CF Industries Holdings Inc. on March 20 announced that it
has signed a definitive agreement with Australia’s Incitec Pivot Ltd. (IPL) to
purchase IPL’s 880,000 st/y (800,000 mt/y) ammonia production complex located
in Waggaman, La., for $1.675 billion (A$2.5 billion). IPL reported last
November (GM Nov. 18, 2022) that it was taking a strategic review of
Waggaman after having received a number of unsolicited offers.
The companies will allocate approximately $425 million of the purchase price to a 25-year ammonia offtake agreement under which CF will supply up to 200,000 st/y of ammonia to IPL’s Dyno Nobel Americas (DNA) explosives subsidiary. IPL said the agreement secures the ammonia at producer cost, which is linked to natural gas-based pricing at a level commensurate with Waggaman’s cost of production.
CF expects to fund the remaining $1.25 billion of the purchase price with cash on hand.
“We are pleased to reach this agreement with Incitec Pivot Ltd. that benefits from our industry-leading ammonia production capabilities, deploys our capital efficiently, and provides long-term value for both companies’ shareholders,” said Tony Will, CF President and CEO. “We believe the Waggaman facility will fit seamlessly into our network, as well as our strategic focus on ammonia as a clean energy source, given its proximity and pipeline connection to our Donaldsonville, La., Complex, its distribution and logistics flexibility, and its favorable characteristics for the addition of carbon capture and sequestration (CCS) technologies to enable low-carbon ammonia production.”
“Our announcement today represents a pivotal step in the execution of our strategy to enhance the focus of our businesses on the high value technical and service needs of our explosives customers,” said IPL Managing Director and CEO Jeanne Johns. “We are also delighted to be partnering with CF Industries, a world-class producer of ammonia with an excellent manufacturing and safety track record. We are looking forward to this journey as we seek to deliver long-term sustainable value creation for our shareholders and stakeholders.”
Ammonia produced at the Waggaman facility today is distributed ratably to three customers – Trammo Inc., Cornerstone Chemical Co., and IPL’s DNA – with approximately 75% used in industrial applications. IPL told Green Markets that these medium- to long-term offtake agreements would remain in place.
Prior to the plant being built, IPL said the plant’s ammonia was sold out from day one with Trammo taking 300,000 mt/y, Cornerstone 200,000 mt/y, and DNA 300,000 mt/y (GM April 22, 2013). At that time, IPL said the new plant would have ammonia pipeline access to supply DNA’s Louisiana, Mo. (LOMO) plant, barge for Donora, Penn., and rail for Cheyenne, Wyo. In the meantime, the Donora plant was idled in May 2015 (GM April 6, 2015), lessening the company’s ammonia requirements.
In addition, CF will reportedly inherit a deal by IPL to supply ammonia to American Plant Food’s planned ammonium sulfate plant in the same 800-acre complex (GM Oct. 28, 2022).
IPL broke ground on the plant in August 2013 (GM Aug. 12, 2013), and it was completed in September 2016 (GM Sept. 30, 2016). At the time of completion, IPL said the plant was within the original budget of $850 million (A$1.3 billion) and that it sat in the bottom quartile of the global ammonia cost curve, benefiting from both low US natural gas prices as well as its brownfield site at Cornerstone’s existing complex on the west bank of the Mississippi River in Jefferson Parish, 15 miles from New Orleans. Cornerstone spent $175 million in upgrades and infrastructure at the facility, which took total investment at the site to $1.025 billion.
Based on the contracts in place, CF estimates that the plant will generate gross margin per ton commensurate with its existing ammonia segment prior to synergies, which the company expects to capture through greater capacity utilization and operational and logistics optimization. Over the last five years, CF said its operational capabilities have resulted in ammonia asset utilization that is approximately 10% higher than the average utilization rate of the company’s North American peers.
Despite CF’s optimism, the Waggaman plant has not had the smoothest run since its 2016 startup, with IPL having to deal with an original construction defect, which, along with other problems has caused significant downtime over the years (GM Feb. 25, 2022; Nov. 19, 2021; Sept. 17, 2021; May 21, 2021; Nov. 15, 2019; April 5, 2019). However, as of November 2022 (GM Nov. 18, 2022), Johns said the plant had been running flawlessly since a production restart in April 2022. In the most recent major event, the plant suffered a pipe rupture on Feb. 18, 2022, that resulted in a hydrogen release and did not restart until April 19, 2022 (GM Feb. 18, 2022; April 22, 2022).
CF anticipates implementing CCS at the site on an accelerated timeline, increasing its network’s low-carbon ammonia production capability, supporting Louisiana’s and the country’s climate goals, and earning 45Q tax credits for sequestered carbon dioxide. IPL had already been advancing the plant toward blue ammonia production with a front end engineering design (FEED) study for a carbon capture facility underway (GM Sept 9, 2022), which would process up to 950,000 mt of CO2 to transport via a pipeline to a permanent geological sequestration site. After the completion of the FEED, IPL said construction of the carbon capture unit would commence in 2023 and be completed by the end of 2025.
The transaction has been unanimously approved by the Boards of Directors of both companies and is subject to receipt of certain regulatory approvals and other customary closing conditions. Under the terms of the sales agreement, antitrust regulatory clearance and the completion of customary closing conditions must be satisfied within 24 months of the execution of the agreement. “While we’re very hopeful that this process will be completed within the next nine months to 12 months, I do want to emphasize that the process will run its due course,” said IPL CFO Paul Victor.
Should the deal not gain antitrust approval, CF would have to pay IPL a $75 million break-up fee. “Obviously, we wouldn’t have entered into this transaction if we didn’t see a pathway to success on the antitrust,” Johns told analysts. IPL said there is no possibility of a counter bid.
The Waggaman divestment is seen as a prelude to IPL’s plan to separate its explosives and fertilizer businesses into separate companies (GM Nov. 18, 2022; May 27, 2022; Sept. 6, 2019).
The net cash proceeds after tax are $837 million (A$1.249 billion). The sale will allow IPL plenty of cash to implement its planned $400 million share buyback plan, and also to pay down debt.
Johns told analysts that the 200,000 st/y offtake agreement for 25 years effectively equates to retaining about 25% of the economic benefit of Waggaman for that time period. The offtake is for 15 years, however, it can be extended for two five-year periods at IPL’s option.
“Of Waggaman’s ammonia production, only about 20% of today’s volume is utilized within our manufacturing footprint, which underpins the Dyno Nobel Americas explosives business,” Johns added. “With the decision to sell this world-class asset, we will reduce our excess exposure to commodity and operating risk, while maintaining Waggaman’s strategic value.”
IPL said that of the 200,000 st, 150,000 st/y would be available for DNA’s Louisiana, Mo. (LOMO) plant, with the additional 50,000 st/y for a probable LOMO debottleneck opportunity, top-off feedstock for other parts of the DNA business, or for sale. IPL’s Victor said the cost of the ammonia will be below the previous price used to allocate value to Waggaman from the tons supplied to LOMO. He noted the 200,000 st/y is for a continuous supply of ammonia, and not subject to outages at Waggaman. “I think if you really look at the economic benefits, it is much greater than what we have today,” he said.
Analysts noted that high natural gas costs in Australia caused IPL to close its Gibson Island urea plant (GM Nov. 12, 2021), though the site may have a new life as a green ammonia plant (GM Oct. 7, 2022). IPL also announced a joint venture to build a new Technical Ammonium Nitrate (TAN) plant in Saudi Arabia for a facility with deepwater access, advantaged ammonia based on its proximity to some of the cheapest gas reserves in the world, and the ability to provide a growth agenda in Europe (GM Nov. 4, 2022).