CF Industries Holdings, Inc.

Good day, ladies and gentlemen, and welcome to the CF Industries Holdings' nine-month and third-quarter 2020 results and conference call. My name is Joanna, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of the presentation. To pose a question at any time, please press star 1 on your touchstone telephone keypad. If at any time during this call you require assistance, please press star zero and a coordinator will be happy to assist you. Thank you. I would now like to turn the presentation over to your host for today, Mr. Martin Jarosik with CF Investor Relations. Sir, please proceed.

Good morning, and thanks for joining the CF Industries Year-to-Date 2020 Earnings Conference Call. I'm Martin Jarosik, Vice President, Investor Relations for CF. With me today are Tony Will, CEO, Chris Bone, CFO, and Bert Frost, Senior Vice President of Sales, Market Development, and Supply Chain. CF Industries reported its year-to-date 2020 results yesterday afternoon. On this call, we'll review the CF Industries' year-to-date results in detail, discuss our outlook, and then host a question-and-answer session. Statements made on this call and in the presentation on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statements. More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available on our website. Also, you will find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website.

Now, let me introduce Tony Will, our president and CEO. Thanks, Martin, and good morning, everyone. Yesterday we posted our financial results for the first nine months of 2020 in which we generated adjusted EBITDA of just over $1 billion. We feel good about our position as we near the end of the year. As we review our results on this call, I'd like to remind you that we evaluate our performance based on half years and full years rather than a single quarter. This is because there can be significant shifts across quarters due to weather or other events However, that spikiness tends to smooth out over time. So a longer time period provides a better picture of actual performance than focusing on an individual quarter. As of today, with two months to go and most of the fall ammonia season still ahead of us, we continue to expect that our full year 2020 results will end up within plus or minus a few percentage points of our 2018 performance for adjusted EBITDA. Our outlook hasn't changed since back in February, when we first gave our expectations for the full year. Overall, the CF team continues to execute exceptionally well. Assay utilization remains high, and our sales volumes through nine months are a new company record. We also continue to efficiently convert EBITDA into free cash. Most importantly, we are operating safely. Our 12-month rolling recordable incident rate at the end of September was 0.17 incidents per 200,000 labor hours, which is a new company record and substantially better than industry benchmarks. This is a tremendous accomplishment and we're extraordinarily proud of our team's unwavering focus on safety, particularly in the face of the pandemic. Speaking of which, our pandemic-related precautionary measures have been working well, and we have not had a single known transmission of the COVID-19 virus within any of our locations. With these precautions in place, we were able to complete safely critical turnaround activity at several locations during the quarter. As we look toward next year, the company is well positioned for the opportunities ahead. As Bert will describe in a few moments, we expect solid global demand and widening energy spreads, which will create greater price realization opportunities during 21 compared to this year. Given our position at the low end of the global cost curve, we believe these dynamics will support continued strong free cash flow generation. We were very excited about our announcement last week and our commitment to the clean energy economy, which provides a real growth platform for the company. As we discussed, hydrogen has emerged as a leading clean energy source to help the world achieve net zero carbon emissions, and ammonia is one of the most efficient ways to transport and store hydrogen. Because CF is the world's largest producer of ammonia, We are uniquely positioned with our unparalleled asset base and technical knowledge to serve this developing demand. As we decarbonize our network and aggressively scale our ability to produce green and low-carbon ammonia, we believe we will be able to realize the clean fuel value for ammonia rather than its nutrient value. In doing so, we expect to realize a substantial premium compared to the value of ammonia as a fertilizer or a feedstock. Last Thursday, we announced our first steps in seizing this growth opportunity with the Green Ammonia Project at Donaldsonville as the centerpiece of initial investments. We look forward to sharing our progress and our follow-on steps in the months ahead. With that, let me turn it over to Bert, who will discuss the global nitrogen market. Then Chris will follow to talk about our financial position of capital allocation before I return for some closing comments. Bert?

