Terra Industries 10Q 2007 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2007


o		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.Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act


Large accelerated filero		Accelerated filerþ		Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).o Yesþ No

As of July 23, 2007, the following shares of the registrant’s stock were outstanding:


Common Shares, without par value		91,856,667 shares

TABLE OF CONTENTS


Part I — FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets	3

	Consolidated Statements of Operations	4

	Consolidated Statements of Cash Flows	5

	Consolidated Statements of Changes in Common Shareholders' Equity	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	36

Item 4.	Controls and Procedures	36

Part II — OTHER INFORMATION

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 3.	Defaults upon Senior Securities	37

Item 4.	Submission of Matters to a Vote of Security Holders	38

Item 5.	Other Information	39

Item 6.	Exhibits	40

Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TERRA INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)


	June 30,			December 31,			June 30,
	2007			2006			2006
Assets
Cash and cash equivalents	$	286,950		$	179,017		$	85,243
Accounts receivable, less allowance for doubtful accounts of $422, $333 and $110		242,415			198,791			195,504
Inventories		169,674			211,017			169,865
Other current assets		23,342			31,680			13,194

Total current assets		722,381			620,505			463,806

Property, plant and equipment, net		702,106			720,897			737,883
Equity method investments		165,201			164,099			160,691
Deferred plant turnaround costs, net		41,375			44,558			36,848
Intangible assets, net		4,704			5,645			6,586
Other assets		23,299			17,009			27,657

Total assets	$	1,659,066		$	1,572,713		$	1,433,471


Liabilities
Accounts payable		143,904			156,493			118,580
Customer prepayments		25,166			77,091			13,589
Accrued expenses and other current liabilities		110,390			75,863			62,695

Total current liabilities		279,460			309,447			194,864

Long-term debt and capital lease obligations		330,000			331,300			331,300
Pension liabilities		119,407			134,444			119,900
Other liabilities		157,801			104,039			95,573
Minority interest		105,549			94,687			95,905

Total liabilities and minority interest		992,217			973,917			837,542


Preferred Stock- liquidation value of $120,000		115,800			115,800			115,800

Common Shareholders’ Equity
Capital stock
Common Shares, authorized 133,500 shares; 91,857; 92,630 and 93,215 outstanding		144,202			144,976			145,044
Paid-in capital		680,819			693,896			696,861
Accumulated other comprehensive loss		(57,149	)		(63,739	)		(50,241	)
Accumulated deficit		(216,823	)		(292,137	)		(311,535	)

Total common shareholders’ equity		551,049			482,996			480,129

Total liabilities and minority interest, preferred stock and common shareholders’ equity	$	1,659,066		$	1,572,713		$	1,433,471

See Accompanying Notes to the Consolidated Financial Statements.

TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share amounts)
(unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2007			2006			2007			2006
Revenues
Product revenues	$	691,164		$	521,808		$	1,190,794		$	919,551
Other income		2,651			1,712			5,307			2,888

Total revenues		693,815			523,520			1,196,101			922,439


Costs and Expenses
Cost of sales		536,043			491,170			962,219			914,686
Selling, general and administrative expense		28,194			13,006			45,251			24,716
Equity in loss (earnings) of unconsolidated affiliates		804			(6,880	)		(4,813	)		(15,021	)

Total cost and expenses		565,041			497,296			1,002,657			924,381

Income (loss) from operations		128,774			26,224			193,444			(1,942	)
Interest income		3,482			1,824			6,369			3,408
Interest expense		(6,871	)		(11,782	)		(15,780	)		(23,554	)
Loss on early retirement of debt		(174	)		—			(38,836	)		—

Income (loss) before income taxes and minority interest		125,211			16,266			145,197			(22,088	)
Income tax (provision) benefit		(40,617	)		(5,766	)		(44,757	)		8,000
Minority interest		(13,939	)		(4,243	)		(22,576	)		(3,647	)

Net income (loss)		70,655			6,257			77,864			(17,735	)
Preferred share dividends		(1,275	)		(1,275	)		(2,550	)		(2,550	)

Net Income (Loss) Available to Common Shareholders	$	69,380		$	4,982		$	75,314		$	(20,285	)


Basic and diluted income (loss) per share:
Basic	$	0.76		$	0.05		$	0.82		$	(0.22	)
Diluted	$	0.66		$	0.05		$	0.73		$	(0.22	)

Basic and diluted weighted average shares outstanding:
Basic		91,496			93,317			91,677			93,592
Diluted		107,294			95,212			107,311			93,592

See Accompanying Notes to the Consolidated Financial Statements.

TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)


	Six Months Ended
	June 30,
	2007			2006
Operating Activities
Net income (loss)	$	77,864		$	(17,735	)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Depreciation of property, plant and equipment and amortization of deferred plant turnaround costs		54,360			52,696
Deferred income taxes		34,981			(8,000	)
Minority interest in earnings		22,576			3,647
Distributions in excess of (less than) equity earnings		(3,813	)		9,944
Non-cash loss on derivatives		624			1,573
Share-based compensation		13,681			2,317
Amortization of intangible and other assets		4,485			5,165
Non cash loss on early retirement of debt		4,662			—

Changes in operating assets and liabilities:
Accounts receivable		(40,420	)		16,200
Inventories		48,192			27,994
Accounts payable and customer prepayments		(65,789	)		(49,790	)
Other assets and liabilities, net		31,438			(1,928	)

Net cash flows from operating activities		182,841			42,083

Investing Activities
Purchase of property, plant and equipment		(13,496	)		(26,636	)
Plant turnaround expenditures		(20,320	)		(22,112	)
Distributions received from unconsolidated affiliates		—			9,660
Changes in restricted cash		—			8,595
Proceeds from the sale of property, plant and equipment		—			275

Net cash flows from investing activities		(33,816	)		(30,218	)

Financing Activities
Issuance of debt		330,000			—
Payments under borrowings arrangements		(331,300	)		(30	)
Payments for debt issuance costs		(6,398	)		—
Preferred share dividends paid		(2,550	)		(2,550	)
Proceeds from exercise of stock options		406			363
Payments under share repurchase program		(19,211	)		(14,428	)
Distributions to minority interests		(11,714	)		—

Net cash flows from financing activities		(40,767	)		(16,645	)

Effect of exchange rate changes on cash		(325	)		3,657

Increase (decrease) to cash and cash equivalents		107,933			(1,123	)
Cash and cash equivalents at beginning of period		179,017			86,366

Cash and cash equivalents at end of period	$	286,950		$	85,243

See Accompanying Notes to the Consolidated Financial Statements.

Consolidated Statements of Cash Flows (continued)


	Six Months ended
	June 30
	2007			2006

Supplemental cash flow information:
Interest paid	$	472		$	21,066
Income tax refunds received	$	547		$	—
Income taxes paid	$	5,198		$	1,046

Supplemental schedule of unconsolidated affiliates distributions received:
Equity in earnings of unconsolidated affiliates	$	4,813		$	15,021
Distribution in excess of (less than) equity earnings		(3,813	)		9,944
Distributions received from unconsolidated affiliates		—			9,660

Total cash distributions received from unconsolidated affiliates	$	1,000		$	34,625

See Accompanying Notes to the Consolidated Financial Statements.

TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS’ EQUITY
SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(in thousands)
(unaudited)


							Accumulated
							Other
	Common			Paid-In			Comprehensive			Accumulated						Comprehensive
	Stock			Capital			Loss			Deficit			Total			Income

Balance at January 1, 2007	$	144,976		$	693,896		$	(63,739	)	$	(292,137	)	$	482,996

Comprehensive income (loss):
Net income		—			—			—			77,864			77,864		$	77,864
Foreign currency translation adjustment		—			—			11,486			—			11,486			11,486
Change in fair value of derivatives, net of taxes of $3,665		—			—			(6,809	)		—			(6,809	)		(6,809	)
Pension and post retirement benefit liabilities		—			—			1,913			—			1,913			1,913

Comprehensive income																$	84,454

Preferred share dividends		—			—			—			(2,550	)		(2,550	)
Exercise of stock options		226			180			—			—			406
Shares purchased and retired under share repurchase program		(1,000	)		(18,211	)		—			—			(19,211	)
Share-based compensation		—			4,954			—			—			4,954

Balance at June 30, 2007	$	144,202		$	680,819		$	(57,149	)	$	(216,823	)	$	551,049


							Accumulated
							Other
	Common			Paid-In			Comprehensive			Unearned			Accumulated						Comprehensive
	Stock			Capital			Loss			Compensation			Deficit			Total			Income

Balance at January 1, 2006	$	146,994		$	712,671		$	(70,143	)	$	(5,369	)	$	(291,250	)	$	492,903

Comprehensive income (loss):
Net loss		—			—			—			—			(17,735	)		(17,735	)	$	(17,735	)
Foreign currency translation adjustment		—			—			19,371			—			—			19,371			19,371
Change in fair value of derivatives, net of taxes of $321		—			—			531			—			—			531			531

Comprehensive income																			$	2,167

Preferred share dividends		—			—			—			—			(2,550	)		(2,550	)
Exercise of stock options		95			268			—			—			—			363
Shares purchased and retired under share repurchase program		(2,045	)		(12,383	)		—			—			—			(14,428	)
Reclassification for adoption of FAS 123 R		—			(5,369	)		—			5,369			—			—
Share-based compensation		—			1,674			—			—			—			1,674

Balance at June 30, 2006	$	145,044		$	696,861		$	(50,241	)	$	—		$	(311,535	)	$	480,129

See Accompanying Notes to the Consolidated Financial Statements.

