CF Industries Holdings Inc
NYSE:CF
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CF Industries Holdings Inc
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Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2017 CF Industries Holdings Earnings Conference Call. My name is Cynthia. I will be your coordinator for today. [Operator Instructions]
I would now like to turn the presentation over to the host for today, Mr. Martin Jarosick, with CF, Investor Relations. Sir, please proceed.
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 the 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 shift 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 price along with corresponding mutation safe cost are higher, while European gas and Chinese coal prices are meaningfully higher. Meanwhile North American natural gas cost is significantly lower to 2018 versus 2017.
Additionally, global nitrogen demand and pricing remains higher than last year. These factors higher international cost structure, weaker U.S. dollar, cheaper U.S. gas and better nitrogen prices create a set of the industry conditions that make us optimistic about the year ahead. Along with the more positive market environment CFO realized the benefits in 2018 from our recent actions to lower fixed charges, reduce controllable cost and run the company more efficiently.
In December we repaid 1.1 billion of our most expensive debt with the blended coupon rate of about 7%. This lower 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 to simplify the structure of the company and reduced 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 pass changes in the U.S. tax laws. CF has long had a cash tax rate close to the historical 35% statutory rate. There are 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 plan field for U.S. base 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 as it has volume, we produced 2.6 million of gross ammonia in the quarter, our annual gross ammonia production was a company record 10.3 million tons. We also did an outstanding job moving all of the product with sales reaching record 20 million product tons for the year, we moved more than 7 million product tons by marine transport including barge, vessels and export vessels 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 and safety in all our plants and facilities.
At the end of the year our 12-month average recordable incident rate within 0.6, 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 loss 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, we reduced our controllable manufacturing cost, $13 per ton or about 14%. As a result of cost reduction initiatives and product deficiencies due to increase volumes. Going forward we will maintain our focus and driving further savings and efficiencies but you should not expect the large quarter over quarter improvements we have delivered in 2017.
Capital expenditures for the fourth quarter of 2017 were 183 million, for the full year 2017 capital expenditures were 473 million of which approximately 350 million was for new activities. We expect CapEx for new activity in 2018 to be in the $400 million to $450 million 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 filled into our manufacturing and distribution network. For the year we sold approximately 20 million product tone which was a company record. This included record sales for each product segment as well. It’s a 4.1 million of ammonia about 4.4 million tons of urea and 7.1 million of ton 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 off take contract.
Our sales volume in 2017 also reflect the tremendous progress we've made building our diesel fluid business from the ground up. This is important because DES typically sells at a substantial premium to granular urea on a urea equivalent basis. To support growth in this business we completed in 2017 a new 400,000-ton urea equivalent ton per year DEF unit at Donaldsonville. 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 DES in 2017 has 400,000 urea of equivalent tons a 75% compound average growth rates 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 in 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 export out of China continued imports into India and Brazil and less important in the United States during this fertilizer year. Imports of the urea and UAN to North America from July through December decline 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 you reabsorbed prices at more liens average to $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 forcible future it will need to attract substantial offshore volumes to meet demand this spring. The urea price discount international asperity at [Nolan] is therefore not sustainable. Further 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 cost and a weaker U.S. dollar pushed up to global cost curve. Particularly at the high end. Energy cost of [rhythm] for marginal producers in China and Europe the price per metric ton of Chinese [indiscernible] coal has risen nearly 30% since the middle of 2017 to the beginning of February. While the price of natural gas at the Dutch TTS [ph] hub has risen approximately 25% for MMBtu over the same time period.
Ocean freight costs are risen for all nitrogen exporters reflecting higher oil prices and a tightening vessels 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 is pushed up to deliver cost of the nitrogen fertilizer exports and U.S. dollar terms. The impact of these factors has been evident on Chinese urea exports. China's role in global urea seaborne trade have already been shrinking with urea exports they are planning about 65% in just two years from over 13 million metric ton in 2015 to 4.7 million metric tons in 2017. We anticipate that China's net urea exports will decline further in 2018 given 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 and Brazil as well as 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 in the unsustainable levels you saw in the summer 2017.
