Terra Industries Inc. Q4 2007 Earnings Call Transcript

Terra Industries Inc. (TRA)

Q4 2007 Earnings Call

February 7, 2008 03:00 am ET

Executives

Joe Ewing - Vice President of Investor Relations

Mike Bennett - Chief Exec. Officer, Pres, Director,

Dan Greenwell - Chief Financial Officer and Sr. VP

Analyst

Charlie Rentschler - Wall Street Access

Mike Judd - Greenwich Consultants

Steve Byrne- Merrill Lynch

Andrew O’Conner - Millennium Partners

Rich Newman- First Capital Alliance

Bob Amenta - JP Morgan

Bryan Yu - Citi

Steve Scharley (ph) - Oppenheimer & Company

Don Carson - Merrill Lynch

Michael Christodolou – Inwood Capital

Presentation

Operator

Welcome to the Fourth Quarter 2007 Terra Industries Earnings Conference Call.

(Operator Instructions)

I would now like to turn the presentation over to Mr. Joe Ewing, Vice President of Investor Relations, please proceed.

Joe Ewing

Welcome everyone to Terra’s Fourth Quarter and Full Year Results Conference Call. This morning, we issued a news release announcing that for the 2007 Fourth Quarter, Terra achieved net income of $69.7 million or $0.66 per diluted share. For the year, Terra achieved net income available to common shareholders of $196.8 million or $1.97 per share. At the end of that news release is our Safe Harbor Statement. It describes the limitations of forward-looking statements in any other items that are non-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 relation’s activities since our last earnings call, we have participated in an equity conference, credit conference and a three-day investor tour of several cities in the Western US. In upcoming weeks, we will be busy with the following investor events. Next Tuesday, Dan will present at the Goldman Sach’s Ag Biotech Forum in New York. He will also present at the Lehman Brothers Bond Conference in Orlando in mid March and Mike present at CitiGroup’s small and mid cap conference in Las Vegas on March 18. We also continue to host visitors to Sioux City to meet with management and to tour our fourth manufacturing facility. If anyone listening today is interested in making this trip, we would be pleased to have you come. Please call Kim Mathers or me to make those arrangements. I will now turn the call over to Mike Bennett so he can give us his perspective on the Fourth Quarter and the outlook for Terra and the industry in the upcoming months.

Mike Bennett

As expected, Terra performed well in the Fourth Quarter of 2007. The customer demand for nitrogen products was quite strong both for fall application and storage fill in preparation for the upcoming spring season. Market prices for nitrogen continue to respond favorably and we ended the year with roughly $300 million in customer prepayments which are the highest level we had experienced at Terra in our nitrogen business. Our people that did find job in the fourth quarter is they had all year in operating our plants and distributing our products efficiently and effectively. The economic environment for our business continues to be exceptional and we continue to view prospects for the upcoming application season very positively.

Commodity grain prices remain at very strong levels in response to near historic load global stocks to use to ratios. The strength and depth before grain markets clearly signal that this is not a short term phenomenon. Our customers are very positive in their outlook to the upcoming application season, we anticipate the upcoming top dress application season on wheat to result in increased demand for nitrogen on that crop. It is too early to predict exactly what plant of corn acres will be this spring, but we expect a strong pre-plant and side dress season for corn as well.

Global supplies of nitrogen resulted in strengthening prices over the course of the fourth quarter and prices continue to be very solid as we get closer to moving product to the ground. Natural gas as we pointed out in our press release is always a significant cost factor for Terra, but we feel very good about the current position we have in relationship to the prepayments that we have secured through the spring season and the natural gas supplies that represented significant percentage of our first half needs.

We are excited to get this season underway and we are excited about several near and medium term opportunities for Terra to enhance the turning’s capabilities. In the near term, we have taken steps to return our Donaldsonville ammonia unit to production in the third quarter. This will enable us to replace some 400,000 tons of purchased imported material with domestic production with better gross margins. The imported material has been supplied under a long term purchase agreement that is scheduled to expire later this year. We expect this to be a seamless transition to the long standing customers that we supply through the Donaldsonville facility.

Now, I would also note that this introduces very little net additional nitrogen into the global marketplace as our joint venture business in the UK has closed in an uncompetitive facility there.

As we have mentioned today, we have identified several promising investment opportunities to upgrade more of our ammonia production into higher valued products, mainly UAN and liquid Urea. The relative value of these products has continued to grow as desire projected demand for these products from our agricultural and industrial customers. We are in advanced stages of valuating one of these opportunities and expect to reach a decision on it soon. Each project of this type would require an investment of $100 million to $150 million. If sanctioned by our board, the first could be completed in 2010. These perspective investments are in keeping with our aim to reinvest capital in existing or additional nitrogen assets that can neither exceed our targeted rates or return.

