CF工業控股 (CF) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2007 CF Industries results conference call. My name is Lauren and I will be your coordinator for today.

(OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's conference, Mr. Charles Nekvasil, head of Investor Relations.

Thank you Lauren. Good morning ladies and gentlemen and thanks for joining us on this conference call for CF Industries Holdings, Inc.

I am Chuck Nekvasil, Director of Public and Investor Relations and with me are Steve Wilson, our Chairman and Chief Executive Officer; Tony Nocchiero, our Senior Vice President and Chief Financial Officer; and Dave Pruett, our Senior Vice President of Operations.

Yesterday afternoon, CF Industries Holdings, Inc. released its second quarter results.

As you read our news release posted on the Investor Relations section of our website at www.cfindustries.com and as you listen to this conference call, please recognize that both contain forward looking statements within the meaning of Federal Securities laws.

All statements in this call other than those relating to historical information or current condition may be considered forward looking statements.

These forward looking statements are subject to a number of risks and uncertainties, many of which are beyond our control and which could cause actual results to differ materially from such statements.

These risks and uncertainties include those spelled out in the Safe Harbor Statement included in the news release. Consider all forward looking statements in light of those and other risks and uncertainties.

Now let me introduce Steve Wilson, our Chairman and Chief Executive Officer.

Thanks, Chuck and thank you all for joining us this morning.

Yesterday afternoon, CF Industries announced second quarter net earnings of $93.6 million or a $1.65 per diluted share. More than double the net earnings or $42.6 million or $0.77 per diluted share in last years second quarter.

This year's unprecedented increase in domestic corn acreage help set the table to a very profitable second quarter for the North American fertilizer industry.

We capitalized on that opportunity through strong operating performances by our sales, manufacturing, logistics and distribution teams.

Cool damp weather delayed a lot of corn planting. When the weather finally turned favorable, it took a combination of well positioned inventories and our effective transportation and distribution capabilities to get product in the customer's hands and deliver those strong second quarter results.

Our second quarter performance clearly reinforced the value of our ammonia distribution system as a key differentiator for CF Industries as a late spring surge in demand provided us with an opportunity to finish strong.

As the news release details, our nitrogen segment enjoyed robust increases in prices and volume producing a $32.8 million improvement in gross margin versus last year's second quarter.

In tracking average nitrogen selling prices from first quarter 2007 levels, we saw ammonia prices rise by $92.00 per ton to $390.00, the urea prices by $37.00 per ton to $331.00, and UAN prices by $20.00 per ton to $206.00 per ton.

Our phosphate segment with even stronger overall price increases delivered an almost five-fold improvement in gross margin over 2006.

The average DAP price rose $87.00 per ton from first quarter 2000 levels to $349.00 per ton while MAP prices rose by $72.00 per ton to $341.00.

Speaking of price comparisons you will note that the first quarter average prices included in our release are higher than those we reported with our first quarter results.

As we have indicated in our financials that accompanied the news release, we have corrected certain amounts in our nitrogen and phosphates segment data including average selling prices. This did not impact income.

Second quarter reported gross margin in nitrogen was negatively affected by a non-cash $36.3 million pre-tax unrealized loss which amounted to $0.41 per diluted share on an after tax basis. This unrealized non-cash loss resulted from mark-to-market adjustments on natural gas derivatives at June 30th.

By way of contrast in last year's second quarter, nitrogen gross margin benefited from a non-cash $11.7 million pre-tax mark-to-market gain. This represented $0.13 per diluted share on an after tax basis.

We recognize that investors make their own judgments on how or whether to factor in these adjustments as they assess reported performance, but to me the key is these unrealized non-cash gains and losses do not reflect the underlying margin locked in on orders taken under the company's forward pricing program.

Only the derivatives are mark-to-market.

As fertilizer sales are realized in future quarters, any gains or losses on those derivatives are generally offset by changes in the cost of the natural gas actually consumed in our production process.

