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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, 2003
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 (State or other jurisdiction of incorporation or organization) | 52-1145429 (I.R.S. Employer Identification No.) | |
| Terra Centre P.O. Box 6000 600 Fourth Street Sioux City, Iowa (Address of principal executive offices) | 51102-6000 (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. Yesx Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2.) Yesx Noo
As of October 31, 2003, the following shares of the registrant’s stock were outstanding:
| Common Shares, without par value | 77,504,916 shares |
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands)
(unaudited)
| September 30, | December 31, | September 30, | ||||||||||
| 2003 | 2002 | 2002 | ||||||||||
ASSETS | ||||||||||||
| Cash and short-term investments | $ | 21,278 | $ | 58,479 | $ | 41,879 | ||||||
| Accounts receivable, less allowance for doubtful accounts of $1,643, $135, $191 | 107,450 | 101,013 | 97,455 | |||||||||
| Inventories | 87,599 | 88,598 | 86,838 | |||||||||
| Other current assets | 32,835 | 31,201 | 30,528 | |||||||||
Total current assets | 249,162 | 279,291 | 256,700 | |||||||||
| Property, plant and equipment, net | 706,610 | 790,475 | 792,182 | |||||||||
| Deferred plant turnaround costs | 26,029 | 29,177 | 23,287 | |||||||||
| Other assets | 35,194 | 29,167 | 30,147 | |||||||||
Total assets | $ | 1,016,995 | $ | 1,128,110 | $ | 1,102,316 | ||||||
LIABILITIES | ||||||||||||
| Debt due within one year | $ | 152 | $ | 143 | $ | 140 | ||||||
| Accounts payable | 74,956 | 94,916 | 66,883 | |||||||||
| Accrued and other liabilities | 105,329 | 98,330 | 54,555 | |||||||||
Total current liabilities | 180,437 | 193,389 | 121,578 | |||||||||
| Long-term debt and capital lease obligations | 402,242 | 400,358 | 400,394 | |||||||||
| Deferred income taxes | 27,942 | 72,748 | 99,626 | |||||||||
| Pension liabilities | 61,248 | 60,722 | 31,080 | |||||||||
| Other liabilities | 47,155 | 44,197 | 49,818 | |||||||||
| Minority interest | 84,777 | 98,832 | 100,021 | |||||||||
Total liabilities and minority interest | 803,801 | 870,246 | 802,517 | |||||||||
STOCKHOLDERS’ EQUITY | ||||||||||||
| Capital stock | ||||||||||||
| Common Shares, authorized 133,500 shares; outstanding 77,505, 76,920 and 76,902 shares | 128,920 | 128,654 | 128,654 | |||||||||
| Paid-in capital | 555,509 | 555,167 | 555,167 | |||||||||
| Accumulated other comprehensive loss | (58,964 | ) | (63,668 | ) | (43,572 | ) | ||||||
| Retained deficit | (412,271 | ) | (362,289 | ) | (340,450 | ) | ||||||
Total stockholders’ equity | 213,194 | 257,864 | 299,799 | |||||||||
Total liabilities and stockholders’ equity | $ | 1,016,995 | $ | 1,128,110 | $ | 1,102,316 | ||||||
See Accompanying Notes to the Consolidated Financial Statements
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TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share amounts)
(unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
REVENUES | |||||||||||||||||
| Net sales | $ | 324,317 | $ | 257,875 | $ | 982,569 | $ | 770,681 | |||||||||
| Other income, net | 525 | 799 | 1,361 | 1,051 | |||||||||||||
| Total revenues | 324,842 | 258,674 | 983,930 | 771,732 | |||||||||||||
COSTS AND EXPENSES | |||||||||||||||||
| Cost of sales | 308,554 | 238,546 | 954,659 | 733,900 | |||||||||||||
| Selling, general and administrative expense | 10,384 | 10,328 | 29,444 | 28,810 | |||||||||||||
| Impairment of long-lived assets | — | — | 53,091 | — | |||||||||||||
| Total costs and expenses | 318,938 | 248,874 | 1,037,194 | 762,710 | |||||||||||||
| Income (loss) from operations | 5,904 | 9,800 | (53,264 | ) | 9,022 | ||||||||||||
| Interest income | 48 | 116 | 429 | 277 | |||||||||||||
| Interest expense | (13,829 | ) | (13,408 | ) | (41,664 | ) | (40,052 | ) | |||||||||
| Minority interest | 234 | (492 | ) | 12,902 | (1,777 | ) | |||||||||||
| Loss from continuing operations before income taxes | (7,643 | ) | (3,984 | ) | (81,597 | ) | (32,530 | ) | |||||||||
| Income tax benefit | 3,094 | 2,048 | 31,615 | 13,012 | |||||||||||||
| Loss from continuing operations | (4,549 | ) | (1,936 | ) | (49,982 | ) | (19,518 | ) | |||||||||
| Discontinued operations, net of income taxes of $6.0 million | — | (11,000 | ) | — | (11,000 | ) | |||||||||||
| Cumulative effect of change in accounting principle | — | — | — | (205,968 | ) | ||||||||||||
NET LOSS | $ | (4,549 | ) | $ | (12,936 | ) | $ | (49,982 | ) | $ | (236,486 | ) | |||||
| Basic and diluted loss per share: | |||||||||||||||||
| Loss from continuing operations | $ | (0.06 | ) | $ | (0.03 | ) | $ | (0.66 | ) | $ | (0.25 | ) | |||||
| Discontinued operations | — | (0.15 | ) | — | (0.15 | ) | |||||||||||
| Cumulative effect of change in accounting principle | — | — | — | (2.74 | ) | ||||||||||||
| Net loss per share | $ | (0.06 | ) | $ | (0.18 | ) | $ | (0.66 | ) | $ | (3.14 | ) | |||||
| Basic and diluted weighted average shares outstanding | 75,726 | 75,468 | 75,602 | 75,276 | |||||||||||||
See Accompanying Notes to the Consolidated Financial Statements
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TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Nine Months Ended | |||||||||
| September 30, | |||||||||
| 2003 | 2002 | ||||||||
OPERATING ACTIVITIES | |||||||||
| Net loss | $ | (49,982 | ) | $ | (236,486 | ) | |||
| Adjustments to reconcile net loss from operations to net cash flows from operating activities: | |||||||||
| Impairment of long-lived assets | 53,091 | — | |||||||
| Discontinued operations | — | 11,000 | |||||||
| Cumulative effect of change in accounting principle | — | 205,968 | |||||||
| Depreciation and amortization | 82,041 | 78,977 | |||||||
| Deferred income taxes | (33,806 | ) | (12,854 | ) | |||||
| Minority interest in earnings (losses) | (12,902 | ) | 1,777 | ||||||
| Changes in current assets and liabilities: | |||||||||
| Accounts receivable | (3,874 | ) | 5,931 | ||||||
| Inventories | 237 | 25,646 | |||||||
| Other current assets | (4,660 | ) | 12,989 | ||||||
| Accounts payable | (22,419 | ) | (9,733 | ) | |||||
| Accrued and other liabilities | (9,120 | ) | 15,136 | ||||||
| Other | 569 | (98 | ) | ||||||
| Net cash flows from operating activities | (825 | ) | 98,253 | ||||||
INVESTING ACTIVITIES | |||||||||
| Purchase of property, plant and equipment | (7,074 | ) | (16,589 | ) | |||||
| Plant turnaround costs | (20,666 | ) | (15,052 | ) | |||||
| Other | (1,100 | ) | 4,404 | ||||||
| Net cash flows from investing activities | (28,840 | ) | (27,237 | ) | |||||
FINANCING ACTIVITIES | |||||||||
| Issuance of long-term debt | 202,000 | — | |||||||
| Principal payments on long-term debt and capital lease obligations | (200,107 | ) | (36,068 | ) | |||||
| Deferred financing costs | (8,581 | ) | — | ||||||
| Stock issuance-net | — | 608 | |||||||
| Distributions to minority interests | (1,153 | ) | (923 | ) | |||||
| Net cash flows from financing activities | (7,841 | ) | (36,383 | ) | |||||
| Effect of exchange rate changes on cash | 305 | 121 | |||||||
| Increase (decrease) in cash and short-term investments | (37,201 | ) | 34,754 | ||||||
| Cash and short-term investments at beginning of period | 58,479 | 7,125 | |||||||
Cash and short-term investments at end of period | $ | 21,278 | $ | 41,879 | |||||
See Accompanying Notes to the Consolidated Financial Statements
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TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(in thousands)
(unaudited)
| Accumulated | ||||||||||||||||||||||
| Other | ||||||||||||||||||||||
| Capital | Paid-In | Comprehensive | Retained | |||||||||||||||||||
| Stock | Capital | Income (Loss) | Deficit | Total | ||||||||||||||||||
| Balance at January 1, 2003 | $ | 128,654 | $ | 555,167 | $ | (63,668 | ) | $ | (362,289 | ) | $ | 257,864 | ||||||||||
| Comprehensive income (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 | ) | ||||||||||||||||||||
| Stock incentive plan | 266 | 342 | — | — | 608 | |||||||||||||||||
| Balance at September 30, 2003 | $ | 128,920 | $ | 555,509 | $ | (58,964 | ) | $ | (412,271 | ) | $ | 213,194 | ||||||||||
