Terra Industries Inc. Q3 2008 Earnings Call Transcript

Terra Industries Inc. (TRA)

Q3 2008 Earnings Call Transcript

October 23, 2008, 03:00 pm ET

Executives

Joe Ewing – VP, IR

Mike Bennett – President & CEO

Dan Greenwell – SVP & CFO

Analysts

Edlain Rodriguez – Goldman Sachs

Wayne Cooperman – Cobalt Capital

David Rosen – SAC

Charlie Rentschler – Wall Street Access

Steve Burn – Merrill Lynch

Tariene [ph] – Goldman Sachs

Aaron Whiteman – Appaloosa Management

Michael Christodolou – Inwood Capital

Bob Amenta – JP Morgan

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2008 Terra Industries Earnings Conference Call. My name is Kim and I'll be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator instructions).

I’d now like to turn the presentation over to your host for today's conference Mr. Joe Ewing, Vice President of Investor Relations. Please proceed, sir.

Joe Ewing

Thank you very much, Kim, and welcome to everyone for Terra's third quarter results conference call. This morning we issued a news release announcing that for the 2008 third quarter Terra achieved net income of $165 million or $1.64 per diluted share, more than triple the earnings we achieved in the 2007 third quarter.

At the end of that news release is our Safe Harbor statement, describes the limitations of forward-looking statements and any other items that are not historical facts included in the news release. Please note that those same limitations apply to any forward-looking statements we may make during this call.

With me today are Mike Bennett, Terra's President and CEO, and Dan Greenwell, Senior Vice President and CFO.

Regarding recent and upcoming Investor Relations activities, since our last earnings call we've participated in a large equity conference and road show that took us to several mid-western cities.

Coming up we have on the East Coast road show hosted by BMO and a conference hosted by Sidoti in Chicago in early November, the TD Newcrest AG Fertilizer Conference in Toronto later in November and in December, Citi Basic Materials Conference in New York, and the Merrill Lynch Small Cap One-on-One Conference in Boston.

You can get more information about these events from our Web site or by calling us. We also always welcome visitors. If anyone listening today in the interest of the coming to our Port Neal manufacturing facility and to meet their management would be very pleased to have you. Please call either Kim Mathers or me to make those arrangements.

I will now turn the call over to Mike Bennett so that he can give us his perspective on the third quarter as well as the outlook for Terra and the industry in upcoming months. Mike?

Mike Bennett

Thanks, Joe, and good afternoon everyone, joining us on the call today. Terra reported a very strong third quarter reflecting our significant forward order book which we carried in for the second quarter and added to early in the third quarter. Our manufacturing facilities operated well during the quarter.

We realized excellent contributions from our joint ventures in the U.K. and Trinidad. Most notable events in the quarter were substantial reductions in global urea and energy market prices. These didn't affect the third quarter results and won't significantly impact our fourth quarter results, but will likely influence our business as we move forward into 2009.

Regarding the fourth quarter many of you probably gathered from our published forward natural gas positions that most of our expected agricultural sales in Q4 has been on the books for some time. While we generally all like to pay more in the current market price for natural gas the market opportunities that was presented by these orders was acceptable and accommodated our customers demand for these products.

Much of our unpriced business to Q4 in the industrial segment. While price of these products sells up well thus far, we wouldn't be surprised to see prices slip on these products as quarter progresses. It remains to be seen what effect a broad economic downturn will have on demand for industrial customers products.

As we look ahead to 2009 many indicators just fundamental to grain markets will remain soft, especially feed grains, and that energy costs could be quite favorable. Domestic natural gas prices have declined substantially over the past several months, reflecting expectations that U.S. natural gas production is projected to reach 22.4 trillion cubic feet in 2009. This is the highest level in 35 years amid concerns the economic downturn will adversely affect industrial demand to natural gas.

Grain inventories remain low and world population will continue to grow. While many expect economic growth in China and India will slow most project their respective rates of economic growth to be significant nonetheless. This supports the growing world demand for protein by extension demand for feed grains.

USDA also projects significant increase in demand for corn, for ethanol in the United States during 2009. Most recent estimate is an increase of roughly 1/3 over 2008. All this tells us that increased corn plantings will be needed next spring to prevent a further decline in already tight corn inventories.

Projections indicate plantings will need to be at least in the area of 90 million acres. While this has proven difficult to predict nitrogen prices there are numerous reports this week in the Trade Press of production curtailments in a number of countries due to current price levels and allowing a buying activity.

Natural gas prices in Europe was significantly higher than gas prices here in North America and given our proximity to our markets we believe that Terra is well-positioned competitively. At some point relatively soon global buyers will need to reenter the market to secure necessary supplies in 2009 planning season.

This resumption of purchases coupled with the impact of production curtailments should stabilize nitrogen market values, and give us a clear picture where prices may hit in the first half of 2009. While this is a period of virtually unprecedented market turmoil we remain very positive about agriculture in the financial and strategic strength of Terra in this environment.

Finally, I like to comment that we remain very pleased with the growth and performance by our environmental technologies business. Revenues there up 67% compared to a year ago, year-to-date, and we are extremely excited about our potential in the emerging diesel emissions fluid market.

With that I am going to turn the call over to Dan Greenwell and he can give you some insight into our financial conditions. Dan?

