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Terra Nitrogen Company, L.P. (NYSE:TNH)

Q3 2008 Earnings Call Transcript

October 23, 2008, 03:00 pm ET

Executives

Joe Ewing – VP, IR and Human Resources

Mike Bennett – President and CEO

Dan Greenwell – SVP and CFO

Analysts

Edlain Rodriguez [ph] – Goldman Sachs

Wayne Cooperman – Cobalt Capital

David Rosen – FAC

Charlie Rentschler – Wall Street Access

Steve Burns of Merrill Lynch

Christian [ph] – Goldman Sachs

Aaron Whitman – Appaloosa Management

Michael Christodolou – Inwood Capital

Bob Amenta [ph] – JPMorgan

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2008 Terra Industries Earning Conference Call. My name is Kim and I will 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 would 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

Okay, 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 the news release is our Safe Harbor statement. It 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 a road show that took us to several Midwestern cities. Coming up we have an 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 the 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 website or by calling us. We also always welcome visitors. If anyone listening today is interested in coming to tour our Port Neal manufacturing facility and to meet with our management, we’d be very pleased to have. Please call either Kim Mathers or me to make those arrangements.

I’ll 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 to everyone joining us on the call today.

Terra reported a very strong third quarter, reflecting our significant Ford order book which we carried in from the second quarter and added to early in the third quarter. Our manufacturing facilities operated well during the quarter and we realized excellent contributions from our joint ventures in the UK and Trinidad. The most notable events of the quarter were substantial reductions in global urea and energy market prices. These didn’t affect our 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 the problem we gathered from our published forward natural gas positions that most of our expected agricultural sales in Q4 had been on the books for some time. While we generally don’t like to pay more than the current market price for natural gas, the market opportunity that was presented by these orders was acceptable and accommodated our customers demand for these products. Much of our unpriced business for Q4 is in the industrial segment. While pricing for these products has held up well thus far, we wouldn’t be surprised to see prices slip on these product as the quarter progresses. It remains to be seen what effect the broad economic downturn will have on demand for investor or customers product.

As we look ahead to 2009, many indicators suggest fundamentals in grain markets will remain strong, 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 US natural gas production is projected to reach 22.4 trillion cubic feet in 2009. This is the highest level in 35 years amid concerns that an economic downturn will adversely affect industrial demand for natural gas.

Grain inventories remain low and the 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 and by extension, the demand for feed grains.

USDA also projects a significant increase in demand for corn throughout the United States during 2009. The most recent estimate is an increase of roughly one-third 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 be need to be at least in the area of 90 million acres.

While it is proven difficult to predict nitrogen prices, there are numerous reports this week in the trade press of production in a number of countries due to current price levels and a lack of buying activity. Natural gas prices in Europe were 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 re-enter the market to secure necessary supplies through 2009 planting season. This resumption of purchases, coupled with the impact of production curtailments, should stabilize nitrogen market values and give us a clearer picture of 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 and 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 of our environment al technologies business. Revenues there are 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 would like to first round out our discussion of the top line with a few comments about the product selling prices and natural gas costs. Then I will follow with additional 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 will then discuss our stock buyback program and Terra’s liquidity, including anticipated cash from 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 if converted method relating to the preferred shares. Basic earnings per share include the effect of the $5.2 million preferred share inducement payments during the quarter, which was $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 that revenues in the third quarter of 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 year’s United Kingdom sales, third quarter 2008 North American revenues increased by $318 million. Approximately $297 million of this increases resulted from price improvements.

You may have noticed that we have nominal income associated with discontinued operations. The discontinued operations consists of our Belmont, Texas methanol plant. During the third quarter of last year, discontinued operations loss is primarily related to the asset impairment charge of $39 million net of the $12 million of revenue realized under the profit contribution agreement with Methanex.

The Belmont facility is under contract to be sold with an expected closing to occur on or before January 1, 2009. We are carrying the Belmont assets on our books at estimated realizable value up on sales or approximately $45 million. Natural gas costs increased by approximately 2.82 per MMBTU or $77 million during the third quarter of 2008 as compared to the prior year. We continue 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 in aggregate $132 million. Additionally, we separately identified the hedge liability of $219 million. Hedged assets of $31 million are included in other current assets.

