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Edited Transcript of CF earnings conference call or presentation 16-Feb-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 CF Industries Holdings Inc Earnings Call

DEERFIELD Feb 20, 2017 (Thomson StreetEvents) -- Edited Transcript of CF Industries Holdings Inc earnings conference call or presentation Thursday, February 16, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Martin Jarosick

CF Industries Holdings, Inc. - IR

* Tony Will

CF Industries Holdings, Inc. - President & CEO

* Bert Frost

CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain

* Dennis Kelleher

CF Industries Holdings, Inc. - SVP & CFO

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Conference Call Participants

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* Chris Parkinson

Credit Suisse - Analyst

* Vincent Andrews

Morgan Stanley - Analyst

* Don Carson

Susquehanna Financial Group - Analyst

* Dan Jester

Citigroup - Analyst

* Steve Byrne

BofA Merrill Lynch - Analyst

* Jeff Zekauskas

JPMorgan - Analyst

* John Roberts

UBS - Analyst

* Oliver Rowe

Scotiabank - Analyst

* Mark Connelly

CLSA Limited - Analyst

* Joel Jackson

BMO Capital Markets - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the fourth-quarter 2016 CF Industries Holdings earnings conference call. My name is Carmen and I will be your coordinator for today.

(Operator Instructions)

I would like to turn the presentation over to the host for today, Mr. Martin Jarosick with CF Investor Relations. Sir, please proceed.

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Martin Jarosick, CF Industries Holdings, Inc. - IR [2]

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Good morning and thanks for joining us on this conference call for CF Industry Holdings Inc. I'm Martin Jarosick, Vice President of Investor Relations for CF. With me today are Tony Will, our President and Chief Executive Officer; Dennis Kelleher, our Senior Vice President and Chief Financial Officer; Bert Frost, our Senior Vice President of Sales, Market Development and Supply Chain; and Chris Bohn, our Senior Vice President of Manufacturing and Distribution.

CF Industries Holdings Inc. reported its fourth quarter 2016 results yesterday afternoon, as did Terra Nitrogen Company LP. On this call, we will review the CF Industries results in detail and discuss our outlook, referring to several slides that are posted on our website. At the end of the call, we will host a question-and-answer session related to the Company's financial results for the quarter.

As you review the news releases posted on the Investor Relations section of our website at CFIndustries.com and as you listen to this conference call, please recognize that they contain forward-looking statements as defined by Federal Securities laws. Actual results may differ materially from those projected as a result of certain risks and uncertainties.

Including those detailed on slide 2 of the Company presentation, and from time to time in the Company's Securities and Exchange Commission filings. These forward-looking statements are made as of today, and the Company assumes no obligation to update any forward-looking statements.

This conference call will include discussion of certain non-GAAP financial measures. In each case, a presentation of the most directly comparable financial measure calculated and presented in accordance with GAAP, and coinciding reconciliation of the non-GAAP financial measure to the most directly comparable financial measure calculated and presented in accordance with GAAP. Is provided in the earnings release and the slides for this webcast presentation on the Company's website at presentation on the Company's website at CFIndustries.com.

Now let me introduce Tony Will, our President and CEO.

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Tony Will, CF Industries Holdings, Inc. - President & CEO [3]

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Thanks, Martin, and good morning, everyone. Last night, we posted our financial results for the fourth quarter and full year 2016, in which we generated adjusted EBITDA of $133 million and $858 million respectively after taking into account the items detailed in our earnings release. Bert and Dennis will cover for fourth-quarter, full-year and near-term outlook in more detail later.

What I'd like to do is offer longer-term perspective on our industry, and why we believe our strategic position makes us the company best situated to capitalize on the emerging sector recovery. For the past 12 months, we have experienced some of the most challenging conditions the nitrogen industry has faced in over a decade. Global feedstock and ocean freight costs fell as capacity additions came online, driving prices to unsustainable lows.

The dramatic decline in nitrogen prices as demonstrated by US Gulf urea fallen by more than more than $170 per ton or roughly 50% from 2015 to the middle of 2016, impacted our results more than most because we are a pure play nitrogen production company. The converse should also prove to be true as prices rebound, with price increases going directly to our bottom line.

Because we are one of the world's largest producers of nitrogen products and enjoy among the very lowest costs, nitrogen price recovery should have an amplified impact on our financial results. We believe that 2016 represented the low point of the cycle. The unsustainably low prices of 2016 led to the very predictable outcome of plant curtailments and permanent shutdowns in higher cost regions.

In China alone, approximately 9 million metric tons of urea capacity were permanently closed, and the industry as a whole ended the year running at only about 50% of remaining effective capacity. Nitrogen prices at the US Gulf today, although continuing to trade below international parity, are up on average year to date compared to last year.

Though new capacity will come online in 2017, it will be well below the rate of the past two years as shown on slide 15 of our materials. Industry observers have pointed to approximately 4 million tons of net urea capacity coming online in 2017. However, approximately one-third of that is only upgrades of existing ammonia and does not represent new nitrogen production.

Post 2017 and through the foreseeable future, the rate of new capacity growth is expected to be well below the normal annual demand growth rate of roughly 2%, thereby tightening the Global S&D balance and driving sustained price recovery. Although we believe the first half of this year is shaping up nicely, uncertainty exists for the second half, particularly given the evolving nature of buyer behavior. Because of our ability to efficiently access the export market coupled with our large in-market storage capacity, we also believe we are best positioned to maximize results even if North American buyers delay purchases like they did last year.

