Fellow CF Industries
Shareholders:

We set annual company records for production volumes (10.3 million tons of gross ammonia), sales volumes (nearly 20 million product tons) and export volumes (more than 3 million product tons). We reduced our controllable cost of sales per product ton by 19 percent since 2015. We also started production at our new diesel exhaust fluid (DEF) unit at the Donaldsonville Nitrogen Complex on time and under budget. In the area of corporate stewardship, we have reduced our CO2 equivalent (CO2e) emissions by 25 percent per product ton since 2013.

This level of performance was critical in a year when nitrogen prices were lower – reaching decades-low levels in the middle of the year – and natural gas prices were higher than in 2016. Despite these difficult conditions, our adjusted EBITDA was $969 million, 13 percent higher than in 2016,(1) and we generated positive free cash flow for the year.

Positive Outlook for 2018

We expect noticeable improvement in our financial performance in 2018 and beyond.

First, we will benefit directly from actions we took at the end of 2017 to retire $1.1 billion of our most expensive long-term debt and in early 2018 to exercise our right to purchase all of the publicly traded common units of Terra Nitrogen Company, L.P. (TNCLP). We estimate that full ownership of TNCLP would have added approximately $45 million to EBITDA on an annualized basis last year, including anticipated cost reductions and network optimization benefits. Including the additional benefit of lower interest expense due to the impact of the debt repurchased last year, this would have resulted in $110 million of additional free cash flow.

Second, the new U.S. statutory corporate tax rate of 21 percent is substantially lower than the 35 percent historical rate. Because of our existing federal net operating loss, we do not expect to pay federal cash taxes in the nearer term. However, over the longer term, we expect the lower federal tax rate, in addition to other changes contained in the 2017 U.S. Tax Cuts and Jobs Act, to result in substantially greater earnings and cash flow for the company.

Finally, we believe we have made it through the trough of the current nitrogen cycle. The global industry is absorbing the significant capacity increases of recent years. For 2018, the combination of higher energy costs in key producing regions outside of North America; reduced production in China; higher freight costs; a somewhat weaker U.S. dollar; and steady global demand growth should support nitrogen prices at levels higher than 2017.

Focus on Shareholder Value

As the global industry recovers, we expect that our cash generation will increase. Indeed, we believe that through the cycle, our cost-advantaged platform will continue to enable superior cash flow generation compared to most other industry competitors.

Our goal is to use excess cash to increase shareholder participation in our underlying assets as measured by tons of nitrogen capacity per 1,000 shares. We do this in two ways. First, we look to reinvest in our business where we can identify opportunities that fit within our strategic fairway and have risk-adjusted rates of return well above our cost of capital. Second, in the absence of available growth opportunities, we expect to distribute excess capital to shareholders. From 2010-2017, this approach has increased shareholder participation in our underlying assets by approximately 220 percent from 11 tons of nitrogen capacity per 1,000 shares in 2010 to 35 tons per 1,000 shares today.

We continually seek ways to create additional shareholder value. Therefore, our strategy is to leverage our core capabilities – operational excellence and disciplined capital and corporate stewardship – to optimize and grow the world’s most advantaged nitrogen and chemicals platform to serve our customers.

Our Strategy in Practice

Executing this strategy has resulted in a stronger and more capable CF Industries.

At our core, we remain a leading operator of chemical plants. Our focus on process engineering and plant operations and maintenance has delivered superior asset utilization as demonstrated by our record level of production during 2017.

We have proven our ability to leverage this capability across a variety of assets. At Donaldsonville and Port Neal, our newest production units have consistently achieved output levels 15-20 percent above nameplate capacity. Following the acquisition and assumption of full operating control of CF Fertilisers UK, we have increased asset utilization by nearly 20 percent while delivering synergies in excess of $35 million annually.

Leveraging our core capabilities has allowed us to expand our strategic fairway. Over the past several years, we have built a global portfolio of customers beyond our traditional North American base. This helped us achieve approximately 3 million product tons of export sales in 2017 that maximized our overall system margin.

Similarly, we have successfully moved beyond a singular focus on fertilizer. Since 2010, we have developed our DEF business from the ground up, capturing sales that are typically at a substantial premium to granular urea on a urea equivalent basis. Investments in people, production capacity and storage have resulted in DEF sales growth from 8,000 urea equivalent tons in 2010 to 400,000 urea equivalent tons in 2017, a 75 percent compound annual growth rate. Today, we are the largest and most reliable supplier of DEF in North America.

As we have executed our strategy, the scale and complexity of our business has grown. At the same time, our corporate costs have grown at a much slower rate than our sales volume, demonstrating the scalability of the business. Since 2015, our product tons have increased 45 percent while our SG&A costs per product ton have decreased 22 percent.

Creating More Value in the Years Ahead

Our ability to execute our strategy is the result of the enduring performance culture our people have built.

Our culture drives our commitment to safety and operational excellence, disciplined capital allocation and corporate stewardship.

These have made CF Industries more efficient, agile and forward-looking than ever before. We are one of the best commodity chemical companies in the world, and we are well positioned to meet the market challenges and to make the most of the opportunities we see in front of us. We look forward to rewarding your continued support by creating more value in the years ahead.

W. Anthony Will
President and Chief Executive Officer

(1) See Financials for a reconciliation of adjusted EBITDA to the most directly comparable GAAP measures.