In other words, regardless of reported mark-to-market adjustments, we still earn the original locked in margin on the underlying orders.

In a moment Tony Nocchiero, our Chief Financial Officer will walk you through the quarter's results in more detail.

I'll just close my opening comments by characterizing our performance as an extremely strong one.

Back in April on our first quarter conference call, we told you that we were well positioned to capitalize on improving demand and pricing for both nitrogen and phosphate.

As the industry moved in to what was shaping up as the largest planted corn acreage since the 1940's, the weather delayed the season a bit, but our good operating and logistics performance permitted us to deliver on the opportunity with strong financial results.

Now Tony will provide some added details on our financials.

Thanks Steve and good morning everyone.

As Steve noted yesterday afternoon we announced second quarter net earnings of $93.6 million or $1.65 per diluted share.

Those results were more than double the $42.6 million and $0.70 (sic - see Press Release) per diluted share we reported for the second quarter of 2006.

Gross margin increased by $76 million or 76%. That gross margin increase is after the effect of recognized $36.3 million of unrealized mark-to-market losses on nature gas derivatives in the current quarter.

We recognized $11.7 million of unrealized mark-to-market gains in the second quarter of 2006.

Financial highlights for the quarter compared to last year's second quarter include -- net sales increase by 23% to $849 million, total volume was up 6% adding $11 million to gross margin, our nitrogen shipments were up by 10%, which more than offset an 8% decline in phosphate shipments.

Selling prices were higher for all products except ammonia increasing total sales and gross margin by $98 million, of which $47 million was in nitrogen products and $51 million was in phosphate products.

Our realized natural gas costs decreased by $19 million, primarily due to reduced realized losses on natural gas derivatives.

SG&A expenses were $17.5 million compared to $14.3 million in last year's second quarter.

Two significant contributors to the increase were higher cash and stock-based incentive compensation totaling $1 million and corporate office relocation expenses of $800,000.

Cash flow from operations totaled $111 million versus $44 million in the year earlier quarter primarily due to this year's improved earnings.

Our liquidity remains strong. As of June 30, 2007, we had cash in short-term investments of $566 million and $190 million available under our senior credit facility which was undrawn.

And finally we declared our regular quarterly dividend of $0.02 per share payable on August 31, 2007.

As Steve noted, we delivered very strong financial results and the improvements we've highlighted are in comparison to a second quarter of 2006 that delivered strong results in its own right, Steve.

Thanks, Tony. So we have just completed a very profitable second quarter and first half.

Looking to the second half of this year into the Spring of 2008, I am optimistic that we will continue to take advantage of the opportunity this marketplace presents.

The fact is the table is still set for CF Industries.

All indications are that this year's corn crop will produce substantially increased revenues for farmers with expected continued growth and demand for corn, not just to feed the domestic ethanol boom, but also to supply export and other markets. We are looking at another very strong year for corn acreage in 2008.

Will planted corn acreage match this year's 92.9 million acres? Probably not. After all, agronomic reasons alone suggest that farmers will rotate some corn acreage to soybeans.

Even so we are looking at a 2008 corn crop that the respected Doane Agricultural Service has preliminarily projected at more than 90 million acres.

Given demand for corn, that kind of acreage, coupled with this year's expected yields should sustain corn prices at levels high enough to encourage robust planting and fertilizer application rates, but not so high that we begin to see demand destruction.

I would also expect that memories of this year's spring season could produce strong demand for fall fertilizer application.

The cool damp weather we saw throughout a sizeable portion of the Corn Belt delayed planting and apparently led to reduced fertilizer application in some areas. Farmers may use the fall application season to catch up or to reduce the risk or delays next spring.

I believe the substantially increased forward pricing program bookings we reported in our news release are a good indicator of the fall season's potential strength which we think should carry over into the spring of 2008.