Dan Greenwell

Thank you, Mike and good afternoon to everyone. Mike has highlighted the strong third quarter results and the current environment for nitrogen products. I'd like to first round out our discussion of the top line with a few comments about the product selling prices and natural gas costs. Do not follow the traditional comments about our operating results and the joint venture operations in Trinidad and the United Kingdom and our restart of the Donaldsonville ammonia plant.

We will also provide discussion on our effective tax rate and further tax planning activities. I'll then discuss our stock buyback program and Terra's liquidity including anticipated cash from the United Kingdom operations.

Net income available to common shareholders was $165 million or $1.64 per diluted share compared to last year's $53 million or $0.51 per share. Earnings per share are calculated based on the converted method relating to preferred shares. Basic earnings per share include the effect of the $5.2 million preferred share inducement payments during the quarter which was a $0.05 per share earnings reduction.

Actual shares outstanding as of today are 102.1 million shares plus we have non-vested restricted shares of about 600,000. For planning going forward, 103 million shares is an approximate share count that should be utilized.

Revenues increased by $210 million in the third quarter of 2008 as compared to last year. Keep in mind the revenues in the third quarter in 2007 included our United Kingdom operations which generated approximately $108 million of third quarter revenues with an operating income of $28 million. Excluding the impact of prior years United Kingdom sales third quarter 2008 North American revenues increased by $318 million, approximately $297 million of this increase resulted from price improvements.

You may have noted that we have nominal income associated with discontinued operations. The discontinued operations consist of our Beaumont, Texas Methanol plant. During the third quarter of last year discontinued operations was is primarily related to the asset impairment charge of $39 million net of $12 million of revenue realized under the profit contribution agreement with MatheMax.

The Beaumont facility is under contract to be sold with an expected closing to occur on or before January 1^st 2009. We are carrying the Beaumont assets on our books at estimated realizable value upon sale or approximately $45 million.

Natural Gas cost increased by approximately $2.82 per MMBtu or $77 million during the third quarter of 2008 as compared to the prior year. We continued to purchase gas as we take orders for products that will ship in the future.

On our balance sheet at the end of September 2008 we separately identified the margin deposit assets associated with our natural gas hedging activities which were an aggregate $132 million. Additionally, we separately identify the hedge liability of $219 million. Hedge assets of $31 million are included in other current assets.

The year-over-year decrease to third quarter selling, general and administrative expenses total $3.6 million. The third quarter of 2007 included approximately $2.8 million of cost associated with the United Kingdom when it was consolidated in our results. Year-to-date selling, general and administrative expenses declined an $8.9 million in 2008 as compared to 2007. Approximately, $7.8 million this decline was attributed to the United Kingdom operations in 2007.

We recognize approximately $10.5 million of net benefit during the third quarter of 2008. This stems from incentive compensation for a general partnership interest in Terra Nitrogen Limited partnership. The year-to-date net general partner benefit due to the high splits is approximately $26.1 million.

Our United Kingdom joint venture operations performed very well during the quarter. Sales prices and volume increases in the UK more than offset higher gas costs which continued to be volatile especially as we move into the winter months.

As a result of the profitability of the joint venture we anticipate receiving 30 million pounds of cash in the fourth quarter of 2008. This amount will be treated as a balancing payment as specified in the original joint venture agreement and will reduce Terra's equity investment in the joint venture.

Included at the charge in the third quarter operating income was $7.5 million or $0.05 a share after tax related to the start of Donaldsville. This cost is primarily attributed to additional natural gas utilized during the period of intermittent operations in August and early September. The plant is operating at expected rates since late September.

We also successfully completed plant turnaround activities at our Port Neal, Iowa facility in August 2008. In 2009, we will undergo turnarounds at our Yazoo City, Woodward, and one half of the Verdigris plant. We will also have a turnaround on the Courtright urea plant in 2009.

Terra's effective tax rate after minority interest in UK equity earnings was 26.9% for the third quarter. Terra was a Federal and State cash taxpayer in the third quarter of 2008. We have developed multiple tax strategies to lower the effective tax rate and the amount of cash taxes paid.

During the quarter we recognized approximately $13 million of state tax credits. We anticipate completing international tax planning activities and other federal and state planning strategies before the end of 2008 and estimating a 2008 effective annual rate between 30% and 32%.

During the third quarter we bought back approximately 2.4 million shares of our common stock at an average price of approximately $41.69 per share. Aggregate cost for the repurchases during the quarter was $100 million. Our current buyback program extends through June 2010 and we currently have 10.3 million shares available to purchase under the authorization. We anticipate making further buybacks under the repurchase program.

During the third quarter we converted approximately 118,000 of the preferred shares of the common stock. As part of the conversion we paid approximately $5.2 million to preferred holders to induce them to convert. As we noted earlier, the inducement payments are included in the basic EPS calculations. We currently have 1,600 preferred shares outstanding.

Our cash balances which included $195 million in customer prepayments totaled $681 million. This cash is invested in high quality money funds and commercial paper. We also received $14.5 million from our Trinidad and other North American joint venture operations during the third quarter. Year-to-date cash from the North American equity investments totaled $55.4 million.

