CF Industries Holdings Inc (CF) — Q4 2017 Earnings Call Transcript

Good morning, and thanks for joining the CF Industries' fourth quarter earnings conference call. I'm Martin Jarosick, Vice President-Investor Relations for CF. With me today are Tony Will, our CEO; Dennis Kelleher, our CFO; Bert Frost, Senior Vice President of Sales, Market Development and Supply Chain; and Chris Bohn, Senior Vice President of Manufacturing and Distribution and Eugene McCluskey, Vice President of Tax. CF Industries reported its fourth quarter 2017 results yesterday afternoon, as did Terra Nitrogen Company, L.P. On this call, we'll review the CF Industries' results in detail, 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. Last night, we posted our financial results for 2017. For the fourth quarter, we generated adjusted EBITDA of $260 million, and for the full year we produced $969 million of adjusted EBITDA after taking into account the items detailed in our earnings release. These results reflect outstanding execution in all aspects of our business. The CF team has produced, sold, and shipped more product volume than ever before. Most importantly, we improved on our already excellent safety performance, setting a new company record as our safest year ever. It was a tremendous achievement by our manufacturing, distribution, sales, and corporate teams. This level of execution was crucial in a year where nitrogen prices and the cost of natural gas were significant headwinds. Despite this, we did what we do best—focus on what we can control. As a result, our production levels, sales volumes, and cost management efforts more than offset the challenges we faced. As we look ahead to the balance of 2018, we expect the environment to be better than what we navigated in 2017. As Bert and Dennis will cover in more detail, the U.S. dollar is weaker against key global currencies, notably the Ruble and RMB. Global oil prices, along with corresponding mitigation cost, are higher, while European gas and Chinese coal prices are meaningfully higher. Meanwhile, North American natural gas costs are significantly lower in 2018 versus 2017. Additionally, global nitrogen demand and pricing remain higher than last year. These factors, including the higher international cost structure, a weaker U.S. dollar, cheaper U.S. gas, and better nitrogen prices, create a set of industry conditions that make us optimistic about the year ahead. Along with the more positive market environment, CF anticipates benefits in 2018 from our recent actions to lower fixed charges, reduce controllable costs, and run the company more efficiently. In December, we repaid $1.1 billion of our most expensive debt with a blended coupon rate of about 7%. This lowered our debt by about 19%, and our interest payments by 25% or $76 million annually. Last week, we announced that we are exercising our right to purchase all of the publicly traded common units of Terra Nitrogen Company, L.P. This will help simplify the structure of the company and reduce the administrative cost associated with operating TNCLP as a separately listed public entity and deliver network optimization benefits. As shown on slide 32, the expected results of these actions would have increased EBITDA by approximately $45 million and generated about $110 million of additional free cash flow. Moving forward, we also expect to benefit from the recently passed changes in the U.S. tax laws. CF has long had a cash tax rate close to the historical 35% statutory rate. There are a lot of moving pieces with tax reform that Dennis will cover, but it is clear that a lower corporate tax rate will generate earnings and cash flow that drops straight to our bottom line. Additionally, the new tax law will create a more level playing field for U.S.-based manufacturers like CF. This is good for the country, our company, employees, and shareholders. We're proud of what we achieved under difficult circumstances in 2017, and we are looking forward to the opportunities we see ahead in 2018. With that, let me turn the call over to Chris to review our operational performance. Then Bert will cover our sales and market outlook, and Dennis will discuss our financials before I return for closing thoughts. Chris?