| Accumulated | ||||||||||||||||||||||
| Other | ||||||||||||||||||||||
| Capital | Paid-In | Comprehensive | Retained | |||||||||||||||||||
| Stock | Capital | Income (Loss) | Deficit | Total | ||||||||||||||||||
| Balance at January 1, 2002 | $ | 128,363 | $ | 554,850 | $ | (78,470 | ) | $ | (103,964 | ) | $ | 500,779 | ||||||||||
| Comprehensive income (loss): | ||||||||||||||||||||||
| Net loss | — | — | — | (236,486 | ) | (236,486 | ) | |||||||||||||||
| Foreign currency translation adjustment | — | — | 25,131 | — | 25,131 | |||||||||||||||||
| Change in fair value of derivatives, net of taxes of $3,503 | — | — | 9,767 | — | 9,767 | |||||||||||||||||
| Comprehensive loss | (201,588 | ) | ||||||||||||||||||||
| Stock incentive plan | 291 | 317 | — | — | 608 | |||||||||||||||||
| Balance at September 30, 2002 | $ | 128,654 | $ | 555,167 | $ | (43,572 | ) | $ | (340,450 | ) | $ | 299,799 | ||||||||||
See Accompanying Notes to the Consolidated Financial Statements
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TERRA INDUSTRIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| 1. | The accompanying unaudited consolidated financial statements and 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”) and the results of Terra’s operations for the periods presented. Because of the seasonal nature of Terra’s 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 Terra’s 2002 Annual Report to Stockholders. Certain reclassifications have been made to prior years’ financial statements to conform with current year presentation. |
| Basic earning (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. |
| Inventories consisted of the following: |
| September 30, | December 31, | September 30, | ||||||||||
| (in thousands) | 2003 | 2002 | 2002 | |||||||||
| Raw materials | $ | 23,812 | $ | 22,546 | $ | 21,619 | ||||||
| Supplies | 22,287 | 26,765 | 26,590 | |||||||||
| Finished goods | 41,500 | 39,287 | 38,629 | |||||||||
| Total | $ | 87,599 | $ | 88,598 | $ | 86,838 | ||||||
The components of accumulated other comprehensive loss consisted of the following:
| September 30, | December 31, | September 30, | ||||||||||
| (in thousands) | 2003 | 2002 | 2002 | |||||||||
| Foreign currency translation adjustment | $ | 19,866 | $ | 38,558 | $ | 37,940 | ||||||
| Derivatives, net of taxes of $5,888, ($2,652) and ($3,503) | 8,832 | (3,978 | ) | (5,254 | ) | |||||||
| Minimum pension liability, net of taxes of $17,890, $17,310 and $7,257 | 30,266 | 29,088 | 10,886 | |||||||||
| Total | $ | 58,964 | $ | 63,668 | $ | 43,572 | ||||||
| Revenue is recognized when title to finished product 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 |
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each accounting period. Costs associated with settlement of natural gas purchase contracts and costs for shipping and handling are included in cost of sales.
Terra accounts for its 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 loss and diluted 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 | Nine Months Ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| (in thousands, except per-share amounts) | 2003 | 2002 | 2003 | 2002 | ||||||||||||
| Net loss — as reported | $ | (4,549 | ) | $ | (12,936 | ) | $ | (49,982 | ) | $ | (236,486 | ) | ||||
| Net loss — pro forma | (4,549 | ) | (12,951 | ) | (49,982 | ) | (236,531 | ) | ||||||||
| Basic and diluted loss per share, as reported | $ | (0.06 | ) | $ | (0.18 | ) | $ | (0.66 | ) | $ | (3.14 | ) | ||||
| Basic and diluted loss per share, pro forma | (0.06 | ) | (0.18 | ) | (0.66 | ) | (3.14 | ) | ||||||||
| 2. | Terra Nitrogen (U.K.) Limited was found liable for damages associated with May 1998 recalls of carbonated beverages containing carbon dioxide tainted with benzene. Appeals against those judgments were unsuccessful. Certain other beverage manufacturers have indicated their intention to file claims for various and unspecified amounts. Management estimated total claims against Terra from these lawsuits may be £10 million, or $14 million when Terra, in 2001, established reserves to cover estimated loses. |
| Terra’s insurer denied Terra insurance coverage for these claims and Terra began litigation in federal court to obtain a declaration of insurance coverage. On October 17, 2003 the Eighth Circuit Court of Appeals upheld a lower court decision that Terra’s insurer is obligated to defend and indemnify Terra for all current and future benzene claims. According to the court’s decision, Terra is entitled to reimbursement of all benzene settlements and judgments paid to date, defense and associated costs, and interest from August 2002, the date of the lower court’s decision. The decision is subject to appeal, which the insurer has to file by November 17, 2003. Terra will not recognize income for any recoveries or reductions to reserves until the insurer has exhausted all appeals. |
| Terra is 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, or the U.K. benzene claims, will have a material adverse effect on the results of operations, financial position or net cash flows. |
| 3. | Natural gas is the principal raw material used in Terra’s production of nitrogen products and methanol. Natural gas prices are volatile and we manage this volatility through the use of derivative commodity instruments and fixed price physical contracts. Terra’s normal 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 |
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| 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 Terra’s 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. |
| Terra has entered into forward pricing positions for a portion of its natural gas requirements for the remainder of 2003 and part of 2004, consistent with its policy. As a result of its policies, Terra has 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, Terra will incur higher costs. Contracts were in place at September 30, 2003 to cover 26% of natural gas requirements for the succeeding twelve months. We also use basis swaps to manage some of the basis risk. |
| Unrealized losses from forward pricing positions in North America totaled $9.3 million as of September 30, 2003. Terra also had $3.4 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, 2003, recording the fair value of derivatives resulted in a $8.2 million decrease to current assets, a $13.2 million increase to current liabilities and a $12.8 million increase, after deferred taxes of $8.5 million, to Accumulated Other Comprehensive Loss, which reflected the effective portion of the derivatives designated as cash flow hedges. The decrease to current assets was to recognize the value of open natural gas contracts and the increase to current liabilities was to reclassify deferred losses on closed contracts relating to future periods. |
| 4. | Terra classifies its continuing operations into two business segments: nitrogen products and methanol. The nitrogen products business produces and distributes ammonia, urea, nitrogen solutions and ammonium nitrate 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. Terra does 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 | Nine Months Ended | |||||||||||||||||
| September 30, | September 30, | |||||||||||||||||
| (in thousands) | 2003 | 2002 | 2003 | 2002 | ||||||||||||||
| Revenues | — Nitrogen Products | $ | 277,292 | $ | 211,103 | $ | 821,577 | $ | 653,753 | |||||||||
| — Methanol | 47,025 | 46,772 | 160,992 | 116,928 | ||||||||||||||
| — Other | 525 | 799 | 1,361 | 1,051 | ||||||||||||||
| Total revenues | $ | 324,842 | $ | 258,674 | $ | 983,930 | $ | 771,732 | ||||||||||
| Income (loss) from operations | ||||||||||||||||||
| — Nitrogen Products | $ | 9,355 | $ | 4,241 | $ | (51,757 | ) | $ | 7,111 | |||||||||
| — Methanol | (1,083 | ) | 6,696 | 3,659 | 3,782 | |||||||||||||
| — Other | (2,368 | ) | (1,137 | ) | (5,166 | ) | (1,871 | ) | ||||||||||
| Total income (loss) from operations | $ | 5,904 | $ | 9,800 | $ | (53,264 | ) | $ | 9,022 | |||||||||
The impairment of long-lived assets (Note 5) of $53.1 million was included as a charge against the nitrogen segment’s second quarter operating income and resulted in a decrease of the nitrogen segment’s long-term assets.