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

We recognized approximately $10.5 million of net benefit during third quarter of 2008 that stems from incentive compensation for general partnership interest in terra nitrogen limited partnership. The year to date net general partner benefit due to the high split 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 continue 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 as a charge in the third quarter, operating income was 7.5 million or $0.05 a share after tax related to the start up of Donaldsonville. 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 turnaround 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 tax payer in the third quarter of 2008. We have developed multiple tax strategies o 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 estimate 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 for purchase under the authorization. We anticipate making further buybacks under the repurchase programs.

During the third quarter we converted approximately 118,000 of the preferred shares into 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 include $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 counter parties. At September 30, 2008, this amount was $132 million. We expect this margin deposit requirement to decline as open derivative position settle each month. We spent approximately $34 million for normal maintenance capital and turnarounds during the third quarter of 2008. We estimate our 2008 sustaining capital expenditures and turnaround costs will total between $60 million and $65 million. In addition, we expect expenditures of approximately of $40 million to $50 million related to long lead items for the Woodward UAN expansion project. The 2008 total annual capital expenditures and turnaround costs will approximate between $100 million and $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’d like to turn the call back to Mike Bennett.

Mike Bennett

All right. 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 the Q&A session. Kim?

Question-and-Answer Session

Operator

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

Edlain Rodriguez – Goldman Sachs

Thank you. Good afternoon, guys.

Mike Bennett

Good afternoon, Edlain.

Edlain Rodriguez – Goldman Sachs

Mike, question for you, I mean what do you believe is going on in the 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

Well, you know, it’s I guess everyone’s got a theory and a 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 much of the purchasing or at least some for second half of ’08 into really ’09, was actually concluded really as Q2 of 2008.

As so for example we continue to see some fairly decent export volumes of urea coming into United States in August when price quite frankly there was very little in the way of actual buying at the current 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 over supply it is as much as a real timing issue where you really ended with Q3 with not that many in my opinion natural buyers needing to come back into the marketplace at a time when there are 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 in certainly reducing market values but our view is that when you look at things in the balance, up till now in the year that there is still a fare amount of product that needs to be positioned, whether it is India, whether it is some additional suppliers for 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 head. But as I said in my remarks, I think that the combination of this delay and the impact it’s having on production rates in some countries with the number of production facilities ultimately should serve to create a bottom and kind of stabilizing level in this marketplace. When that is going to happen is anybody’s guess, but if you look back at previous buying patterns, one would expect that to occur sometime yet here in the fourth quarter.

Edlain Rodriguez – Goldman Sachs

Okay. Another question, when you look at the current contracts right now, do you believe they provide enough incentive for farmers to plant corn, or do you 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 in a lot of different markets are certainly getting somewhat confusing signals. Certainly as we look at farmer’s 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 features 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 have to improve in that environment to track the additional acres, but at this point, we still don’t see why that certainly couldn’t be the case, 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 this is kind of a fictitious question but how bad do you think it can get next year and are you guys just going to take the cash and just kind of buyback stock so you are not sitting on a net cash position?

Mike Bennett

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 people would have anticipated three months ago, we’re also seeing some fairly attractive energies feedstock cost 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 over supplied. I know we’ve seen quite a timing shift but I am 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

Once I mean do you guys have a do you need to have cash on the Balance sheet, would you have debt, I mean just kind of curious what your goal is on the Balance sheet?

Mike Bennett

Well, you know, we’ve got 300 million long term debt and that’s 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’ve 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 in assets at a good value for our 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 of special dividend

Mike Bennett

Anything’s possible. The only thing I’d caution is that first of all that you know 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 buyback do represents good value to our shareholders at the right levels.

Wayne Cooperman – Cobalt Capital

You guys, what do you think about your stock price? I mean your assets are trading at probably less than a fifth of replacement cost, does it make any sense?

Mike Bennett

Well, I guess I’d ask about these market generally, did exactly what makes sense. 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 flow for businesses like this and a sense of how quickly those cash flows can basically if you want return the equity investment in the business that share price will take care of themselves.