At this time, I will turn the call over to Dan for his comments on our financial condition and some additional detail on some of the Q4 numbers.

Dan Greenwell

Mike has highlighted the strong fourth quarter results and solid demand for nitrogen products. I would like to first round out our discussion of the top line with a few comments about product selling prices, volumes and natural gas cost then I will follow with additional comments about our operating results and a joint venture operations in the United Kingdom and our plan to restart of the Donaldsonville ammonia plant. Finally, I will spend a few moments on the year-to-date results and summarize some of the 2007 financial highlights.

Nitrogen revenue has increased by $116 million in the fourth quarter of 2007 as compared to last year. Selling prices increased revenues by about $140 million and higher North American volumes added an additional $55 million over 2006 revenues. These revenue gains were partly offset by the de-consolidation of our United Kingdom operations which generated $84 million up 2006 fourth quarter revenues with an operating income of $8.6 million. The contribution of our United Kingdom operations into a joint venture with Kemira changed our reporting to an equity accounting basis at the end of the third quarter of 2007. Our joint venture holdings are classified as a non-operating equity investment. Accordingly, our interest in the net results is reported below operating income as a separate line on our income statement.

During the fourth quarter, selling prices on our primary product, UAN increased from those we achieved during the prior year. The average price for 28% UAN was $221.00 per ton in the 2007 fourth quarter compared to $131.00 per ton in the 2006 fourth quarter. As Mike mentioned, we believe the market continues to place the value premium on UAN. This premium provides significant operating leverage to Terra since we would sell approximately 4.5 million ton annually.

You may have noted a decrease to methanol revenues from the third quarter. That decrease is principally related to the revenues realized under the Beaumont facilities methanol production contract which were payable in methanol margins achieved specified levels and can amount to approximately $12 million a year. Terra recognized these revenues at the maximum of $12 million level in the third quarter and was not due additional amounts in the fourth quarter.

Volumes of methanol shipped increased significantly from prior year comparable period and the proceeding quarter due to increased market requirements.

The Beaumont methanol facility is under contract to be sold with an expected closing date on or before January 2009. We are currently carrying the Beaumont assets on our books at approximately $50 million. We seized depreciation at the end of the 2007 second quarter. Last year’s fourth quarter depreciation expense approximated $3 million. Natural gas costs increased by approximately $26 million during the fourth quarter of 2007 as compared to the prior year.

The year-over-year increase to fourth quarter selling, general and administrative expenses included $11 million due to annual incentive accruals and share based compensation. The primary increase results from a market-to-market accounting treatment for the phantom share program. The 2006 fourth quarter included approximately $3 million of fees associated with the United Kingdom joint venture that did not recur in the fourth quarter of 2007.

Our United Kingdom joint venture integration activities progressed well during the fourth quarter. In October, the joint venture announced the closure of its Severnside plant. At the end of January 2008, the plant ceased operations and is not closed. Additionally, Terra’s former administrative offices have been closed and all services and core systems are now consolidated at the Iowa headquarters. Cost of these and other actions totaled approximately $26.5 million and half was charged in Terra’s equity earnings during the fourth quarter.

Terra’s portion equated to approximately $0.08 per share. Product sales price increases in the UK were largely offset by higher cost of natural gas. Gas costs for the fourth quarter of 2007 in the United Kingdom was approximately $9.05 per MMBtu. Without the severance and other synergy cost, the 2007 United Kingdom joint venture equity earnings would have approximated operating earnings achieved by Terra’s standalone operation in 2006.

The joint venture anticipates additional synergy cost of $9 million throughout 2008. As Mike mentioned, we are currently undertaking turnaround and startup activities for our Donaldsonville ammonia facility. These activities will take place in the first and second quarters of 2008. We plan to restart the plant in the third quarter of 2008. The aggregate cost of these startup activities will approximate $10 million half which will be catalyst cost. Production from these facilities will replace products that has previously been purchased in international markets.

Terra’s effective tax rate was 36.3% for the year. We expect to be cash tax payer in 2008 and estimate our 2008 effective rate will be between 37% to 38.5%. Our cash balances which included almost $300 million of customer prepayments totaled $698 million. This cash is invested in high quality money funds. We also received $14 million from our Trinidad operations during the fourth quarter. We spent approximately $82 million for normal maintenance capital and turnarounds during 2007. We estimate our annual 2008 sustaining capital expenditures and turnaround cost will total between $60 million and $65 million.

2007 was a very strong year for Terra. Robust market conditions coupled with relatively stable gas cost and high on stream operating levels allowed Terra to significantly enhance operating margins. Customer demand and market pricing continues to remain firm.

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

Mike Bennett

That concludes our prepared remarks this afternoon. At this time, I would like to turn the call back over to the operator who will give you instructions on how to pose questions to us in the call.