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| 5. | On February 27, 2003, we suspended production at our Blytheville, Arkansas and Woodward, Oklahoma facilities due to high natural gas prices. On March 5, 2003, we reduced ammonia and methanol production rates at our other North American facilities. On March 13, 2003, we announced the restart of the idled facilities and the resumption of near capacity production at our other North American facilities. |
| On June 26, 2003, we suspended production at our Blytheville, Arkansas facility due to expectations that the facility would not cover its cash costs because of continuing high natural gas costs and the seasonal decline in nitrogen fertilizer demand and prices. 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,” we commenced a review to determine if the Blytheville facility’s carrying value was impaired. This review led management to conclude that future market conditions may 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 during the second quarter as an “Impairment of long-lived assets”. While the plant’s value is permanently impaired, we resumed production in October 2003 in response to higher urea selling prices and improved seasonal demand. We expect production will continue through April 30, 2004. We anticipate $4.0 to $6.0 million of spending will be required when the facility is permanently idled. |
| 6. | On May 21, 2003, Terra Capital, Inc., a wholly owned subsidiary of Terra Industries Inc. issued $202 million of 11.5% Second Priority Senior Secured Notes due in 2010. The notes were priced at 99.402% to yield 11.625%. The fees and expenses of the transaction totaled $8.6 million. Terra used the proceeds of the offering to repay its 10.5% Senior Notes due 2005. |
| The notes are secured by a second priority security interest in certain domestic current assets and intellectual property of Terra Industries Inc. and its subsidiaries and capital stock of certain of its subsidiaries. The security interest is second in priority to a first priority security interest in the same assets in favor of the lenders under our revolving credit facility and is shared equally and ratably with our outstanding 12.875% Senior Secured Notes due 2008. |
| 7. | Our pension liabilities were $226 million at December 31, 2002, which was $91 million higher than pension plan assets. Pension liabilities are computed during the fourth quarter of each year and the December 31, 2002 liability was computed based on a 6.3% discount rate based on yields for high-quality corporate bonds with a maturity approximating the duration of our pension liability. Declines in comparable bond yields would increase our pension liability and increases in comparable bond yields would reduce our pension liability. Our net pension liability, after deduction of plan assets, could also increase or decrease depending on the extent to which returns on pension plan assets are lower or higher than the 6.3% discount rate. |
| 8. | Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations”, was effective for our financial statements as of January 1, 2003. This standard required us to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The adoption of this standard did not have a material effect on our results of operations or financial position. |
| SFAS No. 149, “Amendments of Statement 133 on Derivative Instruments and Hedging Activities”, amends and clarifies financial accounting for derivative instruments. This standard became effective in our third quarter. The adoption of this standard did not have a material effect on our financial position or results of operations. |
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| SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”, establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This standard became effective for contracts entered into after May 31, 2003. The adoption of this standard did not have a material effect on our financial position or results of operations. |
| FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements, Including Indirect Guarantees of Indebtedness of Others”, clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing certain guarantees. FIN 45 also expands the disclosure to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. The provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 became effective for Terra in 2003, and did not impact our financial position. |
| FASB Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities”, explains how to identify variable interest entities and how an enterprise assesses its interest in a variable interest entity to decide whether to consolidate that entity. The provisions of FIN 46 applied to Terra on June 15, 2003. FIN 46 did not impact our financial position. |
| FASB Emerging Issues Task Force (“EITF”) issue 02-9, “Accounting for Changes that Result in a Transferor Regaining Control of Financial Assets Sold”, was effective for Terra on April 2, 2003 and did not impact our financial position. |
| FASB EITF issue 01-8, “Determining Whether an Arrangement Contains a Lease”, was assessed and did not impact our financial position. |
| 9. | Condensed consolidating financial statements 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, 2003, December 31 and September 30, 2002 and condensed statements of operations and cash flows for the nine months ended September 30, 2003 and 2002 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. |
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Condensed Consolidating Statement of Financial Position as of September 30, 2003:
| Guarantor | Non-Guarantor | |||||||||||||||||||||||||
| (in thousands) | Parent | TCAPI | Subsidiaries | 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 | |||||||||||||||||||
| Other assets and deferred plant turnaround costs | 48 | 19,698 | 11,250 | 29,487 | 740 | 61,223 | ||||||||||||||||||||
| Investments in and advanced to (from) affiliates | 345,261 | 523,901 | 1,280,027 | 31,917 | (2,181,106 | ) | — | |||||||||||||||||||
| Total assets | $ | 344,744 | $ | 577,653 | $ | 1,720,680 | $ | 557,521 | $ | (2,183,603 | ) | $ | 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 and minority interest | $ | 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 | 1,819,036 | 725,545 | (2,694,799 | ) | 555,509 | |||||||||||||||||||
| Accumulated other comprehensive loss | (58,964 | ) | (23,250 | ) | — | (14,500 | ) | 37,750 | (58,964 | ) | ||||||||||||||||
| Retained deficit | (412,271 | ) | (18,263 | ) | (230,676 | ) | (274,289 | ) | 523,228 | (412,271 | ) | |||||||||||||||
| Total stockholders’ equity | 213,194 | 108,705 | 1,588,433 | 486,465 | (2,183,603 | ) | 213,194 | |||||||||||||||||||
| Total liabilities and Stockholders’ equity | $ | 344,744 | $ | 577,653 | $ | 1,720,680 | $ | 557,521 | $ | (2,183,603 | ) | $ | 1,016,995 | |||||||||||||
11
Table of Contents
Condensed Consolidating Statement of Operations for the nine months ended September 30, 2003:
| Guarantor | Non-Guarantor | |||||||||||||||||||||||||
| (in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||||
Revenues | ||||||||||||||||||||||||||
| Net sales | $ | — | $ | — | $ | 387,621 | $ | 592,886 | $ | 2,062 | $ | 982,569 | ||||||||||||||
| Other income, net | — | — | 2,726 | 697 | (2,062 | ) | 1,361 | |||||||||||||||||||
| Total revenues | — | — | 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 | ) | — | ||||||||||||||||||
| Total costs and expenses | 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 | ) | (5,273 | ) | 5,265 | (41,664 | ) | |||||||||||||||
| Minority interest | — | 2,524 | 10,378 | — | — | 12,902 | ||||||||||||||||||||
| 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 Loss | $ | (49,982 | ) | $ | (72,490 | ) | $ | (99,184 | ) | $ | (36,315 | ) | $ | 207,989 | $ | (49,982 | ) | |||||||||
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Condensed Consolidating Statement of Cash Flows for the nine months ended September 30, 2003:
| Guarantor | Non-Guarantor | ||||||||||||||||||||||||||
| (in thousands) | Parent | TCAPI | Subsidiaries | 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 | ) | ||||||||||||||||||
| Change in operating assets and liabilities | 11,409 | (3,947 | ) | (96,993 | ) | (4,934 | ) | 54,629 | (39,836 | ) | |||||||||||||||||
| Other | — | — | — | — | 569 | 569 | |||||||||||||||||||||
| Equity in earnings (loss) of subsidiaries | (72,490 | ) | (49,067 | ) | (84,586 | ) | 481 | 205,662 | — | ||||||||||||||||||
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 | ) | |||||||||||||||||
| Deferred financing costs | — | (8,581 | ) | — | — | — | (8,581 | ) | |||||||||||||||||||
| Distribution to minority interests | — | (225 | ) | (928 | ) | — | |||||||||||||||||||||
| — | (1,153 | ) | |||||||||||||||||||||||||
| Change in investments and advances from (to) affiliates | 353,164 | (64,756 | ) | 238,298 | (113,591 | ) | (413,115 | ) | — | ||||||||||||||||||
| 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 Period | 1 | 15,388 | — | 109,180 | (66,090 | ) | 58,479 | ||||||||||||||||||||
Cash and Short-term Investments At End of Period | $ | — | $ | 18,566 | $ | 1,801 | $ | 911 | $ | — | $ | 21,278 | |||||||||||||||
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Condensed Consolidating Statement of Financial Position as of December 31, 2002:
| Guarantor | Non-Guarantor | |||||||||||||||||||||||||
| (in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||||
Assets | ||||||||||||||||||||||||||
| Cash and short-term investments | $ | 1 | $ | 15,388 | $ | — | $ | 109,180 | $ | (66,090 | ) | $ | 58,479 | |||||||||||||
| Accounts receivable, net | — | — | 38,102 | 62,911 | — | 101,013 | ||||||||||||||||||||
| Inventories | — | — | 25,475 | 63,123 | — | 88,598 | ||||||||||||||||||||
| Other current assets | 6,391 | — | 6,950 | 18,213 | (353 | ) | 31,201 | |||||||||||||||||||
| Total current assets | 6,392 | 15,388 | 70,527 | 253,427 | (66,443 | ) | 279,291 | |||||||||||||||||||
| Property, plant and equipment, net | — | — | 396,722 | 397,753 | (4,000 | ) | 790,475 | |||||||||||||||||||
| Investments in and advanced to (from) affiliates | 621,231 | 397,043 | 1,438,412 | (76,472 | ) | (2,380,214 | ) | — | ||||||||||||||||||
| Other assets and deferred plant turnaround costs | (479 | ) | 13,886 | 11,560 | 33,377 | — | 58,344 | |||||||||||||||||||
| Total assets | $ | 627,144 | $ | 426,317 | $ | 1,917,221 | $ | 608,085 | $ | (2,450,657 | ) | $ | 1,128,110 | |||||||||||||
Liabilities | ||||||||||||||||||||||||||
| Debt due within one year | $ | — | $ | — | $ | 88 | $ | 55 | $ | — | $ | 143 | ||||||||||||||
| Accounts payable | 201 | 1,525 | 107,647 | 51,985 | (66,442 | ) | 94,916 | |||||||||||||||||||
| Accrued and other liabilities | 25,695 | 5,676 | 34,802 | 32,157 | — | 98,330 | ||||||||||||||||||||
| Total current liabilities and minority interest | 25,896 | 7,201 | 142,537 | 84,197 | (66,442 | ) | 193,389 | |||||||||||||||||||
| Long-term debt and capital lease obligations | 200,000 | 200,000 | 225 | 133 | — | 400,358 | ||||||||||||||||||||
| Deferred income taxes | 70,154 | 19,422 | — | (16,828 | ) | — | 72,748 | |||||||||||||||||||
| Pension and other liabilities | 73,230 | 12,202 | 2,668 | 16,818 | 1 | 104,919 | ||||||||||||||||||||
| Minority interest | — | 19,332 | 79,500 | — | — | 98,832 | ||||||||||||||||||||
| Total liabilities | 369,280 | 258,157 | 224,930 | 84,320 | (66,441 | ) | 870,246 | |||||||||||||||||||
Stockholders’ Equity | ||||||||||||||||||||||||||
| Common stock | 128,654 | — | 73 | 49,709 | (49,782 | ) | 128,654 | |||||||||||||||||||
| Paid in capital | 555,167 | 150,218 | 1,817,591 | 724,088 | (2,691,897 | ) | 555,167 | |||||||||||||||||||
| Accumulated other comprehensive loss | (63,668 | ) | (36,285 | ) | — | (18,238 | ) | 54,523 | (63,668 | ) | ||||||||||||||||
| Retained earnings (deficit) | (362,289 | ) | 54,227 | (125,373 | ) | (231,794 | ) | 302,940 | (362,289 | ) | ||||||||||||||||
| Total stockholders’ equity | 257,864 | 168,160 | 1,692,291 | 523,765 | (2,384,216 | ) | 257,864 | |||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 627,144 | $ | 426,317 | $ | 1,917,221 | $ | 608,085 | $ | (2,450,657 | ) | $ | 1,128,110 | |||||||||||||
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Condensed Consolidating Statement of Financial Position as of September 30, 2002:
| Guarantor | Non-Guarantor | ||||||||||||||||||||||||
| (in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Assets | |||||||||||||||||||||||||
| Cash and short-term investments | $ | — | $ | 35,702 | $ | — | $ | 57,889 | $ | (51,712 | ) | $ | 41,879 | ||||||||||||
| Accounts receivable, net | — | 1,019 | 33,544 | 62,891 | 1 | 97,455 | |||||||||||||||||||
| Inventories | — | — | 23,159 | 63,678 | 1 | 86,838 | |||||||||||||||||||
| Other current assets | 9,427 | — | 5,509 | 17,462 | (1,870 | ) | 30,528 | ||||||||||||||||||
| Total current assets | 9,427 | 36,721 | 62,212 | 201,920 | (53,580 | ) | 256,700 | ||||||||||||||||||
| Property, plant and equipment, net | — | — | 406,228 | 390,453 | (4,499 | ) | 792,182 | ||||||||||||||||||
| Other assets and deferred plant turnaround costs | 22 | 14,558 | 13,221 | 25,634 | (1 | ) | 53,434 | ||||||||||||||||||
| Investments in and advanced to (from) affiliates | 656,334 | 396,235 | 1,224,495 | 136,664 | (2,413,728 | ) | — | ||||||||||||||||||
| Total assets | $ | 665,783 | $ | 447,514 | $ | 1,706,156 | $ | 754,671 | $ | (2,471,808 | ) | $ | 1,102,316 | ||||||||||||
Liabilities | |||||||||||||||||||||||||
| Debt due within one year | $ | — | $ | — | $ | 86 | $ | 54 | $ | — | $ | 140 | |||||||||||||
| Accounts payable | 19 | 2,372 | 80,307 | 37,769 | (53,584 | ) | 66,883 | ||||||||||||||||||
| Accrued and other liabilities | 8,442 | 13,602 | 19,628 | 13,036 | (153 | ) | 54,555 | ||||||||||||||||||
| Total current liabilities | 8,461 | 15,974 | 100,021 | 50,859 | (53,737 | ) | 121,578 | ||||||||||||||||||
| Long-term debt and capital lease obligations | 200,000 | 200,000 | 247 | 147 | — | 400,394 | |||||||||||||||||||
