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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from____to____
Commission file number: 1-8520
TERRA INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1145429
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Terra Centre
P.O. Box 6000
600 Fourth Street 51102-6000
Sioux City, Iowa (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (712) 277-1340
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of October 31, 2001, the following shares of the registrant's stock were
outstanding:
Common Shares, without par value 76,440,540 shares
================================================================================
PART I. FINANCIAL INFORMATION
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands)
(unaudited)
September 30, December 31, September 30,
2001 2000 2000
-------------- --------------- -------------
ASSETS
Cash and short-term investments $ 44,132 $ 101,425 $ 101,916
Accounts receivable, less allowance for
doubtful accounts of $879, $889, $443 97,947 107,299 119,184
Inventories 123,627 101,526 92,865
Other current assets 32,414 17,448 21,633
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Total current assets 298,120 327,698 335,598
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Equity and other investments 2,412 1,865 2,370
Property, plant and equipment, net 849,188 902,801 919,258
Excess of cost over net assets of acquired businesses 211,098 231,372 235,924
Other assets 37,547 48,816 54,466
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Total assets $ 1,398,365 $ 1,512,552 $ 1,547,616
====================================================================================================================
LIABILITIES
Debt due within one year $ 5,108 $ 5,546 $ 5,968
Accounts payable 73,742 62,820 89,851
Accrued and other liabilities 53,435 60,324 54,707
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Total current liabilities 132,285 128,690 150,526
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Long-term debt 453,921 467,808 469,101
Deferred income taxes 121,537 156,475 163,323
Other liabilities 50,115 43,508 50,197
Minority interest 98,947 105,274 108,629
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Total liabilities 856,805 901,755 941,776
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STOCKHOLDERS' EQUITY
Capital stock
Common Shares, authorized 133,500 shares;
outstanding 76,441, 75,885 and 75,989 shares 128,363 128,283 127,890
Paid-in capital 554,850 554,750 552,903
Accumulated other comprehensive loss (66,571) (48,115) (46,763)
Retained deficit (75,082) (24,121) (28,190)
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Total stockholders' equity 541,560 610,797 605,840
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Total liabilities and stockholders' equity $ 1,398,365 $ 1,512,552 $ 1,547,616
====================================================================================================================
See Accompanying Notes to the Consolidated Financial Statements. 2
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
-------------- ------------- -------------- -------------
REVENUES
Net sales $ 237,224 $ 263,175 $ 802,076 $ 785,169
Other income, net 481 1,934 1,001 5,960
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Total revenues 237,705 265,109 803,077 791,129
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COSTS AND EXPENSES
Cost of sales 255,783 228,690 803,611 727,685
Selling, general and administrative expense 8,394 9,410 26,254 34,323
Product claim costs -- -- 14,023 --
Equity in earnings of unconsolidated
affiliates (264) (248) (547) (548)
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263,913 237,852 843,341 761,460
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Income (loss) from operations (26,208) 27,257 (40,264) 29,669
Insurance settlement costs -- (879) -- (5,529)
Interest income 977 1,231 2,852 2,090
Interest expense (12,034) (12,981) (37,857) (38,684)
Minority interest 2,785 (985) 2,468 (5,360)
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Income (loss) before income taxes (34,480) 13,643 (72,801) (17,814)
Income tax provision (benefit) (10,344) 7,447 (21,840) (3,563)
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NET INCOME (LOSS) $ (24,136) $ 6,196 $ (50,961) $ (14,251)
========================================================================================================================
Basic and diluted income (loss) per share $ (0.32) $ .08 $ (0.68) $ (0.19)
========================================================================================================================
Basic weighted average shares outstanding 75,175 74,704 75,033 74,761
Diluted weighted average shares outstanding 75,175 75,995 75,033 74,761
========================================================================================================================
See Accompanying Notes to the Consolidated Financial Statements. 3
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
---------------------------------------
2001 2000
------------- -------------
OPERATING ACTIVITIES
Net loss from operations $ (50,961) $ (14,251)
Adjustments to reconcile net loss from
operations to net cash flows from operating activities:
Depreciation and amortization 84,870 86,147
Deferred income taxes (31,080) 13,576
Minority interest in earnings (2,470) 5,359
Changes in current assets and liabilities:
Accounts receivable 8,221 (20,704)
Inventories (23,652) 37,461
Other current assets (16,388) 9,982
Accounts payable 11,847 2,439
Accrued and other liabilities (11,550) 7,705
Other 9,022 (548)
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Net cash flows from operating activities (22,141) 127,166
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INVESTING ACTIVITIES
Purchase of property, plant and equipment (11,136) (11,019)
Other items (5,887) (5,932)
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Net cash flows from investing activities (17,023) (16,951)
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FINANCING ACTIVITIES
Net changes in short-term borrowings -- (6,000)
Principal payments on long-term debt (14,325) (5,392)
Stock issuance-net 180 --
Repurchases of TNCLP common units (1,671) --
Distributions to minority interests (2,028) --
Deferred financing costs -- (6,697)
Other -- --
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Net cash flows from financing activities (17,844) (18,089)
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Effect of exchange rate changes on cash (285) --
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Increase (decrease) to cash and short-term investments (57,293) 92,126
Cash and short-term investments at beginning of period 101,425 9,790
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Cash and short-term investments at end of period $ 44,132 $ 101,916
===================================================================================================================
See Accompanying Notes to the Consolidated Financial Statements. 4
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED September 30, 2001 AND 2000
(in thousands)
(unaudited)
Accumulated
Other
Capital Paid-In Comprehensive Retained
Stock Capital Loss Deficit Total
-------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2001 $ 128,283 $ 554,750 $ (48,115) $ (24,121) $ 610,797
Comprehensive loss:
Net loss -- -- -- (50,961) (50,961)
Foreign currency
translation adjustment -- -- (12,343) -- (12,343)
Cumulative effect of change in
accounting for derivative
financial instruments -- -- 31,400 -- 31,400
Income tax effect of change
in accounting -- -- (10,990) -- (10,990)
Change in fair value of derivatives,
net of income taxes -- -- (26,523) -- (26,523)
--------
Comprehensive loss (69,417)
Exercise of stock options 80 100 -- -- 180
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Balance at September 30, 2001 $ 128,363 $ 554,850 $ (66,571) $ (75,082) $ 541,560
==========================================================================================================================
Accumulated
Other
Capital Paid-In Comprehensive Retained
Stock Capital Loss Deficit Total
--------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2000 $ 127,890 $ 552,903 $ (9,852) $ (13,939) $ 657,002
Comprehensive loss:
Net loss -- -- -- (14,251) (14,251)
Foreign currency
translation adjustment -- -- (36,911) -- (36,911)
--------
Comprehensive loss (51,162)
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Balance at September 30, 2000 $ 127,890 $ 552,903 $ (46,763) $ (28,190) $ 605,840
============================================================================================================================
See Accompanying Notes to the Consolidated Financial Statements. 5
TERRA INDUSTRIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. The accompanying unaudited consolidated financial statements and notes
thereto contain all adjustments necessary, in the opinion of management, to
summarize fairly the financial position of Terra Industries Inc. and all
majority-owned subsidiaries ("Terra") and the results of Terra's operations
for the periods presented. Because of the seasonal nature of Terra's
operations and effects of weather-related conditions in several of its
marketing areas, results of any interim reporting period should not be
considered as indicative of results for a full year. These statements
should be read in conjunction with Terra's 2000 Annual Report to
Stockholders. Certain reclassifications have been made to prior years'
financial statements to conform with current year presentation.