Wayne Cooperman – Cobalt Capital

Hope so, thanks.

Operator

Your next question comes from the line of David Rosen of FAC, please proceed.

David Rosen – FAC

Hey guys. In your disclosure on your nat gas purchases, I think it was 36% and in that paragraph you talked about I think for Q4 and Q1, so if you extrapolate that that would imply about 72% of next two quarter you’ve actually already locked in pricing. Can you give us some order of magnitude what percentage of that have you locked in for q4, so you 80%, 85% and then I guess we can figure out what that will look in Q1?

Mike Bennett

Yes, David, we don’t break those out because ultimately we just get bogged down in the numbers, numbers and more numbers. But what I can tell you is that almost always which is the case with the bulk of our forward positions are going to be heavily weighted towards 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 apriority for us to produce and ship that production as soon as we can.

David Rosen – FAC

And I presume most of – I mean that’s all coded under for December 30, that should be reflective of spot prices of Q3, correct?

Mike Bennett

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

David Rosen – FAC

Final question then, this relates to the earlier comment about you cash, I mean it doesn’t take a rocket scientist to actually lay out what your cash will be in the next couple of quarters based on the fact that you have a collar of 70% of your business already booked, and it’s clear your getting – you mentioned before you are going to get that make hold payment from UKG the – you are going to get back the cash from the margin which is about what 130 million. And then the order of magnitude of the cash inflows are fairly material, and I know you were kind of hesitant to talk about making incremental investment in your stock. It does seem sort of odd to us and it seems somewhat opportunistic for you looking at the fact that you could actually buy back your assets at call it 20% of your replacement cost that on the longer term as you mentioned that is a unbelievable return on investment capital and what you guys have the benefit of which the markets don’t is you have the benefit of being capital investment fund soon, so you could take advantage of before selling prospectively some of those off.

Mike Bennett

I appreciate your insight. It’s 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, a plan for ’09, and I wondered if on top of that there are any upgrades on tap and what your total capital expenditure, I realize it’s 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, Verdigris has multiple ammonia trains and we are on this turnaround for one of those for next year. And then the Courtright Ontario urea plant is due for 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 are still evaluating opportunities like that. So I don’t think we are at a point right now where we have anything to announce. 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 a – and this a very rough estimate for ’09, but I would say anywhere from $130 million to $170 million would be CapEx including maintenance turnaround capital plus the UAN expansion 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 an up to move the needle yet, are we talking – can you give us some kind of sensitivity of what the sales are, what – how big a deal that is?

Mike Bennett

Sure. Today it is bouncing 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. And – go ahead.

Charlie Rentschler – Wall Street Access

And that doesn’t include any of the SDR [ph] fluid you were talking about?

Mike Bennett

No, that business is predominantly geared to this 2010 launch of Cleaner 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

Right. But you see that business rising to over 10% of revenues in the next couple, 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 Burns of Merrill Lynch. Please proceed.

Steve Burns – Merrill Lynch

Mike, out of your volumes that you’ve 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 the application 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 customer’s storage. When we look at ammonia, a 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 volumes have been remarkably consistent most years and even though we’ve got kind of the late corn crop coming off, our guess is we will still hopefully see some pretty decent activity on ammonia this fall.

Steve Burns – 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, are you seeing 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 hand for quite a while mainly because a fair amount of UAN was positioned early. A lot of the folks with debt positions on fall ammonia, not only our customers but everyone’s I think they will come 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 starting to move back up. And 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 Burns – Merrill Lynch

And would you see that rebound and demand in January or how would you guess that the –?

Mike Bennett

Well, you know, I guess my thinking, Steve, which can 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 a good ten days away from seeing a lot of corn coming in. But that crop starts coming off and growers finish off corn harvest and start of take some cash to 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 am 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 Burns – Merrill Lynch

Thank you.

Operator

Your next question comes from the line of Christian [ph] of Goldman Sachs. Please proceed.

Christian – Goldman Sachs

Hi, this is actually Teri in for Christian. We’re just wondering if you would clarify what cash taxes and cash interest were for the quarter.

