America. We also have confidence in the long-term pricing dynamics of nitrogen. Nitrogen is not an industry where product pricing can collapse overnight by the action of one company. It is also not an industry with large fixed cost structures and big shutdown and restart costs that beckon to producers to gut it out and keep running through times with negative margins. Instead, nitrogen is an economically rational industry, where direct feedstock costs are typically 70% or more of the cash cost of production. It is an industry where producers shut down when product prices are below cash costs as was the case recently in parts of Eastern Europe and China. Nitrogen is an industry that adheres to a global cost curve, where product prices below cash cost of marginal producers are not sustainable. We have repeatedly tested the global cost curve over the past 2 years and found that it stands the test of time. So we are confident in pricing dynamics as well. Although a severe and prolonged winter drove gas cost to the highest levels in recent years during the first half of 2014, North American gas producers were quick to respond. Gas production has increased over 3 Bcf per day compared to last year and gas storage levels are now on a comfortable zone given the increased rate of production. The NYMEX forward curve is priced near $4 per MMBtu through 2018, with no sight of a calendar $5 price until after 2026. As a result, we are very confident in the long-term stable characteristics of our cost base. This access to low-priced natural gas continues to be a true differentiator and competitive advantage for CF Industries. The persistent demand for nitrogen, the only non-discretionary nutrient, coupled with rational industry pricing dynamics and a significant structural cost advantage, provide a strong economic incentive to run our plants at full rates every single day, making every ton we can. While there will be quarterly variations based on short-term weather dynamics and our decisions about the timing of when we sell our inventory, over a longer wavelength perspective, like a full year, we will tend to sell every ton of product we make. And every ton of that cost-advantaged product generates a significant amount of cash. Even with gas costs at recent highs through the first half of 2014 and product prices forcing some high-cost producers to curtail, we still generated 40% gross margins from our North American production system through the first 9 months of the year. As a reminder of the annual cash generating ability of our business, please refer to Slide 5 in our presentation materials, which is a page that was taken directly from our June 2013 Investor Day presentation. This slide shows nitrogen cash operating earnings at various urea and natural gas prices. Although this slide is representative of our business in 2014, it will not be accurate beyond this year, as our 2015 results will reflect additional product volumes and the associated cash operating earnings as our new capacity expansion projects come on stream beginning next year. In the future, we will provide an updated slide like this one for 2017, the first full year of production for all of the new capacity. 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. Global nitrogen markets trended well during the quarter. As we had expected earlier in the year, the U.S. and international markets moved toward parity, as both gas curtailments and further [ph] production constraints in a number of regions tightened supply. At the same time, robust ammonia shipments and inventory depletion in the U.S. and strong urea shipments to India and South America supported the market. Ammonia prices strengthened during the quarter, showing tightness in the market. Corn Belt prices moved from $610 per short ton at the beginning to $650 at the end of the quarter. While we picked up some of the benefit of this move, we also had a significant amount of sales from our order book priced at the lower level seen in June and July, prior to when the outages tightened the market and caused the prices to increase. A heavy volume of industrial sales also impacted our average pricing due to the Mosaic contract sales and the lower mix of ag sales that normally occur in the quarter. Participating in the spot urea market continued to be a positive decision for us, as there was good demand in the Southern Plains for winter wheat and we sold urea for prompt delivery. Along with this domestic demand, prices at the U.S. Gulf were also supported by the international markets. These international prices were higher than a year ago due to purchasing activity in South America and India tender activity, in addition to the high level of global production outages. Chinese producers suffered heavy losses during the second and third quarters, which drove them back -- to back out of contractual commitments in some urea sales from the second quarter. This demonstrates to us the move toward economically-driven decisions in the utilization of their production and their attempt to develop a solid price floor for urea. For UAN, we had a healthy amount of sales from our large order book, and we chose to export some UAN in order to balance our system and continue to grow our international footprint. Our DES and other products saw good growth characteristics during the quarter as well. We are looking forward to the fourth quarter and 2015. The economics for U.S. farmers for growing corn continue to be attractive and offer a premium over soybeans. With drought conditions in Brazil and the potential for late planting of their second-crop corn, concern is developing that corn production from that area of the world will be reduced, which will have the effect of increasing demand for U.S. corn in the international market. We see this showing up in corn prices, which are now on the rise from their harvest lows. With an expected 90 million of acres of corn to be planted, we should see healthy nitrogen demand through the first half of 2015. That demand is clearly evident in ammonia movement and price in the northern tier in Western Canada. Weather has been conducive to applications, and ammonia has been moving out of our tanks at a rapid pace, such as at our Vanscoy Saskatchewan terminal, which set a new record for shipments in a single year. Ammonia prices of around $650 to $680 per short ton, as quoted in industry publications, is indicative of strong demand in those Northern areas. One near-term item that we are mindful of is our tight inventory level and level of planned outages during the fourth quarter, along with our unplanned outage at Woodward. These will limit our production and tons available for sale such that excluding our deliveries from our Trinidad production to Mosaic, we are likely to have fourth quarter ammonia sales volume similar to last year. Additionally, our unplanned outage at Woodward will result in lost production, which could have an impact of approximately $20 million of loss cash operating earnings during the fourth quarter. This is on top of the loss cash operating earnings around $27 million from the outage earlier in the year. However, we are confident that healthy ammonia prices will support pricing on upgraded products, and with limited availability of ammonia, upgraded products such as urea and UAN are likely to experience higher demand once we move into 2015. Now let me turn the call over to Dennis.

