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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 September 30, 2007
OR
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 | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
Terra Centre | ||
P.O. Box 6000 | ||
600 Fourth Street | ||
Sioux City, Iowa | 51102-6000 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (712) 277-1340
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
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 filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No
o Yes þ No
As of October 23, 2007, the following shares of the registrant’s stock were outstanding:
Common Shares, without par value | 89,507,153 shares |
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Exhibit 10.1 | ||||||||
Exhibit 10.2 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 |
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TERRA INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
(unaudited)
September 30, | December 31, | September 30, | ||||||||||
2007 | 2006 | 2006 | ||||||||||
Assets | ||||||||||||
Cash and cash equivalents | $ | 360,478 | $ | 179,017 | $ | 122,170 | ||||||
Accounts receivable, less allowance for doubtful accounts of $326, $333 and $371 | 159,905 | 198,791 | 193,339 | |||||||||
Inventories | 126,154 | 211,017 | 160,191 | |||||||||
Other current assets | 13,067 | 31,680 | 26,158 | |||||||||
Total current assets | 659,604 | 620,505 | 501,858 | |||||||||
Property, plant and equipment, net | 435,103 | 720,897 | 722,952 | |||||||||
Equity method investments | 369,605 | 164,099 | 161,455 | |||||||||
Deferred plant turnaround costs, net | 35,029 | 44,558 | 40,577 | |||||||||
Intangible assets, net | 4,234 | 5,645 | 6,115 | |||||||||
Other assets | 16,918 | 17,009 | 27,164 | |||||||||
Total assets | $ | 1,520,493 | $ | 1,572,713 | $ | 1,460,121 | ||||||
Liabilities | ||||||||||||
Accounts payable | 80,296 | 156,493 | 115,734 | |||||||||
Customer prepayments | 85,313 | 77,091 | 27,949 | |||||||||
Accrued expenses and other current liabilities | 96,351 | 75,863 | 80,974 | |||||||||
Total current liabilities | 261,960 | 309,447 | 224,657 | |||||||||
Long-term debt and capital lease obligations | 330,000 | 331,300 | 331,300 | |||||||||
Pension liabilities | 38,041 | 134,444 | 112,729 | |||||||||
Other liabilities | 139,882 | 104,039 | 96,541 | |||||||||
Minority interest | 102,854 | 94,687 | 95,014 | |||||||||
Total liabilities and minority interest | 872,737 | 973,917 | 860,241 | |||||||||
Preferred Stock- liquidation value of $120,000 | 115,800 | 115,800 | 115,800 | |||||||||
Common Shareholders’ Equity | ||||||||||||
Capital stock | ||||||||||||
Common Shares, authorized 133,500 shares; 89,501; 92,630 and 92,639 outstanding | 142,069 | 144,976 | 144,968 | |||||||||
Paid-in capital | 617,085 | 693,896 | 693,944 | |||||||||
Accumulated other comprehensive loss | (63,480 | ) | (63,739 | ) | (52,362 | ) | ||||||
Accumulated deficit | (163,718 | ) | (292,137 | ) | (302,470 | ) | ||||||
Total common shareholders’ equity | 531,956 | 482,996 | 484,080 | |||||||||
Total liabilities and minority interest, preferred stock and common shareholders’ equity | $ | 1,520,493 | $ | 1,572,713 | $ | 1,460,121 | ||||||
See Accompanying Notes to the Consolidated Financial Statements.
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TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share amounts)
(unaudited)
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Revenues | ||||||||||||||||
Product revenues | $ | 590,046 | $ | 461,533 | $ | 1,780,840 | $ | 1,381,084 | ||||||||
Other income | 3,669 | 3,248 | 8,976 | 6,135 | ||||||||||||
Total revenues | 593,715 | 464,781 | 1,789,816 | 1,387,219 | ||||||||||||
Costs and Expenses | ||||||||||||||||
Cost of sales | 442,879 | 422,523 | 1,405,098 | 1,337,210 | ||||||||||||
Selling, general and administrative expense | 21,935 | 13,679 | 67,186 | 38,395 | ||||||||||||
Equity (earnings) of unconsolidated affiliates (Note 8) | (5,566 | ) | (809 | ) | (10,379 | ) | (15,830 | ) | ||||||||
Impairment of long-lived assets (Note 5) | 38,964 | — | 38,964 | — | ||||||||||||
Total cost and expenses | 498,212 | 435,393 | 1,500,869 | 1,359,775 | ||||||||||||
Income (loss) from operations | 95,503 | 29,388 | 288,947 | 27,444 | ||||||||||||
Equity earnings of unconsolidated affiliates (Note 8) | 2,202 | — | 2,202 | — | ||||||||||||
Interest income | 4,709 | 2,091 | 11,078 | 5,499 | ||||||||||||
Interest expense | (6,905 | ) | (11,786 | ) | (22,685 | ) | (35,340 | ) | ||||||||
Loss on early retirement of debt | — | — | (38,836 | ) | — | |||||||||||
Income (loss) before income taxes and minority interest | 95,509 | 19,693 | 240,706 | (2,397 | ) | |||||||||||
Income tax (provision) benefit | (29,985 | ) | (6,000 | ) | (74,742 | ) | 2,002 | |||||||||
Minority interest | (11,144 | ) | (3,352 | ) | (33,720 | ) | (7,000 | ) | ||||||||
Net income (loss) | 54,380 | 10,341 | 132,244 | (7,395 | ) | |||||||||||
Preferred share dividends | (1,275 | ) | (1,275 | ) | (3,825 | ) | (3,825 | ) | ||||||||
Income (Loss) Available to Common Shareholders | $ | 53,105 | $ | 9,066 | $ | 128,419 | $ | (11,220 | ) | |||||||
Basic and diluted income (loss) per share: | ||||||||||||||||
Basic | $ | 0.59 | $ | 0.10 | $ | 1.41 | $ | (0.12 | ) | |||||||
Diluted | $ | 0.51 | $ | 0.10 | $ | 1.24 | $ | (0.12 | ) | |||||||
Basic and diluted weighted average shares outstanding: | ||||||||||||||||
Basic | 90,092 | 91,817 | 91,143 | 92,994 | ||||||||||||
Diluted | 105,946 | 93,405 | 106,899 | 92,994 |
See Accompanying Notes to the Consolidated Financial Statements.
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TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
(unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2007 | 2006 | |||||||
Operating Activities | ||||||||
Net income (loss) | $ | 132,244 | $ | (7,395 | ) | |||
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 | 81,057 | 78,859 | ||||||
Impairment of long-lived assets | 38,964 | — | ||||||
Deferred income taxes | 48,981 | (2,002 | ) | |||||
Minority interest in earnings | 33,720 | 7,000 | ||||||
Distributions in excess of equity earnings | 5,121 | 9,135 | ||||||
Equity earnings GrowHow UK Limited | (2,202 | ) | — | |||||
Non-cash loss on derivatives | 176 | 2,775 | ||||||
Share-based compensation | 16,838 | 4,285 | ||||||
Amortization of intangible and other assets | 6,655 | 8,128 | ||||||
Non-cash loss on early retirement of debt | 4,662 | — | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (29,242 | ) | 25,785 | |||||
Inventories | 49,472 | 36,592 | ||||||
Accounts payable and customer prepayments | (25,100 | ) | (38,859 | ) | ||||
Other assets and liabilities, net | 20,391 | (21,029 | ) | |||||
Net cash flows from operating activities | 381,737 | 103,274 | ||||||
Investing Activities | ||||||||
Purchase of property, plant and equipment | (23,124 | ) | (40,785 | ) | ||||
Plant turnaround expenditures | (35,985 | ) | (31,987 | ) | ||||
Cash retained by GrowHow UK Limited | (17,249 | ) | — | |||||
Distributions received from unconsolidated affiliates | — | 9,660 | ||||||
Changes in restricted cash | — | 8,595 | ||||||
Proceeds from the sale of property, plant and equipment | — | 9,666 | ||||||
Net cash flows from investing activities | (76,358 | ) | (44,851 | ) | ||||
Financing Activities | ||||||||
Issuance of debt | 330,000 | — | ||||||
Payments under borrowing arrangements | (331,300 | ) | (34 | ) | ||||
Payments for debt issuance costs | (6,403 | ) | — | |||||
Preferred share dividends paid | (3,825 | ) | (3,825 | ) | ||||
Common stock issuances and vestings | 89 | 363 | ||||||
Payments under share repurchase program | (87,426 | ) | (18,796 | ) | ||||
Distributions to minority interests | (25,554 | ) | (4,244 | ) | ||||
Net cash flows from financing activities | (124,419 | ) | (26,536 | ) | ||||
Effect of exchange rate changes on cash | 501 | 3,917 | ||||||
Increase to cash and cash equivalents | 181,461 | 35,804 | ||||||
Cash and cash equivalents at beginning of period | 179,017 | 86,366 | ||||||
Cash and cash equivalents at end of period | $ | 360,478 | $ | 122,170 | ||||
See Accompanying Notes to the Consolidated Financial Statements.