TERRA INDUSTRIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Financial Statement Presentation

Basis of Presentation

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”, “the Company” and “it”) and the results of 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 the Company’s 2006 Annual Report on Form 10-K to Shareholders.

Revenue Recognition

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, no obligations remain and collectibility is probable.

Revenues are primarily comprised of sales of the Company’s nitrogen- and methanol-based products, including any realized hedging gains or losses related to nitrogen product derivatives, and are reduced by estimated discounts and trade allowances. Revenues also include profit sharing revenue under the Methanex supply contract when the estimated margin on an annualized basis is probable. The Company classifies amounts directly or indirectly billed to its customers for shipping and handling as revenue.

Cost of Sales

Costs of sales are primarily related to manufacturing costs related to the Company’s nitrogen- and methanol-based products, including any realized hedging gains or losses related to natural gas derivatives. The Company classifies amounts directly or indirectly billed for delivery of products to its customers or its terminals as cost of sales.

Derivatives and Financial Instruments

The Company enters into derivative financial instruments, including swaps, basis swaps, purchased put and call options and sold call options, to manage the effect of changes in natural gas costs, to manage the prices of its nitrogen products and to manage foreign currency risk. The Company reports the fair value of the derivatives on its balance sheet. If the derivative is not designated as a hedging instrument, changes in fair value are recognized in earnings in the period of change. If the derivative is designated as a hedge, and to the extent such hedge is determined to be effective, changes in fair value are either (a) offset by the change in fair value of the hedged asset or liability, or (b) reported as a component of accumulated other comprehensive income (loss) in the period of change, and subsequently recognized in cost of sales in the period the offsetting hedged transaction occurs. If an instrument is settled early, any gains or losses are immediately recognized in cost of sales.

Inventories

Inventories are stated at the lower of average cost or estimated net realizable value. The Company performs a monthly analysis of its inventory balances to determine if the carrying amount of inventories exceeds its net realizable value. The analysis of estimated realizable value is based on customer orders, market trends, and historical pricing. If the carrying amount exceeds the estimated net realizable value, the carrying amount is reduced to the estimated net realizable value.

Production costs include the cost of direct labor and materials, depreciation and amortization, and overhead costs related to manufacturing activity. The cost of inventories is determined using the first- in, first-out method.

The Company estimates a reserve for obsolescence and excess of its materials and supplies inventory. Inventory is stated net of the reserve.

Plant Turnaround Costs

Costs related to the periodic scheduled major maintenance of continuous process production facilities (plant turnarounds) are deferred and charged to product costs on a straight-line basis during the period until the next scheduled turnaround, generally two years.

Impairment of Long-Lived Assets

Terra reviews its 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.

Use of Estimates in Preparation of the Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Income (Loss) Per Share

Basic income (loss) per share data is based on the weighted-average number of common shares outstanding during the period. Diluted income (loss) per share data is based on the weighted-average number of common shares outstanding and the effect of all dilutive potential common shares including stock options, nonvested shares, convertible preferred shares and common stock warrants. Nonvested stock carries dividend and voting rights, but is not involved in the weighted average number of common shares outstanding used to compute basic income (loss) per share.

The following table provides a reconciliation between basic and diluted income (loss) per share for the three- and six-month periods ended June 30, 2007 and 2006:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands, except per-share amounts)	2007			2006			2007			2006
Basic income (loss) per share computation:
Income (loss) from continuing operations	$	70,655		$	6,257		$	77,864		$	(17,735	)
Less: Preferred share dividends		(1,275	)		(1,275	)		(2,550	)		(2,550	)

Income (loss) available to common shareholders	$	69,380		$	4,982		$	75,314		$	(20,285	)


Weighted average shares outstanding		91,496			93,317			91,677			93,592


Basic income (loss) per common share	$	0.76		$	0.05		$	0.82		$	(0.22	)


Diluted income (loss) per share computation:
Income (loss) available to common shareholders	$	69,380		$	4,982		$	75,314		$	(20,285	)
Add: Preferred share dividends		1,275			—			2,550			—

Income (loss) available to common shareholders and assumed conversions	$	70,655		$	4,982		$	77,864		$	(20,285	)


Weighted average shares outstanding		91,496			93,317			91,677			93,592
Add incremental shares from assumed conversions:
Preferred shares		12,048			—			12,048			—
Nonvested stock		753			681			681			—
Common stock warrants		2,887			1,042			2,760			—
Common stock options		110			172			145			—

Dilutive potential common shares		107,294			95,212			107,311			93,592


Diluted income (loss) per common share	$	0.66		$	0.05		$	0.73		$	(0.22	)

For the three- and six-month periods ended June 30, 2006, common stock options totaling 0.1 million shares were excluded from the computation of diluted income per share because the exercise prices of these options exceeded the average market price of the Company’s stock for the respective periods, and the effect of their inclusion would have been antidilutive. For the three-month period ending June 30, 2006, 120,000 preferred shares were excluded from the computation of diluted earnings per share. These preferred shares were antidilutive using the if-converted method.

For the six-month period ended June 30, 2006, all preferred shares, nonvested stock and common stock options were antidilutive because the Company was in a net loss position. As such, these instruments were excluded from the computation of the diluted income (loss) per share for the six-month period ended June 30, 2006.

Inventories

Inventories consisted of the following:


	June 30,		December 31,		June 30,
(in thousands)	2007		2006		2006
Raw materials	$	23,187	$	26,583	$	23,500
Supplies		49,882		54,542		55,517
Finished goods		96,605		129,892		90,848

Total	$	169,674	$	211,017	$	169,865

Inventory is valued at actual first in — first out cost. Costs include raw material, labor and overhead.

Derivative Financial Instruments

Terra manages risk using derivative financial instruments for (a) changes in natural gas supply prices (b) interest rate fluctuations (c) changes in nitrogen prices and (d) currency. Derivative financial instruments have credit risk and market risk.

To manage credit risk, Terra enters into derivative transactions only with counter-parties who are currently rated as BBB or better or equivalent as recognized by a national rating agency. Terra will not enter into transactions with a counter-party if the additional transaction will result in credit exposure exceeding $20 million. The credit rating of counter-parties may be modified through guarantees, letters of credit or other credit enhancement vehicles.

Terra classifies a derivative financial instrument as a hedge if all of the following conditions are met:

	1.	The item to be hedged must expose Terra to currency, interest or price risk.

	2.	It must be probable that the results of the hedge position substantially offset the effects of currency, interest or price changes on the hedged item (e.g., there is a high correlation between the hedge position and changes in market value of the hedge item).

��	3.	The derivative financial instrument must be designated as a hedge of the item at the inception of the hedge.

Natural gas supplies to meet production requirements at Terra’s North American and United Kingdom (U.K.) production facilities are purchased at market prices. Natural gas market prices are volatile and Terra effectively fixes prices for a portion of its natural gas production requirements and inventory through the use of futures contracts, swaps and options. The North American contracts reference physical natural gas prices or appropriate NYMEX futures contract prices. Contract physical prices for North America are frequently based on prices at the Henry Hub in Louisiana, the most common and financially liquid location of reference for financial derivatives related to natural gas. However, natural gas supplies for Terra’s North American production facilities are purchased at locations other than Henry Hub, 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. The U.K. contracts are based on the Intercontinental Exchange (ICE) index price. Physical delivery prices in the U.K. are based on the ICE index. The contracts are traded in months forward and settlement dates are scheduled to coincide with gas purchases during that future period.

A swap is a contract between Terra and a third party to exchange cash based on a designated price. Option contracts give the holder the right to either own or sell a futures or swap contract. The futures contracts require maintenance of cash balances generally 10% to 20% of the contract value and option contracts require initial premium payments ranging from 2% to 5% of contract value. Basis swap contracts require payments to or from Terra for the amount, if any, that monthly published gas prices from the source specified in the contract differ from the prices of a NYMEX natural gas futures during a specified period. There are no initial cash requirements related to the swap and basis swap agreements.

Terra may also use a collar structure where it will enter into a swap, sell a call at a higher price and buy a put. The collar structure allows for greater participation in a decrease to natural gas prices and protects against moderate price increases. However, the collar exposes Terra to large price increases. At June 30, 2007 there were no collars outstanding.

The following summarizes open natural gas derivative contracts at June 30, 2007 and 2006 and December 31, 2006:


	Other		Other
	Current		Current			Deferred		Net
(in thousands)	Assets		Liabilities			Taxes		Asset (Liability)
June 30, 2007	$	2,523	$	(30,749	)	$	10,040	$	(18,186	)
December 31, 2006	$	4,731	$	(22,591	)	$	6,373	$	(11,487	)
June 30, 2006	$	1,347	$	(9,984	)	$	2,455	$	(6,182	)

Certain derivatives outstanding at June 30, 2007 and 2006, which settled during July 2007 and 2006, respectively, are included in the position of open natural gas derivatives in the table above. The July 2007 derivatives settled for an approximate $5.5 million loss. Substantially all open derivatives will settle during the next 12 months.

