CF Industries Holdings, Inc. (NYSE:CF)
Q4 2013 Earnings Conference Call
February 19, 2014, 10:00 AM ET
Daniel Swenson - Senior Director, Investor Relations and Corporate Communications
Anthony Will - President and Chief Executive Officer
Dennis Kelleher - Senior Vice President and Chief Financial Officer
Bert Frost - Senior Vice President, Sales and Market Development
Vincent Andrews - Morgan Stanley
Kevin McCarthy - Bank of America Merrill Lynch
Don Carson - Susquehanna Financial
Matthew Korn - Barclays
PJ Juvekar - Citi
Adam Samuelson - Goldman Sachs
Tim Tiberio - Miller Tabak
Chris Parkinson - Credit Suisse
Jeff Zekauskas - JPMorgan
Good day, ladies and gentlemen, and welcome to the CF Industries' fourth quarter earnings conference call. (Operator Instructions) I would now like to introduce your host for today's conference, Dan Swenson. You may begin.
Good morning, and thanks for joining us on this conference call for CF Industries Holdings, Inc. I am 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; and Bert Frost, our Senior Vice President of Sales, Distribution and Market Development.
CF Industries Holdings, Inc. reported its fourth quarter 2013 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 release that's posted on the Investor Relations section of our website at cfindustries.com, and as you listen to this conference call, please recognize that they contain forward-looking statements as defined by federal securities laws. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including those detailed on Slide 2 of this webcast presentation and from time-to-time in the company's Securities and Exchange Commission filings. These forward-looking statements are made as of today and the company assumes no obligation to update any forward-looking statements.
Now, let me introduce Tony Will, our President and CEO.
Thanks, Dan, and good morning, everyone. I am pleased to be with you today and honored to have the opportunity to take over the leadership of CF Industries from Steve Wilson. Steve left an exceptional legacy of creating shareholder value, one that I am fully committed to build upon.
I'll come back to the topic of just how we intend to continue creating shareholder value later in the call. But first, I want to review our fourth quarter and full year results.
We Generated $643 million of EBITDA in the quarter, representing 48% of our revenues. This capped the year, in which we generated $2.7 billion of EBITDA or 49% of our full year revenues. These results highlight the cash flow generation capability of our business, even during difficult market conditions.
During the fourth quarter, our view of the global urea supply curve was yet again validated. In October, urea price has bottomed out at the global floor, based on the level where marginal producers were estimated to be breakeven on a cash cost basis. In this case, that was Chinese anthracite coal-based production. This forced even higher cost producers in Europe and other regions to take downtime.
Prices began to recover after the Chinese low-tariff export window closed and global supply tightened as demand emerged. Prices continue to move up in December, as the market needed to bid some of the high cost European production back online to meet global demand requirements.
This quarter again demonstrated that the nitrogen industry continues to be driven by free market economics, where cash cost forced all market participants to make rational economic business decisions. CF Industries is able to generate significant amount of sustainable cash flows due to three factors.
The first, the structural cost advantage we enjoyed based on North American natural gas cost compared to hydrocarbon feedstock cost in other production regions of the world. The second, our expensive network of production, logistical and distribution assets, which create synergies and opportunities for us that no other nitrogen company enjoys. And the third, our experienced and high-performing team.
Several people have commented in the past that we are the best nitrogen operators in the world, and that was demonstrated again this quarter, as we performed extremely well in difficult market conditions and still generated $643 million of EBITDA.
2013 began with a cold, wet spring over much in North America, which led to delayed planting and application season. These conditions proved difficult for ammonia, but favored our upgraded products. The delayed planting in turn led to a late harvest, which shortened the fall ammonia application season. As a result, ammonia sales volumes and prices for 2013 were significantly lower than 2012 levels.
2013 certainly had its share of challenges. A difficult ammonia market because of weather, a difficult urea environment in the second half of the year, and particularly in the fourth quarter, when the Chinese low-tariff export window was open, and the result in price pressure on UAN, given where ammonia and urea were trading. However, despite all of that, our team here at CF Industries was still able to deliver $2.7 billion of EBITDA for the year, our third best year ever.
As I mentioned at the start of the call, we are committed to driving long-term shareholder value, which we measure in terms of total shareholder return. Our approach to this is really pretty simple. We are focused on maximizing the cash flow generation capabilities per share of stock, while we seek to lower the cost of financing the enterprise.
The strategic decisions we make are governed by that framework. We invest in projects to grow our cash flow generation, when those projects have return profiles well above our cost of capital, while we actively reduce our share count.
So now I'd like to highlight some of the key strategic accomplishments in both the fourth quarter and for all of 2013. In terms of growing our cash flow generation capability, in April, we completed the acquisition of Viterra's interest in our Medicine Hat facility, which increased our cash flow capacity by retaining 270,000 tons of net ammonia and 275,000 tons of urea that previously went to our former partner.