Keep in mind too, that the combination of natural gas derivatives to support those FPP orders and existing product inventories should help protect us from any weather related natural gas cost spikes in the second half of the year.

Our second quarter release also announced that we have taken important steps to advance two initiatives we have discussed with you on previous calls.

We have identified reducing our dependence on North American natural gas a strategic priority for CF Industries.

To address that priority we have signed an agreement with Uhde Corporation of America, a world leader in both gasification and ammonia technologies, to proceed with preliminary engineering of a gasification project at our Donaldsonville, Louisiana Nitrogen Complex.

The proposed facility would produce hydrogen and carbon dioxide from a mixture of petroleum coke and coal. This would reduce -- this would replace hydrogen currently produced from natural gas at two of the complex's four existing and anhydrous ammonia plants.

I believe this project has the potential to reduce our dependence on North American natural gas significantly and to provide important cost and operating advantages at North America's largest nitrogen complex.

The preliminary study should require from four to six months to complete.

At that time, if project economics confirm our expectations, we intend to proceed with the front end engineering and design or FEED study and detailed engineering. The facility could be in commercial operation late in 2012.

We also announced the milestone in the potential development of a uranium recovery facility at our Plant City, Florida Phosphate Complex. We have signed an exclusivity agreement with NUKEM, Inc. in order to seek long term contracts with electrical utilities to supply a uranium compound to them.

We can extract the uranium compound as a byproduct of our phosphate operations with no reduction in overall fertilizer production capacity and no need to mine additional rock.

We believe NUKEM, one of the top five producers of uranium for nuclear power plants worldwide, brings technical and marketing expertise to this project.

Our plan is to obtain long term supply contracts that support the project's economics by year end. If we do so, the companies would then obtain project financing and proceed with detailed engineering for this facility which has the potential to generate attractive returns for both parties.

We believe these two initiatives both using proven technology have the potential to improve the financial performance on our nitrogen and phosphate businesses respectively.

One last point before we wrap up our comments and open up the call to your questions, we are now at 25 months and counting without a single loss time accident in any of our facilities. We are as proud of that achievement as we are of the financial results we reported for the quarter.

So with the usual caveats including weather, natural gas costs spikes and others, we are pleased with our excellent second quarter and looking forward to exciting prospect for this year's second half in the spring of 2008.

We are committed to delivering on those prospects.

With that I will open your call to questions. Lauren please explain the Q&A procedure.

Of course. (OPERATOR INSTRUCTIONS).

And you first question comes from the line of Marshall Reid with Bank of America Securities.

Good morning, guys. A couple questions. First on phosphate, how much product did you hold back from the export market from last quarter and can you just give us some color as to what sales margins would have been if you had made those export sales?

We held back some product as we indicated in our news release but I just assume not quantify it.

Okay and then on the FPP backlog, can you talk about sort of when those orders were received and the average selling prices for those forward sales?

Well, Marshall, as we have indicated in the past we do business under our FPP program most every day and we are putting out price indications certainly in this environment that are quite aggressive looking to capitalize on the strong margins that have been out there so that they come in throughout the last several months and at margins that we believe are quite attractive and we think our performance in the second quarter indicates that what we did previous to the second quarter led to margins that are quite good.

Okay, and then the last question I'll get back in queue on uses of cash, you have almost $400 million in net cash in the balance sheet, you probably have over $500 million after the next quarter with no major outlays for projects for another probably one to two years, why have you guys been reluctant to return some of this cash to shareholders with a higher dividend given the optimism you expressed in your outlook?

Well, we'd -- we cover that topic with our Board on a regular basis given our list of strategic initiatives, some of which we have talked about and some of which we haven't. We believe at this point, it's prudent for us to be in a position to capitalize on opportunities that come up along the way.

That's not to say we don't consider other uses of cash, it's part of our job to do that, we do that as part of our routine work internally and in our communication with our Directors.

Okay thanks Steve.

Thanks Marshall.