With this backdrop, it is clear why we believe CF Industries is the best positioned company to benefit from the emerging cyclical recovery. CF is a strong company, our structural advantages, access to low-cost North American natural gas, operating in an import-dependent North America and the long-term demand growth for nitrogen are well-established and enduring.

Our operational advantages, scale, production flexibility, significant in-region storage, and export optionality set us apart from other producers. Taken together, they position CF to benefit disproportionately from the improving price environment we see before us. Now let me turn the call over to Bert who will talk about the market and our outlook in more detail, then Dennis will discuss our financial performance before I offer some closing remarks. Bert?

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Bert Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [4]

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Thanks, Tony. At the end of the third quarter, we discussed how fundamental economics would continue to pressure high-cost producers and result in higher nitrogen prices globally. Additionally, we expected North American customers to increase buying headed into 2017 after delaying purchases in 2016. Both dynamics are playing out today as we enter the spring season in the United States.

I want to start the demand side of the story. During 2016, many customers believed prices would continue to fall as additional nitrogen capacity came online. Because they did not want to take the price risk associated with buying early, many stayed on the sidelines and only purchased minimal volumes. Domestic and international suppliers both chased what the demand materialized.

This resulted in weak pricing in North America that was not only below international parity much of the year, but also well below cash costs for many high cost producers. Not surprisingly, this made it difficult for foreign producers to send product economically to North America. Indeed, imports of urea and UAN were approximately 33% lower in the second half of 2016 compared to the same period in 2015.

Demand was also lower than expected during the fall ammonia season, due to weather and farm-level economic decisions. Unfavorable weather in the fall limited the application window, as soil temperatures in many areas were too high at the start of the season and then cold temperatures and snow developed too quickly. Farm-level economic considerations, especially declining year-over-year farmer disposable income due to low corn and wheat prices, negatively impacted decisions to purchase and apply ammonia.

Additionally, future prices favored soybeans over corn for the first time since 2008. Historically, relatively favorable returns on beans have coincided with weaker fall ammonia applications, as growers deferred fertilizer and planting decisions until spring. This year was no different.

However, the demand doesn't just go away, it only gets deferred. Nitrogen is not a discretionary nutrient, and current corn prices still provide farmers the incentive to apply nitrogen at historical levels.

Because of purchasing delays and lower imports, we believe that entering the year North American customers had secured only a portion of their 2017 needs, and were behind the normal purchasing and shipment pattern. Customers are aware of the need to close this gap. We had record shipments of UAN in the fourth quarter, over 2 million tons for the first time, as customers built positions for spring after delaying purchases earlier in the year.

Because we are able to optimize our business even when North American demand is low, we are well-positioned to serve our customers so they increase their purchasing pace. With approximately 3 million tons of ammonia, UAN and urea storage owned and leased in the United States and Canada, we can choose to position product for the future sales in North America. We are doing just that.

We could also sell to our growing portfolio of global customers. During the fourth quarter, we had just one of Donaldsonville's two deepwater docks available. The second dock is being upgraded to load UAN more than two times as quickly, and ammonia three times faster than before.

Nevertheless, we loaded 16 export vessels totaling approximately 500,000 tons, a new Company quarterly record for exports. This flexibility benefits the Company throughout the year, and proves invaluable at times like now when our early application season develops due to warm weather. Because we did not have to sell in advance of unreasonably low prices, we were ready for the early ammonia movement now occurring in Texas, Kansas, Oklahoma and Missouri.

Additionally, because there are logistical constraints on the ammonia distribution system, it will be difficult for farmers to fully wait or make up for the weak fall ammonia applications season. Most likely that means farmers will move a greater portion of their needs to urea and UAN, which we are ready to supply through our distribution facilities.

As we sell into this early spring season, US Gulf urea barge prices have rebounded, ranging between $230 to $250 per short ton in the first quarter. The most important driver of these prices has been a decline in Chinese urea exports. They dropped from more than 1 million metric tons per month in the first quarter of 2016, to an average of approximately 470,000 metric tons per month in the fourth quarter.

Low global prices, rising costs for marginal producers in China, including significantly higher coal costs compared to the middle of 2016 and the removal of subsidies, and concerns over pollution and air quality drove urea operating rates down to approximately 50% during the fourth quarter and into February. At these operating rates, seasonal demand for Chinese urea is expected to exceed supply, even with reduced exports.

Indeed, we may see some tons from Chinese port inventories returning to the domestic market as well as imports from Iran. Our analysis suggests that at recent operating rates, China may not be able to satisfy local demand and will instead have to import product.

As a result, we expect Chinese manufacturers to focus on their home region, and for urea exports to total only 5 million to 6 million metric tons this year. A decline of approximately 60% from two years ago. The reduced availability of Chinese urea along with higher hydrocarbon feedstock costs globally should support prices as we move forward.

Supply and demand dynamics will adjust again later this year, as the market absorbs the increase in global urea capacity expected to come online during 2017. However, we remain confident in our ability to optimize our business as we've done this year, given the flexibility we've built into our manufacturing, distribution and logistics systems.

This will be an enduring advantage for CF. And with that, let me turn the call over to Dennis.