Thanks, Tony. Our manufacturing and distribution systems continue to run well in the fourth quarter. In terms of volume, we produced 2.6 million tons of gross ammonia in the quarter; our annual gross ammonia production was a company record of 10.3 million tons. We also did an outstanding job moving all of the product, with sales reaching a record 20 million product tons for the year. We moved more than 7 million product tons by marine transport, including barges, vessels, and exports. We also loaded more than 50,000 rail cars and more than 240,000 trucks at our facilities during the year. What's most impressive about this level of activity is the commitment to and focus on safety in all our plants and facilities. At the end of the year, our 12-month average recordable incident rate was 0.6, with 0.7 incidents for 200,000 work hours; this is the lowest rate we have on record for the company. We also had a run of almost 4.5 million work hours without a lost-time injury in 2017. To do this while making and moving so many products is a remarkable accomplishment by the team. In the fourth quarter, we continued our momentum on cost management for the year, reducing our controllable manufacturing costs by $13 per ton, or about 14%. As a result of cost reduction initiatives and product efficiencies due to increased volumes. Going forward, we will maintain our focus on driving further savings and efficiencies, but you should not expect the large quarter-over-quarter improvements we achieved in 2017. Capital expenditures for the fourth quarter of 2017 were $183 million, and for the full year 2017, capital expenditures were $473 million, of which approximately $350 million was for new activities. We expect CapEx for new activities in 2018 to be in the $400 million to $450 million range, reflecting a higher number of plant turnarounds in 2017. As a result, we expect production levels to be slightly lower than the record volumes we experienced in 2017. With that, let me turn it over to Bert.

Thanks, Chris. Our sales volume in 2017 demonstrated the advantage we created through the optionality we built into our manufacturing and distribution network. For the year, we sold approximately 20 million product tons, which was a company record. This included record sales for each product segment as well: 4.1 million tons of ammonia, about 4.4 million tons of urea, and 7.1 million tons of UAN. These totals include the impact of our work over several years to grow our global customer base. We exported about 3 million product tons during the year, maximizing our overall system market. We have the capability to export even more; however, we anticipate that exports in 2018 will be lower, mostly due to greater domestic shipments under our long-term ammonia offtake contract. Our sales volume in 2017 also reflects the tremendous progress we've made building our diesel exhaust fluid (DEF) business from the ground up. This is important because DEF typically sells at a substantial premium to granular urea on a urea equivalent basis. To support growth in this business, we completed a new 400,000-ton urea equivalent ton per year DEF unit at Donaldsonville in 2017. This facility started up on time and under budget, with returns well above our cost of capital. With a partial year of additional capacity in Donaldsonville, sales of DEF in 2017 reached 400,000 urea equivalent tons, a 75% compound average growth rate over seven years. As a result of our outstanding 2017 performance, we entered 2018 with lower inventory and a solid order book. This has positioned us well for the first half of the year, which we believe will be noticeably stronger than the same period in 2017. The North American and global nitrogen market is in a former position compared to this time last year, supported by fewer exports out of China, continued imports into India and Brazil, and less importation in the United States during this fertilizer year. Imports of urea and UAN to North America from July through December declined 37% and 24% respectively. Projected imports for the first few months of 2018 are also running lower compared to the year before. This is not surprising as urea prices at NOLA are averaging about $25 per ton below international parity during the fourth quarter, discouraging imports. Because North America is and will remain an input-dependent region for the foreseeable future, it will need to attract substantial offshore volumes to meet demand this spring. The urea price discount at NOLA is therefore not sustainable. Furthermore, prices in North America do not yet fully reflect a substantial steepening of the global cost curve since mid-2017. Since the beginning of July 2017, higher energy prices outside of North America, higher freight costs, and a weaker U.S. dollar have pushed up the global cost curve, particularly at the high end. Energy costs have risen for marginal producers in China and Europe; the price per metric ton of Chinese coal has risen nearly 30% since the middle of 2017 to the beginning of February, while the price of natural gas at the Dutch TTF hub has risen approximately 25% over the same time period. Ocean freight costs have risen for all nitrogen exporters reflecting higher oil prices and a tightening vessel freight market. The cost to ship a metric ton of urea from the Middle East to the Gulf of Mexico has risen nearly 30% from July to the beginning of February. Putting further pressure on exporters is the weaker U.S. dollar; the RMB has appreciated significantly against the dollar since the middle of 2017 moving from approximately 6.8 to 6.3. Currencies and other producing regions have also increased; this has pushed up the delivery costs of nitrogen fertilizer exports in U.S. dollar terms. The impact of these factors has been evident on Chinese urea exports. China's role in global urea seaborne trade has already been shrinking, with urea exports declining about 65% over two years from over 13 million metric tons in 2015 to 4.7 million metric tons in 2017. We anticipate that China's net urea exports will decline further in 2018 considering the global factors we just discussed and the ongoing impact of environmental regulation enforcement in that country. The removal of more than 8 million metric tons of Chinese urea from the global marketplace has helped offset some of the recent increases in capacity elsewhere. At the same time, global demand has been robust, driven by India, Brazil, Australia, Mexico, and Turkey. All of these factors point to global nitrogen prices sustaining levels above where they were in similar periods in 2017. This includes the second half of the year when we expect the traditional resets following the completion of spring applications in North America to be at a higher price than the unsustainable levels you saw in the summer of 2017. We're well positioned for this environment; we've demonstrated our ability to effectively leverage the flexibility of the CF systems and navigate market conditions, and we're confident in our ability to maximize our overall margin through the year and into the future. With that, I will turn the call over to Dennis.