We're well positioned for this environment, we've demonstrated our ability to effectively leverage the flexibility of the CS 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 [indiscernible] 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 onetime item that is 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 test 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 onetime tax expense associated with the deemed repatriation of previously on tax profits, the repatriation tax we paid over eight years commencing [ph] 2019. Approximately one third will be spread across the first four year and the remaining two thirds we paid during the final four years. Offsetting this $36 million alternative minimum tax credit they are fully refundable by 2022. On the balance sheet AMP credits have been reclassified from deferred tax assets to a long-term receivable in other asset.
From a cash tax prospected we generated income tax net operating losses in 2017 and therefore did not pay U.S. federal cash taxes. As markets improved and experience higher margins and higher taxable income, we expect our longer-term cash tax rate to settle into the low to mid 20's range which accounts for federal state in 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 purposing $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 for $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 changes in market and other conditions. So far in 2018 prices for our products have generally been higher than the same period of 2017, because of this and all the development have heard and explained earlier, 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 begins over seven decades ago. It's also a very different company then 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 enhance 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 Stuart chip. 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 in the years ahead.
With that operator we will open the call to questions.
[Operator Instructions] Our first question comes from Michael Piken with Cleveland Research. Your line is now open.
Maybe we can start a little bit with kind of the current market dynamic in terms of the trade flows and when does the UAN and Urea imports need to arrive in the U.S. to sort of guarantee on time level for the [Indiscernible] season, if you can kind of give us your color on that, that would be great.
The current market we just return from the TFI, The Fertilizer Institute meetings in San Diego has just interact with our customers as and just get a feel for where we are in the market and we believe we are in a very good place, imports have then lagging behind and you are right there is a window of when those urea and UAN vessels need to right to be how to make it on to a barge or a rail car and move up into the Midwest. And I wouldn’t say that just by arrival mid to late April at worse and that means you maybe get on the water probably by early to mid-march and so we're watching those vessels and we have been lagging behind on imports and we expect that to continue.
However there has been additional capacity that has come online our own in the 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 the lead top dress market, were 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 have 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.
Our next question comes from Vincent Andrews with Morgan Stanley.
Good morning. This is Neil calling in 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 sprint 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 is certain market that are fall and there are certain markets that are spring and so your ice states and some in the 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 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 its statistically outside the sort of the historical numbers and 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 its robbing nutrient demand for the spring at all.
Thank you. Our next question comes from Steve Byrne with Bank of America. Your line is open.
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 that does not alone account for the sub 50% operating rate in China, I assume is there -- is your view that the capacity that’s running at a slower rate there because of say environmental initiatives there is likely to come back on stream and do you have visibility to how much inventory they have there, could that market get tight this spring.
So, on the likelihood of this to come back, I think that the combination of gas plants that are down there in the winter and some of the gas production could come back on depending what L&G price shows up as you get into the spring in summer, but most of the plants that are facing set down or curtailment as a result of the environmental rigs, we don’t really expect those plants to like to comeback. The cost associated with the scrubbing and elimination of the emissions is so high and given where kind of the product is trading on a global basis it just doesn’t make sense. We think that ultimately the kind of the denominator is going to continue to shrink in terms of available capacity in China, relative to are they going to be sort of just reducing export volumes versus [technical difficulty] that import and I'll turn that over to Bert.
I think you covered this, the factors that we’re watching and 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 programs we think that's a little bit late when you look 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.
Thank you. Our next question comes from Joel Jackson with BMO Capital Markets. Your line is open.
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 second half of the year, some of the ships going on in the market and your domestic and export mix to some of the premiums you've achieved have been a little bit that best can be versus the benchmark?
We always have to remember Joel as your roll through the fourth quarter the prices were when you roll into the quarter and as you are selling into the market what that looks like, so you read it today as about $255 per short-term in NOLA. UAN is probably $170 plus per short term in NOLA and we've moved volumes at those numbers and we believe that those numbers will increase as we get closer to spring and so like we've said in our in the 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 an end basis needs to increase in price also just to be at parity with urea.
Our next question comes from Andrew Wong with RBC Capital Markets.
So, the market commentary you provided today sounded very positive more than has for a while I think. When I look at the publish cost looks like the costs range for the marginal process maybe only up about $10 per ton year-over-year so just trying to reconcile those things together and are we maybe at a turning point where the market price is meaningfully above where the cost curve is?