Thanks, Tony. Year to date, the global nitrogen market has been incredibly resilient in light of the pandemic. Demand for agricultural applications has grown in 2020, and industrial demand continues to recover from the disruptions in April and May. Looking ahead to 2021, we expect solid global demand led by North America, India, and Brazil. We also project improving price dynamics as the global cost curve steepens with rising energy prices and wider energy spreads compared to North America. As we noted in the press release, we are projecting a healthy level of corn planting as well as increases in wheat and canola plantings in North America, supporting good demand in the region. We are forecasting approximately 90 million planted corn acres in the United States in 2021. This is in line with levels of the last 10 years and supported by improved farm economics due to higher corn futures, government payments, and lower input prices. If weather conditions allow, we would expect to have a strong fall ammonia season due to the farm economics I just described and the attractiveness of ammonia prices today compared to the other nitrogen products. We expect that industrial demand will continue to recover in line with economic activity. We believe industrial demand for ammonia has been mostly tied to the state of the economy due to the pandemic. In contrast, demand for feed grade urea and diesel exhaust fluid has been relatively resilient. Our year-to-date DES sales volumes are up 6% compared to 2019, which would have been difficult to foresee in April when economic activity and miles driven declined so dramatically. Outside of North America, we continue to expect positive demand in most growing regions, particularly India and Brazil. We believe India is likely to exceed 9 million metric tons of urea imports through tenders in 2020. We also expect demand for urea imports into Brazil of approximately 6.5 million metric tons will continue to be supported by improved farm incomes and no active domestic urea production. As we look at our cost curve projection for the next year on slide 12, we see opportunities for greater price realizations during 2021 compared to this year. In 2020, the convergence of global natural gas prices in the first half led to a largely flat global cost curve. Formerly high-cost producers pursued this temporary margin opportunity available to them, increasing operating rates and pressuring product prices. In recent months, energy prices have risen across the globe, but at a much higher rate in Europe and Asia than in North America. These higher gas costs and the steeper global cost curve that results increases opportunities for low-cost producers like CF to achieve greater price realizations. Indeed, some of our most profitable years has been when our own natural gas costs were higher but energy spreads were wider. We are well prepared as the nitrogen market dynamics adjust over the coming year and the direction of the global response to the pandemic becomes clearer. With that, let me turn the call over to Chris.

Thanks, Bert. For the first nine months of 2020, the company reported net earnings attributable to common stockholders of $230 million, or $1.07 per diluted share. EBITDA was $982 million, and adjusted EBITDA was $1 billion. For the third quarter of 2020, we reported a net loss attributable to common stockholders of $28 million, or 13 cents per diluted share. EBITDA was $196 million, and adjusted EBITDA was $204 million. As you know, the third quarter typically has our lowest realized prices, lowest volumes, and highest level of maintenance and turnaround activity. This quarter was no different. However, both our year-to-date and quarterly results reflect the same overall factors. Lower year-over-year global nitrogen prices partially offset by lower natural gas and SG&A costs. On a trailing 12-month basis, net cash provided by operating activities was approximately $1.2 billion, and free cash flow was $756 million. At the end of October, cash on the balance sheet was well over $600 million, and we are well positioned to fulfill our commitment to repay the remaining $250 million on our 2021 notes. We expect capital expenditures for 2020 to be approximately $350 million as we maintain our high standards of reliability and safety. As we noted in the press release, this is lower than our initial estimate due largely to the deferral of non-essential activity as a result of the pandemic. We expect our capital budget will return to our typical $400 to $450 million range in 2021 and beyond. Each year, Our capital CapEx budget includes not only turnarounds and other sustaining activities, but also investments in improvement projects that allow us to pursue strategic opportunities. Recent examples from the SWATA category include the Nitric Acid Expansion Project announced this year, and the Diesel Exhaust Fluid Unit completed in 2017, both at our Donaldsonville facility. The Green Ammonia Project at Donaldsonville will fit into this improvement portion of our capital expenditure budget over the next three years, which allows us to maintain our overall capex at normal levels. That said, we expect that additional steps we will take to enable the production of green and low-carbon ammonia will require investment beyond this $400 to $450 million annual range. We are excited to invest in the growth of the company given the expected return profile. And we see a lot of opportunities ahead to do just that. So after the repayment of the $250 million in 2021 notes, we would expect that our primary use of cash in the coming years will be in support of our strategic focus on clean hydrogen and ammonia projects. With that, Tony will provide some closing remarks before we open the call to Q&A.

Thanks, Chris. Before we move on to your questions, I want to thank everyone at CF for their continued outstanding execution. Our team continues to demonstrate their focus, operational excellence, and the strength of our business during the most unusual of years. I also want to recognize the winner of our annual Wilson Award for Excellence in Safety. This year's winner is our Cartwright Nitrogen Facility in Ontario for their deployment of wireless technology to better predict, and prevent equipment failures. This award is a great reflection of our safety culture at work and I encourage everyone to view the impressive ideas from this year's finalists which can be found on our website. As the world focuses on decarbonization, hydrogen will be a key clean energy source and ammonia is a critical enabler for the storage and transport of hydrogen. CF Industries is the world's largest producer of ammonia and we will leverage our significant competitive advantages, which include the strength of our team, our operational excellence, technical knowledge, and unparalleled asset base. Advantages that will enable us to deliver green and low carbon ammonia at scale years faster and billions of dollars less capital intensive than many others looking at this opportunity. This will propel us to the forefront of hydrogen supply being a leader in producing clean fuels for a sustainable world and providing a growth platform to create shareholder value. With that, operator, we will now open the call to your questions.