As noted earlier we were required to deposit funds with our natural gas hedge counterparties. At September 30^th 2008 this amount was $132 million. We expect this margin deposit requirement to decline as open derivative positions to settle each month. We spent approximately $34 million for normal maintenance capital and turnaround during the third quarter 2008. We estimate our 2008 sustaining capital expenditures and turnaround cost will total between $60 million and $65 million.

In addition, we expect expenditures of approximately $40 million to $50 million related to long lead items for the Woodward UAN expansion project. The 2008 total annual capital expenditures and turnaround cost will approximate between $100 million to $115 million. Terra declared a $0.10 per common share dividend payable on December 12, 2008 to shareholders of record as of November 24, 2008.

At this time I would like to turn the call back to Mike Bennett.

Mike Bennett

Alright, thank you, Dan. That concludes our prepared remarks this afternoon. At this time I'd like to turn the call back over to Kim and she will give you instructions for Q&A session. Kim?

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from the line of Edlain Rodriguez of Goldman Sachs. Please proceed.

Edlain Rodriguez -- Goldman Sachs

Thank you. Good afternoon, guys.

Mike Bennett

Good afternoon, Edlain.

Edlain Rodriguez -- Goldman Sachs

My question for you. What do you believe is going on into global nitrogen market right now in terms of pricing? As one of the few buyers in the market right now is India putting -- having an exaggerated pressure to the market, or is it -- are we getting a distorted view of the market right now just because we don't have enough buyers out there?

Mike Bennett

As you know, it's -- I guess everyone's got a theory or an opinion, Edlain. So I will be happy to give you mine since you asked for it. And that is that if you really go back and look at purchasing patterns including purchasing patterns here domestically it appears to us that, that much of the purchasing or at least some for second half of '08 into '09 is actually concluded as early as Q2 of 2008. And so for example, we continue to see some fairly decent export volumes of urea coming into United States in August, quite frankly, there was very little in the way of actual buying occurring at that time. And so I think to some degree I think it really remains to be seen whether this is and if so, how much of an oversupply situation it is as much as a real timing issue where you really ended up with the Q3 with not that many -- in my opinion natural buyers needing to come back into the marketplace at a time when there is still a number of export plants especially in the Middle East and Black Sea regions. That continue to produce urea and have begun to build inventory. With the Indians being really the only natural buyer in the market at this point in time I think it gave them a great opportunity to I think skillfully execute their buying strategies and I think that's been successful and certainly reducing market values. But our view is that when you look at things in the balance until now in the year that there is still a fair amount of product that needs to be positioned whether it's India, whether it's some additional supplies to south America or north America and frankly, at some point we believe that those buyers will need to come to the market. I don't know what effect obviously it will have on prices. And ultimately where they will hit. But as I said my remarks, I think that the combination of this delay and the impact its having on the production rates in some countries with the number of production facilities ultimately should serve to create a bottom and kind of a stabilizing level in this marketplace. When that's going to happen is anybody's guess, but if you look back into previous buying patterns one could expect that to occur some time yet here in the fourth quarter.

Edlain Rodriguez -- Goldman Sachs

Okay. Another question. When you look at the current corn prices right now do you believe they provide enough incentive for farmers to plant corn or do we might not see that acreage getting to that 90 million next year?

Mike Bennett

Well, the way I look at it is that certainly today I think that corn farmers, like a lot of people, lot of different markets are certainly getting somewhat confusing signals. Certainly, as we look at farmers' inputs, again, it remains to be seen on average what input costs will be for corn as we go into 2009. Certainly, fertilizer costs will be higher than they were a year ago, but it appears from here that fuel costs will be lower. And I think it remains to be seen what corn prices really will be. I think a lot of people are tending to look at the current corn price which is, quite frankly, really before harvest and not really focusing on the new crop futures in '09, and also aren't really thinking about the fact that once this crop is off and buyers start making decisions about next year I think that there will still be some acreage competition, if you will, between corn and soybeans. And certainly, corn prices on a relative basis compared to soybeans will to have improve in that environment to attract the additional acres. But at this point, we still don't see why that certainly couldn't be the case if it won't be.

Operator

Your next question comes from the line of Wayne Cooperman of Cobalt Capital. Please proceed.

Wayne Cooperman -- Cobalt Capital

Hey guys. So it's kind of a facetious question but I mean, how bad can things get next year, and what are you -- are you guys just going to take the cash and just kind of buyback stocks so you're not sitting on a net cash position?

Mike Bennett

Well, one nice thing about our position today is we don't need to borrow any money; and certainly, we believe we still make products that people need to buy. And so from my perspective -- again, I would go back to some of the points made earlier which are, number one, while certainly we may see nitrogen prices on average lower than a lot of people would have anticipated three months ago. We're also seeing some fairly attractive energy to feedstock costs for our facilities as we look forward as well. And so the term "bad" is all relative. But I think from a relative standpoint that domestic producers are in a very strong position competitively. I do think that it remains to be seen whether this market is really oversupplied. I know we've seen quite a timing shift, but I'm not convinced it's quite as dramatic as the price falls would indicate. And so, from our standpoint, as far as cash goes, we intend to continue to execute our plan accordingly, and that is to first of all, make sure we maintain adequate liquidity. But second to try to put some of that cash to work for shareholders.

Wayne Cooperman -- Cobalt Capital

What's -- do you guys have a -- do you need to have cash on the balance sheet when you have debt? Just kind of curious what your goal is on the balance sheet.