At June 30, 2007, the Company determined that certain derivative contracts were ineffective hedges for accounting purposes and recorded a charge of $0.3 million to cost of sales for the three-month period and a credit of $0.5 million for the six-month period ending June 30, 2007. Derivatives outstanding at June 30, 2006 included a loss of $1.6 million that was recorded as an ineffective position and a charge to cost of sales for the three- and six-months ending June 30, 2006.

The effective portion of gains and losses on derivative contracts that qualify for hedge treatment are carried as accumulated other comprehensive income (loss) and credited or charged to cost of sales in the month in which the hedged transaction settles. Gains and losses on the contracts that do not qualify for hedge treatment are credited or charged to cost of sales based on the positions’ fair value. The risk and reward of outstanding natural gas positions are directly related to increases or decreases in natural gas prices in relation to the underlying NYMEX and ICE natural gas contract prices.

The activity to accumulated other comprehensive income (loss), net of income taxes, relating to current period hedging transactions for the three-month periods ended June 30, 2007 and 2006 follows:


	Three Months Ended
	June 30,
	2007						2006
(in thousands)	Gross			Net of tax			Gross			Net of tax
Beginning accumulated gain (loss)	$	4,210		$	2,736		$	(3,962	)	$	(2,599	)
Reclassification into earnings		(2,375	)		(1,544	)		7,727			4,950
Net change in market value		(30,519	)		(19,837	)		(10,799	)		(6,929	)

Ending accumulated gain (loss)	$	(28,684	)	$	(18,645	)	$	(7,034	)	$	(4,578	)

The activity to accumulated other comprehensive income (loss), net of income taxes, relating to current period hedging transactions for the six-month periods ended June 30, 2007 and 2006 follows:


	Six Months Ended
	June 30,
	2007						2006
(in thousands)	Gross			Net of tax			Gross			Net of tax
Beginning accumulated gain (loss)	$	(18,210	)	$	(11,836	)	$	(7,886	)	$	(5,109	)
Reclassification into earnings		352			229			42,590			27,611
Net change in market value		(10,826	)		(7,038	)		(41,738	)		(27,080	)

Ending accumulated gain (loss)	$	(28,684	)	$	(18,645	)	$	(7,034	)	$	(4,578	)

At times, the Company also uses forward derivative instruments to fix or set floor prices for a portion of its nitrogen sales volumes. At June 30, 2007, the Company had open contracts covering 45,000 tons of nitrogen solutions. When outstanding, the nitrogen solution contracts do not qualify for hedge treatment due to inadequate trading history to demonstrate effectiveness. Consequently, these contracts are marked-to-market and unrealized gains or losses are reflected in revenue in the statement of operations. For the three- and six-month periods ending June 30, 2007, the Company recognized a loss of $1.1 million and $2.0 million, respectively, on nitrogen forward derivative instruments. For the three- and six-month periods ending June 30, 2006, there were no gains or losses on nitrogen forward derivative instruments.

Unrecognized Tax Benefit

The Company adopted the provision of Financial Accounting Standards Board (FASB) Interpretation No. 48,Accounting for Uncertainty to Income Taxes(FIN 48), on January 1, 2007. Under FIN 48, tax benefits are recorded only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company’s tax returns that do not meet these recognition and measurement standards.

The primary jurisdictions in which the Company or one of its subsidiaries files income tax returns are the United States, Canada and the United Kingdom. In most United States jurisdictions, the Company has significant net operating loss (“NOL”) carryforwards that date back to 1999 and will remain subject to examination by tax authorities as those NOL positions may be used to offset future taxable earnings. For jurisdictions in Canada and the United Kingdom, income tax returns remain subject to examination by tax authorities for calendar years beginning in 2001 and 2005, respectively.

The adoption of FIN 48 had no impact on the Company’s financial statements. The Company’s other liabilities include an unrecognized tax benefit of $33.5 million at June 30, 2007, which had been previously recognized under FASB Statement No. 5Accounting for Contingenciesor FASB Statement No. 109Accounting for Income Taxes.There were no changes in unrecognized tax positions during the period, and there are no expected changes in the next twelve months. If recognized, the $33.5 million of unrecognized tax benefit would have an impact on the effective tax rate.

When applicable, the Company recognizes interest accrued and penalties related to unrecognized tax benefits in income taxes on the statement of operations. Due to the Company’s NOL carryforward position, no interest or penalties were recognized at June 30, 2007.

Other Liabilities

Other liabilities consisted of the following:


	June 30,		December 31,		June 30,
(in thousands)	2007		2006		2006
Deferred income taxes	$	66,186	$	63,851	$	57,173
Unrecognized tax benefit		33,560		—		—
Long-term medical and closed facility reserve		23,618		23,206		23,679
Other		34,437		16,982		14,721

	$	157,801	$	104,039	$	95,573

Equity Investments

Terra’s investments in companies that are accounted for on the equity method of accounting consist of the following: (1) 50% ownership interest in Point Lisas Nitrogen Limited, (“PLNL”) which operates an ammonia production plant in Trinidad (2) 50% interest in an ammonia storage joint venture located in Houston, Texas and (3) 50% interest in a joint venture in Oklahoma CO₂ at Terra’s nitrogen plant. These investments were $165.2 million at June 30, 2007. Terra includes the net earnings of these investments as an element of income from operations since the investees’ operations provide additional capacity to Terra.

The combined results of operations and financial position of Terra’s equity method investments are summarized below:


	Three Months Ended					Six Months Ended
	June 30,					June 30,
(in thousands)	2007			2006		2007		2006
Condensed income statement information:
Net sales	$	25,696		$	47,197	$	55,059	$	101,865


Net income	$	2,382		$	12,199	$	9,494	$	28,481


Terra’s (loss) equity in earnings of unconsolidated affiliates	$	(804	)	$	6,880	$	4,813	$	15,021


	June 30,		June 30,
(in thousands)	2007		2006
Condensed balance sheet information:
Current assets	$	51,141	$	41,210
Long-lived assets		201,217		200,317

Total assets	$	252,358	$	241,527


Current liabilities	$	24,502	$	31,929
Long-term liabilities		—		—
Equity		227,856		209,598

Total liabilities and equity	$	252,358	$	241,527

The carrying value of these investments at June 30, 2007 was $51.3 million more than Terra’s share of the affiliates’ book value. The excess is attributable primarily to the step-up in basis for fixed asset values, which is being depreciated over a period of approximately 15 years. Terra’s equity in earnings of unconsolidated subsidiaries is different than its ownership interest in income reported by the unconsolidated subsidiaries due to different accounting policies, deferred profits on intergroup transactions and amortization of basis differences.

Terra has transactions in the normal course of business with PLNL whereby Terra is obliged to purchase 50 percent of the ammonia produced by PLNL at current market prices. During the six-month period ending June 30, 2007, Terra purchased approximately $31.9 million of ammonia from PLNL. During 2007, PLNL performed a turnaround, resulting in lower production levels and consequently, lower purchases by the Company. During the first half of 2006, Terra purchased approximately $55.8 million of ammonia from PLNL.

During the first half of 2007 there were $1.0 million in cash distributions from all of the Company’s equity investments. The total distributions from all investments were $34.6 million for the six-month period ended June 30, 2006.

Long-term Debt and Capital Lease Obligation

Long-term debt and capital lease obligations consisted of the following:


	June 30,		December 31,		June 30,
(in thousands)	2007		2006		2006
Unsecured Senior Notes, 7.0% due 2017	$	330,000	$	—	$	—

Secured Senior Notes, 12.875% due 2008		—		200,000		200,000

Second Priority Senior Secured Notes, 11.5%, due 2010		—		131,300		131,300
Other		—		1		8

Total long-term debt and capital lease obligations		330,000		331,301		331,308
Less current maturities		—		1		8

Total long-term debt and capital lease obligations	$	330,000	$	331,300	$	331,300

In January 2007, Terra Capital, Inc., (“TCAPI”) a subsidiary of Terra Industries Inc., issued $330 million of 7.0% Senior Notes due 2017. The notes are unconditionally guaranteed by Terra Industries Inc. and its U.S. subsidiaries. Fees and expenses of the transaction totaled $6.4 million. These notes and guarantees are unsecured and will rank equal in right of payment with any existing and future senior obligations of such guarantors. The Indenture governing these notes contains covenants that limit, among other things, the Company’s ability to: incur additional debt, pay dividends on common stock of Terra Industries Inc. or repurchase shares of such common stock, make certain investments, sell any of the Company’s principal production facilities or sell other assets outside the ordinary course of business, enter into transactions with affiliates, limit dividends or other payments by our restricted subsidiaries to us, enter into sale and leaseback transactions, engage in other businesses, sell all or substantially all of the Company’s assets or merge with or into other companies, and reduce the Company’s insurance coverage. In addition, the Company is obligated to offer to repurchase these notes upon a Change of Control (as defined in the Indenture) at a cash price equal to 101% of the aggregate principal amount outstanding at that time, plus accrued interest to the date of purchase. The Indenture governing these notes contains events of default and remedies customary for a financing of this type. Offering proceeds were used to repurchase the Company’s 12.875% Senior Secured Notes and 11.5% Second Priority Secured Notes pursuant to a tender offer.

Both the 12.875% Senior Secured Notes and 11.5% Second Priority Secured Notes were repurchased pursuant to a tender offer. Following completion of the tender offer, $2.5 million face value of 11.5% Secured Notes were not tendered and remained outstanding at March 31, 2007. The remaining bonds were redeemed on June 1, 2007.