Thanks, Bert. Beginning this quarter, we have changed our segment reporting, moving from 2 segments, Nitrogen and Phosphate, to 4 Nitrogen Product segments: ammonia, urea, UAN and other, along with Phosphate. The Phosphate segment will continue to appear until there are no prior year results to be shown, but the separation of Nitrogen into 4 reporting segments demonstrate our focus on Nitrogen as our core business and our commitment to transparency to enable investors to better understand our operations. In the third quarter, we generated $338 million of EBITDA on sales of $921 million. This compares to $478 million of EBITDA in 2013 or $450 million excluding the $28 million of gross profit in the Phosphate segment. As Tony discussed, although our top line performance was solid, EBITDA results were lower than the prior year period due to a few distinct items. Our cost of goods sold was affected by both losses on natural gas collar transactions that settled during the quarter and the higher cost of natural gas that made its way through inventory and cost of goods sold. These dynamics of our natural gas cost bear closer denomination. First, when our derivative positions settle, the realized gains or losses from those derivatives impact the cost of goods sold line immediately in the quarter in which that derivatives settle. Our third quarter 2014 cost of goods sold included a loss of $20 million on the natural gas collars that settled that quarter. We entered into these collars during June and July when gas storage was low and gas prices, as indicated on Slide 11, were much higher due to the risk of a hot summer and associated peaks in power demand. The losses on the derivatives were due to the subsequent decline in gas prices by the time those hedges settled during the third quarter. From a fundamental perspective, lower natural gas prices are a positive for our business. It is worth noting that on a 9-month year-to-date basis, we have realized net gains of $64 million on our settled gas derivative positions, as represented on Slide 11. These significant gains provide evidence of the beneficial impact of our hedging programs in reducing volatility in gas pricing, especially during winter months. Second, the cost of the physical gas we use to produce nitrogen moves into inventory when we purchase the gas, as indicated on Slide 10. It is only when we sell that inventory that the cost of that gas then flows through to cost of goods sold. Because of how much ammonia inventory we hold at times of the year and because of the seasonal nature of when we sell agricultural ammonia, the physical cost of natural gas purchased in 1 quarter can show up in cost of goods sold in later quarters. As we look at the third quarter, the ammonia we sold during the quarter was generally produced in the June, July time frame. As you look at the Henry Hub first of month settlement prices graphed on Slide 10, you can see that gas was priced on average around the $4.50 level across the period. Those prices are more indicative of the cost of goods sold for the physical gas that flowed through our income statement during the quarter than were the Henry Hub average market prices within the quarter. During the quarter, we also recorded approximately $24 million in expenses for certain other items. These items included higher storage costs. Previously, these costs were inventories and appeared in the cost of goods sold when the tons were sold. We now expense these costs when incurred. This changes an item that negatively affects the third quarter and will not impact future quarters. The other items also included incrementally lower margins due to a mix of sales from purchase product versus manufactured product and pension benefits settlement charges that occurred during the quarter. Other operating expenses were impacted by a swing from a $22 million gain on foreign currency derivatives to a loss of $27 million due to the dollar strengthening against the euro. This impact to earnings is offset by the stronger purchasing power we have in buying euro-denominated equipment and engineering services for the expansion projects. The projects are progressing well as construction activity remained on time and in line with budget expectations. You can see from the pictures in our earnings materials that a significant number of vessels have been set in place at Donaldsonville, and we are nearing completion of critical foundation work in Port Neal, so that we can continue with mechanical construction through the winter. Our capital expenditure projection for the year stands at $2 billion, consisting of $1.6 billion for the capacity expansion projects and $400 million for sustaining CapEx. The reduction from our previous estimate of $1.7 billion for the expansion projects represents a change in timing of payments, not a change in the overall project budgets or schedules. Finally, as we move into the fourth quarter, we have seen attractively priced gas making its way into inventory. We have also entered into collars for 90% of our gas needs through the first quarter of 2015, with floor prices averaging $3.41 per MMBtu and ceiling prices averaging $4.25. These hedges and the fixed bases differentials we have in place for our Port Neal and Courtright complexes have taken any significant winter gas price risks off the table. With that, Tony will provide some closing remarks before we open the call to Q&A.