Basic earning (loss) per share data are based on the weighted-average
number of Common Shares outstanding during the period. Diluted earnings per
share data are based on the weighted-average number of Common Shares
outstanding and the effect of all dilutive potential common shares
including stock options, restricted shares and contingent shares.
Inventories consisted of the following:
September 30, December 31, September 30,
(in thousands) 2001 2000 2000
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Raw materials $ 28,696 $ 24,085 $ 26,963
Supplies 21,587 20,918 20,952
Finished goods 73,344 56,523 44,950
-------------------------------------------------------------------------------------
Total $ 123,627 $ 101,526 $ 92,865
=====================================================================================
2. On July 13, 2001, a British court found Terra Nitrogen (U.K.) Ltd. liable
for damages associated with recalls of carbonated beverages containing CO2
tainted with benzene, plus interest and attorney fees. In addition, there
are two similar cases awaiting trial and certain other beverage
manufacturers have indicated their intention to file claims for unspecified
amounts. Management estimates total claims against Terra from these
lawsuits may be (pound)10 million, or $14 million. Terra has established
reserves to cover estimated losses.
In addition to Terra's plan to appeal the British court's decision, Terra's
management also believes it has recourse for these claims against both its
insurer and the previous owner of Terra's U.K. operations. Management will
vigorously pursue Terra's rights against these parties, but there will be
no income recognition for those rights until settlements are finalized.
Terra is involved in various other legal actions and claims, including
environmental matters, arising from the normal course of business. While it
is not feasible to predict with certainty the final outcome of these
proceedings, management does not believe that these matters, or the U.K.
benzene claims, will have a material adverse effect on the results of
operations, financial position or net cash flows.
3. Natural gas is the principal raw material used in Terra's production of
nitrogen products and methanol. Terra enters into forward pricing
arrangements for natural gas provided that such arrangements would not
result in costs greater than expected selling prices for nitrogen products
6
and methanol. Terra's normal natural gas procurement policy is to
effectively fix or cap the price of between 25% and 80% of its natural gas
requirements for a one-year period and up to 50% of its natural gas
requirements for the subsequent two-year period through supply contracts,
financial derivatives and other forward pricing techniques. In response to
extremely volatile natural gas costs during the last six months of 2000 and
uncertainties regarding the ability of finished goods to recover the
increases to gas costs, Terra amended its policy and eliminated the minimum
hedge requirement through the end of 2001. The financial derivatives are
traded in months forward and settlement dates are scheduled to coincide
with gas purchases during those future periods. These contracts reference
physical natural gas prices or appropriate NYMEX futures contract prices.
Contract prices are frequently based on prices at the most common and
financially liquid location of reference for financial derivatives related
to natural gas. However, natural gas supplies for Terra's facilities are
purchased for each plant at locations other than reference points, which
often creates a location basis differential between the contract price and
the physical price of natural gas. Accordingly, the use of financial
derivatives may not exactly offset the change in the price of physical gas.
Terra has entered into forward pricing positions for a portion of its
natural gas requirements for the remainder of 2001 and part of 2002,
consistent with its policy. As a result of its policies, Terra has reduced
the potential adverse financial impact of natural gas price increases
during the forward pricing period, but conversely, if natural gas prices
were to fall, Terra will incur higher costs. Contracts were in place at
September 30, 2001 to cover 16% of natural gas requirements for the
succeeding twelve months. The September 30, 2001 contracts covered 12% of
Terra's expected North American natural gas requirements and 36% of its
expected U.K. natural gas requirements.
Unrealized losses from forward pricing positions in North America totaled
$1.3 million as of September 30, 2001. In addition, Terra had purchase
commitments for natural gas in the U.K. at prices $5.8 million lower than
September 30, 2001 forward markets. The amount ultimately recognized by
Terra will be dependent on published prices in effect at the time of
settlement. Terra also had $4.2 million of realized losses on closed North
America contracts relating to future periods that have been deferred to the
respective period.
4. On April 29, 2001, Terra's Canadian facility was shut down due to a
mechanical outage, resulting in a $4 million charge to second quarter
earnings. Insurance proceeds for business interruption claims associated
with the outage will be reported as income when received.
On June 10, 2001, Terra suspended production of ammonia and urea at its
Blytheville, Arkansas plant due to its inability to generate cash flow
under existing price and cost conditions. The restart of production at that
facility began on October 1, 2001.
5. Statement of Financial Accounting Standards (SFAS) 133, "Accounting for
Derivative Instruments and Hedging Activities" requires that all derivative
instruments, whether designated in hedging relationships or not, be
recorded in the balance sheet at fair value. If the derivative is
designated as a fair value hedge, the change in the fair value of the
derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. If the derivative is designated as a cash flow
hedge, the effective portions of the changes in fair value of the
derivative are recorded in other comprehensive income (OCI) and are
recognized in the income statement when the hedged item affects earnings.
Ineffective portions of changes in the fair value of cash flow hedges are
recognized in earnings. Terra has designated its natural gas derivative
instruments as cash flow hedges. The effective portion of the cash flow
hedge is deferred in OCI until the natural gas it relates to is used in
production which is then reclassified from OCI to earnings.