Thanks, Bert. The company reported a diluted loss per share of $1.98 and EBITDA of $224 million for the fourth quarter of 2017. After taking into account the items detailed in our press release, our adjusted diluted loss per share for the fourth quarter was $0.02, and adjusted EBITDA was $360 million. Our adjustments included a $3 million unrealized net mark-to-market gain on natural gas derivatives and a $14 million gain on the sale of our joint venture in the Oklahoma facility. It also includes a large one-time income tax benefit of $491 million resulting from the impact of the new U.S. tax legislation. Let me take a moment to outline the impact of the new U.S. tax law on our income statement and balance sheet in more detail. The $491 million tax benefit is a one-time item that consists of two principal components: first, it includes a $552 million tax benefit due to the revaluation of our net deferred tax liability to reflect the new lower federal tax rate of 21%. On the balance sheet, this is reflected by the reduction in the net deferred tax liability. Second, it includes a $57 million one-time tax expense associated with the deemed repatriation of previously untaxed profits; the repatriation tax we paid over eight years commencing in 2019. Approximately one-third will be spread across the first four years, and the remaining two-thirds will be paid during the final four years. Offsetting this is a $36 million alternative minimum tax credit that is fully refundable by 2022. On the balance sheet, AMT credits have been reclassified from deferred tax assets to a long-term receivable in other assets. From a cash tax perspective, we generated income tax net operating losses in 2017 and therefore did not pay U.S. federal cash taxes. As markets improved and we experience higher margins and higher taxable income, we expect our longer-term cash tax rate to settle into the low to mid-20% range, which accounts for federal, state, and foreign taxes on our roll income. As Tony mentioned, we reduced our debt by $1.1 billion in December by redeeming all $800 million of our 2018 bonds and purchasing $300 million of our 2020 bonds. These actions reduce annual interest payments by approximately $76 million or about 25%. At this level of debt, interest expense for 2018 would be approximately $230 million. Our cash and cash equivalents were $835 million as of December, and our $750 million revolving credit facility was undrawn. I will now provide some thoughts regarding our expectations for 2018, understanding that this is subjective to changes in market conditions. So far in 2018, prices for our products have generally been higher than the same period of 2017, and because of this, and all the developments I have outlined, we believe it is likely that our financial results for 2018 will exceed our 2017 results. With that, Tony will provide some closing remarks.

Thanks, Dennis. Before we open the call to questions, I want to thank all CF employees for their work in the fourth quarter and for the full year. This past Monday marks the 72nd anniversary of CF's founding. CF is a vastly different company today than when it began over seven decades ago. It's also a very different company than when I joined 11 years ago. In that time, we've grown from 6 ammonia plants to 17, exited the phosphate business, developed new product offerings, and expanded our global presence. In doing so, we consistently improved operations and safety, delivered synergies, and enhanced the free cash flow generation capacity of the company. Our ability to do this is the result of what hasn’t changed about CF: 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 market challenges and to make the most of the opportunities in the years ahead. With that, operator, we will open the call to questions.

Could you provide some insights on the current market dynamics regarding trade flows and when UAN and urea imports need to arrive in the U.S. to ensure timely supply for the upcoming season? Your perspective on this would be appreciated.