Thanks, Dennis. Many of you may have observed the news flow related to our recently terminated merger discussions with Yara. I think it's important to provide a little perspective on those discussions. The discussions were, for CF, borne out of a position of strength. We have a well-defined, very specific business plan centered on our capacity expansions, the first operating unit of which will begin production within 10 months. Our plan is tangible, observable and requires no heroic assumptions, nor leaps of faith. The plan informs our view of the intrinsic value of CF Industries, which we believe is substantially above the price at which our share is currently trading. As a management team, it is incumbent on us to execute our business plan but also to look for opportunities that will increase shareholder value above our plan. We engaged in the discussions with a strongly held and well-formed view of the value that should be attributable to CF Industries' shareholders in appreciation of the strong cash flow generation of a company, especially given the significant uplift in cash flow, which will occur as the expansion projects come online. Although we were jointly able to identify operational and structural synergies significantly higher than any of the published estimates we saw, ultimately, we were not able to agree on terms that would have met the requirements of all the respective shareholders. Specifically, in the one and only metric that matters, we did not believe that CF Industries' shareholders would have been rewarded above and beyond our current business plan on a risk-adjusted basis. As a result, we ended the discussions. I would again like to thank the management team of Yara for their professionalism and their time. I hold their team in high regard. In terms of what is next for CF Industries, we will continue to execute our business plan to realize the significant value we believe is embedded in it. The future is directly in front of us and largely within our control. We are confident in our belief that executing our plan will deliver significant value creation to our shareholders. We are focused on increasing cash flow per share by investing in high-return projects and otherwise, returning excess cash to shareholders through an attractive dividend and robust share repurchase programs. With that, we will now open the line to answer your questions. Grace?

[Operator Instructions] Our first question comes from the line of Vincent Andrews with Morgan Stanley.

Could you just give us a little bit more perspective on the remaining CapEx in terms of, you're on time, you're on budget, what are the risks that remain between here and getting Donaldsonville started up in less than 10 months and then ultimately, Port Neal? What are you concerned about? Is it labor? Is it labor costs? Is it weather over the winter? What should we be paying attention to?

We actually feel pretty good about delivery schedule of all the major equipment. Let's start off with diesel first, because that's the one that's closest. Then the urea plant should be starting up end of the second quarter, beginning of the third quarter next year. The issues out there, really, we have seen a little bit of a tightening in the labor market. With more and more projects coming online, there is some competition. But we believe we can put in place provisions to adequately address that and make sure we've got the right number of resources on site. We do have contingency funds built into both of our projects to anticipate escalation of labor cost that, frankly, we thought may have happened before this. So labor is one issue, but I think we can address it. The other one, as you mentioned, is weather. When it rains a lot, diesel, things get real soupy, it's tough to make a lot of forward progress. But we don't anticipate that really getting in the way between us and our anticipated start time. Relative to Port Neal, again, we feel good about vessel deliveries and critical equipment. We need to make sure we've got all the foundation support and ready to get into steel erection during the winter months, so we can make good forward progress there. But if anything, we feel that there's a little more cushion in the Port Neal time frame based on the commitments we've made to the market versus the progress that we're making. So we're not anticipating any real challenges without meeting that schedule.

Okay. And just as a follow-up to that, if I'm thinking about this correctly, sort of hitting the time line and staying on budget as sort of the gating event for how you're thinking about using your cash flow and your balance sheet, whether it's for buybacks or increasing the dividend or what have you. So it sounds like you're progressing, sort of hitting your margin and hitting your targets and perhaps there was no buyback in the quarter because you were in discussions with Yara, but is that the right way to think about things? And as we progress through the next 6 months, would you anticipate that you'll continue to follow sort of the pattern of the last year or so where when you -- or as things are progressing according to plan and schedule, it seems to free up some of your desire to use the balance sheet or to use your cash flow. Is that the right way to think about it?

Yes. I think that's a good characterization of where we are. We, as I said in my prepared remarks, believe that our shares don't reflect the intrinsic value of the company. And so we're absolutely buyers, and we'll execute that as appropriate as we go forward.

And our next question is from Don Carson from Susquehanna Financial.

A question for Bert, just wondering about what your thoughts are in building the forward order book. You've told us what you expect to happen in ammonia for Q4. Maybe you could make some comments on how you're positioned in urea and UAN? And as you look forward to next spring, are you anticipating that we missed some applications this fall because of weather and that leads to very tight spring nitrogen market and just wondering if so, what -- how you're positioned to benefit from that?