Thank you so much. Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may press the pound key. Your first question comes from the line of Chris Parkinson from Credit Suisse. Your line is open.

Great. Thank you very much. Just regarding the focus on ammonia as a fuel source, you know, in the intermediate to long term, just what appears to be the – which this ultimately appears to be a reflection of, you know, the Japanese efforts. Can you just speak to the potential intermediate term growth of blue NH3 in the context of the current – merchant ammonia market. So, you know, generally just out of the 20 million or so tons, what percent of these will actually, you know, could be utilized for fuels just given the required retrofits, you know, technology, infrastructure, et cetera? It seems like the Saudis and ultimately you guys in North America are well positioned, but what about others? So just how should we be thinking about that? Thank you.

Yeah, Chris, I'll handle this and then also ask Bert and Chris to chime in as we go here. But As you said, initially, I think the first sources of demand that we're seeing right now are really coming from some of the Japanese utility providers. As you know, in the wake of the terrible tragedy at Fukushima, the nuclear fleet was decommissioned in Japan, and that necessitated a movement back to coal-based electricity production. Obviously, that's going the wrong direction from a greenhouse gas emissions perspective. And so they are very focused and moving aggressively toward alternative clean sources of energy to help offset the coal-based production of electricity. And injecting ammonia is one of those ways that they're going to improve their footprint from a country perspective. But we see a number of other applications that are rapidly developing as well, including marine transport where ammonia can be used directly as a fuel as well as disassociated into hydrogen to be used as a fuel. And there's a number of other off-road and industrial applications that are being pretty rapidly explored along with vehicle traffic. And so our view is that this is actually going to hit a tipping point pretty soon, and the more infrastructure that gets developed, the faster that will happen, and then you'll see really rapid evolution. But obviously that can't occur until you start developing the supply base, and so we're on the front edge of this to be able to develop the supply base and help facilitate the, you know, really getting to the infrastructure and the tipping point faster. So we're really excited about this opportunity. I think it's the only way the world is going to make a dramatic dent in the overall greenhouse gas emissions profile, and we're excited to be, you know, leading the efforts. Bert, Chris?

Thank you. No, that was helpful. And just a very quick follow-up, just Very simple. It's been a year since UAN trade flows have readjusted out of Europe. Can you just give us a quick update on your projections for UAN parity pricing? Do you still expect a discount in the U.S. in 2021, or do you expect that to normalize ultimately?

What we've seen through 2020 is, again, that price discount relative to other nitrogen opportunities, especially in North America. We've seen a substantial increase or kind of As North American production is ramped up, we've seen a continued import level that has probably been in excess of what is needed. That pressure price is lower. It was just about a year ago when the EU sanctions went into full effect, and that play out was played out for that price reflection was more of the impact in 2020. So I think with growth and what we're seeing with acres in 2021, and depending on how the fall application for ammonia goes, we expect to see greater increases of UAN consumption, which should improve the pricing profile.

Thank you so much. Your next question comes from the line of Steve Brang from Bank of America. Your line is open.

Hi, good morning. This is actually Luke Washeron for Steve. You talked about average selling prices being pressured over the course of the year due to lower energy prices spurred increased production rates. Was that meaningfully skewed towards one nitrogen product in particular, like urea or ammonia? And with natural gas costs now coming back up, have you started to see that global supply start to normalize? And in what regions are you seeing that normalize?

I'll give a little bit of an answer and then ask Bert to chime in as well. But, you know, the places where you see it manifest in terms of lower prices are areas particularly in the highly traded and commodities for which there's a lot of additional supply. So that's particularly in ammonia and urea. Obviously, per the previous question that Bert talked about with the UAN rebalancing, there's still some downward pressure on UAN as well. But I think in response, what you've seen is Some of the higher cost producers or production facilities globally have actually curtailed or shut down. There's been at least three significant plants in Trinidad that have curtailed for an extended period of time. And the benefit that we see going forward is as you see energy spreads expand between North America and Europe and Asia in particular, even if the overall energy complex is going up, it's the spread that actually matters a lot because that'll push the kind of high-cost second tier or second quartile, third quartile people into the fourth and dramatically pressure margins to the point that during parts of the year where it was pretty sloppy this year from excess supply, you won't see that excess supply next year. And that's why we think there'll be pretty significant improvement opportunities in terms of pricing. And so we're excited about getting kind of the normal energy spread differential back to where it should be.

