CF Industries Holdings, Inc.

Good day, ladies and gentlemen, and welcome to CF Industries 2022 full year and fourth quarter financial results. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. We will facilitate a question and answer session towards the end of the presentation. To pose a question at any time, please press star, then 1 on your touch-tone phone. I would now like to turn the presentation over to the host for today, Mr. Martin Jarosky with CF Investor Relations. Sir, please proceed.

Good morning, and thanks for joining the CF Industries Earnings Conference Call. With me today are Tony Wells, CEO, Chris Bone, CFO, and Bert Frost, Senior Vice President of Sales, Market Development, and Supply Chain. CF Industries reported its results for the fourth quarter and full year of 2022 yesterday afternoon. On this call, we will review the results, 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 afternoon, we posted results for the fourth quarter and full year of 2022 that reflected a phenomenal year at CF Industries, highlighted by outstanding execution from our team. Our plants ran extremely well, producing nearly 10 million tons of ammonia, and most importantly, we continued to operate safely. At the end of the year, our 12-month recordable incident rate was 0.33 incidents per 200,000 labor hours. well below industry averages. Against the backdrop of a persistently tight global nitrogen supply-demand balance, these achievements led to extraordinary results. We produced record full-year earnings, record fourth quarter and full-year adjusted EBITDA, and record full-year free cash flow. We also made significant progress decarbonizing our network and furthered our leadership position in low-carbon ammonia production. Over the last 12 months, we signed an MOU with Mitsui for the development of a new blue ammonia production facility, our Bluepoint Complex in Louisiana. We signed a CO2 transportation and sequestration agreement with ExxonMobil. We signed an MOU with Jera for the supply of low-carbon ammonia, and we recently signed an agreement with BP to purchase certified low-methane emissions natural gas. all of which put CF industries at the forefront of decarbonization and sustainability within the nitrogen industry. Turning to the market, the last 18 months have been a particularly volatile period for our industry. High energy prices, geopolitical events, and economic weakness leading to reduced industrial demand affected both nitrogen production rates and nitrogen prices. In the near term, we expect continued volatility in the global nitrogen market, As we look at the first half of 2023, we believe typical spring demand in the northern hemisphere is going to be weighted to the second quarter as buyers have taken a wait-and-see approach to their nitrogen procurement. CF Industries Network, with our combination of in-market production, extensive storage and logistics capabilities, and export optionality, is well-suited to navigate this type of environment. Longer term, we continue to see a positive operating environment for the company. Industry fundamentals remain strong. Resilient demand driven by the need to replenish global grain stocks, significant energy spreads between North America compared to Europe and Asia, and the emergence of demand for low carbon ammonia as a clean energy source are all very favorable for our cost-advantaged network. As a result, we expect to continue to generate substantial free cash flow in the years ahead. This will enable us to both invest in growth and return capital to shareholders. We are enthusiastic about the growth opportunity that low-carbon blue and green ammonia provides for our company and believe our MOU with Jera demonstrates tangible emerging demand for low-carbon ammonia as a clean energy source. We will continue to focus on disciplined investments to decarbonize our network and accelerate our ability to produce low-carbon blue and green ammonia to help meet this developing new demand. Alongside these growth investments, we expect to continue returning substantial capital to shareholders. In 2022, we returned nearly 60% of our free cash flow, $1.65 billion, to shareholders through share repurchases and dividends. And in the last two years, we have reduced our outstanding share count by 11%. We expect to further leverage the $3 billion share repurchase program recently authorized by the Board to continue building on this track record. and providing our long-term shareholders with ever-increasing participation in our business. With that, let me turn the call over to Bert, who will discuss the global nitrogen market conditions in more detail.