The current market—we just returned from the TFI, The Fertilizer Institute meetings in San Diego—has just interacted with our customers and just get a feel for where we are in the market, and we believe we are in a very good place. Imports have been lagging behind and you're right; there is a window of when those urea and UAN vessels need to arrive to be able to make it onto a barge or a rail car and move up into the Midwest. I would say that just by arrival mid to late April at worst, and that means you maybe need to get them on the water probably by early to mid-March, and so we're watching those vessels. We have been lagging behind on imports, and we expect that to continue. However, there has been additional capacity that has come online in our own United States and others that is coming or yet to come online, and so we have to wait and see how this plays out. I think the risk is that arriving too late into this market would penalize the importer and probably put them in a bad position as we get the reset position in June or July. Pricing is firm and probably getting firmer; applications are yet to start. Normally they start in Texas; we have seen some of that, but it's a little bit dry in Oklahoma and Kansas for lead top dress market. Rain is expected in the next week or two, so we expect that to kick off, and then we have spring applications in Romania starting. They have already settled a little bit in Southern Illinois, so I would say we are weeks away. If we have an early spring, it could be pretty good.

Good morning. This is Neil calling in for Vincent. It seems that a lot of the upside in volume in the quarter was from ammonia, and given the stronger ammonia running up in the fall, could that lead to less urea demand in the spring, or do you think there is still pent-up urea demand?

We did have a very good ammonia fall; we had record shipments, but that includes exports—our agreement with Mosaic, our industrial contracts, as well as fall applications of ammonia. We think the industry did very well on fall applications, but there are certain markets that are fall and there are certain markets that are spring. Your states and some in Nebraska are generally pretty big fall ammonia application markets. The spring markets are more in the East; Canada did pretty well in the fall, but there is still quite a bit to go up in Canada as well as the Dakotas. So, we're ready and believe that we will still have a fairly large ammonia spring, and I don’t think that will impact urea applications nor UAN. At the price of UAN today, we believe that UAN still has some upside, but also an attractive end for this spring application.

I think if you look at the aggregate amount of the ammonia that went down in the fall, I don’t think it's statistically outside the historical numbers. As Bert said, we had a little bit of improvement in terms of the ag application, fall of '17 versus fall of '16, but a lot of that volume was industrial. We don’t think it’s robbing nutrient demand for the spring at all.

So, the last slide in your deck has this roster of Chinese facilities that look like they have been down for the last one to two years. Would you say that whatever it is 10 million tons of capacity does not alone account for the sub 50% operating rate in China? Is your view that the capacity that’s running at a slower rate there because of environmental initiatives is likely to come back online, and do you have visibility to how much inventory they have? Could that market get tight this spring?

So, regarding the potential for this capacity to return, I believe that the combination of gas plants in operation during the winter and some gas production may resume depending on the LNG prices in the spring and summer. However, for most plants facing shutdowns or reductions due to environmental regulations, we do not anticipate them coming back online. The costs for emission scrubbing and reduction are excessively high, and given the current global trading status, it doesn’t make financial sense. Ultimately, we expect the overall capacity available in China to continue to decrease, particularly concerning their export volumes and whether they will import more. I’ll pass it over to Bert.

I think you covered this—the factors that we’re watching. We do believe that they will continue; they’ve already imported some from Gulf and some Iranian supply, and we believe that that will continue, especially in the Northern ports. They have announced an inventory build program; we think that's a little bit late when you look at where they are on operating rate and production output, coupled with demand and inventory. We think they are going to be challenged to meet their spring requirements.

Looking at some of our price realization versus the NOLA benchmark, can you give some idea of what we could see for urea and UAN in the first half of the year versus the second half of the year, given some of the shifts going on in the market and your domestic and export mix? Some of the premiums you've achieved have been a little bit dependent. What can be versus the benchmark?