As a result of the Company’s debt refinancing the Company incurred costs of approximately $31.9 million for tender premiums, and approximately $2.2 million for make-whole payments and administrative expenses. In addition, the Company recognized approximately $4.7 million of expense related to deferred fees on the bonds that were repaid. In connection with the new bond offering the Company paid approximately $6.4 million for fees and administrative costs.

In the first quarter of 2007, the Company amended the $200 million revolving credit facility to extend the expiration date to January 31, 2012. The revolving credit facility is secured by substantially all of the assets of the Company. Borrowing availability is generally based on 100% of eligible cash balances, 85% of eligible accounts receivable and 60% of eligible finished goods inventory less outstanding letters of credit issued under the facility. These facilities include $50 million only available for the use of Terra Nitrogen Company, L.P. (TNCLP), one of the Company’s consolidated subsidiaries. Borrowings under the revolving credit facility will bear interest at a floating rate plus an applicable margin, which can be either a base rate, or, at the Company’s option, a London Interbank Offered Rate (LIBOR). At June 30, 2007, the LIBOR rate was 5.32%. The base rate is the highest of (1) Citibank, N.A.’s base rate (2) the federal funds effective rate, plus one-half percent (0.50%) per annum and (3) the base three month certificate of deposit rate, plus one-half percent (0.50%) per annum, plus an applicable margin in each case. LIBOR loans will bear interest at LIBOR plus an applicable margin. The applicable margins for base rate loans and LIBOR loans are 0.50% and 1.75%, respectively, at June 30, 2007. The revolving credit facility requires an initial one-half percent (0.50%) commitment fee on the difference between committed amounts and amounts actually borrowed.

At June 30, 2007, the Company had no outstanding revolving credit borrowings and $16.5 million in outstanding letters of credit. The $16.5 million in outstanding letters of credit reduced the Company’s borrowing availability to $183.5 million at June 30, 2007. The credit facilities require that the Company 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. If the Company’s borrowing availability falls below $60 million, the Company is required to have achieved minimum operating cash flows or earnings before interest, income taxes, depreciation, amortization and other non-cash items of $60 million during the most recent four quarters.

Pension Plans

Terra maintains defined benefit and defined contribution 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. The Company also has certain non-qualified pension plans covering executives, which are unfunded. Terra accrues pension costs based upon annual actuarial valuations for each plan and funds these costs in accordance with statutory requirements.

The estimated components of net periodic pension expense follow:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands)	2007			2006			2007			2006
Service cost	$	748		$	744		$	1,496		$	1,488
Interest cost		6,231			5,888			12,462			11,776
Expected return on plan assets		(6,056	)		(5,394	)		(12,112	)		(10,788	)
Amortization of prior service cost		(9	)		(7	)		(18	)		(14	)
Amortization of actuarial loss		1,409			1,408			2,818			2,816
Termination charge		123			291			246			582

Pension Expense	$	2,446		$	2,930		$	4,892		$	5,860

Cash contributions to the defined benefit pension plans for the three months ended June 30, 2007 and 2006 were $5.7 million and $1.8 million, respectively. Cash contributions to the defined benefit pension plans for the six months ended June 30, 2007 and 2006 were $14.7 million and $3.5 million, respectively.

Terra also sponsors 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 the Company contributions to these plans for the three-month periods ending June 30, 2007 and 2006 totaled $1.8 million and $1.3 million, respectively. Contributions to these plans for the six-month periods ending June 30, 2007 and 2006 were $3.1 million and $2.8 million, respectively.

Terra provides 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.

10.

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income (loss) refers to revenues, expenses, gains and losses that under accounting principles generally accepted in the United States are recorded as an element of shareholders’ equity but are excluded from net (loss) income. Terra’s accumulated other comprehensive income (loss) is comprised of (a) adjustments that result from translation of Terra’s foreign entity financial statements from their functional currencies to United States dollars, (b) adjustments that result from translation of intercompany foreign currency transactions that are of a long-term investment nature (that is, settlement is not planned or anticipated in the foreseeable future) between entities that are consolidated in Terra’s financial statements, (c) the offset to the fair value of derivative assets and liabilities (that qualify as hedged relationships) recorded on the balance sheet, and (d) pension and post-retirement benefit liabilities adjustments.

The components of accumulated other comprehensive income (loss), net of tax, for the six months ended June 30, 2007 and 2006 follow:


	Foreign
	Currency						Pension and Post-
	Translation			Fair Value of			Retirement Benefit
(in thousands)	Adjustment			Derivatives			Liabilities			Total

Balance January 1, 2007	$	24,518		$	(11,836	)	$	(76,421	)	$	(63,739	)
Change in pension and post retirement benefit liabilities		—			—			1,913			1,913
Change in foreign translation adjustment		11,486			—			—			11,486
Reclassification to earnings		—			229			—			229
Change in fair value of derivatives		—			(7,038	)		—			(7,038	)

Balance June 30, 2007	$	36,004		$	(18,645	)	$	(74,508	)	$	(57,149	)


Balance January 1, 2006	$	(9,100	)	$	(5,109	)	$	(55,934	)	$	(70,143	)
Change in foreign translation adjustment		19,371			—			—			19,371
Reclassification to earnings		—			(27,080	)		—			(27,080	)
Change in fair value of derivatives		—			27,611			—			27,611

Balance June 30, 2006	$	10,271		$	(4,578	)	$	(55,934	)	$	(50,241	)

11.

Industry Segment Data

Terra classifies its 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. Terra does not allocate interest, income taxes or corporate-related charges to 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						Six Months Ended
	June 30,						June 30,
(in thousands)	2007			2006			2007			2006
Revenues
- Nitrogen Products	$	680,384		$	516,591		$	1,167,483		$	912,962
- Methanol		10,780			5,217			23,311			6,589
- Other		2,651			1,712			5,307			2,888

Total revenues	$	693,815		$	523,520		$	1,196,101		$	922,439

Income (loss) from operations
- Nitrogen Products	$	128,241		$	29,676		$	192,302		$	4,689
- Methanol		774			(3,250	)		1,562			(6,042	)
- Other		(241	)		(202	)		(420	)		(589	)

Income (loss) from operations	$	128,774		$	26,224		$	193,444		$	(1,942	)

The following summarizes geographic revenues information:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)					2007		2006
United States	$	543,252	$	402,821	$	941,798	$	710,184
Canada		29,413		19,559		43,286		35,882
United Kingdom		121,150		101,140		211,017		176,373

	$	693,815	$	523,520	$	1,196,101	$	922,439

12.

Commitments and Contingencies

The Company is involved in various claims and legal actions arising in the ordinary course of business, including employee injury claims. Based on the facts currently available, management believes that the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operation or liquidity and that the likelihood that a loss contingency will occur in connection with these claims is remote.

The Company has entered into natural gas supply agreements through December 31, 2007 for approximately 30.5 million MMBtu’s. As of June 30, 2007, these natural gas commitments were $0.8 million above the respective index prices.

13.

Share Information

On April 25, 2006, the Board of Directors authorized the Company to repurchase a maximum of 10 percent, or 9,516,817 shares, of its outstanding common stock. The stock buyback program has been and will be conducted on the open market, in private transactions or otherwise at such times prior to June 30, 2008, and at such prices, as determined appropriate by the Company. Purchases may be commenced or suspended at any time without notice. In 2006 there were 2.7 million shares repurchased for an aggregate cost of $18.8 million, which resulted in a balance of 6.8 million shares available for repurchase under the program.

During 2007, the Company repurchases under the stock program were:


(In thousands, except	Number of		Average Price		Total Cost of
average price of shares	Shares		of Shares		Shares
repurchased)	Repurchased		Repurchased		Repurchased
January 2007		—	$	—	$	—
February 2007		—		—		—
March 2007		—		—		—
April 2007		—		—		—
May 2007		650		18.79		12,220
June 2007		350		19.53		6,991

Total		1,000	$	19.20	$	19,211

14.

New Accounting Pronouncements

In September 2006, the FASB issued SFAS 157,Fair Value Measurements,(SFAS 157). SFAS 157 is definitional and disclosure oriented and addresses how companies should approach measuring fair value when required by generally accepted accounting principles (GAAP); it does not create or modify any current GAAP requirements to apply fair value accounting. SFAS 157 provides a single definition for fair value that is to be applied consistently for all accounting applications, and also generally describes and prioritizes according to reliability the methods and input used in valuations. SFAS 157 prescribes various disclosures about financial statement categories and amounts which are measured at fair value, if such disclosures are not already specified elsewhere in GAAP. The new measurement and disclosure and requirements of SFAS 157 are effective for the Company in 2008 first quarter and the Company expects no significant impact from adopting the Standard.

In February 2007, the FASB issued Statement of Financial Accounting Standards (SFAS 159),The Fair Value Option for Financial Assets and Financial Liabilities(SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. SFAS 159 is effective for the Company beginning in the first quarter of 2008. The Company is currently assessing the impact SFAS 159 may have on its financial statements.

15.

Subsequent Events

United Kingdom Joint Venture

On July 11, 2007, the U.K. Competition Commission approved a joint venture planned by Kemira GrowHow Oyj and the Company to combine the fertilizer and associated process chemicals businesses of both companies in the United Kingdom. The approval is conditional upon the divestment of certain processes — which account for less than three percent of sales for the planned joint venture — as well as amendment of certain terms for carbon dioxide supplies.