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Dennis Kelleher, CF Industries Holdings, Inc. - SVP & CFO [5]

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Thanks, Bert. In the fourth quarter of 2016, the Company reported an EBITDA loss of $135 million and a net loss per diluted share of $1.38. After taking into account the items detailed in our press release, our adjusted EBITDA for the fourth quarter was $133 million and our adjusted net loss per diluted share was $0.39. I will cover the two largest adjustments here.

First, we announced during the fourth quarter we completed the refinancing of the private placement notes with maturity dates of 2022, 2025 and 2027 to put in place financing more consistent with the current business structure and operating environment. The make-whole payment associated with the early refinancing of those notes was approximately $170 million. However, as a result of the refinancing, we were able to reduce the average coupon rate of the debt from 4.9% to 4.1%.

Second, during the fourth quarter of 2016, the Company recognized an impairment charge of $134 million relating to its equity method investment in Point Lisas Nitrogen Limited in Trinidad. This was due to projected longer-term challenges with gas availability, and potential price increases from the government-controlled gas supplier.

With the completion of the capacity expansion projects, you will see a number of line items in our P&L return to more normal levels. There will be no startup cost in 2017. Capitalized interest, which was $166 million in 2016, is expected to be less than $5 million in 2017, as a result interest expense will be approximately $320 million for this year.

New capital expenditures for 2017 are expected to be in the range of approximately $400 million to $450 million for sustaining and other, which is a level that continues the Company's commitment to safe, reliable and compliant operations. Actual cash expenditures will also reflect amounts accrued but not paid in 2016. At December 31, 2016, approximately $225 million was accrued related to activities that occurred in 2016.

Finally, depreciation expense in 2017 will reflect that all new capacity expansion assets will be in service for the full year. We expect total depreciation expense to rise to approximately $875 million. This will impact gross margin per ton for all the applicable segments.

With the expansion projects behind us and in improving environment ahead of us, we will continue our prudent approach to managing the balance sheet in order to be in a position to retire $800 million of debt coming due in 2018. The 2018 debt retirement will largely be funded by the federal and state tax refunds we expect to receive in the third quarter of 2017 of approximately $800 million. With that, Tony will provide some closing remarks before we open the call to Q&A.

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Tony Will, CF Industries Holdings, Inc. - President & CEO [6]

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Thanks, Dennis. Before we move to your questions, I want to add some commentary to one of the last items Dennis mentioned. The $800 million tax refund we expect later this year.

As you know, this is a one-time benefit due primarily to accelerated or bonus tax depreciation on our multi-billion-dollar investment in the United States. In 2018 and thereafter, we expect our cash tax rate to be close to the 35% statutory tax rate. So we are actively participating in the debate on tax reform.

While discussions are still in early stages and many of the details are yet to be worked out, the House Tax Reform framework looks very promising. A reduction of the corporate tax rate levels the competitive playing field with the rest of the world, and generates earnings and cash flow that drops straight to our bottom line.

Further, the Border Adjustment Tax is a concept that mirrors barriers we confront today. We face import taxes and tariffs for our products into Europe, China and other geographies, while foreign producers who sell into the US market face no such import tax or tariff. This concept would also help to level the competitive global playing field.

Further, it could also provide a benefit to our Company, given both our significant manufacturing presence in the United States and our capability to export. We believe the House framework for Tax Reform would be good for America, good for CF Industries, its employees and its shareholders.

In closing, I want to thank all of our employees who have stayed focused on executing our business during the challenging year. They have kept their eyes on what's most important, operating safely and serving our customers well.

All of us appreciate their contributions, and we are looking forward to the improving environment we see ahead. With that, operator, we will open the call to questions.

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Questions and Answers

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Operator [1]

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Thank you. Ladies and gentlemen, as a courtesy to others on the call, we ask you to limit yourself to two questions. Should you have additional questions, we ask that you re-enter the queue and we will answer additional questions as time allows.

(Operator Instructions)

Chris Parkinson, Credit Suisse.

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Chris Parkinson, Credit Suisse - Analyst [2]

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Thank you. Given your outlook for 5 million to 6 million tons of Chinese urea exports versus 8.9 million last year, how do you view the marginal cost of the new export level versus the past two years given Chinese owned internal cost curve and some the higher cost tons now being shut in? Do you think that, the FOB price, will be roughly the same or potentially higher or lower?

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Bert Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [3]

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Good morning, Chris, this is Bert. So looking at China, each year we see so many changes to their structure and their economic structure as well as the drivers of their business that we have to continue to stay on top of what's happening over there. And we have been taking a look at that.

Looking first at feedstock costs and what's going on with coal. As you know, they've restricted coal operating rates last year, and then released that to move back up to 330 days. We've seen reports today from Bloomberg where they're looking to restrict that back to the 276 days.

That one impact had a cost-driving impact on the price of coal. And so as you look at the build up to their structural costs being coal, energy, internal freight and just operating costs, we estimate that the marginal anthracite producer was in the range in 2016 of $215 to maybe $220 per ton of cost. Today that's probably $20 higher on a total structural cost basis.

But what that doesn't take into account is the fact that, again through industry reports, there were losses estimated to be as high as $9.2 billion [RMB] last year in China. And so we had prices fall as low as let's say a $180, $190 metric ton FOB China. Today, again losing all that money and the structural cost differential, the floor price has to be significantly higher than it was last year.

Coupled with OSHA freight costs of at least $10 per ton to arrive in the United States, that total cost structure is probably closer to $30. That doesn't even take into account the catastrophe that they are experiencing today with pollution issues.

