TERRA INDUSTRIES INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 1-8520

TERRA INDUSTRIES INC.

(Exact name of registrant as specified in its charter)


Maryland		52-1145429
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Terra Centre P.O. Box 6000 600 Fourth Street Sioux City, Iowa		51102-6000
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (712) 277-1340

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

As of September 30, 2004, the following shares of the registrant’s stock were outstanding:

Common Shares, without par value 77,838,685 shares

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TERRA INDUSTRIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(in thousands)

(unaudited)


	September 30, 2004			December 31, 2003			September 30, 2003
ASSETS
Cash and short-term investments	$	144,592		$	87,334		$	21,278
Accounts receivable, less allowance for doubtful accounts of $233, $87 and $1,643		127,882			133,480			107,450
Inventories		90,823			90,869			87,599
Other current assets		54,294			43,319			32,835

Total current assets		417,591			355,002			249,162

Property, plant and equipment, net		665,900			707,665			706,610
Deferred plant turnaround costs		25,102			28,103			26,029
Other assets		31,585			34,292			35,194

Total assets	$	1,140,178		$	1,125,062		$	1,016,995

LIABILITIES
Debt due within one year	$	161		$	153		$	152
Accounts payable		73,052			79,563			74,956
Accrued and other liabilities		109,493			142,338			105,329

Total current liabilities		182,706			222,054			180,437

Long-term debt and capital lease obligations		402,081			402,206			402,242
Deferred income taxes		40,102			17,831			27,942
Pension liabilities		63,453			63,453			61,248
Other liabilities		43,858			65,325			47,155
Minority interest		91,446			89,062			84,777

Total liabilities and minority interest		823,646			859,931			803,801

STOCKHOLDERS’ EQUITY
Capital stock
Common Shares, authorized 133,500 shares; outstanding 77,839, 77,563 and 77,505 shares		129,473			128,968			128,920
Paid-in capital		555,616			555,529			555,509
Accumulated other comprehensive loss		(36,335	)		(44,596	)		(58,964	)
Accumulated deficit		(332,222	)		(374,770	)		(412,271	)

Total stockholders’ equity		316,532			265,131			213,194

Total liabilities and stockholders’ equity	$	1,140,178		$	1,125,062		$	1,016,995


See Accompanying Notes to the Condensed Consolidated Financial Statements.		2

TERRA INDUSTRIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per-share amounts)

(unaudited)


	Three months ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
REVENUES
Net sales	$	376,147		$	324,317		$	1,152,872		$	982,569
Other income, net		520			525			1,592			1,361

Total revenues		376,667			324,842			1,154,464			983,930

COSTS AND EXPENSES
Cost of sales		337,919			308,554			1,032,144			954,659
Selling, general and administrative expense		13,460			10,384			30,064			29,444
Recovery of product claim costs		—			—			(17,903	)		—
Impairment of long-lived assets		—			—			—			53,091

		351,379			318,938			1,044,305			1,037,194

Income (loss) from operations		25,288			5,904			110,159			(53,264	)
Interest income		774			48			1,763			429
Interest expense		(13,446	)		(13,829	)		(40,387	)		(41,664	)
Minority interest		(1,651	)		234			(8,150	)		12,902

Income (loss) before income taxes		10,965			(7,643	)		63,385			(81,597	)
Income tax (provision) benefit		(4,512	)		3,094			(20,837	)		31,615

NET INCOME (LOSS)	$	6,453			(4,549	)	$	42,548		$	(49,982	)

Basic and diluted income (loss) per share:
Basic	$	0.08		$	(0.06	)	$	0.56		$	(0.66	)
Diluted		0.08			(0.06	)		0.55			(0.66	)

Basic and diluted weighted average shares outstanding:
Basic		76,164			75,726			75,878			75,602
Diluted		78,210			75,726			77,839			75,602


See Accompanying Notes to the Condensed Consolidated Financial Statements.		3

TERRA INDUSTRIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Nine Months Ended September 30,
	2004			2003
OPERATING ACTIVITIES
Net income (loss)	$	42,548		$	(49,982	)
Adjustments to reconcile net income (loss)
To net cash flows from operating activities:
Impairment of long-lived assets		—			53,091
Depreciation and amortization		75,762			82,041
Deferred income taxes		23,913			(33,806	)
Minority interest in earnings (loss)		8,150			(12,902	)
Recovery of product claim costs		(12,874	)		—
Changes in current assets and liabilities:
Accounts receivable		6,437			(3,874	)
Inventories		933			237
Other current assets		(12,795	)		(4,660	)
Accounts payable		(7,146	)		(22,419	)
Accrued and other liabilities		(38,691	)		(9,120	)
Other		(120	)		569

Net cash flows from operating activities		86,117			(825	)

INVESTING ACTIVITIES
Purchase of property, plant and equipment		(8,136	)		(7,074	)
Plant turnaround costs		(14,989	)		(20,666	)
Other		(418	)		(1,100	)

Net cash flows from investing activities		(23,543	)		(28,840	)

FINANCING ACTIVITIES
Issuance of long-term debt		—			202,000
Principal payments on long-term debt and capital lease obligations		(117	)		(200,107	)
Deferred financing costs		—			(8,581	)
Proceeds from exercise of stock options		320			—
Distributions to minority interests		(5,766	)		(1,153	)

Net cash flows from financing activities		(5,563	)		(7,841	)

Effect of exchange rate changes on cash		247			305

Increase (decrease) to cash and short-term investments		57,258			(37,201	)
Cash and short-term investments at beginning of period		87,334			58,479

Cash and short-term investments at end of period	$	144,592		$	21,278


See Accompanying Notes to the Condensed Consolidated Financial Statements.		4

TERRA INDUSTRIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

(in thousands)

(unaudited)


	Capital Stock		Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total
Balance at January 1, 2004	$	128,968	$	555,529		$	(44,596	)	$	(374,770	)	$	265,131

Comprehensive income:
Net income		—		—			—			42,548			42,548
Foreign currency translation adjustment		—		—			4,570			—			4,570
Change in fair value of derivatives, net of taxes of $(1,848)		—		—			3,691			—			3,691

Comprehensive income													50,809

Exercise of stock options, net		159		161			—			—			320
Stock incentive plan		346		(74	)		—			—			272

Balance at September 30, 2004	$	129,473	$	555,616		$	(36,335	)	$	(332,222	)	$	316,532


	Capital Stock		Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total
Balance at January 1, 2003	$	128,654	$	555,167		$	(63,668	)	$	(362,289	)	$	257,864
Comprehensive loss:
Net loss		—		—			—			(49,982	)		(49,982	)
Foreign currency translation adjustment		—		—			18,692			—			18,692
Change in fair value of derivatives, net of taxes of $8,540		—		—			(12,810	)		—			(12,810	)
Minimum pension liability, net of taxes of $580		—		—			(1,178	)		—			(1,178	)

Comprehensive loss													(45,278	)
Exercise of stock options, net		266		342			—			—			608

Balance at September 30, 2003	$	128,920	$	555,509		$	(58,964	)	$	(412,271	)	$	213,194


See Accompanying Notes to the Condensed Consolidated Financial Statements.		5

TERRA INDUSTRIES INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The accompanying unaudited consolidated financial statements and condensed notes thereto contain all adjustments necessary, in the opinion of management, to summarize fairly the financial position of Terra Industries Inc. and all majority-owned subsidiaries (“Terra”, “we” and “our”) and the results of operations for the periods presented. Because of the seasonal nature of our operations and effects of weather-related conditions in several of its marketing areas, results of any interim reporting period should not be considered as indicative of results for a full year. These statements should be read in conjunction with our 2003 Annual Report to Stockholders.