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Consolidated Statements of Cash Flows (continued)
Nine Months ended | ||||||||
September 30 | ||||||||
2007 | 2006 | |||||||
Supplemental cash flow information: | ||||||||
Interest paid | $ | 22,900 | $ | 21,394 | ||||
Income tax refunds received | $ | 555 | $ | — | ||||
Income taxes paid | $ | 8,743 | $ | 1,569 | ||||
Supplemental schedule of non-cash investing and financing activities: | ||||||||
Conversion of warrants to common stock | $ | 568 | $ | — | ||||
Equity method investments contributed to GrowHow UK Limited | $ | 193,784 | $ | — | ||||
Supplemental schedule of unconsolidated affiliates distributions received: | ||||||||
Equity earnings of unconsolidated affiliates | $ | 10,379 | $ | 15,830 | ||||
Distribution in excess of (less than) equity earnings | 5,121 | 9,135 | ||||||
Distributions received from unconsolidated affiliates | — | 9,660 | ||||||
Total cash distributions received from unconsolidated affiliates | $ | 15,500 | $ | 34,625 | ||||
See Accompanying Notes to the Consolidated Financial Statements.
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TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS’ EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(in thousands)
(unaudited)
(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 | — | — | — | 132,244 | 132,244 | $ | 132,244 | |||||||||||||||||
Foreign currency translation adjustment | — | — | (42,361 | ) | — | (42,361 | ) | (42,361 | ) | |||||||||||||||
Change in fair value of derivatives, net of taxes of $1,381 | — | — | (2,565 | ) | — | (2,565 | ) | (2,565 | ) | |||||||||||||||
Pension and post retirement benefit liabilities | — | — | 1,913 | — | 1,913 | 1,913 | ||||||||||||||||||
Comprehensive income | $ | 89,231 | ||||||||||||||||||||||
Transfer of UK pension plan to GrowHow UK Limited | — | — | 43,272 | — | 43,272 | |||||||||||||||||||
Preferred share dividends | — | — | — | (3,825 | ) | (3,825 | ) | |||||||||||||||||
Exercise of stock options | 252 | 320 | — | — | 572 | |||||||||||||||||||
Net vested stock | 273 | (757 | ) | — | — | (484 | ) | |||||||||||||||||
Conversion of warrants | 568 | (568 | ) | — | — | — | ||||||||||||||||||
Shares purchased and retired under share repurchase program | (4,000 | ) | (83,426 | ) | — | — | (87,426 | ) | ||||||||||||||||
Share-based compensation | — | 7,620 | — | — | 7,620 | |||||||||||||||||||
Balance September 30, 2007 | $ | 142,069 | $ | 617,085 | $ | (63,480 | ) | $ | (163,718 | ) | $ | 531,956 | ||||||||||||
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 | — | — | — | — | (7,395 | ) | (7,395 | ) | $ | (7,395 | ) | |||||||||||||||||
Foreign currency translation adjustment | — | — | 22,638 | — | — | 22,638 | 22,638 | |||||||||||||||||||||
Change in fair value of derivatives, net of taxes of $2,589 | — | — | (4,857 | ) | — | — | (4,857 | ) | (4,857 | ) | ||||||||||||||||||
Comprehensive income | $ | 10,386 | ||||||||||||||||||||||||||
Preferred share dividends | — | — | — | — | (3,825 | ) | (3,825 | ) | ||||||||||||||||||||
Exercise of stock options | 95 | 268 | — | — | — | 363 | ||||||||||||||||||||||
Non vested stock | 554 | 549 | — | — | — | 1,103 | ||||||||||||||||||||||
Shares purchased and retired under share repurchase program | (2,675 | ) | (16,121 | ) | — | — | — | (18,796 | ) | |||||||||||||||||||
Reclassification for adoption of FAS 123 R | — | (5,369 | ) | — | 5,369 | — | — | |||||||||||||||||||||
Share-based compensation | — | 1,946 | — | — | — | 1,946 | ||||||||||||||||||||||
Balance at September 30, 2006 | $ | 144,968 | $ | 693,944 | $ | (52,362 | ) | $ | — | $ | (302,470 | ) | $ | 484,080 | ||||||||||||||
See Accompanying Notes to the Consolidated Financial Statements.
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TERRA INDUSTRIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. | 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 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.
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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. During the third quarter, there was an impairment at the Beaumont, Texas facility, see Note 5.
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.
2. | 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.
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The following table provides a reconciliation between basic and diluted income (loss) per share for the three- and nine-month periods ended September 30, 2007 and 2006:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands, except per-share amounts) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Basic income (loss) per share computation: | ||||||||||||||||
Net Income (loss) | $ | 54,380 | $ | 10,341 | $ | 132,244 | $ | (7,395 | ) | |||||||
Less: Preferred share dividends | (1,275 | ) | (1,275 | ) | (3,825 | ) | (3,825 | ) | ||||||||
Income (loss) available to common shareholders | $ | 53,105 | $ | 9,066 | $ | 128,419 | $ | (11,220 | ) | |||||||
Weighted average shares outstanding | 90,092 | 91,817 | 91,143 | 92,994 | ||||||||||||
Basic income (loss) per common share | $ | 0.59 | $ | 0.10 | $ | 1.41 | $ | (0.12 | ) | |||||||
Diluted income (loss) per share computation: | ||||||||||||||||
Income (loss) available to common shareholders | $ | 53,105 | $ | 9,066 | $ | 128,419 | $ | (11,220 | ) | |||||||
Add: Preferred share dividends | 1,275 | — | 3,825 | — | ||||||||||||
Income (loss) available to common shareholders and assumed conversions | $ | 54,380 | $ | 9,066 | $ | 132,244 | $ | (11,220 | ) | |||||||
Weighted average shares outstanding | 90,092 | 91,817 | 91,143 | 92,994 | ||||||||||||
Add incremental shares from assumed conversions: | ||||||||||||||||
Preferred shares | 12,049 | — | 12,049 | — | ||||||||||||
Nonvested stock | 985 | 596 | 783 | — | ||||||||||||
Common stock warrants | 2,710 | 846 | 2,791 | — | ||||||||||||
Common stock options | 110 | 146 | 133 | — | ||||||||||||
Dilutive potential common shares | 105,946 | 93,405 | 106,899 | 92,994 | ||||||||||||
Diluted income (loss) per common share | $ | 0.51 | $ | 0.10 | $ | 1.24 | $ | (0.12 | ) | |||||||
For the three-month period ended September 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 September 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 nine-month period ended September 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 nine-month period ended September 30, 2006.
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3. | Inventories |
Inventories consisted of the following:
September 30, | December 31, | September 30, | ||||||||||
(in thousands) | 2007 | 2006 | 2006 | |||||||||
Raw materials | $ | 19,558 | $ | 26,583 | $ | 29,679 | ||||||
Supplies | 36,385 | 54,542 | 53,642 | |||||||||
Finished goods | 70,211 | 129,892 | 76,870 | |||||||||
Total | $ | 126,154 | $ | 211,017 | $ | 160,191 | ||||||
Inventory is valued at actual first-in, first-out cost. Costs include raw material, labor and overhead.
4. | 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 (See Note 8). 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.
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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 September 30, 2007 there were no collars outstanding.
The following summarizes open natural gas derivative contracts at September 30, 2007 and 2006 and December 31, 2006:
Other | Other | |||||||||||||||
Current | Current | Deferred | Net | |||||||||||||
(in thousands) | Assets | Liabilities | Taxes | Asset (Liability) | ||||||||||||
September 30, 2007 | $ | 4,732 | $ | (26,167 | ) | $ | 7,754 | $ | (13,681 | ) | ||||||
December 31, 2006 | $ | 4,731 | $ | (22,591 | ) | $ | 6,373 | $ | (11,487 | ) | ||||||
September 30, 2006 | $ | 7,050 | $ | (22,129 | ) | $ | 5,365 | $ | (9,714 | ) |
Certain derivatives outstanding at September 30, 2007 and 2006, which settled during October 2007 and 2006, respectively, are included in the position of open natural gas derivatives in the table above. The October 2007 derivatives settled for an approximate $7.7 million loss. Substantially all open derivatives will settle during the next 12 months.