Thanks, Tony. The global nitrogen market was pushed to extremes in 2022. The need to replenish global grain stocks drove prices for feed grains to the highest levels in a decade. This supported resilient demand for nitrogen in major agricultural production regions like North America, Brazil, and India, At the same time, we believe historically high nitrogen prices led to lower demand in smaller subsistence-focused agriculture areas in Asia and Latin America. Industrial demand in Europe and Asia was also softer than expected due to higher prices and recession fears. Additionally, very high natural gas prices in Europe and Asia significantly curtailed production in those regions. This, along with government actions restraining nitrogen trade, reduced product availability further, supporting high global nitrogen prices. These dynamics were exacerbated by Russia's invasion of Ukraine, which triggered disruptions and a large realignment of trade flows. The combination of these events pushed global nitrogen prices to all-time highs in the spring of 2022. Through the second half of last year, the shock of these factors moderated as global trade flows of natural gas and nitrogen adjusted and the world absorbed previously delayed urea capacity additions. In addition, a mild winter in the northern hemisphere resulted in higher natural gas stocks, lower natural gas prices, and therefore lower global nitrogen prices. Global nitrogen prices were also pushed lower as many agricultural buyers took a risk-off, just-in-time approach to purchasing. This is not unusual. Nitrogen prices are historically high, and demand for the spring application season seems distant. This buyer behavior has persisted longer than normal as declining global prices reinforced the wait-and-see approach. Over the last two weeks, we have seen retailers and wholesalers begin to step back into the market at attractive price levels. The decrease in global nitrogen pricing has improved farmer economics dramatically and should spur demand globally that was discouraged at higher prices. We expect significant demand to emerge in North America in the coming weeks as the value chain moves into catch-up mode that will likely last into and through the second quarter. We believe inventories are lower at the farm and retail level given the extent of the Q4-Q1 purchasing slowdown. Additionally, nitrogen imports into the U.S. since July are lower year-over-year, while nitrogen exports were significantly higher. As a result, we believe there is a good amount of product movement yet to occur and purchases required to meet spring needs. From a longer-term perspective, we believe that industry fundamentals continue to point to a tight global nitrogen supply and demand balance. As you can see on slide 9, global grain stocks did not improve from last year's growing season. Poor weather conditions in many key growing areas, along with lower production in Ukraine due to the war, limited global yields. As a result, global coarse grain stocks use ratios remain low, supporting high global grain prices for longer. This has made farming highly profitable in low-cost exporting regions of the world, such as the U.S., Canada, and Brazil. We expect this will support resilient demand for nitrogen as the agricultural sector focuses on maximizing food production and farm incomes. We project that 92 to 93 million acres of corn will be planted in the United States in 2023, along with strong wheat, cotton, and canola plantings across North America. We believe it will take at least two more growing seasons at trend yields to fully replenish global stocks. In our view, Europe remains the marginal nitrogen producer in the industry. While forward energy curves have moderated, the current decline in global nitrogen values suggests that producer profitability in the region will continue to be challenged. We believe this is reflected in the estimated 20% to 30% of European ammonia capacity that is currently curtailed. With European production supplying the marginal product ton in the industry, the marginal opportunity for UCF industries remains substantial, as you can see on slide 10. With that, let me turn the call over to Chris.

Thanks, Bert. For the fourth quarter of 2022, the company reported net earnings attributable to common stockholders of $860 million, or $4.35 per diluted share. EBITDA was $1.25 billion, and adjusted EBITDA was $1.3 billion. For the full year, the company reported net earnings attributable to common stockholders of $3.35 billion or $16.38 per diluted share. EBITDA was $5.5 billion and adjusted EBITDA was $5.9 billion. Full year net cash from operations was approximately $3.9 billion and free cash flow was $2.8 billion. both CF Industries records for a calendar year. We generated this free cash flow even after making $491 million in one-time tax and interest payments in the third and fourth quarters related to a U.S.-Canada tax matter dating back to the early 2000s. Excluding these payments, free cash flow was $3.3 billion, representing a free cash flow to adjusted EBITDA conversion rate of 56%, and a free cash flow yield of almost 20%. Looking ahead to 2023, we expect ammonia production will be approximately 9.5 million tons. Capital expenditures are projected to be in the range of $500 to $550 million in 2023. These amounts reflect a normal turnaround schedule. They also include expenditures related to our low-carbon ammonia projects. We expect our green ammonia project at Donaldsonville to be finished around year end. Fabrication of the electrolyzer is complete and site work is ongoing for its installation and integration later this year. The blue ammonia project at Donaldsonville remains on track for startup in early 2025. Engineering activities and procurement of major equipment for the CO2 dehydration and compression facility are in progress. Longer term, we remain focused on increasing our free cash flow generation capacity and growing shareholder participation in our free cash flow. We do this in four ways. Disciplined growth initiatives in clean energy, investing in high return projects within our current network, pursuing inorganic growth opportunities that offer returns well above our cost of capital, and returning capital to shareholders. In line with this approach, we have a number of high-quality clean energy investments in motion with some of the world's best companies, as you can see on slide 15. We also expect to return substantial capital to shareholders. 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 Industries for their outstanding work in 2022, their expertise and unwavering commitment to safety. is the foundation of everything we do. I particularly want to recognize the more than 400 CF Industries employees who contributed to the successful upgrade of our enterprise resource planning system, which we have had operating since the beginning of the year. This was our largest business technology implementation ever, and it was completed on time and on budget, an outcome that is extremely rare for these types of projects. And while the work may not generate headlines, It is fundamental for our future growth. We are proud of the outstanding 2022 that we had at CF Industries, but we're even more excited about the opportunities ahead. Given our operational focus, disciplined capital stewardship, positive market outlook, and strong return profile from our clean energy initiatives, we expect to continue to generate superior free cash flows. As a result, we believe we are well positioned to build on our proven track record and continue to create substantial shareholder value. With that, operator, we will now open the call to your questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If your question has been answered and you would like to withdraw, press star then two. Our first question comes from Steven Byrne from Bank of America Securities. Steven, please go ahead.