7
On January 1, 2001 Terra adopted SFAS 133 which resulted in a cumulative
$23.3 million increase to current assets, a $9.2 million reduction to
current liabilities, a $1.1 million increase in long-term debt and a $31.4
million increase, before deferred taxes of $11.0 million, to accumulated
OCI, which reflected the effective portion of the derivatives designated as
cash flow hedges. The increase to current assets was to recognize the value
of open natural gas contracts, the reduction to current liabilities was to
reclassify deferred gains on closed contracts relating to future periods
and the increase to long-term debt related to interest rate hedges. The
changes in the components of accumulated OCI during the three months ended
September 30, 2001 follow:
Net Unrealized Unrealized Gain
Gain (Loss) Realized Gain (Loss) on
on Natural Gas (Loss) Deferred to Interest Rate Accumulated
(in thousands) Hedging Activity Future Periods Hedge OCI
---------------------------------------------------------------------------------------------------------------------
Balance June 31, 2001 $ (6,341) $ (3,338) $ (2,535) $ (12,214)
Net unrealized gain (loss)
arising during period (3,756) (4,838) (2,568) (11,162)
Transfer net loss realized
to production costs
and interest expense 8,820 3,338 874 13,032
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Balance September 30, 2001 (1,277) (4,838) (4,229) (10,344)
Deferred Tax Effect 764 1,860 1,607 4,231
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Balance Net of Tax September 30, 2001 $ (513) $ (2,978) $ (2,622) $ (6,113)
=====================================================================================================================
In addition to the $4.2 million of realized losses on closed North
American gas contracts, the company had $0.6 million of losses related to
fertilizer swaps at September 30, 2001.
6. Terra classifies its continuing operations into two business segments:
nitrogen products and methanol. The nitrogen products business produces
and distributes ammonia, urea, nitrogen solutions and ammonium nitrate to
farm distributors and industrial users. The methanol business manufactures
and distributes methanol which is used in the production of a variety of
chemical derivatives and in the production of methyl tertiary butyl ether
(MTBE), an oxygenate and an octane enhancer for gasoline. Terra does not
allocate interest, income taxes or infrequent items to continuing business
segments. Included in Other are general corporate activities not
attributable to a specific industry segment. The following summarizes
operating results by business segment:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------ ------------------------------
(in thousands) 2001 2000 2001 2000
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Revenues - Nitrogen Products $ 209,224 $ 220,465 $ 661,065 $ 688,174
- Methanol 28,000 42,710 141,011 96,995
- Other 481 1,934 1,001 5,960
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Total revenues $ 237,705 $ 265,109 $ 803,077 $ 791,129
==================================================================================================================
Income (loss) from operations
- Nitrogen Products $ (21,328) $ 17,506 $ (35,176) $ 19,318
- Methanol (5,109) 9,974 (6,082) 9,561
- Other 229 (223) 994 790
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Total income (loss) from operations $ (26,208) $ 27,257 $ (40,264) $ 29,669
==================================================================================================================
8
7. In June 2001, the Financial Accounting Standards Board ("FASB") approved
the issuance of Statement of Financial Accounting Standards ("SFAS") No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." These standards, issued in July 2001, establish
accounting and reporting for business combinations. SFAS No. 141 requires
all business combinations entered into subsequent to June 30, 2001 to be
accounted for using the purchase method of accounting. SFAS No. 142
provides that goodwill and other intangible assets with indefinite lives
will not be amortized, but will be tested for impairment on an annual
basis. These standards are effective for Terra beginning on January 1,
2002. The historical impact of not amortizing goodwill (and other
intangible assets with indefinite lives) would have been to decrease the
net loss for the nine months ended September 30, 2001 and 2000 by $9.9
million and $11.6 million, respectively. Terra has not yet quantified the
impact resulting from the adoption of the other provisions of these
standards. Such adoption could result in the write-off in the first
quarter of 2002 of a substantial portion of the goodwill on Terra's
balance sheet, currently classified as "Excess of cost over net assets of
acquired businesses."
In July 2001, the Financial Accounting Standards Board voted to issue
Statement No. 143, "Accounting for Asset Retirement Obligations" (FAS
143). This standard requires the Company to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred and is effective for the Company's fiscal year 2003. The Company
has not yet quantified the impact, if any, arising from adoption of this
standard.
In August 2001, the Financial Accounting Standards Board voted to issue
Statement No. 144, "Accounting for the Impairment of Long-lived Assets"
(FAS 144). This standard requires the Company to recognize an impairment
loss if the carrying amount of a long-lived asset or asset group is not
recoverable and exceeds its fair value and is effective for the Company's
fiscal year 2002. The Company has not yet quantified the impact, if any,
arising from adoption of this standard.
8. On October 10, 2001, Terra Capital, Inc., a wholly owned subsidiary of
Terra Industries Inc., issued $200 million of 12.875% Senior Secured Notes
due in 2008. The notes were priced at 99.43% to yield 13%. The estimated
fees and expenses of the transaction total $11 million. The proceeds will
be used to repay existing debt. The notes are secured by a first priority
interest in ownership or leasehold interest in substantially all real
property, machinery and equipment owned or leased by Terra Capital and the
guaranteeing subsidiaries, the limited partnership's interest in Terra
Nitrogen Company, L.P. owned by Terra Capital and the guaranteeing
subsidiaries, and certain intercompany notes issued to Terra Capital by
non-guaranteeing subsidiaries.
Concurrent with note issuance, Terra Industries Inc. entered into an
amended and restated revolving credit facility that increased the
commitments under the revolving credit facility from $115.6 million to
$175 million, and extended the revolving credit facility from January 2,
2003 to June 30, 2005. The revolving credit facility is secured by
substantially all of the assets of Terra Industries Inc. and its
subsidiaries other than the assets constituting collateral for the notes.
Borrowings under the revolving credit facility will bear interest at a
floating rate, which can be either a base rate, or, at the company's
option, a LIBOR rate. 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 or 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 initial applicable margin for base rate loans and LIBOR loans are
1.75% and 2.75%, respectively.
9
The revolving credit facility requires an initial one-half percent (0.50%)
commitment fee on the difference between committed amounts and amounts
actually borrowed.
The company will be required to recognize an extraordinary loss of
approximately $2.0 million in the fourth quarter of 2001 in connection
with the early extinguishment of debt.