During the year we completed or approved high-return projects to add approximately 100,000 tons of ammonia capacity across our system. All of this additional production volume will be online in 2014. We've also made great progress on our expansion projects in Louisiana and Iowa, which together increase our production capacity by 25%, when they will be completed in 2015 and 2016.
During the year permits were issued and significant progress was made on civil construction at both sites. By the end of 2013, general construction contracts were in place for four of the five production plants, and work had been started under lump sum turn-key contracts for supporting infrastructure, including urea warehouses and ammonia storage tanks at both locations. We're very confident in our teams that are executing these projects, which continue to be on schedule and on budget.
In addition to the deployment of capital to increase our long-term cash flow generation, we repurchased over 7 million shares during the year, representing 12% of our shares outstanding at the beginning of 2013. This reduction in share count increased the cash flow generation on a per share basis to our remaining stockholders. Additionally, we increased our dividend 150% to $1 per share per quarter.
We also sharpened our focus on reducing our cost of capital during 2013, a key step of which was our inaugural issuance of investment grade debt. Maintaining our investment grade rating is a critical element of our financing strategy, as it gives us access to exceptionally low cost long-term capital, while also allowing us the flexibility to pursue value-creating initiatives.
Other key accomplishments during the quarter were the strategic agreements we executed with the Mosaic Company. We are selling our phosphate business in order to redeploy that capital in ways that will create more value for CF shareholders than if we had continued to hold and operate that business.
Additionally, we have put in place ammonia supply agreement, which provide long-term steady demand for a financially strong customer. The ammonia has been priced with a defined margin that supports our belief in the mid-teens return profile for the capacity expansion projects.
I am now going to turn the call over to Bert, to provide a deeper discussion of the nitrogen market conditions and our operations during the quarter. Bert?
Thanks, Tony. Global nitrogen market condition is challenging during the fourth quarter. The industry had to deal with declining corn prices, unfavorable regional weather conditions in North America and excess global nitrogen supply. These factors were all weighing on nitrogen prices, as they hit the floor in the October time period.
The ammonia market had a difficult set of dynamics during the quarter, as the late North American harvest and early cold weather resulted in a short fall application season. Inventory carryover from the spring and high production levels contributed to elevated industry-wide inventory and led to a weak ammonia pricing environment.
Coming into the quarter, the global urea market saw prices under pressure from a significant level of Chinese urea exports during their low tariff export season. The price pressure from the high level of urea supply had an impact on the UAN market as well. Urea and UAN prices at the U.S. Gulf found a floor in October and moved in a narrow band through November, as buyers sat on the sidelines, waiting to take inventory positions.
Then during December, seasonal events started to emerge. The close of the low-tariff Chinese export window and gas curtailments in areas like Libya, Egypt and Pakistan limited available supply. Given the tightening of the global supply demand situation and grower and retailer recognition of their low inventory positions, prices started moving up.
This was evidenced, as average urea prices at the U.S. Gulf increased from $285 in October to nearly $330 in December, and as high as $425 in late January. We operated well in this changing environment by managing our order book to maximize the pricing options available to us. The decisions we made were supported by data-driven analysis of agricultural and fertilizer business trends, the evaluation of global market conditions and the excise of management discretion.
We believe that these are part of the operational excellence that continues to differential CF Industries from our competitors. Recognize that the weak market situation in October/November did not reflect the value of our products and the ultimate demand we were confident of seeing, but we chose to be conservative with our order books during that time.
In anticipation of conditions for more favorable pricing, our teams positioned our inventory and logistical assets for what was a record selling December, as we made sales into recovering markets. We utilized exports to manage our inventory levels and to take advantage of sales opportunities with attractive netback pricing. This included exporting ammonia to Morocco, ammonium nitrate to Central and South America, UAN to Argentina and Urea to Chile. As we move into 2014, we have seen pricing conditions continue to improve.
Demand for nitrogen continues to be strong with high acres planted globally. We expect planting of 92 million acres of corn in North America will support the need to import a significant amount of nitrogen in order to meet spring demand. In that environment, we will operate our plant to full capacity and so all of our production. The timing of these sales will be driven by opportunities to maximize our margins.
Since July, North America has had lower imports of urea compared to last year, contributing to tight regional markets. This situation has been reflected in U.S. Gulf prices for urea, which have rebounded to around $420 a ton recently from the October 2013 average of about $285.
UAN demand is also expected to be strong. With reduced import and inventory relative to last year, UAN prices will likely have to move up in order to attract imports to satisfy overall demand.
The strength urea and UAN should also have a beneficial impact on ammonia demand, as buyers recognize the compelling value ammonia provides to them. Due to oversupply ammonia prices are much lower per pound at end, so on a value basis ammonia should have a robust spring consumption weather permitting.
