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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

 

OR

 

¨ 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)

 

1. 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
    

  

  

 

6


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.

 

7


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

 

8


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 )
    


 


 


 


 

9


6. 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.

 

10


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  
    


 


 


 


 


 


 

11


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  
    


 


 


 


 


 


 

12


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  
    


 


 


 


 


 


 

13


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  
    


 


 


 


 


 


 

14


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  
    


 


 


 


 


 


 

15


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 )
    


 


 


 


 


 


 

16


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  
    


 


 


 


 


 


 

17


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.

 

18


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.

 

19


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

 

20


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.

 

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.

 

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.

 

21


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

 

22


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.

 

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.

 

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.

 

23


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 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.

 

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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.

 

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.

 

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

 

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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.

 

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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.

 

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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

 

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