Mike Bennett

I am sorry?

Christian – 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 will be releasing our Q tomorrow for the most part and cash taxes for the quarter, for the nine months were $197 million. I don’t have the quarter in front of me right now, but for the quarter – for the nine months year to date was $197 million, and interest paid for the nine months was $24 million.

Christian – Goldman Sachs

Okay, thank you very much.

Operator

Your next question comes from the line of Aaron Whitman of Appaloosa management, please proceed.

Aaron Whitman – Appaloosa Management

Hi, guys. Congrats on a good quarter.

Mike Bennett

Thank you.

Aaron Whitman – Appaloosa Management

I have a couple of questions. Starting off, it appears that your stock price seems to think that I guess partially China will reduce its export tariffs, do you see anything to think that right now?

Mike Bennett

We’ve also stated before that we are a long ways 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, 1,800 RMB or whatever that calculates into US dollars. And certainly with lower market values globally on urea, certainly if prices stayed at levels that folks would quote it 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 case of 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 if you reappraise this rebound considerably, that would probably make us 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 Whitman – Appaloosa Management

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

Mike Bennett

I guess it’s much too early to tell. I think we always had a tendency to want to project the future based on a snapshot of recent events. And we’ve really had a great way to try to predict what’s going to happen over the course of the 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 long ways past first of the year that will be a huge challenge given the fact we’ve already got fairly heavily utilized infrastructure here, specially from an import perspective.

Aaron Whitman – Appaloosa Management

Do you see nitrogen as being one of the absolute last things that a farmer would collect particularly in terms of its dramatic (inaudible)?

Mike Bennett

Well, first of all, obviously it depends on the crop, but I certainly think when you talking about corn farmers, the answer is yes, because US farmers for example do a great job of optimizing their application of inputs to get 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 Whitman – Appaloosa Management

How much stock have you repurchased so far this quarter?

Mike Bennett

First of all – you mean in fourth quarter?

Aaron Whitman – Appaloosa Management

Yes.

Mike Bennett

We will disclose that to you in January when we disclose our fourth quarter results.

Aaron Whitman – Appaloosa Management

Okay. One last question, even if I run current prices, it still appears to me that you’d earning well north of 10, maybe 12, 13, or north dollars of EPS which seems totally not discounted in your stock price, am I totally off the ball here, or should you just be dramatically accelerating a share buyback right now?

Mike Bennett

Well, we’ve already answered the buys and 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 the quarter, and it remains to be seen how that goes. Obviously we are not big urea sellers and so the direct impact of urea prices is less severe, but I would say broadly right now, it’s a little bit of a mixed bag. We’ve compared 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 today’s snapshot higher price of gulf ammonia. So I think today’s snapshot creates one picture, but it probably would be why as to wait a few months just to see how everything settled 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 trend.

Aaron Whitman – 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 to 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 that a 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 are deposits. Those orders stay on the books, but the revenue won’t be recognized until those are shipped.

Michael Christodolou – Inwood Capital

So there is nothing contingent upon applications by the grower?

Mike Bennett

No.

Michael Christodolou – Inwood Capital

Okay, got it. And any other counter party risks that you know of just beside the fact that maybe the dealer wouldn’t come through but presumably he’s already gotten prepaid from his growers as well, correct?

Mike Bennett

Well, I think that’s probably a mixed bag depending on the customers. 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 a mixed bag there, Mike. But broadly speaking, our sense of things, specially with grain prices coming down for 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 could tell.

Michael Christodolou – Inwood Capital

I felt 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 five and six and seven dollars, and so they’ve locked in something higher than the current spot price, and so it would seem like they would have been going 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 quantity to you what the sensitivity that activity may have been.

Michael Christodolou – Inwood Capital

I understand. How about the balance sheet of the counter party for your gas delivery now that you have to post capital –

Dan Greenwell

Those are creditworthy counter parties and we don’t anticipate any issues with their creditworthiness.

Michael Christodolou – Inwood Capital

Are they actually (inaudible) guys or is it –

Dan Greenwell

These are (inaudible) institutions. I mean the good news, bad news is we owe them more than they owe us on the derivative positions. 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 and first quarter of ’09, is there storage available at customers sites to your knowledge, and if not, can you remind us about your little profit center that you run from time to time in terms of charging dealers with storage?