Looking forward into 2014, we expect to see a less volatile pricing environment due to the change in the Chinese urea export tariff policy. With a change in the tariff policy to reduce the export tariff during the high season, we expect to see more Chinese product come on to the global market in the November to June time period, when price is supported.
For the full year, we expect about 8 million tons of exports, which is similar to last year. While this supply may reduce some of the peaks in urea prices, we believe we also be conducive to more ratable purchasing and a greater pricing efficiency across the market. We've seen some evidence of this already with the increase in prices fall in the October close of the low-tariff season and with Chinese producers appearing to maximize their profits across domestic and export sales.
Now, let me turn the call over to Dennis.
Thanks, Bert, and good morning, everyone. Our financial results for the quarter and full year demonstrate the robust cash generation capacity of our business as measured by EBITDA. During the quarter it was characterized by very difficult market conditions. We generated $643 million of EBITDA, which was 48% of our $1.3 billion of revenue.
For the year, we generated $24.74 of earnings per share and $2.7 billion of EBITDA, which was 49% of our $5.5 billion of revenue. This level of earnings was in part attributable to the enduring structural advantage provided by low-cost North American natural gas.
We've been watching the gas market very closely, given the exceptionally cold winter weather we've experienced in North America and are encouraged by the relatively stable nature of the natural gas forward curve, even with several recent weeks of record gas storage withdrawals.
We are actively managing our near-term risk exposure to natural gas prices. We have hedged approximately 75% of our first quarter NYMEX exposure and 50% of our second quarter NYMEX exposure at prices well below $4 per MMBtu. Our plants are primarily in gas producing regions, which over time helps minimize the impact on our business of differentials to NYMEX prices.
We are using the cash generated by our business on a select use strategic priority. We spent $129 million of cash on our capital expansion projects during the quarter, which bought our total cash capital expenditures on the project to $356 million for the year. We accrued an additional $204 million at yearend, bringing our total investment in the projects during 2013 to $560 million. We also had $468 million of capital expenditures during 2013 for items other than our capital expansion projects.
These expenditures that provided approximately 100,000 tons of incremental ammonia production capacity, additional transportation logistics infrastructure, expanded storage capacity, and most importantly has help maintained the safe operating condition of our assets. We returned $395 million to shareholders during the quarter through dividends and the repurchase of 1.5 million shares at an average price of $223 per share.
Our financial objectives in 2014 will be focused on closing the phosphate sale, putting in place lower cost capital in the form of long-term debt and continuing to return cash to shareholders by our repurchases and dividend. We expect to close the sale of phosphate business some time in the first half of 2014 and to realize approximately $1 billion of proceeds net of tax. We also intend to raise up to $1.5 billion of additional debt in early 2014.
We are focused on realizing the lowest cost of capital for the overall enterprise, while maintaining our commitment to investment grade credit metrics. We believe this approach provides us with several significant benefits and a superior hand to execute a variety of strategic initiative on a timeframe that we can manage.
It allows us to pay dividend, buyback shares, deploy cash towards growth opportunities, all without significant restrictions and it allows us ready access to long-term financing for the capital markets. Therefore, we are fully committed to maintaining an investment-grade credit metrics.
We are making progress in our evaluation of optimizing the capital structure of the company, including how MLPs might fit within that framework. Early indication suggests that the sale of existing operating assets to an MLP does not look terribly compelling to other alternatives such as additional low cost debt. Our existing assets have low tax bases, which would create tax leakage significantly reducing the net proceeds realized from selling them to an MLP.
Additionally, the cash flows from these operating assets support CFs investment-grade metrics and our current and planned borrowings. However, our analyses are not complete and we continue to evaluate alternative funding options for the company.
Another of our key objective is to continue to buyback shares and return cash to shareholders. To that end, through Friday, we have purchased approximately 700,000 shares at an average price of $230 per share for a total of a $162 million since the beginning of the year.
We currently have approximately 55 million shares outstanding and $1.4 billion of remaining repurchase authorization. In addition, we will continue to evaluate the appropriateness of our dividend level overtime.
With that, Tony, will provide some closing remarks before we open the call to Q&A.
We recently announced entering into a long-term agreement with Orica to be their primary external supplier in North America for industrial-grade ammonium nitrate and AN solutions. This agreement will provide an off-take for about 70% to 80% of the AN production from our Yazoo City complex and shifts our customer base more heavily towards industrial AN and away from agricultural AN.
The agreement is structured in a somewhat similar way to the Mosaic Ammonia Supply Agreement and that we have a defined margin structure with an attractive return profile and a steady long-term customer that is a leader its industry. This agreement will help us to realize significant value from our Yazoo City complex.
I also want to provide some insight into other work we are currently doing. We realized a significant premium per unit of nitrogen for urea compared to ammonia, particularly in the regions served by our Medicine Hat facility, combined with a difficult ammonia market conditions presented by the shortened application season this year. This helps us evaluating options for upgrading more of our ammonia at Medicine Hat. It is early stages at this point, but as our analysis progresses, we will provide you updates.
