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).