We monitor different cities per day on the particulate matter that is in the air. And as compared to the United States, it's an infinitesimal calculation on percentages of what their operating. And there was a report out of Bloomberg I think yesterday, maybe the New York Times a few days ago, where they're estimate 1.1 million people are dying as an impact of pollution.

So we are going to see that the story is not just economic out of China, it structural and we think it's permanent. And going from 14 million tons of export urea, and if we're right 5 million to 6 million, if we're wrong 6 million to 7 million. It's still a big change, and we think it's a change that will be ongoing.

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Chris Parkinson, Credit Suisse - Analyst [4]

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That's great color. And just turning to ammonia, given the recent volatility in energy prices, can you broadly comment on your long-term outlook for gas prices between the Eastern European producers versus domestic, and how this factors into the merchant ammonia market? And also very quickly, if you have any -- given the change in import balances in the US, do you view the dichotomy between Black Sea and Tampa prices evolving differently over the next few years? Thank you.

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Tony Will, CF Industries Holdings, Inc. - President & CEO [5]

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Looking at -- I'm uncomfortable giving a long-term outlook because we've moved from $500 to $200-some back up to $320 today. And so you've got different cost structures driving some of that, today you've got gas costs in the $6 range in Eastern Europe. And what we're seeing at our own operation in the UK, and you can see our gas costs are below $3.

So you do have a structural cost advantage in the United States. But as we articulated about our Trinidadian issues with the lack of gas, there's a significant amount of ammonia coming out of Trinidad that we believe will be constrained going forward. And so these things are all in flux right now with where supply will be, and then the issue with Togliatti that took place late last year with the shutdown of the pipe and loading out of the Black Sea and the operation of the OPZ plant in Ukraine.

All of those factors impacted seaborne ammonia trade. I think that some of those factors will be mitigated a little bit, but that doesn't mean that long-term you can supply coming out of the Black or the Baltic at numbers this low. So I would expect you're going to see a moderating price on ammonia going forward and establishing a new normal.

The LNG coming into Europe, there's a significant amount of LNG, and that structural cost is in line with where gas is supplied today. And then you've got your Russian ruble revaluing, and so the cost structure for that gas is going to be higher also. So we think these are positives going into the longer term.

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Chris Parkinson, Credit Suisse - Analyst [6]

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Great. Thank you very much

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Operator [7]

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Vincent Andrews, Morgan Stanley.

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Vincent Andrews, Morgan Stanley - Analyst [8]

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Good morning, everyone. We've all seen the import data into the US, and it's obviously below prior year and below what's expected to be necessary for urea. But we also see that the price has continued to lag import netbacks. Why do you think that is, and is your expectation that's going to change in the coming weeks? And I'm just curious because we've seen a downtick in urea prices this week in the Gulf, so any color there would be helpful.

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Tony Will, CF Industries Holdings, Inc. - President & CEO [9]

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Yes, when I'm dreaming at night and I think of urea prices, it's always going up. But that's just not reality in life.

So we do have moderating factors, just like stock market goes up and down and people have retrenching times or repositioning times. That happens also in urea. We have seen that this week where it fell into the $230s, and so significantly below the international market.

We are trending lower year on year for imports of both UAN and urea, and that's natural. We have additional production capacity at Donaldsonville and Port Neal that's fully operating today.

And so looking at the spring, there are a lot of factors and each spring is different. Last year, we had a rise up through March and then a fall all the way through to August where the low was established. Previous years have been different and different structures.

What is looking like this year, there's an early spring. We are seeing activity today on ammonia, and that probably bodes well for early planting and earlier applications. But if the end market isn't buying, and some of those retailers and farmers have not, then the stuff that's on the water today in barges has to be cleared and a clearing price has to be established.

We think that's a temporary small blip and a retrenchment, and then we're going to see prices moderate up into March and probably through spring. But we do need less imports than previous years, and that's either going to come through price or people not purchasing and bringing it here because other markets are more attractive. Both those scenarios are in place today

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Vincent Andrews, Morgan Stanley - Analyst [10]

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If I could ask a follow up, a higher-level question, something that were debating a lot here. Which scenario would you prefer, a high global capacity utilization but a flatter cost curve, or a lower global capacity utilization but a very steep cost curve?

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Tony Will, CF Industries Holdings, Inc. - President & CEO [11]

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I think it's got to be the second one, Vincent. That is really the situation that largely existed through the big run up from 2010 through 2013 and into 2014. Which was there was ample production capacity out there, but it was a very steep curve and it was just the incremental plants that would be bid into the marketplace based on where demand settled for those years. And that's clearly our preference.

We believe that hydrocarbon costs will strengthen and freight costs will continue to come back. And the spread between our US delivered cost basis and what is going to take to get imported tons into the Gulf and up into the Midwest will provide us a very healthy return on our asset base. So we're, especially as we look forward, where based on our analysis of the new production coming up, we're going to be trending closer towards a supply-driven market -- or from a supply driven into more of a demand-driven marketplace bidding on some of those higher-cost tons.

As you get out into 2018, 2019 and 2020, because there just is not enough new steel being put in the ground to satisfy ongoing demand growth for these products. So we are very optimistic about what the longer term holds.

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Vincent Andrews, Morgan Stanley - Analyst [12]

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Okay, thanks very much. I appreciate it.

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Operator [13]

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Don Carson, Susquehanna Financial.