Basic earnings (loss) per share data are based on the weighted-average number of Common Shares outstanding during the period. Diluted earnings per share data are based on the weighted-average number of Common Shares outstanding and the effect of all dilutive potential common shares including stock options, restricted shares and contingent shares.

The following table provides a reconciliation between basis and diluted earnings per share for the three and nine months ended September 30, 2004 and 2003:


	Three Months Ended September 30					Nine Months Ended September 30
(in thousands, except per-share amounts)	2004		2003			2004		2003
Net income (loss)	$	6,453	$	(4,549	)	$	42,548	$	(49,982	)

Weighted average shares outstanding		76,164		75,726			75,878		75,602
Dilutive effect of stock options		302		—			193		—
Dilutive effect of restricted shares		1,744		—			1,768		—

Diluted weighted average shares outstanding		78,210		75,726			77,839		75,602

Earnings (loss) per share – basic	$	0.08	$	(0.06	)	$	0.56	$	(0.66	)

Earnings (loss) per share – diluted	$	0.08	$	(0.06	)	$	0.55	$	(0.66	)

Common stock options totaling 0.1 million and 0.9 million shares for the three and nine months ended September 30, 2004 and 2003, respectively, were excluded from the computation of diluted earnings per share because the exercise prices of these options exceeded the average market price of our stock for the respective periods, and the effect of their inclusion would be antidilutive.

Inventories consisted of the following:


(in thousands)	September 30, 2004		December 31, 2003		September 30, 2003
Raw materials	$	30,274	$	22,937	$	23,812
Supplies		21,185		26,058		22,287
Finished goods		39,364		41,874		41,500

Total	$	90,823	$	90,869	$	87,599

Revenue is recognized when title and risk of loss passes to the customer. Revenue is recognized as the net amount to be received after deducting estimated amounts for discounts and trade allowances. Revenues include amounts paid by customers for shipping and handling.

Realized gains and losses from hedging activities and premiums paid for option contracts are deferred and recognized in the month in which the hedged transactions closed. Swaps, options and other derivative instruments that do not qualify for hedge accounting treatment are marked to fair value each accounting period. Costs associated with settlement of natural gas purchase contracts and costs for shipping and handling are included in cost of sales.

We account for our employee stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and the related interpretations, which utilize the intrinsic value method. The pro forma impact on net income (loss) and diluted income (loss) per share of accounting for stock-based compensation using the fair value method required by Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation” follows:


	Three Months Ended September 30					Nine Months Ended September 30
(in thousands, except per-share amounts)	2004		2003			2004		2003
Net income (loss), as reported	$	6,453	$	(75,726	)	$	42,548	$	(49,982	)
Add: Stock based employee compensation expense included in reported income, net of related tax effects		—		—			—		—
Deduct: Stock based employee compensation expense determined under fair value based method for all awards, net of related tax effects		—		—			—		—

Pro forma net income (loss)	$	6,453	$	(75,726	)	$	42,548	$	(49,982	)

Earnings (loss) per share:
Basic – as reported	$	0.08	$	(0.06	)	$	0.56	$	(0.66	)

Basic – pro forma		0.08		(0.06	)		0.56		(0.66	)

Diluted – as reported	$	0.08	$	(0.06	)	$	0.55	$	(0.66	)

Diluted – pro forma		0.08		(0.06	)		0.55		(0.66	)

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows expected to result from the use of the asset (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized based on the difference between the carrying amount and the fair value of the asset.

We commenced a review to determine if the Blytheville facility’s carrying value was impaired during the second quarter of 2003. This review led us to conclude that future market conditions would not justify the ongoing investment in maintenance and replacement capital necessary to extend operations for the remainder of the facility’s useful life. Accordingly, a $53.1 million charge was recorded as an “Impairment of long-lived assets”. Although we resumed production in October 2003, we ceased production on May 31, 2004 and prepared the site for permanent closure. We are operating the facility’s storage and distribution assets as a terminal for ammonia produced at our Verdigris facility or obtained from other sources.

2.	Pending Acquisition

On August 9, 2004, we announced a definitive agreement with Mississippi Chemical Corporation (“MCC”) for our purchase of MCC’s outstanding common shares. As a condition to closing, MCC will either sell or otherwise transfer its phosphate business segment. The transaction is expected to close prior to March 2005. The purchase price will include cash and assumed debt estimated at $161 million, issuance of 15.0 million Terra common shares and Terra preferred shares redeemable at our option within 10 months of closing into between 5.25 million and 6.25 million common shares (depending on the market price of Terra common shares at closing). Common and preferred shares issued in connection with the transaction are subject to adjustments for actual working capital and debt balances at closing. The value of the transaction will depend on the market price of Terra common shares at closing. Based on expected purchase price adjustments derived from MCC financial projections and a Terra common share price greater than $6.10 per share, we estimate the preferred shares will be redeemable into 2.4 million common shares. The purchase of MCC is subject to U.S. Bankruptcy Court approval, successful restructuring of MCC’s nitrogen and phosphate businesses, customary regulatory approvals and consent of our revolving credit agreement lenders. A copy of the definitive agreement was filed with our August 9, 2004 Form 8-K filing with the Securities and Exchange Commission (“SEC”) and pro forma financial statements for the transaction was filed with our October 7 and 8, 2004 Form 8-K and 8-K/A SEC filings.

3.	Product Claim Costs and Other Contingencies

Appeals of a Federal court decision ordering our insurer to pay all of our past and future judgments, settlements and other associated costs arising from a 1998 recall of carbonated beverages containing carbon dioxide tainted with benzene were exhausted in our favor during the 2004 first quarter. Consequently, we recorded in the 2004 first nine months recovery of product claim costs totaling $17.9 million representing elimination of remaining reserves established for these claims of $12.9 million and cash payments of $5.0 million by the insurer as final settlement for claims we previously paid.

We are involved in various other legal actions and claims, including environmental matters, arising from the normal course of business. While it is not feasible to predict with certainty the final outcome of these proceedings, management does not believe that these matters will have a material adverse effect on the results of operations, financial position or net cash flows.

4.	Derivative Financial Instruments

Natural gas is the principal raw material used in our production of nitrogen products and methanol. Natural gas prices are volatile and we manage this volatility through the use of derivative commodity instruments. Our current policy is to hedge 20-80% of our natural gas requirements for the upcoming 12 months and up to 50% of the requirements for the following 24-month period, provided that such arrangements would not result in costs greater than expected selling prices for our finished products. We notify the Board of Directors when we deviate from this policy. The financial derivatives are traded in months forward and settlement dates are scheduled to coincide with gas purchases during those future periods. These contracts reference physical natural gas prices or appropriate NYMEX futures contract prices. Contract prices are frequently based on prices at the most common and financially liquid location of reference for financial derivatives related to natural gas. However, natural gas supplies for our facilities are purchased for each plant at locations other than reference

points, which often creates a location basis differential between the contract price and the physical price of natural gas. Accordingly, the use of financial derivatives may not exactly offset the change in the price of physical gas.

We have entered into forward pricing positions for a portion of our natural gas requirements for the remainder of 2004, consistent with our policy. As a result of our policies, we have reduced the potential adverse financial impact of natural gas price increases during the forward pricing period, but conversely, if natural gas prices were to fall, we will incur higher costs. Contracts were in place at September 30, 2004 to cover 30% of natural gas requirements for the succeeding twelve months. We also use basis swaps to manage some of the basis risk.

Unrealized gains from forward pricing positions in North America totaled $16.6 million as of September 30, 2004. We also had $1.4 million of realized losses on closed North America contracts relating to future periods that have been deferred to the respective period.