I would like to thank all our employees, especially our sales, sales support and logistics team for doing a truly great job in December. Their efforts allowed us to end the year on a high note.
With that, we will now open the line to answer your questions.
(Operator Instructions) Our first question comes from the line of Vincent Andrews of Morgan Stanley.
Vincent Andrews - Morgan Stanley
I think I just heard Dennis make a comment about not dropping down existing plants into an MLP, which I assume meant TNH. You didn't mention anything about what you might do MLP-wise with the two new facilities or if you're not going to do additional dropdowns into TNH, what why you might do with the general partner interest there or with the substantial amount of common units that you'll miss. So maybe you could give us some preliminary thoughts on how you're thinking about all those things.
What I would point out is in our prepared remarks, what I stated was our analyses is going to be a detailed analysis, that we're doing, is not yet complete. If you go back to what we've talked about in the past, we are doing a detailed analysis that will involve, looking at everything on an asset-by-asset basis and looking at all the options, potential contract structures and the like, that one produce to do an MLP. So what I've given today is really just a preliminary view of kind of where we come out on some of the existing assets. We will of course be looking at all of those things over time.
With respect to the assets that we're building at this point in time, again, that will be part of the analysis as well. When we'll have our conclusions later in the year, we'll conclusions at least on a preliminary basis on those. But I think it's worth pointing out that with respect to the new assets, there isn't anything to do with those things until sometime in 2016 or 2017 when they're completed. So it would be difficult to have a final conclusion on those until such time, as they're right to be sold to an MLP, if that were an option, we wanted to pursue.
The other thing that I would throw in there, Vincent, is relative to the TNH position that we currently hold, we've got much lower cost ways currently of generating additional liquidity into business. And in particular, we're talking about raising $1.5 billion of additional debt here in the short term, which the cost of which is pretty minor on an after-tax basis.
First us to sell additional TNH units, we're really selling cash flow from the C Corp shareholders. So we're absolutely looking at that like any other divestiture and can we realize more value by selling that cash flow out in the market versus keeping it for our shareholders. And right now as we look at on a net realized cash basis, the answer is no. It makes sense for us to keep that cash flow and deploy it against our business priorities. So where we stand today, we have no real interest in selling TNH units in the market.
Vincent Andrews - Morgan Stanley
And as a follow-up, I'm not sure what your goal is, but any idea, how much of your volume do you think you could transition into the type of structure that you've done with Mosaic and with Orica?
I think where we are with that I would carry on with what Dennis presented relative to MLP. We are looking at various options for our product flows, and again to maximize the return to the corporation over time. And so yes, there are opportunities out there for us, but we have to still review those and come to a conclusion with the management team, the direction that we will go. But I would just say, more as it develops.
Vincent, from a philosophical standpoint, aligning our production with leaders in the industry spaces that they occupy that are high-credit, longstanding, strong participants in their industry to us makes great business sense, and we're really walking up from strategic partnerships. And so as Bert said, we'll have to evaluate these on a case-by-case basis. But where we've got those kind of intersections of interest and value delivery that we can provide, I think it's a win-win for both sides.
Our next question comes from the line of Kevin McCarthy of Bank of America Merrill Lynch.
Kevin McCarthy - Bank of America Merrill Lynch
A couple of questions, first of all on ammonia, I think you indicated that you ran at an operating rate of 107%, so it's not often we see rates that high. Can you comment on why you ran so hard and how the incremental 100 tons is factoring into that calculation? And also why you would have run that hard, when it sounds like producer inventory of ammonia is a bit elevated? And then secondly, just wondering if you could comment on inventory levels for UAN solutions and urea, please?
So I'll take the first part of that, Kevin, and then I'll turn it over to Bert. So when we report ammonia capacity, we do it on an average over the cycle. And by a cycle it's usually a four-year cycle, because most of our ammonia plants are on a four year turnaround cycle, which means that you sort of have one week outage per year. And so that's factored into the average capacity numbers that we report. And so in a quarter, when we don't have significant downtime or turnaround activity, and we're able to run at something above 100%.
But it's also true that some of the debottleneck projects that are adding 100,000 tons of ammonia capacity were completed during the year and some of that additional capacity is showing up in our production numbers. In terms of why we would want to do that, even though producer inventories are historically a bit higher than they've been in the last couple of years, the margin structure that's available to us is still extraordinary.
When our cash cost of ammonia production is in the neighborhood of $150 to $170 basis on a Gulf basis and we're selling product in the interior north of 500, we want to produce every ton we possibly can, because we're very comfortable that those tons will eventually find their way to ground. And when they do, we will have made great margin as a result of that. Relative to the inventory position, I'll turn that over to Bert.