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Don Carson, Susquehanna Financial Group - Analyst [14]

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Thank you. Bert, a question on your outlook for the inland price premium for nitrogen products, especially as new capacity comes up there, both your own and competitors. How do you see that unfolding? And I assume that this more aggressive export shipment pattern you have now is an attempt to drain the corn belt of excess products, so if you could just describe your outlook for that inland price premium and your export activity going forward.

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Bert Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [15]

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Good morning. So when you look at the premium, as you stair step outsider for up from NOLA into the Southwest, the Midwest and the Northern plains, the premium is built on transportation costs. And so you can barge up through St. Louis or up to Minneapolis and then truck out or rail out, and we do each of those activities, and that's a cost.

And so to do that, you're going to want to be paid more for it. If you have better options available, you're going to take those different options.

The second part of your question on the exports, the exports to us are attractive because it's a timing issue. With North America consumption largely based on March, April, May, the preponderance of our exports occur in Q3 and Q4. And so we have a significant level of capacity in Donaldsonville, and as I mentioned, the ability to load it quickly, we are able to achieve fairly attractive economics.

And that, parallel with what customers were unwilling to commit to in Q3 and Q4, made exports attractive for us. If that changes, if buyer behavior changes and reverts to how it was in let's say the 2007 to 2015 period, then the North American market will be more attractive.

So we have to balance each of that with our asset base, and what to keep our asset base running at full capacity. That's why we utilize the exports. We do fully anticipate the inland premium to hold and to make imports attractive. We still will be an important market going forward, and we'll need to bid those tons in.

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Tony Will, CF Industries Holdings, Inc. - President & CEO [16]

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Don, the other thing I would point out, back to Bert's comment about when buyers step into the marketplace. Is in hindsight, I think buyers would've been much better off stepping in during the third quarter fill program that we normally offer, because they would have realized average prices well below where they are today.

And they were completely unwilling to take that inventory price risk, and so you get what you got. So I think Bert's approach here is the right one, which is if they're not buying here we're going to take it to where they are and then people in the US are going to have to bid those tons back in again in the future. So I think it sets up well in terms of our ability to export in the way that Bert's executing our strategy here.

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Don Carson, Susquehanna Financial Group - Analyst [17]

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Just to follow up on those exports, so would you anticipate a 500,000 ton quarterly run rate, or is that above normal? And how do those netbacks on exports compare to your normal NOLA netbacks?

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Bert Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [18]

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It's a developing issue. Because when we looked at the capacity coming online several years ago, we started the work on the export program, developing the customer base and traveling and looking for options -- new options. That's what we've developed in Brazil, Chile, Columbia and have grown our brace in Argentina. We also have contracts into Belgium and France, and now looking to leverage our position in the UK.

So I don't really want to put a specific number, I was just as surprised myself there was 1 million times -- over 1 million tons of UAN in 2016. But I think we're economically driven, and if the economics are there and it makes more sense for the Company -- I would not put 500,000 tons per quarter, that was just a pretty large quarter for us.

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Don Carson, Susquehanna Financial Group - Analyst [19]

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Thank you.

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Operator [20]

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PJ Juvekar, Citigroup.

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Dan Jester, Citigroup - Analyst [21]

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Good morning, guys. This is Dan Jester on for PJ. So turning to the US demand outlook, I think that you said that you think the corn acres are going to be down this year, the wheat acres are going to be down, but that overall nitrogen demand would be flattish. So is that just a delayed ammonia application from last year gets pushed into 2017, or is there something else that you think that could make up for some of that differential.

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Bert Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [22]

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Yes, actually. So we do anticipate there were 200,000 to 400,000 tons of ammonia that did not go down in the fall that will need to be pushed into the spring. So that's a total end number that just shifts to a March, April, May application. But yes, corn acres were at 89.5 million acres, and some others are little bit higher than that, so it's a decrease in corn acres.

We do say a decrease in wheat acres, stopped use ratios on wheat are exceptionally high, corn not necessarily so. When you look at the world, the world rest of the world when you take out China, is at historical averages for stocks to use ratio. So we think it's a correcting issue in China for corn, but for the rest of the world business as usual.

But how that impacts nitrogen demand is you're going to see those acres shift. And we are expecting a canola increase in Canada, as well as a sorghum increase in the United states and probably some barley. So when you look at the total acres, it's -- or I should say total consumption based on acreage, it's a de minimis amount that if it were to be a decrease. But today with corn being over $4, corn is going probably every day being an attractive option for farmers as we roll into spring -- so more to come.

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Dan Jester, Citigroup - Analyst [23]

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Thank you. And can you just talk about what's your -- the impairment of the Trinidad asset? And it looks like ammonia production in Trinidad is lower than it has been in the past, but it has stabilized. So what do you think in terms of the outlook for gas the situation in Trinidad and the ability of that country to recover some of that lost ammonia production? Thanks.

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Bert Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [24]

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I think Trinidad presents some problems out there for the government. Because it's pretty clear that the producers, gas producers, on the island are unwilling to continue to invest in their E&P activities based on the current gas contracts that have been promised to the users of gas within Point Lisas. And you've seen as those contracts have rolled off, companies trying to renegotiate new contracts, but those tend to be at higher and higher prices.

And as you look forward, the price that again this being paid doesn't warrant additional exploration and production of new gas. So in order to incent the gas production and the gas prices on the island have to rise, and with our expectation that North American gas cost is not going up, that really puts Trinidad in a pretty marginal production place on the supply curve from a cost perspective.