For the period ending September 30, 2004, recording the fair value of natural gas derivatives resulted in a $2.0 million increase to other current assets, a $2.7 million decrease to current liabilities, a $.9 million credit to cost of sales and a $3.7 million decrease, after deferred taxes of $1.8 million to Accumulated Other Comprehensive Loss, which reflected the effective portion of the derivatives designated as cash flow hedges. The increase/decrease to other current assets was to recognize the value of open natural gas contracts and the increase/decrease to other current liabilities was to reclassify deferred gains on closed contracts relating to future periods.

5.	Industry Segment Data

We classify our continuing operations into two business segments: nitrogen products and methanol. The nitrogen products business produces and distributes ammonia, urea, nitrogen solutions, ammonium nitrate and other products to farm distributors and industrial users. The methanol business manufactures and distributes methanol which is used in the production of a variety of chemical derivatives and in the production of methyl tertiary butyl ether (MTBE), an oxygenate and an octane enhancer for gasoline. We do not allocate interest, income taxes or infrequent items to continuing business segments. Included in Other are general corporate activities not attributable to a specific industry segment.

The following summarizes operating results by business segment:


	Three Months Ended September 30						Nine Months Ended September 30
(in thousands)	2004			2003			2004			2003
Revenues - Nitrogen Products	$	326,024		$	277,292		$	1,006,099		$	821,577
- Methanol		50,123			47,025			146,773			160,992
- Other		520			525			1,592			1,361

Total revenues	$	376,667		$	324,842		$	1,154,464		$	983,930

Income (loss) from operations
- Nitrogen Products	$	25,184		$	9,355		$	116,614		$	(51,757	)
- Methanol		638			(1,083	)		(2,332	)		3,659
- Other- net		(534	)		(2,368	)		(4,123	)		(5,166	)

Total income (loss) from operations	$	25,288		$	5,904		$	110,159		$	(53,264	)

We maintain defined benefit pension plans that cover substantially all salaried and hourly employees. Benefits are based on a pay formula. The defined benefit plans’ assets consist principally of equity securities and corporate and government debt securities. We also have certain non-qualified pension plans covering executives, which are unfunded. We accrue pension costs based upon annual actuarial valuations for each plan and fund these costs in accordance with statutory requirements.

The estimated components of net periodic pension expense follow:


	Three Months Ended September 30						Nine Months Ended September 30
(in thousands)	2004			2003			2004			2003
Service cost	$	502		$	1,024		$	1,506		$	3,072
Interest cost		3,754			2,733			11,262			8,199
Expected return on plan assets		(3,065	)		(2,537	)		(9,195	)		(7,611	)
Amortization of prior service cost		7			19			21			57
Amortization of actuarial loss		1,191			1,022			3,573			3,066
Amortization of net assets		(28	)		(77	)		(86	)		(231	)
Termination charge		—			384			—			1,152

Pension Expense	$	2,361		$	2,568		$	7,081		$	7,704

Our cash contributions to the defined benefit pension plans for the quarter ended September 30, 2004 and 2003 were $3.3 million and $2.7 million, respectively. Year-to-date contributions were $9.2 million and $9.0 million, respectively.

We also sponsor defined contribution savings plans covering most full-time employees. Contributions made by participating employees are matched based on a specified percentage of employee contributions. The cost of our contributions to these plans for the three month periods ending September 30, 2004 and 2003 totaled $.8 million and $0 million, respectively. Contributions were $2.4 million and $.7 million for the nine months ended September 30, 2004 and 2003, respectively

We provide health care benefits for certain U.S. employees who retired on or before January 1, 2002. Participant contributions and co-payments are subject to escalation. The plan pays a stated percentage of most medical expenses reduced for any deductible and payments made by government programs. These costs are funded as paid.

In May 2004, the Financial Accounting Standards Board (“FASB”) issued FSAB Staff Position (“FSP”) Financial Accounting Standard (“FAS”) 106-2 to provide guidance on accounting for the effects of the “Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act)”, to the employers that sponsor post retirement health care plans which provide prescription drug benefits. This FSP supercedes FSP FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003”. The standard was effective during the quarter ending September 30, 2004 and did not have a significant effect on our financial statements.

7.	Guarantor Subsidiaries

Condensed consolidating statement of financial position of Terra Industries Inc. (the “Parent”), Terra Capital, Inc. (“TCAPI”), the Guarantor Subsidiaries and subsidiaries of the Parent that are not guarantors of the Senior Secured Notes due 2008 for September 30, 2004, December 31 and September 30, 2003. Condensed statements of operations for the three and nine months ended September 30, 2004 and 2003 and condensed statement of cash flow for the nine month period ended September 30, 2004 and 2003 are presented below for purposes of complying with the reporting requirements of the Guarantor Subsidiaries.

Guarantor subsidiaries include subsidiaries that own the Woodward, Oklahoma, Port Neal, Iowa and Beaumont, Texas plants as well as the corporate headquarters facility in Sioux City, Iowa. All other company facilities are owned by non-guarantor subsidiaries.

Condensed Consolidating Statement of Financial Position as of September 30, 2004:


(in thousands)	Parent			TCAPI			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Cash and short-term investments	$	—		$	142,806		$	807		$	979		$	—		$	144,592
Accounts receivable, net		—			7,515			39,892			80,475			—			127,882
Inventories		—			—			27,688			63,135			—			90,823
Other current assets		10,339			18,324			9,503			16,128			—			54,294

Total current assets		10,339			168,645			77,890			160,717			—			417,591

Property, plant and equipment, net		—			—			313,812			353,463			(1,375	)		665,900
Investments in and advanced to (from) affiliates		430,268			398,135			698,258			149,855			(1,676,516	)		—
Other assets and deferred plant turnaround costs		(460	)		15,506			16,539			24,227			875			56,687

Total assets	$	440,147		$	582,286		$	1,106,499		$	688,262		$	(1,677,016	)	$	1,140,178

Liabilities
Debt due within one year	$	—		$	—		$	100		$	61		$	—		$	161
Accounts payable		18			—			21,784			51,250			—			73,052
Accrued and other liabilities		(19,098	)		30,541			36,999			61,051			—			109,493

Total current liabilities		(19,080	)		30,541			58,883			112,362			—			182,706

Long-term debt and capital lease obligations		—			402,000			53			28			—			402,081
Deferred income taxes		52,928			—			—			(12,826	)		—			40,102
Pension and other liabilities		89,767			(5,871	)		19,435			3,982			(2	)		107,311
Minority interest		—			17,887			73,559			—			—			91,446

Total liabilities		123,615			444,557			151,930			103,546			(2	)		823,646

Stockholders’ Equity
Common stock		129,473			—			72			49,709			(49,781	)		129,473
Paid-in capital		555,616			150,218			1,190,790			666,677			(2,007,685	)		555,616
Accumulated other comprehensive income (loss)		(36,335	)		(36,335	)		—			21,098			15,237			(36,335	)
Retained earnings (deficit)		(332,222	)		23,846			(236,293	)		(152,768	)		365,215			(332,222	)

Total stockholders’ equity		316,532			137,729			954,569			584,716			(1,677,014	)		316,532

Total liabilities and stockholders equity	$	440,147		$	582,286		$	1,106,499		$	688,262		$	(1,677,016	)	$	1,140,178

Condensed Consolidating Statement of Operations for the three months ended September 30, 2004:


(in thousands)	Parent			TCAPI			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues
Net sales	$	—		$	—		$	131,110		$	243,498		$	1,539		$	376,147
Other income, net		—			—			1,930			129			(1,539	)		520