So historically what we've done is we've tried to put out the next year's cost curve as part of our third quarter call and then we cannot to do a lot of updating on it during the year. And so 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 kind of 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 kind of $0.10 or $0.15 and what's not shown in there is the basis differentials and a lot of the locations where we're actually buying gas has also gapped out in a favorable way for us.
So, on as we look at what the forward curve of gas plus basis differential is into 2018 versus 2017 were about a $100 million favorable '18 versus '17 just in gas alone and meanwhile putting in the exchange rate and ocean free factors into the cost curve increases the top end of that curve can I call it $15 to $20 maybe $25. So, the balance of those things has created a pretty favorable tailwind for us and if you think about kind of our opportunity to participate in and improving 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 are hearing some pretty more positive commentary from us than we've said in the past. We also although expect there to be a normal reset comfort quarter given where European gases and Chinese cost structures, we don’t think we're going to be back in the world of 160 urea this year what we were last year, we were there for three months, almost four months last year. Both the combination of simply favorable first half indications as well as our belief that the lows don’t get anywhere close to where they were last year, that makes us pretty optimistic about where the year ends up.
Thank you. Our next question Ben Isaacson with Scotia Bank. Your line is open.
So recently in ammonia plants that closed, they were shut down due to the supplier and producer not been 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 be may be your thoughts on the outlook for gas play, fill in the region.
We have 50% of one ammonia plant down there as [indiscernible] nitrogen limited and the original gas contract on that plant ran through 2018, we have a unilateral right to extend it an additional five years and NGC Gas Company Trinidad was kind disputing our right to extend, we went to arbitration in London and won, so they upheld our right to do it and NGC has recognized that fact and so, we have a gas contract in place through 2023, we're getting a 100% of our requirements and we're pretty pleased about that.
We do think longer term that does based on pretty sizable challenges around being competitive just based on where the cost structures compared to North America natural gas. And I say from our prospective, that’s not a bad thing, we rather give up the economics on one half of one plant and see all the rest of that production challenged from the global basis and then have that be a low-cost production source. So, we're pretty constructive on the impact that has overall.
Thank you. Our next question comes from Adam Samuelson with Goldman Sachs. Your line is open.
I wanted to talk a little bit about the spring outlook and really understand may be made it by product, which mean urea, UAN, ammonia kind how you're thinking about the price trajectory from here, kind of the upside and downside risk to the base outlook, ammonia the offshore prices have started to come off a little bit, meanwhile urea 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, are that we're having some drought type conditions in Oklahoma, Kansas and Texas and just looking at that area but that represents may be 200,000 to 300,000 total tons of urea. So not a big impact on a 11-million-ton market and even if that goes in urea price rallies we're believing 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 be 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 tin 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 were not there yet and we need to get there and I believe that we will and probably exceed that number.
UAN has been trading into 160 to 170 range and has been trading at a discount to urea which just 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 are probably have not operated at capacity and the imports are down on UAN also 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 at the Gulf coast up in 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 are correct on the international ammonia market it has weaken that's a reflection of lot of ammonia plants that were on turnaround extended turnaround during the low prices periods of Q3 and Q4 have since come back on especially in Northern Africa and 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 things on that one Adam in terms of Ammonia is that last year the vessel was already so 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 shipped alone and the impact to 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 where less exposed to kind of where international ammonia prices trade because there is not a one for one co-relation between the international ammonia price and Midwest and ammonia 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.
Our next question comes from Mark Connelly with Stephens.
Hi, this is [indiscernible] for Mark Connelly. Just wondering if the U.S. dollars remained weak past applications season we more likely to see imbalance in the U.S. market or do you think that during that your net back [ph] would still support exports on balance? 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 or 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 as there is a natural build up and draw down in the North America market as we work through the agricultural cycle. And then we layered 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 United states that opportunities that are available to us and we have consistently and constantly worked with our international customers to be able to be a nice receiving point for our product, [indiscernible] with our deep water docks we can load several vessels at a time. And so, yes, the net backs are attractive for us, whether Europe, South America or even Asia when 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.
Thank you. Our next question comes from Christopher Parkinson with Credit Suisse. Your line is open.
I don’t want to get ahead of myself but given the significant degree of deleveraging you've undertaken and 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 you see as your own potential role in the overall the process and 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. And 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.