| Deferred income taxes | 102,059 | 19,802 | (7,257 | ) | (15,132 | ) | 154 | 99,626 | |||||||||||||||||
| Pension and other liabilities | 55,464 | 13,247 | 2,031 | 10,153 | 3 | 80,898 | |||||||||||||||||||
| Minority interest | — | 19,564 | 80,457 | — | — | 100,021 | |||||||||||||||||||
| Total liabilities and minority interest | 365,984 | 268,587 | 175,499 | 46,027 | (53,580 | ) | 802,517 | ||||||||||||||||||
Stockholders’ Equity | |||||||||||||||||||||||||
| Common stock | 128,654 | — | 73 | 49,709 | (49,782 | ) | 128,654 | ||||||||||||||||||
| Paid in capital | 555,167 | 150,218 | 1,656,742 | 892,448 | (2,699,408 | ) | 555,167 | ||||||||||||||||||
| Accumulated other comprehensive loss | (43,572) | (43,572 | ) | — | (16,335 | ) | 59,907 | (43,572 | ) | ||||||||||||||||
| Retained earnings (deficit) | (340,450) | 72,281 | (126,158 | ) | (217,178 | ) | 271,055 | (340,450 | ) | ||||||||||||||||
| Total stockholders’ equity | 299,799 | 178,927 | 1,530,657 | 708,644 | (2,418,228 | ) | 299,799 | ||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 665,783 | $ | 447,514 | $ | 1,706,156 | $ | 754,671 | $ | (2,471,808 | ) | $ | 1,102,316 | ||||||||||||
15
Table of Contents
Condensed Consolidating Statement of Operations for the nine months ended September 30, 2002:
| Guarantor | Non-Guarantor | ||||||||||||||||||||||||
| (in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Revenues | |||||||||||||||||||||||||
| Net sales | $ | — | $ | — | $ | 287,417 | $ | 477,365 | $ | 5,899 | $ | 770,681 | |||||||||||||
| Other income, net | — | — | 2,969 | 3,980 | (5,898 | ) | 1,051 | ||||||||||||||||||
| Total revenues | — | — | 290,386 | 481,345 | 1 | 771,732 | |||||||||||||||||||
Cost and Expenses | |||||||||||||||||||||||||
| Cost of sales | — | — | 285,198 | 450,643 | (1,941 | ) | 733,900 | ||||||||||||||||||
| Selling, general and administrative expenses | 2,219 | (464 | ) | 18,942 | 7,650 | 463 | 28,810 | ||||||||||||||||||
| Equity in the (earnings) loss of subsidiaries | 222,575 | 202,382 | (4,450 | ) | (7,996 | ) | (412,511 | ) | — | ||||||||||||||||
| Total costs and expenses | 224,794 | 201,918 | 299,690 | 450,297 | (413,989 | ) | 762,710 | ||||||||||||||||||
| Income (loss) from operations | (224,794 | ) | (201,918 | ) | (9,304 | ) | 31,048 | 413,990 | 9,022 | ||||||||||||||||
| Interest income | 36 | 191 | — | 50 | — | 277 | |||||||||||||||||||
| Interest expense | (16,393 | ) | (20,500 | ) | 4,070 | (7,205 | ) | (24 | ) | (40,052 | ) | ||||||||||||||
| Minority interest | — | (348 | ) | (1,429 | ) | — | — | (1,777 | ) | ||||||||||||||||
| Income (loss) from continuing operations before income taxes | (241,151 | ) | (222,575 | ) | (6,663 | ) | 23,893 | 413,966 | (32,530 | ) | |||||||||||||||
| Income tax (provision) benefit | 15,665 | — | — | (2,653 | ) | — | 13,012 | ||||||||||||||||||
| Income (loss) continuing operations | (225,486 | ) | (222,575 | ) | (6,663 | ) | 21,240 | 413,966 | (19,518 | ) | |||||||||||||||
| Discontinued operations, net of income taxes | (11,000 | ) | — | — | — | — | (11,000 | ) | |||||||||||||||||
| Cumulative effect of change in accounting principle | — | — | (189,971 | ) | (15,997 | ) | — | (205,968 | ) | ||||||||||||||||
| Net income (loss) | $ | (236,486 | ) | $ | (222,575 | ) | $ | (196,634 | ) | $ | 5,243 | $ | 413,966 | $ | (236,486 | ) | |||||||||
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Table of Contents
Condensed Consolidating Statement of Cash Flows for the nine months ended September 30, 2002:
| Guarantor | Non-Guarantor | ||||||||||||||||||||||||
| (in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Operating Activities | |||||||||||||||||||||||||
| Net income (loss) | $ | (236,486 | ) | $ | (222,575 | ) | $ | (196,634 | ) | $ | 5,243 | $ | 413,966 | $ | (236,486 | ) | |||||||||
| Adjustments to reconcile net loss to net cash flows from operating activities: | |||||||||||||||||||||||||
| Discontinued operations | 11,000 | — | — | — | — | 11,000 | |||||||||||||||||||
| Cumulative effect of change in accounting principle | — | — | 189,971 | 15,997 | — | 205,968 | |||||||||||||||||||
| Depreciation and amortization | — | 2,085 | 38,224 | 38,668 | — | 78,977 | |||||||||||||||||||
| Deferred income taxes | (8,859 | ) | — | (3,887 | ) | (6,860 | ) | 6,752 | (12,854 | ) | |||||||||||||||
| Minority interest in earnings | — | 348 | 1,429 | — | — | 1,777 | |||||||||||||||||||
| Change in operating assets and liabilities | 3,804 | (27,778 | ) | 59,194 | 27,087 | (12,338 | ) | 49,969 | |||||||||||||||||
| Other | — | — | — | — | (98 | ) | (98 | ) | |||||||||||||||||
| Equity in earnings (loss) of subsidiaries | 222,575 | 202,382 | (4,450 | ) | (7,996 | ) | (412,511 | ) | — | ||||||||||||||||
Net Cash Flows from Operating Activities | (7,966 | ) | (45,538 | ) | 83,847 | 72,139 | (4,229 | ) | 98,253 | ||||||||||||||||
Investing Activities | |||||||||||||||||||||||||
| Purchase of property, plant and equipment | — | — | (2,239 | ) | (14,350 | ) | — | (16,589 | ) | ||||||||||||||||
| Plant turnaround costs | — | — | (6,823 | ) | (8,229 | ) | — | (15,052 | ) | ||||||||||||||||
| Other | — | — | 6,823 | 2,361 | (4,780 | ) | 4,404 | ||||||||||||||||||
Net Cash Flows from Investing Activities | — | — | (2,239 | ) | (20,218 | ) | (4,780 | ) | (27,237 | ) | |||||||||||||||
Financing Activities | |||||||||||||||||||||||||
| Principal payments on long-term debt | — | (36,277 | ) | 9 | 201 | (1 | ) | (36,068 | ) | ||||||||||||||||
| Stock issuance — net | 608 | — | — | — | — | 608 | |||||||||||||||||||
| Distributions to minority interests | — | (220 | ) | (703 | ) | — | — | (923 | ) | ||||||||||||||||
| Change in investments and advances from (to) affiliates | 7,961 | 125,051 | (90,049 | ) | 2,530 | (45,493 | ) | — | |||||||||||||||||
| Other | (603 | ) | (7,314 | ) | (7,798 | ) | (21,508 | ) | 37,223 | — | |||||||||||||||
Net Cash Flows from Financing Activities | 7,966 | 81,240 | (98,541 | ) | (18,777 | ) | (8,271 | ) | (36,383 | ) | |||||||||||||||
Effect of Foreign Exchange Rate on Cash | — | — | — | — | 121 | 121 | |||||||||||||||||||
Increase (decrease) in Cash and Short-term Investments | — | 35,702 | (16,933 | ) | 33,144 | (17,159 | ) | 34,754 | |||||||||||||||||
Cash and Short-term Investments at Beginning of Period | — | — | 16,933 | 24,745 | (34,553 | ) | 7,125 | ||||||||||||||||||
Cash and Short-term Investments At End of Period | $ | — | $ | 35,702 | $ | — | $ | 57,889 | $ | (51,712 | ) | $ | 41,879 | ||||||||||||
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Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America for interim reporting purposes. The preparation of these financial statements requires us to make estimates and judgments that affect the amount of assets, liabilities, revenues and expenses at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that reflect significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. Our critical accounting policies are described below.