		—			—			133,040			243,627			—			376,667

Cost and Expenses
Cost of sales		—			—			122,771			216,985			(1,837	)		337,919
Selling, general and administrative expenses		(138	)		(502	)		9,855			2,807			1,438			13,460
Equity in the (earnings) loss of subsidiaries		(6,067	)		(18,119	)		—			—			24,186			—

		(6,205	)		(18,621	)		132,626			219,792			23,787			351,379

Income from operations		6,205			18,621			414			23,835			(23,787	)		25,288
Interest income		—			434			1,083			482			(1,225	)		774
Interest expense		(772	)		(12,665	)		(7	)		(1,283	)		1,281			(13,446	)
Minority interest		—			(323	)		(1,328	)		—			—			(1,651	)

Income before income taxes		5,433			6,067			162			23,034			(23,731	)		10,965
Income tax provision		1,020			—			—			(5,532	)		—			(4,512	)

Net Income	$	6,453		$	6,067		$	162		$	17,502		$	(23,731	)	$	6,453

Condensed Consolidating Statement of Operations for the nine months ended September 30, 2004:


(in thousands)	Parent			TCAPI			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues
Net sales	$	—		$	—		$	408,118		$	739,145		$	5,609		$	1,152,872
Other income, net		—			—			6,779			422			(5,609	)		1,592

		—			—			414,897			739,567			—			1,154,464

Cost and Expenses
Cost of sales		—			—			388,031			646,113			(2,000	)		1,032,144
Selling, general and administrative expenses		1,693			(1,907	)		20,510			7,974			1,794			30,064
Recovery of product claims costs		—			—			—			(17,903	)		—			(17,903	)
Equity in the (earnings) loss of subsidiaries		(47,816	)		(84,477	)		(861	)		—			133,154			—

		(46,123	)		(86,384	)		407,680			636,184			132,948			1,044,305

Income from operations		46,123			86,384			7,217			103,383			(132,948	)		110,159
Interest income		—			1,074			3,052			1,070			(3,433	)		1,763
Interest expense		(2,311	)		(38,048	)		(23	)		(3,526	)		3,521			(40,387	)
Minority interest		—			(1,594	)		(6,556	)		—			—			(8,150	)

Income before income taxes		43,812			47,816			3,690			100,927			(132,860	)		63,385
Income tax provision		(1,264	)		—			—			(19,573	)		—			(20,837	)

Net Income	$	42,548		$	47,816		$	3,690		$	81,354		$	(132,860	)	$	42,548

Condensed Consolidating Statement of Cash Flows for the nine months ended September 30, 2004:


(in thousands)	Parent			TCAPI			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Operating Activities
Net income (loss)	$	42,548		$	47,816		$	3,690		$	81,354		$	(132,860	)	$	42,548
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Depreciation and amortization		—			3,144			35,158			37,460			—			75,762
Deferred income taxes		22,649			—			—			(378	)		1,642			23,913
Minority interest in earnings		—			1,594			6,556			—			—			8,150
Recovery of product claim costs		—			—			—			(12,874	)		—			(12,874	)
Equity in earnings (loss) of subsidiaries		47,816			84,477			861			—			(133,154	)		—
Change in operating assets and liabilities		(23,398	)		(18,679	)		8,876			(23,901	)		5,840			(51,262	)
Other		—			—			(1	)		12,874			(12,993	)		(120	)

Net Cash Flows from Operating Activities		89,615			118,352			55,140			94,535			(271,525	)		86,117

Investing Activities
Purchase of property, plant and equipment		—			—			(1,653	)		(6,483	)		—			(8,136	)
Plant turnaround costs		—			—			(11,725	)		(3,264	)		—			(14,989	)
Other		(189	)		(3	)		(7,296	)		52			7,018			(418	)

Net Cash Flows from Investing Activities		(189	)		(3	)		(20,674	)		(9,695	)		(7,018	)		(23,543	)

Financing Activities
Principal payments on long-term debt and capital lease obligations		—			—			(72	)		(45	)		—			(117	)
Change in investments and advances from (to) affiliates		(89,749	)		(49,049	)		(34,685	)		(90,780	)		264,260			—
Proceeds from exercise of stock options		320			—			—			—			—			320
Distributions to minority interests		—			(1,125	)		(4,641	)		—			—			(5,766	)

Net Cash Flows from Financing Activities		(89,426	)		(50,174	)		(39,398	)		(90,825	)		264,260			(5,563	)

Effect of Foreign Exchange Rate on Cash		—			—			—			—			247			247

Increase (decrease) in Cash and Short-term Investments		—			68,175			(4,932	)		(5,985	)		—			57,258

Cash and Short-term Investments at Beginning of Year		—			74,631			5,739			6,964			—			87,334

Cash and Short-term Investments at End of Year	$	—		$	142,806		$	807		$	979		$	—		$	144,592

Condensed Consolidating Statement of Financial Position as of December 31, 2003:


(in thousands)	Parent			TCAPI			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Cash and short-term investments	$	—		$	74,631		$	5,739		$	6,964		$	—		$	87,334
Accounts receivable		—			—			49,642			83,838			—			133,480
Inventories		—			—			26,337			64,532			—			90,869
Other current assets		7,541			6,267			16,836			12,221			454			43,319

Total current assets		7,541			80,898			98,554			167,555			454			355,002

Property, plant and equipment, net		—			—			343,379			366,321			(2,035	)		707,665
Investment in and advanced to (from) affiliates		380,076			425,301			688,379			82,676			(1,576,432	)		—
Other assets and deferred plant turnaround costs		—			18,650			10,037			34,126			(418	)		62,395

Total Assets	$	387,617		$	524,849		$	1,140,349		$	650,678		$	(1,578,431	)	$	1,125,062

Liabilities
Debt due within one year	$	—		$	—		$	95		$	58		$	—		$	153
Accounts payable		669			—			29,426			49,468			—			79,563
Accrued and other liabilities		851			27,456			41,213			72,818			—			142,338

Total current liabilities		1,520			27,456			70,734			122,344			—			222,054

Long-term debt and capital lease obligations		—			402,000			130			76			—			402,206
Deferred income taxes		30,279			—			—			(12,448	)		—			17,831
Pension and other liabilities		90,687			(3,680	)		23,019			18,750			2			128,778
Minority interest		—			17,421			71,641			—			—			89,062

Total liabilities and minority interest		122,486			443,197			165,524			128,722			2			859,931

Stockholders’ Equity
Common stock		128,968			—			72			49,709			(49,781	)		128,968
Paid in capital		555,529			150,218			1,249,601			725,546			(2,125,365	)		555,529
Accumulated other comprehensive income (loss)		(44,596	)		(44,596	)		—			16,090			28,506			(44,596	)
Retained earnings (deficit)		(374,770	)		(23,970	)		(274,848	)		(269,389	)		568,207			(374,770	)

Total stockholders’ equity		265,131			81,652			974,825			521,956			(1,578,433	)		265,131

Total liabilities and stockholders’ equity	$	387,617		$	524,849		$	1,140,349		$	650,678		$	(1,578,431	)	$	1,125,062

Condensed Consolidating Statement of Financial Position as of September 30, 2003:


(in thousands)	Parent			TCAPI			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Cash and short-term investments	$	—		$	18,566		$	1,801		$	911		$	—		$	21,278
Accounts receivable, net		—			15			36,282			71,153			—			107,450
Inventories		—			—			29,692			57,907			—			87,599
Other current assets		(565	)		15,473			7,800			10,127			—			32,835

