e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2006
OR
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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)
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Maryland
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52-1145429 |
(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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Terra Centre
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51102-6000 |
600 Fourth Street
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(Zip Code) |
P. O. Box 6000 |
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Sioux City, Iowa
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(712) 277-1340 |
(Address of principal executive offices)
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(Registrants telephone number) |
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange |
Title of each class
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on which registered |
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Common Shares, without par value
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New York Stock Exchange |
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yeso No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statement incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or non-accelerated filer. See definition of accelerated filed and large accelerated filer in Rule
12b-2 of the Act).
Large Accelerated Filer
o Accelerated Filer þ Non-accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yeso No þ
The aggregate market value of the voting and non-voting common shares held by non-affiliates
computed by reference to the price at which the common shares were last sold, or the average bid
and asked price of such common shares, as of the last business day of the registrants most
recently completed second fiscal quarter was $580,794,088.42.
The number of Common Shares, without par value, outstanding as of March 1, 2007 was 92,756,438.
Documents Incorporated by Reference
Certain portions of the proxy statement for the Annual Meeting of Shareholders of Registrant
to be held on May 8, 2007 are incorporated herein by reference into Part III hereof.
PART I
Item 1. Business
Terra Industries Inc., a Maryland corporation, is referred to as Terra, or the Company
throughout this report. References to Terra also include the direct and indirect subsidiaries of
Terra Industries Inc. where required by the context. Subsidiaries not wholly-owned by Terra
include a limited partnership, Terra Nitrogen Company, L.P. (TNCLP), which, through its
subsidiary, Terra Nitrogen, Limited Partnership, operates Terras manufacturing facility at
Verdigris, Oklahoma. Terra is the sole general partner and the majority limited partner of TNCLP.
Terras principal corporate office is located at Terra Centre, 600 Fourth Street, P.O. Box 6000,
Sioux City, Iowa 51102-6000 and its telephone number is (712) 277-1340.
Terra makes available free of charge through its website, www.terraindustries.com, its Annual
Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all
amendments to those reports as soon as reasonably practicable after such material is
electronically filed with the Securities and Exchange Commission. Terras internet website and the
information contained or incorporated therein are not intended to be incorporated into this Annual
Report on Form 10-K.
Business Overview
Terra is a leading North American and U.K. producer and marketer of nitrogen products,
serving agricultural and industrial markets. In addition, Terra owns a 50% interest in Point Lisas
Nitrogen Limited (PLNL), an ammonia production joint venture in the Republic of Trinidad and
Tobago. Terra is one of the largest North American producers of ammonia, the basic building block
of nitrogen fertilizers. The Company upgrades a significant portion of the ammonia it produces
into higher value products, which are easier for distributors and farmers to transport, store and
apply to crops than ammonia. Terra owns nine manufacturing facilities in North America and the
U.K. capable of producing nitrogen products. Two of these facilities (Beaumont, Texas and
Woodward, Oklahoma) can also produce methanol. The Beaumont, Texas facility, which historically
had been a significant methanol producer, was mothballed in December 2004 and the Donaldsonville,
Louisiana ammonia plant was mothballed in the first quarter of 2005. These two facilities remain
out of production.
Terras business is organized into a nitrogen business segment and a methanol business segment.
The methanol segment has become less significant to the Companys business since the closing of
the Beaumont, Texas facility.
Nitrogen is both a global and local commodity: global because it is produced and traded in almost
all regions of the world, local because fertilizer customers display preferences for nitrogen in
one of four basic forms based upon local conditions. The principal forms of globally traded
nitrogen fertilizer are ammonia (82% nitrogen by weight) and urea (46% nitrogen by weight).
Ammonium nitrate (AN) (34% nitrogen by weight) is traded in international markets. Urea ammonium
nitrate solution (UAN) (28% to 32% nitrogen by weight) is used principally in North America and
has only recently been traded in international markets to a lesser extent. UANs high water
content and need to be transported in tankers can cause transportation costs per ton of nitrogen
to be higher than other forms of internationally traded nitrogen products. Because transportation
is a significant component of a customers total product cost, a key to competitiveness in the
nitrogen business is proximity to the end user, which allows a supplier to have the lowest
delivered cost for the customers product of choice. In addition, a supplier must provide a
reliable source of product.
1
The locations of Terras North American production facilities provide Terra a competitive
advantage in serving agricultural customers in the Corn Belt and other major agricultural areas in
the United States and Canada. Terras U.K. facilities are able to serve competitively the entire
British agricultural market. The Point Lisas ammonia production facility in Trinidad and Tobago
serves U.S. and international nitrogen markets and benefits from access to low-cost natural gas
supplies. Terras facilities have the following production capacities:
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Annual Capacity1 |
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Location |
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Ammonia2 |
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UAN3 |
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AN4 |
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Urea5 |
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Methanol6 |
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Beaumont, Texas7 |
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255,000 |
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225,000,000 |
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Donaldsonville, Louisiana8 |
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500,000 |
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Port Neal, Iowa |
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370,000 |
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840,000 |
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60,000 |
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Verdigris, Oklahoma |
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1,050,000 |
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2,200,000 |
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Woodward, Oklahoma9 |
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440,000 |
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340,000 |
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25,000 |
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40,000,000 |
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Yazoo City, Mississippi10 |
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500,000 |
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600,000 |
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775,000 |
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7,000 |
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Courtright, Ontario |
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480,000 |
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400,000 |
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175,000 |
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Severnside, U.K. |
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265,000 |
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500,000 |
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Billingham, U.K.12 |
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550,000 |
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520,000 |
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Point Lisas, Trinidad and Tobago13 |
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360,000 |
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Total |
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4,770,000 |
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4,380,000 |
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1,795,000 |
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267,000 |
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265,000,000 |
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Annual capacity includes an allowance for planned maintenance shutdowns. |
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Measured in gross tons of ammonia produced; net tons available for sale will
vary with upgrading requirements. |
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Measured in tons of UAN containing 28% nitrogen by weight. |
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Measured in tons. |
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Urea is sold as urea liquor from the Port Neal, Woodward and Yazoo City
facilities and as either granular urea or urea liquor from the Courtright facility.
Production capacities shown are for urea sold in tons. |
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Measured in gallons. |
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The Beaumont facility was mothballed in December 2004 and remains out of
production. The Beaumont plant capacity depends on product mix (ammonia/methanol). |
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The Donaldsonville facilitys manufacturing capacity consists of a single
ammonia plant. This plant was mothballed in January 2005 and remains out of
production. |
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Woodwards plant capacity depends on product mix (ammonia/methanol). |
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The Yazoo City facility also produces merchant nitric acid; sales for the
twelve months ended December 31, 2006 were 71,000 product tons. |
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Terras full AN capacity at Yazoo City is 835,000 tons, however such production
would limit Yazoo Citys UAN production to approximately 450,000 tons and increase
urea production to 45,000 tons. The plant has the ability to produce both
agricultural grade AN and industrial grade AN (IGAN). |
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The Billingham, England facility also produces merchant nitric acid; sales for
the twelve months ended December 31, 2006 were 282,000 product tons. |
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The Point Lisas plant capacity represents Terras 50% interest. |
2
The principal customers for Terras North American nitrogen products are national
agricultural retail chains, farm cooperatives, independent dealers and industrial customers.
Industrial customers use nitrogen products to manufacture chemicals, plastics and other products
such as acrylonitrile, polyurethanes, fibers, explosives and adhesives; to reduce nitrogen oxides
(NOx) and other emissions from power plants; and in water treatment processes.
Agricultural customers accounted for approximately 70% and industrial customers approximately 30%
of Terras North American nitrogen product revenue in 2006. For more information on the nitrogen
business, see the discussion under Nitrogen Business Segment below.
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% of Total |
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U.S. |
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U.K. |
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2006 Terra |
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Capacity |
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Capacity |
Product |
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Revenues1 |
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Position |
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Position |
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Ammonia |
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34.9 |
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UAN |
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31.4 |
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AN |
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16.6 |
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Solid Urea |
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2.2 |
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4 |
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Methanol |
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2.0 |
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1 |
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Revenues from sales of carbon dioxide, nitric acid and other
nitrogen products and services, as well as industrial sales in
the U.K., represented 12.9% of Terras total revenues for 2006. |
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Terra does not produce in these markets. Terra produces
granular urea at its Courtright, Ontario facility. |
In December 2003, Terra entered into contracts with the Methanex Corporation (Methanex),
providing it exclusive rights to all methanol production at the Beaumont facility for five years.
In December 2004, this facility was mothballed. As long as the Beaumont facility remains idle
through the December 2008 termination of the Methanex contract, Terra will continue to realize
revenues relating to the facility of up to $16.4 million per year consisting of $4.4 million from
annual amortization of deferred revenues plus one-half of the annual cash margin, if any, based on
the plants methanol production capacity, reference prices and natural gas costs. In 2006, the
Company recorded $12.0 million in revenue related to the cash margin clause of the Methanex
agreement. No revenue was recorded in 2005 relating to the cash margin clause of the Methanex
agreement due to the high natural gas prices. Terra also entered into an agreement for Methanex
to market, under a commission arrangement, all methanol produced at the Woodward facility. For
more information on the methanol business, see the discussion under Methanol Business Segment
below.
Nitrogen Business Segment
Terra is a leading producer and marketer of nitrogen products, principally fertilizers. The
Company upgrades a significant portion of the ammonia it produces into other nitrogen products,
such as urea, ammonium nitrate (AN) and urea ammonium nitrate solutions (UAN). Ammonia, AN, urea
and UAN are the principal nitrogen products the Company produces and sells in North America. Terra
produces and sells primarily ammonia and AN in the U.K. The Point Lisas production facility in
Trinidad provides ammonia for sale into both the U.S. and international nitrogen markets. Other
products Terra manufactures include nitric acid, dinitrogen tetroxide and carbon dioxide. These
products, along with a portion of Terras ammonia, AN and urea production, are used in
non-agricultural applications. In 2003, Terra formed its Terra Environmental Technologies division
to provide products and services to customers using nitrogen products (primarily ammonia, aqua
ammonia and liquid and dry urea) to reduce nitrogen oxides (NOx) emissions from various sources,
including power plants, and in other environmental processes such as water treatment plants.
Although the different nitrogen fertilizer products are interchangeable to some extent, each has
its own characteristics which make one product or another preferable to the end-user. Terras
plants are designed to provide the fertilizer products preferred by end-users in the regions in
which they are located. These preferences vary according to the crop planted, soil and weather
conditions, regional farming practices,
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relative prices, and the cost and availability of storage, handling and application equipment.
Terras nitrogen products and its 2006 production are described in greater detail below.
Anhydrous Ammonia
Anhydrous ammonia (or ammonia) is the simplest form of nitrogen fertilizer and the feedstock for
the production of other nitrogen fertilizers, including urea, AN and UAN. Ammonia is also a vital
raw material for many industrial applications. Terra is the leading U.S. producer of ammonia.
Ammonia is produced when natural gas reacts with steam and air at high temperatures and pressures
in the presence of catalysts. Ammonia has a nitrogen content of 82% by weight and is generally the
least expensive form of fertilizer on a per-pound-of- contained-nitrogen basis. Although generally
the cheapest source of nitrogen available to agricultural customers, ammonia can be less desirable
to end-users than urea, AN and UAN because of its need for specialized application equipment and
its limited application flexibility.
In 2006, Terra produced approximately 2,632,000 tons of ammonia at its North American facilities
and approximately 505,000 tons of ammonia at its U.K. facilities. The Company is obligated by
contract through 2018 to purchase one-half of the ammonia produced by Point Lisas Nitrogen in
Trinidad at a discount to market, subject to a minimum price. In 2006, Terra purchased
approximately 307,000 tons pursuant to its contract with Point Lisas Nitrogen. Terra sold a total
of 1,897,000 tons of ammonia worldwide in 2006 and consumed approximately 2,204,000 tons of
ammonia as a raw material to manufacture its other nitrogen products.
Urea Ammonium Nitrate Solutions (UAN)
UAN is a liquid fertilizer and, unlike ammonia, is odorless and does not require refrigeration or
pressurization for transportation or storage. UAN is produced by combining liquid urea, liquid
ammonium nitrate and water. The nitrogen content of UAN ranges from 28% to 32% by weight. (Unless
specifically stated to the contrary, all references to UAN herein shall be to 28%.) Because of its
high water content, UAN is relatively expensive to transport, making it largely a regionally
distributed product.
UAN can be applied to crops directly or mixed with crop protection products, permitting the
application of several materials simultaneously, reducing energy and labor costs and accelerating
field preparation for planting. UAN may be applied from ordinary tanks and trucks and sprayed or
injected into the soil, or applied through irrigation systems. In addition, UAN may be applied
throughout the growing season, providing significant application flexibility. Due to its
stability, UAN (like AN) may be used for no-till row crops where fertilizer is spread on the
surface of the soil and is subject to evaporation losses.
Terra produced approximately 3,710,000 tons of UAN at its North American facilities in 2006 and
sold approximately 4,368,000 tons of UAN in 2006, primarily to U.S. fertilizer dealers and
distributors.
Ammonium Nitrate (AN)
Terra is the largest manufacturer and marketer of agricultural-grade AN fertilizer in the U.S. and
produces AN at two facilities in the U.K. AN is produced by combining nitric acid and ammonia into
a liquid form which is then converted to a solid, largely for fertilizer applications. The
nitrogen content of AN is 34% by weight. AN is less subject to volatilization (evaporation) losses
than other nitrogen products. Due to its stability, AN is often the product of choice for pastures
and no-till crops (that is, where the soil is not plowed prior to planting) where fertilizer is
spread upon the surface and is subject to evaporation losses.
4
Industrial grade AN prills and ammonium nitrate solution is utilized as explosives in the mining
industry as well as a raw material in the production of catalyst materials.
The Company produced approximately 508,000 tons of solid AN, 452,000
agricultural grade AN and
54,000 industrial grade ammonium nitrate (IGAN), at its Yazoo City, Mississippi facility and
approximately 775,000 tons of solid AN at its U.K. facilities in 2006. During this period, the
Company sold approximately 555,000 tons in the U.S. and 561,000 tons in the U.K.
Urea
Urea is produced by converting ammonia and carbon dioxide into liquid urea, which can be further
processed into a solid, granular form. Urea is used for fertilizer and animal feed as well as in
industrial applications as a raw material to produce resins and environmentally as a reagent to
reduce NOx emissions. Granular urea has a nitrogen content of 46% by weight, the highest level of
any solid nitrogen product. Terra produces both a granulated form of urea, generally for the
fertilizer market, and urea liquor (liquid) for animal feed supplements and industrial
applications.
In 2006, Terra produced approximately 220,000 tons of urea and urea liquor, all of it at North
American plants. During this period, the Company sold approximately 244,000 tons of urea and urea
liquor.
Nitric Acid
Nitric acid is made by oxidizing ammonia with air. The product is used as a raw material for other
nitrogen products and by industrial customers to produce such products as nylon fibers,
polyurethane foams and specialty fibers. In 2006, the Company produced approximately 893,000 tons
of nitric acid worldwide. Approximately 366,000 of these tons were sold to industrial users and
the remainder was used as a raw material for the production of Terras other nitrogen products.
Dinitrogen Tetroxide
Dinitrogen tetroxide (N2O4) is the propellant oxidizer used in various satellite, rocket and
missile propulsion systems. It is also used by industrial customers in the manufacturing of
pharmaceuticals. Dinitrogen tetroxide is produced by cooling and condensing a slipstream of
process gas from a nitric acid plant containing various oxides of nitrogen. The recovered product
is filtered and its composition adjusted to meet final product specifications. Terra manufactured
approximately 90,000 pounds of the product in 2006.
Marketing and Distribution
Terras customers are broadly segregated into two groups: (1) North American customers, including
those receiving shipments of imported product from the Point Lisas Nitrogen facility, and (2) U.K.
customers, including export sales to continental Europe and Australia.
The principal customers for Terras North American manufactured nitrogen products fall into two
broad categories agricultural fertilizer customers and industrial customers. The agriculture
customers consist of independent dealers, national retail chains, and cooperatives. These
agricultural customers, in turn, sell product to dealers, farmers and other users. Industrial
customers use nitrogen products as a feedstock for a variety of chemical processes, in the
manufacture of pulp, paper, fibers and to control nitrous oxide (NOx) emissions from power plants.
Nearly all of Terras industrial customers are end-users. The Companys agricultural and
industrial customers are located primarily in the Gulf, midwestern plains and southern regions of
the U.S. where the Companys facilities are located. It is Terras objective to ship as much of
its North American production as possible directly from its manufacturing facilities to its
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customers. Its five North American production facilities have total storage capacity for 190,000
tons of ammonia and 240,000 tons of UAN.
Terras Donaldsonville terminal has ready access to rail, truck and ammonia pipeline
transportation and permits economical oceangoing vessel and barge transportation for imports and
exports of nitrogen products. The terminal includes two ammonia storage tanks, each with a
capacity of 30,000 tons, and can receive ocean-going vessels carrying
50,000 tons or more of
ammonia. During 2006, the terminal received and shipped approximately 729,000 and 729,000 tons of
ammonia, respectively. Terra expanded the terminals capabilities by constructing a new UAN
solution tank with a 50,000-ton capacity. This tank and related receiving and shipping equipment
was completed in December 2006 at a cost of $9.2 million.
In July 2005 Terra sold to a subsidiary of Kinder Morgan Energy Partners its terminal assets in
Blytheville, Arkansas, consisting of storage and supporting
infrastructure for 40,000 tons of ammonia,
9,500 tons of UAN and 40,000 tons of urea. In conjunction with this sale of assets, Terra has
entered into a long-term agreement to lease from Kinder Morgan exclusively these terminal assets.
This arrangement will maintain Terras distribution capabilities in the Blytheville, Arkansas
region.
Terra owns a 50% interest in the Houston Ammonia Terminal, located on the Houston Ship Channel
near Pasadena, Texas. This entity has two 15,000 ton ammonia storage tanks which provide ammonia
to industrial customers in the area via a pipeline system capable of shipping approximately 1,000
tons per day. The terminal can receive ocean-going vessels.
In the U.K., agricultural customers accounted for approximately 57% and industrial customers
approximately 43% of sales in 2006. Terra engages merchants and buying groups to sell its Nitram
brand bagged AN fertilizer directly to British farmers. Terra also bags AN for other U.K.
suppliers and sells it in bulk to suppliers who blend it with potash and phosphates, bag it and
distribute it to farmers. Terra exports a small quantity of AN to continental Europe. Terras U.K.
industrial products include ammonia, nitric acid and liquid carbon dioxide. Most industrial sales
are to customers where Terra has a freight advantage.
Industry Overview
The three major nutrients required for plant growth are phosphorous, mined as phosphate rock;
potassium, mined as potash; and nitrogen, produced from natural gas. Phosphorus plays a key role
in the photosynthesis process. Potassium is an important regulator of plants physiological
functions. Nitrogen is an essential element for most organic compounds in plants because it
promotes protein formation. Nitrogen is also a major component of chlorophyll, which helps promote
green healthy growth and high yields. There are no known substitutes for nitrogen fertilizers in
the cultivation of high-yield crops. These three nutrients occur naturally in the soil to a
certain extent, but must be replaced because crops remove them from the soil. Nitrogen, to a
greater extent than phosphate and potash, must be reapplied each year in areas of intense
agricultural usage because of nitrogen absorption by crops and its tendency to escape from the
soil by evaporation or leaching. Consequently, demand for nitrogen fertilizer tends to be more
consistent on a year-by-year, per-acre-planted basis than is demand for phosphate or potash
fertilizer.
The major nitrogen consuming crop in North America is corn and in the United Kingdom, wheat.
Certain crops, such as soybeans and other legumes, can use atmospheric nitrogen and do not require
nitrogen fertilizers.
6
Demand
Global demand for fertilizers typically grows at predictable rates and tends to correspond to
growth in grain production. Global fertilizer demand is driven in the long term primarily by
population growth, increases in disposable income and associated improvements in diet. Short-term
demand depends on world economic growth rates and factors creating temporary imbalances in supply
and demand. These factors include weather patterns, the level of world grain stocks relative to
consumption, agricultural commodity prices, energy prices, crop mix, fertilizer application rates,
farm income and temporary disruptions in fertilizer trade from government intervention, such as
changes in the buying patterns of China or India. Grain consumption has historically grown at
approximately 1.2% per year. According to IFA, International Fertilizer Industry Association,
over the last 45 years global fertilizer demand has grown 3.7% annually and global nitrogen
fertilizer demand has grown at a faster rate of 4.8% annually. During that period, North American
nitrogen fertilizer demand has grown 3.3% annually.
