Terra Industries Inc. Q1 2008 Earnings Call Transcript

Terra Industries Inc. (TRA)

Q1 2008 Earnings Call

April 24, 2008 3:00 pm ET

Executives

Joe Ewing - VP, IR

Mike Bennett - President and CEO

Dan Greenwell - SVP and CFO

Analysts

Michael Judd - Greenwich Consultants

Charlie Rentschler - Wall Street Access

Terence Ortslan - TSO Associates

Steve Byrne - Merrill Lynch

Brian Yu - Citigroup

Mike O'Reilly - Maximum Group

Kent Greene - Boston American Assets

Steven Leonard - Morgan Stanley

Evan Kochav - JP Turner

Michael Christodolou - Inwood Capital

Soon Lee - Royal Capital

Presentation

Operator

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

I'd like to now turn the call over to your host for today Mr. Joe Ewing, Vice President of Investor Relations. Sir you may proceed.

Joe Ewing

Okay, thank you very much Cady and welcome to everyone to Terra's first quarter results conference call. This morning we issued a news release announcing that for the 2008 first quarter. Terra achieved net income of $100 million or $0.97 per diluted share.

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.

I will speak now regarding recent and upcoming investor relations activities. Since our last earnings call we've participated in the three equity conferences, a leverage finance conference and a bond conference. We have several things coming up. Our annual reception for the New York area financial community on May 5th and May 6th. Also a tour of five western and southern cities in late May and conferences later in May and June hosted by Credit Suisse, Merrill Lynch and RBC Capital Markets.

We also continue to host visitors to Sioux City to meet with our management and to tour our Port Neal manufacturing facility. If anyone listening today is interested making this trip, we'd be happy to have you. Please call Kim Mathers or me to make those arrangements.

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

Mike Bennett

All right, thanks Joe, good afternoon everybody. Terra kicked off 2008 with an excellent first quarter in terms of revenues, net income and cash generation. Despite steadily increasing natural gas prices, nitrogen prices progressed upward over the quarter, resulting in strong margins for our products.

Our overall North American sales volumes were off slightly from last year’s first quarter reflecting poor wet weather we experienced in March, in much of the corn-belt versus a last March, which was more conducive to early planning and fertilizer applications.

Our production facilities ran well as we expected, and unlike last year we realized a normal operating quarter from our Trinidad production. We realized solid contribution from our GrowHow UK joint venture and are pleased with the progress that business is making towards achieving expected cost synergies.

Looking ahead to the second quarter and balance of the year, the Midwest planning season is of to a slower start than last year. As of last Friday only 4% of this year’s current crop had been planted. This week while we had experienced some normal rain showers in areas of the corn-belt, the general weather patterns have improved and more farmers are getting into the field.

This late start could compress the ammonia application season in some areas and we believe it moved some ammonia demand over to UAN. Generally late planning springs are not unusual. We've been through a few of these before, and growers are able to get a lot of corn in the ground in a relatively short period of time.

We would expect the next three weeks to be extremely busy as that planning takes place and we expect this season to have a fairly long tail on it, as supplemental nitrogen applications occur well into June.

Corn prices have remained very strong and provide a powerful incentive for growers. We believe the prospect of realizing planted corn acres either above or below the 86 million acre forecast by USDA will depend to a great degree on the weather's effect on planting progress.

One somewhat unusual development in the marketplace is that we have seen strong early interest in UAN for off-season fill and ammonia for fall application. This reflects the tight supply-demand balance for corn that is expected to carry into 2009, as well as the likely strong demand environment for nitrogen in the next crop year.

Global nitrogen supplies continue to look well balanced and the recent imposition of higher fertilizer export tariffs by China should reduce trade of supplies for the next five months.

Natural gas prices have continued to creep higher than most market observers expected. Certainly, high natural gas prices in other parts of the world, driven in part by record crude oil prices have had an impact on this market. It remains to be seen how these markets will respond to fundamentals as the year progresses, and we will continue to be disciplined in our approach to secure margins on forward sales with corresponding gas hedge positions.

We are nearly complete evaluating capital projects that can enhance our future earnings performance through further upgrade of our existing ammonia capacity, and expect to reach a decision on one of these projects in the very near future. Our preparation to restart the Donaldsonville plant remains on track for the third quarter and also it should be noted that our environmental technologies business is on track for good growth and improved earnings this year and is laying a very solid foundation preferred a growth in 2009.

That's concludes my prepared remarks. At this time I'll turn the call over to Dan Greenwell for his comments. Dan?

Dan Greenwell

Thank you, Mike and good afternoon to everyone. Mike has highlighted the solid first quarter results and strong margin for nitrogen products. I would like to first round out our discussions of the top line with a few comments about the product selling prices and natural gas costs. Then I’ll follow with additional comments about our operating results and the joint venture operations in Trinidad and the United Kingdom and our planned restart with the Donaldsonville ammonia plant.

Net income available to common shareholders was approximately $100 million during the quarter or $0.97 compared to last years $6 million or $0.06 per share. Results in the first quarter of 2007 included a charge for the debt refinancing of $38.7 million or $0.26 per share.