Total current assets		(565	)		34,054			75,575			140,098			—			249,162

Property, plant and equipment, net		—			—			353,828			356,019			(3,237	)		706,610
Investments in and advanced to (from) affiliates		345,261			523,901			710,592			31,917			(1,611,671	)		—
Other assets and deferred plant turnaround costs		48			19,698			11,250			29,487			740			61,223

Total assets	$	344,744		$	577,653		$	1,151,245		$	557,521		$	(1,614,168	)	$	1,016,995

Liabilities
Debt due within one year	$	—		$	—		$	94		$	58		$	—		$	152
Accounts payable		31			25			30,887			44,013			—			74,956
Accrued and other liabilities		25,126			19,883			30,266			30,054			—			105,329

Total current liabilities		25,157			19,908			61,247			74,125			—			180,437

Long-term debt and capital lease obligations		—			402,000			153			89			—			402,242
Deferred income taxes		28,579			19,422			—			(20,059	)		—			27,942
Pension and other liabilities		77,814			11,036			2,652			16,901			—			108,403
Minority interest		—			16,582			68,195			—			—			84,777

Total liabilities	$	131,550		$	468,948		$	132,247		$	71,056		$	—		$	803,801

Stockholders’ Equity
Common stock		128,920			—			73			49,709			(49,782	)		128,920
Paid in capital		555,509			150,218			1,249,601			725,545			(2,125,364	)		555,509
Accumulated other comprehensive loss		(58,964	)		(23,250	)		—			(14,500	)		37,750			(58,964	)
Retained earnings (deficit)		(412,271	)		(18,263	)		(230,676	)		(274,289	)		523,228			(412,271	)

Total stockholders’ equity		213,194			108,705			1,018,998			486,465			(1,614,168	)		213,194

Total liabilities and stockholders equity	$	344,744		$	577,653		$	1,151,245		$	557,521		$	(1,614,168	)	$	1,016,995

Condensed Consolidating Statement of Operations for the three months ended September 30, 2003:


(in thousands)	Parent			TCAPI			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues
Net sales	$	—		$	—		$	127,838		$	195,915		$	564		$	324,317
Other income, net		—			—			653			436			(564	)		525

		—			—			128,491			196,351			—			324,842

Cost and Expenses
Cost of sales		—			—			127,421			182,194			(1,061	)		308,554
Selling, general and administrative expenses		1,747			(253	)		6,306			2,328			256			10,384
Equity in the (earnings) loss of subsidiaries		8,705			(3,182	)		66,655			(226	)		(71,952	)		—

		10,452			(3,435	)		200,382			184,296			(72,757	)		318,938

Income (loss) from operations		(10,452	)		3,435			(71,891	)		12,055			72,757			5,904
Interest income		—			816			990			28			(1,786	)		48
Interest expense		(817	)		(13,002	)		(10	)		(1,787	)		1,787			(13,829	)
Minority interest		—			46			188			—			—			234

Income (loss) from operations		(11,269	)		(8,705	)		(70,723	)		10,296			72,758			(7,643	)
Income tax (provision) benefit		6,720			—			—			(3,626	)		—			3,094

Net income (loss)	$	(4,549	)	$	(8,705	)	$	(70,723	)	$	6,670		$	72,758		$	(4,549	)

Condensed Consolidating Statement of Operations for the nine months ended September 30, 2003:


(in thousands)	Parent			TCAPI			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues
Net sales	$	—		$	—		$	387,621		$	592,886		$	2,062		$	982,569
Other income, net		—			—			2,726			697			(2,062	)		1,361

		—			—			390,347			593,583			—			983,930

Cost and Expenses
Cost of sales		—			—			387,460			570,515			(3,316	)		954,659
Selling, general and administrative expenses		3,735			(1,000	)		18,391			7,334			984			29,444
Impairment of long-lived assets		—			—			12,436			40,655			—			53,091
Equity in the (earnings) loss of subsidiaries		72,490			49,067			84,586			(481	)		(205,662	)		—

		76,225			48,067			502,873			618,023			(207,994	)		1,037,194

Income (loss) from operations		(76,225	)		(48,067	)		(112,526	)		(24,440	)		207,994			(53,264	)
Interest income		47			2,539			2,995			118			(5,270	)		429
Interest expense		(12,139	)		(29,486	)		(31	)		(5,237	)		5,265			(41,664	)
Minority interest		—			2,524			10,378			—			—			12,902

Income (loss) from operations		(88,317	)		(72,490	)		(99,184	)		(29,595	)		207,989			(81,597	)
Income tax (provision) benefit		38,335			—			—			(6,720	)		—			31,615

Net income (loss)	$	(49,982	)	$	(72,490	)	$	(99,184	)	$	(36,315	)	$	207,989		$	(49,982	)

Condensed Consolidating Statement of Cash Flows for the nine months ended September 30, 2003:


(in thousands)	Parent			TCAPI			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Operating Activities
Net income (loss)	$	(49,982	)	$	(72,490	)	$	(99,184	)	$	(36,315	)	$	207,989		$	(49,982	)
Adjustments to reconcile net loss to net cash flows from operating activities:
Impairment of long-lived assets		—			—			12,436			40,655			—			53,091
Depreciation and amortization		—			2,768			38,184			41,089			—			82,041
Deferred income taxes		(41,575	)		—			—			(3,231	)		11,000			(33,806	)
Minority interest in losses		—			(2,524	)		(10,378	)		—			—			(12,902	)
Equity in earnings (loss) of subsidiaries		(72,490	)		(49,067	)		(84,586	)		481			205,662			—
Change in operating assets and liabilities		11,409			(3,947	)		(96,993	)		(4,934	)		54,629			(39,836	)
Other		—			—			—			—			469			569

Net Cash Flows from Operating Activities		(152,638	)		(125,260	)		(240,521	)		37,745			479,849			(825	)

Investing Activities
Purchase of property, plant and equipment		—			—			(2,491	)		(4,583	)		—			(7,074	)
Plant turnaround costs		—			—			(6,148	)		(14,518	)		—			(20,666	)
Other		—			—			—			—			(1,100	)		(1,100	)

Net Cash Flows from Investing Activities		—			—			(8,639	)		(19,101	)		(1,100	)		(28,840	)

Financing Activities
Issuance of long-term debt		—			202,000			—			—			—			202,000
Principal payments on long-term debt and capital lease obligations		(200,000	)		—			(66	)		(41	)		—			(200,107	)
Change in investments and advances from (to) affiliates		353,164			(64,756	)		238,298			(113,591	)		(413,115	)		—
Deferred financing costs		—			(8,581	)		—			—			—			(8,581	)
Distributions to minority interests		—			(225	)		(928	)		—			—			(1,153	)
Other		(527	)		—			13,657			(13,281	)		151			—

Net Cash Flows from Financing Activities		152,637			128,438			250,961			(126,913	)		(412,964	)		(7,841	)

Effect of Foreign Exchange Rate on Cash		—			—			—			—			305			305

Increase (decrease) in Cash and Short-term Investments		(1	)		3,178			1,801			(108,269	)		66,090			(37,201	)

Cash and Short-term Investments at Beginning of Year		1			15,388			—			109,180			(66,090	)		58,479

Cash and Short-term Investments at End of Year	$	—		$	18,566		$	1,801		$	911		$	—		$	21,278