We always have to remember, Joel, as you roll through the fourth quarter, the prices were when you rolled into the quarter and as you were selling into the market what that looks like. So you read it today as about $255 per short ton in NOLA. UAN is probably $170 plus per short ton in NOLA, and we've moved volumes at those numbers. We believe that those numbers will increase as we get closer to spring. And so, like we've said in our prepared remarks, to bring a vessel in from the Arab Gulf at today's prices, urea needs to value probably closer or above $270, and UAN probably at a discount on a urea equivalent basis needs to increase in price also just to be at parity with urea.

So, the market commentary you provided today sounded very positive, more than it has for a while, I think. When I look at the published costs, it looks like the costs range for the marginal process may only be up about $10 per ton year-over-year, so just trying to reconcile those things together. Are we maybe at a turning point where the market price is meaningfully above where the cost curve is?

So historically, we've tried to put out the next year's cost curve as part of our third quarter call, and then we come out and do a lot of updating on it during the year. The cost curve is on page 25 of our material, but page 26 has the embedded assumptions in it. So, in that curve, which was generated back in the September timeframe, for publish, and in October and November, the RMB exchange rate was 6.8 versus 6.3 today, and Henry Hub gas has also come down about $0.10 or $0.15. What's not shown in there is the basis differentials, and a lot of the locations where we're actually buying gas have also gapped out in a favorable way for us. So, as we look at what the forward curve of gas plus basis differential is into 2018 versus 2017, we're about a $100 million favorable in '18 versus '17 just in gas alone; and meanwhile, putting in the exchange rate and ocean freight factors into the cost curve, that increases the top end of that curve by about $15 to $20, maybe even $25. So, the balance of those things has created a pretty favorable tailwind for us, and if you think about our opportunity to participate in and improve the nitrogen environment, a urea price of $25 translates into about $350 million of incremental EBITDA generation for us over the course of the year. So that's why you're hearing some more positive commentary from us than we've said in the past.

So recently, ammonia plants that closed were shut down due to the supplier and producer not being able to bridge the bid-ask spread on gas pricing. Are you having any issues over there? What's the status of your gas contract and maybe your thoughts on the outlook for gas pricing in the region?

We have 50% of one ammonia plant down due to nitrogen limitations, and the original gas contract for that plant expired in 2018. We have the right to extend it for an additional five years, but NGC Gas Company Trinidad disputed this right. After arbitration in London, we won, confirming our right to extend, and NGC has acknowledged this. We have a gas contract in place through 2023, which meets all our requirements, and we're quite pleased with that. However, we believe that this will create significant long-term challenges in terms of competitiveness, especially when comparing our cost structures to North American natural gas. From our perspective, we prefer to sacrifice the economics on half of one plant rather than see the rest of our production face global challenges and become a low-cost production source. Overall, we view this impact quite positively.

I wanted to talk a little bit about the spring outlook and really understand maybe by product, which means urea, UAN, ammonia, how you're thinking about the price trajectory from here, and kind of the upside and downside risks to the base outlook. Ammonia, the offshore prices have started to come off a little bit; meanwhile, urea and UAN, the imports are well down, as you highlighted it, could be setting the U.S. market up short, but just trying to think about how you think about the puts and takes around that outlook that could really change things one way or the other.

Just starting with, like I said, really the weather and the possible negatives. We are having some drought type conditions in Oklahoma, Kansas, and Texas, and just looking at that area. But that represents maybe 200,000 to 300,000 total tons of urea, so not a big impact on an 11-million-ton market. And even if that goes in urea price rallies, we believe that that would just then move to Canada and you would see greater applications of plantings for your spring and then in the P&W. So, when we look at urea today, we're behind on our imports and well, it needs to be in place to satisfy demand. We do believe that some of the other plants have not operated optimally, and that product is probably not in position. We have operated well; we do have product in position, and when you look at the global pricing structure of $265 out of where it goes today on a vessel and on a barge without the margin that lands with NOLA, about $270 per short ton, we're not there yet. We need to get there, and I believe that we will—and probably exceed that number. UAN has been trading into the $160 to $170 range and has been trading at a discount to urea, which just is traditionally not the case. And again, our plans have been operating at capacity; we've exported a significant amount of product, but it's also been working to get our inventory positions in place, and again we look around that some of the other operating units in the North American markets probably have not operated at capacity. The imports are down on UAN, and that’s a harder product to get into position as you are moving the liquid product either from the East Coast all the way to the Eastern Midwest, or from the Gulf Coast up to the Midwest. And so, we believe as we've moved into our spring application season, especially if it's early, that could be a very good dynamic for us. You're correct on the international ammonia market; it has weakened— that's a reflection of a lot of ammonia plants. That were on turnaround extended turnaround during the low price periods of Q3 and Q4 have since come back on, especially in Northern Africa. So some of those prices have moderated down a bit, but we're seeing healthy demand over the phosphate market as well as Asian industrial demand, and so we believe that will hit a nice floor and probably operate in a higher price range than we had last year.