Good morning, and thanks. So for our order book, what we communicated, we're well-positioned through this year and into Q1 on UAN. We took a summer fill program through July and since have built on that program, and we'll continue to do so. We have in place our own inventory system that we can also place product in, in preparation for the spring. So for UAN, we're fairly confident of where we are and where the market will be and our ability to supply. On urea, as I mentioned, we have been generally spot sellers as the -- during Q2 and Q3, as the North American market traded above the international market. We were able to capture a positive price spread for the company. That has since come to parity, and as we roll out of Q4 and into the Q1, we expect that probably could continue, but we've continued to be spot sellers. And if that were to change, then we might take a different tact and do some forward selling. So right now, the U.S. is a little bit below the international market, so I would say we'll see a rising market going through Q1 and into Q2 for urea. On ammonia, I think the whole system has been a little bit short of product. Looking at data from TSI and just some industry feedback from the market, from our sales team, that seems to be the case and that's reflected in higher pricing where the Midwest market is at $650 to $680 a short ton in the I [ph] states. And so, I think as you go through Q4, you'll probably have, as we've presented, that we expect to hit last year's numbers, which were little underwhelming compared to historic ability, part of that is reflected in our large Q1 and Q2. We had a record ammonia application, record ammonia pull, almost 1.7 million tons through the first half of 2014 and I think our -- the whole industry had that same type of situation. So the ammonia -- that extra ammonia is just not available. So we expect pricing to be fairly positive going through Q2 next year, and we'll fully utilize our distribution system to capture that. On the spring, I think I just mentioned about your question on missed applications of ammonia being tight, I think I already mentioned that. So we're fairly positive going into 2015.

And again, with missed applications and logistical difficulties, both rail barge and terminals, would you expect quite a potential fly up in prices because -- next spring, it sounds like that's what you're positioning your business for?

On the fly up in prices, I think with -- we'll just have a massive amount of corn coming in right now. I'll let you turn the logistical question over to Chris.

Yes, from a logistic standpoint, we've done several things. This was something that we anticipated happening coming out of last winter, so there's really 4 things we did, and that is we began to position our product earlier. We repositioned a lot of our assets. One thing we talk a lot about here at CF is just the flexibility of our distribution assets and our logistics assets, so we are able to lean on that a little bit more than some of our competitors or other industry participants. And we continue to have an intense amount of conversations with our carriers, both from a barge and a rail to let them know where we're going. And then, again, given the flexibility, we look at alternative modes, whether it be barge or rail. So I think for the most part, while we see some blips in some of the movements, there's nothing that's really concerned us or affected customer deliveries at all.

And our next question comes from the line of P.J. Juvekar from Citi.

You seem to have changed your strategy on hedging. In the first 2 quarters, you were hedging at a one price level. In the third and fourth quarter, you're hedging with these collars. So what is the logic behind the change in strategy, if I understand it correctly? And then also, what is the cost of these collars?

So P.J., one of the issues in the -- coming out of the third and fourth quarters of last year, we were pretty happy with the absolute price level that we saw, which was a Henry Hub deck of I think $3.66 in the first quarter and $3.55 in the second. As we got into the back end, the third quarter of this year, and we saw the dramatic increase in production and the fact that storage was rapidly building, still down relative to the 5-year average, but it was close to 3.5 TCF, and the fact that the increased rate of gas production continues at a high level, our view was, if the winter was moderate, there could be a lot of opportunity for our prices to continue to soften through the winter months in the first quarter. So we wanted to be able to participate in the softening or the potential for a softening gas market. At the same time as put an absolute ceiling on the top end of our cost structure. So that was why we entered into collars as opposed to fixed swap -- fixed price swaps, and on the pricing of the collars, I'll ask Chris to...

Yes. The pricing of the collars, from a premium standpoint, were about $0.10 to $0.15, depending on -- we layered in several different layers of the collars for an average of $3.41 to $4.25.

Great. And then secondly, Tony, you've talked about this cost curve and that it's held quite well in the past cycles. I was wondering if you can give us a quick update on where did the high cost China producers stand today on that cost curve? And also an update on Ukraine and the gas situation there?

Okay. Well, I'm going to ask Dennis to talk about Ukraine and what's going on there, but I think a fair bit of that is political unrest and uncertainty. But Dennis, do you want to...

Yes. I mean, obviously, we don't know what's going to happen there, but to the degree that we see producers getting their gas curtailed because gas pump cuts them back for political reasons or the case -- or whatever the case may be. We're going to obviously see curtailments and therefore, less supply into the marketplace. The other thing that works against us, to some degree, is that if people have -- are getting gas and those gases are oil linked, you'll see people getting somewhat cheaper gas because of the lower oil price. So the way I would kind of look at it is, we don't know exactly what's going to happen in Ukraine and how the political events there are going to affect availability in pricing. But we do know that as we look back here over the past 6 months, that with respect to curtailments in Eastern Europe and other places generally, that has resulted in constricted supply and higher prices as Bert described in his prepared remarks.