Question and Answer Session

Operator

(Operator Instructions)

Your first question comes from the line of Charlie Rentschler from Wall Street Access, please proceed.

Charlie Rentschler - Wall Street Access

In your press release, you say that sales volume of ammonia and UAN increased 9% and 5% respectively, I guess that is for the year which would suggest that there is not a lot of opportunity for incremental volume, but can you talk about that, how much of physical volume is left with your facilities looking at ’08 versus ’07?

Mike Bennett

Well, I wish we could squeeze a lot more out of them. We really had a pretty good operating year in ’07 and I think that certainly helped us a bit from the supply standpoint. I think looking at ’08, one factor in ’08 that will be a bit different from ’07 is that we only have one facility scheduled for a turnaround in 2008 and that is our Port Neil facility.

Typically, Verdigris will undergo a turnaround at one unit every other year just due to the schedule and some of the projects there we actually will not have a turnaround there in 2008 and so that will free up a relatively small amount of volume, I guess, but otherwise, might not have been available, but really whether we can improve much on the volume numbers this year will again depend primarily on the operating performance of the plants.

Charlie Rentschler - Wall Street Access

The Donaldsonville really is not incremental as it is really replacement, is it not, I guess we have to think.

Mike Bennett

It is, we will probably on a full year basis, once we get going it will increase our ammonia volumes slightly relative to what we have been purchasing, but the real opportunity there really is that purchase margins on that material are generally pretty slim and we think conditions have changed enough globally in a number of different competitive environments that it warrants restarting the facility and using domestic production and our goal is to achieve some better gross margins as a result.

Charlie Rentschler - Wall Street Access

With the 60-some new ethanol refineries coming on stream in this country this year and with the capacity of 4.6 billion or 4.7 billion gallons, I forget exactly what, I guess that works at to about 2.2 billion bushels of corn required on the back of what 13.2 we produced record last year, where is all that corn going to come from and what does that portend for corn prices and therefore for your business.

Mike Bennett

First of all, I guess when one looks at how things are shaping up for corn this year, I have read estimates anywhere from 87 million corn acres to perhaps a shade over 90 million depending upon which prognosticator you read, but basically, with the increased ethanol demand that we expect this year, corn acreage in that level will pretty much ensure that we will still end up with a very tight ending inventory level moving out of this crop year into the next. Certainly if we end up on the lower end of that plan of acre range and if we do not achieve something better than trend line yields, then I think we stand a good chance of seeing a further reduction in corn inventories, and so if the competition this year from wheat and soy beans for acreage with the great prices we are seeing in all of these commodities, it is challenging for corn to really compete for enough acreage this year to actually markedly improve on that ending inventory situation, so most of what I read tells us that the corn market is going to stay pretty tight that I think the corn price scenario will certainly depend ultimately not only acreage planted but certainly whether we have an above, below or an average production year, but any way you look at it, it looks like a challenge for us for at least the next several years.

Operator

Your next question comes from the line of Mike Judd from Greenwich Consultants.

Mike Judd - Greenwich Consultants

The underlying fundamentals in the business look great, I am just wondering if you could help us understand down stream how inventories look throughout the chain and given that this year, the buying patterns had been very strong so far, should we look to expect that sort of these customer inventories would be perhaps built up a little sooner than they would in other years, what are you anticipating in terms of volumes moving to the system and timing thereof.

Mike Benett

I will answer that the best I can. When we look back at the ’06-’07 crop and fertilizer year, the best numbers we have tell us that the overall supply chain downstream had inventories reduced substantially and so we think we entered July of ’07 with basically a very low system throughout the supply chain, thus far, as I have indicated, we have seen very strong demand from customers to replenish those inventories, domestic production at the end of the day probably will not be far off, maybe slightly better than it was in the previous 12-month period. Imports will be up, but quite frankly, they need to be because assuming a comparable demand year for nitrogen, we simply did not have the inventory to pull down one more time.

At this point in time, we are continuing to ship hard to customers and they are pulling products, preparing inventories for the start of the application season, I think in most areas, customers will be reasonably well prepared in a few areas if we get off to a real hard run, there could be some issues here and there, but ultimately again, if the nitrogen demand for this season ends up playing out pretty similarly to that of the year ago, we would once again expect some pretty low inventory levels in the chain coming out of the ’08 planting season.

Mike Judd - Greenwich Consultants

So, usually in a rising price environment, there typically is a lot of pre-buy or getting as much materials as possible ahead of price increases, I am just curious if you think this year, those types of trends have been able to play out or had there been any, the new inventories are very well, but I am just wondering down stream whether basically the inventories are in really pretty good shape. I guess, I am trying to get a feel on that, not so much for the end of this season, but how things are going on a year-over-year basis relative to either expectations or how they were last year?