Nitrogen revenues increased by $74 million in the first quarter of 2008, as compared to last year. The 2007 revenues included our United Kingdom operations which generated $90 million of first quarter revenues with an operating loss of approximately $1 million.

First quarter 2008, North American revenues increased by a $163.7 million. Approximately $155 million of this increase resulted from price improvements. During the first quarter selling prices on our primary product UAN increased from those we've achieved during the prior year. The average price for 32% UAN was $285 per ton in the 2008 first quarter compared with $185 per ton in the 2007 first quarter, an increase of 54%. As Mike mentioned, with the late start to the 2008 planting season we do expect strong demand for UAN throughout this planting season.

You may have noted that we classified the Beaumont results and balances as discontinued operations. The Beaumont facility is under contract to be sold with an expected closing to occur on or before January 2009. We are carrying the Beaumont assets on our books at an estimated realizable value upon sale. We filed an 8-K on April 8 that provides historically amounts on a restated basis.

North American natural gas cost increased by approximately $0.81 per MMBtu or $26 million during the first 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.

The year-over-year decrease to first quarter selling, general and administrative expenses included approximately $3.5 million due to the annual incentive accruals and share-based compensation. The primary decrease results from the variable accounting treatment for the Phantom share program. The share price utilized in the market 2008 analysis was $35.53 compared to $47.76 at December of 2007.

The 2007 first quarter included approximately $2.2 million of costs associated with the United Kingdom. The United Kingdom's operating results are now classified as equity earnings. Our United Kingdom joint venture of integration activities progressed well during the first quarter.

At the end of January 2008 the joint venture Severnside plant ceased operations and it is now closed. Additionally, Terra's former administrative offices have been closed and all services and core systems are now consolidated at the GrowHow head quarters. Sales prices and volume increases in the UK were partially offset by the higher gas cost.

As part of the joint venture contribution agreement Terra was entitled to working capital true of adjustment and we received $28 million from the joint venture in the first quarter of 2008. The joint venture anticipates additional synergy cost of approximately $9 million throughout 2008. There were no significant integration or synergy charges in the first quarter.

As Mike mentioned we are currently undertaking turnaround in startup activities for a Donaldsonville ammonia facility. We plan to restart the plant in the third quarter of 2008. The aggregate cost of the startup activities will approximate between $10 million to $13 million, approximately half will be catalyst costs. Production from this facility will replace product that has previously been purchased in the international markets.

Terra's effective tax rate was 37% for the quarter. Terra expected federal cash tax payers starting the second quarter of 2008. We estimate our 2008 effective rate will be between 37% to 38%.

Our cash balances, which included almost $282 million in customer prepayment, totaled $817 million. This cash is invested in high quality money fund.

We also received 20 million from our Trinidad, another North American joint venture operation, during the first quarter. Additionally, as I mentioned earlier, we received $28 million from the UK as a settlement for working capital contributions upon formation of the JV.

We spent approximately $7 million for normal maintenance capital turnarounds during the first quarter of 2008, and we estimate that our 2008 sustained capital expenditures and turnaround cost will total between $60 million to $65 million.

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

Mike Bennet

All right. Thank you, Dan. That concludes our prepared remarks this afternoon, and at this time, I would like to turn the call back over to Katie, and she can instruct you on how to pose questions to us. Katie?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Mike Judd from Greenwich Consultants. Please proceed.

Michael Judd - Greenwich Consultants

Yeah. Good afternoon and congratulations on a good quarter.

Mike Bennett

Thank you.

Michael Judd - Greenwich Consultants

The Donaldsonville plant, you mentioned that it's starting up in the third quarter. Should we anticipate that it begins operations at the beginning of the quarter or middle or latter part of the quarter?

Dan Greenwell

Well, it's a fluid process, getting equipment, filled, completed and ready to go, but at this point, our best guess is that startup activities will commence in the month of August, and we would normally expect it to take maybe 10 days to two weeks to get the thing up to rate. So I wouldn't expect it to be a contributor for at least two of the three months in that quarter.

Michael Judd - Greenwich Consultants

Okay, and then, I understand that you would have, typically when you're doing a startup, you have higher fixed costs per unit and those types of issues. As you think about the profitability of that particular unit relative to other ammonia plants that you have just for the third quarter should be say cutting it a little bit just to be conservative?

Mike Bennett

Well, I think from a fixed cost standpoint, I would say probably not. One factor in startup costs on any plant even one that's gone down accidentally and restarts, is that there are some unabsorbed costs initially in startup natural gas used in the process. And so realistically for the month of September, that startup gas could have somewhat of an adverse impact on net profits. And so it's probably difficult to tell exactly what the level of contribution from that plant will be in Q3. But at this point we would expect it to have a full level of contribution in Q4.

Mike Judd - Greenwich Consultants

Okay. And just lastly, I apologize and I should know the answer to this question, but if I look at Terra nitrogen I look at the net income and look at the net income allocable to common units. Could you just describe the delta there? What are some of the factors there? And what should we be thinking about moving forward?