The other thing on that one, Adam, in terms of ammonia is that last year the vessel was already sold; we weren’t able to ship to Mosaic or kind of to our supply agreement, and we ended up having to export a bunch of that ammonia. This year, there is the work shipping against that contract, which is between, call it, 600,000 and 800,000 tons of ammonia that will be shipped alone. The impact of that means that we're not—because that's a gas plus base deal, we're not really looking at ammonia exports for the year, and because that's a gas plus arrangement, we're less exposed to where international ammonia prices trade. Because if you don’t have the terminal, we can't get the product there anyway. So the good news is, even though it's weakening, we are pretty insulated against that price change.

Hi, this is for Mark Connelly. Just wondering if the U.S. dollar remains weak after the application season, will we be more likely to see an imbalance in the U.S. market, or do you believe that during that time your net back would still support exports overall? Thank you.

Well, I mean these structural changes incur in season that are short-term issues generally, and they are driven by economic as well as economic policy and interest rates and what is perceived to be growth opportunities driven by those various economies. And so, the weak dollar could be around for quite a while, especially with what we're seeing coming out of Washington with fiscal spending, or lack of fiscal control. And so when you look at an imbalance, obviously we are pretty focused on calculating what we produce and moves as well as enters the United States, however, we don’t view CF as a balancing mechanism—we're market driven, and if we make more money going to the international market, we will export. As I said in our prepared remarks, we can export even more. And so how we look at this market is there is a natural buildup and drawdown in the North America market as we work through the agricultural cycle. And then we layer into our business our industrial book, which is an important part because of 24/7 in terms of demand. And then we look at as we roll out of the spring season in the United States, the opportunities that are available to us. We have consistently and constantly worked with our international customers to be able to be a nice receiving point for our product. With our deep water docks, we can load several vessels at a time. Yes, the net backs are attractive for us, whether in Europe, South America, or even Asia. We’ve done all of the above last year. So, we’re ready for that, eventually if it does come, and we do believe it will be net back attractive for the company.

I don’t want to get ahead of myself, but given the significant degree of deleveraging you've undertaken and the consequent interest rate reduction, what are the next stages of capital deployment, especially as the market is now relatively more stable? Do you still feel industry consolidation is necessary, and generally what do you see as your own potential role in the overall process? Should we limit our thinking to North America? Thank you.

I think on the role of capital deployment, we have been pretty consistent saying that we want to take out the rest of the $500 million of 2020 bonds that are at a relatively high interest rate. Then it will get us down to one foot, one status taken out to a place where we feel is a very sustainable amount of leverage for the business across the cycle. I would say another kind of $500 million and then we will start thinking a little bit more broadly about other opportunities. Obviously, we went out with just under $400 million to buy in those TN CLP units that were out there, because it represented a tremendous opportunity for us both in terms of adding on a free cash flow basis and also just simplifying our perfect structuring and cost reduction efforts back here in the home office. We can say, to start deploying capital, and what I would term it in a more offensive way. I think ongoing industry consolidation is inevitable, and it's really a function of what the market prices require to clear trade in terms of when that kind of stuff starts happening. We're open to being outside of the U.S., as you’ve seen with our UK acquisition that has been a tremendous benefit for us, and we're really pleased with it. But there are some regions in the world where we’re more likely to go than others, that’s a U.S. company, subject to SEPA and OFAC and other challenges, and certain regions are more difficult than others. We will focus on places where we think we can operate in ways that are in keeping with our culture and the strict interpretation of the law, so that limits us to some extent.