Thank you. I'm very curious to hear your view on what has driven NOLA Urea from $700 to $300 in five months. Is this just deferred demand at the retail level that is driving that? Or are there some other things like the U.S. is willing to take Russian cargoes a lot of countries aren't? Is there, you know, some Saudi-based cargoes that are coming in and getting manipulated on price? Is there something else going on here? I don't get it. You've got the marginal producer, even with lower gas, it's still, their marginal costs are still $500 a ton. So what has led to this, and where do you think it goes from here?

Good morning, Steve. This is Bert, and your short answer is yes, yes, and yes. So yes, the pricing has fallen down from, I would say, $600 in September to $300 today, short-ton FOB NOLA. And there are some concerns Factors, as I mentioned in my prepared remarks, of there is the theory that high prices cure high prices, and some of that is reflected in demand. When you look across the world globally to whether it's a Tier 1, Tier 2, or Tier 3 consuming country, a lot of the Tier 2 and Tier 3 countries did cut back, especially on subsistence farming or where you're importing in dollars but trading in a local currency, which makes it economically difficult for that kind of transaction. So when you look at South America and Asia, and let's just say countries like Peru or Central America or Thailand, that combination between those two regions is probably 2.5 million tons of lower demand, coupled with then the next step of that equation is additional supply that came on feathered throughout 2022 from India, Iran, Nigeria, Russia, Brunei. It's probably 5 million tons. So it doesn't take a lot to tip that over. And then, you know, we're starting in a, or at least a talked about recession. And we did see that in our EU operations with the high energy prices and therefore the lower consumption of industrial products in Europe. Now there was to add in, to do an added on that equation, there was the European shutdowns that took a significant amount of tonnage off the market. and pulled in imports from various exporting regions. So those combinations, along with in the Tier 1 countries of demand deferral or a slowdown or a purchasing holiday, we like to say, has pushed prices lower. And then you're right, the cargoes from various countries that sell on index have overwhelmed NOLA. All that being equal, though, we still see a positive market going into Q2 and a significant amount of demand to be satisfied. And we're right in position with $2.50 gas in Oklahoma and a freight differential that's positive to us. And so we're eager. We've got a good order book on and waiting for Q2 to arrive.

And maybe just one more for you, Bert. And you just said you have a good order book on. Would you say that you've sold more into – the second quarter than normal or maybe less than normal if you're expecting a recovery in pricing?

Well, we're pleased with our order book and always look to manage those expectations and internal requirements. And, you know, we're market sensitive. We're wide open for Q2.

Yeah, Steve, I think it's fair to say, you know, Burt sort of manages this really well. We're comfortable in terms of the orders that we have to get us to the place where we're expecting demand to start emerging in a very significant way in the quarter, but we're keeping our powder dry with respect to being able to participate in that high-demand portion of the first half here.

Understood. Thank you.

Our next question comes from PJ Juvicar from Citigroup. PJ, please go ahead.

Yes, good morning. I have a question on your Jera agreement where you're supplying half a million tons of clean ammonia. Where does all this ammonia come from? From which projects that you have going on? Where would it come from? Or do you need to build more? And, you know, would Jera offtake that in Louisiana and take it from there? And how do you... How do you contract pricing? Is it a long-term market rate price, or what are your current initial thoughts on this?

Yeah, good morning, PJ. So, you know, the first sizable quantity of low-carbon ammonia is going to be available at Donaldsonville as a result of the CO2 dehydration compression project that Chris talked about earlier in the agreement with ExxonMobil for transportation and permanent sequestration of that CO2. So we're going to be able to sequester about 2 million metric tons of CO2 a year beginning in 2025, which is about the timeframe that Jera is going to begin taking some of these volumes. And so it syncs up very well with our ability to produce it when demand is beginning to emerge. We have a framework or an MOU around the agreement. Some of the specifics of whether there's an equity investment in the project from, you know, from JIRA, whether or not it is strictly an offtake agreement. All of those things, you know, are currently being discussed, and we're, you know, we've got a very good relationship and a good dialogue going. But more details to come as we kind of further firm things up. But suffice it to say, with the... the availability of the 45Q tax credit and the recognition globally of the value and relative scarcity of low-carbon ammonia, we're really excited about this development of real tangible demand showing up and the interest on the part of consumers of this product to be involved in the equity side of the production of it as well. So to us, that's very different than you know, people building spec plants. You've got kind of the base consumers that really want to vertically integrate into the production side, and that's an exciting development.

Yeah, my follow-up is for Bert. You know, Bert, how much urea does U.S. need to import between now and planting season? And how much of that is already contracted at these lower prices and is on water to get here? Can you just give us an update on sort of what happens between now and planting season?