First, the CFs, we ended up the year, as we mentioned in our release as well as during this discussion, ammonia was challenged throughout the fourth quarter, I'd say really challenged since the start of the fertilizer year. We did well in terms of moving our product and recognize the difficult environment that we entered in November and that's why you saw us export ammonia in the fourth quarter.
We ended the quarter or ended 2013 relatively solid on our inventory levels for ammonia, but probably higher than we would prefer. For urea and UAN they were both below our three-year average, and again we think we managed that well through various options that are available to us in order to end up in an acceptable position to start 2014.
Kevin McCarthy - Bank of America Merrill Lynch
And then as a follow-up, if I may, on natural gas, do you have any hedges in place for the back half of the year? And then I just had, I guess, a clarification, your press release indicates you've got exposure to floating basis differentials for gas at some production points, so wondering if you could just elaborate and explain what the impact of that or implication could be?
With respect to the hedges that we've got on, Kevin, what we explained in the press release was, we had the first quarter hedged at 75% and second quarter hedged at 50%, and that's the best, that's our disclosure that we have. With respect to basis differentials, really that affects us principally, and this is only a time that two plants, that there is in Iowa and also at our Courtright plant in Canada. We've got some hedging with respect to basis differentials at the Canada plant.
But at the end of day, this isn't a big deal for us because over time, like I've said in the prepared remarks our plants really sit in gas producing regions. And so basis differentials, as a rule generally don't terribly out of line, and so consequently, although, yes, this does affect our results to a degree, but the affect on our results is not gigantic by any means.
Kevin, the mechanisms around basis differential is the NYMEX is basically priced at Henry Hub. So when we're buying gas, we're buying it at the Hub and to the extent there is transportation differences that then swapped out for gas, delivered into Port Neal, Iowa. There is basically transportation cost is not hedged, that's what the basis differential is.
Our next question comes from Don Carson of Susquehanna Financial.
Don Carson - Susquehanna Financial
A question for Bert. Bert, you talked about strong outlook this spring, especially for urea and UAN. So I'm wondering why you were so active in export market in the fourth quarter, when you have been better off sort of inventorying that product and selling it into the domestic market, especially given the potential for logistical constraints and how that works to your advantage?
And next, one longer-term question. Slide 9, you've got your projection of the North American nitrogen import situations through 2018. How many new greenfield plants and/or major brownfield expansions are you putting into that supply demand and import balance outlook.
Regarding the spring outlook, obviously today it's fairly rosy. We were pretty confident in what we had positioned and what we believe will materialize through the second quarter. The high insight is 2020. We did not have that view in the fourth quarter, which was a fairly challenging environment where you saw urea, I think in the releases, at $275, maybe $285 for an average. But the floor was fairly low. And with the outlook, that continued production would be coming to the United States.
And so you have taken balance, that's what we do at least is balance our options, and so during that time period, in order to be prudent with our order book, we've decided to export through key train through to a number of countries, throughout South America, Central America and Europe to move our products on, I would say, judicious spaces, which allowed us to maintain our inventory levels through an acceptable position, but during that time period, also building inventory to allow us to capture the December increase as well as the Q1 pricing environment that we have today.
So when you look at the exports and how we acted in the market, it was with that intent to balance the options available to the company and position it in what we thought would be the best position.
Regarding the greenfield and brownfield, Don, on the new plants what we're assuming is that there is basically four new greenfield plants and including in that are the projects at Port Neil and Donaldsonville that we're doing, even though those are brownfield. And then we've got several capacity expansion projects embedded in there from the majors.
It's principally Agrium, PCS, Koch that have announced and we believe those are real projects that are moving forward. Most of the other projects that have been talked about at this point we don't see having any sort of significant production volume, even if were they to occur in the 2018 time horizon. So if they show up, their impact is really going to be '19 and beyond.
Don Carson - Susquehanna Financial
I wanted just to follow up on that. You show about 5 million nutrient tons of net import demand in North America in 2018. How would you see that unfolding by 2020? Do you think it goes away by then or do you think that we remain -- our North America remains a net nitrogen importer?
We believe it will be remained a net nitrogen importer. I think what you've seen are the people that are already in this business that have assets and networks that they can leverage to get the most bang for new steel in the ground are the ones most likely to make investments.
And you've seen projects cancelled by a number of those participants. So our view is while there maybe a one or more projects that eventually show up, it's a pretty long thought for a lot of new entrants to get there. And so we believe North America will continue to be a nitrogen import region for the foreseeable future.
Our next question comes from Matthew Korn of Barclays.
Matthew Korn - Barclays
I'll ask a little bit of I guess a market question. I'm just wondering if farmers, given the turn that we've seen in expected income levels go into next year, is there anything behaviorally changing as to how they're buying? Are they being more aggressive on last $5, $10 a ton, are they being more discretionary in winter purchases at all that you can tell.