Kemira GrowHow and the Company will each own a 50% interest in the joint venture, which will include the Kemira GrowHow site at Ince and the Company’s Teeside and Severnside sites. Upon final approval and formation of the joint venture, the Company will account for its 50% interest as an equity investment. The June 30, 2007 book value of net assets to be transferred by the Company to the joint venture approximated $280 million. The joint venture will perform a determination of its fair value shortly after inception. In the event that the Company’s interest in the fair value of the joint venture is less than the Company’s book value of its equity method investment, the Company will be required to write down its equity method investment to fair value and include the write down amount as a charge to net income for the period.

Beaumont Facilities

On July 18, 2007, the Company announced it has executed with Eastman Chemical Company (“Eastman”) an agreement giving Eastman an exclusive and irrevocable option to purchase all the assets of Terra’s Beaumont, Texas facility. Eastman may exercise its option to purchase the Beaumont facility no later than October 1, 2007. Should Eastman elect to exercise its option to purchase the Beaumont assets, that transaction would close on or before January 1, 2009.

As a result of this option agreement, the Company determined that the value of its Beaumont property is impaired. The Company expects to record an estimated $42 million impairment charge for the quarter ended September 30, 2007. The impairment charge reduces Terra’s investment in the Beaumont property to approximately $47 million.

16.

Guarantor Subsidiaries

The 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 2012 for June 30, 2007; December 31, 2006; and June 30, 2006 are presented below for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. Statements of operations and statements of cash flows for the six months ended June 30, 2007 and 2006 are presented below for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. The guarantees of the Guarantor Subsidiaries are full and unconditional. The Subsidiary issuer and the Guarantor Subsidiaries guarantees are joint and several with the Parent.

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

Consolidating Balance Sheet as of June 30, 2007:


							Guarantor		Non-Guarantor
(in thousands)	Parent			TCAPI			Subsidiaries		Subsidiaries			Eliminations			Consolidated
Assets
Cash and cash equivalents	$	1		$	49,114		$	176,703	$	531,140		$	(470,008	)	$	286,950
Accounts receivable, net		—			—			94,706		147,710			(1	)		242,415
Inventories		—			—			90,822		84,175			(5,323	)		169,674
Other current assets		2,274			6,900			9,244		11,281			(6,357	)		23,342

Total current assets		2,275			56,014			371,475		774,306			(481,689	)		722,381

Property, plant and equipment, net		—			—			361,308		340,799			(1	)		702,106
Equity method investments		—			—			11,072		154,129			—			165,201
Intangible assets, other assets and deferred plant turnaround costs		(1,839	)		8,702			24,216		45,358			(7,059	)		69,378
Investments in and advanced to (from) affiliates		679,441			343,352			1,488,733		(212,242	)		(2,299,284	)		—

Total assets	$	679,877		$	408,068		$	2,256,804	$	1,102,350		$	(2,788,033	)	$	1,659,066


Liabilities
Accounts payable	$	27		$	—		$	62,376	$	81,501		$	—		$	143,904
Accrued expenses and other current liabilities		28,819			9,128			60,702		42,582			(5,675	)		135,556

Total current liabilities		28,846			9,128			123,078		124,083			(5,675	)		279,460

Long-term debt and capital lease obligations		—			330,000			—		—			—			330,000
Pension and other liabilities		153,912			(342	)		15,580		53,556			54,502			277,208
Minority interest		—			20,597			84,951		—			1			105,549

Total liabilities and minority interest		182,758			359,383			223,609		177,639			48,828			992,217


Preferred stock— liquidation value of 120,000		115,800			—			—		—			—			115,800

Common Shareholders’ Equity
Common stock		144,202			—			73		49,709			(49,782	)		144,202
Paid-in capital		680,819			150,218			2,006,068		1,244,369			(3,400,655	)		680,819
Accumulated other comprehensive income (loss)		(83,135	)		—			—		9,018			16,968			(57,149	)
Accumulated deficit		(360,567	)		(101,533	)		27,054		(378,385	)		596,608			(216,823	)

Common shareholders’ equity		381,319			48,685			2,033,195		924,711			(2,836,861	)		551,049

Total liabilities and minority interest, preferred stock and common shareholders equity	$	679,877		$	408,068		$	2,256,804	$	1,102,350		$	(2,788,033	)	$	1,659,066

Consolidating Statement of Operations for the three months ended June 30, 2007:


							Guarantor			Non-Guarantor
(in thousands)	Parent			TCAPI			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues
Product revenues	$	—		$	—		$	319,322		$	376,307		$	(4,465	)	$	691,164
Other income		—			—			2,203			448			—			2,651

Total revenues		—			—			321,525			376,755			(4,465	)		693,815

Cost and Expenses													��
Cost of sales		300			1,886			276,478			275,828			(18,449	)		536,043
Selling, general and administrative expenses		421			(3,433	)		7,199			12,653			11,354			28,194
Equity in the (earnings) loss of unconsolidated affiliates		(173,288	)		(106,854	)		1,059			3,060			276,827			804

Total cost & expenses		(172,567	)		(108,401	)		284,736			291,541			269,732			565,041

Income (loss) from operations		172,567			108,401			36,789			85,214			(274,197	)		128,774
Interest income		—			698			1,788			982			14			3,482
Interest expense		(465	)		(6,291	)		1			(271	)		155			(6,871	)
Loss on early retirement of debt		—			(174	)		—			—			—			(174	)

Income (loss) before income taxes and minority interest		172,102			102,634			38,578			85,925			(274,028	)		125,211
Income tax (provision) benefit		(34,220	)		—			—			(6,397	)		—			(40,617	)
Minority interest					—			(2,690	)		(11,249	)		—			(13,939	)

Net income (loss) available to common shareholders	$	137,882		$	99,944		$	27,329		$	79,528		$	(274,028	)	$	70,655

Consolidating Statement of Operations for the six months ended June 30, 2007:


							Guarantor			Non-Guarantor
(in thousands)	Parent			TCAPI			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues
Product revenues	$	—		$	—		$	561,413		$	633,846		$	(4,465	)	$	1,190,794
Other income		—			—			4,150			1,156			1			5,307

Total revenues		—			—			565,563			635,002			(4,464	)		1,196,101

Cost and Expenses
Cost of sales		300			1,886			503,638			487,592			(31,197	)		962,219
Selling, general and administrative expenses		952			(5,724	)		8,117			17,805			24,101			45,251
Equity in the (earnings) loss of unconsolidated affiliates		(127,492	)		(180,198	)		(5,088	)		(10,681	)		318,646			(4,813	)

Total cost & expenses		(126,240	)		(184,036	)		506,667			494,716			311,550			1,002,657

Income (loss) from operations		126,240			184,036			58,896			140,286			(316,014	)		193,444
Interest income		—			1,270			3,557			1,528			14			6,369
Interest expense		(930	)		(14,621	)		(3	)		(226	)		—			(15,780	)
Loss on early retirement of debt		—			(38,836	)		—			—			—			(38,836	)

Income (loss) before income taxes and minority interest		125,310			131,849			62,450			141,588			(316,000	)		145,197
Income tax (provision) benefit		(39,134	)		—			—			(5,623	)		—			(44,757	)
Minority interest		—			(4,357	)		(18,219	)		—			—			(22,576	)

Net income (loss) available to common shareholders	$	86,176		$	127,492		$	44,231		$	135,965		$	(316,000	)	$	77,864

Consolidating Statement of Cash Flows for the six months ended June 30, 2007:


							Guarantor			Non-Guarantor
(in thousands)	Parent			TCAPI			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Operating Activities
Net income (loss)	$	86,176		$	127,492		$	44,231		$	135,965		$	(316,000	)	$	77,864
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Depreciation and amortization		—			—			28,432			25,928			—			54,360
Deferred income taxes					34,981			—			—			—			34,981
Minority interest in earnings		—			2,096			20,479			—			1			22,576
Distributions in excess of (less than) equity earnings		78,936			4,126			(3,813	)		788,067			(871,129	)		(3,813	)
Non-cash loss (gain) on derivatives		624			—			—			(342	)		342			624
Share-based compensation		13,683			—			—			—			(2	)		13,681
Amortization of intangible and other assets		—			—			4,485			—			—			4,485
Non-cash loss on early retirement of debt		—			4,662			—			—			—			4,662
Change in operating assets and liabilities		(68,104	)		(2,106	)		(36,467	)		(192,252	)		272,350			(26,579	)

Net Cash Flows from Operating Activities		146,296			136,270			57,347			757,366			(914,438	)		182,841

Investing Activities
Purchase of property, plant and equipment		—			—			(3,654	)		(9,843	)		1			(13,496	)
Plant turnaround expenditures		—			—			(7,268	)		(13,052	)		—			(20,320	)

Net Cash Flows from Investing Activities		—			—			(10,922	)		(22,895	)		1			(33,816	)

Financing Activities
Issuance of debt		—			330,000			—			—			—			330,000
Payments under borrowing arrangements		—			(331,300	)		(1	)		—			1			(331,300	)
Payments for debt issuance costs		—			(6,398	)		—			—			—			(6,398	)
Proceeds from exercise of stock options		406			—			—			—			—			406
Preferred share dividends paid		(2,550	)		—			—			—			—			(2,550	)
Repurchases of TRA stock		(19,211	)		—			—			—			—			(19,211	)
Change in investments and advances from (to) affiliates		(124,941	)		(180,194	)		141,993			(281,288	)		444,430			—
Distributions to minority interests		—			—			(11,714	)		—			—			(11,714	)