Supply
Over the past six years, global ammonia capacity has remained relatively flat, growing at an
average of less than 1% per annum. This result was the combination of new project capacity being
offset by permanent plant closing in the U.S. and Europe. As global operating rates and prices
have risen, so have plans for new capacity.
This new global capacity will likely come from advantaged natural gas regions of the world, such
as the Middle East and Africa. This expansion of capacity could be limited, however, by high
capital and construction costs, lower nitrogen prices and increasing natural gas prices. Russia
has recently announced plans to raise domestic gas prices as well as prices paid by their export
customers. This will raise the production costs for new and existing plants in the former Soviet
Union and Europe.
Imports account for a significant portion of U.S. nitrogen product supply. Producers from the
former Soviet Union, Canada, the Middle East, Trinidad and Venezuela are major exporters to the
U.S. These export producers are often competitive in regions close to the point of entry for
imports, primarily the Gulf coast and east coast of North America. Due to higher freight costs and
limited distribution infrastructure, importers are less competitive in serving the main
corn-growing regions of the U.S., which are more distant from these ports. According to Fertecon,
a leading industry publication, world trade in ammonia grew from 15.4 million tons in 2000 to 19
million tons by 2005 due to the exceptional increase in gas prices in the U.S. and Europe during
this period and the consequent closure of U.S. capacity.
Outlook
Fertecon forecasts that global nitrogen fertilizer demand is expected to rise by around 1.8% per
year from 2005 to 2015, increasing by 16 million tons or close to 18% over the period. In North
America, nitrogen fertilizer consumption is expected to increase from 2005 to 2015 from 12.3
million tons to 14.1 million tons, a 14%increase.
Global grain inventories are currently at levels significantly below the ten-year average, and
current corn prices have increased significantly to $3.85 per bushel as of January 18, 2007 versus
$1.90 per bushel one year prior. Both of these factors influence the improved outlook for demand.
The emergence of ethanol as an alternative energy source has the potential to drive incremental
fertilizer demand. Corn, the primary feedstock for U.S. ethanol production, represents
approximately 40% of fertilizer demand in North America. New ethanol capacity is increasing
demand for corn and, according
7
to Fertecon, is expected to contribute to a forecasted 21 million hectare increase in planted corn
area in the world by 2030. The amount of corn used in the U.S. for ethanol production has doubled
in the last four years. In 2005-2006, around 1.6 billion bushels of corn were used for ethanol
production. According to Fertecon, a 34% increase is forecast for the current 2006-2007 crop
year, bringing the total bushels used for ethanol to 2.15 billion. This number is expected to
rise to over 3 billion bushels by 2007-2008, equivalent to 25% of the U.S. corn crop.
Due to the Clean Air Act, energy providers are required to reduce emissions of nitrogen oxides, or
NOx. This presents a new market opportunity for ammonia, which can be used to reduce NOx from air
emissions. We believe that this new application could increase ammonia demand by up to 1 million
tons, or 10% of U.S. capacity in 2010.
The continued growth in demand for nitrogen products has helped stabilize global ammonia
utilization rates, which averaged 86% between 2004 and 2005. According to Fertecon, global
ammonia utilization rates are forecasted to remain in the mid-80s through 2015. North American
ammonia utilization rates are forecast to decrease from 84% in 2006 to 78% by 2015 due in part to
projected long-term growth in worldwide capacity and in imports.
To help meet the growing global demand for fertilizers, especially in high growth areas like China
and India, new ammonia capacity is expected to come on stream globally in the next nine years.
According to Fertecon, global ammonia capacity is forecast to increase by a new 37.5 million tons
by 2015, a total increase of 22%. There are a number of new capacity projects expected or
underway in gas advantaged regions; however, increased construction costs and changes in market
dynamics have delayed a number of projects.
World trade in ammonia is expected to increase by 1.6 million tons or 8% in the period to 2010,
according to Fertecon, representing more modest growth than seen from 2000 to 2005. Fertecon
projects that higher gas costs for Russian and Ukrainian exporters and the lower-than-previous gas
price outlook for the U.S. would appear to support continued operating rates at the remaining U.S.
ammonia capacity, limiting the near-term growth in ammonia imports.
Methanol Business Segment
Terras methanol business segment has shrunk considerably since it mothballed its principal
methanol production facility at Beaumont, Texas in December 2004. The facility remained closed
throughout 2005 and 2006 and remains closed to date. Terras remaining manufacturing facility
capable of producing methanol is in Woodward, Oklahoma.
In December 2003, Terra entered into contracts with Methanex Corporation (Methanex) providing
Methanex exclusive rights to all methanol production at Terras Beaumont, Texas facility for five
years. Methanex paid $25 million for these rights and agreed to purchase Terras methanol
production at amounts expected to approximate cash production costs. Methanex also agreed to pay
Terra 50% of any gross profits earned from its sales of Beaumont product up to maximum payments of
$12 million per year. The agreement also gave Methanex the right to terminate Beaumonts
production, with Terra being responsible for the costs of shutting down the facility. On December
1, 2004, at the request of Methanex and under the terms of the parties agreement, Terra ceased
production at the Beaumont facility and mothballed the plant. The parties agreement stipulates
that, beginning two years from the date of the shutdown, Terra may terminate the agreement by
paying Methanex approximately $417,000 per month remaining in the agreements term. As long as the
Beaumont facility remains idle through the December 2008 termination of the Methanex contract,
Terra will continue to realize revenues relating to the facility of up to $16.4 million per year
consisting of $4.4 million from annual amortization of deferred revenues
8
plus one-half of the annual cash margin, if any, attributable to idled methanol production based
on reference prices and natural gas costs. Terra received the maximum payment of $12 million in
2006.
Terra has retained some employees to operate the Beaumont methanol storage and distribution
terminal and potentially to operate the ammonia plant.
Manufacturing Facilities
Terra owns the plant and processing equipment at the Beaumont facility, which has an annual
methanol production capacity of 225 million gallons. Terra did not produce any methanol at the
Beaumont plant in 2006. For a description of the Beaumont facility, see the Beaumont, Texas
description under Item 2 Properties. The Woodward, Oklahoma facility produced 24.1 million, 30.4
million and 37.3 million gallons of methanol in 2006, 2005 and 2004, respectively, and has an
annual methanol production capacity of 40 million gallons. For a description of the Woodward
facility, see the Woodward, Oklahoma listing under Item 2 Properties, Marketing and Distribution
In addition to the Beaumont production agreement, Terra also entered into an agreement with
Methanex to market, under a commission arrangement, all methanol produced at the Woodward,
Oklahoma facility. The customers served under these arrangements are primarily large domestic
chemical producers.
Industry Overview
Methanol is a liquid made primarily from natural gas that is used as a feedstock in the
production of formaldehyde, acetic acid, methyl tertiary-butyl ether (MTBE), and a variety of
other chemical intermediates which form the foundation of a large number of secondary derivatives.
Methanol is a typical commodity chemical and the methanol industry is characterized by cycles of
oversupply resulting in lower prices and idled capacity, followed by periods of shortage and
rapidly rising prices until increased prices justify new plant investments or the re-start of
idled capacity. Over the past several years significant industry restructuring has taken place
with most North American methanol capacity shut down. New methanol production facilities have
generally been constructed in locations with access to low-cost natural gas, although this
advantage is partially offset by higher distribution costs due to distance form major markets.
Credit
Terras credit terms are generally 15-30 days in the U.S. and 30 days in the U.K., but may be
extended for longer periods during certain sales seasons, consistent with industry practices.
Seasonality and Volatility
The fertilizer business is highly seasonal, based upon the planting, growing and harvesting
cycles. Nitrogen fertilizer inventories must be accumulated to permit uninterrupted customer
deliveries, and require significant storage capacity. This seasonality generally results in higher
fertilizer prices during peak periods, with prices normally reaching their highest point in the
spring, decreasing in the summer, and increasing again in the late fall early winter period as
depleted inventories are restored.
Nitrogen fertilizer prices can also be volatile as a result of a number of other factors. The most
important of these factors are:
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Weather patterns and field conditions (particularly during periods of high fertilizer
consumption); |
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Quantities of fertilizers imported to primary markets; |
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Current and projected grain inventories and prices, which are heavily influenced by U.S.
exports, worldwide grain markets, and domestic demand (food, feed, biofuel); and |
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Price fluctuations in natural gas, the principal raw material used to produce nitrogen
fertilizer. |
Governmental policies may directly or indirectly influence the number of acres planted, the level
of grain inventories, the mix of crops planted and crop prices, as well as environmental demands.
While most U.S. methanol is sold pursuant to long-term contracts based on market index pricing and
fixed volumes, the spot market price of methanol can be volatile. The industry has experienced
cycles of oversupply, resulting in depressed prices and idled capacity, followed by periods of
shortages and rapidly rising prices. Future demand for methanol will depend in part on the
emerging regulatory environment with respect to reformulated gasoline.
Raw Materials
The principal raw material used to produce manufactured nitrogen products and methanol is
natural gas. Natural gas costs in 2006 accounted for approximately 46% of Terras total
manufacturing costs and expenses. Significant increases in natural gas costs that are not hedged
or recovered through increased prices to customers would have an adverse impact on the Companys
business, financial condition and results. Terra management believes there will be a sufficient
supply of natural gas for the foreseeable future and will, as opportunities present themselves,
enter into firm transportation contracts to minimize the risk of interruption or curtailment of
natural gas supplies during the peak-demand winter season. The Company uses a combination of spot
and term purchases of varied duration from a variety of suppliers to obtain natural gas supply.
Natural gas prices have moderated, averaging $6.54 and$6.46 per MMBtu in the third and fourth
quarters of 2006. This follows a period of significant cost pressure after hurricanes hit the
U.S. in late 2005 causing natural gas prices to increase and peak at an average price of $12.79
per MMBtu in November 2005. This significantly increased costs for North American producers in
the fourth quarter of 2005 and first quarter 2006. Currently, natural gas storage in North
America exceeds five-year historic levels.
Terra owns a 50% interest in Point Lisas Nitrogen Limited, a 50/50 ammonia production joint
venture with KNC Trinidad Limited. Point Lisas Nitrogen Limited has a contract to purchase natural
gas from the National Gas Company of Trinidad and Tobago. The joint ventures cost of natural gas
has historically been significantly lower than U.S. natural gas costs, which has resulted in the
joint venture being substantially more profitable than comparable North American facilities.
Pursuant to a policy approved by the board of directors, Terra employs natural gas hedges with a
goal of mitigating risk from increases to natural gas prices. The Company has implemented a policy
setting boundaries to ensure coverage of fixed forward sales as well as potential outstanding
forward priced quotes and prepay programs. The Companys policy is designed to achieve an
acceptable gross margin on forward sales estimates. Terra hedges natural gas prices through the
use of supply contracts, financial derivatives and other instruments. Terra enters into these
positions when it believes such arrangements would not result in costs greater than expected
selling prices for the finished products.
If natural gas prices rise, Terra may benefit from the use of forward-pricing techniques.
Conversely, if natural gas prices fall, the Company may incur costs above the then-available spot
market price. The settlement dates of forward-pricing contracts coincide with gas purchase dates
as well as shipment periods on forward committed sales. Forward-pricing contracts are based on a
specified price referenced to spot market prices or appropriate NYMEX futures contract prices.
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Transportation
Terra uses several modes of transportation to distribute products to customers, including
railroad cars, common carrier trucks, barges and common carrier pipelines.
Railcars are the major mode of transportation at Terras North American manufacturing facilities.
At December 31, 2006, Terra had 2,858 railcars under lease. Terra owns 10 nitric acid railcars. In
addition, Terra operates Terra Express, Inc., a common carrier covering the 48 contiguous United
States which is most active in the middle third of the country. Terra Express specializes in
transporting liquid bulk products, including UAN, urea liquor, ethanol, ammonia and propane. Terra
Express employs two drivers and 42 owner-operators. In the U.K., Terras AN production is
transported primarily by contract carrier trucks, and ammonia is transported primarily by
pipelines that the Company owns.
Terra transports purchased natural gas to its Woodward, Oklahoma facility via both intrastate and
interstate pipelines and to Terras Verdigris, Oklahoma facility via intrastate pipeline. The
intrastate pipelines serving Woodward and Verdigris are not open-access carriers, but are
nonetheless part of a widespread regional system through which Woodward and Verdigris can receive
natural gas from any major Oklahoma source. Terra also has limited access to out-of-state natural
gas supplies for these facilities. Terras Beaumont, Texas facility sources natural gas via four
intrastate pipelines. The Courtright, Ontario facility sources natural gas at delivery points at
Parkway and Dawn, Ontario and a local utility. Terra transports purchased natural gas for its Port
Neal, Iowa facility via interstate, open-access pipelines. At the Billingham and Severnside,
England locations, purchased natural gas is transported to the facilities via a nationwide,
open-access pipeline system. Terras Donaldsonville, Louisiana facility sources purchased natural
gas from two intrastate pipelines. Terras Yazoo City facility is served by three interstate
pipelines and one intrastate pipeline.
FMCL Limited Liability Company, Terras 50/50 ammonia shipping joint venture with KNC Trinidad
Limited, leases a vessel for transportation of ammonia, primarily between the Point Lisas Nitrogen
Limited facility in Trinidad and the United States. Use of this vessel is shared between the joint
venture partners, Terra and KNC Trinidad Limited.
Research and Development
At the present time, Terra is not undertaking any significant, ongoing research and
development efforts.
Competition
The markets in which Terra operates are highly competitive. Competition in agricultural input
markets takes place largely on the bases of price, supply reliability, delivery time and quality
of service. Feedstock availability to production facilities and the cost and efficiency of
production, transportation and storage facilities are also important competitive factors.
Government intervention in international trade can distort the competitive environment. The
relative cost and availability of natural gas are also important competitive factors. Significant
determinants of a plants competitive position are the natural gas acquisition and transportation
contracts negotiated with its major suppliers as well as proximity to natural gas sources and/or
end-users.
Terras domestic competitors in the nitrogen fertilizer markets are primarily other independent
fertilizer companies. Nitrogen fertilizers imported into the United States compete with
domestically produced nitrogen fertilizers, including those produced by Terra. Countries with
inexpensive sources of natural gas (whether as a result of government regulation or otherwise) can
produce nitrogen fertilizers at a low cost. A substantial amount of new ammonia capacity is
expected to be added abroad in the foreseeable future.
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In the methanol segment, production and trade have become increasingly globalized and a number of
foreign competitors produce methanol primarily for the export market. Many of these foreign
competitors have access to favorably priced sources of natural gas and are relatively insensitive
to raw material price fluctuations. However, because of low domestic demand, foreign competitors
aggressively pursue the U.S. and other export markets.
Environmental and Other Regulatory Matters
Terras U.S. operations are subject to various federal, state and local environmental, health
and safety laws and regulations, including laws relating to air quality, hazardous or solid wastes
and water quality. Terras operations in Canada are subject to various federal and provincial
regulations regarding such matters, including the Canadian Environmental Protection Act
administered by Environment Canada, and the Ontario Environmental Protection Act administered by
the Ontario Ministry of the Environment. Terras U.K. operations are subject to similar
regulations under a variety of acts governing hazardous chemicals, transportation and worker
health and safety. All of Terras facilities require operating permits that are subject to review
by governmental agencies. Terra is also involved in the manufacturing, handling, transportation,
storage and disposal of materials that are or may be classified as hazardous or toxic by federal,
state, provincial or other regulatory agencies. The Company takes precautions to reduce the
likelihood of accidents involving these materials. If such materials have been or are disposed of
at sites that are targeted for investigation and/or remediation by federal or state regulatory
agencies, Terra may be responsible under CERCLA or analogous laws for all or part of the costs of
such investigation and remediation, and damages to natural resources.
The State of Arizona designated Inspiration Consolidated Copper Company (Inspiration), a Terra
subsidiary that disposed of its assets in 1988 and no longer operates a business, as one of
several potentially responsible parties (PRP) under the state Superfund law at the Pinal Creek
Drainage Basin Site (Pinal Site) in Globe/Miami, Arizona, based upon Inspirations prior
ownership and operation of copper mining and production facilities. Under state and federal
Superfund laws, all PRPs may be jointly and severally liable for the costs of investigation and/or
remediation of an environmentally impaired site regardless of fault or the legality of original
disposals. The Pinal Site is the subject of ongoing investigation and cleanup to address
groundwater releases of acidic metal-bearing solutions from past copper mining and production
facilities. The remedial actions are governed by a 1997 consent decree (1997 Consent Decree)
between the Arizona Department of Environmental Quality and the two current owners/operators of
the copper mining and production facilities (one of whom is the successor to Inspirations buyer),
both of whom the State designated as PRPs, and Inspiration (collectively with Terra, the Group).
The Groups members are jointly financing and performing the work, but Inspiration no longer owns
assets or is conducting any activities at the Pinal Site. Also, the Group has filed an action for
cost-recovery against other former owners and operators at the Pinal Site, a substantial portion
of which has been settled. In a related matter, more than a decade ago, residents in an area of
the Pinal Site brought a class action lawsuit against the Group seeking property damages and
medical monitoring for potential personal injuries allegedly related to the acidic metal-bearing
groundwater. The class action lawsuit was settled in September 2000, although plaintiffs reserved
the right to assert personal injury claims individually. In the 1988 sale agreement, Inspiration
was contractually indemnified by its buyer (which includes the buyers successor) for all
environmental claims relating to the Pinal Site. In April 2005, Inspiration and its successor
settled most claims relating to the 1988 indemnity, confirming that the successor will indemnify
Inspiration for past and future costs arising out of the 1997 Consent decree, for allocation
claims arising out of the cost-recovery lawsuit, and for legal fees of common counsel in the
various lawsuits. After consideration of such factors as the number of
12
PRPs and levels of financial responsibility, including the ongoing litigation and contractual
indemnities, Terra believes its liability with respect to these matters will not be material.
Terra retained a small number (less than 10%) of its retail locations after the sale of its
distribution business in 1999. Some of these locations are now, or are expected in the future to
be, the subject of environmental clean-up activities for which the Company has retained liability.
Terra does not believe that such environmental costs and liabilities will have a material effect
on its results of operations, financial position or net cash flows. As of November 30, 2006, there
were 12 remaining locations, six of which were undergoing environmental clean-up activities prior
to the sale or release of those properties to the landowner. The total net cost associated with
the former retail locations in 2007 and beyond (including environmental expenditures and proceeds
from voluntary clean-up reimbursements and sale of properties) is not expected to exceed $2
million.
With respect to the Verdigris, Oklahoma facility, Freeport-McMoRan Resource Partners, Limited
Partnership (a former owner and operator of the facility) retained liability for certain
environmental matters. With respect to the Beaumont, Texas facility, DuPont retains responsibility
for certain environmental costs and liabilities stemming from conditions or operations to the
extent such conditions or operations existed or occurred prior to its sale of the facility to
Terra in 1991. Likewise, with respect to the Billingham and Severnside, England facilities, the
seller, ICI, indemnified Terra, subject to certain conditions, for pre-December 31, 1997
environmental contamination associated with the purchased assets. Known conditions are not
expected to result in material expenditures but discovery of unknown conditions or the failure of
prior owners and operators and indemnitors to meet their obligations could require significant
expenditures.
In the wake of the September 11 tragedy, both the U.S. Congress and U.K. Parliament are
considering various additional security and handling requirements for hazardous chemicals,
including AN, which can be used to manufacture explosives. Terras facilities already have the
basic plans and vulnerability assessments in place that may be required under new legislation.
Accordingly, such legislation is unlikely to have an adverse impact on Terras operations,
financial position, or cash flow.
Terra may be required to install additional air and water quality control equipment, such as low
nitrous oxide burners, scrubbers, ammonia sensors and continuous emission monitors, at certain
facilities to comply with applicable environmental requirements. Terra estimates that the total
cost of additional equipment to comply with these requirements in 2007 and the next two years will
be less than $15 million.