Mike Bennett

Again, I think that customers typically walked in the application season with fairly low inventories and certainly at least most of them I have talked to are positioning themselves to have at least some adequate supplies on hand to start the season, but we are kind of in an environment that we have not really been in before at least in many years and you see some interesting things that they are somewhat new.

For example, we talked in the remarks about kind of what I would call the depth of this demand market relative to crops like corn, and we have had a few customers talking to us about pricing and supply information already for fall because some of their farmer customers are actually looking to sell ’09 new crop corn and to hedge their cost of imports which has been a big variable for them over the past couple of years. That has not been at a significant level at this point in time. I do not know how that might progress, but when the dealer is coming to you to talk about hedging material for those things, certainly, it does not sound like they plan to be carrying a great deal of inventory out of this season, so it would be interesting to see how it plays out, but at this point in time, we would expect it to move along well. It is possible that simply because of being behind the curve shipping material to customers that those still shipments may go a little bit later than normal and that may result in a little less actual shipping in the second half of the application season, but at the end of the day, we expect the numbers are likely going to be fairly comparable.

Operator

Your next question is from the line of Steve Byrne from Merrill Lynch.

Steve Byrne- Merrill Lynch

Our estimates, your cash margins on UAN in the corn belts are almost twice what they are for ammonia that is on a per unit nutrient basis. What is driving that incremental demand for UAN that is just driving that price for UAN up so much? Is it the increased demand in the wheat region or irrigated western Corn Belt? What do you see is driving those dynamics?

Mike Bennett

Well, we really saw a major shift in that spread between ammonia and UAN prices last spring. I think that while we may attribute some of that additional pressure this year to certainly expectations on wheat because obviously ammonia will not participate in that market this spring. I think a lot of it also has to do with the fact that frankly, farmers understand that within reason, the earlier they get that corn crop in the field, the better their prospects are for a good yield, and certainly those farmers typically get a very good response with UAN and it commits them to get out there and get that crop planted as opposed to waiting for the weather to change or waiting for toolbars or something of that nature, so I think the opportunity to get out there early and get a lot of corn in the ground and certainly not be encumbered by potential delays and other issues is certainly a big factor behind that.

Steve Byrne- Merrill Lynch

And you have what looks like around 800,000 tons of merchant ammonia or excess ammonia in the US. Geographically, if you were to pick a region of the Corn Belt to upgrade some of that either into UAN or urea, where would be your preferred location?

Mike Bennett

Well, for us, it is definitely going to be the Western Corn Belt. I will not talk about specific plants, but certainly Western Corn Belt is still a great agricultural area for both wheat and corn. It does not have quite as heavy as soils in many of these areas as they do in Illinois for example, and so it does not lend itself as well to fall nitrogen application without loss and so really, from the irrigation market to preplant corn and side dress and wheat top dress, we like the Western Corn Belt as a growth market for UAN.

Steve Byrne- Merrill Lynch

Is there an opportunity to bring on Donaldsonville earlier than third quarter? It would seem like that plant, the current prices could have a pay back on that investment of a couple of months.

Mike Bennett

We are sure hoping for a nice payback on that restart. We have got some preparations to conclude before the plant is ready to restart. We obviously need to make sure that everything is in good order and we are prepared to start safely and efficiently. I do not think we could improve upon the time schedule that we have kind of outlined by much and the other factor there is that we will obviously honor our commitments under our current ammonia contract as well. Much of that ammonia goes to industrial customers as opposed to the agricultural market, and so we have to make sure that we can manage, I guess the influx of supply from the production facility as we phase out the purchased ammonia contract, so if we really get fortunate, we might be able to improve on that sum, but for now, I think the timeframe we have outlined is comfortable for us.

Operator

Your next question comes from the line of Andrew O’Conner from Millennium Partners.

Andrew O’Conner - Millennium Partners

I wanted to know, has your forward natural gas position changed appreciably from yearend ’07 at this moment? Is it still about 28%?

Mike Bennett

We typically do not comment on that in terms of percentages once we have picked a number at the end of the quarter so I cannot give you a concrete answer. What I can tell you is that there continues to be a demand for our products on a forward basis looking to spring. We continue to work with our customers to supply what they need and as we firm those commitments up, we are going to hedge those sales to make sure that we take the gas variable out of the equation, so there is always ongoing activity, but we really are not free to give you a particular percentage at this point.

Andrew O’Conner - Millennium Partners

In terms of restarting Donaldsonville, any sense for how you would hedge this production?

Mike Bennett

Yes, I mean obviously, we have and we will continue to take a look at the forward gas market there. As I indicated in Steve’s question, most of that material is going to industrial customers who have a variety of different types of pricing mechanisms on their contracts. Some are market related which makes it a little bit difficult to buy gas against, others are more formulaic from a gas standpoint and so we are going to approach it on a kind of patchwork basis to basically fill in the slots relative to the business that we will be looking to hedge there.