And P.J., based on where we see from a cost curve perspective, we estimate that China is kind of in that $3.30 to $3.50 per metric on a delivered basis and -- I'm sorry, on a fab [ph] basis, and Ukraine is sort of similarly in about a $3.40 to $3.50 per metric basis as well. And today, the price is about kind of $3.20-ish, $3.30-ish. And so, there's a number of those producers that are having a hard time making money or even operating at those rates.

And I would suggest for granular, $3.20. The market for prilled today is in the $2.90 to $2.95, if you've seen from the Indian tenders. This is Bert. And what you're seeing is what Tony referenced as the negative returns for these companies and then the ratchet down on your average operating rate, which is below 70%. What that means is that people aren't operating, and we're seeing that reflected in the volume of product going into the bonded warehouses or not going into the bonded warehouses. Now we're projecting that China will be exporting between 10 million and 11 million tons for this year, which is a higher rate but they had additional capacity that came online and so longer-term, we see that rationalizing and decreasing if the pricing stays at this level.

And Bert, of those 10 or 11 tons, how much is that granular versus prilled?

I don't have that exact number, but it's mostly prilled, untreated prilled.

And P.J., although the untreated prill does come out and it certainly does take nutrient, kind of, content away from other people, it's not a product that is generally received in many parts of the world. It's only a few specific markets that actually are willing to deal with the Chinese prills. So it has some overhang, but it's not directly comparable or affects the U.S. market on a one-for-one basis.

And our next question comes from the line of Kevin McCarthy with Bank of America Merrill Lynch.

Tony, if we look out over the next couple of years, it would seem that there's a fair amount of nitrogen capacity expected to come online globally. On the other hand, the capacity that's already here isn't running very well as you illustrate on Slide #9. So can you give us a sense of what is driving these elevated levels of outage? How much might be geopolitics versus maybe assets in the West that have just been running too hard for too long? And how do you expect operating rates to trend in all of this?

Yes, Kevin, that's a great question. In nitrogen, we have been in a supply-driven market condition for about a year now or maybe a little more than that. And so we are actually operating as opposed to a demand-driven situation where people are bidding up tons above marginal cost. It really is being driven off of marginal cost of production. And I think some of the outages, due to political unrest, you'd expect those things to moderate over time, but some outages are really due to gas availability. So for instance, Egypt, Oman, Trinidad, there are a number of places in the world where there are just physically gas shortages to be able to run the assets at full rates. In the West, it really has probably been more a maintenance or unplanned operational outages that have caused curtailments; it's certainly not an economic driver. But even in China, I think they brought on something in the neighborhood of about 20 million tons of urea production in the last 3 or 4 years, and I think they've taken about 5 million to 6 million tons permanently offline in the last year. And so, although there will continue to be new capacity brought online, what you're going to end up seeing is shedding assets at the very highest end of the cost curve. And the point that I want to reinforce is, even though the market in nitrogen is operating in a supply-driven arena and North American gas costs were a little high, we still generated 40% gross margins in those conditions. Underlying that, on positives going forward, there will continue to be ongoing market demand growth for nitrogen, both in the industrial applications and some on the agricultural side. And we're seeing North America continue to be an important marketplace through the end of this decade.

Second question would be regarding your MOE discussions with Yara. Maybe 2 parts. First, was it the inability to settle on a specific number that caused you to discontinue the negotiations, or were there structural barriers that were problematic, such as tax or perhaps both? And then second, I think you made a comment that your synergy numbers were projected to be much higher than the published estimates that you saw from The Street. What do you think The Street was missing?

So Kevin, there has been an awful lot of talk and discussion about things like tax inversions and so forth. And we, very early on, had conversations with the IRS and got an indication from them that they viewed this not as an inversion transaction, but actually as traditional cross-border M&A. So there was nothing here that was out of the ordinary and therefore, there was no kind of regulatory or structural impediments from that perspective going forward. But what I think the market may not have recognized as much is all of the areas where there really were an awful lot of overlap or opportunities to rationalize. So people that are spending the time looking at these things realize that Yara moves an awful lot of products out of Europe into North America. And in fact, we export a fair bit of product out of North America and send it the other direction. We literally have ships passing in the middle of the night. If you look at their Belle Plaine facility and how it would have fit into our North American asset base and distribution structure, it would have been a really nice add. And they are quite a bit product short in Latin America and for us, Donaldsonville, it's $30 to $35 to move product into the Corn Belt. It's $30 to $35 to move it down into Brazil and Argentina. And when we move it offshore, we could have structured it through some offshore trading companies in a way that would have been very, very tax efficient. And I don't know that people really kind of stepped back and understood what the current tax laws are and the opportunity. We're paying tax on a marginal rate, almost 35%, and we certainly could have put that in a different sphere, being located in a different tax regime. So I think people missed all of those things. And I don't want to get into the nitty-gritty of kind of why things didn't happen, but I would just characterize it as, at the end of the day, we feel we've got a terrific value proposition from our standalone business plan. And given all of the puts and takes that were on the table, we didn't think on a risk-adjusted basis, it was going to end up being a good deal for CF shareholders relative to what we can offer them today.