8.	Subsequent Events

On October 15, 2004, we issued $100 million of Series A cumulative convertible perpetual preferred shares. Proceeds will be used to redeem up to $70.7 million of our 11.5% Second Priority Senior Secured notes due 2010 for $78.8 million, including redemption premiums, and other general corporate purposes. We also granted the initial purchasers of the preferred shares a thirty-day option to purchase up to an additional $20 million of the Series A shares. On November 5, 2004 the initial purchasers exercised their option to purchase $20 million of the Series A cumulative convertible perpetual preferred shares. The sale of the preferred shares is expected to close on November 10, 2004. Proceeds from this sale will be used for general corporate purposes. These preferred shares have an annual dividend rate of 4.25% and are convertible into common shares at an initial conversion price of $9.96 per common share. The conversion rate is subject to adjustment upon the occurrence of certain events. Dividends are payable, at our option, in cash or common shares. The Series A preferred shares are non-redeemable. However, on or after October 15, 2009 we may, at our option, cause the Series A preferred shares to be automatically converted into that number of our common shares that are issuable at the then prevailing conversion rate if our common share price is greater than 140% of the equivalent conversion price for a specified period. At our option, the Series A preferred shares are exchangeable into subordinated debentures which would be due 30 years from the exchange date, bear interest at the dividend rate and have substantially identical conversion features as the preferred shares. Under the terms of the Series A preferred shares, the holders of the Series A preferred shares may require us to purchase all or part of the shares held by them upon a “Fundamental Change” (as defined in the Articles Supplementary for the Series A Preferred Shares) for an amount equal to 100% of the liquidation preference of the Series A preferred shares to be repurchased, plus accrued and unpaid dividends, if any. As a result of the repurchase obligation in the event of a Fundamental Change, the Series A Preferred Shares will be classified separately from Stockholders’ Equity in our statement of financial position.

On October 15, 2004, we notified the trustee of our 11.5% Second Priority Senior Secured notes due 2010 of our irrevocable election to redeem $70.7 million of the notes for $78.8 million, including redemption premiums, on November 15, 2004.

On November 1, 2004, we received notification from Methanex Corporation, under the terms of our agreement, to cease production at our Beaumont, Texas methanol manufacturing facility on December 1, 2004. We sold to Methanex our sales contracts and rights to the full output of the Beaumont plant for five years ending December 31, 2008, for a received lump-sum payment of $25 million and a share of cash gross profits generated from Beaumont sales. The agreement gave Methanex the right to cease production at the Beaumont facility. We plan to mothball the plant for an indefinite period. We will spend up to $5.0 million to mothball the plant and for employee separation payments.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Introduction

We produce and market nitrogen products for agricultural and industrial markets with production facilities located in North America and the United Kingdom. Nitrogen products are commodity chemicals that are sold at prices reflecting global supply and demand conditions. The nitrogen products industry has cycles of oversupply, resulting in lower prices and idled capacity, followed by supply shortages, resulting in high selling prices and higher industry-wide production rates. In order to be viable in this industry, a producer must be among the low-cost suppliers in the markets it serves and have a financial position that can sustain it during periods of oversupply.

Natural gas is the most significant raw material in the production of nitrogen products. North American natural gas costs have increased substantially since 1999. Since we compete with nitrogen products imported from regions with lower natural gas costs, the oversupply situation during most of the three years ending December 31, 2003 did not allow us and other North American producers to increase selling prices to levels necessary to cover the natural gas cost increases. This resulted in curtailments of North American nitrogen production that have contributed to higher nitrogen product prices through reductions to global supplies. Our United Kingdom operations have benefited from higher nitrogen product prices, but, until recently, have generally incurred natural gas costs lower than those in North America.

Imports, most of which are produced at facilities with access to fixed-price natural gas supplies, account for a significant portion of U.S. nitrogen product supply. Imported products’ natural gas costs have been and could continue to be substantially lower than the delivered cost of natural gas to our facilities. Off-shore producers are most competitive in regions close to the point of entry for imports, including the Gulf Coast and East Coast of North America.

Our sales volumes depend primarily on our plants’ operating rates. We may purchase product from other manufacturers or importers for resale, but gross margins on those volumes are rarely significant. Profitability and cash flows from our nitrogen products business are affected by our ability to manage our costs and expenses (other than natural gas), most of which do not materially change for different levels of production or sales. Other factors affecting our nitrogen products results include the level of planted acres, transportation costs, weather conditions (particularly during the planting season), grain prices and other variables described in Items 1 and 2 “Business and Properties” section of our most recent Form 10-K filing with the Securities and Exchange Commission.

We also produce methanol in the U.S. Like nitrogen products, methanol is a commodity chemical manufactured from natural gas. Consequently, natural gas costs and the supply/demand balance for methanol significantly affect methanol earnings and cash flows. A significant portion of U.S. methanol demand is satisfied by imports from regions with natural gas costs lower than those available to U.S. producers. Industry analysts have identified approximately 7.0 million metric tonnes of new methanol capacity (20% of current global demand) that should start up from 2004 through 2006 in regions with low natural gas costs. U.S. methanol demand has declined over the past year and is expected to continue to decline due to reduced U.S. consumption of MTBE, a gasoline oxygenate and octane enhancer that uses methanol as a feedstock.

In December 2003, we entered into contracts with the Methanex Corporation (“Methanex”) assigning it our sales contracts and providing it exclusive rights to all methanol production at the Beaumont facility for five years as more fully described in Items 1 and 2 “Business and Properties” most recent Form 10-K filing with the SEC. On November 1, 2004, we received notification from Methanex Corporation, under the terms of our agreement, to cease production at our Beaumont, Texas methanol manufacturing facility on December 1, 2004. We will spend up to $5.0 million to mothball the plant and for employee separation payments.

RESULTS OF OPERATIONS

QUARTER ENDED SEPTEMBER 30, 2004 COMPARED WITH

QUARTER ENDED SEPTEMBER 30, 2003

Consolidated Results

We reported net income of $6.5 million for the 2004 third quarter compared with a 2003 loss of $4.5 million. The increase in 2004 net income was primarily related to higher margins on nitrogen product sales.

We classify our operations into two business segments: nitrogen products and methanol. The nitrogen products segment represents operations directly related to the wholesale sales of nitrogen products from our ammonia production and upgrading facilities. The methanol segment represents wholesale sales of methanol produced by Terra’s two methanol manufacturing plants.

Total revenues and income (loss) from operations by segment for the three-month period ended September 30, 2004 and 2003 follow:


(in thousands)	2004			2003
REVENUES:
Nitrogen Products	$	326,024		$	277,292
Methanol		50,123			47,025
Other		520			525

	$	376,667		$	324,842

INCOME (LOSS) FROM OPERATIONS:
Nitrogen Products	$	25,184		$	9,355
Methanol		638			(1,083	)
Other - net		(534	)		(2,368	)

	$	25,288		$	5,904

Nitrogen Products

Volumes and prices for the three-month periods ended September 30, 2004 and 2003 follow:

VOLUMES AND PRICES


	2004			2003
(quantities in thousands of tons)	Sales Volumes	Average Unit Price*		Sales Volumes	Average Unit Price*
Ammonia	324	$	266	334	$	219
Nitrogen solutions	897		128	994		98
Urea	38		218	73		180
Ammonium nitrate	342		168	269		141

*	After deducting outbound freight costs

Nitrogen products segment revenues increased $48.7 million to $326.0 million in the 2004 third quarter compared with $277.3 million in the 2003 third quarter primarily as a result of higher sales prices. Sales

prices were higher as the result of increased demand and lower supplies caused by curtailments to North American production in response to high natural gas costs. Sales volumes of nitrogen solutions declined in 2004 from the prior year due mainly to lower inventory quantities at the beginning of the third quarter. Declines to ammonia and urea sales volumes reflect the closure of our Blytheville plant at the end to the 2004 second quarter. The increase to ammonium nitrate reflects increased demand by our U.K. customer base.