Mike Bennett

Well, we've got $300 million long term debt and that's a relatively low cost source of capital for us, and so we certainly would intend to maintain that. We think right now it's certainly a good thing not to be in a position to have to go borrow money, and there's really no reason to want to rush into our revolver. But we still as you noticed have significant liquidity, and that presents opportunity in our view to reinvest in existing facilities to if the numbers are right, buy back stock and reinvest -- invest in assets that will add a good value for shareholders, or look at other growth opportunities that may come along that we think will create long-term earnings per share growth.

Wayne Cooperman -- Cobalt Capital

Why not just buy back $500 million of stock tomorrow or pay it all out as special dividend?

Mike Bennett

If anything is possible. The only thing I would caution is that first of all, that buying back stock does create EPS growth, which we like. It doesn't create future cash flow growth. And so certainly we think in the absence of other similarly valued opportunities that create cash flow growth, that share buy backs do represent good value to our shareholders at the right levels.

Wayne Cooperman -- Cobalt Capital

Well, you guys -- what do you think about your stock price? I mean, your assets are trading at probably less than a fifth of the replacement cost. That make any sense?

Mike Bennett

Well, I guess I'd ask about these markets in generally they exactly what makes sense. That's -- that's kind of a hard one to answer, but I think in the long run that once folks get a better sense of future cash flows for businesses like this, and essentially how quickly those cash flows can basically, if you want, return the equity investment in the business, that share prices will take care of themselves.

Wayne Cooperman -- Cobalt Capital

Hope so. Thanks.

Operator

Your next question comes from the line of David Rosen of SAC. Please proceed.

David Rosen -- SAC

Hey, guys.

Mike Bennett

Hey, David.

David Rosen -- SAC

You guys in your disclosure on your nat gas purchases, I think it was 36% -- in that paragraph you talked about that being for Q4 and Q1. So if you extrapolate that that would imply about 72% of your next two quarters you have actually already locked in pricing. Can you give us some order of magnitude what percentage of that have you looked in for Q4? Are you 80%? 85%? And then I guess we can figure out what that would look like in Q1.

Mike Bennett

Yes, we -- David, we don't break those out because ultimately we just get bogged down in numbers, numbers and more numbers. But what I can tell you is that almost always it's the case that the bulk of our forward positions are going to be heavily weighted toward the nearby quarter. And in this case I wouldn't expect it to be any different, and you should assume that the whole idea here is to hedge against shipments and to make those shipments on a priority basis. So one way to look at 36% of nat gas is, it's roughly about, four months worth of production, and obviously it's going to be a priority for us to produce and ship that production as soon as we can.

David Rosen -- SAC

And I presume most -- I mean, that's all clearly been done before September 30th. That should be reflective of spot prices as of the Q3, correct?

Mike Bennett

Well, again, we -- I think we indicated in my remarks that we carried in a fair amount of this book in from Q2, and we also accumulated some of this order book in early Q3. And as Edlain noted in his question, the month of August for the most part and the month of September pretty slow sales months for just about everybody around the globe.

David Rosen -- SAC

Okay. Final question. And this relates to the earlier comment about your cash. I mean, it doesn't take a rocket scientist to actually lay out what your cash will be in the next couple quarters based on the fact that you have, call it over 70% of your business already booked. And it's clear you're getting -- you mentioned before you're going to get that make whole payment from UK JV, you are going to get back the cash from the margin, which is about what $130 million. I mean, the order of magnitude of the cash inflows are fairly material. And I know you were kind of hesitant to talk about making incremental investments in your stock, but, it does seem sort of odd to us, and it seems almost opportunistic for you, looking at the fact that you could actually buy back your assets at call 20% of replacement cost that on the longer term, as you mentioned, that is a unbelievable return on invested capital. And what you guys have the benefit of, which the markets don't is you have the benefit of this as being permanent capital, where some investment funds don't. So you could take advantage of the foreselling perspectively in some of those funds.

Mike Bennett

I appreciate your insight. Kind of quiet. Kim, do we have any additional questions?

Operator

Yes, sir. Your next question comes from the line of Charlie Rentschler of Wall Street Access. Please proceed.

Charlie Rentschler -- Wall Street Access

Yes, you mentioned four turnarounds are planned for '09. And I wondered if on top of that there were any upgrades on cap and what your total capital expenditure -- I realize it's -- we're over two months away from '09, but what your ballpark thoughts would be for CapEx for '09 versus '08, please.

Dan Greenwell

Right, Charlie. We did mention that the Yazoo city plant, the Woodward plant and as you know, Woodward has two ammonia trains, one of them we overhauled -- sorry, sorry, Verdigris has multiple ammonia trains, and we're on this turnaround for one of those for next year. And then the Courtright, Ontario urea plant is do for a turnaround in '09. So we do have a heavy turnaround activity. This past year, the only one that we had outside of Donaldsonville was Port Neal. So we just finished that one.

Charlie Rentschler -- Wall Street Access

But I was wondering along the lines of the Woodward UAN expansion, whether you are going to do something like that elsewhere --

Dan Greenwell

Well, we're still evaluating opportunities like that, so I don't think we're at a point right now where we have anything to announce, but we continue to look and see if upgrading makes sense at facilities where we have merchant ammonia capacity. We'll look at that. But when we take -- and this is a very rough estimate for '09 but I would say anywhere from $130 million to $70 million would be CapEx, including maintenance turnaround capital, plus the UAN expansion of Woodward next year.