And our next question comes from the line of Chris Parkinson with Crédit Suisse. Christopher S. Parkinson - Crédit Suisse AG, Research Division: You hit on a little of this, but on Slide 9, you go over the last 5 years of reported outages in both ammonia and urea. Can you just go over your current view for the 2015, particularly in Trinidad and also the Middle East and North Africa region?

Yes, Chris, I'll ask Bert to opine as well and Dennis, but I -- look, I don't think Trinidad has done anything to structurally solve the gas availability issue going into Point Lisas. And I don't know that there's a quick fix on the horizon. So I would anticipate there being ongoing gas curtailments going forward. In Trinidad, that could be in the 10% to 15% of production range. Relative to Middle East and North Africa, you still don't really have recognized sort of basis of power and influence in some regions like Libya and other places to make operations reasonable. And you also have gas shortages in Egypt and Oman, again, for which there's not a quick solution. So my perspective is I don't think that you're going to see a dramatic uptick in production from those areas. But Dennis and Bert, you got...

I think if you look at North Africa, you got to look at it in 3 buckets. And if you look at Egypt, for instance, where they produce nitrogen today, the issue there really is gas availability and potentially, politics in terms of getting plants started up and keeping them running. When you look over at Libya, again, there's plenty of gas that's available that could be put into a facility. The problem is that the situation there is so unsafe and so unstable, that it's difficult to keep a plant up and running with people and staffing it for a prolonged period of time. And as you move further west to Algeria, there certainly is plenty of gas to the degree they have outages, they're largely going to be driven by operational issues or issues between the people who own the foreign participating share in these joint ventures and [indiscernible]. And those things can be sometimes a bit intractable, as we saw earlier last year. So -- but I would say about the supply of North Africa is, we don't have any crystal ball but with those sources of potential uncertainty and instability, it's very difficult to really kind of draw a supply curve for North Africa with any degree of reliability or accuracy. Christopher S. Parkinson - Crédit Suisse AG, Research Division: Perfect. And then just a quick follow-up, you mentioned some themes in China which many of us have been monitoring, which could potentially help the floor price. Could you just further elaborate on which aspects you view as the most material including various tax regimes and also, the overall industry attempting to help stabilize export prices?

Yes. I'll give you a few and then I'm going to pass this over to Bert for his -- him to weigh in as well. There's a couple of issues, one of which is the changing regulations on what's acceptable for our imported coal in the way of fly ash and sulfur, means that there's less sea borne coal that's actually eligible to enter the marketplace. It puts on higher demand on domestic coal and that will drive up coal prices to some extent. Similarly, you see some reduction in the availability or an increase in that corresponding price of gas going into the gas-driven plants in China. Those things help from a cost structure standpoint. You've seen movement away from subsidized rail rates and port costs and other things. All of those things mean that the producers or the traders that want to take possession of those goods are incurring real economic cost for all of those movements, all of those things, mean the price has to rise for that product to show up at a profit on the international scene. And finally, as you mentioned, there's the 5% tax that's flat across the year. My perspective on that one is that's very helpful for our business. You don't see these big movements where inventories balloon up and then disgorge that drive some funkiness in terms of buying behaviors, particularly in places with large tenders like India and Pakistan. And I think if you see more ratable product coming out of some of those regions, it leads to more stability in the pricing on a global basis. But Bert, do you have other thoughts?

No, I think you've touched on the key ones, and they all reflect a positive perspective or a positive opportunity for the industry going forward. Costs are going up. Coal, freight, labor, those are positives for our business. The 5% tax, I agree with Tony and that the rational nature of that will bring to the overall supply and the supply availability coming out of China. The demand structure is in place domestically for Chinese consumption. We've been tracking that as well as industrial demand, which is also fairly consistent. So it's that available tonnage that will be exported and then, at what economical cost that will be exported for. Fantastic demand going forward out of India and Pakistan that is open to receive the untreated prilled product coming out of China. So you set up a system that, that probably will be the supply base for those regions and the granular that is coming out of China today is at a quality disadvantage and is trading at a $20 to $25 discount to domestically-produced product in North America. So I look at these things as coming together. It's a maturing of our industry, a maturing of the industry in China, and we see those as positives going forward.

And our next question comes from the line of Adam Samuelson with Goldman Sachs.