The nitrogen products segment had operating income of $25.2 million for the 2004 third quarter compared with operating income of $9.4 million for the 2003 period. As compared to the last year’s third quarter, higher selling prices contributed almost $53.0 million to 2004 gross profits. Third quarter natural gas costs increased about $33.6 million from the 2003 period. Administrative expenses during the 2004 third quarter were $3.0 million higher than the prior year due to increased reserves for earnings-related employee incentive payments. Natural gas unit costs, net of forward pricing gains and losses, were $5.44/MMBtu during the 2004 third quarter compared to $4.51/MMBtu during the same 2003 period. As a result of forward price contracts, second quarter 2004 natural gas costs for the nitrogen products segment were $4.2 million higher than spot prices.

Methanol

For the three months ended September 30, 2004 and 2003 the Methanol segment had revenues of $50.1 million and $47.0 million, respectively. Sales volumes were essentially unchanged from prior year levels and selling prices increased from $.69/gallon in 2003 to $.72/gallon in 2004.

The methanol segment had operating income of $.6 million for the 2004 third quarter compared to an operating loss of $1.1 million for the 2003 second quarter. The increase to operating income reflected higher sales prices that were partly offset by increased natural gas costs. Natural gas costs, net of forward pricing gains and losses, were $5.69/MMBtu during the 2004 third quarter compared to $5.06/MMBtu during the 2003 period.

Other – Net

We had other operating losses of $.5 million in the 2004 third quarter compared to $2.4 million operating loss in the 2003 second quarter. The reduction to expenses relates primarily to higher 2003 legal and administrative expenses related to corporate activities not assignable to either business segment.

Interest Expense – Net

Interest expense, net of interest income, declined to $12.7 million during the 2004 third quarter from with $13.8 million for the prior year period due to higher cash balances and lower borrowings under our bank credit lines

Minority Interest

Minority interest represents third-party interests in the earnings of the publicly held common units of Terra Nitrogen Company, L.P. (TNCLP). The 2004 and 2003 amounts are directly related to TNCLP earnings and losses.

Income Taxes

Income taxes for the third quarter 2004 were recorded based on the estimated annual effective tax rate for the individual jurisdictions in which we operate.

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED WITH

NINE MONTHS ENDED SEPTEMBER 30, 2003

Consolidated Results

We reported net income of $42.5 million for the first nine months ending September 30, 2004 compared with a net loss of $50.0 million for the same period in 2003. The 2003 net loss included a $27 million loss for impairment of long-term assets (representing a $53.1 million charge to operating income, less $9.9 million allocated to minority interest and $16.2 million of income tax benefit). The remaining increase in 2004 income was primarily related to higher margins on nitrogen product sales and recovery of product claim costs.

Total revenues and operating income (loss) from operations by segment for the nine-month period ended September 1, 2004 and 2003 follow:


(in thousands)	2004			2003
REVENUES:
Nitrogen Products	$	1,006,099		$	821,577
Methanol		146,773			160,992
Other		1,592			1,361

	$	1,154,464		$	659,088

INCOME (LOSS) FROM OPERATIONS:
Nitrogen Products	$	116,614		$	1,334
Impairment of long-lived assets (nitrogen products)		—			(53,091	)
Methanol		(2,332	)		3,659
Other - net		(4,123	)		(5,166	)

	$	110,159		$	(53,264	)

Nitrogen Products

Volumes and prices for the nine-month periods ended September 30, 2004 and 2003 follow:

VOLUMES AND PRICES


	2004			2003
(quantities in thousands of tons)	Sales Volumes	Average Unit Price*		Sales Volumes	Average Unit Price*
Ammonia	1,077	$	262	1,012	$	224
Nitrogen solutions	2,868		123	2,843		97
Urea	327		191	397		170
Ammonium nitrate	766		176	686		135

*	After deducting outbound freight costs

Nitrogen products segment revenues increased $184.4 million to $1,006.1 million in the 2004 first nine months compared with $821.6 million in the 2003 first nine months primarily as a result of higher sales prices. Sales prices were higher as the result of increased demand and lower supplies caused by

curtailments to North American production in response to high natural gas costs. The increased sales volumes reflect higher operating rates during 2004 compared to 2003 when certain of our plants were curtailed in response to high natural gas costs.

Excluding 2003 charges for impairment of long-term assets, the nitrogen products segment had operating income of $116.6 million for the first nine months of 2004 compared with an operating loss of $51.8 million for the 2003 first nine months. The 2003 operating loss included a $53.1 million impairment of long-lived assets charge. As compared to the 2003 first nine months, higher selling prices contributed almost $154.9 million to 2004 gross profits. In addition, recovery of product claim costs contributed $17.9 million to 2004 first nine months operating income. First nine months natural gas costs increased about $58.9 million from the same period of 2003. Natural gas unit costs, net of forward pricing gains and losses, were $5.30/MMBtu during the 2004 first nine months compared to $4.71/MMBtu during the same 2003 period. As a result of forward price contracts, first nine months 2004 natural gas costs for the nitrogen products segment were $8.4 million lower than spot prices.

Impairment of Long-lived Assets

During the 2004 second quarter, due to expectations that our Blytheville facility would not cover its future cash costs and required capital improvements because of continuing competition from urea imports from regions with much lower gas costs, we decided to permanently close the facility following the 2004 planting season. In response to this action and as required by Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” a $53.1 million charge was recorded during the 2003 second quarter. On May 26, 2004 the Blytheville production facility was permanently shutdown.

Methanol

For the nine months ended September 30, 2004 and 2003 the Methanol segment had revenues of $146.8 million and $161.0 million, respectively. Sales volumes declined 5% from prior year levels and selling prices declined from $.74/gallon in 2003 to $.69/gallon in 2004. Sales volumes declined in 2004 as we discontinued selling product purchased from other manufacturers and prices declined in response to increased industry supplies.

The methanol segment had an operating loss of $2.3 million for the first nine months of 2004 compared to operating income of $3.7 million for the first nine months of 2003. The decrease to operating income reflected lower sales prices and increased natural gas costs. Natural gas costs, net of forward pricing gains and losses, were $5.64/MMBtu during the 2004 first nine months compared to $5.27/MMBtu during the 2003 period.

Other– Net

We had other operating losses of $4.1 million in the 2004 first nine months compared to $5.2 million operating loss in the 2003 period. The decline to expenses relates primarily to higher 2003 legal and administrative expenses related to corporate activities not assignable to either business segment.

Interest Expense - Net

Interest expense, net of interest income, totaled $38.6 million during the first nine months of 2004 compared with $41.2 million for the prior year period. The reduction to interest expense included $1.7 million of 2003 interest expense due to the issuance of the new debt and higher 2004 interest income as the result of increased average cash balances.

Minority Interest

Income Taxes

Income taxes for the first nine months of 2004 were recorded based on the estimated annual effective tax rate for the individual jurisdictions in which we operate.

PENDING ACQUISITION

On August 9, 2004, we announced a definitive agreement with Mississippi Chemical Corporation (“MCC”) for our purchase of MCC’s outstanding common shares. As a condition to closing, MCC will either sell or otherwise transfer its phosphate business segment. The transaction is expected to close prior to March 2005. The purchase price will include cash and assumed debt estimated at $161 million, issuance of 15.0 million Terra common shares and Terra preferred shares redeemable at our option within 10 months of closing into between 5.25 million and 6.25 million common shares (depending on the market price of Terra common shares at closing). Common and preferred shares issued in connection with the transaction are subject to adjustments for actual working capital and debt balances at closing. The value of the transaction will depend on the market price of Terra common shares at closing. Based on expected purchase price adjustments derived from MCC financial projections and a Terra common share price greater than $6.10 per share, we estimate the preferred shares to be redeemable into 2.4 million common shares. The purchase of MCC is subject to U.S. Bankruptcy Court approval, successful restructuring of MCC’s nitrogen and phosphate businesses, customary regulatory approvals and consent of our revolving credit agreement lenders. A copy of the definitive agreement was filed with our August 9, 2004 Form 8-K filing with the SEC and pro forma financial statements for the transaction was filed with our October 7 and 8, 2004 Form 8-K and 8-K/A SEC filings.