Condensed Consolidating Statement of Financial Position for the nine months
ended September 30, 2001:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
----------------------------------------------------------------------------------------------------------------------
Assets
Cash $ -- $ (3,391) $ 45,607 $ 1,916 $ -- $ 44,132
Accounts Receivable -- -- 34,939 63,008 -- 97,947
Inventories -- -- 35,417 88,210 -- 123,627
Other current assets 5,568 4,215 6,871 25,777 (10,017) 32,414
----------------------------------------------------------------------------------------------------------------------
Total current assets 5,568 824 122,834 178,911 (10,017) 298,120
----------------------------------------------------------------------------------------------------------------------
Property, plant and
equipment, net -- -- 448,789 403,138 (2,739) 849,188
Excess of cost over net assets
of acquired businesses -- -- 194,391 16,707 -- 211,098
Investments in and advanced
to (from) affiliates 1,064,912 444,106 1,285,567 240,188 (3,034,773) --
Other assets 775 7,005 7,233 24,592 354 39,959
----------------------------------------------------------------------------------------------------------------------
Total assets $ 1,071,255 $ 451,935 $ 2,058,814 $ 863,536 $ (3,047,175) $ 1,398,365
======================================================================================================================
Liabilities
Debt due within one year $ -- $ -- $ 47 $ 5,061 $ -- $ 5,108
Accounts payable -- 3,773 17,227 56,540 (3,798) 73,742
Accrued and other liabilities 14,675 629 19,271 7,873 10,987 53,435
----------------------------------------------------------------------------------------------------------------------
Total current liabilities 14,675 4,402 36,545 69,474 7,189 132,285
----------------------------------------------------------------------------------------------------------------------
Long-term debt 358,755 -- 947 94,219 -- 453,921
Deferred income taxes 134,882 9,682 (4,232) (121) (18,674) 121,537
Other liabilities 21,383 13,841 510 13,454 927 50,115
Minority interest -- 19,394 79,553 -- -- 98,947
----------------------------------------------------------------------------------------------------------------------
Total liabilities 529,695 47,319 113,323 177,026 (10,558) 856,805
----------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock 128,363 -- 73 49,709 (49,782) 128,363
Paid in capital 554,850 150,218 1,856,742 918,886 (2,925,846) 554,850
Accumulated other
comprehensive loss (66,571) (66,571) 2,204 (69,543) 133,910 (66,571)
Retained earnings (deficit) (75,082) 320,969 86,472 (212,542) (194,899) (75,082)
----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 541,560 404,616 1,945,491 686,510 (3,036,617) 541,560
----------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders equity $ 1,071,255 $ 451,935 $ 2,058,814 $ 863,536 $ (3,047,175) $ 1,398,365
======================================================================================================================
10
Condensed Consolidating Statement of Operations for the three months ended
September 30, 2001:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------
Revenues
Net sales $ -- $ -- $ 99,062 $ 138,086 $ 76 $ 237,224
Other income, net (2) -- 429 129 (75) 481
-----------------------------------------------------------------------------------------------------------------
(2) -- 99,491 138,215 1 237,705
-----------------------------------------------------------------------------------------------------------------
Cost and Expenses
Cost of sales -- -- 108,905 132,841 14,037 255,783
Selling, general and
administrative expenses 750 695 7,235 13,844 (14,130) 8,394
Equity in the (earnings) loss
of subsidiaries 24,639 23,204 4,395 11,020 (63,522) (264)
-----------------------------------------------------------------------------------------------------------------
25,389 23,899 120,535 157,705 (63,615) 263,913
-----------------------------------------------------------------------------------------------------------------
Income (loss) from operations (25,391) (23,899) (21,044) (19,490) 63,616 (26,208)
Interest income 28 428 1,628 511 (1,618) 977
Interest expense (9,142) (1,714) (12) (2,780) 1,614 (12,034)
Minority interest -- 546 2,239 -- -- 2,785
-----------------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes (34,505) (24,639) (17,189) (21,759) 63,612 (34,480)
Income tax provision (benefit) (10,369) -- -- 25 -- (10,344)
-----------------------------------------------------------------------------------------------------------------
Net income (loss) $ (24,136) $ (24,639) $ (17,189) $ (21,784) $ 63,612 $ (24,136)
=================================================================================================================
Condensed Consolidating Statement of Operations for the nine months ended
September 30, 2001:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------
Revenues
Net sales $ -- $ -- $ 328,408 $ 473,592 $ 76 $ 802,076
Other income, net (2) -- 1,369 (291) (75) 1,001
-----------------------------------------------------------------------------------------------------------------
(2) -- 329,777 473,301 1 803,077
-----------------------------------------------------------------------------------------------------------------
Cost and Expenses
Cost of sales -- -- 343,802 445,772 14,037 803,611
Selling, general and
administrative expenses 1,827 2,804 19,087 16,666 (14,130) 26,254
Product claim costs -- -- -- 14,023 -- 14,023
Equity in the (earnings) loss
of subsidiaries 39,757 36,736 (3,436) 9,453 (83,057) (547)
-----------------------------------------------------------------------------------------------------------------
41,584 39,540 359,453 485,914 (83,150) 843,341
-----------------------------------------------------------------------------------------------------------------
Income (loss) from operations (41,586) (39,540) (29,676) (12,613) 83,151 (40,264)
Interest income 69 2,085 5,861 511 (5,674) 2,852
Interest expense (29,326) (2,786) (147) (11,268) 5,670 (37,857)
Minority interest -- 484 1,984 -- -- 2,468
-----------------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes (70,843) (39,757) (21,978) (23,370) 83,147 (72,801)
Income tax provision (benefit) (19,882) -- -- (1,958) -- (21,840)
-----------------------------------------------------------------------------------------------------------------
Net income (loss) $ (50,961) $ (39,757) $ (21,978) $ (21,412) $ 83,147 $ (50,961)
==================================================================================================================
11
Condensed Consolidating Statement of Cash Flows for the nine months ended
September 30, 2001:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
-------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $ (50,961) $ (39,757) $ (21,978) $ (21,412) $ 83,147 $ (50,961)
Adjustments to reconcile net
loss to net cash flows from
operating activities:
Depreciation and amortization -- 2,779 50,911 31,180 -- 84,870
Deferred income taxes (15,839) (7,500) (4,232) (4,076) 567 (31,080)
Minority interest in earnings -- (484) (1,984) -- (2) (2,470)
Equity in earnings (loss)
of subsidiaries 39,758 36,736 (3,436) 9,453 (82,511) --
Change in operating assets
and liabilities 7,776 (5,393) (16,404) (5,466) (12,035) (31,522)