I think two things. The energy issue is probably the cost side where we fell to as low as $1.50 in North America, but also equally cheap in Europe and the U.K., which brought on their continued high cost capacity to operate. But the pandemic was a big impact. And in April and May, we went from $270, $280 a short ton of NOLA. And by May and June, we're down to $190 to $200. So substantial fall or decrease in pricing and then some inventory carryover. And so you just had an imbalance and then a perception of of where value lied and what type of risk would be taken on by either the retail or wholesaler group. And the one positive or two positives that have really pushed the market back into a normal operating rate have been India and Brazil. And so we see the positive factors going into 2021 are the economic position. Hopefully we get through this pandemic, good acre plantings and good international support with a higher cost curve. That should improve prices.

Thank you. We have our next question comes from the line of P.J. Juvicar from Citi. Your line is open.

Hey, good morning. This is Kendall Marthaler on for P.J. So just sticking with prices, obviously U.S. Urea prices are at a pretty big discount to international prices right now. So how high do you think those could go to meet international parity in the first quarter next year? And I guess in order to meet that parity, do you see any decline in international prices, or is it mostly just growth in U.S. prices to get back up to parity?

So when you look at the area discount today, you're correct. We are operating in a $30 to $40 differential negatively to the world market. And, again, those go to the issues that I just mentioned for the last caller. But where we are today in the most recent India tender period, in the $270 a metric ton delivered, it's a China story. And China's operating rates today are around 55 million tons of supply with 4 to 5 million tons exported. And what is that price level with RMB at currently 6.7 and coal costs where they are? The marginal producer is going to be pressured and probably will not be participating in the international tenders. That, coupled with increasing Chinese demand for urea and crop production, as well as production of NPKs, we don't see China being as big of a force probably post-November in the international market. Again, coupled with good demand globally where we see the key markets driving and Europe's yet to buy, we see healthy demand going into spring. That should tighten up the market. We're at, I think, through September, 600,000 tons of imports into the United States and that's probably below where it should be. And so at some point, we need to start catching up and bidding in those tons from either North Africa or the Middle East or Russia. And so that should drive pricing as we get closer to spring. And again, corn plantings could be higher than what we're projecting with a $4 corn position out there today.

Thank you. We have our next question from the line of John Roberts from UBS. Your line is open.

Hi, guys. This is Lucas Beaumont. I'm third, John. Just wanted to follow up on the energy costs. So in terms of the normalising differentials, do you see any risks around the normalisation either from lack of availability of supply in North America as demand picks back up and with some supplies shut in or on the demand side from Europe with the deteriorating kind of conditions over there the last four to six weeks as they're sort of increasing COVID-related shutdowns?

Yeah, I think rising energy costs in North America is actually a good thing for us because what that means is the LNG cargoes, from a replacement economic perspective, starts becoming incrementally more expensive. And that's really what's going to end up driving the energy price differentials or that spread. What happened this last year was in the, you know, as Bert talked about in the aftermath of the economic slowdown driven by COVID, you had very cheap natural gas costs in the U.S. and you had a lot of excess cargoes of LNG floating around it for which there was really no home. And that led to a massive oversupply. And the result of that was extraordinarily low cost gas into Europe. there was a big chunk of the year we were paying less for natural gas in our U.K. facilities than we were in North America, and that's completely upside down from normal. So that led to the abnormally high operating rates in the rest of the world and excess supply, which capped pricing for nitrogen. And I think in a rising price for a natural gas environment where the demand is really – trying to kind of spur back on again, we'd expect there to be, given the reduction in LNG exports, a return to normal differentials, and that provides a much better price environment, even if our cost structure is higher. I think Bert mentioned this in his prepared remarks, but Some of our best years from the standpoint of profitability actually were with a relatively higher natural gas cost in North America compared to a real low cost. And so, you know, we think that this actually portends well for us looking forward.

Thank you. Your next question comes from the line of Joel Jackson from BMO. Your line is open.

Hi, good morning. with your, you know, newer focus here now on green ammonia, more blue ammonia, if we think about down the road and kind of M&A opportunities, you know, which you would start to be very cautious on, maybe some smaller deals, but would this imply that you really wouldn't do any kind of smaller nitrogen acquisition of plants that are, you know, obviously taking in gases, unless you thought you could add some sequestration to those assets? Like, how do you think about how your newer focus might affect your M&A strategy over the next decade.