Operator

Your next question comes from the line of Brian Lorraine from First Capital Alliance.

Rich Newman- First Capital Alliance

I have got a question for Dan, a bit of a technical question. Acquired in the 10Q, as general partner for Terra Nitrogen, you are going to start receiving as much as 50% of the profits up from the 1% that you have been getting starting in the next quarter, is this a windfall for Terra or does it just mean that you will receive much more, but your TNH holding will drop in value when their available profits or distribution decline?

Dan Greenwell

The information that we announced with the partnership was $4.45 distribution in the current quarter. With that distribution, that would take what we call the deficit. There is a minimum quarterly distribution required in the partnership agreement before the general partner is entitled to any additional incentive compensation, that deficit has to be satisfied before we get any incentive compensation and we are looking at the calculation right now, we are $2.86 per unit from satisfying that deficit or roughly $53 million, so once that deficit is satisfied with minimum quarterly distributions, we would be entitled to incentive compensation according to the terms of the partnership agreement and it is based on a series of tiers and that the maximum tier I think the general partners is entitled to roughly 48% of that maximum tier structure, so it does cascade across amounts in the partnership agreement. We are not really going to project what will happen in the first quarter or beyond. I will just state that we are $2.86 of cumulative deficit that needs to be made up before we are entitled to any additional incentive compensation.

Rich Newman- First Capital Alliance

Okay, so it looks to me that you likely will make it next quarter, but forgetting about making that projection and do I have it right though that it is kind of a wind fall for Terra in terms of you guys will be getting a much greater piece of the pie, but since we are 75% shareholders of TNH that Terra Nitrogen, we might be kind of a wash where the stock drops in Terra Nitrogen but we get the greater distribution, is that the correct way to look at it?

Mike Bennett

I will give you a technical answer to it and that is, we really do not look at it as wind fall. I mean this partnership has been around for a long time and this is the way that the thing was structured to work and certainly if the partnership continues to perform at a level that pays out those types of distributions, first of all, we think that that is obviously good for the minority unit holders of Terra Nitrogen and we think that also it is good for the TRA holders because of the additional cash consideration we received, but I am not sure how at the end of the day it relates one way or the other to the per share value of the units and certainly how one might look at Terra in a value one way or the other depending upon where the units trade.

Rich Newman- First Capital Alliance

Again, I do not want to take up too much time but I am little confused by that because it appears that your profits will go up quite a bit as a general partner and the only negative I can see is that your holdings in Terra Nitrogen because the distributions will fall for those holders, that is the only way you are negatively impacted, is that right because the rest is all just gravy?

Dan Greenwell

Well the way the distribution mechanics work is once that cumulative deficit is satisfied, the general partner is entitled to some additional compensation, but keep in mind it is a tier structure and I do not think, as Mike said it will be considered a windfall, yes Terra will get first a bigger tier structure than the common unit holders or the minority interest would get, but normally, we are entitled to roughly 75% of it anyway, and this is a portion that we get of the minority interest of 25%, we would get on top of that 75%, so I do not look at it as a big windfall for us, it is just how the partnership agreement is structured.

Rich Newman- First Capital Alliance

I really did not clarify exactly or maybe somebody else will get the exact answer. I do not want to take up any more of your time.

Operator

Your next question is from Bob Amenta from JP Morgan.

Bob Amenta - JP Morgan

A couple of questions on cash flow issues, as far as the upgrades that you are looking at, I believe you mentioned 100 million to 150 million for each one, I do not want to imply that you are going to do more than one, but if you were to upgrade more than one facility, are you looking at this just one at a time, or how would you undertake this?

Mike Bennett

We will evaluate several projects concurrently. We have kind of looked at them from a priority standpoint. We are trying to look at where our future product needs are projected and so it is conceivable, but at this point certainly not any sure thing that we could substantially be undertaking several of these at any given time.

Bob Amenta - JP Morgan

And than along the Donaldsonville, I do not know if this is something that you will or can disclose, but it talks about just basically replacing imported purchase ammonia 400,000 tons a year, higher gross margin, is there a number per ton, I mean I know it is going to move it, but at current prices that is 400,000 times X that would give us an idea of how much that is going to improve?

Mike Bennett

Well, I think you can make your own assumptions on future gas and ammonia prices, but from our perspective, again, the margin on purchased ammonia is pretty slim. At the end of the day, I do not have a firm number for you, but certainly, as things span today, the spread on produced material is far more attractive.

Bob Amenta - JP Morgan

And then something that was mentioned on the last call, the project in Peru with Orica, maybe I missed the press release since then, whatever happened with that in the natural gas supply bidding process?