And so 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 that [TN] CLP units that were out there, because it represented a tremendous opportunity for us both in terms of will it will add on a free cash flow basis and also just simplifying our perfect structuring and cost reduction efforts back here in the home office. So, can saying, start deploying capital and what I would turn it in more offensive way.
I think on going 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 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 and more difficult than others. And were difficult than others. We will focused on places where we think we can operate in ways that are and in keeping with our culture and the stripped interpretation of the law. So that limits to unites to some extent.
Our next question comes from Donald Carson with Susquehanna.
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 of new U.S. capacity would lead to lower prices and the tenant have lower channel inventories how is that situation now.
And then just one clarification on 17 you said for 2018 that 10% of your gases has that 321 to 20% is nationally hedged 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 un-hedged 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.
So never say never but the opportunity available to us on gas at today's production rate it 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 and now with oil around $60 for TWI the associated gas it's going to be coming online with that production is puts 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 and so our people stay in this current environment through 2018 and so we look at these things monthly for the gas committee.
On the psychology of the retail wholesale and trader group and of our customers is interesting because a lot of people got punish last year a lot of access material came into the United States pricing collapsed in late February or early March and just works steadily down weak-by-weak as we entered May and early June that I want to say that low as of$160 per ton for urea and NOLA and stayed there well into Q3.
And I think because of the losses that were incurred there is a lot of hesitation and taking large import positions and bringing them in and distributing them. That's why in our communication with our customer why 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, buy lower levels of wheat, higher levels of soybeans but overall good applications of NPNK [ph] and we're preparing ourselves to participate in a good way this year.
Our next question comes from P.J. Juvekar with Citi.
Couple of questions on China. Can you talk about coal price in China and is there potential for coal prices to drop post winter? And if that happens how much capacity comes back online?
And secondly you mentioned that China has become an importer here near-term. I guess strategically don’t you want the high cost player in the export market? Thank you.
On the coal side, P.J part of what is helping on the coal a little bit of government hand in terms of managing output production at the mine. So there has defiantly been some restrictions on the number of operating days and the number of mines that have closed is in astronomical number.
And additionally, you see the see borne coal rates have gone up quite a bit. Now could they reverse that trend, sure but I think that’s going pretty much against what they stated policy has been which is try to make the companies that are remaining more profitable both from the coal side all the way through the conversion and get rid of the some of the zombie industry problems that they had.
Additionally, there is strong desire from an environmental prospective to kind clean up the environment and review submissions. So, we don’t believe that you will see the coal price go back down again. And there are lot of factors that are impacting the economics there, coal being one, the exchange rate being another one, the elimination of subsidies to chemical plants and on rail and for electricity being another, so I think there is a lot of factors that are driving the reduction of production in China.
And going back to the notion of on a global supply basis, to the extent that those plants are running and China continues to need to feed its population that’s just going instead of putting tons out into the marketplace that’s going to soak up tons.
And so, from our prospective that’s an outstanding result because ultimately there are going to be buying of tons and it's going to further tighten up the overall SMB balance.
If you look at [indiscernible] on a per ton basis in 2016 it was like $115 a ton in '17 it was up to 151 currently it's like almost 180. Again, that is a dramatic increase in terms of the cost structure there and we really don’t see that turning around and going the other direction.
[Operator Instructions] Our next question comes from John Roberts with UBS. Your line is open.
On slide 39 in 2018 and beyond all most all of the capacity that you have to start up is by emerging market players. Are these almost all experience firms with good track records of bringing capacity up online and really don’t know may be those companies that well.
You look what’s coming on in terms of these new plans in the various regions you articulated. Generally, I do [indiscernible] in contract with in terms -- if the major equipment comes through from the builds whether it be German, Italian or -- and then with support so we believe that we're not holding back thinking that these are substandard groups we think they are world scale capabilities.
I think the other thing I would add to that John is that if you look at the experience that we've had here in North America with companies that actually are in the business of doing this, if 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've likely see sort of a different experience, in some cases you might see experience that’s adverse compared to what we experience.
Thank you. Ladies and gentlemen, that is all the time we have for questions for today. I would like to turn the call back over to Mr. Martin Jarosick for closing remarks.
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.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may now disconnect. Everyone, have a great day.