Yeah, I think, you know, Joel, it really comes down to the particular assets in question and access to, you know, renewable energy, access to sequestration, and also access to end markets from a logistics standpoint. And I think, you know, at the end of the day, this all really is a price value and what would the investment have to be compared to making those investments and modifications to our own existing asset base. As you know, we put a bunch of money into the old Terra assets when we finished up that acquisition, and now all of those assets are running at extraordinarily high utilization rates and on stream factor. I don't know that there's another set of assets out there that are close to ours. So, you know, one of the embedded costs of M&A is you have to first start off with assets that are probably not as well maintained and get them up to our standard before then you make additional investments on top to convert into low carbon and green ammonia. So, you know, while it's certainly a possibility and, again, it comes down to price value and I really like our asset base, and we're excited about the opportunity to continue to reinvest in it. Thank you.

Thank you. Your next question comes from the line of Ben Isaacson from Scotiabank. Your line is open.

Thank you very much. Tony, in the past, when the fall ammonia window was narrow, CS has talked about demand being made up in the spring. So I guess my question is, Is the reverse true? When you have a strong or wide fall window, are we going to start to see some sales in the spring get cannibalized? And does that matter by product mix? And then second, can you just touch quickly on China's ban on Australian coal imports? Is that propping up the nitrogen cost curve right now? And is that at risk of going down if that dispute gets solved? Thank you so much.

Yeah, Yvette, thanks. I'll start off a little bit here and then pass it over to Bert. In general, if you're a grower, you need a certain amount of nitrogen load. If you're able to apply some of that in the fall, that requires less nitrogen in the spring. We really like ammonia going down, whether it's in the fall or the spring. because we have a differential asset base that allows us to realize terrific values for ammonia. And if you end up with poor ammonia application, then we end up having to export ammonia, and the price realization for that tends to be lower. And in general, we sell everything that we make, and we run our plants full on. And so the benefit that we have is... given that North America is an import region that, you know, we're not really worried about are you, quote, unquote, cannibalizing sales out of next year, you know, to be able to move them this year. We run our plants at capacity. We sell everything that we make over the course of a year. And so, you know, we either get it in the fall or we get it in the spring, but basically it's the same number of tons ultimately that go down. And there is this sort of love-hate relationship we have with ammonia. On the one hand, again, we've got this differential asset base that allows us to exploit and realize terrific values. But on the other side, the less anhydrous ammonia that goes down means the more upgraded product that goes down. And basically, you're putting on two tons of urea for every ton of ammonia that didn't go down, or about three tons of UAN for every ton of ammonia that didn't go down. And the margins on a per unit of nitrogen basis tend to be better on upgraded products. So in a strong ammonia market, we're going to do really well because we get great value. In an ammonia market that doesn't move a lot, we're going to do really well because of the volume of upgraded products that we make. So, you know, it's a really good kind of natural hedge position that we have based on our product mix. Bert, do you want to?

Yeah, I'd just say we've had some difficult ammonia seasons where it was either too wet, too cold, and that moved to spring. And we've had some difficult springs where we've had river floods and excess moisture and inability to apply and did well in both of those markets because of our ability or adaptability to transition and put the right product into the market at the right time. You also have to remember with precision ag, the impact of fall ammonia is less than it was 20 years ago, where you're actually probably applying less on that one pass-through and doing multiple applications, whether that be some ammonia in fall or spring, and then urea or a UAN on top. And so the impact of a negative fall is less, and again, what Tony said, our ability to manage through it is pretty solid.

Thank you so much. Your next question comes from the line of Andrew Wong from RBC Capital. Your line is open.

Good morning. Going back to green and blue ammonia, is there a market for that product in the ag and fertilizer space? Could there be some future drive to decarbonize farming that results in demand for low-carbon nitrogen?

Hi, Andrew. Thanks. We see that that's a possibility. I would say it's not real strong right now, although there's a number of growers and actually other entities that are beginning to look at the ability to do carbon sequestration within the soil and end up in a you know, in a regime that's got a cap and trade system or so forth, that can be a fairly valuable source of income for farmers. And so potentially in that environment, if you're using lower carbon inputs, you can get even additional benefits associated with, you know, in-soil sequestration. And so I think that's a possibility. I'd say right now, That doesn't really exist, but particularly if we end up projecting forward around a set of carbon regs and legislation that may be developing here, I could imagine that that might be something pretty attractive. And Bert's had a number of conversations with customers of ours and others that are looking at modeling carbon sequestration at the farm level and the value that can provide

Yeah, that's exactly right. So we're meeting with the leaders of that. We're, as an input provider and a key part of that value chain, there is a recognition, obviously, for what we bring to the table with the strength of our network and team. But that value will lie at the farm gate. So it's how do you help that farmer achieve through seed technology, crop protection, nutrients, farming practices, and then put together with or married with other opportunities, whether that's hedging or derivatives that are out there for weather and crop insurance, and then tracking the level of production correlated with the potential for what percentage of carbon is being captured, and I think that's measurable, and that's the next step for this industry. If we're able to achieve that, we'll play a critical role because of what we believe we can do with our network to help that solution.