Impairments of long-lived assets —We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of these items. Our cash flow estimates are based on historical results adjusted to reflect our best estimate of future market and operating conditions. The net carrying value of assets not recoverable is reduced to fair value. Our estimates of fair value represent our best estimate based on industry trends and reference to market rates and transactions. The recoverability of these assets depends highly upon the realization of certain underlying assumptions, such as future product prices and costs. During the 2003 second quarter, events occurred that necessitated an evaluation of recoverability of assets at our Blytheville facility.
On June 26, 2003, we suspended production at our Blytheville facility due to expectations that the facility would not cover its cash costs because of continuing high natural gas costs and the seasonal decline in nitrogen fertilizer demand and prices. 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,” we commenced a review to determine if the Blytheville facility’s carrying value was impaired. This review led us to conclude that future market conditions may 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 during the second quarter as an “Impairment of long-lived assets”. While the plant’s value is permanently impaired, we resumed production in October 2003 in response to higher urea selling prices and improved seasonal demand. We expect production will continue through April 30, 2004. We anticipate $4.0 to $6.0 million of spending will be required when the facility is permanently idled.
Pension assets and liabilities —Pension assets and liabilities are affected by the estimated market value of plan assets, estimated expected return on plan assets and discount rates. Actual changes in the fair market value of plan assets and differences between the actual return on plan assets and the expected return on plan assets will affect the amount of pension expense ultimately recognized. Our pension liabilities were $226 million at December 31, 2002, which was $91 million higher than pension plan assets. Pension liabilities are computed during the fourth quarter of each year and the December 31, 2002 liability was computed based on a 6.3% discount rate based on yields for high-quality corporate bonds with a maturity approximating the duration of our pension liability. Declines in comparable bond yields would increase our pension liability and increases in comparable bond yields would reduce our pension liability. Our net pension liability, after deduction of plan assets, could also increase or decrease depending on the extent to which returns on pension plan assets are lower or higher than the 6.3% discount rate.
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Post-retirement benefits — Post-retirement benefits are determined on an actuarial basis and are affected by assumptions including the discount rate and expected trends in health care costs. Changes in the discount rate and differences between actual and expected health care costs will affect the recorded amount of post-retirement benefits expense ultimately recognized.
Revenue recognition —Revenue is recognized when title to finished product passes to the customer. Revenue is recognized as the net amount to be received after deducting estimated amounts for discounts and trade allowances. Revenue includes amounts paid by customers for shipping and handling.
Deferred income taxes —Deferred income tax assets and liabilities are based on the differences between the financial statement carrying amounts and the tax basis as well as temporary differences resulting from differing treatment of items for tax and accounting purposes. Deferred tax assets are regularly reviewed for recoverability based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. If we continue to operate at a loss or are unable to generate sufficient future taxable income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, a reduction to all or a significant portion of our deferred tax assets may be required. In addition, we may be limited in our ability to reduce future losses for related income tax benefits due to inadequate deferred tax liabilities becoming due during the loss carryforward period.
Inventory valuation — Inventories are stated at the lower of cost or estimated net realizable value. The average cost of inventories is determined using the first-in, first-out method. The nitrogen and methanol industries are characterized by rapid change in both demand and pricing. Rapid declines in demand could result in temporary or permanent curtailment of production, while rapid declines in price could result in a lower of cost or market adjustment.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2003 COMPARED WITH
QUARTER ENDED SEPTEMBER 30, 2002
Consolidated Results
We reported a net loss of $4.5 million for the 2003 third quarter compared with a net loss of $12.9 million in 2002.
Our 2002 third quarter results included an $11.0 million charge for discontinued operations. Approximately $8.4 million of the charge related to discontinued coal operations’ higher-than-expected retiree health care costs with the remaining $2.6 million for estimated litigation damages and reserves against notes receivable and other assets associated with previously discontinued operations.
Our third quarter net loss from continuing operations was $4.5 million in 2003 and $1.9 million in 2002. The increased 2003 third quarter loss was primarily the result of lower margins for our methanol business segment as compared the prior year partially offset by margin improvements to our nitrogen business segment.
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 Terra’s ammonia production and upgrading facilities. The methanol segment represents wholesale sales of methanol produced by Terra’s two methanol manufacturing plants.
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Total revenues and operating income (loss) by segment for the three-month periods ended September 30, 2003 and 2002 follow:
| (in thousands) | 2003 | 2002 | ||||||
REVENUES: | ||||||||
| Nitrogen Products | $ | 277,292 | $ | 211,103 | ||||
| Methanol | 47,025 | 46,772 | ||||||
| Other | 525 | 799 | ||||||
| $ | 324,842 | $ | 258,674 | |||||
OPERATING INCOME (LOSS): | ||||||||
| Nitrogen products | $ | 9,355 | $ | 4,241 | ||||
| Methanol | (1,083 | ) | 6,696 | |||||
| Other loss — net | (2,368 | ) | (1,137 | ) | ||||
| $ | 5,904 | $ | 9,800 | |||||
Nitrogen Products
Volumes and prices for the three-month periods ended September 30, 2003 and 2002 follow:
VOLUMES AND PRICES
| 2003 | 2002 | |||||||||||||||
| Sales | Average | Sales | Average | |||||||||||||
| (quantities in thousands of tons) | Volumes | Unit Price* | Volumes | Unit Price* | ||||||||||||
| Ammonia | 334 | $ | 219 | 354 | $ | 140 | ||||||||||
| Nitrogen solutions | 994 | 98 | 967 | 73 | ||||||||||||
| Urea | 73 | 180 | 138 | 126 | ||||||||||||
| Ammonium nitrate | 269 | 141 | 239 | 118 | ||||||||||||
*After deducting outbound freight costs
Nitrogen products segment revenues increased $66.2 million to $277.3 million in the 2003 third quarter compared with $211.1 million in the 2002 third quarter primarily as a result of higher sales prices. Lower nitrogen supplies and higher natural gas costs were the primary factors causing the increased prices as compared to the 2002 third quarter. Third quarter 2003 ammonia and urea sales volumes were affected by a decision to suspend production at our Blytheville facility due to expectations that the facility would not cover its cash costs because of continuing high natural gas costs and the seasonal decline in nitrogen fertilizer demand and prices.