Dan Greenwell

Well, as we talked about in previous calls, we had a minimum cumulative deficit that had to be made up to all the common unit holders. That was done in the current quarter. And deficit has been satisfied. In fact the general partner was entitled to some additional compensation in the current quarter. That had an impact of roughly $0.39 per common unit on the partnership going forward. There is probably $0.165 distribution before the high-splits take into effect and so any distributions or earnings above that, the joint partnership should be entitled to those.

Mike Judd - Greenwich Consultants

So if for modeling purposes, if I am calculating a net income, I just need to basically here correct that debt by $0.165 basically to come up with the EPS estimate on a common unit?

Dan Greenwell

No I wouldn't do that. There is disclosure in the partnership 10-K that provides a table that shows that the relative distribution levels, how much each shareholder class is entitled to. I would key that table if you're developing a model.

Mike Judd - Greenwich Consultants

Thank you.

Operator

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

Charlie Rentschler - Wall Street Access

Yes, can you hear me, okay.

Mike Bennett

I can. Thank you, Charlie.

Charlie Rentschler - Wall Street Access

You commented about a slower start of corn planting this spring versus last but with the price of beans being only about 2.3 times the price of corn, would it be reasonable to expect that farmers would probably do everything they could do to get that corn planted this spring, even if it was a bit late.

Mike Bennett

Yeah. I think as I kind of alluded to that in my prepared remarks Charlie, certainly the economic incentive is there. If the weather holds well and the planting progress moves forward. I wouldn't be a bit surprised to see that acreage estimate, kind of edged up by those farmers because of that economic incentive. But we don’t have it in the ground yet and it's always difficult to predict the weather. So I think right now that weather will certainly be a variable in that ending level of acreage.

Charlie Rentschler - Wall Street Access

Yeah, and I suspect then falling on that, there probably wouldn’t be farmers cutting back much on ammonia applications. I mean, although the prices are substantially up, they are going through the goal would that be a fair assumption?

Mike Bennett

Well, yeah, even if current fertilizer costs Charlie and not just nitrogen but across the board, there is still a, I think a pretty strong profit incentive for growers per acre of corn especially in the average or above average yield areas and we wouldn’t expect to see any significant changes in the application rates.

Charlie Rentschler - Wall Street Access

Okay, and then just as a final question about the summer. I don’t know if you use the climatologist or saucer or somebody like that. But do have any point of view about what the weather conditions could be like in the corn-belt. I've heard some talk about a two-three week drought. How likely is that?

Mike Bennett

Actually, we've got a real left wheel and we converted into a weather prediction device, but, you know all about it.

Charlie Rentschler - Wall Street Access

That is cheaper than the saucer, right?

Mike Bennett

Yeah I agree. In Iowa State one of their climatologists has, as you stepped from an odds perspective that there could be a better chance of dry weather conditions in parts of the corn-belt this year. But certainly we are starting the year out with generally very good soil moisture conditions and so really one of the keys here will be to get this corn in the ground early enough to get it canopied before we possibly enter into any dryer weather patterns. But at this point, sometimes it's hard for me to figure out what's going to happen this weekend, but generally at this point anyway they're in pretty good shape.

Charlie Rentschler - Wall Street Access

Okay. Thank you, and keep up the great work.

Mike Bennett

Thanks Charlie.

Operator

Your next question comes from the line of Terence Ortslan from TSO and Associates. Please proceed.

Terence Ortslan - TSO Associates

Thanks. Thanks for a great review. Can we talk about the impact of the imports coming into the market, tell me why also the price. Then also, maybe you want to make a few comments about the export taxes or the limitations. And then maybe in fact, there are no limitations coming from the Black Sea. Thanks.

Mike Bennett

Sure. Well, yeah, first of all, on imports, fertilizer imports, particularly nitrogen were up this year, and they needed to be because of the very low system inventories that we carried out of the last crop year. And so I think the pricing basis in the US was such that imports did flow better than they had the previous year and at this point it appears that the market is reasonably well supplied.

I think one of the surprises last year was the, at least globally was the relatively high amount of urea that was exported in the global markets from China. And at least from what I can read apparently the impact of that on domestic supplies in China has been of concern to officials there. I think it's a 135% tariff on exported urea has been enacted through September, in part to make sure that too much urea supply doesn't slip out there. So, going forward, we think, starting this season we're in pretty good shape relative from a supply standpoint. As we've indicated, a lot of folks would expect us to follow this upcoming season with a pretty strong corn season next year. And certainly the overall import situation may change, we’ll see, but certainly could be impacted by some of these other measures that are happening elsewhere.

Terence Ortslan - TSO Associates

All right. Thank you very much.

Operator

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

Steve Byrne - Merrill Lynch

Mike, when you mentioned you are seeing orders for off-season and fall delivery of UAN and ammonia. Have you seen that in the past in April?

Mike Bennett

The arms width is not really there Steve, but it's seems like the last few years this whole process has been kind of accelerated. I think a year ago we got some of the first increase in late May and some of that business was done then and in June typically or historically we haven't consummated much of that business until July. And so I think that, I think there are lot of factors at work here Steve and certainly among there is a very deep future market for corn that creates I think a financial incentive to perhaps look at hedging 2009 crop year corn with input costs. As well a fact, again as I stated that, anyway you pencil it out, if we end up with 86 million acres this year, unless the yields are absolutely phenomenal there is a good chance we're going to further aggregate that the corn inventories and I think the expectation will be to send some strong signals to the growers for planting corn in 2009. And I think some of our customer's firmly believe that this may be the time to begin to tighten global supplies to stock up for that.