It's an interesting question, because yes that has taken place with buyer behavior. We see the farmer behavior representing the retailer ability or desire to take positions. And so what you have is the market is operating today with a very short cycle. The farmers have not stepped-in. And for fall, I'd think they've bought a portion of their requirements, but there's still a high percentage still to be purchased.
And what has happened as the retailers are backing up, they haven't been buying as much as what we've seen in the past. And so we believe that that will show itself or materialize in a very active April -- maybe March and April period when people will have to stepped-in and cover their spring requirements.
Part of that behavior is represented in risk. Again, there's both farmer and retailer are not desiring to take on a tremendous amount of risk and we happened to participate in very volatile market these days with the urea prices spiking $50 a week at times. And so we understand that and that's why we're preparing the way that we do to utilize our inventory space, as I mentioned earlier, our export options and the various methods that we come to the market.
Matthew Korn - Barclays
Following-up for Dennis, back in December, you put out a really nice chart, kind of outlining over 2014, 2016, your kind of available capital versus your expected uses of capital. And if I read that correctly, that implied maybe around like $2 billion and $2.5 billion in capital, above and beyond your current commitments.
It talks a little bit about the opportunity maybe to do some upgrading at Medicine Hat, when do you think we'd hear more over the course of the year about whether we would see a lift in repurchase expectations or any other type of growth investment?
I would say, again, the framework that we used is to the extent that we've got projects that return well above our cost of capital than we're interested in deploying cash against those. And to the extent, we don't, we're focused on returning cash to shareholders in the form of dividends and share repurchases.
And as mentioned, we're still sort of early stages on the Medicine Hat analysis, but we will be providing regular updates to that on calls as we go and I don't want to put a time horizon on it, or a definitive decision on that. But we should be able to make some pretty significant progress on that during the course of the year.
And your next question comes from PJ Juvekar of Citi.
PJ Juvekar - Citi
Your customer advances on the balance sheet were much lower than last year. I was wondering if you could explain that, part of that could be price of urea and other products, so can you break down the decline with how much is lower volume versus how much is lower price?
PJ, we usually don't get into disclosing kind of what we have in terms of volumes, in respect of our customer advances. But I would say this year, that we have a significantly lower volume in terms of our forward pricing program, which generates the customer advances than we've had in previous years. And obviously, you've got price pressure too, this year versus in the end of year last year. Bert, if you've got anything more, you want to add in terms of color on the market.
I think it's both, Dennis. I think what you've seen is, just to take ammonia for example, we were last year around the $700 level and that is today around the $500 level. And that's representing each of the products. As well as volume is probably a little bit lower, but not much as compared to previous years. You have to prepare for spring ammonia by pre-purchasing or pre-allocating where those tons will go. And that takes time for us as well as the other producers. And so in order to prepare for that we have to sell.
And I think we are adequately positioned on our order book with UAN and urea. But there is a reflection as, I said earlier, that customers have been hesitated to take, I would say, three to four months out forward positions. And we're okay with where the market is today in relative to that decision.
And PJ part of that too is was a very conscious decision that Bert and his team used to manage our forward order book to the extent that we believe we're moving into a period of relative strength, our appetite for taking on a lot of forward orders is diminished.
And when we find levels that we're very happy with in terms of our margins that are available to us, then we'll go ahead and take more of that. So as we were coming out of the pretty difficult environment in the fourth quarter, moving into what we expected to be a brighter spring, it's not surprising that our forward order book would be lower.
PJ Juvekar - Citi
And then secondly, the Chinese exported over 8 million tons of urea last year. So Tony, when you look at 2014 given the changes in tariff structure, how much export do you expect? And then is there a bottleneck in port, and can they export more from their existing infrastructure?
Yes. We're expecting somewhere in the same zip code about 8 million tons again. I would say, to the extent that prices on the global market rise significantly above what their other alternatives are, you'll see them find ways to get around port congestion and so forth, and that those tons will find their way out in the market.
As Bert mentioned in his prepared remarks that may put out a little bit of a feeling just on how high urea prices rise during the year, but even with that out, there we're still generating the huge amount of cash based on our business model with the advantages that we have. So we feel very comfortable with the marketplace and the environment we're operating in.
Our next question comes from the line of Adam Samuelson of Goldman Sachs.
Adam Samuelson - Goldman Sachs
Maybe first, Bert, if you could reflect on the recent move in urea prices, UAN has moved up as well, maybe not as quickly, and narrowed some of that premium that you saw really developed over 2013. Can you give us some thoughts on how do you think that's going to play out over 2014? And why does any premium UAN can carryover urea, as you go into the spring?
I think where we are today, relative to the imports that have come in, the demand we expect from 92 million acres of corn as well as the other feed grains and fiber, we are expecting healthy demand and that needs to be met by a combination of imports and domestically produced products. So urea prices today is, as I mentioned around $420 for spot products, even getting as high as $430.