Other -- -- -- -- 9,022 9,022
-------------------------------------------------------------------------------------------------------------------------
Net Cash Flows from
Operating Activities (19,266) (13,619) 2,877 9,679 (1,812) (22,141)
-------------------------------------------------------------------------------------------------------------------------
Investing Activities
Purchase of property,
plant and equipment -- -- (2,272) (8,864) -- (11,136)
Other -- -- -- -- (5,887) (5,887)
-------------------------------------------------------------------------------------------------------------------------
Net Cash Flows from
Investing Activities -- -- (2,272) (8,864) (5,887) (17,023)
-------------------------------------------------------------------------------------------------------------------------
Financing Activities
Principal payments on
long-term debt -- -- (7,980) (6,345) -- (14,325)
Change in investments and
advances from (to) affiliates 19,013 (60,259) 46,283 (14,424) 9,387 --
Stock (repurchase) issuance - net 180 -- -- -- -- 180
Distributions to minority inte rests -- (337) (1,691) -- -- (2,028)
Repurchase of TNLP
common units -- (1,671) -- -- -- (1,671)
Other 73 (4,464) (3,454) 9,249 (1,404) --
-------------------------------------------------------------------------------------------------------------------------
Net Cash Flows from
Financing Activities 19,266 (66,731) 33,158 (11,520) 7,983 (17,844)
-------------------------------------------------------------------------------------------------------------------------
Effect of Foreign Exchange
Rate on Cash -- -- -- -- (285) (285)
-------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Cash
and Short-term Investments -- (80,350) 33,763 (10,705) (1) (57,293)
-------------------------------------------------------------------------------------------------------------------------
Cash and Short-term Investments
at Beginning of Year -- 76,959 11,844 12,622 -- 101,425
-------------------------------------------------------------------------------------------------------------------------
Cash and Short-term Investments
At End of Year $ -- $ (3,391) $ 45,607 $ 1,917 $ (1) $ 44,132
=========================================================================================================================
12
Condensed Consolidating Statement of Financial Position for the nine months
ended September 30, 2000:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------------------------------------------------------
Assets
Cash $ 50 $ 88,620 $ 305 $ 12,941 $ -- $ 101,916
Accounts Receivable -- (51) 45,262 73,973 -- 119,184
Inventories -- -- 27,212 65,653 -- 92,865
Other current assets 5,164 4,434 25,364 16,241 (29,570) 21,633
-----------------------------------------------------------------------------------------------------------------------
Total current assets 5,214 93,003 98,143 168,808 (29,570) 335,598
-----------------------------------------------------------------------------------------------------------------------
Property, plant and
equipment, net 37 4,077 494,270 429,374 (8,500) 919,258
Excess of cost over net assets
of acquired businesses -- -- 212,072 23,852 -- 235,924
Investments in and advanced
to (from) affiliates 1,081,528 479,972 1,228,712 308,131 (3,098,343) --
Other assets 5,745 6,466 9,810 33,685 1,130 56,836
-----------------------------------------------------------------------------------------------------------------------
Total assets $ 1,092,524 $ 583,518 $ 2,043,007 $ 963,850 $(3,135,283) $ 1,547,616
=======================================================================================================================
Liabilities
Debt due within one year $ -- $ -- $ 544 $ 5,424 $ -- $ 5,968
Accounts payable -- 5,083 28,339 56,429 -- 89,851
Accrued and other liabilities 4,723 3,595 26,653 19,736 -- 54,707
-----------------------------------------------------------------------------------------------------------------------
Total current liabilities 4,723 8,678 55,536 81,589 -- 150,526
-----------------------------------------------------------------------------------------------------------------------
Long-term debt 358,755 -- 8,471 101,875 -- 469,101
Deferred income taxes 96,159 99,435 48 836 (33,155) 163,323
Other liabilities 27,047 13,255 5,522 4,431 (58) 50,197
Minority interest -- 18,032 91,486 -- (889) 108,629
-----------------------------------------------------------------------------------------------------------------------
Total liabilities 486,684 139,400 161,063 188,731 (34,102) 941,776
-----------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Common stock 127,890 -- 73 50,586 (50,659) 127,890
Paid in capital 552,903 150,218 1,798,969 917,735 (2,866,922) 552,903
Accumulated other
comprehensive loss (46,763) (46,763) -- (41,208) 87,971 (46,763)
Retained earnings (deficit) (28,190) 340,663 82,902 (151,994) (271,571) (28,190)
-----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 605,840 444,118 1,881,944 775,119 (3,101,181) 605,840
-----------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders equity $ 1,092,524 $ 583,518 $ 2,043,007 $ 963,850 $(3,135,283) $ 1,547,616
=======================================================================================================================
13
Condensed Consolidating Statement of Operations for the three months ended
September 30, 2000:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
------------------------------------------------------------------------------------------------------------------
Revenues
Net sales $ -- $ -- $ 117,303 $ 150,368 $ (4,496) $ 263,175
Other income, net -- -- 1,465 1,936 (1,467) 1,934
------------------------------------------------------------------------------------------------------------------
-- -- 118,768 152,304 (5,963) 265,109
------------------------------------------------------------------------------------------------------------------
Cost and Expenses
Cost of sales -- -- 107,558 126,412 (5,280) 228,690
Selling, general and
administrative expenses 247 963 4,892 3,990 (682) 9,410
Equity in the (earnings) loss
of subsidiaries (14,426) (14,541) (16,269) (3,847) 48,835 (248)
-----------------------------------------------------------------------------------------------------------------
(14,179) (13,578) 96,181 126,555 42,873 237,852
------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 14,179 13,578 22,587 25,749 (48,836) 27,257
Insurance settlement costs -- -- (879) -- -- (879)
Interest income (6) 1,260 3,612 8,023 (11,658) 1,231
Interest expense (10,791) (248) (160) (13,439) 11,657 (12,981)
Minority interest -- (164) (823) -- 2 (985)
-----------------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes 3,382 14,426 24,337 20,333 (48,835) 13,643
Income tax provision (benefit) (2,814) -- 5,885 4,376 -- 7,447
------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 6,196 $ 14,426 $ 18,452 $ 15,957 $ (48,835) $ 6,196
==================================================================================================================
Condensed Consolidating Statement of Operations for the nine months ended
September 30, 2000:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
------------------------------------------------------------------------------------------------------------------