Question on the Woodward facility. This was the downtime that you announced a few weeks ago. This is the second major shutdown in the plants in this year. And I think both times you cited boilers in the press release. And I think there was schedule turnaround activity that took place earlier in the year on the back of the first shutdown. Can you maybe just elaborate on what actually happened at the facility, the confidence that you have in the sustainability of the capital equipment and the investments that you are making there on an ongoing basis?

You bet, Adam. The big issue at -- one of the big issues at Woodward is it is 1 of 2 non-Kellogg plants that we have in our North American system. In fact, the intellectual property or process designers of that plant was Fluor. And there's only 2 Fluor ammonia plants in the world. So this one is a little bit of an oddity or a strange beast. And the parts that go into it are dissimilar from all of our Kellogg plants. So if this has happened at one of our Kellogg ammonia plants, it would've been really easy to fix because we've got spare kit for all of the major operating components so we could have just moved the product or moved our OAC [ph] boiler out of one facility into the next, plugged it in and are ready to go. So we have a huge operational footprint advantage with 11 of our 13 ammonia plants being Kellogg plants and able to swap and receive similar vessels. But because this is an oddball, we've got to fix what's there. And this particular, it's the same OAC [ph] boiler in both cases. There's the primary OAC [ph] boiler, and in the first instance, we had a failure of the insulation refractory. In the second case, we had a failure with internal tube bundle. We're working hard to get it replaced. We don't believe that there is any long-term issue in terms of the operability or the on-stream factor of that plant. We're just working through one particular problem that's been going on this year. And it's unfortunate because, as Bert pointed out, we're going to lose close to $50 million of gross margin out of that facility this year because of the outages. But the good news is we didn't have any one hurt. We didn't have any offsite impacts to the community or environmental releases, and those are things that have much more long-term and problematic impact for our company than missing a few weeks of production. So we're...

Okay. Appreciate that color. And then maybe just switching gears, your major western Canadian peer yesterday was talking about repatriating tonnage in Western Canada into the retail segments and my understanding was a lot of that tonnage was emanating from Medicine Hat when Viterra owned the 33% stake. How are you looking at your marketing strategy in Western Canada and your ability to find a home for the tonnage that maybe -- may need a new home outside of the Agrium system in Western Canada?

Yes, I'll give you just a high-level comment and then I will ask Bert to go into details. We -- as part of the 1/3 interest that we bought, we also purchased a couple of ammonia terminals, one of which is, as Bert indicated in his comments, was Vanscoy Saskatchewan. We set an all-time shipping record for ammonia out of that facility this year. And it is, at the end of the day, a commodity product where it's a competitive marketplace and pricing is set by outside dynamics. And we feel very comfortable in terms of our ability to focus our tons on the best netbacks possible and we think we're in a good position to do it. But I'll let Bert talk specifics of...

I would say from just looking at our system, we're not wedded to a market and we're not market share-focused and we're not going to say that a certain percentage of our tonnage needs to be directed to one market. We're more netback-driven. And so if that netback that we can receive at any of the markets is greater than where that ton is currently allocated, it will be allocated on a netback basis. And we have built our team in Western Canada. We used to market that through distribution. And a couple of years ago, we've put in place our own team that has integrated very well into our system. And were seamlessly moving the Viterra tons as well as our historical tons out of Medicine Hat into Western Canada and other markets as well. And so hopefully, you're seeing us being good marketers and executors of our system and our strategies. But Western Canada is a good market, and we'll continue to focus on that and to build our relationships with our customers there. But whether it goes there or Montana or North Dakota, we're ambivalent as long as it's netback-driven.

And our next question comes from Mark Connelly with CLSA.

Tony, you said that again that you like CF's footprint as you said last quarter. So do the substantial synergies that you say you found with Yara changed your view of CF's global opportunity and make you more interested in looking further, exploring further overseas or maybe looking for more deals there?

Thanks for the question, Mark. Look, I'd say we evaluate and are open to opportunities kind of globally anywhere as long as they fit the following criteria: as long as they're in our core strategic fairway and have a return profile that's well in excess of our cost of capital. But our standalone business plans sets a really high bar on what these things need to achieve in order for us to be interested in going after them, if it's something other than a cash basis. If we have to use our stock in order to acquire them, then it sets a really high bar on the return profile. We have looked at a lot of projects over the years, some of them we've done, some of them we didn't. Things that we've done include the 50% acquisition of KEYTRADE, the Terra acquisition, the 1/3 interest in Medicine Hat, along with the Canadian ammonia terminals, the divestiture of phosphate and the capacity expansion projects. And I think if you look at what we've done, the market would say, "Wow, all of those have been pretty darn good deals." There are some things that we announced that we didn't do. Coal gasification at Donaldsonville, looking at an ammonia, urea complex in Peru after we had secured a gasify agreement down there and then most recently, Yara. So the ones that we haven't done, I think we've had very good and valid reasons for not doing those. There's other ones that are currently in consideration right now, things like Medicine Hat urea that we've talked about. And the issue is, we like that marketplace. We like urea in that marketplace. But the concern in that region is the high cost and unpredictability of labor and we must -- we can guarantee a full end [ph] cost structure including labor that I can say to you all we've got a return well in excess of our cost of capital, then we won't be doing that project. So that's why we've been sort of silent as we're working that to refine it behind the scenes. So as long as it's in our core business, there is not a geographic constraint on where we will or we won't be, but it's got to be a great deal for our shareholders or we are not interested in doing it.