And you can read different industry projections or predictions, but we do see a healthy urea environment, and if are under -- continue under the import level, we could even see a spike. UAN will accompany that. They do trade in relation to each other, but at times they separated. As you mentioned last year, that was the case where urea or UAN traded at a healthy premium. We expect those premiums to be maintained. I won't give you an exact range, but UAN is a preferred product. It's a great product for corn and we're expecting demand to be solid.
Adam, the one other thing I would add there is we're expecting robust demand on ammonia. But the key there is weather permitting to the extent that we have a spring like we had last year. It's going to diminish the number of tons that can actually hit the ground before the farmers want to get in the field. If that were to occur, the value of our credit product system is that much higher. And so you'd see in that case the premium for UAN spike even higher. So we're well-positioned, whichever way the weather takes the spring application season.
And if you look at last year at the end of 2013 in Q4 for what the industry or the TFI or the industry projections came out, and how much reduced the ammonia application was, there is a significant amount that needs to be made up in the spring. And I think that's difficult to do, because you have logistical complications, and we know how our assets run and how hard our distribution assets run during the application period. And it's a matter of days to dump those and to try to fill as much as you can for the second round. But I think it's going to be a challenge to meet the ammonia demand this spring.
Adam Samuelson - Goldman Sachs
And maybe on Tony's point, you've had two consecutive disappointing ammonia application seasons in the Midwest. If the weather doesn't cooperate in the next couple of months, how does the distribution chain really handle that as you get into the summer?
I mean, is it really, product has to stay at the Gulf and they'll will be exported, because there is just no room in the Midwest anymore to take additional tons? Or can you talk through on kind of the applications, if you have a third consecutive disappointing ammonia season?
I think you have taken a relative sense. We will have an ammonia season, and it's difficult, it's in the margin of how much is not applied. So if we were to take, let's say, the ammonia market for the year, there is 4 million tons to 4.5 million tons and if 10% of that is not applied, that's 400,000 tons, but that represents a lot of urea and UAN on an end-basis. And so if we don't have, specifically looking at CF Industries, if we are unable to maximize ammonia applications, you're exactly right, we will make decisions to balance our system.
And in sometimes, that's bringing product in from the north and that's one of reasons why we're looking at Medicine Hat for upgrades, because that difficulties tend to happen in the Dakotas or Canada for ammonia applications on limited season. And then we rebalance. We can bring product into the Gulf, or we can bring product up through the pipe, or we can export it, but the goal for us is to maintain a balance. We're not having to dump product at an uneconomical way.
Adam, that's one of the huge benefits that we have with our network having Donaldsonville where it is, because we can export ammonia out of D'ville in a way that very few of our competitors have the option of being able to do. And given where North American gas cost is we can do that very profitably and still make good margin on that those export tons. So again, we've got some levers and some flexibility that other people just don't have.
Our next question comes from the Tim Tiberio of Miller Tabak.
Tim Tiberio - Miller Tabak
I just circle back through the long-term supply outlook. I believe Pemex announced that they are looking to restart a brownfield site in Mexico over the next two years. I just wanted to get a sense of whether that is factored into your North American import and supply outlook?
Generally speaking, even though from a geographic perspective, Mexico is part of North America. When we talk about North America, we're principally talking U.S. and Canada. And the Pemex project those tons will likely stay in Mexico and really be kicking out imports in Mexico from other areas. So we don't see that project having a real significant S&D impact on the U.S. and Canada. We maybe should be able a little more precise when we say North America and talk about U.S. and Canada.
Tim, the other thing I'd point out is, globally if you look at the long-term mix and you see it growing at about 2% per year. And so globally you're going to need, we believe, between 4% and 5% among the urea complexes to be built every year just to keep up the demand. So while PMX maybe doing that, other people will shutdown, some other stuff will get build. We tend to take a look at these types of things and put them in the global context.
And then secondly, can you disclose the net volume increase from this or supply agreement from Orica, I believe if I'm correct, they were an existing customer?
They are our current customer. We have an agreement with them that is winding up sort of back-to-back with when the new one kicks off. And as we mentioned in the press release that the new agreement will consume about 70% to 80% of Yazoo City total production capacity, which is ballpark about 1 million tons of ammonium nitrate, and that is up substantially.
And with this agreement, we're moving more focused on the industrial AN segment and more away from the agricultural land segment. So this is a pretty significant increase in terms of the volume that we'll be supplying to them going forward. But the terms, the details of the existing contract are confidential. So we can't really get into the volumes and so forth of the existing one.
Well, as far as magnitude to, could you at least give us some perspective of whether this is double volumes or some type of range, so we can at least get a sense of magnitude?
Yes. It's in that range.
Our next question comes from Chris Parkinson of Credit Suisse.