At September 30, 2007, the Company determined that certain derivative contracts were ineffective hedges for accounting purposes and recorded a credit of $0.3 million to cost of sales for the three-month period and a credit of $1.7 million for the nine-month period ending September 30, 2007. At September 30, 2006, the Company determined that certain derivative contracts were ineffective hedges for accounting purposes and recorded a charge of $1.2 million and $2.8 million to cost of sales for the three- and nine-month periods ending September 30, 2006, respectively.
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.
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The activity to accumulated other comprehensive income (loss), net of income taxes, relating to current period hedging transactions for the three-month periods ended September 30, 2007 and 2006 follows:
Three Months Ended | ||||||||||||||||
September 30, | ||||||||||||||||
2007 | 2006 | |||||||||||||||
(in thousands) | Gross | Net of tax | Gross | Net of tax | ||||||||||||
Beginning accumulated gain (loss) | $ | (28,684 | ) | $ | (18,644 | ) | $ | (7,034 | ) | $ | (4,578 | ) | ||||
Reclassification into earnings | (31,210 | ) | (20,286 | ) | (34 | ) | (14 | ) | ||||||||
Net change in market value | 37,739 | 24,529 | (8,263 | ) | (5,374 | ) | ||||||||||
Ending accumulated gain (loss) | $ | (22,155 | ) | $ | (14,401 | ) | $ | (15,331 | ) | $ | (9,966 | ) | ||||
The activity to accumulated other comprehensive income (loss), net of income taxes, relating to current period hedging transactions for the nine-month periods ended September 30, 2007 and 2006 follows:
Nine Months Ended | ||||||||||||||||
September 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 | (31,562 | ) | (20,515 | ) | 42,556 | 27,597 | ||||||||||
Net change in market value | 27,617 | 17,950 | (50,001 | ) | (32,454 | ) | ||||||||||
Ending accumulated gain (loss) | $ | (22,155 | ) | $ | (14,401 | ) | $ | (15,331 | ) | $ | (9,966 | ) | ||||
At times, the Company also uses forward derivative instruments to fix or set floor prices for a portion of its nitrogen sales volumes. At September 30, 2007, the Company had open contracts 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 nine-month periods ending September 30, 2007, the Company recognized a loss of $1.0 million and $2.9 million, respectively, on nitrogen forward derivative instruments. For the three- and nine-month periods ending September 30, 2006, there were no gains or losses on nitrogen forward derivative instruments.
5. | Impairment of Beaumont Assets |
On September 28, 2007, Eastman Chemical Company exercised its option to purchase the Company’s Beaumont, Texas assets, including the methanol and ammonia production facilities. The Company anticipates closing the sale on or before January 1, 2009.
As a result of this agreement, the Company determined that the value of its Beaumont property was impaired. The Company recorded a $39.0 million impairment charge for the quarter ended September 30, 2007. The impairment charge reduces Terra’s investment in the Beaumont property to approximately $51 million.
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6. | 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 (See Note 8). 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 other than the reclassification of the unrecognized tax benefit. The Company’s other liabilities include an unrecognized tax benefit of $33.5 million at September 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 September 30, 2007.
7. | Other Liabilities |
Other liabilities consisted of the following:
September 30, | December 31, | September 30, | ||||||||||
(in thousands) | 2007 | 2006 | 2006 | |||||||||
Deferred income taxes | $ | 49,691 | $ | 63,851 | $ | 58,922 | ||||||
Unrecognized tax benefit | 33,560 | — | — | |||||||||
Long-term medical and closed facility reserve | 24,026 | 23,206 | 23,560 | |||||||||
Other | 32,605 | 16,982 | 14,060 | |||||||||
$ | 139,882 | $ | 104,039 | $ | 96,542 | |||||||
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8. | Equity Investments |
Trinidad and United States
Terra’s investments in companies that are accounted for on the equity method of accounting and included in operations 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 Verdigris nitrogen plant. These investments were $156.4 million at September 30, 2007. Terra includes the net earnings of these investments as an element of income from operations as the investees’ operations provide additional capacity to Terra’s operations.
The combined results of operations and financial position of Terra’s equity method investments are summarized below:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Condensed income statement information: | ||||||||||||||||
Net sales | $ | 46,844 | $ | 28,078 | $ | 101,903 | $ | 129,943 | ||||||||
Net income | $ | 13,555 | $ | 4,483 | $ | 23,049 | $ | 32,964 | ||||||||
Terra’s (loss) equity in earnings of unconsolidated affiliates | $ | 5,566 | $ | 809 | $ | 10,379 | $ | 15,830 | ||||||||
September 30, | September 30, | |||||||
(in thousands) | 2007 | 2006 | ||||||
Condensed balance sheet information: | ||||||||
Current assets | $ | 43,130 | $ | 45,964 | ||||
Long-lived assets | 194,310 | 194,549 | ||||||
Total assets | $ | 237,440 | $ | 240,513 | ||||
Current liabilities | $ | 24,193 | $ | 26,473 | ||||
Long-term liabilities | — | — | ||||||
Equity | 213,247 | 214,040 | ||||||
Total liabilities and equity | $ | 237,440 | $ | 240,513 | ||||
The carrying value of these investments at September 30, 2007 was $49.7 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 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 nine-month period ending September 30, 2007, Terra purchased approximately $52.7 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 nine months of 2006, Terra purchased approximately $63.4 million of ammonia from PLNL.
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During the first nine months of 2007 there were $15.5 million in cash distributions from all of the Company’s equity investments. The total distributions from all investments were $34.6 million for the nine-month period ended September 30, 2006.
United Kingdom
On September��14, 2007, the Company completed the formation of GrowHow UK Limited (GrowHow), a joint venture between the Company and Kemira GrowHow Oyj (Kemira). Pursuant to the joint venture agreement, Terra contributed its United Kingdom subsidiary Terra Nitrogen (UK) Limited to the joint venture for a 50% interest. Subsequent to September 14, 2007, the Company has accounted for its investment in GrowHow UK Limited as an equity method investment. The equity investment of $213.2 million was recorded at Terra’s net historical cost basis.
The preliminary financial position of GrowHow UK Limited at September 30, 2007 was:
September 30, | ||||
Condensed balance sheet information: | 2007 | |||
Current assets | $ | 119,082 | ||
Long-lived assets | 179,767 | |||
Total Assets | $ | 298,849 | ||
Current liabilities | $ | 52,527 | ||
Long-term liabilities | 74,697 | |||
Equity | 171,625 | |||
Total liabilities and Equity | $ | 298,849 | ||
These preliminary financial position balances are based on historical cost of the Growhow UK Limited assets contributed into the joint venture.
Pursuant to the joint venture agreement, the Company retained all rights to sales generated through September 30, 2007. GrowHow UK Limited was formed on September 14, 2007. The Company estimated the equity earnings of its equity method investment of $2.2 million for the 2007 third quarter. This estimate was based on the proportionate number of days as an equity investment as compared to the pre-joint venture classification as a wholly-owned and fully consolidated subsidiary.
The Company’s interest in the joint venture is classified as a non operating equity investment. Terra does not include the net earnings of this investment as an element of income from operations since the investees’ operations do not provide additional capacity to Terra, nor are its operations integrated with Terra’s supply chain in North America.
Pursuant to the Joint Venture Contribution Agreement, the Company is eligible to receive a balancing consideration payment from GrowHow UK Limited. The payment is due to the Company in 2011. The Company will receive a minimum of $40 million, and has the right to receive up to $120 million, based on operational efficiencies of GrowHow UK Limited.
The Company has rights to receive a cash refund from GrowHow UK Limited for working capital contributions in excess of amounts specified in the Joint Venture Contribution Agreement. The Company anticipates receiving approximately $20 million during the 2007 fourth quarter.
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There were no distributions from the United Kingdom equity investment for the three- and nine-month period ended September 30, 2007.
9. | Long-term Debt and Capital Lease Obligation |
Long-term debt and capital lease obligations consisted of the following:
September 30, | December 31, | September 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 | 4 | |||||||||
Total long-term debt and capital lease obligations | 330,000 | 331,301 | 331,304 | |||||||||
Less current maturities | — | 1 | 4 | |||||||||
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 the Company’s restricted subsidiaries, 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.
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.
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.