Net Cash Flows from Financing Activities		(146,296	)		(187,892	)		130,278			(281,288	)		444,431			(40,767	)

Effect of Foreign Exchange Rate on Cash		—			—			—			(325	)		—			(325	)

Increase (decrease) in Cash and Cash Equivalents		—			(51,622	)		176,703			452,858			(470,006	)		107,933

Cash and Cash Equivalents at Beginning of Year		1			100,736			—			78,282			(2	)		179,017

Cash and Cash Equivalents at End of Period	$	1		$	49,114		$	176,703		$	531,140		$	(470,008	)	$	286,950

Consolidating Balance Sheet for the Year Ended December 31, 2006:


							Guarantor			Non-Guarantor
	Parent			TCAPI			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Assets
Cash and cash equivalents	$	1		$	100,736		$	—		$	78,282		$	(2	)	$	179,017
Accounts receivable, net		—			—			75,466			123,325			—			198,791
Inventories		—			—			84,924			117,958			8,135			211,017
Other current assets		3,166			1,319			12,918			18,355			(4,078	)		31,680

Total current assets		3,167			102,055			173,308			337,920			4,055			620,505

Property, plant and equipment, net		—			—			381,987			338,912			(2	)		720,897
Equity method investments		—			—			10,710			153,389			—			164,099
Deferred plant turnaround costs, intangible and other assets		(1,839	)		7,582			22,117			39,351			1			67,212
Investments in and advances to (from) affiliates		758,377			347,478			1,622,696			422,436			(3,150,987	)		—

Total Assets	$	759,705		$	457,115		$	2,210,818		$	1,292,008		$	(3,146,933	)	$	1,572,713

Liabilities
Accounts payable	$	109		$	—		$	63,634		$	92,750		$	—		$	156,493
Accrued expenses and other current liabilities		28,119			5,927			61,782			62,354			(5,228	)		152,954

Total current liabilities		28,228			5,927			125,416			155,104			(5,228	)		309,447

Long-term debt and capital lease obligations		—			331,300			—			—			—			331,300
Pension and other liabilities		188,246			—			7,386			45,060			(2,209	)		238,483
Minority interest		—			18,501			76,186			—			—			94,687

Total liabilities and minority interest		216,474			355,728			208,988			200,164			(7,437	)		973,917


Preferred stock — liquidation value of 120,000		115,800			—			—			—			—			115,800

Common Shareholders’ equity
Common stock		144,975			—			73			49,709			(49,781	)		144,976
Paid in capital		693,895			150,218			2,007,811			1,246,129			(3,404,157	)		693,896
Accumulated other comprehensive income (loss)		(92,187	)		—			6,373			30,828			(8,753	)		(63,739	)
Accumulated deficit		(319,252	)		(48,831	)		(12,427	)		(234,822	)		323,195			(292,137	)

Total stockholders’ equity		427,431			101,387			2,001,830			1,091,844			(3,139,496	)		482,996

Total liabilities minority interest, preferred stock and common shareholders’ equity	$	759,705		$	457,115		$	2,210,818		$	1,292,008		$	(3,146,933	)	$	1,572,713

Consolidating Balance Sheet as of June 30, 2006:


							Guarantor			Non-Guarantor
(in thousands)	Parent			TCAPI			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Assets
Cash and cash equivalents	$	1		$	(23,653	)	$	75,791		$	33,105		$	(1	)	$	85,243
Accounts receivable, net		—			—			43,674			151,830			—			195,504
Inventories		—			—			47,723			122,007			135			169,865
Other current assets		1,710			36			5,043			6,406			(1	)		13,194

Total current assets		1,711			(23,617	)		172,231			313,348			133			463,806

Property, plant and equipment, net		—			—			269,030			468,852			1			737,883
Equity method investments		—			—			—			160,691			—			160,691
Intangible assets, other assets and deferred plant turnaround costs		—			9,046			4,543			57,504			(2	)		71,091
Investments in and advanced to (from) affiliates		736,627			568,191			1,384,256			510,029			(3,199,103	)		—

Total assets	$	738,338		$	553,620		$	1,830,060		$	1,510,424		$	(3,198,971	)	$	1,433,471


Liabilities
Debt due within one year	$	—		$	—		$	8		$	—		$	—		$	8
Accounts payable		18			—			31,554			87,008			—			118,580
Accrued expenses and other current liabilities		173			91,340			31,864			28,805			(75,906	)		76,276

Total current liabilities		191			91,340			63,426			115,813			(75,906	)		194,864

Long-term debt and capital lease obligations		—			331,300			—			—			—			331,300
Deferred income taxes		—			—			—			57,174			—			57,174
Pension and other liabilities		147,261			(337	)		9,893			1,482			—			158,299
Minority interest		—			18,753			77,152			—			—			95,905

Total liabilities and minority interest		147,452			441,056			150,471			174,469			(75,906	)		837,542


Preferred stock — liquidation value of 120,000		115,800			—			—			—			—			115,800

Common Shareholders’ Equity
Common stock		145,044			—			73			49,709			(49,782	)		145,044
Paid-in capital		696,861			150,218			1,797,069			1,529,005			(3,476,292	)		696,861
Accumulated other comprehensive income (loss)		(60,277	)		—			—			28,961			(18,925	)		(50,241	)
Accumulated deficit		(306,542	)		(37,654	)		(117,553	)		(271,720	)		421,934			(311,535	)

Common shareholders’ equity		475,086			112,564			1,679,589			1,335,955			(3,123,065	)		480,129
Total liabilities and minority interest, preferred stock and common shareholders equity	$	738,338		$	553,620		$	1,830,060		$	1,510,424		$	(3,198,971	)	$	1,433,471

Consolidating Statement of Operations for the three months ended June 30, 2006:


							Guarantor			Non-Guarantor
(in thousands)	Parent			TCAPI			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues
Net sales	$	—		$	—		$	155,007		$	366,801		$	—		$	521,808
Other income		—			—			1,791			(79	)		—			1,712

		—			—			156,798			366,722			—			523,520

Cost and Expenses
Cost of sales		—			—			168,510			342,276			(19,616	)		491,170
Selling, general and administrative expenses		482			(2,720	)		(3,650	)		(1,046	)		19,940			13,006
Equity in the (earnings) loss of unconsolidated affiliates		27,853			(37,182	)		—			(26,954	)		29,403			(6,880	)

Total cost and expenses		28,335			(39,902	)		164,860			314,276			29,727			497,296

Income (loss) from operations		(28,335	)		39,902			(8,062	)		52,446			(29,727	)		26,224
Interest income		—			480			(1,607	)		1,344			1,607			1,824
Interest expense		(465	)		(11,884	)		3,353			(4,849	)		2,063			(11,782	)

Income (loss) before income taxes and minority interest		(28,800	)		28,498			(6,316	)		48,941			(26,057	)		16,266
Income tax provision		(7,940	)		—			—			2,174			—			(5,766	)
Minority interest		—			(819	)		(3,424	)		—			—			(4,243	)


Net (loss) income	$	(36,740	)	$	27,679		$	(9,740	)	$	51,115		$	(26,057	)	$	6,257

Consolidating Statement of Operations for the six months ended June 30, 2006:


							Guarantor			Non-Guarantor
(in thousands)	Parent			TCAPI			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues
Product revenues	$	—		$	—		$	269,946		$	649,605		$	—		$	919,551
Other revenues		—			—			3,581			(693	)		—			2,888

Total revenues		—			—			273,527			648,912			—			922,439

Cost and Expenses
Cost of sales		—			—			305,039			635,850			(26,203	)		914,686
Selling, general and administrative expenses		1,007			(4,562	)		(2,111	)		4,181			26,201			24,716
Equity in the (earnings) loss of unconsolidated affiliates		18,678			(39,279	)		—			(58,408	)		63,988			(15,021	)

Total cost & expenses		19,685			(43,841	)		302,928			581,623			63,986			924,381

Income (loss) from operations		(19,685	)		43,841			(29,401	)		67,289			(63,986	)		(1,942	)
Interest income		—			1,050			—			2,358			—			3,408
Interest expense		(930	)		(23,586	)		3,351			(6,554	)		4,165			(23,554	)

Income (loss) before income taxes and minority interest		(20,615	)		21,305			(26,050	)		63,093			(59,821	)		(22,088	)
Income tax benefit		2,822			—			—			5,178			—			8,000
Minority interest		—			(704	)		(2,943	)		—			—			(3,647	)


Net (loss) income	$	(17,793	)	$	20,601		$	(28,993	)	$	68,271		$	(59,821	)	$	(17,735	)

Consolidating Statement of Cash Flows for the six months ended June 30, 2006:


							Guarantor			Non-Guarantor
(in thousands)	Parent			TCAPI			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Operating Activities
Net income (loss)	$	(17,793	)	$	20,601		$	(28,993	)	$	68,271		$	(59,821	)	$	(17,735	)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Depreciation and amortization		—			1,464			22,044			34,353			—			57,861
Deferred income taxes		—			—			—			(8,000	)		—			(8,000	)
Minority interest in earnings		—			704			2,943			—			—			3,647
Distribution in excess of (less than) equity earnings		(18,678	)		39,279			—			83,373			(94,030	)		9,944
Non-cash loss on derivatives		—			—			1,240			333			—			1,573
Share-based compensation		1,674			—			—			—			643			2,317
Change in operating assets and liabilities		900			12,601			13,939			38,059			(73,023	)		(7,524	)