And your next question comes from the line of Brian Yu of Citigroup.

Morning Steve and congrats on the strong result.

Good Morning Brian. Thanks.

A few questions with regard in the economics of the [petcoke] project. Can you give us a sense of what the CapEx might be and the net gas equivalent operating costs and then I know in the past you have indicated that you were seeking a partner, that you have decided to go ahead, it does seem like you have the sufficient resources to fund the project internally. I just wanted to get your thoughts on those three aspects of the [petcoke].

Well, in terms of the capital expenditure costs, we are at the preliminary engineering stage so at this point we are talking about really boxcar numbers clearly north of $1 billion and how far north of that we don't know yet.

In terms of the economic justification again, that will require better knowledge of the capital costs than we have now. We think it is very likely to be quite attractive economically or we wouldn't be proceeding.

We continue to consider whether we should have partners and if so, who those partners might be. We have had a number of parties contact us, we have talked to people in terms of business partners, financial partners and as things evolve, we may bring someone else into the project. Certainly we will be seeking outside financing for the project.

We are comfortable at this point given our own expertise and as you mentioned our own capital structure proceeding with this phase of the project, but really not on our own, but in partnership with Uhde. We have a long relationship with them. They were a major part of our last capital program in the mid to late 1990's and we're very comfortable working with them.

Okay, would you say the net gas equivalent cost the [petcoke] plant in on the order of $3.00 minimum BTU or --

I'd just assume not quantify it at this point. We are not far enough along to give you that kind of number, Brian.

Okay and then turning to the phosphate side of your business. It looks like the phosrock productions declined for about three straight quarters in a row, is this just related to market demand, some occurring within the rock operations. Can you comment?

Sure, if you look at the second quarter of this year compared to the second quarter of last year there was significant -- significantly lower production this year.

The principal reason for that is that in the second quarter last year, we had abnormally high production of rock and so it's really just keeping our rock inventories in the proper balance going forward. There is nothing more than that.

Okay, and then last one on the phosphate realizations is that it does seem like the lag is still or persisting somewhat and would you expect your realizations to reflect spot rates in the third quarter?

Well I would never predict that our realizations would equal spot prices because we really don't do business that way.

We have seen quickly rising prices first quarter to second quarter, the market remains attractive. I think you'll find the margins that we have been booking will continue to be attractive as they were in the second quarter.

Okay thanks.

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

Hi, thank you. When you book a phosphate sale forward, do you also hedge the ammonia cost at that time?

No we don't, Steve.

Basically when we book a phosphate sale forward it's because we like the price, like the opportunity to make margin that we see for the time period over which it will be shipped.

And the increase in that percentage of your phosphate sales is included in the forward purchase program, is that a reflection of the domestic market demands being greater than in prior years?

I think that is a fair characterization, yes.

And in your -- your forward order book now that's roughly twice what it was a year ago, can you split that out between nitrogen and phosphate?

There is a significant piece of phosphate in there but I wouldn't want to quantify it.

Okay and just lastly on the phosphate -- the uranium project, would you expect NUKEM to be a financial partner on this or do you -- or just on the commercial end?

We would expect them to be a financial partner. They have expressed that interest and we are talking to them and I guess we are prepared to say in the broadest possible way as a business partner here.

Okay, alright, thank you.

Thank you, Steve.

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

Yes good morning. On your [petcoke] project, I guess there is another company that is doing a project -- a couple of projects and I am just curious, their project is mostly financed -- about 50% financed with debt and then the equity portion is basically split with a private equity holder.

Is this the kind of capital structure you're thinking about? That's my first question.

Second question is looking at the hedges that you have in for the third quarter, if you have any comments about any kind of mark-to-market adjustments we should be thinking about and natural gas for the third quarter and just lastly on the tax rate for the quarter, you've basically been running around 34%, 35% in the first half of the year. Is it -- is that the right rates you'll use in the second half of the year? Thank you.