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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 September 30, 2007, the LIBOR rate was 5.13%. 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 September 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 September 30, 2007, the Company had no outstanding revolving credit borrowings and $10.8 million in outstanding letters of credit. The $10.8 million in outstanding letters of credit reduced the Company’s borrowing availability to $189.2 million at September 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.
10. | 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 | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Service cost | $ | 748 | $ | 744 | $ | 2,244 | $ | 2,232 | ||||||||
Interest cost | 6,231 | 5,888 | 18,693 | 17,664 | ||||||||||||
Expected return on plan assets | (6,056 | ) | (5,394 | ) | (18,168 | ) | (16,182 | ) | ||||||||
Amortization of prior service cost | (9 | ) | (7 | ) | (27 | ) | (21 | ) | ||||||||
Amortization of actuarial loss | 1,409 | 1,408 | 4,227 | 4,224 | ||||||||||||
Termination charge | 123 | 291 | 369 | 873 | ||||||||||||
Pension expense | $ | 2,446 | $ | 2,930 | $ | 7,338 | $ | 8,790 | ||||||||
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Cash contributions to the defined benefit pension plans for the three months ended September 30, 2007 and 2006 were $14.7 million and $8.8 million, respectively. Cash contributions to the defined benefit pension plans for the nine months ended September 30, 2007 and 2006 were $29.4 million and $14.1 million, respectively.
During the 2007 third quarter, the Company contributed its UK assets and operations into a joint venture, which included a reduction of the Company’s pension liabilities of approximately $67 million (see Note 8).
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 September 30, 2007 and 2006 totaled $1.4 million and $1.2 million, respectively. Contributions to these plans for the nine-month periods ending September 30, 2007 and 2006 were $4.5 million and $5.3 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.
11. | 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 income (loss). 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.
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The components of accumulated other comprehensive income (loss), net of tax, for the nine months ended September 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 | ||||||||||||
Transfer of UK pension plan to GrowHow UK Limited | — | — | 43,272 | 43,272 | ||||||||||||
Change in foreign translation adjustment | (42,361 | ) | — | — | (42,361 | ) | ||||||||||
Reclassification to earnings | — | (20,515 | ) | — | (20,515 | ) | ||||||||||
Change in fair value of derivatives | — | 17,950 | — | 17,950 | ||||||||||||
Balance September 30, 2007 | $ | (17,843 | ) | $ | (14,401 | ) | $ | (31,236 | ) | $ | (63,480 | ) | ||||
Balance January 1, 2006 | $ | (9,100 | ) | $ | (5,109 | ) | $ | (55,934 | ) | $ | (70,143 | ) | ||||
Change in foreign translation adjustment | 22,638 | — | — | 22,638 | ||||||||||||
Reclassification to earnings | — | 27,597 | — | 27,597 | ||||||||||||
Change in fair value of derivatives | — | (32,454 | ) | — | (32,454 | ) | ||||||||||
Balance September 30, 2006 | $ | 13,538 | $ | (9,966 | ) | $ | (55,934 | ) | $ | (52,362 | ) | |||||
12. | 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 | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
Revenues - Nitrogen Products | $ | 571,518 | $ | 442,612 | $ | 1,739,001 | $ | 1,355,574 | ||||||||
- Methanol | 18,528 | 18,921 | 41,839 | 25,510 | ||||||||||||
- Other | 3,669 | 3,248 | 8,976 | 6,135 | ||||||||||||
Total revenues | $ | 593,715 | $ | 464,781 | $ | 1,789,816 | $ | 1,387,219 | ||||||||
Income (loss) from operations | ||||||||||||||||
- - Nitrogen Products | $ | 123,676 | $ | 20,409 | $ | 315,978 | $ | 25,098 | ||||||||
- Methanol | (27,208 | ) | 9,405 | (25,646 | ) | 3,363 | ||||||||||
- Other | (965 | ) | (426 | ) | (1,385 | ) | (1,017 | ) | ||||||||
Income (loss) from operations | $ | 95,503 | $ | 29,388 | $ | 288,947 | $ | 27,444 | ||||||||
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The following summarizes geographic revenues information (See Note 8):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(in thousands) | 2007 | 2006 | 2007 | 2006 | ||||||||||||
United States | $ | 474,270 | $ | 337,958 | $ | 1,416,068 | $ | 1,048,142 | ||||||||
Canada | 11,353 | 12,874 | 54,639 | 48,755 | ||||||||||||
United Kingdom | 108,092 | 113,949 | 319,109 | 290,322 | ||||||||||||
$ | 593,715 | $ | 464,781 | $ | 1,789,816 | $ | 1,387,219 | |||||||||
13. | 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 physical natural gas supply agreements through March 2009 for approximately 25.9 million MMBtu’s. As of September 30, 2007, these natural gas commitments were $1.4 million above the respective index prices.
14. | 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 | |||||||||
July 2007 | 200 | 25.53 | 5,067 | |||||||||
August 2007 | 2,800 | 22.55 | 63,148 | |||||||||
September 2007 | — | — | — | |||||||||
Total | 4,000 | $ | 21.86 | $ | 87,426 | |||||||
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15. | 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.
16. | Subsequent Events |
On October 9, 2007, GrowHow UK Limited (GrowHow) announced the closure of its Severnside manufacturing facilities. The closure is expected to be completed by the end of January 2008. GrowHow estimates the costs associated with severance to be approximately $26.5 million, which will impact the Company’s equity earnings from GrowHow during the 2007 fourth quarter.
Pursuant to the Joint Venture Contribution Agreement, the Company is responsible for any remediation costs required to prepare the Severnside site for disposal. The Company anticipates remediation costs to be approximately $5.0 million to $10.0 million; however, the Company also has an option to purchase the Severnside land for a nominal amount at any time prior to its sale. The Company anticipates that the proceeds related to the sale of the Severnside land would exceed the total cost of reclamation of the site.
17. | 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 Unsecured Senior Notes due 2017 for September 30, 2007; December 31, 2006; and September 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 nine months ended September 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.
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Consolidating Balance Sheet as of September 30, 2007:
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Cash and cash equivalents | $ | — | $ | 43,545 | $ | 218,604 | $ | 566,133 | $ | (467,804 | ) | $ | 360,478 | |||||||||||
Accounts receivable, net | — | — | 97,989 | 61,916 | — | 159,905 | ||||||||||||||||||
Inventories | — | — | 78,753 | 51,785 | (4,384 | ) | 126,154 | |||||||||||||||||
Other current assets | 2,075 | 537 | 7,516 | 4,811 | (1,872 | ) | 13,067 | |||||||||||||||||
Total current assets | 2,075 | 44,082 | 402,862 | 684,645 | (474,060 | ) | 659,604 | |||||||||||||||||
Property, plant and equipment, net | — | — | 311,535 | 123,569 | (1 | ) | 435,103 | |||||||||||||||||
Equity method investments | — | — | 10,917 | 358,688 | — | 369,605 | ||||||||||||||||||
Intangible assets, other assets and deferred plant turnaround costs | (1,839 | ) | 8,326 | 23,854 | 30,253 | (4,413 | ) | 56,181 | ||||||||||||||||