Net Cash Flows from Operating Activities		(33,897	)		74,649			11,173			216,389			(226,231	)		42,083

Investing Activities
Purchase of property, plant and equipment		—			—			(4,286	)		(22,350	)		—			(26,636	)
Plant turnaround expenditures		—			—			(7,045	)		(15,067	)		—			(22,112	)
Distributions received from unconsolidated affiliates		—			—			—			9,660			—			9,660
Changes in restricted cash		—			—			8,595			—			—			8,595
Proceeds from the sale of property, plant and equipment		—			—			—			275			—			275

Net Cash Flows from Investing Activities		—			—			(2,736	)		(27,482	)		—			(30,218	)

Financing Activities
Payments under borrowing arrangements		—			—			(18	)		(12	)		—			(30	)
Preferred share dividends paid		(2,550	)		—			—			—			—			(2,550	)
Proceeds from exercise of stock options		363			—			—			—			—			363
Payments under share repurchase program		(14,428	)		—			—			—			—			(14,428	)
Change in investments and advances from (to) affiliates		50,512			(109,810	)		—			(166,933	)		226,231			—

Net Cash Flows from Financing Activities		33,897			(109,810	)		(18	)		(166,945	)		226,231			(16,645	)

Effect of Foreign Exchange Rate on Cash		—			—			—			3,657			—			3,657

Increase (decrease) in Cash and Cash Equivalents		—			(35,161	)		8,419			25,619			—			(1,123	)

Cash and Cash Equivalents at Beginning of Year		1			11,508			67,372			7,486			(1	)		86,366

Cash and Cash Equivalents at End of Period	$	1		$	(23,653	)	$	75,791		$	33,105		$	(1	)	$	85,243


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

Introduction

Terra produces and markets 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. Natural gas is the most significant raw material in the production of nitrogen and methanol products. 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.

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. The natural gas costs of imported products have been and could continue to be substantially lower than the delivered cost of natural gas to Terra’s 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.

Terra’s sales volumes depend primarily on its plants’ operating rates. The Company also purchases product from other manufacturers and importers for resale; however, historic gross margins on these volumes have not been significant. Profitability and cash flows from Terra’s nitrogen products business are affected by the Company’s ability to manage its costs and expenses (other than natural gas), most of which do not materially change for different levels of production or sales. Other factors affecting Terra’s 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 Item 1 “Business” and Item 2 “Properties” sections of Terra’s 2006 Form 10-K filing with the Securities and Exchange Commission.

RESULTS OF OPERATIONS

QUARTER ENDED JUNE 30, 2007 COMPARED WITH
QUARTER ENDED JUNE 30, 2006

Consolidated Results

Terra reported net income of $70.7 million for the 2007 second quarter compared with 2006 net income of $6.3 million. The net income increase is primarily due to higher sales volume and prices.

Terra classifies its 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 the Company’s ammonia production and upgrading facilities. The methanol segment represents wholesale sales of methanol produced by Terra’s methanol manufacturing plant.

Total revenues and income (loss) from operations by segment for the three-month periods ended June 30, 2007 and 2006 follow:


(in thousands)	2007			2006
REVENUES:
Nitrogen Products	$	680,384		$	516,591
Methanol		10,780			5,217
Other		2,651			1,712

	$	693,815		$	523,520


INCOME (LOSS) FROM OPERATIONS:
Nitrogen Products	$	128,241		$	29,676
Methanol		774			(3,250	)
Other		(241	)		(202	)

	$	128,774		$	26,224

Nitrogen Products

Volumes and prices for the three-month periods ended June 30, 2007 and 2006 were:

VOLUMES AND PRICES


	2007				2006
	Sales		Average		Sales		Average
(quantities in thousands of tons)	Volumes		Unit Price*		Volumes		Unit Price*
Ammonia		568	$	347		552	$	323
Nitrogen solutions		1,310	$	200		1,064	$	147
Urea		32	$	317		46	$	265
Ammonium nitrate		433	$	251		332	$	226


*		After deducting outbound freight costs

Nitrogen products segment revenues for the quarter ended June 30, 2007 increased $163.8 million, or 32%, compared with the same 2006 quarter primarily due to higher sales volumes and higher prices for nitrogen solutions. The volume and price increases are due to stronger demand for nitrogen products, primarily as a result of increased planted corn acreage as compared to 2006.

Operating income for the 2007 second quarter was $128.2 million, which was $98.5 million more than the $29.7 million income in the 2006 second quarter. Higher second quarter sales volumes and prices increased operating income approximately $27.8 million and $89.6 million, respectively. Cost reductions as the result of higher production rates and lower spending increased operating income by an additional $6.6 million. These improvements were offset by a $7.6 million decrease in equity earnings and a $15.2 million increase to selling, general and administrative expenses. Second quarter equity earnings declined from 2006 due to an extended plant outage and turnaround at the Point Lisas Trinidad nitrogen facility, which resumed normal operating rates during May. Selling, general and administrative expense for the 2007 second quarter increased from the 2006 second quarter, mainly due to the annual and long term compensation and incentive plans.

Methanol

For the three months ended June 30, 2007 and 2006, the Methanol segment had revenues of $10.8 million and $5.2 million, respectively. In the 2007 second quarter, approximately 8.5 million gallons of methanol were sold at the Woodward, Oklahoma facility compared to approximately 4.5 million gallons of methanol sold in the 2006 second quarter.

The methanol segment had operating income of $0.8 million for the 2007 second quarter compared to operating loss of $3.3 million for the 2006 second quarter. The increase in operating income was primarily due to the increased sales volumes.

Interest Expense

Interest expense decreased approximately $4.9 million to $6.9 million during the 2007 second quarter as compared to $11.8 million for the 2006 second quarter. The decrease in interest expense was due to the refinancing of debt in January 2007.

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 2007 and 2006 amounts are directly related to TNCLP earnings and losses.

Income Taxes

Income taxes for the 2007 second quarter were recorded based on the estimated effective tax rate for the individual jurisdictions in which Terra operates. The annual effective tax rates were 36.5% and 48.0% in the quarters ended June 30, 2007 and 2006, respectively. The 2006 rate of 48% was primarily due to losses in foreign jurisdictions with a lower benefit rate compared to income in the United States with a higher rate. In addition, 2006 permanent differences were a higher percentage of pretax income in both the U.S and foreign jurisdictions.

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2007 COMPARED WITH
SIX MONTHS ENDED JUNE 30, 2006

Consolidated Results

Terra reported net income of $77.9 million for the 2007 first six months compared with a 2006 net loss of $17.7 million in 2006. The 2007 net income increase is primarily due to higher sales volumes and prices, offset by $38.8 million of 2007 losses on early retirement of debt. The 2006 net loss was primarily related to lower sales volumes as a result of high natural gas costs during 2006.

Total revenues and income (loss) from operations by segment for the six-month period ended June 30, 2007 and 2006 follow:


(in thousands)	2007			2006
REVENUES:
Nitrogen Products	$	1,167,483		$	912,962
Methanol		23,311			6,589
Other		5,307			2,888

	$	1,196,101		$	922,439


INCOME (LOSS) FROM OPERATIONS:
Nitrogen Products	$	192,302		$	4,689
Methanol		1,562			(6,042	)
Other		(420	)		(589	)

	$	193,444		$	(1,942	)

Nitrogen Products

Volumes and prices for the six-month periods ended June 30, 2007 and 2006 are:

VOLUMES AND PRICES


	2007				2006
	Sales		Average		Sales		Average
(quantities in thousands of tons)	Volumes		Unit Price*		Volumes		Unit Price*
Ammonia		988	$	339		951	$	340
Nitrogen solutions		2,384	$	182		1,769	$	151
Urea		65	$	308		84	$	280
Ammonium nitrate		752	$	240		556	$	226


*		After deducting outbound freight costs

Nitrogen products segment revenues for the six months ended June 30, 2007 increased $254.5 million, or 28%, compared with the same 2006 first half primarily due to higher sales volumes for nitrogen solutions and ammonium nitrates, and higher prices for nitrogen products. The volume increase is due to stronger demand for nitrogen products, primarily as a result of increased planted corn acreage as compared to 2006.

The operating income for the 2007 first half was $192.3 million and was $187.6 million more than the $4.7 million operating income in the 2006 first half. Higher 2007 sales volumes, selling prices and cost reductions contributed to operating income increases of $49 million, $81.6 million and $77.1 million, respectively. Cost reductions were principally related to lower natural gas costs and higher production rates than during 2006. These improvements were offset by a $10.2 million decrease in equity earnings and a $20.5 million increase to selling, general and administrative expenses. First half equity earnings declined from 2006 due to an extended plant outage and turnaround at the Point Lisas Trinidad nitrogen facility, which resumed normal operating rates during May. Selling, general and administrative expense for the 2007 first half increased from 2006, mainly due to the annual and long term compensation and incentive plans.