Revenues
Net sales $ -- $ -- $ 291,904 $ 497,217 $ (3,952) $ 785,169
Other income, net -- 401 3,662 3,908 (2,011) 5,960
------------------------------------------------------------------------------------------------------------------
-- 401 295,566 501,125 (5,963) 791,129
------------------------------------------------------------------------------------------------------------------
Cost and Expenses
Cost of sales -- -- 291,236 441,729 (5,280) 727,685
Selling, general and
administrative expenses 553 790 20,626 13,036 (682) 34,323
Equity in the (earnings)
loss of subsidiaries (959) 457 (30,897) (20,140) 50,991 (548)
------------------------------------------------------------------------------------------------------------------
(406) 1,247 280,965 434,625 45,029 761,460
------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 406 (846) 14,601 66,500 (50,992) 29,669
Insurance settlement costs -- -- (5,529) -- -- (5,529)
Interest income -- 3,249 10,233 266 (11,658) 2,090
Interest expense (31,245) (554) (635) (17,907) 11,657 (38,684)
Minority interest -- (890) (4,472) -- 2 (5,360)
-----------------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes (30,839) 959 14,198 48,859 (50,991) (17,814)
Income tax provision (benefit) (16,588) -- 10,660 2,365 -- (3,563)
------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (14,251) $ 959 $ 3,538 $ 46,494 $ (50,991) $ (14,251)
==================================================================================================================
14
Condensed Consolidating Statement of Cash Flows for the nine months ended
September 30, 2000:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
----------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income (loss) $ (14,251) $ 959 $ 3,538 $ 46,494 $ (50,991) $ (14,251)
Adjustments to reconcile net
loss to net cash flows from
operating activities:
Depreciation and amortization -- 1,790 47,915 36,442 -- 86,147
Deferred income taxes 7,451 24,925 140 (27) (18,913) 13,576
Minority interest in earnings -- 890 4,472 -- (3) 5,359
Equity in earnings (loss)
of subsidiaries 959 (457) 30,897 20,140 (51,539) --
Change in operating assets
and liabilities 8,325 (33,879) 24,809 50,825 (13,197) 36,883
Other -- -- -- -- (548) (548)
----------------------------------------------------------------------------------------------------------------------
Net Cash Flows from
Operating Activities 2,484 (5,772) 111,771 153,874 (135,191) 127,166
----------------------------------------------------------------------------------------------------------------------
Investing Activities
Purchase of property,
plant and equipment -- -- (5,752) (5,267) -- (11,019)
Other -- -- -- -- (5,932) (5,932)
----------------------------------------------------------------------------------------------------------------------
Net Cash Flows from
Investing Activities -- -- (5,752) (5,267) (5,932) (16,951)
----------------------------------------------------------------------------------------------------------------------
Financing Activities
Net short-term borrowings
(repayments) -- (6,000) -- -- -- (6,000)
Principal payments on
long-term debt -- -- (2,452) (2,940) -- (5,392)
Change in investments and
advances from (to) affiliates (3,659) 112,542 (133,024) (137,388) 161,529 --
Deferred financing costs -- (6,697) -- -- -- (6,697)
Other 1,217 (5,636) 1,309 23,516 (20,406) --
----------------------------------------------------------------------------------------------------------------------
Net Cash Flows from
Financing Activities (2,442) 94,209 (134,167) (116,812) 141,123 (18,089)
----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Cash
and Short-term Investments 42 88,437 (28,148) 31,795 -- 92,126
----------------------------------------------------------------------------------------------------------------------
Cash and Short-term Investments
at Beginning of Year 8 183 28,453 (18,854) -- 9,790
----------------------------------------------------------------------------------------------------------------------
Cash and Short-term Investments
At End of Year $ 50 $ 88,620 $ 305 $ 12,941 $ -- $ 101,916
======================================================================================================================
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
---------------------
QUARTER ENDED SEPTEMBER 30, 2001 COMPARED WITH
QUARTER ENDED SEPTEMBER 30, 2000
Consolidated Results
Terra reported a net loss of $24.1 million for the 2001 third quarter compared
with net income of $6.2 million in 2000. The increase in the 2001 loss was
primarily related to decreased operating income as the result of lower sales
prices.
Terra classifies its operations into two business segments: nitrogen products
and methanol. The nitrogen products segment represents operations directly
related to the wholesale sales of nitrogen products from Terra's ammonia
production and upgrading facilities. The methanol segment represents wholesale
sales of methanol produced at Terra's two methanol manufacturing facilities.
Total revenues and operating income (loss) by segment for the three-month
periods ended September 30, 2001 and 2000 follow:
(in thousands) 2001 2000
---------------------------------------------------------------------------------------------------------------------
REVENUES:
Nitrogen Products $ 209,224 $ 220,465
Methanol 28,000 42,710
Other 481 1,934
---------------------------------------------------------------------------------------------------------------------
$ 237,705 $ 265,109
=====================================================================================================================
OPERATING INCOME (LOSS):
Nitrogen Products $ (21,328) $ 17,506
Methanol (5,109) 9,974
Other income - net 229 (223)
---------------------------------------------------------------------------------------------------------------------
$ (26,208) $ 27,257
=====================================================================================================================
Nitrogen Products
Volumes and prices for the three-month periods ended September 30, 2001 and 2000
follow:
VOLUMES AND PRICES
2001 2000
---------------------------------------------------------------------------------------------------------------------
Sales Average Sales Average
(quantities in thousands of tons) Volumes Unit Price Volumes Unit Price
---------------------------------------------------------------------------------------------------------------------
Ammonia 315 $ 154 311 $ 175
Nitrogen solutions 989 80 887 87
Urea 65 128 69 149
Ammonium nitrate 257 124 283 128
---------------------------------------------------------------------------------------------------------------------
16
Nitrogen products segment revenues declined $11.2 million to $209.2 million in
the 2001 third quarter compared with $220.4 million in the 2000 third quarter.
Lower sales prices reduced 2001 revenues $16 million primarily as the result of
an over supply of nitrogen products in most of Terra's North American markets.
This situation was caused by fewer planted acres of corn, wheat and other
agricultural products and reduced application rates because of low grain prices.
Some of the revenue shortfall from lower sales prices was offset by higher 2001
volumes as compared to last year's third quarter.