Investments in and advanced to (from) affiliates | 589,662 | 344,748 | 1,459,277 | — | (2,393,687 | ) | — | |||||||||||||||||
Total assets | $ | 589,898 | $ | 397,156 | $ | 2,208,445 | $ | 1,197,155 | $ | (2,872,161 | ) | $ | 1,520,493 | |||||||||||
Liabilities | ||||||||||||||||||||||||
Accounts payable | $ | 2,298 | $ | (212 | ) | $ | 89,147 | $ | 74,376 | $ | — | $ | 165,609 | |||||||||||
Accrued expenses and other current liabilities | 36,314 | 3,549 | 37,913 | 20,357 | (1,782 | ) | 96,351 | |||||||||||||||||
Total current liabilities | 38,612 | 3,337 | 127,060 | 94,733 | (1,782 | ) | 261,960 | |||||||||||||||||
Long-term debt and capital lease obligations | — | 330,000 | — | — | — | 330,000 | ||||||||||||||||||
Pension and other liabilities | 100,247 | (511 | ) | 14,167 | (27,333 | ) | 91,353 | 177,923 | ||||||||||||||||
Minority interest | — | 20,077 | 82,777 | — | — | 102,854 | ||||||||||||||||||
Total liabilities and minority interest | 138,859 | 352,903 | 224,004 | 67,400 | 89,571 | 872,737 | ||||||||||||||||||
Preferred stock- liquidation value of 120,000 | 115,800 | — | — | — | — | 115,800 | ||||||||||||||||||
Common Shareholders’ Equity | ||||||||||||||||||||||||
Common stock | 142,070 | — | 73 | 32,458 | (32,532 | ) | 142,069 | |||||||||||||||||
Paid-in capital | 617,085 | 150,218 | 1,949,997 | 1,173,391 | (3,273,606 | ) | 617,085 | |||||||||||||||||
Accumulated other comprehensive income (loss) | (37,305 | ) | — | — | 102,236 | (128,411 | ) | (63,480 | ) | |||||||||||||||
Accumulated deficit | (386,611 | ) | (105,965 | ) | 34,371 | (178,330 | ) | 472,817 | (163,718 | ) | ||||||||||||||
Common shareholders’ equity | 335,239 | 44,253 | 1,984,441 | 1,129,755 | (2,961,732 | ) | 531,956 | |||||||||||||||||
Total liabilities and minority interest, preferred stock and common shareholders equity | $ | 589,898 | $ | 397,156 | $ | 2,208,445 | $ | 1,197,155 | $ | (2,872,161 | ) | $ | 1,520,493 | |||||||||||
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Consolidating Statement of Operations for the three months ended September 30, 2007:
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Product revenues | $ | — | $ | — | $ | 297,668 | $ | 292,378 | $ | — | $ | 590,046 | ||||||||||||
Other | — | — | 3,129 | 541 | (1 | ) | 3,669 | |||||||||||||||||
Total revenues | — | — | 300,797 | 292,919 | (1 | ) | 593,715 | |||||||||||||||||
Cost and Expenses | ||||||||||||||||||||||||
Cost of sales | 300 | 261 | 244,160 | 209,265 | (11,107 | ) | 442,879 | |||||||||||||||||
Selling, general and administrative expenses | 564 | (3,056 | ) | 8,150 | 5,371 | 10,906 | 21,935 | |||||||||||||||||
Equity in the (earnings) loss of unconsolidated affiliates | (95,936 | ) | (100,364 | ) | (5,769 | ) | (15,374 | ) | 211,877 | (5,566 | ) | |||||||||||||
Impairment | — | — | 38,964 | — | — | 38,964 | ||||||||||||||||||
Total cost & expenses | (95,072 | ) | (103,159 | ) | 285,505 | 199,262 | 211,676 | 498,212 | ||||||||||||||||
Income (loss) from operations | 95,072 | 103,159 | 15,292 | 93,657 | (211,677 | ) | 95,503 | |||||||||||||||||
Equity in the earnings (loss) of unconsolidated affiliates | — | — | — | 2,202 | — | 2,202 | ||||||||||||||||||
Interest income | — | 1,251 | 1,520 | 2,075 | (137 | ) | 4,709 | |||||||||||||||||
Interest expense | (465 | ) | (6,323 | ) | (2 | ) | (115 | ) | — | (6,905 | ) | |||||||||||||
Income (loss) before income taxes and minority interest | 94,607 | 98,087 | 16,810 | 97,819 | (211,814 | ) | 95,509 | |||||||||||||||||
Income tax (provision) benefit | (24,714 | ) | — | — | (5,271 | ) | — | (29,985 | ) | |||||||||||||||
Minority interest | — | (2,151 | ) | (8,993 | ) | — | — | (11,144 | ) | |||||||||||||||
Net income (loss) | $ | 69,893 | $ | 95,936 | $ | 7,817 | $ | 92,548 | $ | (211,814 | ) | $ | 54,380 | |||||||||||
24
Table of Contents
Consolidating Statement of Operations for the nine months ended September 30, 2007:
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Product revenues | $ | — | $ | — | $ | 859,081 | $ | 926,224 | $ | (4,465 | ) | $ | 1,780,840 | |||||||||||
Other | — | — | 7,279 | 1,697 | — | 8,976 | ||||||||||||||||||
Total revenues | — | — | 866,360 | 927,921 | (4,465 | ) | 1,789,816 | |||||||||||||||||
Cost and Expenses | ||||||||||||||||||||||||
Cost of sales | 600 | 2,147 | 747,798 | 696,857 | (42,304 | ) | 1,405,098 | |||||||||||||||||
Selling, general and administrative expenses | 1,516 | (8,780 | ) | 16,267 | 23,176 | 35,007 | 67,186 | |||||||||||||||||
Equity in the (earnings) loss of unconsolidated affiliates | (223,428 | ) | (280,562 | ) | (10,857 | ) | (26,055 | ) | 530,523 | (10,379 | ) | |||||||||||||
Impairment | — | — | 38,964 | — | — | 38,964 | ||||||||||||||||||
Total cost & expenses | (221,312 | ) | (287,195 | ) | 792,172 | 693,978 | 523,226 | 1,500,869 | ||||||||||||||||
Income (loss) from operations | 221,312 | 287,195 | 74,188 | 233,943 | (527,691 | ) | 288,947 | |||||||||||||||||
Equity in the earnings (loss) of unconsolidated affiliates | — | — | — | 2,202 | — | 2,202 | ||||||||||||||||||
Interest income | — | 2,521 | 5,077 | 3,603 | (123 | ) | 11,078 | |||||||||||||||||
Interest expense | (1,395 | ) | (20,944 | ) | (5 | ) | (341 | ) | — | (22,685 | ) | |||||||||||||
Loss on early retirement of debt | — | (38,836 | ) | — | — | — | (38,836 | ) | ||||||||||||||||
Income (loss) before income taxes and minority interest | 219,917 | 229,936 | 79,260 | 239,407 | (527,814 | ) | 240,706 | |||||||||||||||||
Income tax (provision) benefit | (63,848 | ) | — | — | (10,894 | ) | — | (74,742 | ) | |||||||||||||||
Minority interest | — | (6,508 | ) | (27,212 | ) | — | — | (33,720 | ) | |||||||||||||||
Net income (loss) | $ | 156,069 | $ | 223,428 | $ | 52,048 | $ | 228,513 | $ | (527,814 | ) | $ | 132,244 | |||||||||||
25
Table of Contents
Consolidating Statement of Cash Flows for the nine months ended September 30, 2007:
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Operating Activities | ||||||||||||||||||||||||
Net income (loss) | $ | 156,069 | $ | 223,428 | $ | 52,048 | $ | 228,513 | $ | (527,814 | ) | $ | 132,244 | |||||||||||
Adjustments to reconcile net income (loss) to net cash flows from operating activities: | ||||||||||||||||||||||||
Depreciation and amortization | — | — | 47,594 | 33,463 | — | 81,057 | ||||||||||||||||||
Impairment of assets | — | — | 38,964 | — | — | 38,964 | ||||||||||||||||||
Deferred income taxes | 48,981 | — | — | — | — | 48,981 | ||||||||||||||||||
Minority interest in earnings | — | 1,575 | 32,145 | — | — | 33,720 | ||||||||||||||||||
Distributions in excess of equity earnings | 168,715 | 2,730 | 5,121 | 427,083 | (598,528 | ) | 5,121 | |||||||||||||||||
Non-cash loss on derivatives | 176 | — | — | — | — | 176 | ||||||||||||||||||
Share-based compensation | 16,839 | — | — | — | (1 | ) | 16,838 | |||||||||||||||||
Amortization of intangible and other assets | — | — | 6,655 | — | — | 6,655 | ||||||||||||||||||
Non-cash loss on early retirement of debt | — | 4,662 | — | — | — | 4,662 | ||||||||||||||||||
Change in operating assets and liabilities | (80,018 | ) | (1,323 | ) | (4,506 | ) | 110,724 | (9,356 | ) | 15,521 | ||||||||||||||
Net Cash Flows from Operating Activities | 310,762 | 231,072 | 178,021 | 799,783 | (1,135,699 | ) | 383,939 | |||||||||||||||||
Investing Activities | ||||||||||||||||||||||||
Purchase of property, plant and equipment | — | — | (10,917 | ) | (12,207 | ) | — | (23,124 | ) | |||||||||||||||
Cash retained by GrowHow UK Limited | — | — | — | (17,249 | ) | — | (17,249 | ) | ||||||||||||||||