Charlie Rentschler -- Wall Street Access

And that would compare with what this year?

Dan Greenwell

We estimate between $100 million and $115 million this year.

Charlie Rentschler -- Wall Street Access

Okay, and Mike, you mentioned the environmental technology business. Is that enough to move the needle yet? Are we talking -- can you give us some kind of sensitivity of what the sales are or how big a deal that is?

Mike Bennett

Sure. Well, today it's balancing the needle a little bit, Charlie. This year we estimate, at least from a volume perspective, it will be about -- pretty close to 5% of our business as a company, which isn't bad considering four years ago or so it was zero -- .

Charlie Rentschler -- Wall Street Access

That doesn't include any of the SCR fluid you were talking about.

Mike Bennett

No, that business is predominantly geared to this 2010 launch of the Clean Air Act requirements for diesel emissions. We'll see some material begin to go into the pipeline for that next year, Charlie, but the first -- I would say significant volume effect won't be until 2010.

Charlie Rentschler -- Wall Street Access

Okay. But you see that business rising to over 10% of revenues in the next couple or three years?

Mike Bennett

Actually, we believe that as we go forward, if we stretch that time horizon, Charlie, out to about 2014, 2015, which is more on the order of about six years, that we think it could comprise anywhere from 15% to 20% of our total business.

Charlie Rentschler -- Wall Street Access

Thank you very much.

Operator

Your next question comes from the line of Steve Burn of Merrill Lynch. Please proceed.

Steve Burn -- Merrill Lynch

Mike, out of your volumes that you have already booked for the fourth quarter, what portion of them would you say are contingent on product actually being applied this Fall? In other words, what if your -- if growers either were cut short because of an early winter or they held back because of uncertainty about what crops they were going to plant next year, or they thought prices were going to come down, or whatever? If they reduce applications this fall, how much of your fourth quarter volumes are at risk to that scenario?

Mike Bennett

Well, there's kind of two facets to the question there, Steve. First of all, the bulk of our material that's booked at this point in time is primarily UAN, from a nitrogen content standpoint, and that product basically isn't going to be applied until next spring. So that will continue to move into customers storage. When we look at ammonia, good share of the ammonia that has been sold for Fall is prepaid, and I think for the most part, our customers have commitments from growers for that material. So from the standpoint of the commitment, certainly, if we see a slow ammonia Fall, some of that product volume will probably be carried over until spring. But, on the other hand, every year folks kind of predict either a slow or a big ammonia Fall, depending upon what the weather is doing today, but at the end of the day the volume has been remarkably consistent most years, and even though we've got kind of a late corn crop coming off, our guess is we'll still hopefully see some pretty decent activity on ammonia this Fall.

Steve Burn -- Merrill Lynch

Okay. And then how would you characterize the interest from your distributor customers in the last few weeks? Are they still looking for -- to book volumes with you, or have you seen a slowdown in their orders?

Mike Bennett

I would say from our perspective, Steve, actually even beyond that, we've seen people sitting on their hands for quite a while, mainly because a fair amount of UAN was positioned early. A lot of the folks that took positions on Fall ammonia -- not only our customers, but everyone, I think, took them early, and certainly once prices start to slip a bit, like they certainly have globally on urea, and certainly make those indications in some other products, that sends buyers to the sidelines until they see things settling out and starting to move back up. So there hasn't been a great deal of activity, I would guess, in most markets globally. But again, at some point in time here, we've got a limited amount of time to position product and have it ready to go for application next spring.

Steve Burn -- Merrill Lynch

Would you see that rebound in demand being January, or how would you guess at that date?

Mike Bennett

Well, I guess -- my thinking Steve, which always be off, naturally, has been many times, is that once the corn crop really starts coming off and frankly, with the rain we've had now, we're probably, good 10 days away from seeing a lot of corn coming in. But as that crop starts coming off and growers finish up corn harvest and start to take some cash into dealers, basically to prepay expenses on this crop here, I think that activity will spur some additional interest in positioning really all products. So from a timing standpoint right now, I'm thinking probably more like that period of mid-November to mid-January will be a period where we'll probably see, more of that interest resuming.

Steve Burn -- Merrill Lynch

Thank you.

Operator

Your next question comes from the line of Kristen McDuffy of Goldman Sachs. Please proceed.

Tariene -- Goldman Sachs

Hi, this is actually Tariene [ph] for Kristen. I was just wondering if you could clarify what cash taxes and cash interest were for the quarter.

Mike Bennett

I'm sorry?

Tariene -- Goldman Sachs

Cash taxes and cash interest for the quarter?

Dan Greenwell

Cash taxes for the quarter, if you look at the cash flow statement you should be able to see that as a supplement -- well, we don't have it on supplement. We'll be releasing our Q tomorrow, for the most part, and cash taxes for the quarter were -- well, for the nine months were $197 million. I don't have the quarter in front of me right now, but for the quarter -- but for the nine months year-to-date was $197 million, and interest paid for the nine months was $24 million.

Tariene -- Goldman Sachs

Okay, thank you very much.