The nitrogen products segment had an operating loss of $21.3 million for the
third quarter of 2001 compared with operating income of $17.5 million for the
2000 third quarter. Lower sales prices reduced 2001 operating income by $16
million from last year. Natural gas costs were lower than during the 2000 third
quarter as unit costs, net of forward pricing gains and losses, decreased to
$3.11/MMBtu, during the 2001 third quarter compared to $3.15/MMBtu during the
same 2000 period. Third quarter 2001 natural gas costs for the nitrogen products
segment were $5.2 million higher than spot prices as a result of Terra's forward
price contracts.
Methanol
For the three months ended September 30, 2001 and 2000 the Methanol segment had
revenues of $28.0 million and $42.7 million, respectively. Sales volumes
decreased 5% from prior year levels and selling prices decreased from
$.62/gallon in 2000 to $.43/gallon in 2001.
The methanol segment had an operating loss of $5.1 million for the 2001 third
quarter compared to operating income of $10.0 million for the 2000 third
quarter. The decrease in the operating income was due primarily to lower prices
which reduced 2001 earnings by $12.3 million. Lower sales volumes and higher
operating costs than during last year's third quarter also reduced operating
income. These factors were partially offset by lower natural gas costs which,
net of forward pricing gains and losses, averaged $3.31/MMBtu, during the 2001
third quarter compared to $3.50/MMBtu during the 2000 period. As a result of
forward pricing contracts, third quarter 2001 natural gas costs for the methanol
segment were $3.1 million higher than spot prices.
Other Income - Net
Terra had other operating income of $0.2 million in the 2001 third quarter
compared to an other operating loss of $0.2 million in the 2000 third quarter.
Insurance Settlement Costs
During the 2000 third quarter, Terra incurred $0.9 million of legal and other
professional fees in connection with a lawsuit to recover costs from the 1994
explosion at Terra's Port Neal facility. These expenses were related to the
insurance recovery gain reported in Terra's 1997 financial statements and,
consequently, have been excluded from the determination of 2000 operating
income.
Interest Expense - Net
Interest expense, net of interest income, totaled $11.1 million during the 2001
third quarter compared with $11.8 million for the prior year period.
17
Minority Interest
Minority interest represents third-party interests in the earnings of the
publicly held common units of Terra Nitrogen Company, L.P. (TNCLP). Minority
interest credits of $2.8 million were recorded for the 2001 third quarter as the
result of TNCLP losses, which were included in their entirety in consolidated
operating results. The decreased charge as compared to the 2000 second quarter
reflected lower nitrogen earnings for TNCLP.
Income Taxes
Income taxes for the third quarter 2001 were recorded at an effective tax rate
of 30%, Terra's estimated annual effective tax rate.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH
NINE MONTHS ENDED SEPTEMBER 30, 2000
Consolidated Results
Terra reported a net loss of $51.0 million for the nine months ended September
30, 2001 with a net loss of $14.3 million in 2000. The increase in the 2001 loss
was primarily related to decreased operating income as the result of higher
natural gas costs, lower sales volumes, and product recall costs, partially
offset by higher product prices.
Terra classifies its operations into two business segments: nitrogen products
and methanol. The nitrogen products segment represents operations directly
related to the wholesale sales of nitrogen products from Terra's ammonia
production and upgrading facilities. The methanol segment represents wholesale
sales of methanol produced at Terra's two methanol manufacturing facilities.
Total revenues and operating income (loss) by segment for the nine-month periods
ended September 30, 2001 and 2000 follows:
(in thousands) 2001 2000
-------------------------------------------------------------------------------------------------------
REVENUES:
Nitrogen Products $ 661,065 $ 688,174
Methanol 141,011 96,995
Other 1,001 5,960
-------------------------------------------------------------------------------------------------------
$ 803,077 $ 791,129
=======================================================================================================
OPERATING INCOME (LOSS):
Nitrogen Products, before product claim costs $ (21,153) $ 19,318
Less: product claim costs (14,023) --
-------------------------------------------------------------------------------------------------------
Net nitrogen products (35,176) 19,318
Methanol (6,082) 9,561
Other income - net 994 790
-------------------------------------------------------------------------------------------------------
$ (40,264) $ 29,669
=======================================================================================================
18
Nitrogen Products
Volumes and prices for the nine-month periods ended September 30, 2001 and 2000
follow:
VOLUMES AND PRICES
2001 2000
----------------------------------------------------------------------------------------------------------------
Sales Average Sales Average
(quantities in thousands of tons) Volumes Unit Price Volumes Unit Price
----------------------------------------------------------------------------------------------------------------
Ammonia 854 $ 204 1,130 $ 153
Nitrogen solutions 2,324 108 3,066 75
Urea 294 157 353 131
Ammonium nitrate 490 129 819 114
----------------------------------------------------------------------------------------------------------------
Nitrogen products segment revenues decreased $27.2 million to $661 million in
the 2001 first nine months compared with $668.2 million in the 2000 first nine
months. Sales volumes declined as the result of fewer planted acres of corn,
wheat and other agricultural products and reduced application rates because of
low grain prices and high fertilizer costs. Sales volumes of ammonium nitrate,
which is the primary form of fertilizer sold by Terra in the United Kingdom,
were also limited as the result of British transportation restrictions in
response to the outbreak of foot and mouth disease. A substantial portion of the
revenue shortfall from lower sales volumes was offset by higher 2001 prices as
compared to last year's first nine months. Price increases were realized in
response to lower nitrogen supplies during the 2001 first half as high natural
gas costs resulted in industry-wide production curtailments since the middle of
last year.
The nitrogen products segment had an operating loss of $21.2 million for the
first nine months of 2001, before product claim costs, compared with operating
income of $19.3 million for the 2000 first nine months. The decrease in
operating income was primarily related to higher natural gas costs and reduced
sales volumes, offset in part by higher selling prices. Natural gas costs
increased almost $126 million over the 2000 first nine months as unit costs, net
of forward pricing gains and losses, increased to $4.40/MMBtu, during the 2001
first nine months compared to $2.77/MMBtu during the same 2000 period. Natural
gas costs in the 2001 first nine months were $8.3 million lower than spot prices
as the result of forward price contracts.
Following the judgment of a British court, Terra Industries recorded a $14
million charge to reflect the estimated value of claims (plus interest and
attorney fees) associated with recalls of beverages containing carbon dioxide
tainted with benzene. In addition to the right to appeal the British court's
decision, we believe we have recourse for these claims against our insurer and
the previous owner of Terra Industries' U.K. operations. We will vigorously
pursue our rights against these parties, but there will be no income recognition
for those rights until appeals or settlements are finalized.