Yeah, on average, in a historical review of previous experiences, let's just say it's 5 million tons, a million and a half has come in, probably have 3.5 million tons to bring in. February and March, we're tracking the cargoes are probably between 700 to a million tons for each month. And then it gets a little dicey for the importer because If you're putting a vessel on the water in April, getting here in late April, early May, and has to move from a coastal import port into the interior, it's not that easy. So I think more to come on that issue. I think the other issue is demand. When you look at what the additional corn acres we've targeted in our remarks of 92 to 93, and the additional wheat acres of probably 5 million acres, you've got I'd say 300,000 to 400,000 tons of additional demand on top of the pasture acres that will be fertilized. So good demand profile going forward. I think the imports generally tend to be balanced, and we're well positioned with our three urea plants on the coast and in the interior to serve that need. Great.

Thank you.

We have a question now from Christopher Parkson from Mizuho. Christopher, please go ahead.

Great. Thank you so much. Your free cash flow conversion was pretty good, Justin, for the tax payment. I'm just curious to inquire on when I look at the free cash flow in the outer years, whether it's 23, 24, 25, Tony and Chris, has your idea in terms of the distribution between share buybacks and some of the blue and green projects and obviously the support for the Japanese decarbonization initiatives. In the context of the IRA, is that distribution of that free cash flow, has your thought process around that changed versus buybacks just given the opportunities that have continuously emerged and then obviously you've been already participating in? Just curious to hear your updated thoughts.

Thank you. Chris, good morning. I would say the good news here is that there should be plenty for all of the above. The investments that we're making on the decarbonization and in particular the dehydration compression are relatively modest compared to the amount of free cash flow that we're generating. And so our expectation is that we can continue to do all of the above. Now, I would say given the return profile of some of those projects, particularly in light of the 45Q tax credit, that, you know, our first call on capital is going to be investing in these kind of projects that have returns way above the cost of capital. You know, that's good for all seasons, but I don't think this is a choice that we have to make as an either or.

Yeah, I think, Chris, also just how we're looking at those projects in the clean energy segment is, you know, as always very disciplined, but also where we don't have the technology or the the infrastructure, looking to partner. And that really goes to the modest capital side that Tony mentioned there. I think as you look at those projects, as he mentioned, there's not huge calls on capital at this particular time, so that leaves a lot of excess free cash flow for us to distribute to shareholders. I think the one thing we will look at differently this year is sort of that ratable versus opportunistic method in which we went about share repurchases last year. And I can just point to Q4 where, you know, with no change in the long-term fundamentals of our industry or, you know, CF in general, if anything, getting better, we saw our share price where we repurchased at $100 during that time frame that today, you know, we're trading in the mid-80s. So the way we're looking at it maybe is if the market's going to offer that large of a discount, we may do some altering to that ratable versus opportunistic type of share repurchase. And as Tony mentioned in his remarks, I think we have a history of returning cash to shareholders with the 60% of free cash flow we returned last year.

I also think, and I just want to highlight one of the things Chris said, is while we're looking at a host of different clean energy initiatives and low-carbon ammonia opportunities, we are partnering with people to bring those things to reality. And so the example being if we built a new ammonia facility, our Blue Point Complex in Louisiana, we're doing that with Mitsui, who is in for almost 50 cents on the dollar. So it really does, and as you think about

cap you know cash going out the door that spread over for maybe four and a half years it really is relatively modest in the grand scheme of things and that's why we feel we can do all of the above here just as a quick follow-up you know just given the fact that European production still is favoring imported ammonia and you've also seen you know less production out of you know Trinidad and you've even seen some facilities in Europe be reluctant to restart um, holistically just because of the current pricing environment, which I thought it was a bit odd, but just, are you at all surprised? And I apologize for the short term question. Are you at all surprised that the market, you know, on the downstream side hasn't ultimately been a little bit tighter, even if it's still relatively earlier in the year, if you could just say that additionally in that framework, I'd, it would be very helpful. Thank you.

Yes. So I would say by historical standards, we're very happy with where the ammonia pricing is. Um, You know, arguably it's a good value out there in the market today. I would say, you know, some of this goes back to the point that Bert mentioned earlier, which is a little bit of reduction of economic activity. You know, we've also seen a reduced demand on ammonia going into industrial applications, so that certainly had somewhat of an impact on it. But, you know, look, by any standard other than a period of time last year, the ammonia market that we're looking at right now is absolutely phenomenal.

And I would say the same for the upgraded products. The market monohistorical standard is tight, and some of the dynamics that we talked about earlier with these purchasing delays has pushed product in the open market with an India tender delay as well. So... All this incentivizes, just as higher prices were probably limiting some demand, these attractive prices are going to incentivize demand, incentivize seed populations as well as application and application rates, not only in the United States but in other countries as well. So I would say we're fairly prosaic about the market today and the market going forward.

Thank you so much.

We now have a question from Joel Jackson from BMO Capital Markets. Joel, please go ahead.