Operator

Your next question comes from the line of Aaron Whiteman of Appaloosa Management. Please proceed.

Aaron Whiteman -- Appaloosa Management

Hi guys, congrats on a good quarter.

Mike Bennett

Thank you.

Aaron Whiteman -- Appaloosa Management

I have a couple questions. Starting off, it appears that your stock price seems to think that -- I guess partially trying to will reduce its export terrace. Do you see anything to think that right now?

Mike Bennett

All we've -- we've also stated before that we're a long way from experts on what China will do, but certainly what we've read in the trade press lately is that the Chinese have kept the price of urea internally at relatively low levels, 1800 RMB, whatever that calculates into U.S. dollars. And certainly, with lower market values globally on urea, certainly a price that's stayed at levels that folks have quoted out there today. My guess is that you wouldn't see a whole lot of stuff just rushing out of there anyway at these prices. But frankly, I think that will be a case where China ultimately will look at the potential for loss of urea to the outside market and want to make sure that they have adequate inventory for their production needs next Spring. My guess is that if urea prices rebound considerably, that would probably make a stronger case for them retaining a higher level of tariff, and if global markets ultimately remain fairly soft, because there probably wouldn't be as great a financial incentive for that product to move outside China.

Aaron Whiteman -- Appaloosa Management

Okay. Looking forward, I guess with delays in purchases near-term, do you see a greater likelihood that, I guess, U.S. farmers will be caught short, particularly buying from international buyers such that you'll be better positioned?

Mike Bennett

Well, I just think it's much too early to tell. I think we always have a tendency to want to project the future based on a snapshot of recent events, and rarely is that a great way to try to predict what's going to happen over the course of a year. Certainly, we've seen big changes in a very short period of time. At some point, obviously, these changes are going to stabilize. And so from my perspective, I think much of this depends on when ultimately buyers come back to the market. But I do believe the longer that situation is delayed, the more challenging it will be to position inventory. And certainly, if we get out much past -- a long ways past the first of the year, that will be a huge challenge given the fact that we've already got fairly heavily utilized infrastructure here, especially from import perspective.

Aaron Whiteman -- Appaloosa Management

Do you see nitrogen as being one of the absolute last things that a farmer will cut, particularly, in terms of its dramatic cut of yields?

Mike Bennett

Well, first of all, obviously, it depends on the crop. But I certainly think where you are talking about corn farmers, the answer is yes, because, U.S. farmers, for example, do a great job of optimizing their application of inputs to get kind of an optimal yield, given the cost of the inputs; and if anything, I guess my view is that we'd be more likely to see a shift in acreage geographically from more marginal producing areas to the stronger producing areas in the midwest on corn than we would some type of unilateral rate cuts.

Aaron Whiteman -- Appaloosa Management

How much stock have you repurchased so far this quarter (inaudible)?

Mike Bennett

Well, we -- first of all -- you mean in the fourth quarter?

Aaron Whiteman -- Appaloosa Management

Yes.

Mike Bennett

Well, we'll disclose that to you in January when we disclose our fourth quarter results.

Aaron Whiteman -- Appaloosa Management

Okay. One last question. Even if I run current prices, it still appears to me that you would be earning well north of $10, maybe $12, $13, or north dollars of EPS, which just seems totally not discounted in your stock price. Am I totally off the ball here, or shouldn't you just be dramatically accelerating your share buyback right now?

Mike Bennett

Well, we've already had some advice on the share buyback which we appreciate. I think when you look at the snapshots, first of all, certainly snapshot prices today indicate very strong prices for anhydrous ammonia. Some folks are predicting that Gulf Coast price could very well slip over the course of a quarter, and it remains to be seen how that goes. Obviously, we're not big urea sellers, and so the direct impact of urea prices is less severe. But, yes, say broadly right now it's a little bit of a mixed bag. We've -- compared to, for example, just looking at values compared to, let's say, roughly July when we made this call, we've seen some fairly big drops, obviously, in the value of urea. We've seen prices quoted a little lower for UAN, and actually seen at today's snapshot a hire price of Gulf ammonia. So I think today's snapshot creates a one picture, but it probably would be wise to wait a few months just to see how everything settles out, whether it's higher prices for urea or lower prices for ammonia or other products until we truly get a sense of how that will track.

Aaron Whiteman -- Appaloosa Management

Okay.

Operator

Your next question comes from the line of Michael Christodolou of Inwood Capital. Please proceed.

Michael Christodolou -- Inwood Capital

Hi, gentlemen. I've got several questions that I think I know the answer too, but I think it would be helpful to just kind of get a reminder on some of these answers. So on your prepaid volumes, would you recap for us your revenue recognition policy? Is it upon shipment to the dealer?

Mike Bennett

Yes, we don't recognize -- a sale isn't made until the product is shipped and been invoiced, Mike, and so prepayments or deposits, those orders stay on the books, but the revenue won't be recognized until those shipped.

Michael Christodolou -- Inwood Capital

So there's nothing contingent upon application by the grower?

Mike Bennett

No.

Michael Christodolou -- Inwood Capital

Okay. And any other counterparty risks that you know of just besides the fact that maybe the dealer wouldn't come through but presumably he's already gotten prepays from his growers as well, correct?