Methanol
For the nine months ended September 30, 2001 and 2000 the methanol segment had
revenues of $141 million and $97 million. Sales volumes increased 10% from prior
year levels, and selling prices increased from $.48/gallon in 2000 to
$.64/gallon in 2001. Selling price increases reflect higher raw material costs
and the higher volumes were the result of a decrease in domestic supplies during
2001.
The methanol segment generated a $6.1 million operating loss in the 2001 first
nine months compared to a $9.6 million operating income in the 2000 first nine
months. The increased operating loss reflects cost increases that outpaced the
effects of higher selling prices and increased volumes. In addition, contractual
and market conditions necessitated the purchase of methanol products from other
producers
19
which resulted in incrementally higher costs of approximately $14 million
compared to the same period in 2000. The major cost increase was to natural gas
costs which, net of forward pricing gains and losses, increased to $4.41/MMBtu,
during the 2001 nine months compared to $2.92/MMBtu during the 2000 period.
First nine month 2001 natural gas costs were $2.8 million lower than spot prices
as a result of forward pricing contracts.
Other Income - Net
Terra had other operating income of $1.0 million in the 2001 first nine months
compared to $0.8 million in the 2000 first nine months.
Insurance Settlement Costs
During the 2000 first nine months, Terra incurred $5.5 million of legal and
other professional fees in connection with a lawsuit to recover costs from the
1994 explosion at Terra's Port Neal facility. Theses expenses related to the
insurance recovery gain reported in Terra's 1997 financial statements and,
consequently, have been excluded from the determination of 2000 operating
income.
Interest Expense - Net
Interest expense, net of interest income, totaled $35.0 million during the 2001
first nine months compared with $36.6 million for the prior year period.
Minority Interest
Minority interest represents third-party interests in the earnings of the
publicly held common units of Terra Nitrogen Company, L.P. (TNCLP). Minority
interest credits of $2.5 million were recorded for the 2001 first nine months as
the result of TNCLP losses, which were included in their entirety in
consolidated operating results. The decreased charge as compared to the 2000
first nine months reflected lower nitrogen earnings for TNCLP.
Income Taxes
Income taxes for the first nine months of 2001 were recorded at an effective tax
rate of 30%, Terra's estimated annual effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Terra's primary uses of funds are to fund its working capital requirements, make
payments on its indebtedness and other obligations, make capital expenditures
and acquisitions and fund repurchases of TNCLP common units. The principal
sources of funds are cash flow from operations and borrowings under available
bank facilities.
Net cash flows used in operations in the first nine months of 2001 were $22.1
million comprised of $22.5 million used by increases to net working capital
balances, net of $0.4 million in operating profits after non-cash charges.
Working capital increases during the 2001 second quarter are primarily related
to carryover of inventory balances related to lower sales volumes experienced
during the 2001 first half.
20
Terra funded plant and equipment expenditures of $11.1 million during the first
nine months of 2001. Terra expects remaining 2001 capital expenditures to be
less than $20 million consisting principally of routine equipment replacements.
Cash balance at September 30, 2001 was $44.1 million.
On October 10, 2001, Terra Capital, Inc., a wholly owned subsidiary of Terra,
issued $200 million of 12.875% Senior Secured Notes due in 2008. The notes were
priced at 99.43% to yield 13%. The proceeds will be used to repay existing debt.
The notes are secured by a first priority interest in ownership or leasehold
interest in substantially all real property, machinery and equipment owned or
leased by Terra and its limited partnership interest in Terra Nitrogen Company,
L.P. Pro forma sources and uses of funds at September 30, 2001 were as follows:
(in millions)
---------------------------------------------------------------------------------------------------------------
Sources Uses
---------------------------------------------------------------------------------------------------------------
Proceeds from issuance of senior Repay senior notes due 2003 including
secured notes due 2008 $ 198.9 accrued interest of $8.5 million $ 167.3
Repay fixed asset term loan 40.0
Reduction to cash balances 33.8 Repay current asset term loan 59.4
Revolving credit facility 45.0 Fees and expenses 11.0
---------------------------------------------------------------------------------------------------------------
Total soures $ 277.7 Total uses $ 277.7
===============================================================================================================
Concurrent with note issuance, Terra amended its revolving credit facility that
increased the facility to $175 million and extended its term to June 30, 2005.
The amended facility requires Terra to generate operating cash flows (as
defined) for the most recent twelve month period of $40 million at December 31,
2001 and March 31, 2002; $60 million due at June 30, 2002; $75 million at
September 30, 2002 and $90 million at December 31, 2002 and at each quarter end
thereafter. The amended revolving credit facility also allows Terra to prepay
senior notes due 2005, or purchase outstanding minority interests in Terra
Nitrogen Company, L.P., subject to liquidity restrictions and minimum earnings
levels. The liquidity restrictions require Terra have an available borrowing
base under the revolving credit facility of $125 million following any such
prepayment or purchase. Minimum earnings levels require that twelve month cash
flows (as defined) at the most recent quarter end exceed $125 million when the
prepayment or purchase occurs. Annual prepayments or purchases are limited to
the amount Terra's average available borrowing base exceeds $125 million from
June 15 through July 15 of each year, or $75 million, whichever is less. No
prepayment or purchases are permitted until after July 15, 2002. At September
30, 2001, Terra's available borrowing base was approximately $60 million,
adjusted for the effects of the October 10, 2001 senior secured bond offering
and the amended revolving credit facility.
Terra management believes that cash from operations and available financing
sources will be sufficient to meet anticipated cash requirements.
POTENTIAL CHANGE OF CONTROL
Anglo American plc, through its wholly-owned subsidiaries, owns 49.5% of Terra
Industries' outstanding shares. Anglo American has made public its intention to
dispose of its interest in Terra Industries with the timing based on market and
other conditions.
21
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.
22
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
Form 8-K dated October 10, 2001, announcing completion of a new
$175.0 million revolving credit facility and issuance of $200.0
million of 12 7/8% Senior Secured Notes due in 2008.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
TERRA INDUSTRIES INC.
Date: November 14, 2001 /s/ Francis G. Meyer
---------------------------------------
Francis G. Meyer
Senior Vice President and Chief
Financial Officer and a duly authorized
signatory
23