Agrium Inc. will cancel its agreement to take certain nitrogen products from Rentech Inc.’s East Dubuque, Ill., nitrogen plant should its bid to buy CF Industries Holdings, Inc. be successful. In addition, the company told Green Markets that it would sell two terminals to Terra Industries Inc. ?Çô one currently owned by CF, another by Agrium.
Agrium announced Nov. 17 that it has signed a proposed consent agreement with the staff of the U.S. Federal Trade Commission relating to an Agrium-CF deal. Agrium said the remedies in the agreement are not material to the proposed transaction. The agreement will now be forwarded to the Commission for its review and approval.
Agrium President and CEO Mike Wilson said the agreement illustrates that Agrium has a clear path to completing the CF acquisition. Agrium had already received approval from Canadian regulatory authorities and has agreed to sell a one-half stake in its Carseland, Alberta, nitrogen plant to Terra should the CF deal be concluded (GM October 26, 2009). In addition, Agrium says it has entered into a conditional supply arrangement with Terra for a long-term, competitively priced supply of approximately 175,000 mt of nitrogen products from Terra’s facilities. Agrium will also supply a minimum of 60,000 mt of urea per year to Terra for five years.
The Rentech distribution agreement dates back to April 26, 2006 (GM May 1, 2006). Royster-Clark, which once owned the East Dubuque plant, was in the process of selling it to Rentech when Agrium acquired Royster-Clark. Agrium has exclusive distributor rights to the ammonia, UAN, nitric acid, and granular urea made at the facility. Capacity levels at East Dubuque include 332,000 st/y of anhydrous ammonia, 146,000 st/y of urea, 350,000 st/y of UAN, 170,000 st/y of ammonium nitrate, and 144,000 st/y of nitric acid, according to the International Fertilizer Development Center.
Rentech says its Rentech Energy Midwest Corp. (REMC) marketing team, which currently works in conjunction with Agrium in marketing existing REMC product sales, is confident that there will be no material impact on the sales, timing, and pricing of products in the event the exclusive distribution arrangement is terminated. Prior to entering into the distribution agreement with Agrium, REMC’s marketing team was responsible for all sales and distribution of REMC product sales.
In the past, Rentech has touted its relationship with Agrium (GM Dec. 22, 2008), saying that it was not worried about getting the money on its forward contracts; that most of it would be through Agrium, its major buyer; and that it is take or pay, with customers putting down at least 25 percent up front. “To the extent that there is credit risk in the contract it falls at the Agrium level,” said Rentech CEO Hunt Ramsbottom at the time. “It doesn’t go through to the distributor or the farmer.” In a response to questions, Rentech said it does not have account receivables insurance and did not know if Agrium does. Agrium declined to comment on the insurance, but a spokesman said Agrium was probably Rentech’s strongest customer financially. Rentech said Agrium purchased approximately 81 percent of its nitrogen production in fiscal 2008.
“Looking ahead at REMC, we have already entered into significant prepaid sales agreements for a significant portion of production for fiscal 2009,” Rentech CFO Dan Cohrs told analysts in December 2008. “For ammonia, 60 percent of our projected shipments for fiscal 2009 have already been contracted at an average sales price of $816/st. For UAN, 40 percent of our projected shipments for next year have been contracted already at an average sales price of $396/st. On all of those forward sales we’ve locked in gross margins through purchases of natural gas.”
REMC’s East Dubuque facility has been a money maker for Rentech, which has used the cash flow to develop its alternative energy technologies. The company says some 600,000 st/y of its nitrogen products are sold into the Midwest each year. It currently projects FY 2009 EBITDA of $65 million, up from FY 08’s $55.2 million and FY 07’s $20 million.