Bert, you’ve talked about how imports are down significantly. What's their psychology of the domestic buyer? I know in the past they've started off new U.S. capacity that would lead to lower prices, and then with lower channel inventories, how is that situation now? And then just one clarification on '17. You said for 2018 that 10% of your gas is hedged in the range of 21% to 20% through your industrial contracts. I noted if that's the same as third-quarter, so is this kind of your ongoing policy on hedging to be relatively unhedged going forward, which should be a market break from what you've done in the last two years?

So, let me answer the gas question first. You are correct in where we're hedged, and you're correct that from our previous announcement that has not changed. Never say never, but the opportunity available to us on gas at today's production rate—it’s almost hitting 80 per day and where consumption is; and you look at the build into fall of 2018, we feel very, very good where we are with the resource base and the activity that's going on. Now, with oil around $60 for TWI, the associated gas that's going to be coming online with that production is putting us in a very comfortable position, and as Chris or Tony mentioned, the collapse or the basis has made it even more attractive not to position ourselves with hedges. Our people stay in this current environment through 2018, and we look at these things monthly for the gas committee. On the psychology of the retail, wholesale, and trader group, our customers is interesting because a lot of people got punished last year—a lot of excess material came into the United States, pricing collapsed in late February or early March, and just worked steadily down week-by-week as we entered May and early June. I want to say that low was $160 per ton for urea at NOLA and stayed there well into Q3. I think because of the losses that were incurred, there is a lot of hesitation in taking large import positions and bringing them in and distributing them. That's why in our communication with our customer, we believe we are well positioned in that our customers provide truck at a time, a railcar at a time, a barge at a time, take larger positions if they want to, and we've structurally positioned ourselves with inventory throughout the United States to pick up that opportunity. So, I would say I would classify that the retail, wholesale, and trader group as risk-averse, but positively inclined to participate in the market this spring, believing that we are going to have 89 to 91 million acres of corn and lower levels of wheat, higher levels of soybeans, but overall good applications of NPNK, and we're preparing ourselves to participate in a good way this year.

Couple of questions on China. Can you talk about coal price in China? Is there potential for coal prices to drop post-winter? If that happens, how much capacity comes back online? Additionally, you mentioned that China has become an importer near-term. I guess strategically, don’t you want the high-cost player in the export market?

On the coal side, part of what is helping is government involvement in managing production output at the mines. There have certainly been restrictions on operating days, and the number of closed mines is significant. Additionally, seaborne coal rates have increased substantially. While it's possible for that trend to reverse, it would contradict the stated policy aimed at making the remaining companies more profitable and addressing issues related to the struggling industry. Moreover, there is a strong environmental push to improve conditions and revise submissions. Therefore, we don’t expect coal prices to decrease. Several factors are influencing the economics, including coal prices, exchange rates, and the reduction of subsidies for chemical plants, rail, and electricity. We believe many factors are contributing to reduced production in China, which is a positive outcome for us because it means they will be purchasing more tons, further tightening the overall market balance. In 2016, the price per ton was around $115; in 2017, it rose to $151, and currently, it hovers around $180. This represents a significant increase in cost, and we don’t anticipate that reversing.

On slide 39 in 2018 and beyond, most of the capacity that you have to start up is by emerging market players. Are these almost all experienced firms with good track records of bringing capacity online? And I don’t really know maybe those companies that well.

Looking at the new plants coming online in the regions you've mentioned, I generally believe the major equipment sourced for these builds—whether from Germany, Italy, or elsewhere—will support our efforts. We are confident that we are not compromising on quality, as these groups possess world-scale capabilities.

I think the other thing I would add to that, John, is that if you look at the experience we’ve had here in North America with companies that actually are in the business of doing this, things have tended to cost more, and things have started up later than what people thought here in North America. It's sort of hard to believe as you look at some of these other places that you might see a different experience. In some cases, you might see experience that’s adverse compared to what we experience.

Thanks, everyone, for joining us on the call this morning. We look forward to speaking with you at various conferences in the next few months.