Steve Byrne - Merrill Lynch

Do you think that your customers perceive the market to be balanced in terms of nitrogen given prices have been pretty flat the last few months. Or do you think there is concern out there that particularly with the urea cut that was from China that nitrogen markets could tighten up? What do you think your customers are thinking and what is your view?

Mike Bennett

Well. First of all I guess the last few years the early purchases have probably been the best from a class perspective for customers. And so, I think we have that track record that's in place. Certainly, I think the potential impact of the tightened global supplies through various actions, such as China's are weighing under the mines as well. And I guess the other factor that we talked about is a fact that, if energy costs stay relatively high both here and in Europe and elsewhere, that effectively lends a fair amount of support for what people may anticipate prices to be going forward.

Steve Byrne - Merrill Lynch

And then just lastly on the same topic, how has it affected your forward sales, more specifically, how many products have you sold beyond the second quarter and are you selling at prices consistent with current levels or you expecting them to go higher and thus are making your offers at higher prices.

Mike Bennett

Well. Let me try to answer in this way. We certainly had some business on the books for Q3. We certainly believe that what has been done thus far isn't totally inconsistent, I guess, from a pricing level standpoint with what, the publications have shown for some of the average pricing over the past several months. And certainly it would be our objective as we did a year ago, if the economics are there to continue to try to walk up some values from those initial levels, like we have the last couple of years.

Steve Byrne - Merrill Lynch

Okay, thank you.

Operator

Your next question comes from the line of Brian Yu from Citigroup. Please proceed.

Brian Yu - Citigroup

Hello, great, thanks and good afternoon Mike.

Mike Bennett

Hi, Brian.

Brian Yu - Citigroup

Mike I want to get some of your thoughts, it looks like the prepaid are a little bit lower, just based on our forward natural gas position. I want to find out, do you think that because of just delayed plantings or is this a more conscious decision on your part to not to commit to sales at lower margins, based on what we are seeing in the spot market.

Mike Bennett

Well, I guess, first of all, the prepayment level, I think at the end of the quarter was about, pretty close to $300 million versus just under a $148 year ago and so, I suppose when you [swag] that from a pricing standpoint. It is not just similar to -- its may be actually slightly higher and I guess Brian, what we -- this is what we generally saw from a prepayment standpoint is that the UAN commitments weren’t that dissimilar and we did see a little increase, I think, earlier on in ammonia for the spring prepayment, but generally I'm not sure that they're substantially different than a year ago, given the inflationary impact of selling prices on those numbers.

Brian Yu - Citigroup

Okay. And -- some of your peers have started to comment on the margins --that and the pre-pays. Would you be able to comment on your pre-pays, are margins flat, better or worse than what you posted this quarter?

Mike Bennett

Well, I'd rather not comment on that, but what I can tell you is Brian is as you noted, and I think probably asked me the question on the last call, the numbers that we looked at each quarter always are kind of, part of an evolution, and certainly, we have seen some better pricing as things have moved forward. Certainly, as we've talked, we've also seen some cost increases as well. And so, on balance, we've seen probably some improvement on both sides of the ledger, but beyond that, we'd probably rather not predict margins at this point in time.

Brian Yu - Citigroup

Okay, and then, last one is a little bit more macro. We've seen spot global natural gas prices really shoot up, and it looks like US may actually be one of the lower natural gas cost regions outside of Middle East or Russia. But are you seeing anybody, any nitrogen operations being pressured by high natural gas costs in the current time?

Mike Bennett

Not currently. Certainly, as you pointed out, those gas prices are higher, certainly in Europe, and obviously some of that is the fact that there the pricing mechanisms they are still to a degree, linked to crude oil prices, which have been at record levels. And I think the gas market here has been nudged in part to the fact that right now because of those high levels over there, other markets are attracting more the available LNG supplies at certainly a greater proportion than they did a year ago.

So I think a lot of what happens really in gas markets will depend on it at some point, what we see oil prices do? What impact that has on some of these other markets and how it impacts the flow of LNG. Some of that's really tangible from the supply standpoint. I think a lot of that is to a degree psychological. But at this point, I'm not aware of any operations that would be specifically pressured, because of I guess, because of cash margins.

Brian Yu - Citigroup

Okay. Thanks.

Operator

Your next question comes from the line of [Mike O'Reilly] from Maximum Group. Please proceed.

Mike O'Reilly - Maximum Group

Hi, guys I'm going to do my best to ask some fertilizer questions, although I am a Northeastern guy.

Mike Bennett

Great.

Mike O'Reilly - Maximum Group

We've talked a lot about corn and nitrogen here and this is a general comment about these. Sometimes you feel like an orphan child to the pro test players even though you guys participate in the same supply demand. In balance your growing is quickly and you continue to participate in the global growth in agriculture?