Hi, good morning. Maybe following a bit on Chris here. You know, it seems like ammonia has been trading with the marginal cost curve, marginal cost for months and months. And urea is not. In fact, there's urea negative margins, right, to upgrade from ammonia. Can you talk about that? And is that really sustainable? And Bert, Tony, have you seen this before? Because I don't think I've seen this before in a long time that's lasted for this many months.

I think with where the market is today on ammonia, because ammonia is utilized in the initial production of some of these products, and some of the plants that have been down, like ours in Billingham in the UK, can import ammonia and run the upgraded products, operates differentially. And where we are in urea, for example, you do have additional urea that has come on stream, and you've got some delays in some purchases. The Egyptians, the Algerians, the Nigerians have been moving product into Europe at just under that marginal cost of production. However, for ammonia, why it's trading a little bit differently, some of that ammonia, and you need the production to make the DEF, to make the products that require CO2, in Europe. So it's a little bit of two different processes.

I mean, I think the ammonia S&D is tighter than the urea one for the points that Bert just mentioned. One is the additional urea plants, upgrade plants that have come on this past year, and then additionally just sort of the reluctance right now on purchasing prior to the application season. But I think the expectation is you start to see that tighten up as well.

Okay. I have a question a little bit different around the, the, uh, announced you made last week, or I think it was for this week on the BP gas arrangement. And this is a little bit out of my comfort area, but I'm going to try. Can you, would that arrange it with BP? So are you, it's a two part question. Are you paying a premium for this gas? And then how exactly is BP going to supply 90% lower carbon intensity gas is BP investing in financial offsets. that's netting against the actual carbon intensity of the physical gas supply? What else is going on?

Yeah, so, Chris, I'm happy to give you a little bit of background on this, and then I'll invite others to jump in here as we go. But basically – or Joel, yeah, sorry. You know, basically there are typically involved when you're doing E&P – some fugitive methane emissions that you get slip in terms of both around the wellhead as well as in the transportation and pipeline system. And BP has developed and has implemented and invested in some technologies and approaches to dramatically reduce the amount of methane emissions slip at those sources. And methane, as you know, is a very potent greenhouse gas. by them investing to reduce the amount of fugitive emissions, that has a pretty dramatic impact on our scope three emissions. Because they're investing in reducing their emissions profile, there is a premium on the gas, but it is really small. It's de minimis. And so this is a way that we can go after another piece of our emissions profile, do it in a very cost-effective way, and do it in a way that's good for the environment. And so we're excited about this partnership and continuing to move forward with it.

Yeah, and I think the only thing I would add in this particular case, these are verified credits as well, and it's something that is legitimate in reducing our scope three.

Okay, we're going to continue with a question from Adam Samuelson from Goldman Sachs. Adam, please go ahead.

Yes, thank you. Good morning, everyone.

Good morning.

Good morning. So maybe another question on some of the clean energy type investments that you've been pursuing to date. I mean, these are largely confined to the U.S. Gulf. the Donaldsonville plant and kind of the central new plant with Mitsui. Can you talk about maybe things you're evaluating or considering at the rest of your North American plant network related to carbon capture? Does 45Q at Vertigris or Port Neal become viable? Medicine Hat obviously is in Canada, but different kind of opportunities that might be available north of the border. and how those would fit into the portfolio of clean energy and ammonia, hydrogen kind of opportunities.

You bet, Adam. So one of the places that we have a significant amount of CO2 that's currently being vented, and it's partly because what we're primarily producing there is Ammonium nitrate is our Yazoo City facility, so there's a lot of CO2 we end up venting. And we are in active discussions about finding solutions from transportation and sequestration options there. That was one of the two initial ones that we highlighted, you know, when we announced kind of our movement into clean energy and decarbonization. And as you pointed out in Medicine Hat, The city of Medicine Hat has been granted the right to the pore space in that area, and so we're in active discussions with them about developing a sequestration option, and it's a different kind of benefit for us, unlike the 45Q here in the U.S. The cost of carbon, as I'm sure you're aware, in Canada, is already high and it's going to get a lot higher going forward. So there is really good economics around a potential investment there where we can also dramatically reduce our aggregate emissions profile. And we are continuing to evaluate in other areas as well. The one challenge at a place like Port Neal, because the amount of urea and UAN that we're we're using most of the processed CO2 that we produce, and so it's fairly low, the amount that ultimately gets vented there, and so the prospect of doing a CCS project is, you know, is small. Vertigris, on the other hand, does have some, you know, some reasonable amount of CO2, and we are looking at it across the network for other opportunities, including going after some of our N2O emissions from our nitric acid plants. The N2O side is, you know, also really carbon intensive from a CO2 equivalency standpoint.

And then, you know, just to build on what Tony said, those are the more defined projects that are out there that really, you know, the hydrogen production tax credit and the enhancement of the 45Q. So those are already in motion, but there's others that that are related to everything from the hydrogen hubs, the carbon transport incentives that are part of the IRA as well. And those are continuing to evolve in what the scope is and everything like that, but we remain very active in evaluating those as well. But again, as we talked about earlier, a lot of this is really playing to where our strengths are, partnering where we don't have it, and participating where we have the highest return on those value chains.