I'll let Tony handle the last --

Yea, 35% is a good rate to use for the rest of the year.

In terms of our gasification project, we haven't determined what the capital structure will be for the project but these projects tend to be done in similar fashions. Large projects like this with roughly 30% or so equity and the rest debt financed, but we have not made that financing decision yet.

In terms of our natural gas positions, Mike, I guess the one comment that I would make is that we don't try to predict mark-to-market. We think of mark-to-market as being a snapshot of our gas portfolio against what the market is on a specific date.

In terms of the third quarter, that will be September 30th or whatever the last business day is of the month.

In the second quarter it was really only during the last week or two that we saw gas prices fall in that big mark-to-market adjustment build. So we don't project it.

In terms of my own personal view of the business, the first thing that I ask for from my accounting people after I see what the bottom line results are, is what's the mark-to-market and then I adjust it out personally.

You guys have to do whatever you think is appropriate, but since it's a non-cash item and since at the end of the day in subsequent quarters we will be reflecting both the gain or loss on the derivatives and the underlying physical gas purchase to determine the margin and we know what that margin is.

I actually think mark-to-market is pretty much a non-event. That's just a personal opinion.

It gives us of course an indication of the direction of gas prices and when gas prices are going down, by and large I view that as a positive for the business going forward.

And just a follow up on the gasification project. So I would imagine one of the big byproducts or a -- sorry not big byproducts but a byproduct of that is going to be carbon dioxide so I would imagine that there is plenty of opportunities given the location there to pipe that out for basically natural gas extraction, this, that and the other.

I agree with that and I'd also just remind you that we run four urea plants at Donaldsonville and a significant amount of that CO2 will be required in manufacturing urea and upgrading urea into UAN.

Congratulations on a great quarter.

Thank you very much Mike.

Your next question comes from the line of Dave Silver with JPMorgan.

Good morning, Dave.

Yes, hi good morning. I guess I'd -- a couple of questions.

First I was hoping, Steve, that you could maybe discuss kind of your thinking in terms of moving forward on the coal gasification project and maybe my perspective might be this, I guess there is a coal gasification project just up the road a bit and there was an opportunity to be an off taker for ammonia from that facility.

And I noticed that while you are moving forward in coal gas, you're not moving forward or you hadn't been -- you're not in a position to make an announcement about moving forward in Trinidad and kind of when I, you know, draw a line down the middle of a piece of paper and put the two -- put, let's say an off take agreement, plus Trinidad on one side and a coal gas on the other, I think you could probably get as much or more ammonia at a lower capital cost to you, if you -- if you were to go the other way or chose an alternate -- choose the alternative of maybe an off take at someone else's project and move forward on Trinidad.

So, a messy question, but I guess I was just wondering if you could qualitatively discuss why you want to do the coal gas project and pass up an opportunity to be a off taker right in that area with no capital cost and instead have maybe another ammonia competitor in that region.

Well, I think I understand your question, Dave, so if I mess it up, please let me know.

First of all, we don't -- we don't view Trinidad and gasification as mutually exclusive at all. We view them as potentially complimentary. Trinidad would add to our nitrogen production capacity. Gasification by and large would be a replacement of the front end technology, albeit we would get a boost in output in going through this -- going through this process.

So we think that the economics of both of those stand on their own and we would be pleased to be moving forward in Trinidad if we had a site and the revisited economics justified moving forward.

With respect to the question of being an optic or at somebody else's project versus being a principal at our own facility I think clearly all these gasification projects would not be on the drawing boards if they weren't attractive economically and so, we are very interested in obtaining the economic benefits from the gasification process by itself and by linking gasification with our own ammonia production, we are maintaining and modestly increasing our productive output and presumably coming out with a better cost structure and less North American natural gas risk.

In terms of buying ammonia, whether it's from somebody else's project or on the open market, we have the capabilities to do that today and in fact we are regular buyers of ammonia on the open market.