The nitrogen products segment had operating income of $9.4 million for the third quarter of 2003 compared with operating income of $4.2 million for the 2002 third quarter. The effect of higher sales prices on 2003 operating income was partially offset by higher natural gas costs and $3.2 million of idle plant costs at Blytheville. Natural gas costs increased $51 million from the 2002 third quarter as unit costs, net of forward pricing gains and losses, were $4.51/MMBtu during the 2003 third quarter compared to $2.81/MMBtu during the same 2002 period. As a result of forward price contracts, third quarter 2003 natural gas costs for the nitrogen products segment were $2.6 million higher than spot prices.
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Methanol
For the three months ended September 30, 2003 and 2002 the Methanol segment had revenues of $47.0 million and $46.8 million, respectively. Sales volumes decreased 19% from prior year levels, but sales prices increased from $.56/gallon in 2002 to $.69/gallon in 2003 in response to higher production costs and tighter supplies.
The methanol segment had an operating loss of $1.1 million for the 2003 third quarter compared to operating income of $6.7 million for the 2002 third quarter. The decline to operating income was due to a $15 million (65%) increase to natural gas costs, which net of forward pricing gains and losses, were $5.06/MMBtu during the 2003 third quarter compared to $3.06/MMBtu during the 2002 period. The increase in sales prices was insufficient to offset the increased natural gas costs. As a result of forward pricing contracts, third quarter 2003 natural gas costs for the methanol segment were $1.0 million higher than spot prices.
Other Income — Net
Terra had other operating losses of $2.4 million in the 2003 third quarter compared to $1.1 million operating losses in the 2002 second quarter. These losses relate primarily to legal expenses for corporate activities not assignable to either business segment.
Minority Interest
Minority interest represents third-party interests in the earnings or losses of the publicly held common units of Terra Nitrogen Company, L.P. (TNCLP). Minority interest benefits of $.2 million were recorded for the 2003 third quarter as the result of TNCLP losses which were included in their entirety in consolidated operating results. Minority interest charges of $.5 million were recorded for the 2002 third quarter reflected nitrogen earnings for TNCLP, which were included in their entirety in consolidated financial results.
Interest Expense — Net
Interest expense, net of interest income, totaled $13.8 million during the 2003 third quarter compared with $13.3 million for the prior year period. The increased interest expense primarily related to higher interest rates associated with $202 million of long-term debt issued in May, 2003.
Income Taxes
Income taxes for the third quarter 2003 and 2002 were recorded at an effective tax rate of 40%, Terra’s estimated annual effective tax rate.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED WITH
NINE MONTHS ENDED SEPTEMBER 30, 2002
Consolidated Results
Terra reported a net loss from operations of $50.0 million for the nine months ended September 30, 2003 compared with a net loss from continuing operations of $19.5 for the same period in 2002. The increase in the 2003 loss was primarily related to $53.1 of impairment charges to write down our Blytheville nitrogen facility to estimated fair value.
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Total revenues and operating income (loss) by segment for the nine-month periods ended September 30, 2003 and 2002 follows:
| (in thousands) | 2003 | 2002 | ||||||
REVENUES: | ||||||||
| Nitrogen Products | $ | 821,577 | $ | 653,753 | ||||
| Methanol | 160,992 | 116,928 | ||||||
| Other | 1,361 | 1,051 | ||||||
| $ | 983,930 | $ | 771,732 | |||||
OPERATING INCOME (LOSS): | ||||||||
| Nitrogen products | $ | 1,334 | $ | 7,111 | ||||
| Impairment of long-lived assets (nitrogen products) | (53,091 | ) | — | |||||
| Methanol | 3,659 | 3,782 | ||||||
| Other loss — net | (5,166 | ) | (1,871 | ) | ||||
| $ | (53,264 | ) | $ | 9,022 | ||||
Nitrogen Products
Volumes and prices for the nine-month periods ended September 30, 2003 and 2002 follow:
VOLUMES AND PRICES
| 2003 | 2002 | |||||||||||||||
| Sales | Average | Sales | Average | |||||||||||||
| (quantities in thousands of tons) | Volumes | Unit Price* | Volumes | Unit Price* | ||||||||||||
| Ammonia | 1,012 | $ | 224 | 1,147 | $ | 141 | ||||||||||
| Nitrogen solutions | 2,843 | 97 | 2,904 | 72 | ||||||||||||
| Urea | 397 | 170 | 482 | 117 | ||||||||||||
| Ammonium nitrate | 686 | 135 | 690 | 119 | ||||||||||||
* After deducting outbound freight costs
Nitrogen products segment revenues increased $167.8 million to $821.6 million in the 2003 first nine months compared with $653.8 million in the 2002 first nine months primarily as a result of higher sales prices, partly offset by lower sales volumes. Lower nitrogen supplies were the primary factor causing the price increases from 2002 as high natural gas costs resulted in industry-wide production curtailments leading up to the 2003 planting season. Sales volumes in 2003 were lower than previous year due to our own production curtailments including a decision to suspend production on June 26, 2003 at the Blytheville facility due to expectations that the facility would not cover its cash costs because of continuing high natural gas costs and the seasonal decline in nitrogen fertilizer demand and prices.
Excluding impairment charges (see below), the nitrogen products segment had operating income of $1.3 million for the first nine months of 2003 compared with operating income of $7.1 million for the 2002 first nine months. Higher selling prices contributed $187 million to 2003 earnings, but were more than offset by higher natural gas costs, lower sales volumes and idle plant costs. Natural gas costs increased $182 million from the 2002 first nine months as unit costs, net of forward pricing gains and losses, were $4.71/MMBtu during the 2003 first nine months compared to $2.80/MMBtu during the same 2002 period. As a result of forward price contracts, first nine months 2003 natural gas costs for the nitrogen products segment were $3.1 million lower than spot prices.
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Impairment of Long-lived Assets
We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of these items. Our cash flow estimates are based on historical results adjusted to reflect our best estimate of future market and operation conditions. The net carrying value of assets not recoverable is reduced to fair value. Our estimates of fair value represent our best estimate based on industry trends and reference to market rates and transactions. The recoverability of these assets is highly dependent upon the realization of certain underlying assumptions, such as future product prices and natural gas costs. During the 2003 second quarter, events occurred that necessitated an evaluation of recoverability of assets at our Blytheville facility.
On June 26, 2003, we suspended production at our Blytheville facility due to expectations that the facility would not cover its cash costs because of continuing high natural gas costs and the seasonal decline in nitrogen fertilizer demand and prices. 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 second quarter as discussed more fully above under “Critical Accounting Policies”.
Methanol
For the nine months ended September 30, 2003 and 2002 the methanol segment had revenues of $161.0 million and $116.9 million, respectively. Sales volumes decreased 15% from prior year levels, but selling prices increased from $.46/gallon in 2002 to $.74/gallon in 2003. The sales decline was due, in part, to production outages related to a scheduled plant turnaround.
The methanol segment generated $3.7 million operating income in the 2003 first nine months compared to $3.8 million operating income in the 2002 first nine months. The 2003 operating income reflects higher selling prices, offset by higher costs and decreased volumes. The major cost increase was to natural gas costs which, net of forward pricing gains and losses, increased to $5.27/MMBtu, during the 2003 first nine months compared to $2.89/MMBtu during the 2002 period. First nine months 2003 natural gas costs were $1.2 million lower than spot prices as a result of forward pricing contracts.
Other Income — Net
Terra had other operating losses of $5.2 million in the 2003 first nine months compared to $1.9 million operating losses in the 2002 first nine months. The increase to expenses relate primarily to legal expenses for corporate activities not assignable to either business segment.