Mike Bennett

Well, I think it's -- I think that's probably a mixed bag depending on the customer. Certainly, some always use their either internal funding or credit lines to position product. This year, I believe that some were engaged in some earlier prepay activity at the grower level when there was some -- actually, some new crop corn being hedged at better prices. So I think it's mixed bag there, Mike, but broadly speaking, our sense of things is that, especially with grain prices coming down to those customers that have grain operations that have cash tied up in hedging there that things seem at least relatively stable as near as we can tell.

Michael Christodolou -- Inwood Capital

Got it. I mean, I've heard the same thing, and I just want to clarify what you just said. I mean, some growers actually did sell some of their corn, right at $5 and $6 and $7, and so they've locked in something a lot higher than the current spot price, and so it would seem like they would have then gone back to their farm input dealer, to say, let me lock in for '09.

Mike Bennett

Yes, there were some programs starting as early as February of '08 that were engaged in that activity. The problem is we really can't quantify to you what the intensity of that activity may have been.

Michael Christodolou -- Inwood Capital

I understand. How about the balance sheet of the counterparty for your gas delivery here now that you had to post capital?

Dan Greenwell

No, those are credit worthy counterparties, and we don't anticipate any issues with their credit worthiness.

Michael Christodolou -- Inwood Capital

Are they actually gas E&P guys, or is it --

Dan Greenwell

No, these are larger scale institutions. I mean, the good news bad news is, is we owe them more than they owe us on the derivative position. So we actually owe them more.

Michael Christodolou -- Inwood Capital

Very good. And on the prepaid volumes that you will ship here in the fourth quarter of '08, first quarter of '09, is there storage available at the customer site to your knowledge? And if not, can you remind us about your -- the little profit center that you run from time-to-time in terms of charging dealers for storage?

Mike Bennett

Yes, well, first of all, Mike, on the UAN, there clearly is enough storage in the country, and space for that material isn't a concern. Certainly, on ammonia it's difficult for customers to store very significant quantities of that. It's expensive. And so certainly if that material is not able to be pulled after a certain date, due to a variety of reasons, then typically, there are storage penalties incurred on that material.

Michael Christodolou -- Inwood Capital

Okay. Two other questions. I'm looking at the Henry Hub gas trip here, $6.40 to $7. Can you remind us what the mid-continent differential is that you've tended to be recognizing here?

Mike Bennett

Well, today, it's pretty wide. We've seen recently mid-continent gas trading roughly $3 below the Hub. Much of this year though that differential, Mike, has been more perhaps in the range of $1.50 in MMBtu discount to the Hub. And if you look at forwards, going out into like the first quarter of next year, those forwards on that basis differential are more typical of what we've experienced in the past. So right now with gas storage filling up and still relatively mild weather and good production levels of gas, it's created a little more pressure in the mid-continent short-term.

Michael Christodolou -- Inwood Capital

And so my last question is, given that pressure, given your balance sheet, and given that you've got tank storage at Verdigris and Port Neal and some of the other facilities, what's your -- you are not just building to orders, right? So what's your temptation to take some real cheap gas here and build a little bit of product, because you are going to need to if you have any kind of demand as you say, starting here in the January to March time frame?

Mike Bennett

Well, in reality, we will need to continue to run pretty close to capacity to meet the commitments we have in place in the near-term, Mike. So obviously those forward views will tend to be taken more with forward gas derivatives as we have -- as we judge that to be a good move and have room under our risk management plan to do so.

Michael Christodolou -- Inwood Capital

Got it. Very good. Well, keep up the great work. Thanks for the clarifications.

Mike Bennett

Thanks, Mike.

Operator

Your next question comes from the line of Bob Amenta of JP Morgan. Please proceed.

Bob Amenta -- JP Morgan

Thank you. Hi, guys.

Mike Bennett

Hi, Bob.

Bob Amenta -- JP Morgan

I apologize I missed the very first part of the call but another caller I think addressed my question. Two questions. The JV return of cash, I didn't, I missed, you must have said something. Is there a certain amount of money you said is coming back from that?

Dan Greenwell

We anticipate approximately 30 million pounds coming from the UK in the fourth quarter.

Bob Amenta -- JP Morgan

Okay. And then the hedge deposit, I kind of circle that on the balance sheet. The $132 million, and then on the liability side, the $218 million, did you say that -- is this $130 million coming back as cash, or how will that unfold as we go through the next --

Mike Bennett

No, I mean, what we have is, we have $219 million showing up as a liability. As I mentioned in the call in the comments, there's roughly $31 million in assets. You oblige to record the losses as liabilities and the gains as assets; so our net position is roughly $188 million as we mentioned in the press release. Against that $188 million we have $132 million of deposits placed against that.

Bob Amenta -- JP Morgan

Okay, so it -- I apologize I'm not a hedge expert, although I think I'm going to need to be with some of these companies taking some big hits, but I think if the next six months -- this relates to your hedges that are primarily fourth quarter and first quarter. So if we get fast forward to the end of the first quarter, and gas were just to stay where it is now, and would money be coming back to you, how should I view from a cash standpoint what will be happening?