Okay, and then small point, but you are going to have two off takers at the Faustina Plant there and maybe you could just discuss --I mean I'm sure you had the option of taking that position that I believe let's say Agrium has taken.

So, how did you assess whether you wanted to take that position or whether you were comfortable having someone else there.

In other words, earlier in this call, you did mention that your ammonia distribution capability was a real strength and it seems like, by not taking that off take position you are inviting someone else to develop an ammonia distribution capability in your same kind of -- in your same market, let's just put it that way.

Well, Dave, I can't speak to how or why somebody else came to the conclusion they came to. I think I'll just let what I said before stand as our comment on that issue.

Okay, thanks. So on the uranium side you're looking seriously about moving forward there and you're committing some capital.

Back in the 1990's when you last produced uranium, I think you had kind of a joint arrangement with another producer that allowed you to kind of conserve capital I guess at the processing step so separate or extraction, but combined processing.

Is that kind of the model you would consider here or are you looking at the uranium opportunity perhaps just separately as a just stand-alone investment, you 100% by CF.

We haven't come to a conclusion in terms of our own commitment to the project but I will tell you that NUKEM is very interested in putting capital up in their own right and we have yet to decide what the mix will be.

The economics on a very, very preliminary basis of course as you may have looked yourself are quite attractive and in the next phase we are going to find out really whether the marketplace will support that in the form of a contract that itself would support a capital outlay.

And as far as the uranium project, Steve, if you were to go forward by yourself, do you have a boxcar number for what a stand alone project where you are the only -- you control 100% of the project? Is there a boxcar number for the CapEx for that?

Well, implicit in your question is the conclusion that I don't want to leave there and that is that we have not made a conclusion that this would be 100% CF project. That is an open question. Boxcar number for the capital investment in the range of $200 million, maybe less.

Okay, very good, I'll get back in the queue, thank you.

Thanks Dave.

(OPERATOR INSTRUCTIONS).

And your next question comes from the line of [Stan McCullian] with [Limited Partners].

Good morning gentlemen. I have a strategic question about your internal view on the future of demand for phosphate products and to what extent do you think the demand is sustainable and do you think that there is room for further consolidation and consolidation to this industry and what -- do you have any sort of view on this or any plans to participate?

Well a lot of experts that who follow the phosphate industry have come to the conclusion that global demand for phosphate in the near term and by near term, I mean over the next three years or so, demand is increasing faster than capacity additions and so there is a lot of bullishness out there about the state of the phosphate market.

Having said that, we have gone through a lot of years in this business where the returns were not what we would have liked and so at this point we hope that that's sustainable, but it's very hard to predict based upon a robust demand worldwide for course grains, the way demand has grown there, it seems to support that view that demand is growing somewhat faster than supply.

Now around the end of the decade, the early part of the next decade there is a large project coming on in Saudi Arabia that will have to be absorbed by the marketplace that could cause a hiccup in terms of the trend here, maybe perhaps more than a hiccup.

I am sorry Stan, what was your second part of your question?

Well I was asking about your view and sort of about the potential consolidation --

Okay, I'm sorry. Consolidation, it's an industry that's consolidated quite a bit. You've got of course one big player in the North American market, two of us who have rock or are quite a bit smaller than that big player and you got a couple players who are working off of imported rock.

Is there room for consolidation there? Perhaps, but that's for others to judge at this point.

Okay, thank you.

You next question comes from the line of Alex Mitchell with Scopus Asset Management.

Good morning, Alex.

Good morning. I wanted to go into some detail about your DAP realizations and can you just tell me if they were held back at all by the export market and what do you think the second half would intend for the export market and your realization?

Well, I -- speaking as one guy here I am quite pleased with our realizations in the DAP -- in our DAP business. In the second quarter $249 a ton up from $262 the quarter before, that's pretty aggressive escalation in pricing.