Okay, that's interesting. And then just maybe just in regards to the rollout of the green ammonia capacity across the network, I guess just first is the 100 million initial capex for D-VIL. Is that typical of the cost that you would need for future capacity? And just generally, how would you finance that? You have cash flow, but if you want to build that up a little bit more significantly, it seems like you might need a little bit more cash than your general cash flow. So what would be your preferred approach for financing that?

Yeah, Andrew. So in terms of the initial investment for call it circa 20,000 tons per year, it's 100 million. I think as we talked about last week, a lot of that investment then becomes scalable. So subsequent improvements in capacity come at a discount as long as you're adding to the same plants. And so, in subsequent chunks, we can get some capital efficiency, but every time you move over to either a new complex or a new plant within the same complex, there's going to be some baseline that you're starting from. However, we would expect on our second and third ones of these that will end up with a lot of learnings and some efficiencies and improvements, and so subsequent investments we would expect to come down. But I think at least the initial one or two, we are generating plenty of cash to be able to self-fund those out of cash flow from operations. And, Chris, you want to just talk about that?

Yeah, I think also what we're going to see here is efficiencies and innovation that comes from the electrolyzers, and even the renewable energy side, where those costs are going to come down as well. So based on the initial project that we're looking at here, we feel confident of what we're seeing from a return profile, but I think that profile just continues to get better as we expand, and as Tony said, based on scalable units with having, you know, SIN loops already in place, that's going to put us ahead of many other of our peer groups.

I also think, you know, Andrew, as we look forward and expect there to be a significant premium associated with these tons, you'd expect to see, you know, growth on the EBITDA front, and that can certainly support, you know, additional debt. I know our focus the last sort of, you know, four or five years here has been really to delever, and we're back down once we finish the 250 next year that Chris talked about. back down to a very comfortable level of debt. So if you correspondingly see some growth on the adjusted EBITDA line, that can certainly support some incremental borrowings that can be used to basically self-fund some of this CapEx that we're looking at.

Thank you so much. Your next question comes from the line of Adam Samuelson from Goldman Sachs. Your line is open.

Yes, thank you. Good morning, everyone. Good morning, Adam. So a question just on the area market, and I just want to make sure I'm clear on the expectations on supply and capacity expansions. There's a couple of big projects in Nigeria that are supposed to start up next year, projects in India and Iran late this year, early next year that they're starting up. So I just want to make sure when you talk about the global market for global nitrogen demand growth exceeding the capacity additions. Is that actually true in 2021? And if so, where do you see capacity closures in the next 12 months? Thanks.

Yeah, good morning, Adam. And I agree with you on your list. You've got the Lortigen plant that's coming on or is probably ready to come on, the Dangote project in Nigeria, and then you have the projects in India. All of these projects have been delayed, and we expect continued delays. And then it's the ancillary issues of connections, feedstock, startups, and ability to export, that being the case of Dangote with peer imports and loadings. And so if that's the list, there is not a great list of capacity coming on, coupled with where we see growth and economic recovery on the industrial side for N being what we've already articulated. So we see a tightening market, and what we've seen in Trinidad with a million tons of ammonia coming off and a rising energy market where we're now at, you know, looking at the JKM gas market close to $7 and NBP in Europe and the UK over $5, $5.50, that's a good spread, and that does make higher-cost producers at current pricing for ammonia uneconomic. And so you would expect to see trade flows start to adjust back to where they were, lower cost areas moving to higher cost areas, and that would tighten up the market. But we've had very good demand in 2020, all things being considered, and we expect that to continue in 2021.

Adam, the other thing I want to just tack on to Bert's comments is that there have been a number of plants in India that have come online in the last couple of years, but in aggregate, Indian production has not actually increased. So what you've seen is a number of the older, less efficient plants have shut down. And in fact, I think, Bert, this year for India was a record urea import.

Yeah, we're saying above 9 million, but it's going to be closer to 10 million. So that was a very good healthy demand.

Yeah, so despite the fact that you've seen those capacity additions, You know, there's been rationalization that's been coincident with it. So, you know, we're not looking at those plants as being problematic from the standpoint of trade flows.

I appreciate that. I appreciate that call.

Thanks. Thank you. Your next question comes from the line of Jonas Oxberg from Bernstein. Your line is open.