Mike Bennett

Well, I mean, how it works, basically, Bob, as the hedges roll off monthly, that cash, whatever that hedged difference is, in this case, if we're under water, it goes to the counterparty. We turnaround and buy the natural gas from the gas supplier at the current index price. So as an example, if we had a $10 gas hedge, and we could buy -- we would be paying the counterparty $10, some of which is secured with that cash that he would keep, then we would buy $7 gas from the physical supplier. And so the cash will come back to us in the form of margin or basically gross profit generated from the sales that are consummated through the use of that gas producing product.

Bob Amenta -- JP Morgan

Okay, okay. And then cash tax rate for next year? Just trying to, just for modeling a ballpark, is it 35?

Dan Greenwell

I would expect somewhere around -- between 30% and 32% cash taxes -- maybe down to 29% in fact.

Bob Amenta -- JP Morgan

Okay, and then lastly -- and hopefully this isn't too complicated. I don't think it is. But I was trying -- I recall this is going back years ago, and talking on some calls when things weren't going quite so well. In terms of trying to model production cost and stuff, I recall a number of 33 MMBtus to 35 MMBtus per ton of ammonia, is that a ballpark that most plants kind of need to process?

Mike Bennett

I think a ballpark is somewhere just around 34 MMBtus per ton of ammonia, Bob, yes.

Bob Amenta -- JP Morgan

Okay, so if I just took 34, and just for simplicity used $7 gas, that's $240 roughly. There used -- I recall again this number is probably higher now -- but then tacking on a $20 per ton or $30 per ton of other cash costs, various things. Is there a tack on number now that something different than that that one would add to that 240, the gas cost?

Mike Bennett

I would guess somewhere in the low 30s ought to pretty well catch it, Bob.

Bob Amenta -- JP Morgan

Okay, alright. And then what about that same concept of -- but if we were talking about -- I guess primarily you don't do much urea, but UAN or ammonium nitrate. What -- is there some different math, or either more gas or an incremental other things, products you have to add to that that I would add on to or subtract from to get to kind of the --

Mike Bennett

Then all you do there, Bob, is take the ammonia numbers you got, and multiply that by 0.41, let's say, and then add maybe $20 to $25 cash cost on top of that.

Bob Amenta -- JP Morgan

Okay. And then, I had seen someone on the equity side had put out a piece that's tracking prices and talks about nitrogen corn belt ammonia price premium. And it looks like this is obviously moving rather rapidly nowadays, but it looks like it was maybe in the $150 range. Does that seem reasonable -- or I guess we have your average price, but what would -- is the relevant price for you kind of as we sit here today, or most recent numbers you might have for what your UAN and your ammonia might be selling for if you were selling it today or yesterday at current prices?

Mike Bennett

Well, again, about all we can do is refer you to the reference publications, like Green Markets or Fertilizer Markets something of that nature and I can't even tell you exactly what the last posting was, like on Midwest Ammonia. I thought it was in that ballpark of $1,000 a ton. It could be a range above and below that. Currently, that would have a fairly low spread relative to, I think most recent Gulf Coast ammonia postings of $850 or so; but if you go back -- even back to July, you'll see that the Midwest Ammonia price was still up there in the range of probably $1,000, but the Gulf Coast at that point in time was about $500 or a little more. So that spread will move quite a bit, with the Gulf far more volatile, because that's really a trading vessel market versus what I would call a fixed asset market in the corn belt.

Bob Amenta -- JP Morgan

And would UAN have a premium as well in as ammonia does versus -- ?

Mike Bennett

Well, it does have a premium, but that will -- it will just vary in a different fashion, mainly because it is a little bit easier to transport than ammonia, so I don't know that you'd see a knee jerk or perfect correlation from time-to-time, but certainly, a bit different premium correlation to the Gulf.

Bob Amenta -- JP Morgan

Okay, great quarter, thanks.

Mike Bennett

Thank you.

Operator

(Operator instructions). Your next question is from the line of Charlie Rentschler of Wall Street Access. Please proceed, sir.

Charlie Rentschler -- Wall Street Access

Given the importance of GrowHow, can you give us a brief commentary on how it's doing and how you see it performing next year?

Mike Bennett

Well, certainly, Charlie, as we've broken out in the financials, we're very pleased with the contribution that, that business has made this year. And I think that it reflects a few things. Obviously it reflects a very strong global market for nitrogen products, but I think it also reflects the fact that, that business combination has been a good one. It's driven a lot of efficiencies in the business that has enabled that business to perform significantly better than it did as a -- as two standalone or separate business. And as we look forward, we think that those efficiencies will continue to flow through. Probably the biggest concern there is just the fact that it would appear to us that gas prices in Europe on average are going to be perhaps more volatile and likely higher from time-to-time than they are in North America. And as a result, we may see a little bit more volatility from quarter-to-quarter in the business results there. But broadly speaking, we're very pleased with it. We're really excited about the efficiencies, and we think it's going to continue to be a good contributor for us.

Charlie Rentschler -- Wall Street Access

Thank you.

Operator

There are no further questions at this time. I would now like to turn the call back to Mr. Bennett, for closing remarks.

Mike Bennett

Thank you, Kim, and everyone. We appreciate your interest in Terra, and thank you for joining us on the call this afternoon. Again, if you'd like to take up, Joe, on his offer to come visit us, please call Joe or please call up with him with any further questions you have. And we'll look forward to talking with you on this call after the fourth quarter. Have a great day.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!