So it was the combination of challenges that we're having getting gas from the natural -- or from NGC Natural Gas Company which is the government controlled gas supplier. And the likelihood that gas prices will go up that made us re-evaluate our the value of that asset. And as such, we took the decision that an impairment was in order given what our expectations are for the future of Trinidad and that's reflected in our financials.

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Dan Jester, Citigroup - Analyst [25]

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Great, that's helpful. Thank you very much.

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Bert Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [26]

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Which I'll just add, Dan, by the way, I think that's a helpful development for the global S&D balance on nitrogen honestly, and it certainly is better for us. Because we have only one-half of one ammonia plant in Trinidad, and the rest of our 19 million tons of production sit elsewhere. So to the extent you take a block out of the lower cost region and move it up to the high marginal cost region, that's good for everything else that sits down at the low end.

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Operator [27]

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Steve Byrne, Bank of America.

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Steve Byrne, BofA Merrill Lynch - Analyst [28]

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Yes, thank you. Bert, if you had to estimate what fraction of the amount of nitrogen that will be consumed in the US, let's just say, through the first half, that is either sitting in retail channel inventory right now or that you have sold forward versus the amount that you will sell spot. Where would you put that split right now, and how would that compare to a year-ago level for mid February?

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Bert Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [29]

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Well, I would put it exactly where I think it is and where we want it to be, which is where we have significant tonnage still to sell into Q2 and we are preparing for that. As I said earlier, we are utilizing our inventory and our options and running the plants at full speed.

And so where exactly the total is, I can't give you a specific number. We think the inventory position is lower, and that coupled with an early spring, we look to possibly having an issue going into March of supply availability at the farm gate. So we are working to move tons into position and working with our customers, both at being the retailer, to have those into position for spring.

Again, going back to the low fall ammonia season, you still need to get those tons down. And that's -- we're seeing ammonia, as I said earlier, in Texas, Kansas and Oklahoma and Missouri going pretty full and pretty fast and that could be another 10 days. So it allows farmers to get out and plant earlier, and that probably would be in March and that region then you'll just stair step up, up through the upper Midwest. So we're pretty positive for the spring.

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Tony Will, CF Industries Holdings, Inc. - President & CEO [30]

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Bert, I think it's fair to say that we think that we're well below or behind where last year was, a combination of lower tons that went down in the fall, lower imports thus far. And the fact that the channel we believe is at a lower inventory rate suggests that there's an awful lot more buying catching up that needs to happen in the first half of the year, compared to what it's been historically at this time.

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Bert Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [31]

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I agree.

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Steve Byrne, BofA Merrill Lynch - Analyst [32]

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And just about these new plants in construction in Iran, do you have any intelligence on where they are at, whether or not they are going to be able to get gas to run those plants? And what are your expectations for supply export material out of that area?

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Bert Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [33]

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New plants seem to get announced fairly regularly, and new plants fairly regularly do not get built. So there's an issue today, and that we are receiving information on about Iran and their ability to load some of the commitments they have today. And the gas is there, clearly it is there and the ability to build a plant is there. Do they and is that an economic good decision to make in today's market, that's for them to decide.

I think what the problem is, is some of the publications that come out, or the industry publications, aren't as diligent in their analysis of what's possible and what's profitable. We've seen that from CRU on some of the estimates that have come out with plants that they have two plants in Russia coming on, both the same plant, it's the same company, but just with a different name.

So you have to really be careful siphoning through some of these, again what's reality based and what is not. I think as we go forward in time, we're going to see fewer of these projected plants being built.

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Tony Will, CF Industries Holdings, Inc. - President & CEO [34]

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Steve, one thing I would point to is, again, page 15 of our materials. There was a big [flug] of production that came on in 2016 in Iran, and those were two plants, the Stratus plant and the [Partus] plant -- Partus number 3. Those were both in excess of 1 million tons a year. Then we expect another plant coming online in 2018 that's about 1 million too, the [Wardigan] plant.

So we do expect ongoing development, but what you don't see is any kind of significant activity out in 2019 and 2020 or 2021 right now. And again if you're not engaging in the EPC contracts and beginning to put in place the plans to start building one, you're not going to have another new plant whether it's Iran or anywhere else starting up before 2021 at this point. So that's why as we look forward and the tail of new plants really falls out very quickly, we're pretty optimistic about the longer-term enduring nature of the recovery here going forward.

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Steve Byrne, BofA Merrill Lynch - Analyst [35]

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Thank you.

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Operator [36]

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Jeff Zekauskas, JPMorgan.

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Jeff Zekauskas, JPMorgan - Analyst [37]

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Thanks very much. In the quarter, there was a nice premium in your ammonia prices to NOLA prices but there really wasn't a premium in urea or UAN. Can you talk about why that might be the case?

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Bert Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [38]

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I'll focus on the urea and UAN. When we started the quarter, urea was at $180 FOB NOLA. As we rolled through the quarter, I think it reached $240 at the end, but at the absolute end. And in the middle of that we had the India tender and then the India cancellation of the tender.

So urea was a pretty rocky story during the quarter. And our average price realization reflected that we had tons sold and committed as we rolled into the quarter, and then we picked up some of that optionality as we finished the quarter. So our average I think is appropriate.