Mike Bennett

Well, we're nitrogen people, I guess long-time nitrogen people. So we are used to that. But it is a good industry and obviously will part of the food production story just like the other folks are.

Mike O'Reilly - Maximum Group

And I guess you just touched on it, you don't want to get into your margins. But I just --maybe you can help me with this a little bit. Even if natural gas rose that price increase could still be passed on to customers via their demand and go by bringing on your ammonia facility at the same time. Is a possible you'd would be able to maintain what the margins are now and grow those margins higher?

Mike Bennett

Well. Any thing is possible but I wouldn't point out that for some time now the natural gas price and the nitrogen price especially domestically have basically been decoupled. And so while certainly, ultimately global energy values and I talked in the last question a little bit about that link between oil and gas in some markets and it may impact thinking here, could have some impact on supply in certain areas. It's ultimately the supply-demand balance for nitrogen that will influence where nitrogen prices go form here. So in a back-ended way or in a roundabout way I suppose that could happen. But it was straight forward fashion these markets are moving somewhat independently right now.

Mike O'Reilly - Maximum Group

And just the last question or comment I had about going forward here is again we spoke all about corn today but you also have diversified crop needs as I understand. Whether the USDA came out and said we should go for corn, but you still participate in wheat and other crops as well. So you have a diversified phase with green inventories being at all time low and there happened to be a CNBC comment today about additional unfarmed acres that no doubt may reduce current crop prices. I suspect that you guys would still benefit from additional sales at that point. So corn looking forward, I mean looking forward do you still see you have a strong global market for Terra.

Mike Bennett

Absolutely I mean we talk a lot about corn and corn is certainly a very important market for us, but wheat is a good market for us as our cotton and other crops. And our industrial business is a good market that helps drive our results as well. And certainly looking at aggregate in global grain inventories that are at extremely low levels, at least 30 year lows and that is something which is not going to corrected overnight. And so yeah, I think it is very positive demand environment for nitrogen and other nutrients as well going forward here.

Mike O'Reilly - Maximum Group

That is what I meant earlier when I said we talked a lot about nitrogen and corn because you guys are more than that and sometimes perception leads to well maybe there -- it is a niche, it is a niche product, a niche company.

Mike Bennett

Sure.

Mike O'Reilly - Maximum Group

But really you have diversified; not only have diversified crop products, but you also have diversified business that people may not be paying enough attention to.

Mike Bennett

Well we do. We will try to emphasize that a little more in the future. Thank you.

Mike O'Reilly - Maximum Group

That was great quarter. Thank you, guys.

Operator

Your next question comes from the line of Kent Greene from Boston American Assets. Please proceed.

Kent Greene - Boston American Assets

Great quarter. Those guys from Iowa would tell us.

Mike Bennett

Thank you.

Kent Greene - Boston American Assets

I happen to be from Iowa that is why I said that.

Mike Bennett

All right.

Kent Greene - Boston American Assets

My question pertains to natural gas and hedging. We have seen spike up, almost $11 today on the other forward strip. A lot of industrial demand kicking in from utilities, what are you doing about trying to hedge your cost going forward, particularly if -- we get hurricanes, you get this fall or we get the [tightness] or we get usually hot weather, that kick in.

Mike Bennett

We'll, first of all, one thing we've learned over time with natural gas markets is anything can happen. And certainly and quite frankly, today, while you never know where this market is going, we -- most of the information we rely on, and opinions we rely on tell us that it might be a little bit stout in terms of taking open speculative forward positions. So we try to limit that in these periods of -- and this has been a relatively short price run up on natural gas, and we'll see how it develops over the course of the year.

But one thing we're doing however is we make product sales like we did, we've mentioned earlier in the calls. We are making sure that we get the forward gas positions locked up, so that we aren't short gassed relative to our sales, and give ourselves exposure that way.

One final thing I'll mention is that maybe one benefit of these big NYMEX run ups is that in the physical gas market, there tends to be a little less exuberance and as a result, we've seen some very substantial favorable basis differentials for our three ammonia plants in Oklahoma, and our ammonia plant in Iowa, which we've tried to take advantage of with some favorable basis swaps as we look out into the summer and the fall. So we're going to continue to sell products, where it makes, where we can lock-up forward gas with a favorable basis to produce the type of margins that we're looking for.

Kent Greene - Boston American Assets

Historically, your airlines get killed with higher raw material costs and chemical companies, which you are a chemical converter, benefit from margin expansion from rising commodity prices, have you put in -- or is the market strong enough, or you can pass through margin at a higher price of the raw material, then what is the natural gas as a percentage of your total cost?

Mike Bennett

That’s probably as a company; it's probably close to half of our cost.

Kent Greene - Boston American Assets

Okay. So 50%, so if you pass through half of the price increases and you get no escalation of the rest of it, of course you got escalation in another cost too, which I understand. But obviously, could you hold margins with higher prices in the future, as you lock in these and therefore you would benefit from the higher commodity costs?

Mike Bennett

Again, it’s solely or maybe, but today we don’t see a direct relationship opportunity, because again nitrogen prices, if you look back over the last two years have far outpaced changes in natural gas costs, which is why we are seeing some great margins and good earnings quarters here.