Methanol

For the six months ended June 30, 2007 and 2006, the Methanol segment had revenues of $23.3 million and $6.6 million, respectively. In the 2007 first half, approximately 18.6 million gallons of methanol were sold at the Woodward, Oklahoma facility compared to approximately 4.8 million gallons of methanol sold in the 2006 first half.

The methanol segment had an operating income of $1.6 million for the 2007 first half compared to operating loss of $6.0 million for the 2006 first half. The increase in operating income is primarily related to operational efficiencies in 2007 as compared to 2006, which included curtailments during the first quarter due to high natural gas prices.

Interest Expense

Interest expense decreased approximately $7.8 million to $15.8 million during the 2007 first half as compared to $23.6 million for the prior year period due primarily to the refinancing of debt in January of 2007.

Minority Interest

Income Taxes

Income taxes for the first half of 2007 were recorded based on the estimated annual effective tax rate for the individual jurisdictions in which Terra operates. The annual effective tax rate was 36.5% and 31% in the first half ended June 30, 2007 and 2006, respectively. The increase in the effective rate is due primarily to the losses in 2006 in foreign jurisdictions that had a lower effective rate than the U.S.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents totaled $287.0 million at June 30, 2007. Terra’s primary uses of cash are to fund its working capital requirements, make payments on its debt and other obligations and fund plant turnarounds and capital expenditures. The principle sources of these cash outlays will be cash flow from operations, cash on hand and borrowings under available bank facilities.

Net cash provided by operations in the first six months of 2007 was $182.8 million, composed of $209.4 million of cash provided from operating activities less $26.6 million to fund working capital changes. First half changes to current assets and liabilities represented seasonal fluctuations to working capital balances.

During the first six months, Terra funded plant and equipment purchases of $13.5 million primarily for replacement or stay-in-business capital needs. Plant turnaround costs represent cash used for the periodic scheduled major maintenance of the Company’s continuous process production facilities that is performed at each plant, generally every two years. Terra funded $20.3 million of plant turnaround costs in the first six months of 2007.

In April 2006, the Board of Directors authorized the Company to repurchase a maximum of 10%, or 9,516,817 shares, of its then outstanding common stock on the open market in private transactions or otherwise. During 2007, the Company’s repurchases under its stock buyback programs were:


					Total Number of
	Total				Shares Purchased as		Maximum Number of
Month of	Number of		Average		Part of Publicity		Shares that May Yet Be
Share	Shares		Price Paid		Announced Plans or		Purchased Under the
Purchases	Purchased		per share		Programs		Plans or Programs
January 2007		—	$	—		2,675,100		6,841,717
February 2007		—	$	—		2,675,100		6,841,717
March 2007		—	$	—		2,675,100		6,841,717
April 2007		—	$	—		2,675,100		6,841,717
May 2007		650,000	$	18.79		3,325,100		6,191,717
June 2007		350,000	$	19.53		3,675,100		5,841,717

The Company paid dividends on the outstanding preferred stock of $2.6 million for each of the six-month periods ending June 30, 2007 and 2006.

Distributions paid to the minority TNCLP common unit holders in the first six months of 2007 were $11.7 million and there were no distributions in the 2006 first half. TNCLP distributions are based on “Available Cash” as defined in the Partnership Agreement.

Offering proceeds were used to repurchase the Company’s 12.875% Senoir Secured Notes and 11.5% Second Priority Secured Notes. On April 2, 2007, Terra Capital, Inc. exercised its right to redeem the remaining bonds effective June 1, 2007. On April 2, 2007, sufficient funds were deposited with the trustee of the 11.5% Secured Notes to defease the bonds and allow remaining liens to be released.

In the first quarter of 2007, the Company amended the $200 million revolving credit facility to extend the expiration date to January 31, 2012. Borrowing availability under the credit facility is generally based on 100% eligible cash balances, 85% of eligible accounts receivable and 60% of eligible inventory, less outstanding letters of credit. These facilities include $50 million only available for the use of TNCLP, one of Terra’s consolidated subsidiaries. There were no outstanding revolving credit borrowings and there were $16.5 million in outstanding letters of credit, resulting in remaining borrowing availability of approximately $183.5 million under the facilities. The Company is required to maintain a combined minimum unused borrowing availability of $30 million. The credit facility also requires that the Company 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 the Company’s borrowing availability falls below a combined $60 million, the Company is 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 Company’s 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. Based on current market conditions for the Company’s finished products and natural gas, the Company anticipates that it will be able to meet its covenants through 2007. If there were to be any adverse changes in the factors discussed above, the Company may need a waiver of its credit facility covenants, of which, there is no assurance that the Company could receive such waivers.

Other than the refinancing of debt, with the issuance of $330 million of 7.0% Senior Notes due 2017, there were no material changes outside the ordinary course of business to the Company’s contractual obligations presented in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Annual Report on Form 10-K for the period ended December 31, 2006.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risks relating to Terra’s operations result primarily from interest rates, foreign exchange rates, natural gas prices and nitrogen prices. Terra manages its exposure to these and other market risks through regular operating and financing activities and through the use of derivative financial instruments. Terra intends to use derivative financial instruments as risk management tools and not for speculative investment purposes. Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of Terra’s Annual Report on Form 10-K for the year ended December 31, 2006 provides more information as to the types of practices and instruments used to manage risk.

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. Management also considers the Company’s position related to forward fixed price sales contracts in determining the level of derivatives necessary. Contracts were in place at June 30, 2007 to cover approximately 23% of its natural gas requirements for the succeeding twelve months. The Company’s ability to manage exposure to commodity price risk in the purchase of natural gas through the use of financial derivatives may be affected by limitations imposed by its bank agreement covenants.

ITEM 4. CONTROLS AND PROCEDURES

The Company’s 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 the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits 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 significant changes in the Company’s internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s 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 Terra’s most recent Form 10-K.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company is involved in various claims and legal actions arising in the ordinary course of business, including employee injury claims. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity and the likelihood that a loss contingency will occur in connection with these claims is remote.

ITEM 1A. RISK FACTORS

There were no significant changes in the Company’s risk factors during the first quarter of 2007 as compared to the risk factors identified in the Company’s 2006 Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The 2007 Annual Meeting of shareholders was held on May 8, 2007 in New York, New York. At the meeting a total of 85,277,788 votes were cast by shareholders.

The following persons were elected as Class III directors to hold office until the 2010 Annual Meeting, or until their successors are duly elected and qualified, and received the votes forth opposite their respective name:



NAME	FOR	WITHHELD


David E. Fisher	83,222,811	2,054,977
Dod A. Fraser	84,866,851	410,937

The shareholders approved the proposal for the 2007 Omnibus Incentive Compensation Plan. The number of votes cast for such proposal was 65,575,084; the number cast against was 2,623,031 and the number of abstentions was 672,956.

The shareholders ratified the selection by the Audit Committee of the Corporation’s Board of Directors of Deloitte & Touche LLP as independent accountants for the Corporation for 2007. The number of votes cast for such proposal was 84,625,217, the number against was 116,755 and the number of abstentions was 535,816.

ITEM 5. OTHER INFORMATION

Company Purchases of Equity Securities

The following table provides information about shared repurchases by the Company during 2007.


					Total Number of
	Total				Shares Purchased as		Maximum Number of
Month of	Number of		Average		Part of Publicity		Shares that May Yet Be
Share	Shares		Price Paid		Announced Plans or		Purchased Under the
Purchases	Purchased		per share		Programs		Plans or Programs
January 2007		—	$	—		2,675,100		6,841,717
February 2007		—	$	—		2,675,100		6,841,717
March 2007		—	$	—		2,675,100		6,841,717
April 2007		—	$	—		2,675,100		6,841,717
May 2007		650,000	$	18.79		3,325,100		6,191,717
June 2007		350,000	$	19.53		3,675,100		5,841,717

On April 25, 2006, the Board of Directors authorized the Company to repurchase a maximum of 10 percent, or 9,516,817 shares, of its then outstanding common stock. The stock buyback program has been and will be conducted on the open market, in private transactions or otherwise at such times prior to June 30, 2008, and at such prices, as determined appropriate by the Company. During the 2007 second quarter, the Company repurchased 1,000,000 shares at an average price of $19.20. The remaining number of shares that the Company is authorized to repurchase is 5,841,717 at June 30, 2007.

The calculation of the average price paid per share does not include the effect for any fees, commissions or other costs associated with the repurchase of such shares.

ITEM 6. EXHIBITS

(a) Exhibits


Exhibit 10.1		2007 Omnibus Incentive Compensation Plan, adopted by the board of directors of Terra Industries Inc. (“Terra”) and subsequently approved by its stockholders at the annual meeting of Terra on May 8, 2007, reported on Terra’s Form 8-K filed May 10, 2007 and attached as Appendix A to Terra’s Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on March 15, 2007, is incorporated herein by reference.

Exhibit 10.2		Option Agreement, dated as of July 18, 2007, by and between Terra Industries Inc. and Eastman Chemical Company, filed as Exhibit 10.1 to Terra Industries Inc.’s Form 8-K dated July 23, 2007, is incorporated herein by reference.

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

* filed herewith

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: July 27, 2007	/s/ Francis G. Meyer
	Francis G. Meyer
	Senior Vice President and Chief Financial Officer and a duly authorized signatory

EXHIBIT INDEX


Exhibit Number		Description

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

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

Terra Industries Inactive 10-Q2007 Q2 Quarterly report

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