Did our average for the quarter get to the spot price that some that you have seen in the publications? No but the momentum coming out of the quarter on pricing was quite strong and however we're really not capable at this point at predicting future prices.

Okay, but what -- do you think that you're realizations were held back because the expert market really didn't kick in yet and probably -- and what would happen in the second half if it -- have your normal seasonal pickup in the second half?

Well, we held back a lower product from the export market in anticipation of a stronger domestic demand.

We're a participant in PhosChem the price that we get for our export business is determined by PhosChem's negotiation with customers around the world.

We'll see what happens in the months forward but we are very comfortable with where our DAP business is. There has been some a bit of softening in the export market pricing, albeit from very, very high levels and so we think the -- overall the market is pretty darn good.

Okay, what do you think will happen with phosphate rock prices going forward?

Phosphate rock prices?

Yes.

I'll just give you a very general answer. I think in general they have to be as strong as they are or rise because phosphate rock is a finite commodity.

We are not in the phosphate rock market. We are self-sufficient in rock so we are kind of a one off observer of that but we recognize the value in our reserve base, we recognize the value in our permanent position and it's a -- to me it's a part of the strength of our company that we are in balance from a rock standpoint.

I guess if there was a substantial rise in phosphate rock what do you think that would do to the players that not integrated here in North America?

Well, it depends on how high the rock price goes and whether that acts as a push to dampen MAP prices and then, of course, in the next stage is whether the increase in finished product prices might lead to demand destruction because you get to a point where sometimes the farmer has to make a choice among fertilizers and usually the last one to go is nitrogen and phosphate is one of the first to go and, of course, with rock costs -- rock being imported is subject to the vagaries of the shipping market and shipping costs have risen in recent years also.

Okay and can you -- do you have any further information about the Medicine Hat JV and whether you are in a position to possibly buy that out?

We look at a lot of things strategically. We have a whole list of things we look at. If something were to happen there, we would let people know. I have no other comment on that kind of opportunity.

Okay, thank you very much.

Thank you.

Your next question is a follow up from the line of Brian Yu with Citigroup.

Yes, Steve I have got a question regarding ammonia. Since around May, early June we have seen a divergence in Corn Belt ammonia prices versus the Gulf and this probably just reflects stresses on the distribution infrastructure which did flow through in your results.

So my question is do you think this is going to persist over the next several months as we head into Fall, i.e. will the spread remain at $150 per ton therefore that enhances the value of your distribution assets?

Well, I wish I knew a definitive answer to that question. We -- we have watched those spreads, we have watched that very closely all the time and we work hard to capture as much of that as we can.

I would frankly just reiterate your observation and that is with 20 ammonia terminals and our ability to move ammonia through the pipeline and on the river, we like our position and our sales people are out there everyday trying to make sure that that margin finds its way into our pocketbook.

Okay would you say between the ammonia pipelines and the barges that everything is essentially operating at capacity -- as much material as the system can handle is being moved right now?

Well our people answer the phones everyday when customers call with inquiries. We have terminals that are fully utilized. We have terminals that are less than fully utilized and so we are always seeking opportunities to take advantage of some underutilized locations.

Okay, thank you.

Thank you.

Your next question is a follow up from the line of Dave Silver with JPMorgan.

Yeah, hi. I had a question I was hoping to ask you about the character I guess of your FPP program right now.

So you have had the program under way for a couple of years, certainly a few years, and you noted in the release that there has been a significant pickup in participation and I was wondering if you could generalize or qualitatively say are these incremental FPP customers? Are these people that are locking in for the next few months? Are they purchasing for next spring?

In other words, or is there a different mix of products that people seem to be willing to purchase on a forward basis?

So, with this big pickup in activity, how would you -- how do you guys internally interpret what types of motivations are people demonstrating if their purchasing activity here?