Kent Greene - Boston American Assets

Sure.

Mike Bennett

And so, as if any energy prices are pressured I would say it may be more of the case whether we see this phenomenon continue elsewhere in the world where other producers in other countries are closer to their cash cost to production at current global nitrogen levels. And if any of those producers are pressured to the point that they have to curtail production that in turn would impact the global supply of nitrogen, which could lead prices higher. So it wouldn't be so much that we wouldn't be pushing cost through is that we'd see perhaps a natural occurrence in the marketplace where a higher input cost leads to eventually a overall tighter supply, which I think creates higher end product prices.

Kent Greene - Boston American Assets

One final question, obviously the farmer gets big benefit from continuous applications and I think I saw a statistic recently where a farmer will get $7 back for every dollar of input. The Indian farmers get like $9 back for every dollar of cost input. So you agree with that rough assessment and then obviously there is very, very little price elasticity here as long as the end grain prices are running up faster than the cost of inputs.

Mike Bennett

Yeah. Again I guess I haven't looked at those particular metrics and so I not sure I can agree or disagree with them but what I can tell you is at current grain prices farmers get a very good return on their fertilizers dollar spent in terms of increased yield.

Kent Greene - Boston American Assets

Thank you.

Operator

Your next question comes from the line of [Steven Leonard] from Morgan Stanley. Please proceed.

Steven Leonard - Morgan Stanley

Hi, Mike congratulations on a great quarter.

Mike Bennett

Thank you.

Steven Leonard - Morgan Stanley.

Just trying to clarify a couple of things, obviously you're paying a dividend on TNH. Do you have any plans for Terra?

Mike Bennett

Well, at this point in time the whole idea of how we allocate and use our cash is one that we continue to discuss and we'll talk about it again at upcoming board meetings. Certainly as we revaluated some of these capital project opportunities to increase our future earnings capability and especially in a period like this where the access to the capital market has been pretty tight, we tended to want to be a bit conservative with that cash as we evaluate all the opportunities. But certainly we are getting closer as I indicated --I haven't sorted out where we would like to reinvest and how that impacts cash balances. And there are some signs that maybe the capital markets are starting to look a little better as well. So, certainly that would be an upcoming topic including our May Board meetings, but we have no definitive plan at this point in time for that.

Steven Leonard - Morgan Stanley.

Got it, and I guess turning to the TNH dividend for a second, as I calculated it, if he did the same $4.20, in the second quarter. I have the split going about $1.64 to the GP and $2.56 to the LPs. Is that about right?

Mike Bennett

It is probably not inconsistent or in the general range of that, if you assume that. Once again I will point you to the partnership 10-K. Look at the table in there and its fairly accurately describing the allocation of that, but you are probably not inconsistent.

Steven Leonard - Morgan Stanley.

Okay, so that should be a pretty nice uplift for TRA?

Mike Bennett

As the general partner, we will be saddled with additional moneys under that partnership agreement, yes.

Steven Leonard - Morgan Stanley.

Got it, and given the sort of valuation, at least on tons of nitrogen equivalent basis, the valuation difference in TRA versus TNH, have you contemplated selling off any further TNH stock to the public markets?

Mike Bennett

You know, we've talked about this in past calls. We have looked at it in a hundred different ways but don't have any different plans at this point in time.

Steven Leonard - Morgan Stanley.

Okay. Great. Thanks guys.

Operator

Your next question comes from the line of [Evan Kochav] from JP Turner. Please proceed.

Evan Kochav - JP Turner

Hi Mike. Congratulations on a good quarter.

Michael Bennett

Thank you.

Evan Kochav - JP Turner

In regards -- I think you just elaborated this, in regards with TNH. I mean, do you have any plans whatsoever going forward in regards to the company or what your plans out for the future?

Mike Bennett

Well, obviously, if we had any, we probably wouldn't telegraph you, you are too far out. But you know, we've owned the -- we've been the general partner and owned a majority of those units now for something like 14 years.

Evan Kochav - JP Turner

Okay.

Mike Bennett

Obviously, we think that the asset that TNH owns is certainly a flagship asset and one that will be a part of Terra for many years to come, and it's always something that we'll continue to evaluate but we don't have anything specifically to discuss at this point in time.

Evan Kochav - JP Turner

Okay, and one more question is, can you shed some light or elaborate a little bit on your guidance going forward from this point on?

Mike Bennett

Yeah, we don't issue any guidance.

Evan Kochav - JP Turner

All right, thank you very much. My best regards.

Mike Bennett

You're welcome.

Operator

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

Michael Christodolou - Inwood Capital

Hey Mike, a couple of questions for you. First of all, given that you're seeing some of these earlier indications of off-season demand, how do you expect that might influence your traditional strategy of minimizing inventories at the end of June, to set the stage for a good retail channel pump priming in the third quarter?