Terra endeavors to comply in all material respects with applicable environmental, health and
safety regulations and has incurred substantial costs in connection with such compliance. Because
these regulations are expected to continue to change and generally to be more restrictive than
current requirements, the costs of compliance will likely increase. Terra does not expect its
compliance with such regulations to have a material adverse effect on its results of operations,
financial position or net cash flows. However, there can be no guarantee that new regulations will
not result in material costs.
Terras capital expenditures related to environmental control in 2006, 2005 and 2004 were
approximately $1.2 million, $1.3 million and $2.4 million, respectively. Projected environmental
capital expenditures are $6.7 million for 2007 and $5.2 million for 2008.
Terra believes that its policies and procedures now in effect are in compliance with applicable
environmental laws and with the permits relating to the facilities in all material respects.
However, in the normal course of its business, Terra is exposed to risks relating to possible
releases of hazardous substances into the environment. Such releases could cause substantial
damages or injuries. Although
13
environmental expenditures have not been material during the past year, it is impossible to
predict or quantify the impact of future environmental liabilities associated with releases of
hazardous substances from Terras facilities. Such liabilities could have a material adverse
impact on the results of operations, financial position or net cash flows.
Revenues and Assets
Terras revenues from external customers, measure of profit and loss, total assets and
revenues and assets according to geography for the years 2004-2006 are set forth in Item 8 of this
Annual Report on Form 10-K under the caption Note 21 Industry Segment Data contained in the
Notes to Consolidated Financial Statements.
Employees
Terra had 1,238 full-time employees at December 31, 2006. All 372 U.K. employees are covered
by a wage and working conditions arrangement similar to a collective bargaining agreement.
Item 1A. Risk Factors
In addition to the other information contained in this Form 10-K, the following risk factors
should be considered carefully in evaluating Terras business. The Companys business, financial
condition, or results of operations could be materially adversely affected by any of these risks.
Please note that additional risks not presently known to Terra or that its management currently
deems immaterial may also impair the Companys business and operations.
A substantial portion of Terras operating expense is related to the cost of natural gas, and an
increase in such cost that is either unexpected or not accompanied by increases in selling prices
of products could result in reduced profit margins and lower product production.
The principal raw material used to produce nitrogen products is natural gas. Natural gas costs in
2006 comprised about 46% of total costs and expenses. A significant increase in the price of
natural gas (which can be driven by, among other things, supply disruptions, cold weather and oil
price spikes) that is not hedged or recovered through an increase in the price of related nitrogen
products could result in reduced profit margins and lower product production. Terra has in the
recent past idled one or more of its plants in response to high natural gas prices. A significant
portion of Terras competitors global nitrogen production occurs at facilities with access to
fixed-priced and/or product related natural gas supplies, similar to Terras gas supply contract
in Trinidad. These competitors facilities natural gas costs have been and likely will continue
to be substantially lower than Terras costs.
Declines in the prices of Terras products may reduce profit margins.
Prices for nitrogen products are influenced by the global supply and demand conditions for ammonia
and other nitrogen-based products. Long-term demand is affected by population growth and rising
living standards that determine food consumption. Short-term demand is affected by world economic
conditions and international trade decisions. Supply is affected by increasing worldwide capacity
and the increasing availability of nitrogen product exports from major producing regions such as
the former Soviet Union, Canada, the Middle East, Trinidad and Venezuela. New global ammonia
capacity is expected abroad in the foreseeable future. If this growth in new capacity exceeds the
growth in demand, the price at which Terra sells its nitrogen products may decline, resulting in
reduced profit margins, lower production of products and potential plant closures. Supply in the
U.S. and Europe is also affected
14
by trade regulatory measures, which restrict import supply into those markets. Changes in those
measures would likely adversely impact available supply and pricing.
Terras products are subject to price volatility resulting from periodic imbalances of supply and
demand, which may cause the results of operations to fluctuate.
Historically, Terras products prices have reflected frequent changes in supply and demand
conditions. Changes in supply result from capacity additions or reductions and from changes in
inventory levels. Demand for products is dependent on demand for crop nutrients by the global
agricultural industry and on the level of industrial production. Periods of high demand, high
capacity utilization and increasing operating margins tend to result in new plant investment and
increased production until supply exceeds demand, followed by periods of declining prices and
declining capacity utilization until the cycle is repeated. In addition, markets for Terras
products are affected by general economic conditions. As a result of periodic imbalances of supply
and demand, product prices have been volatile, with frequent and significant price changes. During
periods of oversupply, the price at which Terra sells its products may be depressed and this could
have a material adverse effect on Terras business, financial condition and results of operations.
Terras products are global commodities and Terra faces intense competition from other nitrogen
fertilizer producers.
Nitrogen fertilizer products are global commodities and can be subject to intense price
competition from both domestic and foreign sources. Customers, including end-users, dealers and
other crop-nutrients producers and distributors, base their purchasing decisions principally on
the delivered price and availability of the product. Terra competes with a number of U.S.
producers and producers in other countries, including state-owned and government-subsidized
entities. The U.S. and the European Commission each have trade regulatory measures in effect
which are designed to address this type of unfair trade. Changes in these measures could have an
adverse impact on Terras sales and profitability of the particular products involved. Some of
Terras principal competitors have greater total resources and are less dependent on earnings from
nitrogen fertilizer sales. In addition, a portion of global production benefits from natural gas
contracts that have been, and could continue to be, substantially lower priced than our natural
gas. Terras inability to compete successfully could result in the loss of customers, which could
adversely affect sales and profitability.
The Companys business is subject to risks related to weather conditions.
Adverse weather conditions may have a significant effect on demand for the Companys nitrogen
products. Weather conditions that delay or intermittently disrupt field work during the planting
and growing season may cause agricultural customers to use less or different forms of nitrogen
fertilizer, which may adversely affect demand for the product that Terra sells. Weather conditions
following harvest may delay or eliminate opportunities to apply fertilizer in the fall. Weather
can also have an adverse effect on crop yields, which lowers the income of growers and could
impair their ability to pay Terras customers.
Terras risk measurement and hedging activities might not prevent losses.
The Company manages commodity price risk for its businesses as a whole. Although the Company has
risk measurement systems in place that use various methodologies to quantify risk, these systems
might not always be followed or might not always work as planned. Further, such risk measurement
systems do not in themselves manage risk, and adverse changes involving volatility, adverse
correlation of commodity prices and the liquidity of markets might still adversely affect earnings
and cash flows, as
15
well as the balance sheet under applicable accounting rules, even if risks have been identified.
The 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 Terras bank agreement
covenants.
In an effort to manage financial exposure related to commodity price and market fluctuations,
Terra has entered into contracts to hedge certain risks associated with its assets and operations.
In these hedging activities, the Company has used fixed-price, forward, physical purchase and
sales contracts, futures, financial swaps and option contracts traded in the over-the-counter
markets or on exchanges. Nevertheless, no single hedging arrangement can adequately address all
risks present in a given contract or industry. Therefore, unhedged risks will always continue to
exist. The Company may not be able to successfully manage all credit risk and as such, future cash
flows could be impacted by counterparty default.
Terra is substantially dependent on its manufacturing facilities, and any operational disruption
could result in a reduction of sales volumes and could cause Terra to incur substantial
expenditures.
Terras manufacturing operations may be subject to significant interruption if one or more of its
facilities were to experience a major accident or were damaged by severe weather or other natural
disaster. In addition, Terras operations are subject to hazards inherent in nitrogen fertilizer
manufacturing. Some of those hazards may cause personal injury and loss of life, severe damage to
or destruction of property and equipment and environmental damage, and may result in suspension of
operations and the imposition of civil or criminal penalties. For example, an explosion at Terras
Port Neal, Iowa facility in 1994 required Terra to rebuild nearly the entire facility and a June
1, 2006 explosion shut down the ammonia production plant in Billingham, England until repairs were
completed in August. In addition, approximately four weeks of unplanned outages at Terras Point
Lisas Nitrogen facility during the 2006 third quarter to repair failing heat exchangers were only
partly successful and the plant will be operating at about 80% of capacity until replacement
exchangers are installed during a scheduled turnaround in early 2007. Also, a mechanical outage at
the Courtright, Ontario facility in April 2001 required Terra to shut down that facility for
approximately two months. Terra currently maintains property insurance, including business
interruption insurance, but it may not have sufficient coverage, or may be unable in the future to
obtain sufficient coverage at reasonable costs.
Terra may be adversely affected by environmental laws or regulations to which it is subject.
Terras U.S., Canadian and U.K. operations and properties are subject to various federal, state
and local environmental, safety and health laws and regulations, including laws relating to air
quality, hazardous and solid materials and wastes, water quality, investigation and remediation of
contamination, transportation and worker health and safety. Terra could incur substantial costs,
including capital expenditures for equipment upgrades, fines and penalties and third-party claims
for damages, as a result of compliance with, violations of or liabilities under environmental laws
and regulations. Terra is also involved in the manufacture, handling, transportation, storage and
disposal of materials that are or may be classified as hazardous or toxic by federal, state,
provincial or other regulatory agencies. If such materials have been or are disposed of or
released at sites that require investigation and/or remediation, Terra may be responsible under
the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA, or
analogous laws for all or part of the costs of such investigation and/or remediation, and for
damages to natural resources. Under some of these laws, responsible parties may be held jointly
and severally liable for such costs, regardless of fault or the legality of the original disposal
or release.
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Terra has liability as a potentially responsible party at certain sites under certain
environmental remediation laws. The Company has also been subject to related claims by private
parties alleging property damage and possible personal injury arising from contamination relating
to discontinued operations. Terra may be subject to additional liability or additional claims in
the future. Some of these matters may require the Company to expend significant amounts for
investigation and/or cleanup or other costs.
Terra may be required to install additional pollution control equipment at certain facilities in
order to maintain compliance with applicable environmental requirements.
Continued government and public emphasis on environmental issues can be expected to result in
increased future investments for environmental controls at ongoing operations. Terra may be
required to install additional air and water quality control equipment, such as low emission
burners, scrubbers, ammonia sensors and continuous emission monitors, at certain of its facilities
in order to maintain compliance with applicable environmental requirements. Such investments would
reduce income from future operations. Present and future environmental laws and regulations
applicable to operations, more vigorous enforcement policies and discovery of unknown conditions
may require substantial expenditures and may have a material adverse effect on results of
operations, financial position or net cash flows.
Government regulation and agricultural policy may reduce the demand for Terras products.
Existing and future government regulations and laws may reduce the demand for Terra products.
Existing and future agricultural and/or environmental laws and regulations may impact the amounts
and locations of fertilizer application and may lead to decreases in the quantity of nitrogen
fertilizer applied to crops. Any such decrease in the demand for fertilizer products could result
in lower unit sales and lower selling prices for nitrogen fertilizer products. U.S. and E.U.
governmental policies affecting the number of acres planted, the level of grain inventories, the
mix of crops planted and crop prices could also affect the demand and selling prices of Terras
products. In addition, Terra manufactures and sells ammonium nitrate (AN) in the U.K. and in the
U.S. Ammonium nitrate can be used as an explosive and was used in the Oklahoma City bombing in
April 1995. It is possible that either the U.S. or U.K. governments could impose limitations on
the use, sale or distribution of AN, thereby limiting Terras ability to manufacture or sell this
product.
Terra is subject to risks associated with international operations.
Terras international business operations are subject to numerous risks and uncertainties,
including difficulties and costs associated with complying with a wide variety of complex laws,
treaties and regulations; unexpected changes in regulatory environments; currency fluctuations;
tax rates that may exceed those in the U.S.; earnings that may be subject to withholding
requirements; and the imposition of tariffs, exchange controls or other restrictions. During 2006
Terra derived approximately 24% of its net sales from outside of the U.S. Terras business
operations include a 50% interest in an ammonia production joint venture in the Republic of
Trinidad and Tobago and a 50% interest in an ammonia shipping joint venture that provides
transportation of ammonia from the Trinidad facility to the U.S. and other world markets.
17
Terras business may be adversely impacted by the Companys leverage, which may require the
use of a substantial portion of excess cash flow to service debt and may limit Terras access to
additional capital.
Terras debt could have important consequences on its business. For example, it could (i) increase
Terras vulnerability to adverse economic and industry conditions by limiting flexibility in
reacting to changes in the business industry, (ii) reduce Terras cash flow available to fund
working capital, capital expenditures and other general corporate purposes, (iii) place Terra at a
competitive disadvantage compared to competitors that have less leverage and (iv) limit Terras
ability to borrow additional funds and increase the cost of funds that Terra can borrow. Terra may
not be able to reduce its financial leverage when it chooses to do so, and may not be able to
raise capital to fund growth opportunities.
Terra may not be able to finance a change of control offer.
If Terra considers an offer that would result in a change of control (as defined in its bond
indentures and the instruments governing its Series A convertible preferred shares), it may need
to refinance large amounts of debt. If a change of control occurs, Terra must offer to buy back
the notes under its indentures governing its 7% senior notes due 2017 and the Series A convertible
preferred shares for a price equal to 101% of the notes principal amount or 100% of the
liquidation value of the Series A convertible preferred shares, as applicable, plus any interest
or dividends which has accrued and remains unpaid as of the repurchase date. There can be no
assurance that there will be sufficient funds available for any repurchases that could be required
by a change of control.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
Terras manufacturing facilities and the Point Lisas manufacturing facility in which it owns
a 50% interest, are designed to operate continuously, except for planned shutdowns (usually
biennial) for maintenance and efficiency improvements. Capacity utilization (gross tons produced
divided by capacity tons at expected operating rates and on-stream factors) of the nitrogen
products manufacturing facilities (excluding 2004 production at the Blytheville, Arkansas plant
which closed in May 2004, and the 2004 production at the plants acquired in the Mississippi
Chemical Corporation acquisition) was approximately 83%, 96% and 99% in 2006, 2005 and 2004,
respectively.
Terra owns all of its manufacturing facilities, unless otherwise indicated below. Substantially
all of Terras manufacturing facilities are mortgaged to secure indebtedness under the Companys
credit agreements.
Beaumont, Texas. The Beaumont facility is located six miles south of Beaumont, Texas on the Neches
River. Terra owns the plant and processing equipment at the Beaumont facility, which has an annual
methanol production capacity of 225 million gallons. The facility also contains an ammonia loop
which provides an annual ammonia production capacity of 255,000 tons. The facilitys real estate
is leased from E.I. DuPont de Nemours and Company (DuPont) at a nominal rate under a lease that
expires in 2090. The facility is entirely contained within an industrial complex owned and
operated by DuPont, and DuPont provides access to the facility as well as essential services such
as security, emergency response, product loading and unloading, and a waste water effluent system.
The facility also contains a methanol storage and distribution terminal containing two 7.5 million
gallon methanol storage tanks and one 20,000 ton ammonia storage tank. The Beaumont facility is
currently out of production,
18
however Terra continues to operate the terminal. See further discussion of the Beaumont facility
under the Methanol Business Segment heading.
Donaldsonville, Louisiana. The Donaldsonville facility is located on approximately 766 acres
fronting the Mississippi River and, in 2004, included two ammonia plants, a urea plant and two
melamine crystal production plants. During 2006 all of these plants, except for one ammonia plant,
were decommissioned and sold for parts or scrap. The remaining ammonia plant has been mothballed.
The facility contains a deep-water port facility on the Mississippi River, allowing for barge
transportation and making Donaldsonville one of the northernmost points on the river capable of
receiving economical ocean-going vessels.
Port Neal, Iowa. The Port Neal facility is located approximately 12 miles south of Sioux City,
Iowa on the Missouri River. The facility consists of an ammonia plant, two urea plants, two nitric
acid plants and a UAN plant.
Verdigris, Oklahoma. The Verdigris facility is located on 650 acres northeast of Tulsa, Oklahoma,
near the Verdigris River. It is the second largest UAN production facility in North America. The
facility comprises two ammonia plants, two nitric acid plants, two UAN plants and a port terminal.
Terra owns the plants and leases the port terminal from the Tulsa-Rogers County Port Authority.
Terra renewed its leasehold interest in the port terminal for five years in April 2004, and has an
option to renew the lease for an additional five-year term in 2009.
Woodward, Oklahoma. The Woodward facility is located in rural northwest Oklahoma and consists of
an integrated ammonia/methanol plant, a nitric acid plant, a urea plant and a UAN plant.
Yazoo City, Mississippi. The Yazoo City facility is located on approximately 2,240 acres in Yazoo
County, Mississippi with approximately 60 acres of such land subject to a long-term lease with
Yazoo County. The facility includes two ammonia plants, one of which was sold to Dyno Nobel, Inc.
in July 2006, five nitric acid plants, an AN plant, two urea plants, a UAN plant and a dinitrogen
tetroxide production and storage facility.
In July 2005, Terra entered into a 10-year agreement to supply industrial grade ammonium nitrate
(IGAN) and ammonium nitrate solution (ANS) to Orica USA Inc. Under the terms of this arrangement,
Terra modified the smaller of its Yazoo City facility ammonium nitrate (AN) towers, which was
currently limited to converting ANS to agricultural grade AN. The
modifications are complete and the
tower is now equipped to convert ANS to either agricultural grade AN or IGAN, a prilled,
low-density industrial grade product.
Courtright, Ontario, Canada. The Courtright facility is located on 700 acres south of Sarnia,
Ontario near the St. Clair River. The facility consists of one ammonia plant, a UAN plant, a
nitric acid plant and two urea plants.
Billingham, U.K. The Billingham facility, located in the Teesside chemical area, is geographically
split among three separate areas: the main site contains an ammonia plant, three nitric acid
plants and a carbon dioxide plant; the Portrack site approximately two miles away contains an AN
fertilizer plant and the north Tees site approximately five miles away has an ammonia storage
which Terra operates under a 99-year lease with a third-party and import/export facility that
Terra uses under license from the Crown and under an agreement with a third-party operator.
Severnside, U.K. The Severnside facility is located in southwestern England. The facility consists
of two ammonia plants, two nitric acid plants and an AN plant.
19
Trinidad. The Point Lisas Nitrogen facility in the Republic of Trinidad and Tobago is owned by a
50/50 joint venture with KNC Trinidad Limited. This facility has the capacity to produce annually
720,000 tons of ammonia from natural gas supplied under contract with the National Gas Company of
Trinidad and Tobago. Terra is obligated to buy 50% of the joint ventures ammonia output at market
prices, which is transported primarily to the U.S. Gulf Coast and resold to Terras customers. The
joint ventures natural gas costs have recently been significantly lower than U.S. natural gas
costs, which has made the joint venture substantially more profitable than comparable North
American facilities.
Point Lisas produced 593,000 tons of ammonia in 2006 of which Terra purchased 307,000 tons. All of
the Point Lisas ammonia tons purchased by Terra was delivered to Terras Donaldsonville terminal
for subsequent sale or delivery. In 2006 Terra received $33.8 million of cash distributions from
Point Lisas.
Item 3. Legal Proceedings
From time to time, the Company is involved in litigation, administrative proceedings and
claims, including environmental matters, arising in the ordinary course of business. Terra does
not believe that the matters in which it is currently involved, either individually or in the
aggregate, will have a material adverse effect on its business, results of operations, financial
position or net cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders of Terra during the fourth quarter of
2006.