Hi, morning. Wondering, one of the industrial gas companies announced green hydrogen this week as well, but sourcing biogas instead of electricity. So I was wondering if that's an approach that you have considered, and if you could talk a little bit about the plus and minuses.

Yeah, I don't know quite enough about what the consistency and regularity of the biogas production stream looks like and whether you can actually run a commercial operation off of it. I know that, for instance, the Matex plant in India had all kinds of problems trying to get coal seam methane because of the lack of – sort of consistent, regular compressibility of a gas stream into the plant, which created all kinds of whipsawing. And as you know, Jonas, that is never good for these kind of chemical plants to be up and down and see disruptive supply associated with it. So I don't really know enough about what the source of gas looks like coming off of these bio sources, but it's an interesting idea.

Okay, thank you. Thank you. Your next question comes from the line of Michael Paiken from Cleveland Research. Your line is open.

Yeah, hi. Just wanted to delve in a little bit more on the UAN strategy. I mean, are you guys sort of expecting more imports to come in as the year progresses? And I guess just wondering if we start to see urea prices increase move higher? Are you kind of waiting for that? Or, you know, just any more thoughts in terms of how you're thinking about managing kind of your UAN pricing and the flow of imports and exports over the next several months? Thanks.

When you look at the UAN market in North America of about 15 million tons of demand, you break out domestic production. We've been receiving around 2.5 to 3 million tons of imports, principally from Trinidad and Russia. And so, one, there's the side of demand with increased acres, possibly in 2021. We think that demand will be stable to increasing. But looking at where the market is overall, there hasn't been a lot of new capacity coming in. You've had Akron, a producer in Russia, drop a urea plant in to decrease their production in that market. You've had growing demand in Argentina and Brazil, which has helped support the market. And then you've seen some of the moves that we have made with DEF and nitric acid to take that existing stream into further higher-valued products. And so as we have repatriated our tons from Europe, we have not fully pushed those into the market, and that is how the market at this point has been balanced. But we see some very good opportunities for our in-market plants, and continue to value UAN as a key, if not the key, product of the company.

Thank you. We have our next question coming from the line of Vincent Andrews from Morgan Stanley. Your line is open.

Thank you, and good morning, everyone. I just wanted to sort of ask on next year and make sure I understood, Tony, what your sort of characterization of the market was going to look like with the movement within the cost curve. Because I see on your slide you have it kind of moving up, you know, $5, $10. So I'm just wondering if when we think about the year or what you're trying to get across to us that we'll see higher lows during the year as well as some higher highs. But when we think about your average realization for the year, it's going to be more because the low end, the low end of the period is going to come up. and is going to stay sort of in the middle range longer during the year than might have been the case this year. Is that how we should be thinking about it as we look at our quarterly models?

Yeah, Vincent, that's a great explanation. I'm going to throw it over to Chris here and let him talk about it a little bit.

Yeah, I would agree with your characterization there. Essentially what we're expecting to see is, as Bert and Tony have talked about, with these energy spreads beginning to widen, you know, $2 already in Europe and $3 for JKM, that the expectation is it's going to put pressure on margin, and you should see lower operating rates by some of those mid-tier, call it sort of third and fourth quartile players. And this year, as you saw, we're at much below end of the range for the cost curve, and that is really predominantly because we are right on top of each other from a differential. As Tony mentioned, we are paying less in the U.K. than we were here in the U.S., So I think what 2021 is going to provide us is not only a higher end of the cost curve, but also during particular times of the year, more pricing opportunity than what we've seen specifically this year.

Okay. And just as a follow-up, does the shift into, you know, the green arena, you know, we've been talking about sort of the desire to get back to investment grade. Does that sort of make that even more of a desire, or does it make it less of a desire, or does it not change anything in terms of how you're thinking about your balance sheet overall?

Yeah, I think we still have a strong desire to get back to investment grade. I think having another source from a customer base that is fundamentally different helps get a little more diversification in terms of the end market. with higher margin associated with that base. And because we can go ahead and fund this, you know, first round of investments out of operating cash, you know, we can continue to delever at the same time. So I think all of those are, you know, are positives.

Yeah, I think, as we mentioned, that this first sort of wave is going to be within our $400 to $450 million at CapEx. And as subsequent projects that we're reviewing here, Some of those specifically with carbon sequestration, there are incentives from like a 45-Q tax credit. And the thing to remember is, you know, we already have the capture and the removal process in all of our plants right now because we use that CO2 for us. It puts us at an advantage. So I think both when you look at the initial projects laid out, the incentives coming in, The early periods here, we feel pretty good about just funding this straight out of cash flow.