Okay, that's helpful. And I guess this is a separate follow-up on the Billingham plant in the UK. I think the guidance for the full year was 9.5 million tons of gross ammonia production. Does that assume you actually are able to restart ammonia production in the UK? And if not, kind of how long would you be comfortable not running ammonia there before that starts creating issues at the plant?

Yeah, Adam, I'll start with first, as we've said in the past, the amount of gross margin really associated with the UK business is pretty small on an overall CF basis. Our intention is that when gas prices get into a range where it's more profitable to produce ammonia there and upgrade it than to import it, we'll do that. But right now, it's just a margin play. So I guess from... From a standpoint of how we're looking at this, we're going to be very nimble and flexible, and we will turn the plant back on when we see the margin advantage is better to do that. Right now, importing from Donaldsonville is providing an uplift to that price that the Donaldsonville ammonia could get versus just selling it as merchant ammonia out in the market. So we'll continue to evaluate that, but it'll always be margin dependent rather than production volume.

Okay, that's all helpful. I'll pass it on. Thank you.

We will now take a question from Adland Rodriguez from Credit Suisse. Adland, please go ahead.

Thank you. Good morning, guys. Just a quick one on biopsychology. Like, why do you think buyers are still in a wait and see buying pattern when they can clearly hear you saying that they should expect prices to be going up soon? Like, shouldn't they be rushing to buy ahead of those higher prices?

Well, good morning. This is Bert. And yes, it's an interesting dynamic, but it's been global and so far successful. So we have to recognize that. We've had many conversations today. with our global customers as well as our domestic customers. The team was in Brazil for the conference down there in late January, and we just returned from the TFI yesterday. And we're going to have various customer interactions. There is a spread between what was purchased before. And so on the retail level, several have inventory priced much higher, and they need the dollar cost average. And the feedback we get is they're waiting for the floor. Our feedback is you might want to review what you think the floor is because I think we're there. And so global dynamics will drive this going forward. And again, just look at those dynamics. Higher priced natural gas in Europe will keep a portion of that production offline and keep, I think, supply tighter than is recognized. And the dynamics that we have in place in North America and Europe with adequate soil moisture, good temperatures. We had a drought last year. We're not going to have that this year right now. And probably lower inventory levels point to a very healthy spring. So we'll see what happens.

Okay, thank you. That's all I have.

We will take a question from Jeff Zikalskas from JP Morgan. Jeff, please go ahead.

Thanks very much. Your tax bill to Canada is about $500 million. How much do you expect to get back roughly from the U.S. government and when? And do the same tax problems continue into 2021 and 2022 taxes? Jeff, this is Chris. Thanks for the question.

This, as we talked about earlier, this relates back to the early 2000, and it's really a tax dispute between Canada and the U.S. where, you know, CF, it's a transfer pricing tax issue, and we made our payments. What I would say is given that it's taken this many years to get to where we are now, it'll likely take some time before this is fully resolved, this whole matter fully resolved. However, in saying that, we have filed amended returns for the payments that we made related to 2006 through 2011 seeking refunds from the U.S. Those should come sooner than the full resolution of everything. So there is going to be some frictional costs that will come out of this. What that number is, we just don't know at this particular time because there's some interest difference between what Canada charges in the U.S., much of which we're contesting, but we really don't know at this particular time. But we should begin to see initial payments probably in the 12 to 18 months with, I would say, full resolution of this anywhere from 36 to 48 months, depending on when both jurisdictions get to this item.

And, Jeff, the other thing is we did go ahead and make estimated payments for a period of 2012 through 2021 in order to stop the interest ticking. As Chris said, the candidate charge is a much higher interest rate than the U.S., and so that's where some of the frictional costs comes from. But our expectation is that we'll get you know, much of the money back. And, again, the 06 through 11 money faster. The rest of it is going to likely have to go back through another round of arbitration when you're talking about 12 through 21. But, you know, we're obviously going to put all effort forward to recover as much of this as possible.

Yeah, one other point, Jeff, to answer the second part of your question, is this continuing to build as we go forward? As you recall, this goes back to really 2012 when we started to initiate on it, even though it's early 2000s. So some of that profit distribution was changed during that timeframe. So there's really nothing that's continuing to build on a go-forward basis. It's more or less through this 2021 timeframe for the most part.

In the Donaldson complex, you want to transport and store 2 million tons of processed CO2. How much CO2 does the Donaldson complex throw off? Or maybe put another way, how much CO2 is thrown off per ton of ammonia?