Mike Bennett

We entered the bidding process and we gave it our best shot. We bid on gas supply on the basis of what we felt we could structure given the return objectives we had and we were unsuccessful on that auction. Another company was awarded the opportunity to negotiate with that gas supply and at least for the time being, we have turned our attention elsewhere

Bob Amenta - JP Morgan

And then lastly, although I am a bond holder as opposed to equity clearly with negative net debt it is hard for me to complain, but I am looking at the uses of cash obviously, these upgrade projects, Donaldsonville is a small amount, it sounds like Peru is not going to happen, just without forecasting, but at $4.00 a share, EPS seems to be in the realm of what some of the equity analysts are expecting and I calculate $650 or $700 of EBITDA, you do not have a lot of capex, a couple of hundred million in cash taxes is in fact, your 37% rate is also a cash rate, not much net interest, I mean that is a lot of free cash flow even with a hundred to a hundred fifty million dollar upgrade projects that will take two years. What dividends, I mean, obviously, there are small share buyback left to do, you have not done anymore of that, what else are you looking at?

Mark Bennett

Broadly speaking, what we are focused on are areas where we can employ cash that we think will over the long run provide the best returns for shareholders, certainly we think that the efforts we have made to date in our buy back program have been very good for our shareholders as evidenced by the average price we purchased that at. Obviously, things keep changing in this marketplace and certainly people’s outlooks for the industry, progressively have kept getting better and so that is always kind of a moving target, now that we are focused on the share buyback aspect of it and as well, we think that it is good time to be focused on our core markets and investments that can give us better long term earnings capabilities and certainly we mentioned the upgrading projects today as one example of that where we think hopefully, we can get the type of returns that will stand the test of time and certainly, we do not talk about every conceivable idea or opportunity that we have typically on investor calls, but we think right now, reinvesting cash in the industry and in our core business of nitrogen either to Terra’s assets or other assets will created the best long term return and so we are focused on that right now.

We have got to sort through what those opportunities are and what they may mean relative to our future cash forecast before we might consider or need to consider any other types of cash mechanisms.

Operator

Your next question comes from the line of Bryan Yu from Citi.

Bryan Yu - Citi

I have a question regarding Donaldsonville, can you give us a sense of what the ramp up schedule is going to look like, I know, you said it is going to start in the third quarter, but at what point would you hit the run rate of 400,000 tons per year?

Mike Bennett

Well, actually, once we start, we would hit the run rate pretty fast. We will be putting new catalyst in the facility and typically when you start up an ammonia plant with new catalysts, you do have some reduction time to reduce that and undoubtedly there will be a few things that are not working the way they should, but I think we are fairly hopeful that we will have the type of successful restart where once we commence those startup activities, we would expect to be at or near full rates with that facility probably within a couple of weeks.

Bryan Yu - Citi

And the existing contract which is expiring, is that from the Trinidad supplier or is that Black Sea?

Mike Bennett

The supplies can be variable, so I guess, if I say too much then I may tip off who our supplier is. I probably will not really comment on that, but it is likely from either of those sources or a Middle East source, but those areas.

Bryan Yu - Citi

And then I have a question regarding the pricing, I know you guys do not give any kind of guidance, but if you can help me triangulate in terms of pricing, but right now, at the Gulf, 28-point UAN is going for about $290.00 per ton, and if we were to hold that $290.00 with confidence, at what point would you realize UAN prices approach $290 levels?

I know we are looking at Q2, Q3, just so I can get a sense of the pricing lag?

Mike Bennett

Well, I guess, to get a sense of that, I am guessing, it would probably be, we had approached some variation of that level in probably in Q2. The prepayments that we have talked about and the fairly significant gas position we had, I mean, part of that is attributable to Ag Ammonia, the balance of it is primarily UAN and typically, as you know, there is a flow through with pricing especially in these fill periods, but I would think that we would be realizing something a lot closer to that with the normal adjustments for distribution expense and so forth as we get into Q2.

Bryan Yu- Citi

And then the last one, this is more a mechanical question, how can we try to gauge the stock cost and the SG&A, is that pretty much tied to the share price performance over the quarter?

Mike Bennett

No, there are two components of it or actually three components of it. There is the annual incentive compensation which is an annual amount and that is pretty right throughout the year, pretty steady provided that we are making our earnings targets, the second piece is the restricted share component which is pretty much a fixed amount every period and the third component which is the most variable is the performance share compensation which is obtaining market-to-market accounting so that is the variable component of that is the phantom share stock price that we assume at the end of every quarter we market-to-market, so the phantom fees is the variable component.

Bryan Yu - Citi

Is there some sort of a sensitivity you could provide for every two or five dollar change in Terra price equals X million and this phantom share?