Plant turnaround expenditures | — | — | (10,396 | ) | (25,589 | ) | — | (35,985 | ) | |||||||||||||||
Equity earnings | — | — | — | (2,202 | ) | — | (2,202 | ) | ||||||||||||||||
Net Cash Flows from Investing Activities | — | — | (21,313 | ) | (57,247 | ) | — | (78,560 | ) | |||||||||||||||
Financing Activities | ||||||||||||||||||||||||
Issuance of debt | — | 330,000 | — | — | — | 330,000 | ||||||||||||||||||
Payment on debt | — | (331,300 | ) | (1 | ) | — | 1 | (331,300 | ) | |||||||||||||||
Payments for debt issuance costs | — | (6,403 | ) | — | — | — | (6,403 | ) | ||||||||||||||||
Common stock issuances and vestings | 89 | — | — | — | — | 89 | ||||||||||||||||||
Preferred share dividends paid | (3,825 | ) | — | — | — | — | (3,825 | ) | ||||||||||||||||
Repurchases of TRA stock | (87,426 | ) | — | — | — | — | (87,426 | ) | ||||||||||||||||
Distributions to minority interest | — | — | (25,554 | ) | — | — | (25,554 | ) | ||||||||||||||||
Change in investments and advances from (to) affiliates | (219,603 | ) | (280,562 | ) | 95,027 | (244,769 | ) | 649,907 | — | |||||||||||||||
Net Cash Flows from Financing Activities | (310,762 | ) | (288,265 | ) | 69,472 | (244,769 | ) | 649,908 | (124,419 | ) | ||||||||||||||
Effect of Foreign Exchange Rate on Cash | — | — | — | 501 | — | 501 | ||||||||||||||||||
Increase (decrease) in Cash and Cash Equivalents | (3 | ) | (57,193 | ) | 226,180 | 498,268 | (485,791 | ) | 181,461 | |||||||||||||||
Cash and Cash Equivalents at Beginning of Year | 1 | 100,736 | — | 78,282 | (2 | ) | 179,017 | |||||||||||||||||
Cash and Cash Equivalents at End of Period | $ | (2 | ) | $ | 43,543 | $ | 226,180 | $ | 576,550 | $ | (485,793 | ) | $ | 360,478 | ||||||||||
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Table of Contents
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 | |||||||||||
27
Table of Contents
Consolidating Balance Sheet as of September 30, 2006:
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 1 | $ | (17,081 | ) | $ | 89,612 | $ | 49,639 | $ | (1 | ) | $ | 122,170 | ||||||||||
Accounts receivable, net | — | — | 89,173 | 104,166 | — | 193,339 | ||||||||||||||||||
Inventories | — | — | 62,019 | 98,172 | — | 160,191 | ||||||||||||||||||
Other current assets | (857 | ) | 10,863 | 7,461 | 5,368 | 3,323 | 26,158 | |||||||||||||||||
Total current assets | (856 | ) | (6,218 | ) | 248,265 | 257,345 | 3,322 | 501,858 | ||||||||||||||||
Property, plant and equipment, net | — | — | 389,524 | 333,429 | (1 | ) | 722,952 | |||||||||||||||||
Equity method investments | — | — | 7,193 | 154,262 | — | 161,455 | ||||||||||||||||||
Intangible assets, other assets and deferred plant turnaround costs | — | 8,314 | 23,898 | 41,644 | — | 73,856 | ||||||||||||||||||
Investments in and advanced to (from) affiliates | 727,320 | 551,576 | 1,453,292 | 437,194 | (3,169,382 | ) | — | |||||||||||||||||
Total assets | $ | 726,464 | $ | 553,672 | $ | 2,122,172 | $ | 1,223,874 | $ | (3,166,061 | ) | $ | 1,460,121 | |||||||||||
Liabilities | ||||||||||||||||||||||||
Debt due within one year | $ | — | $ | — | $ | 4 | $ | — | $ | — | $ | 4 | ||||||||||||
Accounts payable | 107 | 900 | 36,015 | 78,712 | — | 115,734 | ||||||||||||||||||
Accrued expenses and other current liabilities | 7,904 | 100,512 | 48,556 | 28,237 | (76,290 | ) | 108,919 | |||||||||||||||||
Total current liabilities | 8,011 | 101,412 | 84,575 | 106,949 | (76,290 | ) | 224,657 | |||||||||||||||||
Long-term debt and capital lease obligations | — | 331,300 | — | — | — | 331,300 | ||||||||||||||||||
Deferred income taxes | — | — | 18,608 | 40,314 | — | 58,922 | ||||||||||||||||||
Pension and other liabilities | 140,659 | (509 | ) | 9,127 | 1,071 | — | 150,348 | |||||||||||||||||
Minority interest | — | 18,564 | 76,450 | — | — | 95,014 | ||||||||||||||||||
Total liabilities and minority interest | 148,670 | 450,767 | 188,760 | 148,334 | (76,290 | ) | 860,241 | |||||||||||||||||
Preferred stock | 115,800 | — | — | — | — | 115,800 | ||||||||||||||||||
Common Shareholders’ Equity | ||||||||||||||||||||||||
Common stock | 144,968 | — | 73 | 49,709 | (49,782 | ) | 144,968 | |||||||||||||||||
Paid-in capital | 693,944 | 150,218 | 2,026,502 | 1,265,009 | (3,441,729 | ) | 693,944 | |||||||||||||||||
Accumulated other comprehensive income (loss) compensation | (63,636 | ) | — | — | 30,080 | (18,806 | ) | (52,362 | ) | |||||||||||||||
Retained earnings (deficit) | (313,282 | ) | (47,313 | ) | (93,163 | ) | (269,258 | ) | 420,546 | (302,470 | ) | |||||||||||||
Common shareholders’ equity | 461,994 | 102,905 | 1,933,412 | 1,075,540 | (3,089,771 | ) | 484,080 | |||||||||||||||||
Total liabilities and minority interest, preferred stock and common shareholders equity | $ | 726,464 | $ | 553,672 | $ | 2,122,172 | $ | 1,223,874 | $ | (3,166,061 | ) | $ | 1,460,121 | |||||||||||
28
Table of Contents
Consolidating Statement of Operations for the three months ended September 30, 2006:
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Product revenues | $ | — | $ | — | $ | 375,329 | $ | 86,204 | $ | — | $ | 461,533 | ||||||||||||
Other income | — | — | 747 | 2,500 | 1 | 3,248 | ||||||||||||||||||
Total revenues | — | — | 376,076 | 88,704 | 1 | 464,781 | ||||||||||||||||||
Cost and Expenses | ||||||||||||||||||||||||
Cost of sales | — | — | 370,874 | 65,206 | (13,557 | ) | 422,523 | |||||||||||||||||
Selling, general and administrative expenses | 616 | (2,286 | ) | (6,206 | ) | 7,996 | 13,559 | 13,679 | ||||||||||||||||
Equity in the (earnings) loss of subsidiaries | 8,658 | (26,829 | ) | (16,848 | ) | 14,949 | 19,261 | (809 | ) | |||||||||||||||
Total cost and expenses | 9,274 | (29,115 | ) | 347,820 | 88,151 | 19,263 | 435,393 | |||||||||||||||||
Income (loss) from operations | (9,274 | ) | 29,115 | 28,256 | 553 | (19,262 | ) | 29,388 | ||||||||||||||||
Interest income | — | (1,274 | ) | 5,194 | (3,576 | ) | 1,747 | 2,091 | ||||||||||||||||
Interest expense | (465 | ) | (10,024 | ) | (3,357 | ) | 2,809 | (749 | ) | (11,786 | ) | |||||||||||||
Income (loss) before income taxes and minority interest | (9,739 | ) | 17,817 | 30,093 | (214 | ) | (18,264 | ) | 19,693 | |||||||||||||||
Income tax provision | (5,657 | ) | — | — | (343 | ) | — | (6,000 | ) | |||||||||||||||
Minority interest | — | (647 | ) | (2,706 | ) | — | 1 | (3,352 | ) | |||||||||||||||
Net (loss) income | $ | (15,396 | ) | $ | 17,170 | $ | 27,387 | $ | (557 | ) | $ | (18,263 | ) | $ | 10,341 | |||||||||
Consolidating Statement of Operations for the nine months ended September 30, 2006:
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Revenues | ||||||||||||||||||||||||
Product revenues | $ | — | $ | — | $ | 645,275 | $ | 735,809 | $ | — | $ | 1,381,084 | ||||||||||||
Other income | — | — | 4,328 | 1,807 | — | 6,135 | ||||||||||||||||||
Total revenues | — | — | 649,603 | 737,616 | — | 1,387,219 | ||||||||||||||||||
Cost and Expenses | ||||||||||||||||||||||||
Cost of sales | — | — | 675,913 | 701,056 | (39,759 | ) | 1,337,210 | |||||||||||||||||
Selling, general and administrative expenses | 1,623 | (6,848 | ) | (8,317 | ) | 12,177 | 39,760 | 38,395 | ||||||||||||||||
Equity in the (earnings) loss of subsidiaries | 27,336 | (66,108 | ) | (16,848 | ) | (43,459 | ) | 83,249 | (15,830 | ) | ||||||||||||||
Total cost & expenses | 28,959 | (72,956 | ) | 650,748 | 669,774 | 83,250 | 1,359,775 | |||||||||||||||||
Income (loss) from operations | (28,959 | ) | 72,956 | (1,145 | ) | 67,842 | (83,250 | ) | 27,444 | |||||||||||||||