Thanks very much.

Your next question comes from the line of Mark Connolly from Stephens. Your line is open.

Thank you. Tony, I was hoping you could give us your perspective on the proposed UK ban on solid urea. It seems like it's sort of going in the wrong direction with what's happening with green and blue, and how would you respond to that

Well, I think part of the rationale, Mark, is around the volatilization and decomposition of the urea, which then releases the CO2 back in the atmosphere, even though it's been kind of temporarily sequestered in the urea granule. And so I think that fundamentally gets to the issue of the U.K. being very serious about trying to reduce aggregate emissions and from agriculture as well. Relative to our North American production base, it's a little bit challenging, but in the UK we make ammonium nitrate, which is really the fertilizer of choice in the UK given the soil conditions and the climate and the crops that are grown over there. And so you know, reducing a substitute from, you know, away from the RAN business is actually very helpful over there. But I, you know, I think we're prepared to support the UK farmers, regardless of which direction they end up going. But I think, again, it just speaks to how serious certain countries have gotten around carbon reduction. And, you know, we're excited about some opportunities that exist in the UK for us to be able to produce green and low-carbon ammonia over there as well. So I think, you know, we're really well-positioned when you start seeing movements like that.

But as a policy position, doesn't this concern you direction-wise? I mean, it's the UK and you're well-positioned there, but if this starts to spread, it starts to hurt everybody.

Well, I mean, I think one of the questions that sort of it's going to raise ultimately, Mark, is what's the price of food, right? Because to the extent you take what is currently the most ubiquitous form of nitrogen fertilizer globally traded and start reducing demand, you've got to substitute other forms of nitrogen for it. And that then starts putting incremental demand with a relatively captive supply that doesn't expand readily. And so, you know, if you ultimately are driving up price of nutrients to the farmer, that's going to, you know, work its way through the supply chain into the price of food on the grocery store shelf. And, you know, that's a question then that, governments are going to have to wrestle with. I think it's probably easier to be managed in some more affluent areas of the world than it is in others. But I guess we'll see how it develops. The good news is because we're moving early on decarbonizing our network, we'll be in a position that whether it's ammonia that's low carbon, whether it's AN that's low carbon, whether it's a different form, we'll be in a position to be able to supply whatever is needed both for an energy source and a nutrient content. And, you know, I think it's a movement that is actually very, very helpful for our business. Great.

And just one follow-up. There was a lot of excitement earlier in the season for a big Brazil corn crop, and that's maybe been tempered a little bit by the late planting. As you think about – about Brazil, are you assuming a steady increase in Brazil acres and a steady increase in nitrogen demand there?

You know, it's exciting for what has been happening in Brazil over the last decades. When you've gone from, let's say, in 2016, million tons of fertilizer demand to probably 38 million tons this year and probably heading towards 50 million tons this in not too distant future. It's been a steadily increasing demand. I think one of the issues that we're dealing with, you know, what Tony's comments climatically relate directly to Brazil and opening new acres and where they're opening those acres and how they're opening those acres. And Bolsonaro has been pretty aggressive of opening up the outer reaches of the savanna, and so that's been controversial globally. But there is a substantial land available that's to cattle feeding today, grass-fed, that could be opened up with not too much difficulty in Mato Grosso do Sul or even Goiás and some of the outer reaches of the area of Bahia. And so the opportunity in Brazil is there. They're taking advantage of it with the devaluation of the currency that we experienced this year down to, let's say, $5.70 to the dollar. That's been super attractive for the Brazilian producer, and what have they done? They've done exactly as they economically should, which is increase areas, increase yields through further fertilization, and the sophistication of the Brazilian farmer is on an equal basis with the American farmer on equipment, on technology, on the things that are happening. So, We're fairly bullish what can happen. You've seen urea grow from 2 million tons 20 years ago of imports to 6.5 million tons this year. And guess what? You've seen a consummate increase in yield. They have further yield to go, in corn especially. The late planting was more related to dryness than it was anything else. So I think you may see a yield impact, again, due to that dry weather pattern that has hovered there and then the late plantings. We'll see what happens with safrinha, which is the second crop corn that gets planted because the soybeans have been planted late. That means the second crop corn will be planted late. So more to come. We're constructive. We're participating in the Brazilian market, and I'd like to see what's happening down there. Super. Thank you.

Thank you so much. Ladies and gentlemen, that is all the time we have for questions for today. I would like to turn the call back to Mr. Martin Jarosik for closing remarks.

Thanks, everyone, for joining us this morning, and we look forward to speaking with you on upcoming conferences.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.