UAN, same story. The market hit a low in the probably $130 short ton NOLA, and rose through the quarter. But UAN, because we produce 22,000, 23,000 tons a day throughout our system, that's one we'd like to stay ahead of and that's why you see us utilize the export option because we can load 40,000 tons at a time. But we're at least a month or two sold on that product, so our price realization there in reflection of how low NOLA was in the absence of North American purchasing was acceptable.

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Tony Will, CF Industries Holdings, Inc. - President & CEO [39]

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Jeff, that's the point that I'll highlight again as Bert just mentioned. Which is, what you didn't see is the end market customers or the channel really taking inventory positions in the quarter, and we brought on our new UAN production which is 6,000 tons a day at Donaldsonville. So that plant is going to be generating NOLA price realization that production, especially when we export it as much as we did.

So I would expect as you start seeing the channel move in to taking inventory positions here as we're moving into the first half of the year and more of that buying is taking place in market, you'll start seeing some of that in-market premium develop. But given where that huge amount of new capacity was added at D'ville and it gives us export optionality, that product really will trade at NOLA pricing going forward.

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Jeff Zekauskas, JPMorgan - Analyst [40]

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That's clear. In your outlook, you talk about the US still needing 7 million nutrient tons of imported nitrogen. How many nutrient tons of UAN do you think the US now needs?

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Bert Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [41]

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It's a good question. We believe UAN is a wonderful product with the optionality and versatility for a farmer for many different crops. I say that because we think it's going to continue to grow in use. So when you look at the total picture, imports, our exports and production flexibility that we often talk about that we can move between urea, ammonia and UAN and ammonium nitrate in Yazoo City, I do think the US will continue to be an importing country of UAN.

That volume will move from the probably peak of over 3 million tons to probably under or right at 1 million tons going forward. And where that will come from, a lot of it today is coming from Russia, Trinidad and like that.

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Tony Will, CF Industries Holdings, Inc. - President & CEO [42]

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So if you think somewhere around 1 million to 1.5 million, you're talking something like 300,000 to 500,000 nutrient tons is in the UAN.

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Jeff Zekauskas, JPMorgan - Analyst [43]

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Okay, good. Thank you so much

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Operator [44]

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John Roberts, UBS.

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John Roberts, UBS - Analyst [45]

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Thank you, and welcome to Martin Jarosick.

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Tony Will, CF Industries Holdings, Inc. - President & CEO [46]

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Indeed, welcome, Martin, we're delighted to have you.

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Martin Jarosick, CF Industries Holdings, Inc. - IR [47]

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Thanks, John.

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John Roberts, UBS - Analyst [48]

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And since you're growing your international business through exports, let me just ask about the reports that Yara has pulled out of the deal to buy Vale's nitrogen assets. Is it safe to say that doesn't fit with your strategy, and even if it did your balance sheet really doesn't allow you that flexibility?

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Tony Will, CF Industries Holdings, Inc. - President & CEO [49]

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Yes, I won't or can't comment on what Yara is deciding to do, but we don't have a lot of interest in buying the production assets in Brazil. I think it's a very fair statement to say that it doesn't fit with our strategy.

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John Roberts, UBS - Analyst [50]

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Okay. And then you highlighted the risks to the second half of 2017, is it the risk of a narrow weather window again as the biggest risk or is it Chinese coal prices declining? Maybe you could prioritize the risks for us, because I think we all know the capacity that will be there in the second half. So what are the things that you think frames the scenarios?

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Tony Will, CF Industries Holdings, Inc. - President & CEO [51]

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I think the risk really comes in a couple of different flavors. One of which is although it's not nearly to the same extent as happened in 2015 and 2016, we do believe that 2017 represents the last year where you end up with a little bit of excess new capacity coming online versus the normal demand growth. And, as you said, we all understand the capacity situation.

The other risk that's in there is what happens with North American buyer behavior, and do they exhibit the same sitting on their hands situation in 2017 that they did in the third quarter of 2016. Or have they learned something from what happened this year, and will they get back in and actually buy at what amounts to be favorable pricing during the season.

I think it's really a question of when do you realize that value, do you get in the third quarter and the fourth quarter, or do we get it in the first quarter and second quarter of 2018? And that's why we're just a little bit uncertain in terms of we think there's some risk out there around the back half of the year.

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John Roberts, UBS - Analyst [52]

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Thank you.

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Operator [53]

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Ben Isaacson, Scotiabank.

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Oliver Rowe, Scotiabank - Analyst [54]

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This is Oliver Rowe on for Ben. Thanks for taking my question. One of your peers recently hedged a portion of their gas supply over the next few years, and I know you've been reluctant to hedge since the last program. I'm just wondering if your stance on this has softened at all, or what it would take to get you to restart hedging?

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Tony Will, CF Industries Holdings, Inc. - President & CEO [55]

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Yes, so our understanding is that -- if you're talking about Agrium, our understanding is they hedging ATCO gas which is at or below $2 per MMBtu. And look at, Medicine Hat is one of the cheapest production assets that we have because it buys it ATCO gas, and we do look at whether it's hedging basis or doing other things like that around those plants.

But we are big believers in the supply response in North America, the ability to deploy rigs and bring new supply on very quickly. So when you saw gas prices spike during the fourth quarter, we were up in the almost $4 at one point to $3.93 I think is where January settled. Today, natural gas is below $3 back at $2.91.