Interest income | — | (224 | ) | 5,194 | (1,218 | ) | 1,747 | 5,499 | ||||||||||||||||
Interest expense | (1,395 | ) | (33,610 | ) | (6 | ) | (3,745 | ) | 3,416 | (35,340 | ) | |||||||||||||
Income (loss) before income taxes and minority interest | (30,354 | ) | 39,122 | 4,043 | 62,879 | (78,087 | ) | (2,397 | ) | |||||||||||||||
Income tax benefit | (2,835 | ) | — | — | 4,835 | 2 | 2,002 | |||||||||||||||||
Minority interest | — | (1,351 | ) | (5,649 | ) | — | — | (7,000 | ) | |||||||||||||||
Net (loss) income | $ | (33,189 | ) | $ | 37,771 | $ | (1,606 | ) | $ | 67,714 | $ | (78,085 | ) | $ | (7,395 | ) | ||||||||
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Consolidating Statement of Cash Flows for the nine months ended September 30, 2006:
Guarantor | Non-Guarantor | |||||||||||||||||||||||
(in thousands) | Parent | TCAPI | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||
Operating Activities | ||||||||||||||||||||||||
Net income (loss) | $ | (33,189 | ) | $ | 37,771 | $ | (1,606 | ) | $ | 67,714 | $ | (78,085 | ) | $ | (7,395 | ) | ||||||||
Adjustments to reconcile net income (loss) to net cash flows from operating activities: | ||||||||||||||||||||||||
Depreciation and amortization | — | 2,196 | 44,488 | 40,302 | 1 | 86,987 | ||||||||||||||||||
Deferred income taxes | — | — | 18,608 | (20,610 | ) | — | (2,002 | ) | ||||||||||||||||
Minority interest in earnings | — | 515 | 6,485 | — | — | 7,000 | ||||||||||||||||||
Equity in undistributed earnings | (27,336 | ) | 66,108 | 16,848 | 43,459 | (89,944 | ) | 9,135 | ||||||||||||||||
Non-cash loss on derivatives | — | — | 1,703 | 1,072 | — | 2,775 | ||||||||||||||||||
Share-based compensation | 4,285 | — | — | — | — | 4,285 | ||||||||||||||||||
Change in operating assets and liabilities | 90 | 11,674 | (71,167 | ) | 48,279 | 13,613 | 2,489 | |||||||||||||||||
Net Cash Flows from Operating Activities | (56,150 | ) | 118,264 | 15,359 | 180,216 | (154,415 | ) | 103,274 | ||||||||||||||||
Investing Activities | ||||||||||||||||||||||||
Purchase of property, plant and equipment | — | — | (25,549 | ) | (15,236 | ) | — | (40,785 | ) | |||||||||||||||
Plant turnaround expenditures | — | — | (13,458 | ) | (18,529 | ) | — | (31,987 | ) | |||||||||||||||
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 | — | — | 7,544 | 2,122 | — | 9,666 | ||||||||||||||||||
Net Cash Flows from Investing Activities | — | — | (22,868 | ) | (21,983 | ) | — | (44,851 | ) | |||||||||||||||
Financing Activities | ||||||||||||||||||||||||
Principal payments under borrowing arrangements | — | — | (22 | ) | (12 | ) | — | (34 | ) | |||||||||||||||
Preferred share dividends paid | (3,825 | ) | — | — | — | — | (3,825 | ) | ||||||||||||||||
Proceeds from exercise of stock options | 363 | — | — | — | — | 363 | ||||||||||||||||||
Payments under share repurchase program | (18,796 | ) | — | — | — | — | (18,796 | ) | ||||||||||||||||
Distributions to minority interests | — | — | (4,244 | ) | — | — | (4,244 | ) | ||||||||||||||||
Change in investments and advances from (to) affiliates | 78,408 | (146,853 | ) | 34,015 | (119,985 | ) | 154,415 | — | ||||||||||||||||
Net Cash Flows from Financing Activities | 56,150 | (146,853 | ) | 29,749 | (119,997 | ) | 154,415 | (26,536 | ) | |||||||||||||||
Effect of Foreign Exchange Rate on Cash | — | — | — | 3,917 | — | 3,917 | ||||||||||||||||||
Increase (decrease) in Cash and Cash Equivalents | — | (28,589 | ) | 22,240 | 42,153 | — | 35,804 | |||||||||||||||||
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 Year | $ | 1 | $ | (17,081 | ) | $ | 89,612 | $ | 49,639 | $ | (1 | ) | $ | 122,170 | ||||||||||
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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 (U.K.).
During the 2007 third quarter, the Company contributed its U.K. operations into GrowHow U.K. Limited (GrowHow), a U.K. joint venture with Kemira GrowHow Oyj (Kemira). The Company received a 50% interest in GrowHow U.K. Limited. The Company accounts for GrowHow U.K. Limited as an unconsolidated equity investment.
In July, the Company entered into an option agreement with Eastman Chemical Company (Eastman) to sell the Company’s Beaumont, Texas facility. During the 2007 third quarter, Eastman exercised its option to purchase the Beaumont facility. The sale of the Beaumont facility is scheduled to close on or before January 1, 2009.
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.
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RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2007 COMPARED WITH
QUARTER ENDED SEPTEMBER 30, 2006
QUARTER ENDED SEPTEMBER 30, 2006
Consolidated Results
Terra reported net income of $54.4 million for the 2007 third quarter compared with 2006 net income of $10.3 million. The net income increase is primarily due to higher sales volume and prices, offset by a $39.0 million impairment of assets charge related to the Beaumont, Texas facility. The 2006 third quarter results include approximately $8.2 million of repairs and additional cost for purchased ammonia due to damage from an explosion at the Billingham, England ammonia plant.
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 September 30, 2007 and 2006 follow:
(in thousands) | 2007 | 2006 | ||||||
REVENUES: | ||||||||
Nitrogen Products | $ | 571,518 | $ | 442,612 | ||||
Methanol | 18,528 | 18,921 | ||||||
Other | 3,669 | 3,248 | ||||||
$ | 593,715 | $ | 464,781 | |||||
INCOME (LOSS) FROM OPERATIONS: | ||||||||
Nitrogen Products | $ | 123,676 | $ | 20,409 | ||||
Methanol | (27,208 | ) | 9,405 | |||||
Other | (965 | ) | (426 | ) | ||||
$ | 95,503 | $ | 29,388 | |||||
Nitrogen Products
Volumes and prices for the three-month periods ended September 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 | 477 | $ | 304 | 466 | $ | 281 | ||||||||||
Nitrogen solutions | 1,113 | $ | 208 | 1,031 | $ | 129 | ||||||||||
Urea | 24 | $ | 298 | 32 | $ | 236 | ||||||||||
Ammonium nitrate | 413 | $ | 250 | 323 | $ | 226 |
* | After deducting outbound freight costs |
Nitrogen products segment revenues for the quarter ended September 30, 2007 increased $128.9 million, or 29%, compared with the same 2006 quarter primarily due to higher prices for all major products. Sales volumes also improved as compared to the quarter ended September 30, 2006, with nitrogen solutions and ammonium nitrate increasing 8% and 28%, respectively. The volume and price increases are primarily due to increased and earlier demand for nitrogen products to support expected 2008 corn and wheat planting intentions.
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Operating income for the 2007 third quarter was $123.7 million, which was $103.3 million more than the $20.4 million income in the 2006 third quarter. Higher third quarter sales volumes and prices increased operating income approximately $12.1 million and $107.9 million, respectively. These improvements were offset by a $12.3 million increase in cost primarily related to higher North American natural gas. Third quarter equity earnings increased from 2006 due to improved operations at the Point Lisas Trinidad nitrogen facility. Selling, general and administrative expense for the 2007 third quarter increased $8.2 million from the 2006 third quarter, primarily due to the annual and long term compensation and incentive plans. Included in the 2006 third quarter results was approximately $8.2 million of repairs and additional cost for purchased ammonia due to damage from an explosion at the Billingham, England ammonia plant.