20
Executive Officers of Terra
The following paragraphs set forth the name, age and offices of each present executive
officer of Terra, the period during which each executive officer has served as such and each
executive officers business experience during the past five years:
|
|
|
|
|
Present positions and offices with the Company |
Name |
|
and principal occupations during the past five years |
|
Michael L. Bennett
|
|
President and Chief Executive Officer of Terra since April 2001. Age 53. |
|
|
|
Joe A. Ewing
|
|
Vice President, Investor Relations and Human Resources of Terra since December 2004; Vice President,
Human Resources of Mississippi Chemical Corporation from April 2003 to December 2004; Vice President,
Marketing and Distribution of Mississippi Chemical Corporation from 1999 to April 2003. Age 56. |
|
|
|
Joseph D. Giesler
|
|
Senior Vice President, Commercial Operations of Terra since December 2004; Vice President of Industrial
Sales and Operations of Terra from December 2002 to December 2004; Global Director, Industrial Sales of
Terra from September 2001 to December 2002. Age 48. |
|
|
|
Daniel D. Greenwell
|
|
Vice President, Controller of Terra since April 2005; Corporate Controller for Belden CDT Inc. from
2002 to 2005; and Chief Financial Officer of Zoltek Companies Inc. from 1996 to 2002. Age 44. |
|
|
|
John W. Huey
|
|
Vice President, General Counsel and Corporate Secretary of Terra since October 2006; Counsel with
Shughart Thomson & Kilroy, P.C. from 2005-2006; Attorney with Butler Manufacturing Company from
1978-2004, Vice President of Administration from 1993-1998, Vice President, General Counsel and
Corporate Secretary from 1998-2004. Age 59. |
|
|
|
Francis G. Meyer
|
|
Senior Vice President and Chief Financial Officer of Terra since November 1995. Age 54. |
|
|
|
Richard S. Sanders Jr.
|
|
Vice President, Manufacturing of Terra since August 2003; Plant Manager, Verdigris, Oklahoma
manufacturing facility from 1995 to August 2003. Age 49. |
|
|
|
Douglas M. Stone
|
|
Vice President, Corporate Development and Strategic Planning since 2006; Director, Industrial sales
from 2003 to 2006; Manager, Methanol and Industrial Nitrogen from 2000 to 2003. Age 41. |
|
|
|
Paul Thompson
|
|
Vice President, Sales and Marketing of Terra since December 2004; Global Director, Ag Sales and Terra
U.K. Managing Director from August 1999 to December 2004. Age 52. |
There are no family relationships among the executive officers and directors of Terra or
arrangements or understandings between any executive officer and any other person pursuant to
21
which any executive officer was selected as such. Officers of Terra are elected annually to serve
until their respective successors are elected and qualified.
PART II
Item 5. Market for Terras Common Equity and Related Stockholder Matters and
Issuer Purchases of Equity Securities
The main market in which Terras common shares are traded is the NYSE. Set forth below are
the high and low sales prices of Terras common shares during each quarter specified as reported
on the NYSE.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(per-share data and stock prices) |
|
March 31 |
|
|
June 30 |
|
|
Sept. 30 |
|
|
Dec. 31 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Share Price: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
7.40 |
|
|
$ |
9.19 |
|
|
$ |
7.99 |
|
|
$ |
12.40 |
|
Low |
|
|
5.45 |
|
|
|
5.93 |
|
|
|
6.07 |
|
|
|
7.80 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Share Price: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
9.27 |
|
|
$ |
7.88 |
|
|
$ |
8.59 |
|
|
$ |
6.65 |
|
Low |
|
|
7.29 |
|
|
|
6.27 |
|
|
|
6.10 |
|
|
|
4.87 |
|
As of March 1, 2007 there were approximately 6,005 record holders of Terras common stock.
Terra does not currently intend to declare or pay dividends on its common stock. Further, Terras
ability to pay dividends is restricted by certain covenants contained in its credit facility, as
well as certain restrictions contained in the indenture governing its senior notes. See Note 7 of
Notes to the Consolidated Financial Statements.
Company Purchases of Equity Securities
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. During 2006, the
Company repurchased 2,675,100 shares at an average price of $7.03. The remaining number of shares
that the Company is authorized to repurchase is 6,841,717 at December 31, 2006.
The following table provides information about shared repurchases by the Company during the quarter
ended December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
April 2006 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
9,516,817 |
|
May 2006 |
|
|
488,100 |
|
|
|
7.49 |
|
|
|
488,100 |
|
|
|
9,028,717 |
|
June 2006 |
|
|
1,556,500 |
|
|
|
6.92 |
|
|
|
2,044,600 |
|
|
|
7,472,217 |
|
July 2006 |
|
|
|
|
|
|
|
|
|
|
2,044,600 |
|
|
|
7,472,217 |
|
August 2006 |
|
|
560,000 |
|
|
|
6.93 |
|
|
|
2,604,600 |
|
|
|
6,912,217 |
|
September 2006 |
|
|
70,500 |
|
|
|
7.03 |
|
|
|
2,675,100 |
|
|
|
6,841,717 |
|
October 2006 |
|
|
|
|
|
|
|
|
|
|
2,675,100 |
|
|
|
6,841,717 |
|
November 2006 |
|
|
|
|
|
|
|
|
|
|
2,675,100 |
|
|
|
6,841,717 |
|
December 2006 |
|
|
|
|
|
|
|
|
|
|
2,675,100 |
|
|
|
6,841,717 |
|
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.
22
Item 6.Selected Financial Data
Financial Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data) |
|
2006 |
|
|
2005 |
|
|
2004(1) |
|
|
2003(2) |
|
|
2002(3) |
|
|
Income Statement Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,836,722 |
|
|
$ |
1,939,065 |
|
|
$ |
1,509,110 |
|
|
$ |
1,351,055 |
|
|
$ |
1,043,983 |
|
Income (loss) from operations |
|
|
66,280 |
|
|
|
113,696 |
|
|
|
134,746 |
|
|
|
(23,560 |
) |
|
|
(5,407 |
) |
Net income (loss) from
continuing operations |
|
|
4,213 |
|
|
|
22,087 |
|
|
|
67,596 |
|
|
|
(12,481 |
) |
|
|
(36,174 |
) |
Net income (loss) |
|
|
4,213 |
|
|
|
22,087 |
|
|
|
67,596 |
|
|
|
(12,481 |
) |
|
|
(258,325 |
) |
Preferred share dividends |
|
|
(5,100 |
) |
|
|
(5,134 |
) |
|
|
(1,029 |
) |
|
|
|
|
|
|
|
|
|
Basic income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
|
(0.01 |
) |
|
|
0.18 |
|
|
|
0.87 |
|
|
|
(0.16 |
) |
|
|
(3.43 |
) |
Discontinued operation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.22 |
) |
Cumulative effect of change in
accounting principle |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.73 |
) |
|
Basic income per share |
|
|
(0.01 |
) |
|
|
0.18 |
|
|
|
0.87 |
|
|
|
(0.16 |
) |
|
|
(3.43 |
) |
Diluted income per share |
|
$ |
(0.01 |
) |
|
$ |
0.18 |
|
|
$ |
0.85 |
|
|
$ |
(0.16 |
) |
|
$ |
(3.43 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,572,713 |
|
|
$ |
1,523,625 |
|
|
$ |
1,685,508 |
|
|
$ |
1,125,062 |
|
|
$ |
1,128,110 |
|
Long-term debt
and capital leases |
|
$ |
331,300 |
|
|
$ |
331,300 |
|
|
$ |
435,238 |
|
|
$ |
402,206 |
|
|
$ |
400,358 |
|
Preferred stock |
|
$ |
115,800 |
|
|
$ |
115,800 |
|
|
$ |
133,069 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
(1) |
|
The 2004 selected financial data includes the effects of the December 21, 2004
acquisition of Mississippi Chemical Corporation and the issuance of preferred shares during
the 2004 fourth quarter. |
|
(2) |
|
The 2003 selected financial data includes a $53.1 million charge for impairment of
long-lived assets. |
|
(3) |
|
The 2002 selected financial data includes a $16.2 million loss from discontinued
operations and a $206.0 million charge related to a cumulative effect of change in
accounting principle for the adoption of Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangibles. |
Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion of historical results of operations and financial condition should
be read in conjunction with the audited financial statements and notes thereto which appear
elsewhere in this report.
Introduction
Terra Industries Inc. (Terra or the Company) produces and markets nitrogen products for
agricultural and industrial markets with production facilities located in North America and the
United Kingdom. During December 2004, the Company acquired Mississippi Chemical Corporation (MCC).
As a result of the acquisition, the Company owns a 50% interest in Point Lisas Nitrogen Limited
(PLNL), an ammonia production joint venture in the Republic of Trinidad and Tobago.
23
During the 2006 fourth quarter, the Company entered into a Memorandum of Understanding with Kemira
GrowHow Oyj to create a joint venture to operate the fertilizer and associated process chemical
businesses of both companies in the U.K. The Memorandum of Understanding is a non-legally binding
agreement and is subject to clearance from the U.K. competition authorities, negotiation of
definitive documents and lender consent. During the 2007 first quarter, the U.K. Office of Fair
Trading referred the proposed joint venture to the Competition Commission.
The Company 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 its ammonia production and upgrading facilities. The methanol segment
represents wholesale sales of methanol produced by its methanol manufacturing plant.
Natural gas is the most significant raw material in the production of nitrogen and methanol
products. During periods of significant increases in natural gas prices, the Company may curtail
or shut down its production facilities if finished goods prices do not allow the Company to cover
variable production costs. The Companys cost of natural gas increased to unprecedented levels in
the 2005 third quarter due to supply disruptions caused by Hurricanes Katrina and Rita. During the
2006 second quarter, North American natural gas prices declined to pre-hurricane prices.
Nitrogen products are commodity chemicals that are sold at prices reflecting global supply and
demand conditions. Imported nitrogen products, most of which are produced at facilities with
access to fixed-priced natural gas supplies, account for a significant portion of U.S. nitrogen
product supply. Imported products natural gas costs have been and could continue to be
substantially lower than the delivered cost of natural gas to our facilities. Off-shore producers
are most competitive in regions close to North American points of entry for imports, including the
Gulf Coast and East Coast. Since some of the Companys products compete with nitrogen products
imported from regions with lower natural gas costs, the Company and other North American producers
have not always been able to increase selling prices to levels necessary to cover the natural gas
cost increases. This led to curtailments of North American nitrogen production in late 2005 and
early 2006.
During the nine month period ending September 30, 2006, the Companys U.S. and U.K. manufacturing
plants operated at approximately 79% of capacity in response to slow demand and high natural gas
costs. Much of the curtailed production was replaced with purchased product from other suppliers.
During the three month period ending December 31, 2006, the same plants operated at approximately
97% of capacity as operations normalized in response to higher grain prices and stable natural gas
costs.
During the 2006 second quarter, the Companys ammonia plant at Billingham, England incurred damage
due to an explosion from a ruptured pipe. The repairs were completed and ammonia production
resumed during the 2006 third quarter.
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. 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.
The Companys nitrogen sales volumes depend primarily on its plants operations and imports from
PLNL. The Company may purchase product from other manufacturers or importers for resale; however,
gross margins on those volumes have historically been insignificant. Profitability and cash flows
from the Companys nitrogen products business are affected by the Companys 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 the Companys nitrogen products results
include the number
24
of planted acres, transportation costs, weather conditions (particularly during planting season),
grain prices and other variables described in Item 1 Business and Item 2 Properties.
The Company also produces methanol in the U.S. Similar to nitrogen products, methanol is a
commodity chemical manufactured from natural gas. Consequently, natural gas costs and the
supply/demand balance for methanol significantly affect methanol earnings and cash flows. A
significant portion of U.S. methanol demand is met by imports from regions with natural gas costs
lower than those available to U.S. producers. In December 2003, the Company entered into contracts
with the Methanex Corporation (Methanex) assigning it the Companys sales contracts and
providing it exclusive rights to all methanol production at the Beaumont facility for five years
as more fully described in Item 1 Business and Item 2 Properties. As permitted under these
contracts, Methanex elected to shut down the Beaumont facility as of December 1, 2004. As long as
the Beaumont, Texas facility remains idle through the December 2008 termination of the Methanex
contract, the Company may realize revenues relating to the facility of up to $16.4 million per
year due to $4.4 million from annual amortization of deferred revenues plus one-half of the annual
cash margin based on the plants methanol production capacity, methanol reference prices and
natural gas costs. Profit sharing cash margin during 2006 was $12.0 million. Due to the high cost
of natural gas, there was no cash margin realized during 2005.
Overview of Consolidated Results
The Companys revenues were $1.8 billion, $1.9 billion and $1.5 billion during 2006, 2005 and
2004, respectively. Terra generated net income of $4.2 million, $22.1 million and $67.6 million in
2006, 2005 and 2004, respectively. Diluted income (loss) per share was $(0.01), $0.18 and $0.85 in
2006, 2005 and 2004, respectively.
Income from operations was $66.3 million in 2006, $113.7 million in 2005 and $134.7 million in
2004. The 2006 revenues decreased $102.3 million from 2005 primarily as a result of lower UAN and
ammonium nitrate sales volumes, which were affected by lower overall fertilizer consumption during
the 2006 planting season. The 2006 operating income decreased $47.4 million from 2005 due
primarily to curtailed production rates during the first half of 2006. The 2006 first half
operating rates averaged 74% of plant capacity, which resulted in higher costs for purchased
product and reduced plant efficiencies.
The 2005 revenues and cost of sales increased $430.0 million and $452.2 million from 2004,
primarily as a result of the acquisition of Mississippi Chemical Company (MCC) in December 2004.
Natural gas prices increased in 2005 due to Hurricanes Katrina and Rita, which also increased cost
of sales. The 2005 net income included a $27.2 million charge related to early retirement of debt
and a $8.9 million gain in a change in fair value of warrants issued in connection with the MCC
acquisition.
The 2004 net income included a $27.9 million income tax benefits due to a favorable settlement
with a foreign taxing authority. The 2004 net income also included $11.6 million attributable to
an insurance recovery of product claim costs (representing $17.9 million of operating income less
$6.3 million of related income taxes) and a $7.1 million loss from the early retirement of
long-term debt (representing $11.1 million of losses less $4.0 million of related income taxes).
Factors That Affect Operating Results
Factors that may affect the Companys operating results include: the relative balance of
supply and demand for nitrogen fertilizers, industrial nitrogen and methanol, the availability and
cost of natural gas, the number of agriculture-planted acres (which is affected by both worldwide
demand and government policies), the types of crops planted, the effect of general weather
patterns on the timing and duration of field work for crop planting and harvesting, the effect of
environmental legislation on supply and
25
demand for the Companys products, the availability of financing sources to fund seasonal working
capital needs, and the potential for interruption to operations due to accidents or natural
disasters.
The principal raw material used to produce nitrogen products and methanol is natural gas. Natural
gas purchases in 2006 and 2005 accounted for approximately 46% and 53%, respectively, of the
Companys total operating costs and expenses. A significant increase in the price of natural gas
that is not hedged or recovered through an increase in the price of the Companys nitrogen and
methanol products would have an adverse effect on the Companys business, financial condition and
results of operations. A portion of global nitrogen products and methanol production is at
facilities with access to fixed-price natural gas supplies that have been, and could continue to
be, substantially lower priced than natural gas costs at the Companys North American and U.K.
facilities. The Companys facility at Point Lisas Nitrogen Limited, an unconsolidated subsidiary,
is located in Trinidad with access to such lower-cost natural gas.
The Company enters into forward pricing contracts for a portion of its natural gas requirements
when such arrangements would not result in costs greater than expected North American and U.K.
selling prices for the Companys finished products. The Companys December 31, 2006 forward
positions covered 17% of the Companys expected 2007 natural gas requirements (excluding the
natural gas requirements of Point Lisas Nitrogen Limited which purchases its gas under contract
with the Natural Gas Company of Trinidad and Tobago).
Prices for nitrogen products are influenced by the world supply and demand balance for ammonia and
other nitrogen-based products. Long-term demand is affected by population growth and rising living
standards that determine food consumption. Short-term demand is affected by world economic
conditions, international trade decisions and grain prices. Supply is affected by increasing
worldwide capacity and the availability of nitrogen product exports from major producing regions
such as the former Soviet Union, the Middle East and South America.
Weather can have a significant effect on demand for the Companys nitrogen products. Weather
conditions that delay or intermittently disrupt field work during the planting and growing seasons
may cause agricultural customers to use forms of nitrogen fertilizer that are more or less
favorable to the Companys products. Weather conditions following harvest may delay or eliminate
opportunities to apply fertilizer in the fall. Weather can also have an adverse effect on crop
yields, which lowers the income of growers and could affect their ability to pay for crop inputs
purchased from the Companys dealer customers.
The Companys nitrogen business segment is seasonal, with the majority of nitrogen products
consumed during the second quarter in conjunction with spring planting activity. Due to the
business seasonality and the relatively brief periods during which customers consume nitrogen
products, the Company and its customers generally build inventories during the second half of the
year in order to ensure product availability during the peak sales season. For the Companys
current level of sales, it maintains lines of credit to fund inventory increases and to support
customer credit terms. The Company believes that its credit facilities are adequate for expected
2007 sales levels.
Methanol is used as a raw material in the production of formaldehyde, methyl tertiary-butyl ether
(MTBE), acetic acid and numerous other chemical derivatives. The price of methanol is influenced
by the supply and demand for each of these products. Environmental initiatives to ban or reduce
the use of MTBE as a fuel additive, such as those currently underway in the United States, could
affect demand for methanol.
26
The Companys manufacturing operations may be subject to significant interruption if one or more
of its facilities were to experience a major accident or were damaged by severe weather or other
natural disaster. The Company currently maintains insurance, including business interruption
insurance, which it believes is sufficient to allow it to recover from major damage to any of its
facilities.
Application of Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting
principles generally accepted in the United States requires management to make judgments,
assumptions and estimates that affect the amounts reported in the Companys Consolidated Financial
Statements and accompanying notes. Note 1 to the Consolidated Financial Statements in Item 8 of
this Form 10-K describes the significant accounting policies and methods used in preparing the
Consolidated Financial Statements. Management considers the accounting policies described below to
be the Companys most critical accounting policies because they are impacted significantly by
estimates that management makes. Management bases its estimates on historical experience or
various assumptions that they believe to be reasonable under the circumstances, and the results
form the basis for making judgments about the reported values of assets, liabilities, revenues and
expenses. Management has discussed the development and selection of the Companys critical
accounting estimates, and the disclosure regarding them, with the audit committee of the Companys
Board of Directors, and do so on a regular basis. Actual results may differ materially from these
estimates.
Derivative and Financial Instruments
The Company enters into derivative financial instruments, including swaps, basis swaps and put and
call options, to manage the effect of changes in natural gas costs, the prices of the Companys
nitrogen products and foreign currency risk. Management evaluates each derivative transaction and
makes an election of whether to designate the derivative as a fair-value or cash flow hedge or not
to elect hedge designation for the derivative. Upon election of hedge designation, 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 the determination of net income in the period that the offsetting hedged transaction occurs.
For derivatives that are not designated as hedges, or to the extent a hedge-designated derivative
is determined to be ineffective, changes in fair value are recognized in earnings in the period of
change.
Until the Companys derivatives settle, management tests the derivatives for ineffectiveness. This
includes assessing the correlation of NYMEX pricing, which is commonly used as an index in natural
gas derivatives, to the natural gas pipelines pricing at the Companys manufacturing facilities.
This assessment requires management judgment to determine the statistically- and
industry-appropriate analysis of prior operating relationships between the NYMEX prices and the
natural gas pipelines prices at the Companys facilities.
To the extent possible, the Company bases its market value calculations on third party data. Due
to multiple types of settlement methods available, not all settlement methods for future period
trades are available from third party sources. In the event that a derivative is measured for fair
value based on a settlement method that is not readily available, management estimates the fair
value based on forward pricing information for similar types of settlement methods.
27
Revenue Recognition
Revenue is recognized when persuasive evidence of a transaction exists, delivery has occurred, the
price is fixed or determinable, no obligations remain and collectibility is probable.
Revenue from sales is generally recognized upon shipment of product to the customer in accordance
with the terms of the sales agreement. As part of the revenue recognition process, the Company
determines whether collection of trade receivables are reasonably assured based on various
factors, including evaluation of whether there has been deterioration in the credit quality of the
Companys customers that could result in the inability to collect the receivable balance. In
situations where it is unclear whether the Company will be able to collect the receivable, revenue
and related costs are deferred. Related costs are recognized when it has been determined that the
collection of the receivable is unlikely.
Inventory Valuation
Inventories are stated at the lower of cost or estimated net realizable value. The cost of
inventories is determined by using the first-in, first-out method. The Company performs a monthly
analysis of its inventory balances to determine if the carrying amount of inventories exceeds
their 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.
Pension Assets and Liabilities
Pension assets and liabilities are affected by the estimated market value of plan assets,
estimates of the expected return on plan assets and discount rates. Actual changes in the fair
market value of plan assets and differences between the actual return on plan assets and the
expected return on plan assets will affect the amount of pension expense ultimately recognized.