Okay. I'm going to take that as a no. And just one quick question. As you look out at 2017 and beyond, what is your best estimate of North America's net import position in ammonia and urea?

So today, North America imports, I think, about 40% of its total nitrogen requirements. After all of the projects that are actually in-flight come online, so those things would include a bunch of bottlenecks that have happened from Agrium and Koch and CF, it would include the OCI project, it would include the Waggaman, Louisiana project and the CF projects. After the things that are actually real steel in the ground have come online, we think that number drops to about 20%. So through -- as you're sitting, looking at beyond '17 and into 18, we think that North America will continue to import about 20% of its total nitrogen requirements. Now that's going to skew by product type. There's going to be less UAN that needs to be brought in because the market will almost be in balance in UAN, but there's still be a fair bit of ammonia and urea that need to be brought in. But -- and if there are some of these other projects that have been talked about, whether it's the CHS Girdwood project or other ones that will start eating into that 20%. But if all of the things that are being added only account for about 20% of the requirements, that means for North America to be in balance, you need another set of projects like D'ville, Port Neal, Waggaman, Weaver and then all of the debottlenecks that have taken place, that's going to take a fair bit of capital over a fairly extended period of time. So that's why we are very confident in the notion that North America will continue to be an import marketplace out through the end of the decade.

Our final question would be from the line of Joel Jackson with BMO Capital Markets.

In looking at some of the synergies you mentioned that you could have achieved as part of a larger network with Yara, are there ways on your own that you can try to achieve some of those offshore export opportunities being able to maybe put together something overseas and be able to take care of some export opportunities into South America and other places?

Thanks, Joel. I think one of the things that surfaced as part of our discussions was a recognition by both Yara and CF that there may be very viable commercial ways where we can work together to realize some of those synergies and we're certainly interested in exploring what those might be. And so I'd say absolutely. There's some of them that are predicated on a more structural basis that are tough to get to, but of the ones that are purely kind of commercially available, yes, we absolutely would be interested in going after those.

Okay. And finally, have you looked at -- I'm sure you have looked at the west side partner's structure for the MLP as you get closer to finishing up Donaldsonville and Port Neal. Have you walked through that structure, gather some pros and cons that you would talk about in that structure that could work or not work for CF going forward?

Yes, Joel, this is Dennis. Thanks for the question. Yes, Joel, we've spent a lot of time over the past year or so looking at MLP structures generally, as you know. I think we're the only major nitrogen producer that actually has an MLP, so it's something that's we studied in detail and also know something a bit about because of what we have. And the way we think about it is, that structure in particular that you mentioned, sort of fixed pay structure and fixed pay structures suck up debt capacity. And because we talk to rating agencies on a regular basis. And as we look at our opportunity going -- particularly as the projects come online, we see ourselves having a materially larger amount of debt capacity as those projects start to come online. And the after-tax cost of that debt is much lower than the after-tax cost of doing any kind of fixed rate structure like the one that you are suggesting. In addition to that, the size of deals that you can do with that type of structure, really, are around $300 million per year or less. So there's a lot of execution risk as you think about trying to do something of a much larger scale over a prolonged period of time than there is with debt. You'll know that what we did with our debt portfolios in the last 2 years, we've issued $3 billion of debt in 2 $1.5 billion tranches, and we can get those deals done in a month with little or no execution risk. And in addition to that, a lot of people have really raised this issue, the particular transaction that you referenced, but we note that nobody else out there has tried to replicate that structure. And some people have suggested that there's some great read-through in terms of valuation to the C Corp, but as we've tracked that particular company's stock since before it announced its MLP structure through today and compared that to another very closely, a very similar company, what we've seen is that the value of that stock has gone down significantly. Its multiple has gone down. And really, it doesn't trade at a premium to either that competitor company and it trades, at least at the data I saw, at a lower multiple to ourselves. So as far as the whole read-through argument is concerned, what we see is that there's really no there, there [ph]. So we don't have a religious sort of conviction against doing interesting transactions, but what is important to us is, that as we look at them on a risk-adjusted basis, they provide real and tangible value to our C Corp shareholders.

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

Thank you, Grace. That concludes our call for today. As always, I'm available for your follow-on questions. Thank you, everyone, for your time and interest.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now, all, disconnect. Everyone, have a great day.