Mike Bennett

Mike, obviously, depending on how this progresses it may provide us some additional or maybe some unusual production and supply planning flexibility. Obviously, if we've got a better visibility into the demand potential for Q3 and beyond in an earlier date, it may well influence ultimately how we choose to upgrade and operate. But at the end of day, we are still looking for a good spring year and our expectation is for relatively low inventories coming out of it, but certainly, anytime we have a longer view I guess into the future, it makes planning that much easier.

Michael Christodolou - Inwood Capital

To the degree that you've got some third quarter business in your prepay, you mentioned you wouldn't comment on the margins, what would you comment on; is it fair to assume that the pricing is more indicative of what green market is showing as of right now as opposed to the average realizations you had on the first quarter?

Mike Bennett

What I would say is that, I'm not sure what green market is showing right now, but my guess is that they're picking up on what’s going on and I would guess they're reporting that and probably reporting something better than what we averaged in Q1.

Michael Christodolou - Inwood Capital

Okay. And then lastly, are you seeing -- do you have any export demand built into your third quarter off-season demand and I'm curious what feelers the Donaldsonville export terminal may be getting from the South Americans to the degree that if there is a little bit of shift away from corn, as all the prognosticators predict -- if there is any nitrogen left over it seems like the South Americans would gladly take it as opposed to letting you hold it into the third quarter. What's your take on that?

Mike Bennett

Well. It's hasn't been that long ago that we saw a little bit urea actually sit back out of the Gulf Coast because of those types of price arbitrages and this year given the fact that probably the big impact of the Chinese would have, would be on urea as a product. That would probably be -- if that were to happen at all that's probably the product that we'd see it in if any. But at this point in time it's pretty difficult to say, but I am sure if anybody has any extra urea left over and the price is good they'll be looking to monetize it.

Michael Christodolou - Inwood Capital

Excellent quarter keep up the way you are.

Mike Bennett

Thanks Mike.

Operator

Your next question comes from the line of [Soon Lee from Royal Capital]. Please proceed.

Soon Lee - Royal Capital

Hi, sorry to harp on the questions on TNH, but just a couple of more. Regarding the dividend that was paid in the quarter just the differences there and the earnings number what's the delta there?

Dan Greenwell

Typically what we have in the partnership agreement is a definition of available cash. And the things that we hold cash back for or with customer pre-payments and then any anticipated capital needs or other capital requirements. So there is a fairly prescribed calculation for that. So that are the terms available for cash and to the extent that depreciation in excess of capital expenditures, you are always going to get that less on that and then of course your working capital levels and things.

So historically if everything was flat and you would historically get differences between depreciation and capital expenditures, is sort of the long-term view of it. So that probably is the difference.

Soon Lee - Royal Capital.

Okay understood, and then the second question on TNH is, if I assume that going forward you earn the same amount that you did this quarter. It sounds like the distribution -- it looks like the distribution the way I calculated it through the 10-K, waterfall that you give out, is about $2.60 per share to the LP, which is significantly lower and assuming the a 100% power ratio is significantly lower than sort of your run rate for the past two quarters. So it sounds like that the folks that are in TNH for the dividend yield are in for a bit of a surprise going forward. To that end just to reiterate why wouldn't it make sense to lose some of your shares at this valuation for Terra shareholders?

Dan Greenwell

Well, let’s talk about the distribution. First of all I don't think it is a surprise. We have talked about it before. It has been publicly available. And the reason the distribution levels going forward may be different because there was a deficit to be made up of distributions. So there is a minimum quarterly distribution requirement before the general partner is entitled to any additional compensation that has been a deficit position for several years in fact and finally with the positive results have made up that deficit. It has been satisfied as of the first quarter. So now we are, we as a general partner of Terra, is entitled to the incentive compensation. So that is why there has been a difference and why it will change going forward.

So I think Mike’s comments on the ownership of the partnership of the core asset for us. It is flagship plant. It is something that we talked about in previous calls and with advisors, and we just -- we believe that's an asset we want to hang on to, for the moment, and if something -- we'll always continue to evaluate, but as of right now, we really don't have anything.

Soon Lee - Royal Capital.

Right, and you've been very frank about the distribution in the past, and I think anyone who follows the company understands the distribution that will be given to LPs going forward. Unfortunately, it just doesn't seem like the investors in TNH are fully cognizant of this, unless you can explain a different reason why there's such a large valuation discrepancy within Terra and TNH.

Dan Greenwell

No, I can't address what they're thinking. We are a 75% owner of the LP and we value our investment.

Soon Lee - Royal Capital.

Okay, I mean, are you scared at all that, that value will fall with the drop in the dividend?

Dan Greenwell

I -- we as a long-term owner of that flagship, 75% owner of that flagship plant. I haven't -I don't have any comments or are concerned about it or not. We think it's a valuable asset. We'll continue to retain it.

Soon Lee - Royal Capital.

Understood. All right, thanks guys. Great quarter.

Operator

You have a follow up from Charlie Rentschler from Wall Street Access. Please proceed.

Charlie Rentschler - Wall Street Access

Mike, you referenced quickly your Terra Environmental Technology business. Can you comment on progress ramping up for the sale of urea liquor for the SCR truck engines come 2010, which is not more than a year and a half from now?