The Companys pension projected benefit obligation was $504.2 million at December 31, 2006, which
was $149.1 million higher than pension plan assets. The December 31, 2006 liability was computed
based on an average 5.5% discount rate, which was based on yields for high-quality corporate bonds
with a maturity approximating the duration of the Companys pension liability. The long-term
return on plan assets is determined based on historical portfolio results and managements
expectations of the future economic environment. In addition, the pension liability for the
Companys U.K. pension plan, which includes provisions to adjust benefit payments for general
inflation rates, was estimated based on an average 3.0% annual inflation rate. Declines in
comparable bond yields or higher U.K. inflation rates would increase the Companys pension
liability. The Companys net pension liability, after deduction of plan assets, could increase or
decrease depending on the extent to which returns on pension plan assets are lower or higher than
the discount rate. The Company engages third party actuarial specialists to assist management in
appropriately measuring pension expense and valuing pension liabilities.
Deferred Income Taxes
Deferred income tax assets and liabilities reflect (a) differences between financial statement
carrying amounts and corresponding tax bases and (b) temporary differences resulting from
differing treatment of items for tax and accounting purposes. Deferred tax assets also include the
expected benefits of carrying forward the Companys net operating losses. The Company regularly
reviews deferred tax assets for recoverability and reduces them if the Company cannot sufficiently
determine that they will be realized. The Company bases this determination on projected future
taxable income and the expected timing of the reversals of existing temporary differences.
28
At December 31, 2006, deferred tax assets, net of valuation allowances, representing future
benefits for the Companys U.S. net operating loss carryforwards totaled $105 million. If there is
a material change in the effective tax rates or time period when temporary differences become
taxable or deductible, the Company may have to additionally reduce all or a significant portion of
its deferred tax assets.
Impairment of Long-Lived Assets
Management assesses the recoverability of long-lived assets when indicators of impairment exist.
The assessment of the recoverability of long-lived assets reflects managements assumptions and
estimates. Factors that management must estimate when performing impairment tests include sales
demand, production levels, prices and costs, inflation, discount rates, currency exchange rates
and capital spending. Significant management judgment is involved in estimating these factors, and
they include inherent uncertainties. All assumptions utilized in the impairment analysis are
consistent with managements internal planning.
During 2006, no events occurred that indicated that the carrying amount of any of the Companys
assets may not be recoverable. However, due to the mothballed status of the Beaumont, Texas
facility, management performs an annual impairment analysis of such assets. As of December 31,
2006, the Beaumont assets had a carrying value, net of $10 million of deferred revenues, of
approximately $86 million. The Company estimated the remaining useful life of the Beaumont
facility at 12 years, assuming normal investment in maintenance and replacement capital throughout
this 12-year period. The estimated cash flows over this 12-year period were based on the Companys
best estimate of future market and operating conditions at December 31, 2006. The estimated cash
flows exceeded the carrying value of the Beaumont assets, therefore, no impairment charge was
recorded. The cash flow estimates were made with the assumption that the Beaumont facility will
remain idle through 2008, the term of the Companys contract with Methanex, and that once
restarted, the Beaumont facility will produce at historic rates and selling prices will be
adequate to realize historic margins.
Results of Continuing Operations2006 Compared with 2005
Consolidated Results
The Company reported 2006 net income of $4.2 million on revenues of $1.8 billion compared
with a 2005 net income of $22.1 million on revenues of $1.9 billion. Diluted income (loss) per
share for 2006 was $(0.01) compared with $0.18 for 2005. The 2005 net income included a $27.2
million ($24.9 million, net of tax) loss related to the early retirement of debt and a $8.9
million ($8.9 million, net of tax) gain relating to change in fair value of warrants.
The Company classifies its operations into two business segments: Nitrogen Products and Methanol.
The Nitrogen Products segment represents the sale of nitrogen products including that produced at
the Companys ammonia manufacturing and upgrading facilities. The Methanol segment represents
sales of methanol including that produced at the Companys two methanol manufacturing facilities.
Total revenues and operating income (loss) by segment for the years ended December 31, 2006 and
2005 were:
29
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
Revenues: |
|
|
|
|
|
|
|
|
Nitrogen products |
|
$ |
1,793,759 |
|
|
$ |
1,899,236 |
|
Methanol |
|
|
34,955 |
|
|
|
31,347 |
|
Other revenues |
|
|
8,008 |
|
|
|
8,482 |
|
|
|
|
$ |
1,836,722 |
|
|
$ |
1,939,065 |
|
|
Operating Income (Loss): |
|
|
|
|
|
|
|
|
Nitrogen products |
|
$ |
63,275 |
|
|
$ |
131,474 |
|
Methanol |
|
|
4,952 |
|
|
|
(14,089 |
) |
Other expensenet |
|
|
(1,947 |
) |
|
|
(3,689 |
) |
|
|
|
$ |
66,280 |
|
|
$ |
113,696 |
|
|
Nitrogen Products
Volumes and prices for 2006 and 2005 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volumes and Prices |
|
2006 |
|
|
2005 |
|
(quantities in |
|
Sales |
|
|
Average |
|
|
Sales |
|
|
Average |
|
thousands of tons) |
|
Volumes |
|
|
Unit Price* |
|
|
Volumes |
|
|
Unit Price* |
|
|
Ammonia |
|
|
1,897 |
|
|
$ |
315 |
|
|
|
1,898 |
|
|
$ |
303 |
|
Nitrogen solutions |
|
|
3,894 |
|
|
|
140 |
|
|
|
4,368 |
|
|
|
151 |
|
Urea |
|
|
147 |
|
|
|
262 |
|
|
|
151 |
|
|
|
262 |
|
Ammonium nitrate |
|
|
1,116 |
|
|
|
224 |
|
|
|
1,581 |
|
|
|
202 |
|
|
|
|
|
* |
|
After deducting outbound freight costs |
Nitrogen product revenues decreased by $105.5 million to $1.8 billion for 2006, compared to $1.9
billion for 2005. The decrease is primarily due to lower UAN and ammonium nitrate sales volumes,
which were affected by lower overall fertilizer consumption during the 2006 planting season.
Nitrogen product operating income decreased by $68.2 million to $63.3 million for 2006, compared
to $131.5 million for 2005. This decrease was primarily due to curtailed production rates during
the first half of 2006 as a result of high natural gas prices. Operating rates averaged 74% of
plant capacity during the 2006 first half, which resulted in higher costs for purchased product
and reduced plant efficiencies. These effects were partially mitigated during the 2006 second half
as operating results normalized in response to higher grain prices and stable natural gas costs.
Natural gas unit costs, net of forward pricing gains and losses, were $7.14 per million British
thermal units (MMBtu) during 2006 compared to $7.50 per MMBtu during 2005. Most of the 2005
higher costs were absorbed into 2006 beginning inventory values and charged against first quarter
2006 cost of sales. The Company enters into forward sales commitments by utilizing forward pricing
and prepayment programs with customers. The Company hedges natural gas associated with the
products sold forward in order to achieve an acceptable gross margin. As a result of forward price
contracts, 2006 natural gas costs for the nitrogen products segment were $50.3 million higher than
spot prices.
Methanol
Methanol revenues were $35.0 million and $31.3 million for the years ended December 31, 2006
and 2005. The 2006 revenues included $12.0 million of cash margin revenue under the Methanex
contract; there was no cash margin revenue realized in 2005 due to high fourth quarter natural gas
costs. Methanol sales in 2006 and 2005 were 18.6 million and 31.6 million gallons,
respectively. The decreased
30
sales
volumes in 2006 were primarily due to partial production curtailment of the Woodward facility due to the
high natural gas prices during the 2006 first half.
The methanol segment had 2006 operating income of $5.0 million compared to an operating loss of
$14.1 million in 2005. The 2006 improvement to operating results included was primarily due to
$12.0 million of cash margin revenue under the Methanex contract and $4.6 million of higher
margins on 2006 sales volumes. Ongoing costs at the idled Beaumont facility also declined $2.7
million from 2005.
Other Operating ActivitiesNet
The Company had $1.9 million of charges from other operating activities in 2006 compared to
$3.7 million in 2005. The decrease in expense relates primarily to administrative fees for general
corporate activities not allocable to any particular business segment.
Interest ExpenseNet
Net interest expense was $41.5 million in 2006 compared with $45.4 million in 2005. The
reduction in interest expense is primarily related to repayment of term debt during the 2005 first
half.
Income Taxes
The Companys income tax expense in 2006 and 2005 was $9.2 million and $14.2 million,
respectively. The 2006 effective tax rate was 69%, compared to 39% in 2005. The increase in the
2006 effective tax rate was due primarily to currency fluctuations and disallowed interest expense
on intercompany loans to non-U.S subsidiaries.
Results of Continuing Operations2005 Compared with 2004
Consolidated Results
The Company reported 2005 net income of $22.1 million on revenues of $1.9 billion compared
with a 2004 net income of $67.6 million on revenues of $1.5 billion. Diluted income per share for
2005 was $0.18 compared with $0.85 for 2004. The 2005 net income included a $27.2 million ($24.9
million, net of tax) loss related to the early retirement of debt and a $8.9 million ($8.9
million, net of tax) gain relating to change in fair value of warrants.
The 2004 net income also included $27.9 million of income tax benefits due to a favorable
settlement with a foreign taxing authority, $11.6 million of income attributable to an insurance
recovery of product claim costs (representing $17.9 million of operating income less $6.3 million
of related income taxes) and a $7.1 million loss from the early retirement of long-term debt
(representing $11.1 million of losses less $4.0 million of related income taxes.
31
Total revenues and operating income (loss) by segment for the years ended December 31, 2005 and
2004 were:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2005 |
|
|
2004 |
|
|
Revenues: |
|
|
|
|
|
|
|
|
Nitrogen products |
|
$ |
1,899,236 |
|
|
$ |
1,320,142 |
|
Methanol |
|
|
31,347 |
|
|
|
186,823 |
|
Other revenues |
|
|
8,482 |
|
|
|
2,145 |
|
|
|
|
$ |
1,939,065 |
|
|
$ |
1,509,110 |
|
|
Operating Income (Loss): |
|
|
|
|
|
|
|
|
Nitrogen products |
|
$ |
131,474 |
|
|
$ |
138,745 |
|
Methanol |
|
|
(14,089 |
) |
|
|
1,479 |
|
Other expensenet |
|
|
(3,689 |
) |
|
|
(5,478 |
) |
|
|
|
$ |
113,696 |
|
|
$ |
134,746 |
|
|
Nitrogen Products
Volumes and prices for 2005 and 2004 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volumes and Prices |
|
2005 |
|
|
2004 |
|
(quantities in |
|
Sales |
|
|
Average |
|
|
Sales |
|
|
Average |
|
thousands of tons) |
|
Volumes |
|
|
Unit Price* |
|
|
Volumes |
|
|
Unit Price* |
|
|
Ammonia |
|
|
1,898 |
|
|
$ |
303 |
|
|
|
1,391 |
|
|
$ |
266 |
|
Nitrogen solutions |
|
|
4,368 |
|
|
|
151 |
|
|
|
3,869 |
|
|
|
120 |
|
Urea |
|
|
151 |
|
|
|
262 |
|
|
|
376 |
|
|
|
195 |
|
Ammonium nitrate |
|
|
1,581 |
|
|
|
202 |
|
|
|
988 |
|
|
|
178 |
|
|
|
|
|
* |
|
After deducting outbound freight costs |
Nitrogen products revenues increased by $579.1 million to $1.9 billion for 2005 compared with $1.3
billion for 2004 primarily as the result of the December 2004 acquisition of MCC and higher sales
prices. Higher selling prices contributed $253.7 million to 2005 revenues as the result of
increased demand and lower fertilizer supplies due to reduced production capacity in North
America. Sales volumes in 2005 were higher than those of the previous year due primarily to the
MCC acquisition.
Nitrogen products operating income decreased by $7.3 million to $131.5 million for 2005 from
$138.7 million for 2004. Operating income in 2005 from the MCC business totaled $34.5 million, but
was more than offset by lower nitrogen margins on other operations and the absence of the $17.9
million 2004 insurance recovery of product claim costs. Nitrogen margins declined principally as
the result of increases to natural gas costs that outpaced selling price changes.
Natural gas costs increased $272.5 million from 2004 as unit costs, net of forward pricing gains
and losses, and were $7.50 per million MMBtu during 2005 compared to $5.37 per MMBtu during 2004.
As a result of forward price contracts, 2005 natural gas costs for the nitrogen products segment
were $0.7 million lower than spot prices.
Methanol
Methanol revenues were $31.3 million and $186.8 million for the years ended December 31, 2005
and 2004, respectively. Sales volumes declined approximately 87% from the prior year primarily due
to cessation of production from the Beaumont facility.
32
The methanol segment had an operating loss of $14.1 million during 2005 compared to operating
income of $1.5 million in 2004. The 2005 operating loss reflected lower sales volumes and idle
facility costs.
Other Operating ActivitiesNet
The Company had $3.7 million of charges from other operating activities in 2005 compared to
$5.5 million in 2004. The decrease in expense relates primarily to administrative and legal fees
for general corporate activities not allocable to any particular business segment.
Interest ExpenseNet
Net interest expense was $45.4 million in 2005 compared with $49.8 million in 2004. The
reduction in interest expense primarily related to higher cash balances during 2005 as compared to
2004, increased yields on the cash balances and a decrease in interest expense due to a 2004
fourth quarter $70.7 million redemption of Senior Notes due in 2010.
Minority Interest
Minority interest represents interest in the earnings of the publicly held common units of
Terra Nitrogen Company, L.P. (TNCLP). The 2005 minority interest charge of $13.7 million reflected
nitrogen earnings for TNCLP, which were included in their entirety in consolidated operating
results. Minority interest charge of $11.2 million was recorded in 2004, which were included in
their entirety in consolidated operating results.
Income Taxes
Terras income tax expense was $14.2 million in 2005, or 39% of pretax income, based
primarily on statutory rates in the jurisdictions where the earnings arise.
Terras income tax benefit was $5.0 million in 2004 and included reductions to tax reserves
totaling $27.9 million for a reduced assessment by a foreign taxing authority.
Liquidity and Capital Resources
The Companys primary uses of cash and cash equivalents is to fund its working capital
requirements, make payments on its debt and other obligations and make payments for plant
turnarounds and capital expenditures. The principal sources of funds are cash flow from operations
and borrowings under available bank facilities.
Unrestricted cash and cash equivalent balances at December 31, 2006, were $179.0 million. During
2006, cash and cash equivalents increased $92.7 million. Net cash provided by operating
activities was $159.3 million. Cash used in financing activities was $19.7 million, primarily
related to the payments under the Companys share repurchase program, distributions to minority
interests and preferred share dividend payments. Cash used for investing activities was $48.8
million, primarily for capital expenditures and plant turnaround costs, offset by distributions
received from unconsolidated affiliates and proceeds from the sale of property, plant and
equipment.
Net cash provided by 2006 operating activities of $159.3 million was composed of $151.4 million of
cash provided from operations and $7.9 million provided from net working capital items. Cash from
working capital items included $24.2 million of cash provided by additional customer prepayments
during 2006. The Company had $77.1 million in total customer prepayments at December 31, 2006 for
the selling price and delivery costs of nitrogen products that it expects to ship during the first
half of 2007.
33
During 2006 and 2005, the Company funded plant and equipment purchases of $50.9 million and $30.8
million, respectively. The 2006 capital expenditures included approximately $20 million to expand
the capabilities of the Companys Yazoo City facility to handle industrial grade ammonium nitrate
and add UAN solution handling capabilities at the Donaldsonville terminal. Other capital
expenditures in 2006 and 2005 were primarily for replacement or stay-in-business capital needs.
The Company expects 2007 plant and equipment purchases to approximate $35 million consisting
primarily of expenditures for replacement of equipment or to improve operating results at its
manufacturing facilities.
Plant turnaround costs represent cash used for the periodic scheduled major maintenance of the
Companys continuous process production facilities that is performed at each plant, generally
every two years. The Company funded $35.3 million and $22.3 million of plant turnaround costs in
2006 and 2005, respectively. The increase to 2006 turnaround costs was primarily due to
managements 2005 decision to extend the turnaround cycle to three years for selected facilities.
The Company estimates 2007 plant turnaround costs will approximate $35 million.
In February 2007, the Company completed a tender offer for $200.0 million in aggregate principal
amount of its
127/8% senior secured notes due 2008 and $131.3 in aggregate principal amount of its
111/2% second priority senior secured notes. A total of $189.2 million, or 94.6% of the aggregate
principal amount of the 127/8% senior secured notes due 2008 and a total of $128.8 million, or
98.1% of the aggregate principle amount of the 11 1/2% second priority senior secured notes due
2010, were validly tendered and not withdrawn prior to the close of the tender offer. The Company
will redeem the remaining 127/8% senior secured notes due 2008 in the first quarter of 2007, and
plans to announce the redemption of the remaining 11 1/2% second priority senior secured notes due
2010 in the second/third quarter of 2007. Proceeds from the Companys offering of $330.0 million
in aggregate principal amount of its new 7% senior notes due 2017 were used to finance the
repurchase of the
127/8% and 11 1/2 % notes in the tender offer. The Company incurred costs related
to tender premiums and transaction fees of approximately $40 million in connection with the tender
offer that will be recorded as an earnings charge in the first quarter of 2007. In connection with
the notes refinancing, the Companys revolving bank credit facility was extended until February
2012.
On December 21, 2004, the Company entered into revolving credit facilities totaling $200 million
that expire in June 2008. In connection with the 2007 bond refinancing, the term of the credit
facility was extended until February 2012. Borrowing availability under the credit facility is
generally based on eligible cash balances, 85% of eligible accounts receivable and 60% of eligible
inventory, less outstanding letters of credit. These facilities include $50 million only available
for the use of TNCLP, one of the Companys consolidated subsidiaries. There were no outstanding
revolving credit borrowings and there were $17.7 million in outstanding letters of credit,
resulting in remaining borrowing availability of approximately $182.3 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 Companys borrowing availability falls below a combined $60
million, it 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 Companys 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
34
termination of the facility. Access to adequate bank facilities is critical to funding the
Companys operating cash needs. Based on our December 31, 2006 financial position and the current
market conditions for the Companys finished products and for natural gas, the Company anticipates
that it will be able to comply with its covenants through 2007.
In April 2006, the Board of Directors authorized the repurchase of up to 10%, or 9.5 million
shares, of the Companys outstanding stock on the open market. During 2006, the Company
repurchased 2.7 million shares for $18.8 million, or an average price of $7.03 per share.
During 2004, the Company issued 4.25% Cumulative Convertible Perpetual Series A Preferred Shares
with a liquidation value of $120 million for net proceeds of $115.8 million. The Series A
preferred shares are not redeemable by the Company, are convertible into common stock at a
conversion price of $9.96 per common share at the option of the holder and may at the Companys
option be automatically converted to common shares after December 20, 2009 if the closing price
for common shares exceeds 140% of the conversion price for any twenty days within a consecutive
thirty day period prior to such a conversion. Upon the occurrence of a fundamental change to the
Companys capital structure, including a change of control, merger, or sale of the Company,
holders of the Series A preferred shares may require the Company to purchase any or all of their
shares at a price equal to their liquidation value plus any accumulated, but unpaid, dividends.
The Company also has the right, under certain conditions, to require holders of the Series A
preferred shares to exchange their shares for convertible subordinated debentures with similar
terms. During 2006 and 2005, the Company paid $5.1 million and $6.0 million, respectively, for
preferred share dividends.
The Companys ability to manage its 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.