Well, just to go back to the introduction to your question, Dave, we have to remind ourselves sometimes that we have now finished four years under this program so while two years ago we claimed to be neophytes now we have got four years of experience so we are very comfortable with the program.

I would not agree with your conclusion that we have added significantly to our customer base doing FPP business. Actually, we have a core group of customers with whom we do most of our FPP business and it's augmented by some others.

Remember a year ago we had particularly light interest in the FPP coming out of the aftermath of the hurricanes.

We had sticker shock on nitrogen product last spring, there was a reluctance to lock in at those prices because people thought perhaps prices would come down and they sat on the side lines for a while.

I believe what's happening -- has happened recently is that customers have taken to heart the experience of the spring where we had strong demand, we had strong pricing, there was an availability issue and so many customers want to make sure that they're assured a supply both for the Fall and even into next Spring.

So I think that this program -- the program popularity with customers is driven, of course, in large part about on expectations for both prices and availability. Both of those seem to be in our favor right now.

And just one aspect to my question I'll ask you to follow up on. Would you say that -- have you noticed any trend where buyers are willing to commit or willing to purchase further in the future than let's say your experience has typically been over the last four years?

I would say that we have had -- it changes quite a bit over time. I would say that the interest that we had recently is more like what we had a couple years ago than what we had a year ago because of the dynamics of the industry in terms of price levels and availability expectations.

Okay. I wanted to ask you a question about your gas hedging position. So first of all, I'm going to ask the question, I think Steve Byrne asked a great question last quarter when he said is your gas hedging strictly reactive or part of your FPP program or are you doing some separately. Are you doing some opportunistic hedging?

So your gas hedge portfolio right now, is it 100% part hedging FPP purchases or how would you characterize that?

Well, our baseline is that we do gas swaps to back committed nitrogen business. That is not the limit to what we will do in the past when we saw gas prices that we liked going out a few months or longer, we have been willing to take positions on gas that we are comfortable with.

And frankly, coming in through last week, most of last week the string was starting to get down into -- the strip was starting to get down to a level at least in the nearby months when we might have been interested in doing some of that. We have had a reversal $0.50, $0.60 or something like that in the last couple of days.

We just -- we watch the market, we're not a trader, we're not in the business of trying to speculate on gas costs, but if we feel confident that by locking in a gas price we can later sell the fertilizer and make a substantial margin we're not reluctant to do that, but we have not done it recently.

Okay, and then one other question about your portfolio of gas hedges here and that is that you did take a mark-to-market loss based on a June 29 or June 30 gas price and I guess this is a combination of the fact that I think due to the FPP business being more significant, your gas portfolio is larger and probably had been adding positions steadily here.

So I guess I am just wondering given that gas markets have been pretty soft, compared on a year to date basis, in your opinion, is there a possibility that you could have another mark-to-market loss in the third quarter or would the timing and the natural expiration and reversal of the existing position kind of make that hard to imagine?

Dave, I am going to have to take a pass on answering that because without advanced knowledge of what the gas prices will be on September 30th, I have no idea.

How about today's gas price?

What, I'm sorry, what about today's gas price?

Well, based on today's gas price.

Are you asking if the quarter ended today?

Yes I am.

I don't know the answer to that. I'd have to sit down and look at our whole portfolio against the whole strip and it's frankly, something that we really don't spend a lot of time looking at that during the quarter. It's a snapshot.

What's important to us, I know I'll be a bit redundant here if I say this but what is the margin that we locked in on our FPP business that will be realized when we actually make and sell the fertilizer.

Right.

What happens with mark-to-market is just a snapshot of a position which as we have just discussed changes every single day. The economics really come out in subsequent months and quarters when we make and sell the fertilizer.

Okay, thanks very much.

Thank you, Dave.

This concludes the question and answer session. I'll now turn the call back over to Mr. Wilson for closing remarks.

Thank you Lauren. As always thanks to all of you for your continued interest in CF Industries and we look forward to talking with you in the future.

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