Michael Bennett

Well, I certainly can, Charlie. You know, we continue to do a lot of work in that market segment and work closely with diesel engine manufacturers to prepare for that market. We do think that a decent percentage of that market will adopt the SCR technology, and we're working right now with our partners do to get set to supply some of that. We have shipped a little material out for people to begin using in various testing and preparation activities. And candidly Charlie, that's one of the markets that enters into our thinking and looking at these various upgrade projects and how we can establish our liquid urea balance for the future, to make that we can maintain our position for our UAN customers and ramp up, just acquire our new industrial customers on the urea liquor side.

Charlie Rentschler - Wall Street Access

Okay. And a couple of more. What is it going to take to get the UK Company where you like it, are there two or three significant steps that you could share with us that you feel you have to take?

Mike Bennett

Well, I think we took one big step already Charlie, and that was I guess it was end of the year in January. We did close one of the three production facilities there; that was a fairly high cost facility and it has been somewhat I guess, less than reliable in terms of on-stream factor. And, currently in the process of looking at capital modification that will enable the remaining two plants to produce basically the same amount of output as the three plants originally produced. And that's really the big value driver there because when you consider the sizeable fixed costs in the facility, we are able to totally eliminate that and maintain your sales volume, that’s a significant value. We taken that first step in getting that facility closed and decommissioned, and we’ve worked through at least a share of the costs needed to realize those synergies. And I think by the time we get to the end of the year, this year that things are going to be hitting all cylinders for us.

Charlie Rentschler - Wall Street Access

Okay. And just finally we talked as people talked about the fall orders, which you never have seen before. Could some of that be due to farmers going to do [tillage] as protocol? And applying nitrogen in the fall?

Mike Bennett

You know it could but, you know Charlie we are not sure that we see the application of fall nitrogen as really a gross market; there are issues that potentially can arise if you don't have the right soil conditions and so forth in applying that nitrogen and then having such a long dormant period from fall to spring. So typically the heavy soil areas where fall ammonia can be safely applied and remains in fact throughout the winter are areas where we'll continue to see that. But I think the bulk of the UAN will be positioned by dealers to put that in inventory. But I think that material still will be primarily a spring applied product.

Charlie Rentschler - Wall Street Access

Thank you.

Operator

You have a follow-up from Brian Yu from Citi. Please proceed.

Brian Yu - Citi

Thanks. And Mike my first question is little bit more housekeeping. With regards to Donaldsonville I know that your 400,000 ton per year number keeps coming up but do you intend to operate at 500,000 tons or 400,000 tons per year.

Mike Bennett

We will be operating at something a little higher than 400,000 Brian, My guess is we -- at least we hope to be in that 450,000 to 500,000 ton range. The 400,000 tons level is basically replacing the purchase material that we've been sourcing for the last three years and the balance will be used to satisfy some other business that typically we might be from other points?

Brian Yu - Citi

Okay, and then my second question, I am going to attack that the cash problem, if you will from a different angle. In the past when you and the Board had discussed, what's the necessary appropriate cash balance. And what do you view is necessary to satisfy growth, working capital, and then enough cushion for that, eventually down turn too, excluding the customer prepays you have over $500 million of cash, so…?

Mike Bennett

Thanks, well typically Brian, it’s pretty simple. I think from a working capital perspective, the way these businesses function, we haven't had all that much variability and so there typically we felt that something in the ballpark of $50 million might make sense. Certainly as we evaluate capital projects, that's getting to be little more difficult. As I am sure you all know, the last, at least year, probably six to nine months, the capital markets have been extremely tight. And as we evaluate a couple of projects that theoretically each, if we did both, could consume anywhere from $300 million to $400 million worth of cash. We just want to be prudent in examining that, especially with markets where they are. Certainly we believe that markets will continue to get better. We think that we are going to be up to the point of having a pretty good line of sight into which of these projects ultimately makes sense for us, given the markets that we are targeting to serve with that material. And should be able to be, I think, little more forthcoming in how that cash balance may be utilized as we go forward here in the relatively near future.

Brian Yu - Citi

Okay. You don't have any of that locked up under auction rate securities, do you?

Dan Greenwell

It's just high quality deposit funds. No.

Brian Yu - Citi

Okay.

Mike Bennett

We got one of those pretty rigid cash investment policies too, Brian.

Brian Yu - Citi

Okay, all right.

Operator

At this time, I'm showing you have no further questions. I'd like to now turn the call back over to management for closing remarks.

Mike Bennett

All right. Well, thank you all very much for your interest in Terra. We enjoyed the call. We look forward to talking with you again following our second quarter. In the interim if you have any additional questions or would like to come out and see us and visit Terra, please contact Joe Ewing, and have a great afternoon. Thanks.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation and you may now disconnect, and have a wonderful day.

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Comments

[nawaha]

I think it's a great service for you to publish earnings call transcripts. I just wish I were able to read the important part of the content! Are you including some characters in the text to preclude Firefox browser from displaying all the text? For example, in TRA's transcript, the first exec introduces two others, then the second says only that's the end of my prepared remarks, then the third turns it back to one of the first two. The entire piece is like this. Ditto for all the other transcripts I've tried to read. Would appreciate some feedback. Thanks.