Minority Interest
Minority interest represents third-party interests in the earnings of the publicly held common units of Terra Nitrogen Company, L.P. (TNCLP). Minority interest credits of $12.9 million were recorded for the 2003 first nine months as the result of TNCLP losses, which included impairment charges for long-lived assets related to the Blytheville facility and were included in their entirety in consolidated operating results. The minority interest charge of $1.8 million in the 2002 first nine months reflected nitrogen earnings for TNCLP, which were included in their entirety in consolidated operating results.
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Interest Expense — Net
Interest expense, net of interest income, totaled $41.2 million during the 2003 first nine months compared with $39.8 million for the prior year period. The increased interest expense primarily related to higher interest rates associated with $202 million of long-term debt issued in May, 2003.
Income Taxes
Income taxes for the first nine months of 2003 and 2002 were recorded at an effective tax rate of 39% and 40%, respectively, Terra’s estimated annual effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Our primary uses of funds will be to fund our working capital requirements, make payments on our debt and other obligations and make capital expenditures. The principal sources of funds will be cash flow from operations and borrowings under available bank facilities.
During the first nine months of 2002, cash and short-term investments declined $37.2 million. Net cash used in operating activities was $825,000 and cash used for investing activities, primarily capital expenditures and plant turnaround costs, was $28.8 million. An additional $7.8 million was used in financing activities, primarily for fees in connection with the refinancing of long-term debt obligations.
Net cash used in operating activities for the first nine months of 2003 was $.8 million, composed of $39.2 million of cash provided from operating activities, and $38.4 million used to fund working capital needs. Working capital needs primarily consisted of reductions to customer prepayment balances and accounts payable. We had $23.7 million in customer prepayments at September 30, 2003 that we anticipate will be satisfied during our fourth quarter.
During the first nine months of 2003, we funded plant and equipment purchases of $7.1 million primarily for replacement or stay-in-business capital needs. We expect 2003 plant and equipment purchases to approximate $10 million, consisting primarily of the expenditures for routine 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 $20.1 million of plant turnaround during the first nine months of 2003. Plant turnaround costs for 2003 are expected to approximate $30 million.
On May 21, 2003, we issued $202 million of 11.5% Second Priority Senior Secured Notes due in 2010. The notes were priced at 99.402% to yield 11.625%. We used the proceeds to repay our 10.5% Senior Notes due in 2005. As a result of these transactions, maturities of long-debt are as follows: 2004 — $0.2 million, 2005 — $36.0 million, 2006 — none, 2007 — none, 2008 — $200.0 million, and for 2009 and beyond — $202 million.
During the first nine months of 2003 and 2002 we distributed $1.2 million and $.9 million, respectively, to the minority TNCLP common unitholders. TNCLP distributions are based on “Available Cash” (as defined in the Partnership Agreement).
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 65% of eligible inventory, less outstanding letters of credit. At September 30, 2003, we had no revolving
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credit borrowings and $31.0 million in outstanding letters of credit, resulting in remaining borrowing availability of approximately $102.0 million under the facility. 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 Terra’s financial statements. For the 12 months ended September 30, 2003, operating cash flows as defined in the credit facility was $80.0 million.
Our ability to meet bank 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 require additional costs and fees to amend the bank facilities or could result in termination of the facilities. 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. Nevertheless, if product margins were to be as depressed as during portions of the 2003 first half or if there were to be any adverse changes in the factors discussed above, we may need a waiver of our bank covenants and there is no assurance we could receive such waivers.
Our ability to manage our exposure to commodity price risk in the purchase of natural gas through the use of financial derivatives may be affected by limitations imposed by our bank agreement covenants.
On August 22, 2003, Fitch, IBCA, Duff & Phelps Ratings (“Fitch”) lowered its rating on our Senior Secured Notes due 2008 from BB- to B+. As of the date of this filing, the following table sets forth the ratings information from Standard & Poor’s Rating Services (“S&P”), Moody’s Investor Services (“Moody’s”) and Fitch:
| S&P | Moody’s | Fitch | ||||
| Corporate/Senior Implied | B+ | B3 | Not applicable | |||
| Senior Secured Notes due 2008 | B+ | B3 | B+ | |||
| Second Priority Senior Secured notes due 2010 | B- | Caa1 | B- |
A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating.
Our pension liabilities were $226 million at December 31, 2002, which was $91 million higher than pension plan assets. Pension liabilities are computed during the fourth quarter of each year and the December 31, 2002 liability was computed based on a 6.3% discount rate based on yields for high-quality corporate bonds with a maturity approximating the duration of our pension liability. Declines in comparable bond yields would increase our pension liability and future increases in comparable bond yields would decrease our pension liability. Our net pension liability, after deduction of plan assets, could also increase or decrease depending on the extent to which returns on pension plan assets are lower or higher than the 6.3% discount rate. Our cash contributions to pension plans were $7 million in 2002 and, based on the 2002 assumptions, are estimated at $7 million in 2003, $20 million in 2004, $15 million in 2005 and $7 million in 2006. Actual contributions for 2004 and beyond could vary depending on actual returns for plan assets, legislative changes to pension funding requirements and plan amendments.
Cash balances at September 30, 2003 were $21.3 million, all of which is unrestricted.
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POTENTIAL CHANGE OF CONTROL
Anglo American plc, through its wholly-owned subsidiaries, owns 48.5% 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.
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, changes in competitive factors and prices, (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 Terra’s most recent Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in financial and commodity market prices and rates. We use derivative financial instruments to manage risk in the areas of natural gas prices, foreign currency fluctuations and interest rates. For more information about how we manage specific risk exposures, refer to our most recent Annual Report on Form 10-K (which is on file with the Securities and Exchange Commission), Item 7A “Quantitative and Qualitative Disclosures about Market Risk” and Note 13 — Derivative Financial Instruments contained in Item 8.
Our operations are significantly affected by the price of natural gas. We employ derivative commodity instruments related to a portion of our natural gas requirements (primarily futures, swaps and options) for the purpose of managing our exposure to commodity price risk in the purchase of natural gas. Changes in the market value of these derivative instruments have a high correlation to changes in the spot price of natural gas. The volume of natural gas hedged varies from time to time based on management’s judgment of market conditions, particularly natural gas prices and prices for nitrogen products and methanol. Contracts were in place at September 30, 2003 to cover 26% of our natural gas requirements for the succeeding twelve months (see Note 3). Our future ability to manage our exposure to commodity price risk in the purchase of natural gas through the use of financial derivatives may be affected by limitations imposed by our bank agreement covenants.
At September 30, 2003, we had no forward positions in any foreign currency.
Our only debt facility with floating rates at September 30, 2003 is borrowings under our bank lines. No borrowings were outstanding at September 30, 2003. There were no interest rate derivatives outstanding at September 30, 2003.
On May 21, 2003, we issued $202 million of 11.5% Second Priority Senior Secured Notes due in 2010. The notes were priced at 99.402% to yield 11.625%. We used the proceeds to repay our 10.5% Senior Notes due in 2005.
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ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Footnote 2 to Terra Industries Inc. Notes to the Consolidated Financial Statements in Part 1 of this Form 10-Q is incorporated herein by reference.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
| (a) | Exhibits | |||
| 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 |
| (b) | Reports on Form 8-K | |
| Form 8-K dated July 31, 2003 announcing second quarter earnings | ||
| Form 8-K dated September 17, 2003 announcing plans to restart the Blytheville facility |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned thereunto duly authorized.
| TERRA INDUSTRIES INC. | ||
| Date: October 31, 2003 | /s/ Francis G. Meyer Francis G. Meyer Senior Vice President and Chief Financial Officer and a duly authorized signatory |
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