So as you look at that, our need to get out there and really try to take a long-term hedge position when you know your paying an embedded [vig] is not -- our appetite really isn't that high right now. Rig count is up 40% since the fourth quarter, and we feel very good about where North America sits in terms of its ability to bring on a lot of gas at a very attractive price for us.

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Operator [56]

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Does that answer your question, Ben?

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Oliver Rowe, Scotiabank - Analyst [57]

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Yes, thank you.

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Operator [58]

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Mark Connelly, CLSA.

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Mark Connelly, CLSA Limited - Analyst [59]

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Thank you. Two questions, Tony. Do you think the value of pipelines is incrementally higher or lower than it was when we needed more imports? I'm just -- obviously you have the value of flexibility, but if we need to get less product into the corn belt do you think that the value of a pipe is going down? And second do you think your UK assets can be profitable in 2017?

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Tony Will, CF Industries Holdings, Inc. - President & CEO [60]

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Our UK assets were profitable in 2016. What we look at is what is the cash generation on that business, and really it's adjusted EBITDA that we focus on in terms of the UK. And we're really happy with both what the gas cost is, what the forward looks like gas for the UK and where selling prices are for ammonium nitrate.

We've also done a really good job over there of renegotiating a bunch of the industrial contracts that we had for both ammonia and nitric acid supply that have added a lot of value to us in terms of that business versus where they were in 2015 and 2016. So we're really pleased with the performance in the UK.

You were asking initially, Mark, about the value of pipeline capacity. What I'd say is, so the inland pipeline is all ammonia, it is not UAN. So to the extent that farmers see value in terms of the discount per unit of nitrogen for applying ammonia which they have historically done, then there will be ongoing value to be able to access and move ammonia into the interior. And the pipeline is among the cheapest way to do that and the most secure way to do that.

So I think the pipeline network has ongoing significant value to the ag sector in this country, and we don't see that going away. And I know that with some of the upgrades that are going on at Borger and at Enid, there may be less utilization on the Magellan side of the pipe than there is on the New Star. But the New Star I think is pretty much full up, so we don't really see any change -- any real changes happening on the Eastern pipe.

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Bert Frost, CF Industries Holdings, Inc. - SVP of Sales, Market Development & Supply Chain [61]

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Mark, I just want to make one more point about the ammonium nitrate business. If you look at the ammonium nitrate business on an underlying basis and [look at] both stuff in the US and also in the UK, and you look at gross margin. Add back depreciation and amortization and also take out the effects of the derivatives, what you see is that the cash margin of that business is roughly around 20% for ammonium nitrate.

If you look at the big three products the same way over the past year in 2016, which obviously as we all know was a very challenging year, that cash margin sits well above 30%. I think what that points up is that sitting where we sit on the cost curve with the gas advantage that we have, even in very, very challenging years as 2016 was, that cost advantage comes through. And from a cash perspective or an economic perspective, it makes the business cash positive and very profitable.

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Mark Connelly, CLSA Limited - Analyst [62]

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That's really helpful. Thank you.

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Operator [63]

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Joel Jackson, BMO Capital Markets.

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Joel Jackson, BMO Capital Markets - Analyst [64]

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Hello, good morning. Can you give us a sense of what utilization the different Port Neal plants ran at in Q4 and in Q1? And then also generally in 2017 when you think you'll reach full capacity at Port Neal? Thanks.

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Tony Will, CF Industries Holdings, Inc. - President & CEO [65]

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The ammonia plant at Port Neal is running at 110% of nameplate right now. So I'd say we're well past full capacity at the moment. The urea plant is running about at nameplate, and it's a little like it happened at Donaldsonville because it's a sister plant to the D'ville plant. Which is, we brought it up to nameplate and then continued to step it up over the next couple of months.

And ultimately were the D'ville plant is currently operating is between about 10% and 15% above nameplate. So we expect to get the same performance out of the Port Neal urea plant here as we go through the balance of the first quarter and into early second quarter. But that plant is fully operational, and at or above nameplate.

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Joel Jackson, BMO Capital Markets - Analyst [66]

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Thanks for that. So is the strategy now -- I've seen your capital allocation the philosophy slide in your presentation. Would the strategy be here to basically sit on your big pile of cash here through the $800 million of debt maturities in May of 2018, is that -- and ride it out and see what will happen next year? Is that basically the idea?

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Tony Will, CF Industries Holdings, Inc. - President & CEO [67]

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We do have the opportunity to do a natural delevering in 2018. I'd say we've got roughly $800 million coming in from the tax refund that we expect due to bonus depreciation. We've got $800 million going out the door. So in a lot of ways -- in terms of the debt repayment.

So in a lot of ways, that repayment has been fully funded at this point. We just don't have the cash in the door yet.

So we certainly feel much better about what we see looking ahead than where we were in the third quarter and fourth quarter. But one of the things that we are focused on is maintaining investment-grade metrics over the long term, so we want to make sure that everything is in the appropriate place before we start thinking too hard about future deployment.

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Joel Jackson, BMO Capital Markets - Analyst [68]

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Thanks.

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Operator [69]

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Ladies and gentlemen, this is all the time we have for questions for today. I would like to turn the call back to Martin Jarosick for closing remarks.

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Martin Jarosick, CF Industries Holdings, Inc. - IR [70]

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That concludes our fourth quarter earnings call. If you have any follow-up questions please reach out. Thanks for everyone's time today.

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Operator [71]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, and you may all disconnect