Mike Bennett

I would probably feel comfortable doing that a little bit later. Historically, what we have kind of done is assume that a dollar change in the stock price is maybe equivalent to half a million dollars of additional compensation expense, so that was the over all rule of thumb, obviously some of those phantom shares we are vesting here now at $12.31 and exactly what the numbers would be going forward, I would have to recalibrate that but that was our overall rule of thumb.

Operator

Your next question is from Steve Scharley (ph) from Oppenheimer & Company.

Steve Scharley - Oppenheimer & Company

Could you comment on the status of legislation regarding the government’s effort to effect cleaning up the emissions from all diesel engines in the United States which I understand is going to take effect to pass and implemented in 2009 and 2010, and also on the use of liquid urea in this injection systems in the trucks and have you discussed the use of this with any of the truck manufacturers and what kind of volumes might this mean to Terra if it this all comes to pass?

Mike Bennett

Well, certainly, we have talked about this subject seminar in our investor meetings and we have been working with major engine manufacturers now for really the past couple of years, working on SCR technology to meet these 2010 diesel emission standards and some investors may know currently, in Europe, this SCR technology utilizing a urea liquid derivative as basically the reagent to scrub those emissions has been in effect for several years. We believe it is a good effect and right now, we are pretty optimistic that SCR or the use of the urea derivative in these exhaust gas emissions systems will hopefully be the prevalent technology used.

We are currently working very hard on developing that market. One of the real challenges to that market is the distribution system. It is a very broad supply chain as you might imagine relative to certainly fertilizer business, but we think that is a market that has some very bright future potential for us. Certainly, it is one factor among others and some of our thought process on different capacities at our facilities and I guess, I have heard a lot of different projections on what that market might ultimately mean. The kind of the number that we have continued to look at for us maybe possibly as much as 300,000 tons on a hundred percent basis of urea which would be pretty significant for us.

It would not a majority percentage, but a fairly sizeable percentage of the liquid urea that we produce today. The bulk of which goes into our UAN product.

Operator

Your next question is from Don Carson from Merrill Lynch.

Don Carson - Merrill Lynch

Macro question, just your outlook on nitrogen consumption in the US this year, I mean, as you said, it is hard to know exactly what corn acres would be. It does look like it will be down slightly, do you think that farmers are getting more comfortable with corn on corn which leads to higher application rates will offset and you think also I mean, in the spring we would approach $13.00, so do you think that wheat growers might be bumping up their application rates as well, I just wanted to know what your overall nitrogen outlook is?

Mike Bennett

Well, it is a little bit like following people for their preference in the presidential candidates. I am not sure sometimes how accurate it is, Don, but when we have looked at it this far, we think where the wheat market is concerned, even though the acreage change is not very great, we think that there is a pretty good chance that the folks that often do not put much in on or sometimes, in these dry land areas, zero depending upon how the bulk of the crops are progressing in the spring, we think we will definitely see some nitrogen demand from those types of growers this year.

And we would expect the other wheat growers who typically fertilize toward optimum yield potential to maintain that.

On the corn side, I think a lot of it really depends on what the acreage comes in. One model we looked at, we looked at a number of about 87 million corn acres and we looked at kind of our best guess on the wheat top dress and kind of our conclusion was if corn came in around 87 million acres, we would probably see about the same level of overall nitrogen demand in the US in this crop year as we did in the 06 and 07 crop year. And one thing in our grower survey which again, I do not know how accurate it is, but our survey found that at least in the grower’s resurveyed on corn, we actually saw a little higher application rate last year than we anticipated and the intentions for 08 from those same farmers were basically at the same level as 06 and 07.

And so I guess, we expect the application rates to remain constant on corn. We expect to see a higher application rates on wheat and they will most likely offset any potential reduction on corn due to lower acreage.

Don Carson - Merrill Lynch

You made a comment earlier that you thought the imports actually had to increase so if you got flattish just slightly up in consumption and increased imports, does that make for more competitive market again thinking specifically when you ramp up Donaldsonville, where do those displace the import tons go?

Mike Bennett

I can always hope they go back toward wherever that UK nitrogen was going that we are producing before, but realistically again, when we look at 06 and 07 we total the domestic production in total imports, more nitrogen was consumed that neither came in or was produced, and so we clearly pulled down inventories, and as you know, the first half of that year, we had a pretty low import number, and so our assumption all along is that imports have to be higher in this crop year to meet demand. Certainly they are on track to be higher and at this point, we think that the supply balances should be again fairly snug, but adequate.

Operator

Your next question comes from the line of Michael Christodou from Inwood Capital.

Michael Christodolou – Inwood Capital

If I could ask this gas question just a little differently, so 28% of your fiscal 08, your asset needs are contracted and you mentioned the significant majority of your first half is contracted, so piecing those two together, it is fair to say you have made a pretty good dent in everything and that you are not going to be over inventoried in July 1, 2008, which is typically never your objective?