Contractual obligations and commitments to make future payments at December 31, 2006 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due In |
|
(in millions) |
|
2007 |
|
|
2008-2009 |
|
|
2010-2011 |
|
|
Thereafter |
|
|
Long-term debt (1) |
|
$ |
|
|
|
$ |
200.0 |
|
|
$ |
131.3 |
|
|
$ |
|
|
Operating leases |
|
|
22.3 |
|
|
|
34.7 |
|
|
|
24.8 |
|
|
|
17.3 |
|
Interest expense on
fixed rate debt (1) |
|
|
40.8 |
|
|
|
52.7 |
|
|
|
6.3 |
|
|
|
|
|
Ammonia purchase
obligations (2) |
|
|
83.4 |
|
|
|
166.8 |
|
|
|
166.8 |
|
|
|
583.7 |
|
Other purchase obligations |
|
|
267.2 |
|
|
|
12.6 |
|
|
|
2.2 |
|
|
|
3.3 |
|
|
Total |
|
$ |
413.7 |
|
|
$ |
466.8 |
|
|
$ |
331.4 |
|
|
$ |
604.3 |
|
|
|
|
|
(1) |
|
In February 2007, the Company refinanced its outstanding notes by issuing $330.0
million in aggregate principal amount of its new 7% senior notes due 2017. These notes
mature in February 2017. The interest payments on the new notes will be approximately $23.1
million per year through February 2017. |
|
(2) |
|
The Company has a contractual obligation to purchase one-half of the ammonia produced
by Point Lisas Nitrogen Limited. The purchase price is based on the average market price of
ammonia, F.O.B. Caribbean, less a discount. Obligations in the above table are based on
purchasing 360,000 short tons per year at the December 2006 average price paid. This
contract expires in October 2018. |
35
The Companys pension projected benefit obligations were $504.2 million at December 31, 2006,
which was $149.1 million higher than its pension plan assets. The pension projected benefit
obligations were computed based on a 5.5% discount rate, which was based on yields for
high-quality corporate bonds (Moodys Investor Service AA rated or equivalent) with a maturity
approximating the duration of the Companys pension obligation. Future declines in comparable bond
yields would increase the Companys pension obligation and future increases in bond yields would
decrease the Companys pension obligation. The Companys pension obligation, net of plan assets,
could increase or decrease depending on the extent that returns on pension plan assets are lower
or higher than the discount rate. In addition, the pension obligation for the Companys U.K.
pension plan, which includes provisions to adjust benefit payments for general inflation rates,
was estimated based on a 3.0% inflation rate. The Companys pension obligation could increase or
decrease based on actual U.K. inflation rates. The Companys cash contributions to pension plans
were $15.1 million in 2006 and are estimated at $20.4 million in 2007. Actual contributions could
vary from these estimates depending on the Companys funding decisions, actual returns for plan
assets, legislative changes to pension funding requirements and/or plan amendments.
Expenditures related to environmental, health and safety regulation compliance are primarily
composed of operating costs that totaled $18.6 million in 2006. Because environmental, health and
safety regulations are expected to continue to change and generally to be more restrictive than
current requirements, the costs of compliance will likely increase. The Company does not expect
compliance with such regulations will have a material adverse effect on the results of operations,
financial position or net cash flows.
The Company incurred $2.2 million of 2006 capital expenditures to ensure compliance with
environmental, health and safety regulations. The Company may be required to install additional
air and water quality control equipment, such as low nitrous oxide burners, scrubbers, ammonia
sensors and continuous emission monitors to continue to achieve compliance with the Clean Air Act
and similar requirements. These equipment requirements typically apply to competitors as well. The
Company estimates that the cost of complying with these existing requirements in 2007, 2008 and
2009 and beyond will be less than $20 million in the aggregate.
The Company owns 75.3% of the common units of TNCLP, which in accordance with the partnership
agreement, permits it to call all common units that it does not own.
During 2006, 2005 and 2004, TNCLP distributed $8.9 million, $13.6 million and $8.1 million,
respectively, to the minority TNCLP common unitholders. TNCLP distributions are based on
Available Cash (as defined in the Partnership Agreement).
During 2006 and 2005, the Company paid $5.1 million and $6.0 million, respectively, for preferred
share dividends.
Recently Issued Accounting Standards
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes, (FIN 48). FIN 48 requires that realization of
an uncertain income tax position must be more likely than not (i.e. greater than 50% likelihood
of receiving a benefit) before it can be recognized in the financial statements. Further, FIN 48
prescribes the benefit to be recorded in the financial statements as the amount most likely to be
realized assuming a review by tax authorities having all relevant information and applying current
conventions. FIN 48 also clarifies the financial statement classification of tax-related penalties
and interest and sets forth new disclosures regarding unrecognized tax benefits. FIN 48 is
effective in the first quarter 2007 for the
36
Company. The Company has performed a preliminary analysis of its income tax position and does not
expect a significant impact to its financial statements as a result of adopting the
Interpretation.
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 September 2006, the FASB issued SFAS 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans, (SFAS 158). SFAS 158 focuses primarily on balance sheet reporting
for the funded status of benefit plans and requires recognition of benefit liabilities for
under-funded plans and benefit assets for over-funded plans, with offsetting impacts to
shareholders equity. These changes are required to be adopted prospectively, effective with the
Companys December 31, 2006 financial statements. The Company is in a net under-funded position
for its pension and retiree health care plans, which resulted in a $13.3 million impact as a
result of adopting SFAS 158. The $13.3 million impact of adopting SFAS 158 increased accumulated
other comprehensive income and deferred tax assets by $8.6 million and $4.7 million, respectively.
SFAS 158 will also require companies to measure benefit plan assets and liabilities and determine
the discount rate for subsequent year expense recognition as of the balance sheet date for
financial reporting purposes, thus eliminating the opportunity to use a measurement of date up to
90 days prior to the balance sheet date. The effective date for this change is delayed until
year-end 2008. The Company currently uses an October 1 measurement date and will adopt a December
31 measurement date in 2008 as required. Switching to the new measurement date will require a
one-time adjustment to retained earnings per the transition guidance in SFAS 158. None of the
changes prescribed by SFAS 158 will impact the Companys results of operations or cash flows.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). This statement, which is expected to expand fair value
measurement, permits entities to choose to measure many financial instruments and certain other
items at fair value. 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.
In September 2006, the SEC issued Staff Accounting Bulletin 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements, (SAB
108). SAB 108 provides interpretive guidance on how the effects of prior-year uncorrected
misstatements should be considered when quantifying misstatements in the current year financial
statements. SAB 108 requires registrants to quantify misstatements using both an income statement
and balance sheet approach and then evaluate whether either approach results in a misstatement
that, when all relevant quantitative and qualitative factors are considered, is material. If prior
year errors that had been previously considered immaterial now are considered material based on
either approach, no restatement is required so long as management properly applied its previous
approach and all relevant facts and circumstances were considered. If prior years financial
statements are not restated, the cumulative effect adjustment is recorded in opening accumulated
deficit as of the beginning of the fiscal year of adoption.
37
SAB 108 is effective for the fiscal year ending after November 15, 2006. The Company adopted the
provisions of SAB 108 on December 31, 2006. Adoption of SAB 108 had no impact on the Companys
financial statements.
In December 2006, the FAB issued FASB Staff Position No. EITF 00-19-2, Accounting for
Registration Payment Arrangements, (FSP EITF 00-19-2). FSP EITF 00-19-2 specifies that the
contingent obligation to make future payments or otherwise transfer consideration under a
registration payment arrangement, whether issued as a separate agreement or included as a
provision of a financial instrument or other agreement, should be separately recognized and
measured in accordance with SFAS 5 Accounting for Contingencies. Adoption of FSP EITF 00-19-2
during 2006 had no impact on the Companys financial statements.
Forward-Looking Precautions
Information contained in this report, other than historical information, may be considered
forward-looking. Forward-looking information reflects managements 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 this discussion.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Risk Management and Financial Instruments
Market risk represents the risk of loss that may impact the Companys financial position,
results of operations or cash flows due to adverse changes in financial and commodity market
prices and rates. The Company uses derivative financial instruments to manage risk in the areas of
(a) foreign currency fluctuations, (b) changes in natural gas prices and (c) changes in nitrogen
prices and (d) changes in interest rates. See Note 3 to the Consolidated Financial Statements for
additional information on the use of derivative financial instruments.
The Companys policy is to avoid unnecessary risk and to limit, to the extent practical, risks
associated with operating activities. The Companys management may not engage in activities that
expose the Company to speculative or non-operating risks and is expected to limit risks to
acceptable levels. The use of derivative financial instruments is consistent with the Companys
overall business objectives. Derivatives are used to manage operating risk within the limits
established by our Board of Directors, and in response to identified exposures, provided they
qualify as hedge activities. As such, derivative financial instruments are used to manage exposure
to interest rate fluctuations, to hedge specific assets and liabilities denominated in foreign
currency, to hedge firm commitments and forecasted natural gas purchase transactions, to set a
floor for nitrogen selling prices and to protect against foreign exchange rate movements between
different currencies that impact revenue and earnings expressed in U.S. dollars.
The use of derivative financial instruments subjects the Company to some inherent risks associated
with future contractual commitments, including market and operational risks, credit risk
associated with counterparties, product location (basis) differentials and market liquidity. The
Company continuously monitors the valuation of identified risks and adjusts the portfolio based on
current market conditions.
38
Foreign Currency Fluctuations
The Companys policy is to manage risk associated with foreign currency fluctuations by entering
into forward exchange and option contracts covering specific currency obligations or net foreign
currency operating requirements, as appropriate. Such hedging is limited to the amounts and
duration of the specific obligations being hedged and, in the case of operating requirements, no
more than 75% of the forecasted requirements. The primary currencies to which the Company is
exposed are the Canadian dollar and the British pound. At December 31, 2006, the Company had
nominal forward currency positions that were matched with committed capital expenditures.
Natural Gas PricesNorth American Operations
Natural gas is the principal raw material used to manufacture nitrogen and methanol. Natural gas
prices are volatile and the Company mitigates some of this volatility through the use of
derivative commodity instruments. The Companys current policy is to hedge natural gas provided
that such arrangements would not result in costs greater than expected selling prices for its
finished products. North American natural gas requirements for 2007 are approximately 100 million
MMBtu. The Company has hedged 22% of its expected 2007 North American requirements and none of its
requirements beyond December 31, 2007. The fair value of these instruments is estimated based, in
part, on quoted market prices from brokers, realized gains or losses and the Companys
computations. These instruments and other natural gas positions fixed natural gas prices at $19.1
million more than published prices for December 31, 2006 forward markets. Market risk is estimated
as the potential loss in fair value resulting from a hypothetical price change. Changes in the
market value of these derivative instruments have a high correlation to changes in the spot price
of natural gas. Based on the Companys derivatives outstanding at December 31, 2006, which
included swaps, basis swaps and put options, a $1 per MMBtu increase in NYMEX would increase the
Companys natural gas costs by approximately $11.1 million and a $1 per MMBtu decrease in NYMEX
pricing would decrease the Companys natural gas costs by approximately $13.4 million.
Natural Gas PricesTrinidad Operation
The natural gas requirements of Point Lisas Nitrogen Limited are supplied under contract with the
Natural Gas Company of Trinidad and Tobago. The cost of natural gas to the joint venture
fluctuates based on changes in the market price of ammonia.
Natural Gas PricesUnited Kingdom Operations
To meet natural gas production requirements at the Companys U.K. production facilities, the
Company may enter into gas supply contracts to fix prices for approximately 20% to 80% of total
annual volume requirements. Procurement requirements for 2007 U.K. natural gas are approximately
32 million MMBtu. As of December 31, 2006, the Company did not have any fixed-price contracts.
Nitrogen Prices
The prices for nitrogen products can be volatile and the Company mitigates some of this volatility
through the use of derivative commodity instruments. The Companys current policy is to hedge no
more than 20% of its expected production for the upcoming 12 months and no more than 50% of any
single months expected production. The Company has hedged less than 5% of its 2007 North American
sales of nitrogen solutions.
39
Interest Rate Fluctuations
The table below provides information about the Companys financial instruments that are sensitive
to changes in interest rates. For debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. The Company had no interest
rate financial derivatives outstanding at December 31, 2006.
Interest Rate Sensitivity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions) |
|
Expected Maturity Date |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
Thereafter |
|
|
Total |
|
|
Fair Value |
|
|
|
|
Long Term Debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Notes (1),
fixed rate of 12.88% ($US) |
|
$ |
|
|
|
$ |
200.0 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
200.0 |
|
|
$ |
197.9 |
|
Senior Second Priority
Secured Notes (1),
fixed rate 11.50% ($US) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131.3 |
|
|
|
|
|
|
|
|
|
|
|
131.3 |
|
|
|
123.9 |
|
|
Total Long Term Debt |
|
$ |
|
|
|
$ |
200.0 |
|
|
$ |
|
|
|
$ |
131.3 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
331.3 |
|
|
$ |
321.8 |
|
|
Short Term Borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility(2),
notional amount ($US) |
|
$ |
150.0 |
|
|
$ |
150.0 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Variable interest rate,
LIBOR based |
|
|
7.10 |
% |
|
|
7.10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TNLP revolving credit
facility(2), notional
amount ($US) |
|
$ |
50.0 |
|
|
$ |
50.0 |
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable interest rate,
LIBOR based |
|
|
7.10 |
% |
|
|
7.10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In February 2007, the Company refinanced its outstanding notes by issuing new,
unsecured notes of $330.0 million with a face interest rate of 7.0%. The new notes have
a maturity date of 2017. |
|
(2) |
|
In February 2007, the Company amended its revolving credit facilities to extend the
term of the facilities to February 2012. |
40
Item 8. Financial Statements and Supplementary Data
Consolidated Statements of Financial Position
|
|
|
|
|
|
|
|
|
|
|
At December 31, |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
179,017 |
|
|
$ |
86,366 |
|
Restricted cash |
|
|
|
|
|
|
8,595 |
|
Accounts receivable, less allowance for
doubtful accounts of $333 and $234 |
|
|
198,791 |
|
|
|
206,407 |
|
Inventories |
|
|
211,017 |
|
|
|
190,314 |
|
Other current assets |
|
|
31,680 |
|
|
|
54,578 |
|
|
Total current assets |
|
|
620,505 |
|
|
|
546,260 |
|
|
Property, plant and equipment, net |
|
|
720,897 |
|
|
|
733,536 |
|
Deferred plant turnaround costs |
|
|
44,558 |
|
|
|
27,447 |
|
Equity investments |
|
|
164,099 |
|
|
|
183,884 |
|
Intangible assets |
|
|
5,645 |
|
|
|
7,526 |
|
Other assets |
|
|
17,009 |
|
|
|
24,972 |
|
|
Total assets |
|
$ |
1,572,713 |
|
|
$ |
1,523,625 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
156,493 |
|
|
$ |
125,863 |
|
Customer prepayments |
|
|
77,091 |
|
|
|
52,913 |
|
Accrued and other current liabilities |
|
|
75,863 |
|
|
|
85,034 |
|
|
Total current liabilities |
|
|
309,447 |
|
|
|
263,810 |
|
|
Long term debt and capital lease obligations |
|
|
331,300 |
|
|
|
331,300 |
|
Deferred income taxes |
|
|
63,851 |
|
|
|
65,998 |
|
Pension liabilities |
|
|
134,444 |
|
|
|
120,236 |
|
Other liabilities |
|
|
40,188 |
|
|
|
41,320 |
|
Minority interest |
|
|
94,687 |
|
|
|
92,258 |
|
|
Total liabilities and minority interest |
|
|
973,917 |
|
|
|
914,922 |
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Shares liquidation value of $120,000
|
|
|
115,800 |
|
|
|
115,800 |
|
|
|
|
|
|
|
|
|
|
Common Stockholders Equity |
|
|
|
|
|
|
|
|
Capital stock |
|
|
|
|
|
|
|
|
Common Shares, authorized 133,500 shares;
92,630 and 95,171 shares outstanding |
|
|
144,976 |
|
|
|
146,994 |
|
Paid in capital |
|
|
693,896 |
|
|
|
712,671 |
|
Accumulated other comprehensive loss |
|
|
(63,739 |
) |
|
|
(70,143 |
) |
Unearned compensation |
|
|
|
|
|
|
(5,369 |
) |
Accumulated deficit |
|
|
(292,137 |
) |
|
|
(291,250 |
) |
|
Total stockholders equity |
|
|
482,996 |
|
|
|
492,903 |
|
|
Total liabilities and stockholders equity |
|
$ |
1,572,713 |
|
|
$ |
1,523,625 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to the Consolidated Financial Statements |
|
|
|
|
|
|
|
|
41
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
(in thousands, except per-share amounts) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Revenues |
|
$ |
1,828,714 |
|
|
$ |
1,930,583 |
|
|
$ |
1,506,965 |
|
Other income, net |
|
|
8,008 |
|
|
|
8,482 |
|
|
|
2,145 |
|
|
Total Revenue |
|
|
1,836,722 |
|
|
|
1,939,065 |
|
|
|
1,509,110 |
|
|
Cost and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
1,732,222 |
|
|
|
1,800,236 |
|
|
|
1,348,077 |
|
Selling, general and administrative expense |
|
|
55,233 |
|
|
|
46,548 |
|
|
|
44,190 |
|
Equity in earnings of unconsolidated affiliates |
|
|
(17,013 |
) |
|
|
(21,415 |
) |
|
|
|
|
Recovery of product claim costs |
|
|
|
|
|
|
|
|
|
|
(17,903 |
) |
|
|
|
|
1,770,442 |
|
|
|
1,825,369 |
|
|
|
1,374,364 |
|
|
Income from operations |
|
|
66,280 |
|
|
|
113,696 |
|
|
|
134,746 |
|
Interest income |
|
|
6,457 |
|
|
|
8,086 |
|
|
|
3,307 |
|
Interest expense |
|
|
(47,991 |
) |
|
|
(53,478 |
) |
|
|
(53,134 |
) |
Loss on early retirement of debt |
|
|
|
|
|
|
(27,193 |
) |
|
|
(11,116 |
) |
Change in fair value of warrant liability |
|
|
|
|
|
|
8,860 |
|
|
|
|
|
|
Income before income taxes and minority interest |
|
|
24,746 |
|
|
|
49,971 |
|
|
|
73,803 |
|
Income tax benefit (provision) |
|
|
(9,247 |
) |
|
|
(14,217 |
) |
|
|
5,000 |
|
Minority interest |
|
|
(11,286 |
) |
|
|
(13,667 |
) |
|
|
(11,207 |
) |
|
Net income |
|
|
4,213 |
|
|
|
22,087 |
|
|
|
67,596 |
|
Preferred share dividends |
|
|
(5,100 |
) |
|
|
(5,134 |
) |
|
|
(1,029 |
) |
|
Income (Loss) Available to Common Stockholders |
|
$ |
(887 |
) |
|
$ |
16,953 |
|
|
$ |
66,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Income (Loss) Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.01 |
) |
|
$ |
0.18 |
|
|
$ |
0.87 |
|
Diluted |
|
|
(0.01 |
) |
|
|
0.18 |
|
|
|
0.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Weighted Average Shares Outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
92,676 |
|
|
|
92,537 |
|
|
|
76,478 |
|
Diluted |
|
|
92,676 |
|
|
|
94,935 |
|
|
|
79,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to the Consolidated Financial Statements |
|
|
|
|
|
|
|
|
|
|
|
|
42
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,213 |
|
|
$ |
22,087 |
|
|
$ |
67,596 |
|
Adjustments to reconcile net income (loss)
to net cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
108,069 |
|
|
|
110,342 |
|
|
|
102,230 |
|
Deferred income taxes |
|
|
3,777 |
|
|
|
13,538 |
|
|
|
(6,058 |
) |
Non-cash loss on derivatives |
|
|
933 |
|
|
|
4,091 |
|
|
|
|
|
Minority interest in earnings (loss) |
|
|
11,286 |
|
|
|
13,667 |
|
|
|
11,207 |
|
Distributions in excess of (less than)
equity earnings |
|
|
9,202 |
|
|
|
(6,941 |
) |
|
|
|
|
Share-based compensation |
|
|
7,010 |
|
|
|
2,431 |
|
|
|
1,205 |
|
Amortization of intangible and other assets |
|
|
6,878 |
|
|
|
5,243 |
|
|
|
|
|
Non-cash loss on early retirement of debt |
|
|
|
|
|
|
22,543 |
|
|
|
2,985 |
|
Change in fair value of warrant liability |
|
|
|
|
|
|
(8,860 |
) |
|
|
|
|
Term loan discount accretion |
|
|
|
|
|
|
1,773 |
|
|
|
|
|
Recovery of product claim costs |
|
|
|
|
|
|
|
|
|
|
(12,874 |
) |
Change in operating assets and
liabilities, net of acquisition: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
16,135 |
|
|
|
(59,591 |
) |
|
|
27,647 |
|
Inventories |
|
|
(14,003 |
) |
|
|
(45,579 |
) |
|
|
(11,352 |
) |
Accounts payable and customer prepayments |
|
|
37,960 |
|
|
|
(60,136 |
) |
|
|
48,394 |
|
Other assets and liabilities, net |
|
|
(32,200 |
) |
|
|
(3,733 |
) |
|
|
(18,508 |
) |
|
Net Cash Flows from Operating Activities |
|
|
159,260 |
|
|
|
10,875 |
|
|
|
212,472 |