POTENTIAL CHANGE OF CONTROL

Anglo American plc, through its wholly-owned subsidiaries, owns 32.2% of Terra Industries’ outstanding shares. Anglo American has made public its intention to dispose of its interest in Terra Industries with the timing based on market and other conditions. Our proposed issuance of common stock to acquire MCC, our $100 million issuance of convertible perpetual preferred stock on October 15, 2004 and the sale of 12.5 million common shares by Anglo American plc on August 8, 2004 puts us in a position where we are approaching certain “change of control” thresholds (as defined in Section 382 of the Internal Revenue Code of 1986, as amended) for purposes of utilizing tax benefits from net operating loss carryforwards and certain other tax attributes available to us. If we exceed the change of control thresholds, our annual ability to use those benefits will generally be limited to a percentage (determined for the month in which the change of control occurs and is currently 4.72%) of our outstanding shares market value at the change of control date. Consequently, in the event of a change of control, realization of tax benefits from our operating loss carryforwards could be delayed by these limitations or could possibly be lost due to expiration of our carryforward periods beginning in 2018. Assuming that we exceed the change of control thresholds following the MCC acquisition and the market price for our common stock is $7.50 per share, the annual limitation on utilization of net operating loss carryforwards would approximate $38 million.

LIQUIDITY AND CAPITAL RESOURCES

Cash and short-term investments totaled $144.6 million at September 30, 2004 of which an estimated $40 million to $50 million will be required to fund the cash portion of the MCC purchase price. Our other primary uses of funds are to fund our working capital requirements, make payments on our debt and other obligations and fund plant turnarounds and capital expenditures. The principle sources of funds will be cash flow from operations and borrowings under available bank facilities.

Net cash provided from operations in the first nine months of 2004 was $86.1 million, composed of $98.9 million of cash provided from operating activities, net of $12.8 million used to fund working capital needs. Working capital needs primarily consisted of seasonal reductions to customer prepayments since year-end.

During the first nine months, we funded plant and equipment purchases of $8.1 million primarily for replacement or stay-in-business capital needs. We expect 2004 plant and equipment purchases to approximate $20 million consisting primarily of expenditures for replacement of equipment at manufacturing facilities.

Plant turnaround costs represent cash used for the periodic scheduled major maintenance of our continuous process production facilities that is performed at each plant generally every two years. We funded $15.0 million of plant turnaround costs in the first nine months of 2004. We estimate 2004 plant turnaround costs will approximate $30 million.

We have a $175 million revolving credit facility that expires in June 2005. Borrowing availability under the credit facility is generally based on eligible cash balances, 85% of eligible accounts receivable and 60% of eligible inventory, less outstanding letters of credit. There were no revolving credit borrowings and there were $30.6 million in outstanding letters of credit under the facility at September 30, 2004. Our remaining borrowing availability under the facility was approximately $144.4 million. We are required to maintain a minimum unused borrowing availability of $30 million. The credit facility also requires that we adhere to certain limitations on additional debt, capital expenditures, acquisitions, liens, asset sales, investments, prepayments of subordinated indebtedness, changes in lines of business and transactions with affiliates. In addition, if our borrowing availability falls below $60 million, we are required to have

generated $60 million of operating cash flows, or earnings before interest, income taxes, depreciation, amortization and other non-cash items (as defined in the credit facility) for the preceding four quarters. The amount of operating cash flows to measure credit facility compliance is different than amounts that can be derived from our financial statements. For the 12 months ended September 30, 2004, operating cash flows as defined in the credit facility was $215.4 million.

Our ability to meet credit facility covenants will depend on future operating cash flows, working capital needs, receipt of customer prepayments and trade credit terms. Failure to meet these covenants could result in additional costs and fees to amend the credit facility or could result in termination of the facility. Access to adequate bank facilities is critical to funding our operating cash needs. Based on current market conditions for our finished products and natural gas, we anticipate that we will be able to meet our covenants through 2004. If there were to be any adverse changes in the factors discussed above, we may need a waiver of our credit facility covenants and there is no assurance we could receive such waivers.

On November 1, 2004, we received notification from Methanex Corporation, under the terms of our agreement, to cease production at our Beaumont, Texas methanol manufacturing facility on December 1, 2004. We sold our sales contracts and rights to the full output of the Beaumont plant for five years ending December 31, 2008, to Methanex for a received lump-sum payment of $25 million and a share of cash gross profits generated from Beaumont sales. The agreement gave Methanex the right to cease production at the Beaumont facility. We plan to mothball the plant for an indefinite period. We will spend up to $5.0 million to mothball the plant and for employee separation payments.

Our cash contributions to pension plans are estimated at $19 million in 2004, $13 million in 2005 and $7 million in 2006. Actual contributions could vary from these estimates depending on actual returns for plan assets, legislative changes to pension funding requirements and/or plan amendments.

Distributions paid to the minority TNCLP common unitholders in the first nine months of 2004 and 2003 were $5.8 million. TNCLP distributions are based on “Available Cash” (as defined in the Partnership Agreement).

Cash and short-term investment balances at September 30, 2004 were $144.6 million, all of which is unrestricted.

ITEM 4. CONTROLS AND PROCEDURES

In response to recently enacted changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes Oxley Act of 2002, we continue to devote significant resources and time to comply with these new requirements. In particular, we are currently undertaking a full analysis and documentation of the Company’s internal control over financial reporting. Our testing and analysis is continuing and will be completed in connection with our evaluation of our internal control over financial reporting as of the end of the current fiscal year. This additional testing may identify deficiencies in our internal control over financial reporting and we may conclude that the identified deficiencies rise to the level of significant deficiencies or material weaknesses in internal control over financial reporting.

Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by the report, that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

FORWARD-LOOKING PRECAUTIONS

Information contained in this report, other than historical information, may be considered forward looking. Forward-looking information reflects management’s current views of future events and financial performance that involve a number of risks and uncertainties. The factors that could cause actual results to differ materially include, but are not limited to, the following: changes in financial markets, general economic conditions within the agricultural industry, competitive factors and price changes (principally, sales prices of nitrogen and methanol products and natural gas costs), changes in product mix, changes in the seasonality of demand patterns, changes in weather conditions, changes in agricultural regulations, and other risks detailed in the “Factors that Affect Operating Results” section of our most recent Form 10-K.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS

(a)

Exhibits


Exhibit 3.1		Terra Industries Inc. Articles Supplementary filed with the State of Maryland on October 14, 2004

Exhibit 10.1		Purchase Agreement dated October 7, 2004 among Terra Industries Inc., Citigroup Global Markets Inc. and Lazard Frères & Co. LLC

Exhibit 10.2		Registration Rights Agreement dated October 7, 2004 among Terra Industries Inc., Citigroup Global Markets Inc. and Lazard Frères & Co. LLC

Exhibit 31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2		Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		TERRA INDUSTRIES INC.

Date: November 8, 2004		/s/ Francis G. Meyer
		Francis G. Meyer
		Senior Vice President and Chief Financial
		Officer and a duly authorized signatory