In terms of Total CO2 generation per ton of ammonia in our plants, it's about 1.8 tons of CO2. Now of that, about a third of it is flue gas, and the rest of it is, or maybe it's more like 40% or 50% is flue gas. The rest of it is processed CO2. So the processed portion of the CO2 is, right now we have an excess of about 4 million tons in aggregate. So we're taking about half of the excess processed CO2 and signing up with Exxon and signed up to sequester that amount. We're going to continue to evaluate and ideally we'll do a second project and sequester more of it. The challenge a little bit is The margin opportunity on urea and UAN tends to be higher than just for ammonia, at least the way current product pricing is. That may change in a clean energy ammonia world. But on a current basis, that's the case. So what we want to do is to ensure when we do have a trip of one of our ammonia plants, we're able to continue to operate the urea upgrade units at full capacity. So we don't, you know, we're unlikely... on a fixed basis to allocate 100% of the excess CO2 for sequestration because we want to make sure that we can keep our upgrades running even if we get a turnaround on an ammonia plant or an upgrade. But one option that we haven't spent a lot of time talking about up to now that we anticipate at some point being able to avail ourselves of is flue gas capture and recovery and then sequestering that CO2. And we are involved in the evaluation of flue gas recovery right now. So as that starts looking like a more promising and realistic technology to be able to cost-effectively implement, that gives us a lot of flexibility in terms of being able to sign up another such sequestration deal on the CO2 side.

That's a pretty good answer. Thanks very much.

We have a question from Vincent Andrews from Morgan Stanley. Vincent, please go ahead.

Hi, guys. This is Will Tang on for Vincent. I'm wondering if you could give some additional color on, I guess, what's happening with respect to Chinese area exports and why you're expecting them to be flat to down on a year-over-year basis in 2023 and then As a follow-up to that, you guys gave, I guess, what they would be on a looser export restriction level of 3 to 5 million tons per year, which is a little bit lower than what they had been exporting between 2019 and 2021 of around 5 million tons. So I'm wondering if you could kind of bridge the difference there. Is that just higher demand from the region, or are there other aspects influencing that estimate?

I would say the biggest reason, and then I'll turn it over to Bert for some more specifics here, but I'd say the biggest thing that affects it is really one of a shift of policy around trying to reduce environmental pollution in the country. Recently here, since COVID, there's also been a strong desire in order to help curb inflation around availability and affordability of nitrogen fertilizers, and so some pretty significant restrictions on exports, but in terms of in a looser export restriction environment, the thing that gives us a lot of comfort around them not going back to sort of the old days is the real push around environmental cleanup and just environmental quality. Urea is a huge particulate matter emitter, a big consumer of fresh water. There's not that many employment jobs that go along with it, and you're effectively exporting energy in the form of urea when you're turning around and importing natural gas, and it's just not a good trade from a policy perspective from the central government.

So I think you covered it well. And the key thing for me was a very good governmental action to protect. This is reflective on 2022. The export controls were an inflation control mechanism and a cost control mechanism for the Chinese farmer to have available nutrients. And it worked. And they did. And so when the price of the global market at $800, the price in China was $400. And so I think that was a successful program. And we see Chinese exports moderating. You're right, last year they were just below 3 million tons, and we probably expect that same level up to maybe 5 million tons. But today the Chinese price is higher than the global market, so there is not an incentive to export those tons. And they're going into their spring season just like we are in the northern hemisphere today. And I expect demand to be robust. China has been a very active purchaser, supporting the global agricultural structure of corn and soybeans and refined products for now decades. And we expect that to continue as they rebuild their stocks, as well as their protein stocks, as well as their feed grain stocks. So we don't see a big change coming out of China on the export front for urea in 2023. Got it.

Thank you.

We have a question from Andrea Wong from RBC Capital Markets. Andrea, please go ahead. Hi.

Thanks for taking my question. So I'm thinking a little bit longer term here on the market. We haven't seen a lot of announcements for kind of traditional gray ammonia builds or urea or UAN or anything like that. Why do you think that is? And with some of these new low-carbon projects that have been coming up, most of it's just ammonia. Do you see some of this ammonia entering the traditional market and competing with gray tons, or do you think they're going to be mostly reserved for clean ammonia uses?

I mean, I think that's one of those situations where you never – fully 100% balanced where demand develops at exactly the same rate as new production does. I think what we'll probably see is as demand develops, if there's not enough production, initial implementation using conventional or gray ammonia with a desire to shift towards blue as it becomes available. And as you have a project or two like this that comes up, if for a while you get a little bit of excess, you know, availability of that product. It's chemically identical, so it can certainly go into any, you know, any of the uses. My sense is, on the margin, there will be a desire on a broader industrial application basis to start making use of low-carbon ammonia as it becomes available. Again, I think the thing that's very different about some of the announcements going on today as compared to what happened in 2012 was there was a lot of spec plans that were being announced by people that were not industry participants at the time just because they thought, hey, this is a great thing that we want to go do. Most of the announcements that you're seeing today are from people that are, you know, well capitalized, already in the business, understand it. And you also see a number of people that are ultimately going to be end users of the product or other participants in the channel that want to be involved as well. And so it's got a very different feel to it. And again, as we look forward, The Jera MOU is really just the first piece of tangible demand that is emerging, and we expect a lot more to come. Our sense is that for ammonia really to take off as a clean energy source, we're going to need the production capability that are represented in some of these announcements. You know, the number that are announced versus the number that get built is ultimately a, you know, it's less than one for one. So we'll, you know, we'll see how well that develops. But we're very pleased with kind of where we sit in terms of the leadership, not only on global ammonia production, but also the actions, the early actions we've taken to decarbonize our network and produce low-carbon ammonia.