Methanol
For the three months ended September 30, 2007 and 2006, the Methanol segment had revenues of $18.5 million and $18.9 million, respectively. In the 2007 third quarter, approximately 6.2 million gallons of methanol were sold at the Woodward, Oklahoma facility compared to approximately 6.8 million gallons of methanol sold in the 2006 third quarter. Third quarter 2007 and 2006 revenues included $12.0 million and $11.6 million, respectively, of profit sharing revenue under the Methanex supply agreement, which expires at the end of 2008. The supply agreement limits the margin to $12.0 million on an annual basis.
The methanol segment had an operating loss of $27.2 million for the 2007 third quarter compared to operating income of $9.4 million for the 2006 third quarter. The operating loss was due primarily to an impairment charge of $39.0 million related to the Company’s Beaumont, Texas facility.
Interest Expense
Interest expense decreased approximately $4.9 million to $6.9 million during the 2007 third quarter as compared to $11.8 million for the 2006 third quarter. The decrease in interest expense was due to the refinancing of debt in the first quarter of 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 third 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% and 37% in the quarters ended September 30, 2007 and 2006, respectively, which approximated statutory rates.
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RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED WITH
NINE MONTHS ENDED SEPTEMBER 30, 2006
NINE MONTHS ENDED SEPTEMBER 30, 2006
Consolidated Results
Terra reported net income of $132.2 million for the 2007 first nine months compared with a 2006 net loss of $7.4 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 and the $39.0 million impairment of assets charge related to the Beaumont, Texas facility. The 2006 net loss was primarily related to lower sales volumes as a result of high natural gas costs during 2006 and approximately $15.6 million of plant outages and repair from the U.K. operations resulting from an explosion during the 2006 second quarter.
Total revenues and income (loss) from operations by segment for the nine-month period ended September 30, 2007 and 2006 follow:
(in thousands) | 2007 | 2006 | ||||||
REVENUES: | ||||||||
Nitrogen Products | $ | 1,739,001 | $ | 1,355,574 | ||||
Methanol | 41,839 | 25,510 | ||||||
Other | 8,976 | 6,135 | ||||||
$ | 1,789,816 | $ | 1,387,219 | |||||
INCOME (LOSS) FROM OPERATIONS: | ||||||||
Nitrogen Products | $ | 315,978 | $ | 25,098 | ||||
Methanol | (25,646 | ) | 3,363 | |||||
Other | (1,385 | ) | (1,017 | ) | ||||
$ | 288,947 | $ | 27,444 | |||||
Nitrogen Products
Volumes and prices for the nine-month periods ended September 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 | 1,465 | $ | 328 | 1,417 | $ | 320 | ||||||||||
Nitrogen solutions | 3,497 | $ | 191 | 2,799 | $ | 143 | ||||||||||
Urea | 88 | $ | 305 | 116 | $ | 267 | ||||||||||
Ammonium nitrate | 1,164 | $ | 244 | 879 | $ | 226 |
* | After deducting outbound freight costs |
Nitrogen products segment revenues for the nine months ended September 30, 2007 increased $383.4 million, or 28%, compared with the same 2006 first nine months primarily due to higher sales volumes for nitrogen solutions and ammonium nitrate, and higher prices for all products. 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.
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The operating income for the 2007 first nine months was $316.0 million and was $290.9 million more than the $25.1 million operating income in the 2006 first nine months. Higher 2007 sales volumes, selling prices and cost reductions contributed to operating income increases of $63.6 million, $185.6 million and $71.0 million, respectively. Cost reductions were principally related to lower natural gas costs and higher production rates than during 2006. In addition, the Company incurred approximately $15.6 million of repairs and additional costs for purchased ammonia due to damage from the explosion at the Billingham, England ammonia plant in 2006. These improvements were offset by a $5.4 million decrease in equity earnings. First nine-month 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 increased $28.8 million for the 2007 first nine months increased from 2006, mainly due to the annual and long term compensation and incentive plans.
Methanol
For the nine months ended September 30, 2007 and 2006, the Methanol segment had revenues of $41.8 million and $25.5 million, respectively. In the 2007 first nine months, approximately 24.8 million gallons of methanol were sold at the Woodward, Oklahoma facility compared to approximately 11.6 million gallons of methanol sold in the 2006 first nine months. Methanol revenues in 2007 and 2006 each included $12.0 of profit sharing revenue under the Methanex supply agreement.
The methanol segment had an operating loss of $25.6 million for the 2007 first nine months compared to operating income of $3.4 million for the 2006 first nine months. The decrease in operating income is due primarily to an impairment charge of $39.0 million related to the Beaumont, Texas facility.
Interest Expense
Interest expense decreased approximately $12.6 million to $22.7 million during the 2007 first nine months as compared to $35.3 million for the prior year period due primarily to the refinancing of debt in January of 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 first nine months 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% and 21% in the first nine months ended September 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.
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LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $360.5 million at September 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 principal 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 nine months of 2007 was $381.7 million, composed of $366.2 million of cash provided from operating activities and $15.5 million from working capital changes. First nine-month changes to current assets and liabilities represented seasonal fluctuations to working capital balances. The primary working capital needs were to fund $33.3 million of accounts payable offset by $8.2 million of customer prepayments, and a reduction of $49.5 million of inventory, for seasonal customer orders.
During the first nine months, Terra funded plant and equipment purchases of $23.1 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 $36.0 million of plant turnaround costs in the first nine months of 2007. Approximately $17.2 million of cash was retained by the creation of the GrowHow U.K. Limited joint venture during the 2007 third quarter.
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 Publicly | 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 | |||||||||||
July 2007 | 200,000 | $ | 25.53 | 3,875,100 | 5,641,717 | |||||||||||
August 2007 | 2,800,000 | $ | 22.55 | 6,675,100 | 2,841,717 | |||||||||||
September��2007 | — | $ | — | 6,675,100 | 2,841,717 |
The Company paid dividends on the outstanding preferred stock of $1.3 million and $3.8 million for the three- and nine-month periods, respectively, ending September 30, 2007 and 2006.
Distributions paid to the minority TNCLP common unit holders in the first nine months of 2007 and 2006 were $25.6 million and $4.2 million, respectively. TNCLP distributions are based on “Available Cash” as defined in the Partnership Agreement.
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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 future senior obligations of such guarantors. Offering proceeds were used to repurchase the Company’s 12.875% Senior 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 $10.8 million in outstanding letters of credit, resulting in remaining borrowing availability of approximately $189.2 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.
The significant changes to the Company’s business were the refinancing of debt during the 2007 first quarter and the contribution of the Terra Nitrogen U.K. Limited into the GrowHow UK Limited joint venture. These transactions did not materially change the Company’s contractual obligations or off-balance sheet arrangements 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.
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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. There were no material changes in the Company’s use of financial instruments during the quarter ended September 30, 2007.
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 September 30, 2007 to cover approximately 30% 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.
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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. 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 third 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
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Company Purchases of Equity Securities
The following table provides information about share 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 | |||||||||||
July 2007 | 200,000 | $ | 25.53 | 3,875,100 | 5,641,717 | |||||||||||
August 2007 | 2,800,000 | $ | 22.55 | 6,675,100 | 2,841,717 | |||||||||||
September 2007 | — | $ | — | 6,675,100 | 2,841,717 |
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 third quarter, the Company repurchased 3,000,000 shares at an average price of $22.70. The remaining number of shares that the Company is authorized to repurchase is 2,841,717 at September 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.
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ITEM 6. EXHIBITS
(a) Exhibits
Exhibit 10.1 | Joint Venture Contribution Agreement among GrowHow UK Limited and Terra International (Canada), Inc. and Kemira GrowHow Oyj and Terra Industries Inc. dated September 14, 2007. | |
Exhibit 10.2 | Shareholders’ Agreement among Kemira GrowHow Oyj and Terra International (Canada), Inc. and Terra Industries Inc. and GrowHow UK Limited dated September 14, 2007. | |
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 |
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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: October 25, 2007 | /s/ Daniel D. Greenwell | |||
Daniel D. Greenwell | ||||
Senior Vice President and Chief Financial Officer and a duly authorized signatory |
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EXHIBIT INDEX
Exhibit No. | Description | |
Exhibit 10.1 | Joint Venture Contribution Agreement among GrowHow UK Limited and Terra International (Canada), Inc. and Kemira GrowHow Oyj and Terra Industries Inc. dated September 14, 2007. | |
Exhibit 10.2 | Shareholders’ Agreement among Kemira GrowHow Oyj and Terra International (Canada), Inc. and Terra Industries Inc. and GrowHow UK Limited dated September 14, 2007. | |
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 |
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