Mike Bennett

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

Two other questions, I am looking at the Henry Hub Gas Strip 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’s 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 like perhaps in the range of $1.50 an 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

You know in realty we will need to continue to run pretty close to capacity to meet the commitments we have in place in the near term, Mike. And 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, keep up the great work. Thanks for the clarifications.

Mike Bennett

Thanks, Michael.

Operator

Your next question comes from the line of Bob Amenta [ph] of JPMorgan. Please proceed.

Bob Amenta – JPMorgan

Thank you. Hi guys.

Mike Bennett

Hi, Bob.

Bob Amenta – JPMorgan

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 missed, you must have said something, there is 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 – JPMorgan

50 [ph] million, okay, dollars. Then the hedge deposit, kind of circled that on the balance sheet. The 132 million and then on the liability side, the 218, did you say that this – the 130 coming back, it’s cash, or how will that unfold as we go through the next three –

Dan Greenwell

No, I mean what we have is we have 219 million showing up as liability. As I mentioned in the call on the comments, there is roughly 31 million in assets. You are obliged 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 – JPMorgan

So you can – I apologize, I am not a hedge expert, although I think I am going to need to be with some of these companies talking 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 past forward to the end of the first quarter, gas would just say where it is now, and would money be coming back to you, how should I view it from a cash standpoint, what will be happening?

Mike Bennett

How it works basically Bob is that the hedges roll off monthly. That cash whatever that hedge difference is, in this case, if we are under water, it goes to the counter party. 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’d be paying the counter party the $10, some of which is secured with the cash that he would keep. I think we would buy $7 from the physical supplier. So, the cash will come back to us in the form of margins, or basically gross profit generated from the sales that are consummated through the use of that gas producing profit.

Bob Amenta – JPMorgan

Okay. And then cash tax rate for next year, I as just trying to just for modeling of ballpark is 35 –

Dan Greenwell

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

Bob Amenta – JPMorgan

Okay. And then lastly and hopefully this isn’t too complicated, I don’t think it is, but I was trying to I recall this is going back years ago and in talking on some calls and things weren’t going quite so well. In terms of trying to model production cost, I recall a number of 33 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 reduced to around 34 MMBTUs to a ton of ammonium, Bob, yes.

Bob Amenta – JPMorgan

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

Mike Bennett

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

Bob Amenta – JPMorgan

All right. And then what about that same concept of what 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, either more gas, or incremental other things, the products you have to add to that that I would add on to or subtract from to get to the kind of the –

Mike Bennett

Then all you do there, Bob, is take your – take the ammonia number you’ve 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 – JPMorgan

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 ammonia price payment and it looks like this is obviously moving rather rapidly nowadays. It looks like it was maybe in the 150 range, does that seem reasonable, or I guess we have your average price, but what is the relevant price for you as we sit here today or most recent numbers you might have for what your UAN and you ammonia might be selling for if you were selling it today or yesterday at current prices?

Mike Bennett

Again, about all we can do is refer you to the reference with publications like a 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 though it was in that ballpark of $1,000 a ton. It could be in a range above and below that. Currently that would have a fairly low spread relative to I think the most recent gulf coast ammonia posting, they did feel so. But if you go back, even back July, you will see that Midwest ammonia price was still up there in the range of probably $1000 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 assets market in the corn belt.

Bob Amenta – JPMorgan

And would UAN have the same premium as well as ammonia does versus –

Mike Bennett

Well, it does have a premium but that – 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 a perfect correlation from time to time, but it’s certainly a bit different premium correlation to the Gulf.

Bob Amenta – JPMorgan

Okay. Great quarter. Thanks, guys.

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 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 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 are very pleased with it. We are really excited about the efficiencies and we think it is going to contribute – 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 like to take up Joe on his offer to come visit us, please call Joe, or please follow up with him with any further questions you have. And we 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.

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Source: Terra Nitrogen Company, L.P. Q3 2008 Earnings Call Transcript
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