Mike Bennett

That is one way to go at it. I might come at it in a little different direction, but probably about the same conclusion.

Michael Christodolou – Inwood Capital

Would you ball park significant majority, is it more than 50%?

Mike Bennett

Well, the way I would characterize it is kind of what we said in the release. We are 20% for a 12-month forward period and virtually all of that gas was purchased to hedge first and second quarter sales commitments and so I guess roughly looking at it, although as I am sure it is not resized would be to double up the number and use it for first half number. Obviously, that is not exact. You may have some smaller positions further out, but it is the substantial gist of where we are.

Michael Christodolou – Inwood Capital

Is it fair to say you were surprised by the pre-pay volume you got?

Mike Bennett

Yes, I guess so. We felt that prepayments would be good with farm income where it has been and certainly we believe that growers are in a pretty good shape from a cash standpoint and also I think with what we saw as a late and continuing trend of upward pressure in pricing that it was important for growers especially those that had contracted some of the 08 crop forward to get a fix on where there cost would be and so, at the end of the day, the number was a little larger than we likely guessed, but as things have played out, I think it makes a lot of sense to us right now.

Michael Christodolou – Inwood Capital

I guess I was struck at the mismatch between your inventories. You brought inventories down from 211 to 113 and yet your prepays were up almost fourfold, so it does seem like you are just trying to be disciplined in keeping inventories down to the back of the calendar year, and that the farmers have fervent and sustained demand. Any other colored commentary you could offer on that?

Mike Bennett

To a lesser degree, all of that is true. The one thing I had pointed out was that on the yearend balance sheet, our UK inventories are no longer a part of our reported inventory, so they made up some of that difference but certainly it has been one of those years where the field activity has been brisk, we had a pretty good fall on ammonia application and did end with the first of the year with pretty low system inventories.

Michael Christodolou – Inwood Capital

My last two questions are on the UK JV, so this $0.08 of cost that you expensed, it would be a non-GAAP number, would that add back the $0.08 and get you to $0.74, is that correct?

Mike Bennett

In essence, yes.

Michael Christodolou – Inwood Capital

And then the $9 million additional cost in 08 for the UK JV, I think that is a different matter. I was just kind of clarifying, is any of that going to be expensed? Could there be another non-recurring $0.03 or $0.04 hit if you will to earnings?

Mike Bennett

We would expect that to be expensed throughout 2008.

Michael Christodolou – Inwood Capital

And so that would be kind of a similar matter to what we are just discussing here now?

Mike Bennett

If you want to look at it like that, the joint venture has some additional synergy cost that they are going to have to undertake throughout the year. They will do those and we estimating that that will be roughly $9 million.

Michael Christodolou – Inwood Capital

Nice quarter and I can remember when you equity cap was almost lower than your prepays, so congratulations.

Mike Bennett

We remember it pretty clearly too, Mike.

Operator

Your next question is a follow up from the line of Charlie Rentschler from Wall Street Access.

Charlie Rentschler - Wall Street Access

I realized we are getting kind of late here, but Mike, let us say I am a mythical corn built mid western farmer and I am seven or eight weeks away from planting corn if that is what I am going to do, but I am looking at Bloomberg here with soy beans well north of $13.00 and my local co-op is quoting me close to $700.00 a ton for anhydrous, what is going through my head here and what do you think this guy is going to do?

Mike Bennett

I think a lot of it depends on where the guy is and what his yield potential is. If I had to guess where we will lose of the corn acreage this year, we will be certainly in some of those areas in the south that planted corn that were not necessarily traditional corn markets and also if you are a grower and maybe in more southern portions of the mid west, perhaps, Missouri, very southern Iowa that sort of thing where the yield potential may not be as great as it would be in much of Iowa or Minnesota or Illinois and so forth, my guess is those growers will lean a little bit more to soy beans. I think that is where some of that acreage shift is going to come, but when you look at the real good ground up here and when you look at some of the strong basis we are seeing because of the strong demand from these ethanol plants, a lot of these new plants are growing up in places like the State of Iowa, state of Minnesota, Illinois, South Dakota, but through that stretch at least at this point in time, from talking to customers and so forth, we do not see a big change on the part of those people in terms of corn intentions.

Operator

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

Mark Bennett

Well, thank you very much. We appreciate you all joining us today on our call and we look forward to speaking with you at the end of the first quarter on our call at that time. As always, if you have any questions or follow up, please contact Joe Ewing and if you would like to come out and visit us, give us a call, we would love to have you. Take care and have a great day.

Operator

Thank you for your participation in today’s conference, this concludes the presentation. You may now disconnect. Have a wonderful day.

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