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
|
(50,856 |
) |
|
|
(30,820 |
) |
|
|
(18,472 |
) |
Plant turnaround costs |
|
|
(35,281 |
) |
|
|
(22,331 |
) |
|
|
(28,878 |
) |
Acquisition, net of cash acquired |
|
|
|
|
|
|
|
|
|
|
(54,168 |
) |
Distributions received from unconsolidated
affiliates |
|
|
9,660 |
|
|
|
31,901 |
|
|
|
|
|
Changes in restricted cash |
|
|
8,595 |
|
|
|
(8,595 |
) |
|
|
|
|
Proceeds from the sale of property, plant
and equipment |
|
|
19,100 |
|
|
|
7,560 |
|
|
|
|
|
|
Net Cash Flows used in Investing Activities |
|
|
(48,782 |
) |
|
|
(22,285 |
) |
|
|
(101,518 |
) |
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Payments under share repurchase program |
|
|
(18,796 |
) |
|
|
|
|
|
|
|
|
Preferred share dividends paid |
|
|
(5,100 |
) |
|
|
(5,950 |
) |
|
|
|
|
Distributions to minority interests |
|
|
(8,861 |
) |
|
|
(13,607 |
) |
|
|
(8,072 |
) |
Changes in overdraft protection
arrangements |
|
|
11,443 |
|
|
|
|
|
|
|
|
|
Excess tax benefits from equity
compensation plans |
|
|
1,255 |
|
|
|
|
|
|
|
|
|
Payments under borrowing arrangements |
|
|
(37 |
) |
|
|
(125,167 |
) |
|
|
(70,854 |
) |
Proceeds from exercise of stock options |
|
|
363 |
|
|
|
142 |
|
|
|
447 |
|
Preferred share issuance, net of $4,200
issuance costs |
|
|
|
|
|
|
|
|
|
|
115,800 |
|
Deferred financing costs |
|
|
|
|
|
|
|
|
|
|
(2,598 |
) |
|
Net Cash Flows used in Financing Activities |
|
|
(19,733 |
) |
|
|
(144,582 |
) |
|
|
34,723 |
|
|
Effect of Exchange Rate Changes on Cash |
|
|
1,906 |
|
|
|
8,560 |
|
|
|
787 |
|
|
Increase (Decrease) in Cash and Cash
Equivalents |
|
|
92,651 |
|
|
|
(147,432 |
) |
|
|
146,464 |
|
Cash and Cash Equivalents at Beginning of
Year |
|
|
86,366 |
|
|
|
233,798 |
|
|
|
87,334 |
|
|
Cash and Cash Equivalents at End of Year |
|
$ |
179,017 |
|
|
$ |
86,366 |
|
|
$ |
233,798 |
|
|
43
Consolidated Statements of Cash Flows (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
42,150 |
|
|
$ |
42,110 |
|
|
$ |
50,455 |
|
Income tax refunds received |
|
|
|
|
|
|
11,933 |
|
|
|
|
|
Income taxes paid |
|
|
1,930 |
|
|
|
1,526 |
|
|
|
1,123 |
|
|
Supplemental schedule of non-cash investing and
financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Series B preferred stock
to common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
$ |
|
|
|
$ |
2,066 |
|
|
$ |
|
|
Paid in Capital |
|
$ |
|
|
|
$ |
14,646 |
|
|
$ |
|
|
Consideration to fund acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Common shares |
|
$ |
|
|
|
$ |
|
|
|
$ |
135,750 |
|
Series B preferred shares |
|
$ |
|
|
|
$ |
|
|
|
$ |
17,269 |
|
Assumed debt |
|
$ |
|
|
|
$ |
|
|
|
$ |
125,000 |
|
Stock Incentive Plan |
|
$ |
4,218 |
|
|
$ |
5,020 |
|
|
$ |
2,908 |
|
Supplemental schedule of unconsolidated affiliates
distributions received: |
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated affiliates |
|
$ |
17,013 |
|
|
$ |
21,415 |
|
|
$ |
|
|
Distribution in excess of (less than) equity earnings |
|
|
9,202 |
|
|
|
(6,941 |
) |
|
|
|
|
Distributions received from unconsolidated affiliates |
|
|
9,660 |
|
|
|
31,901 |
|
|
|
|
|
|
Total cash distributions received from
unconsolidated affiliates |
|
$ |
35,875 |
|
|
$ |
46,375 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to the Consolidated Financial Statements |
|
|
|
|
|
|
|
|
|
|
|
|
44
Consolidated Statements of Change in Common Stockholder Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Comprehensive |
|
|
Unearned |
|
|
Accumulated |
|
|
Comprehensive |
|
(in thousands) |
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Loss |
|
|
Compensation |
|
|
Deficit |
|
|
Total |
|
|
Income |
|
|
January 1, 2004 |
|
|
77,563 |
|
|
$ |
128,968 |
|
|
$ |
555,529 |
|
|
$ |
(44,596 |
) |
|
$ |
|
|
|
$ |
(374,770 |
) |
|
$ |
265,131 |
|
|
|
|
|
|
Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,596 |
|
|
|
67,596 |
|
|
$ |
67,596 |
|
Foreign currency
translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,216 |
|
|
|
|
|
|
|
|
|
|
|
25,216 |
|
|
|
25,216 |
|
Change in fair value of
derivatives, net of taxes
of$690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,286 |
) |
|
|
|
|
|
|
|
|
|
|
(23,286 |
) |
|
|
(23,286 |
) |
Minimum pension liability,
net of taxes of $3,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,328 |
) |
|
|
|
|
|
|
|
|
|
|
(13,328 |
) |
|
|
(13,328 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
56,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred share dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,029 |
) |
|
|
(1,029 |
) |
|
|
|
|
Issuance of common stock |
|
|
14,995 |
|
|
|
14,995 |
|
|
|
120,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,750 |
|
|
|
|
|
Exercise of stock options |
|
|
198 |
|
|
|
198 |
|
|
|
249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
447 |
|
|
|
|
|
Nonvested stock |
|
|
238 |
|
|
|
370 |
|
|
|
5,106 |
|
|
|
|
|
|
|
(4,081 |
) |
|
|
|
|
|
|
1,395 |
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,513 |
|
|
|
|
|
|
|
1,513 |
|
|
|
|
|
|
|
|
|
|
December 31, 2004 |
|
|
92,994 |
|
|
|
144,531 |
|
|
|
681,639 |
|
|
|
(55,994 |
) |
|
|
(2,568 |
) |
|
|
(308,203 |
) |
|
|
459,405 |
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,807 |
|
|
|
22,087 |
|
|
$ |
22,087 |
|
Foreign currency
translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,387 |
) |
|
|
|
|
|
|
|
|
|
|
(23,387 |
) |
|
|
(23,387 |
) |
Change in fair value of
derivatives, net of taxes
of $2,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,198 |
|
|
|
|
|
|
|
|
|
|
|
14,198 |
|
|
|
14,198 |
|
Minimum pension liability,
net of taxes of $5,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,960 |
) |
|
|
|
|
|
|
|
|
|
|
(4,960 |
) |
|
|
(4,960 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred share dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,134 |
) |
|
|
(5,134 |
) |
|
|
|
|
Conversion of preferred shares |
|
|
2,066 |
|
|
|
2,066 |
|
|
|
14,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,712 |
|
|
|
|
|
Reclassification of warrant liability |
|
|
|
|
|
|
|
|
|
|
12,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,240 |
|
|
|
|
|
Exercise of stock options |
|
|
39 |
|
|
|
39 |
|
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142 |
|
|
|
|
|
Nonvested stock |
|
|
72 |
|
|
|
358 |
|
|
|
4,043 |
|
|
|
|
|
|
|
(4,798 |
) |
|
|
|
|
|
|
(397 |
) |
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,997 |
|
|
|
|
|
|
|
1,997 |
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
95,171 |
|
|
|
146,994 |
|
|
|
712,671 |
|
|
|
(70,143 |
) |
|
|
(5,369 |
) |
|
|
(291,250 |
) |
|
|
492,903 |
|
|
|
|
|
|
|
|
|
|
45
Consolidated Statements of Changes in Common Stockholders Equity (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Comprehensive |
|
|
Unearned |
|
|
Accumulated |
|
|
Comprehensive |
|
(in thousands) |
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Loss |
|
|
Compensation |
|
|
Deficit |
|
|
Total |
|
|
Income |
|
|
Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,213 |
|
|
|
4,213 |
|
|
$ |
4,213 |
|
Foreign currency
translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,618 |
|
|
|
|
|
|
|
|
|
|
|
33,618 |
|
|
|
33,618 |
|
Change in fair value of
derivatives, net of taxes
of $3,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,727 |
) |
|
|
|
|
|
|
|
|
|
|
(6,727 |
) |
|
|
(6,727 |
) |
Pension and post-retirement
benefit liabilities,
net of taxes of $4,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,850 |
) |
|
|
|
|
|
|
|
|
|
|
(11,850 |
) |
|
|
(11,850 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of SFAS 158,
net of taxes of $4,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,637 |
) |
|
|
|
|
|
|
|
|
|
|
(8,637 |
) |
|
|
|
|
Preferred share dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,100 |
) |
|
|
(5,100 |
) |
|
|
|
|
Exercise of stock options |
|
|
95 |
|
|
|
95 |
|
|
|
268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
363 |
|
|
|
|
|
Nonvested stock |
|
|
39 |
|
|
|
562 |
|
|
|
(714 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(152 |
) |
|
|
|
|
Shares purchased and retired
under share repurchase
program |
|
|
(2,675 |
) |
|
|
(2,675 |
) |
|
|
(16,121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,796 |
) |
|
|
|
|
Reclassification for adoption
of SFAS 123 R |
|
|
|
|
|
|
|
|
|
|
(5,369 |
) |
|
|
|
|
|
|
5,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation |
|
|
|
|
|
|
|
|
|
|
3,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,161 |
|
|
|
|
|
|
December 31, 2006 |
|
|
92,630 |
|
|
$ |
144,976 |
|
|
$ |
693,896 |
|
|
$ |
(63,739 |
) |
|
$ |
|
|
|
$ |
(292,137 |
) |
|
$ |
482,996 |
|
|
|
|
|
|
See accompanying Notes to the Consolidated Financial Statements
46
Notes to the Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of presentation: The Consolidated Financial Statements include the accounts of Terra
Industries Inc. and all majority owned subsidiaries (Terra). All intercompany accounts and
transactions have been eliminated. Minority interest in earnings and ownership has been recorded
for the percentage of limited partnership common units not owned by Terra Industries Inc. for each
respective period presented.
Description of business: Terra produces nitrogen products for agricultural dealers and industrial
users, and methanol for industrial users.
Foreign exchange: Results of operations for the foreign subsidiaries are translated using average
currency exchange rates during the period; assets and liabilities are translated using period-end
rates. Resulting translation adjustments are recorded as foreign currency translation adjustments
in accumulated other comprehensive income (loss) in stockholders equity.
Cash and cash equivalents: Cash and cash equivalents consist of all cash balances and all highly
liquid investments purchased with an original maturity of three months or less.
Restricted cash: Restricted cash consists of cash and cash equivalents that have been pledged as
collateral on outstanding debt. The restrictions on the balances lapse with the payments for
qualified expenditures at the Verdigris, Oklahoma facility.
Inventories: Inventories are stated at the lower of cost or estimated net realizable value. The
cost of inventories is determined using the first-in, first-out method. The Company performs a
monthly analysis of its inventory balances to determine if the carrying amount of inventories
exceeds their 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.
The Company allocates fixed production overhead costs based on the normal capacity of its
production facilities and unallocated overhead costs are recognized as expense in the period
incurred.
Property, plant and equipment: Expenditures for plant and equipment additions, replacements and
major improvements are capitalized. Related depreciation is charged to expense on a straight-line
basis over estimated useful lives ranging from 15 to 22 years for buildings and 3 to 18 years for
plants and equipment. Equipment under capital leases is recorded in property with the
corresponding obligations in long-term debt. The amount capitalized is the present value at the
beginning of the lease term of the aggregate future minimum lease payments. Maintenance and repair
costs are expensed as incurred.
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.
Equity investments: Equity investments are carried at original cost adjusted for the Companys
proportionate share of the investees income, losses and distributions. The Company periodically
assesses the carrying value of its equity investments and records a loss in value of the
investment when the assessment indicates that an other-than-temporary decline in the investment
exists.
Intangible assets customer relationships: The Companys customer relationships has a finite
useful life and is amortized using the straight-line method over the estimated useful life of five
years. The Company monitors its intangible asset and records an impairment loss on the intangible
asset when circumstances indicate that the carrying amount is not recoverable and that the
carrying amount exceeds its fair value.
The customer relationships were recorded at $9.4 million in connection with the acquisition of
Mississippi Chemical Corporation in December 2004. During 2006 and 2005, the Company recorded $1.9
million of amortization expense each year. There was no amortization expense recorded during 2004.
The estimated amortization expense related to the customer relationships is $1.9 million annually
for 2007, 2008 and 2009.
47
Debt issuance costs: Costs associated with the issuance of debt are included in other noncurrent
assets and are amortized over the term of the related debt using the straight-line method.
Impairment of long-lived assets: The Company reviews and evaluates its long-lived assets for
impairment when events and changes in circumstances indicate that the carrying amount of its asset
may not be recoverable. Impairment is considered to exist if the total estimated future cash flows
on an undiscounted basis are less than the carrying value of the asset. Future cash flows include
estimates of production levels, pricing of the Companys products, costs of natural gas and
capital expenditures. If the assets are impaired, a calculation of fair value is performed; if the
fair value is less than the carrying value of the assets, the assets are reduced to their fair
value.
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.
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 Companys 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 include amounts related to shipping
and handling charges to the Companys customers.
Cost of sales and hedging transactions: Costs of sales are primarily related to manufacturing and
purchased costs related to the Companys nitrogen- and methanol-based products, including any
realized hedging gains or losses related to natural gas derivatives. Costs of sales include
amounts related to shipping and handling charges to the Companys customers.
Share-based compensation: During the 2006 first quarter, the Company adopted Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (SFAS 123 R) which
requires the measurement and recognition of compensation expense for all share-based payment
awards made to employees and directors based on estimated fair values. SFAS 123 R supersedes the
Companys previous accounting under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25) for periods beginning in 2006. In March 2005, the SEC issued
Staff Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123 R. The Company has applied the
provision of SAB 107 in its adoption of SFAS 123 R. The Company adopted SFAS 123 R using the
modified prospective transition method, which requires the application of the accounting standard
as of January 1, 2006 (See Note 15).
Per share results: Basic earnings 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 convertible preferred shares, common stock options, restricted stock and
common stock warrants.
48
Estimates: The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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 the reported amounts
of revenues and expenses during the reporting period. The significant areas requiring the use of
managements estimates relate to assumptions used to calculate pension and other post-retirement
benefits costs, valuation allowance for deferred tax assets, future cash flows from long-lived
assets and the useful lives utilized for depreciation, amortization and accretion calculations.
Actual results could differ from those estimates.
Recently issued accounting standards: In July 2006, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (FIN 48).
FIN 48 requires that realization of an uncertain income tax position must be more likely than
not (i.e. greater than 50% likelihood of receiving a benefit) before it can be recognized in the
financial statements. Further, FIN 48 prescribes the benefit to be recorded in the financial
statements as the amount most likely to be realized assuming a review by tax authorities having
all relevant information and applying current conventions. FIN 48 also clarifies the financial
statement classification of tax-related penalties and interest and sets forth new disclosures
regarding unrecognized tax benefits. FIN 48 is effective in the first quarter 2007 for the
Company. The Company has performed a preliminary analysis of its income tax position and does not
expect a significant impact to its financial statements as a result of adopting the
Interpretation.
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 September 2006, the FASB issued SFAS 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans, (SFAS 158). SFAS 158 focuses primarily on balance sheet reporting
for the funded status of benefit plans and requires recognition of benefit liabilities for
under-funded plans and benefit assets for over-funded plans, with offsetting impacts to
shareholders equity. These changes are required to be adopted prospectively, effective with the
Companys December 31, 2006 financial statements. The Company is in a net under-funded position
for its pension and retiree health care plans, which resulted in a $13.3 million impact as a
result of adopting SFAS 158. The $13.3 million impact of adopting SFAS 158 increased accumulated
other comprehensive income and deferred tax assets by $8.6 million and $4.7 million, respectively.
SFAS 158 will also require companies to measure benefit plan assets and liabilities and determine
the discount rate for subsequent year expense recognition as of the balance sheet date for
financial reporting purposes, thus eliminating the opportunity to use a measurement of date up to
90 days prior to the balance sheet date. The effective date for this change is delayed until
year-end 2008. The Company currently uses an October 1 measurement date and will adopt a December
31 measurement date in 2008 as required. Switching to the new measurement date will require a
one-time adjustment to retained
49
earnings per the transition guidance in SFAS 158. None of the changes prescribed by SFAS 158 will
impact the Companys results of operations or cash flows.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). This statement, which is expected to expand fair value
measurement, permits entities to choose to measure many financial instruments and certain other
items at fair value. 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.
In September 2006, the SEC issued Staff Accounting Bulletin 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements, (SAB
108). SAB 108 provides interpretive guidance on how the effects of prior-year uncorrected
misstatements should be considered when quantifying misstatements in the current year financial
statements. SAB 108 requires registrants to quantify misstatements using both an income statement
and balance sheet approach and then evaluate whether either approach results in a misstatement
that, when all relevant quantitative and qualitative factors are considered, is material. If prior
year errors that had been previously considered immaterial now are considered material based on
either approach, no restatement is required so long as management properly applied its previous
approach and all relevant facts and circumstances were considered. If prior years financial
statements are not restated, the cumulative effect adjustment is recorded in opening accumulated
deficit as of the beginning of the fiscal year of adoption. SAB 108 is effective for the fiscal
year ending after November 15, 2006. The Company adopted the provisions of SAB 108 on December 31,
2006. Adoption of SAB 108 had no impact on the Companys financial statements.
In December 2006, the FAB issued FASB Staff Position No. EITF 00-19-2, Accounting for
Registration Payment Arrangements, (FSP EITF 00-19-2). FSP EITF 00-19-2 specifies that the
contingent obligation to make future payments or otherwise transfer consideration under a
registration payment arrangement, whether issued as a separate agreement or included as a
provision of a financial instrument or other agreement, should be separately recognized and
measured in accordance with SFAS 5 Accounting for Contingencies. Adoption of FSP EITF 00-19-2
during 2006 had no impact on the Companys financial statements.
2. Earnings Per Share
Basic income per share data is based on the weighted-average number of common shares
outstanding during the period. Diluted income 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, restricted shares, convertible preferred shares and common stock
warrants. Nonvested restricted stock carries dividend and voting rights, but is not involved in
the weighted average number of common shares outstanding used to compute basic income per share.
The following table provides a reconciliation between basic and diluted income per share for the
year ended December 31, 2006, 2005 and 2004.
50
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per-share data) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Basic income per share computation: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
4,213 |
|
|
$ |
22,087 |
|
|
$ |
67,596 |
|
Less: Preferred share dividends |
|
|
(5,100 |
) |
|
|
(5,134 |
) |
|
|
(1,029 |
) |
|
Income (loss) available to common shareholders |
|
|
(887 |
) |
|
|
16,953 |
|
|
|
66,567 |
|
Weighted average shares outstanding |
|
|
92,676 |
|
|
|
92,537 |
|
|
|
76,478 |
|
|
Basic income (loss) per common share |
|
$ |
(0.01 |
) |
|
$ |
0.18 |
|
|
$ |
0.87 |
|
|
Diluted income (loss) per share computation: |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to common shareholders |
|
$ |
(887 |
) |
|
$ |
16,953 |
|
|
$ |
66,567 |
|
Add: Preferred share dividends |
|
|
|
|
|
|
|
|
|
|
1,029 |
|
|
Income (loss) available to common shareholders and
assumed conversions |
|
$ |
(887 |
) |
|
$ |
16,953 |
|
|
$ |
67,596 |
|
|
Weighted average shares outstanding |
|
|
92,676 |
|
|
|
92,537 |
|
|
|
76,478 |
|
Add incremental shares from assumed conversions: |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Shares |
|
|
|
|
|
|
1,048 |
|
|
|
2,423 |
|
Restricted stock |
|
|
|
|
|
|
577 |
|
|
|
750 |
|
Common stock options |
|
|
|
|
|
|
179 |
|
|
|
208 |
|
Common stock warrants |
|
|
|
|
|
|
594 |
|
|
|
|
|
|
Dilutive potential common shares |
|
|
92,676 |
|
|
|
94,935 |
|
|
|
79,859 |
|
|
Diluted income (loss) per potential common share |
|
$ |
(0.01 |
) |
|
$ |
0.18 |
|
|
$ |
0.85 |
|
|
Common stock options totaling 0.1 million, 0.1 million and 0.1 million for the years ended
December 31, 2006, 2005 and 2004, respectively, were excluded from the computation of diluted
earnings per share because the exercise prices of those options exceeded the average market price
of Terras stock for the respective periods, and the effect of their inclusion would be
antidilutive.