Chris Parkinson - Credit Suisse
Just very quickly, you recently executed some longer-term deals for both ammonia and a substantial portion of your nitrate production. Do you have any general long-term goals regarding your ideal mix of contract versus spot cargos or these simply are opportunistic?
I would say these are more opportunistic. We had the chance to be able to align ourselves with some long-term agreements with defined margins, irrespective of where gas is traded, and with some real industry leaders in the segment that they're in. And when we climb those kind of situations, it's really a marriage made in heaven, because it's a win-win for both us as a supplier and our customer having guaranteed reliable supply. And so if we find more opportunities like that we will execute them, but otherwise we feel very comfortable with our ability to participate in the spot market and take advantage of that.
Chris Parkinson - Credit Suisse
And just a quick derivative question on that, if all these contracts have defined margins independent of net gas cost, longer volatility of cash flows, et cetera. Will this eventually or potentially have any varying on your thought of, let's say, putting out a more decisive payout ratio for your dividend going forward. I understand certainly, but just any general thoughts as how you may think about that would be appreciated?
I think we are constantly evaluating our dividend and it's certainly something. When we raised it to 150% in 2013, we have kind of targeted a mid S&P kind of yield, which is about 2% or just under. Obviously, our stock price has gone up considerably since then. So we're well under that, which is a good reason to be under it, with our stock price appreciating.
But I think it's something we continue to evaluate and whether the S&P averages the right one or the industry sector averages the right target, we have robust discussions about it. I would say where we're at right now, we have a lot of moving pieces this year. We have $2.5 billion of CapEx, including $2 billion towards our capacity expansion projects. We've got the sale of the phosphate business. We've got up to $1.5 billion of additional debt.
So there is a lot of ins and out. And in that context we kind of want to get to probably a bit more stable place before we do something radical with the dividend. But I think it's fair to say that overtime our objectives would be to increase it. And the other piece of moving ins and out is the additional $1.4 billion of share repurchase authorization that's still open. So there is a lot of, as I said, moving pieces, but it's a good question and one that we continue to evaluate around here.
Our next question comes from the line of Jeff Zekauskas of JPMorgan.
Jeff Zekauskas - JPMorgan
Earlier in the call you talked about mid-teens returns and your sale of ammonias up to Mosaic. Are those mid-teens returns after-tax or pre-tax?
Jeff, what we were talking about there was the mid-teens returns profiles for the projects generally, and yes, those are after-tax IRRs. If you go back to the presentation that we gave in December, I think there was a table, I'm not sure where it is, but we gave sort of a returns profile for the projects, varying urea price and gas price, and those are after-tax return.
Jeff Zekauskas - JPMorgan
Tony, I was wondering if your philosophy of share repurchase is different from that of Steve. And how do you determine when you should buy more of your stock or less?
Well, Jeff, I mean that's a great question. And I would say, I don't know that the philosophy is dramatically different that people that are weighing in on that, Bert and Dennis and I are the same group that was here before. I would say, we believe that our shares continue to represent an outstanding value today and we're happy to be buying them. As you saw we bought quite a few of them since the first of the year at prices in the $230 range and our outlook is certainly very robust, particularly as we're looking at having the new capacity expansion projects come on.
That said, I'd always rather buy more at lower prices, but as we mentioned a couple of times now, we are really looking at completing or largely completing our existing authorization by the end of the year. Again, part of that because we believe that our shares are very attractive for our long-term holders that we're taking amount at these kind of levels.
Jeff Zekauskas - JPMorgan
And then lastly, on AECO gas, really spiked tremendously at the beginning of February, and I think it was up to maybe $16 MMBtu. Was that difficult to cope with or how did you cope with the changes in Canadian gas prices?
I mean, if you look at the AECO gas differential now, as you can see is back down for March. In AECO we're sort of buying daily and during that period of time we did look at whether we should curtail ammonia production a little bit. And in fact, given the difficult ammonia market, as Bert said, when there is a tough ammonia market, it's usually in Canada and the Dakotas, principally because it's already a short application window anyway.
And when it was even further shortened the inventories were getting that big. So we actively look at where gas is trading on a daily basis, where our inventory position is, and we did go ahead and turned down our ammonia plant during that period of high gas price to help cope with that.
And I am showing no further questions at this time. I'd like to hand the call back over to Tony Will for any closing remarks.
Thank you to everyone for participating in today's earnings conference call. Our business model was really tested in the fourth quarter and during all of 2013, and it was again proven to be robust. We are confident in the sustainability and magnitude of the operating cash flow generation capacity of this company, which are underpinned by our three competitive advantages, our cost structure compared to the industry, our operating asset network and our experience and high-performing team.
With these strategic advantages that no other nitrogen company enjoys, we are actively executing a strategy we believe will increase the value of CF Industries. We are investing in high-return projects that are growing the underlying cash generation potential represented by each share. We are actively reducing our outstanding share count and we are putting in place lower cost of capital for the company. Thank you for your time today.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.
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