That's a tough one. And just like on the traditional gray ammonia plants, just in general, we haven't seen a lot of announcements. Like why do you think that is? And does that potentially continue? Is there maybe some sort of hesitancy to invest in carbon generating businesses? Or maybe is there something else?

I think a lot of the announcements, Jeff, that you're hearing are actually blue ammonia projects, which are effectively gray ammonia projects. production that just has sequestration areas around it. So I think it's why you're seeing the activity in the Gulf Coast with the ability to sequester it. So, you know, obviously the transition to a blue ammonia, given the incentive structures that have been put out there, allow you to make that incremental capital. So that's why I think you're seeing it is because blue ammonia projects with the enhanced 45Q become very close to what a conventional production would be.

and actually probably with better economics than conventional production.

Okay, thanks. Our next question comes from Josh Spector from UBC. I'm sorry, UBS. Josh, please go ahead.

Yes, hi, thank you. Just on natural gas quickly, I know you guys normally don't do much hedging, further out, but given where prices are, I mean, do you take a different view over the next six to 12 months? It's hard to see that you'll be very wrong on the low end of that. So just curious on your thoughts.

Yeah, this is Bert. When you're looking at natural gas, you're correct. We don't hedge that far forward. We do hedge in the winter months, as you saw in our Q4 numbers. And that's just as a reflection of some of the things we've seen with freeze-offs and risk But when you look at the forward, we're $2.50 from now through the summer months and then $3 until you hit winter again, and then the low three is there. So that's something to look at, something to talk about. We do have a gas committee that Chris and I and Ashraf and a few of the other teams sit on and ruminate over these things, and we'll have to take a look at that.

Okay, thanks. And just a quick on CapEx. I mean, this year makes sense. I guess, I mean, assuming you guys go forward with FID on the facility, assuming your share of that's roughly a billion spent over four years, I mean, should we be thinking about if that plays out, your capex is in the range 700, 800 million the next four years, barring you don't do any additional further projects?

Yeah, Josh, it's not really ratable that way, even though we can talk about allocating it that way. Typically, there's a little bit of money spent up front for the engineering work and also for the initial down payments on procurement of long lead time vessels and other equipment. you know, the vast, vast majority of the expenditures happen in the last, you know, two years to the last 18 months, which is when you're doing all of the major construction activity. So it's really back-end loaded.

Okay. Thank you.

Our next question comes from Richard Garciatorena. Please, Richard, go ahead.

Great. Thanks for the man. Just one high level of question. You've made a lot of announcements on the clean energy initiatives in the past year. And considering you have strong free cash flow, it doesn't seem like that's a constraint. When do you think your plate will be full in terms of how many projects do you think you could have going on at the same time between now and 2027 or so where you feel comfortable you can manage that? And then I guess just also in terms of what your priorities would be in terms of managing those. Thanks.

Yeah, so I think a lot of it has to do with the capacity of the engineering execution within the existing facilities. The Bluepoint Complex in Louisiana is a bit of a different one because that obviously is a greenfield kind of project, and we are staffing up that organization. for assumed go-forward, but the decision about go-forward has not been made yet, given that we don't have the cost estimate on what that would be. So I feel like we can execute a lot of these things simultaneously. We've got a lot of capacity around the network, and the projects that we're talking about, other than the Bluepoint complex, are not so large and so involved that it would overwhelm our engineering resources. and a lot of this stuff would get phased in. So on the CCS stuff, we're making good progress in a number of the facilities concurrently. I do think as we talk about N2O abatement and or flue gas recovery, that would be phased in over a little bit longer time horizon and making sure that we don't kind of overwhelm resources, but we also align those initiatives with turnaround, planned turnaround activities and so forth. So, you know, those would also get phased in.

Yeah, and the only thing I would add is the projects that we're doing really play into the core competencies, and that's why this strategy makes so much sense for our organization. It's not as if we have to go out and build a whole bunch of new infrastructure. A lot of that exists, and we're making add-ons to that. So I think that also alleviates, you know, the size of these projects and then additionally, you know, partnering with in areas that we don't have those core competencies, allow us to maybe take on a few more projects than we would if we were doing them all by ourselves.

Great, thank you.

Ladies and gentlemen, this is all the time we have for questions for today. I would like to turn the call back to Martin Juracek for closing remarks.

Thanks everyone for joining us and we look forward to seeing you at conferences over the next month.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.