All dilutive instruments were excluded from computation of diluted earnings per share due to the
loss available to common shareholders at December 31, 2006.
3. 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 (i.e., 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 Terras North American and United Kingdom
(U.K.) production facilities are purchased at market prices. Natural gas market prices are
volatile and Terra effectively fixes prices for a portion of its natural gas production
requirements and inventory through the use of futures contracts, swaps and options. The North
American contracts reference physical natural gas prices or appropriate NYMEX futures contract
prices. Contract physical prices for North America are frequently based on prices at the Henry Hub
in Louisiana, the most common and financially liquid location of reference for financial
derivatives related to natural gas. However, natural gas supplies for Terras North American
production facilities are purchased at locations other than Henry Hub, which
51
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. forward contracts and physical delivery are based on the
Intercontinental Exchanged (ICE) index price. Natural gas derivatives are designated as cash flow
hedges, provided that the derivatives meet the conditions discussed above. The contracts are
traded in months forward and settlement dates are scheduled to coincide with gas purchases during
that future period.
A swap is a contract between Terra and a third party to exchange cash based on a designated price.
Option contracts give the holder the right to either own or sell a futures or swap contract. The
futures contracts require maintenance of cash balances generally 10% to 20% of the contract value
and option contracts require initial premium payments ranging from 2% to 5% of contract value.
Basis swap contracts require payments to or from Terra for the amount, if any, that monthly
published gas prices from the source specified in the contract differ from prices of NYMEX natural
gas futures during a specified period. There are no initial cash requirements related to the swap
and basis swap agreements.
Terra will 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.
The following summarizes values and balance sheet effects of open natural gas derivatives at
December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
Other |
|
|
|
|
|
|
Current |
|
Current |
|
Deferred |
|
Net Asset |
(in thousands) |
|
Assets |
|
Liabilities |
|
Taxes |
|
(Liability) |
|
December 31, 2006 |
|
$ |
4,731 |
|
|
$ |
(22,591 |
) |
|
$ |
6,373 |
|
|
$ |
(11,487 |
) |
December 31, 2005 |
|
|
22,152 |
|
|
|
(34,213 |
) |
|
|
2,861 |
|
|
|
(9,200 |
) |
The Company determined that certain derivative contracts were ineffective hedges for accounting
purposes and recorded a charge of $0.9 million to cost of sales for the year ended December 31,
2006. At December 31, 2005, the Company recorded an ineffective position of $4.1 million as a
charge to cost of sales.
The effective portion of gains and losses on derivative contracts that qualify for hedge treatment
are carried as accumulated other comprehensive income (loss) and credited or charged to cost of
sales in the month in which the hedged transaction settles. Gains and losses on the contracts that
do not qualify for hedge treatment are credited or charged to cost of sales based on the positions
fair value. The risk and reward of outstanding natural gas positions are directly related to
increases or decreases in natural gas prices in relation to the underlying NYMEX and ICE natural
gas contract prices.
The activity to accumulated other comprehensive loss, net of income taxes, relating to current
period hedging transactions for the twelve-month periods ended December 31, 2006 and 2005 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended |
|
|
December 31, |
|
|
2006 |
|
2005 |
(in thousands) |
|
Gross |
|
Net of tax |
|
Gross |
|
Net of tax |
|
Beginning accumulated loss |
|
$ |
(7,886 |
) |
|
$ |
(5,109 |
) |
|
$ |
(16,829 |
) |
|
$ |
(19,307 |
) |
Net increase (decrease) in
market value |
|
|
(59,181 |
) |
|
|
(38,420 |
) |
|
|
4,171 |
|
|
|
11,139 |
|
Reclassification into earnings |
|
|
48,857 |
|
|
|
31,693 |
|
|
|
4,772 |
|
|
|
3,059 |
|
|
Ending accumulated loss |
|
$ |
(18,210 |
) |
|
$ |
(11,836 |
) |
|
$ |
(7,886 |
) |
|
$ |
(5,109 |
) |
|
52
Approximately $11.8 million of the net accumulated loss at December 31, 2006 will be reclassified
into earnings during 2007.
At times, the Company also uses forward derivative instruments to fix or set floor prices for a
portion of its nitrogen sales volumes. At December 31, 2006, the Company had 30,000 tons of open
nitrogen solution swap contracts. Outstanding 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 years ending December 31, 2006, 2005 and 2004, the Company
recognized losses of $0.6 million, $2.2 million and $8.2 million, respectively on these forward
derivative instruments.
4. Inventories
Inventories consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
Raw materials |
|
$ |
26,583 |
|
|
$ |
22,487 |
|
Supplies |
|
|
54,542 |
|
|
|
55,647 |
|
Finished goods |
|
|
129,892 |
|
|
|
112,180 |
|
|
Total |
|
$ |
211,017 |
|
|
$ |
190,314 |
|
|
Inventory is valued at actual first in-first out cost. Costs include raw materials, labor and
overhead.
5. Property, Plant and Equipment, Net
Property, plant and equipment, net consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
Land |
|
$ |
17,096 |
|
|
$ |
16,086 |
|
Buildings and improvements |
|
|
65,573 |
|
|
|
62,937 |
|
Plant and equipment |
|
|
1,423,302 |
|
|
|
1,339,799 |
|
Construction in progress |
|
|
24,372 |
|
|
|
27,510 |
|
|
|
|
|
1,530,343 |
|
|
|
1,446,332 |
|
Less accumulated depreciation and amortization |
|
|
(809,446 |
) |
|
|
(712,796 |
) |
|
Total |
|
$ |
720,897 |
|
|
$ |
733,536 |
|
|
Depreciation expense for property, plant and equipment for the years ending December 31, 2006,
2005 and 2004 was $78.9 million, $80.8 million and $74.0 million, respectively.
6. Equity Investments
Terras investments in companies that are accounted for on the equity method of accounting
consist of the following: (1) 50% ownership interest in PLNL, 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, located in Verdigris, Oklahoma which produces CO2
at Terras plant. As of December 31, 2006, the Point Lisas Nitrogen Limited investment is
considered significant as defined by applicable SEC regulations. These investments amounted to
$164.1 million and $183.9 million at December 31, 2006 and 2005, respectively.
53
The combined results of operations and financial position of Terras equity basis investments are
summarized below:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
Condensed income statement information: |
|
|
|
|
|
|
|
|
Net sales |
|
$ |
171,906 |
|
|
$ |
181,818 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
44,751 |
|
|
$ |
62,723 |
|
|
|
|
|
|
|
|
|
|
|
Terras equity in net income of affiliates |
|
$ |
17,013 |
|
|
$ |
31,362 |
|
|
|
|
|
|
|
|
|
|
|
Condensed balance sheet information: |
|
|
|
|
|
|
|
|
Current assets |
|
$ |
59,553 |
|
|
$ |
78,711 |
|
Long-lived assets |
|
|
185,621 |
|
|
|
194,548 |
|
|
Total assets |
|
$ |
245,174 |
|
|
$ |
273,259 |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
$ |
22,311 |
|
|
$ |
37,804 |
|
Long-term liabilities |
|
|
|
|
|
|
75 |
|
Equity |
|
|
222,863 |
|
|
|
235,380 |
|
|
Total liabilities and equity |
|
$ |
245,174 |
|
|
$ |
273,259 |
|
|
The
carrying value of these investments at December 31, 2006 was
$52.7 million more than Terras
share of the equity method investments book value. The excess fair value assigned at the
acquisition date is attributable primarily to fixed asset values and will be amortized over a
period of approximately 15 years.
The Company has transactions in the normal course of business with PLNL, whereby the Company is
obliged to purchase 50 percent of the ammonia produced by PLNL at current market prices. During
the twelve-month period ended December 31, 2006, the Company purchased approximately $76.0 million
of ammonia from PLNL. As of December 31, 2006, PLNL made cash distributions to its shareholders,
of which the Companys portion was $33.8 million for the 12-month period.
The total distributions from all equity investments were $35.9 million and $46.4 million at
December 31, 2006 and 2005, respectively.
54
7. Revolving Credit Facility, Long-Term Debt and Capital Lease Obligations
The Company has revolving credit facilities totaling $200 million that expire June 30, 2008.
The revolving credit facility is secured by substantially all of the assets of the Company other
than the assets collateralizing the Senior Secured Notes. 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 TNCLP, one of the Companys
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 Companys
option, a London Interbank Offered Rate (LIBOR). At December 31, 2006, the LIBOR rate was 5.32%.
The base rate is the highest of (1) Citibank, N.A.s base rate (2) the federal funds effective
rate, plus one-half percent (0.50%) per annum and (3) the base three month certificate of deposit
rate, plus one-half percent (0.50%) per annum, plus an applicable margin in each case. LIBOR loans
will bear interest at LIBOR plus an applicable margin. The applicable margin for base rate loans
and LIBOR loans are 0.50% and 1.75%, respectively, at December 31, 2006. 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 December 31, 2006, the Company had no outstanding revolving credit borrowings and $17.7 million
in outstanding letters of credit. The $17.7 million in outstanding letters of credit reduced the
Companys borrowing availability to $182.3 million at December 31, 2006. 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. The Company was in compliance with all
credit facilities covenants at December 31, 2006. If the Companys 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.
Long-term debt and capital lease obligations consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
Senior Secured Notes, 12.875%,
due 2008 |
|
$ |
200,000 |
|
|
$ |
200,000 |
|
Second Priority Senior
Secured Notes, 11.5%, due 2010 |
|
|
131,300 |
|
|
|
131,300 |
|
Capital lease obligations |
|
|
1 |
|
|
|
38 |
|
|
|
|
|
331,301 |
|
|
|
331,338 |
|
Less current maturities in other current liabilities |
|
|
1 |
|
|
|
38 |
|
|
Total long-term debt |
|
$ |
331,300 |
|
|
$ |
331,300 |
|
|
In connection with the December 2004 acquisition of MCC, the Company assumed obligations due under
MCCs $125.0 million bank term loan and provided the debt holders five-year warrants to purchase
Terras common shares. The warrants were valued at $21.1 million, which was treated as a discount
to par value of the debt.
In 2005, the Company repaid $125 million of the term loan from the MCC acquisition. The Company
recorded a $27.2 million charge which related to the loss on the early repayment and other related
prepayment charges.
During 2003, Terra Capital, Inc., (TCAPI) a subsidiary of Terra Industries Inc., issued $202
million of 11.5% Second Priority Senior Secured Notes due June 1, 2010. The notes were priced at
99.402% to
55
yield 11.625% and are unconditionally guaranteed by the Company and its U.S. subsidiaries. Part of
the proceeds were used to repay existing debt. The Company redeemed $70.7 million of the 2010
notes during 2004. These notes and guarantees are secured by a second priority security interest
in all domestic inventory, domestic accounts receivable, intellectual property of Terra Industries
Inc. and its domestic subsidiaries and certain subsidiary capital stock. The security interest is
second in priority to a first priority security interest in the same assets in favor of the
lenders under the Companys revolving credit facility and is shared equally and ratably with the
Companys outstanding 12.875% Senior Secured Notes due 2008. The Indenture governing these notes
contains covenants that limit, among other things, the Companys ability to incur additional debt,
pay dividends on common stock of Terra Industries Inc. or repurchase shares of such common stock,
make investments (other than in Terra Capital, Inc. or any guarantor), use assets as security in
other transactions, sell any of the Companys 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 Companys restricted subsidiaries to the Company, enter into sale and
leaseback transactions, engage in other businesses, sell all or substantially all of the Companys
assets or merge with or into other companies, and reduce the Companys insurance coverage. In
addition, the Company is obligated to offer to repurchase these notes upon a Change of Control (as
defined in the Indenture) at a cash price equal to 101% of the aggregate principal amount
outstanding at that time, plus accrued interest to the date of purchase. The Indenture governing
these notes contains events of default and remedies customary for a financing of this type.
During 2001, TCAPI issued $200 million of 12.875% Senior Secured Notes due in 2008. The notes were
priced at 99.43% to yield 13%. The proceeds were 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 in TCAPI and the guaranteeing subsidiaries, the
limited partnerships interest in Terra Nitrogen Company, L.P. (TNCLP) owned by TCAPI and the
guaranteeing subsidiaries, and certain intercompany notes issued to TCAPI by non-guaranteeing
subsidiaries. Payment obligations under the Senior Secured Notes are fully and unconditionally
guaranteed on a joint and several basis by Terra Industries Inc. (Parent) and certain of its
U.S. subsidiaries (the Guarantor Subsidiaries). Terra Nitrogen, Limited Partnership, TNCLP, the
general partner of TNCLP and the Parents foreign subsidiaries do not guarantee the notes (see
Note 23 Guarantor Subsidiaries for condensed consolidating financial information). The Parents
ability to receive dividends from its subsidiaries is limited by the revolving credit facility to
amounts required for the funding of operating expenses and debt service (not to exceed $40 million
per year), income tax payments on the earnings of TCAPI and its subsidiaries and liabilities
associated with discontinued operations (not to exceed $5 million per year). The Indenture
governing the Senior Secured Notes consists of covenants that limit, among other things, the
Companys ability to: incur additional debt, pay dividends on common stock of Terra Industries
Inc. or repurchase shares of such common stock, make investments (other than in Terra Capital or
any guarantor), use assets as security in other transactions, sell any of the Companys principle
production facilities or sell other assets outside the ordinary course of business, enter into
transactions with affiliates, limit dividends or other payments by the Companys restricted
subsidiaries, enter into sale and leaseback transactions, engage in other businesses, sell all or
substantially all of the Companys assets or merge with or into other companies, and reduce the
Companys insurance coverage. In addition, the Company is obligated to offer to repurchase these
notes upon a Change of Control (as defined in the Indenture) at a cash price equal to 101% of the
aggregate principal amount, 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.
56
Scheduled principal payments of the Companys long-term debt and capital leases are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Priority |
|
|
|
|
|
|
Senior Secured |
|
Senior Secured |
|
Capital |
|
|
(in thousands) |
|
Notes |
|
Notes |
|
Leases |
|
Total |
|
2007
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
1 |
|
2008
|
|
|
200,000 |
|
|
|
|
|
|
|
|
|
|
|
200,000 |
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
131,300 |
|
|
|
|
|
|
|
131,300 |
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
200,000 |
|
|
$ |
131,300 |
|
|
$ |
1 |
|
|
$ |
331,301 |
|
|
During February 2007, the Company repaid the 12.875% and 11.5% bonds due in 2008 and 2010,
respectively. The Company issued $330 million of 7.0% unsecured notes to finance the repayment. In
addition to the refinancing of the outstanding bonds, the Company amended its revolving credit
facility. The revolving credit facility remains essentially unchanged except for the term of the
facility, which has been extended to 2012 (See Note 22).
8. Accrued and Other Current Liabilities
Accrued and other current liabilities consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
Derivative contracts |
|
$ |
23,222 |
|
|
$ |
34,213 |
|
Payroll and benefit costs |
|
|
10,519 |
|
|
|
12,381 |
|
Pension liabilities |
|
|
12,958 |
|
|
|
8,326 |
|
Accrued interest |
|
|
6,740 |
|
|
|
6,737 |
|
Deferred revenue |
|
|
5,057 |
|
|
|
5,224 |
|
Other |
|
|
17,367 |
|
|
|
18,153 |
|
|
Total |
|
$ |
75,863 |
|
|
$ |
85,034 |
|
|
9. Other Liabilities
Other liabilities consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
Long-term medical and
closed facilities reserve |
|
$ |
23,206 |
|
|
$ |
24,415 |
|
Post retirement benefits |
|
|
6,046 |
|
|
|
4,844 |
|
Deferred revenue |
|
|
5,231 |
|
|
|
10,285 |
|
Other |
|
|
5,705 |
|
|
|
1,776 |
|
|
Total |
|
$ |
40,188 |
|
|
$ |
41,320 |
|
|
57
10. Commitments and Contingencies
The Company is committed to various non-cancelable operating leases for equipment, railcars
and production, office and storage facilities expiring on various dates through 2017.
Total minimum rental payments are as follows:
|
|
|
|
|
(in thousands) |
|
|
|
|
|
2007 |
|
$ |
22,346 |
|
2008 |
|
|
18,721 |
|
2009 |
|
|
15,954 |
|
2010 |
|
|
13,968 |
|
2011 |
|
|
10,822 |
|
2012 and thereafter |
|
|
17,314 |
|
|
Net minimum lease payments |
|
$ |
99,125 |
|
|
Total rental expense under all leases, including short-term cancelable operating leases, was $18.7
million, $17.5 million and $14.5 million for the years ended December 31, 2006, 2005 and 2004,
respectively.
The Company has entered into various contractual agreements that create an obligation into the
future. These agreements expire on various dates through 2018 and are as follows:
|
|
|
|
|
(in thousands) |
|
|
|
|
|
2007 |
|
$ |
350,634 |
|
2008 |
|
|
91,921 |
|
2009 |
|
|
87,490 |
|
2010 |
|
|
84,490 |
|
2011 |
|
|
84,490 |
|
2012 and thereafter |
|
|
587,017 |
|
|
Total obligations |
|
$ |
1,286,042 |
|
|
Included above are purchase agreements for various services and products relating to operations.
These commitments include open purchase orders, inventory purchase commitments and firm utility
and natural gas commitments.
The Company has a contractual agreement to purchase one-half of the ammonia produced by Point
Lisas Nitrogen Limited, the Companys 50-50 joint venture ammonia plant located in Trinidad. The
purchase price is based on the average market price of ammonia, F.O.B. Caribbean, less a discount.
The agreement is in place until October of 2018. Assuming the Company purchases 360,000 short tons
per year at the December 2006 average price paid, the annual purchase obligation would be $83.3
million.
The Company is liable for retiree medical benefits of employees of coal mining operations sold in
1993, under the Coal Industry Retiree Health Benefit Act of 1992, which mandated liability for
certain retiree medical benefits for union coal miners. The Company has provided reserves adequate
to cover the estimated present-value of these liabilities at December 31, 2006. The Companys
long-term medical and closed facilities reserve at December 31, 2006, includes $23.2 million for
expected future payments for the coal operations retirees and other former employees. The Company
may recover a portion of these payments through its rights in bankruptcy against Harman Coal
Company (a former coal subsidiary), and subject to damages received by Harman Coal Company through
its on-going litigation with Massey
58
Energy Company. No provision for such recoveries has been made in the Companys financial
statements.
FASB Interpretation Number 47, Accounting for Conditional Asset Retirement Obligations (FIN 47)
requires recognition of a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated. The Company has certain
facilities that contain asbestos insulation around certain piping and heated surfaces. The
asbestos insulation is in adequate condition to prevent leakage and can remain in place as long as
the facility is operated or remains assembled. The Company plans to maintain the facilities in an
adequate condition to prevent leakage through its standard repair and maintenance activities. The
Company has not recorded a liability relating to the asbestos insulation, as management believes
that it is not possible to reasonably estimate a settlement date for asbestos insulation removal
because the facilities have an indeterminate life.
The Company is required to dismantle its operations at the Beaumont, Texas site at the termination
of its lease in 2090. In accordance with FIN 47, the Company has estimated the costs associated
with dismantling its operations. The Company has applied the guidance of SFAS 143, Accounting for
Asset Retirement Obligations to these estimated costs to determine that the present value of the
retirement obligation is not significant. The Company has not recorded a liability relating to
this obligation.
The Company is involved in various legal actions and claims, including environmental matters,
arising from the normal course of business. Management believes that the ultimate resolution of
these matters will not have a material adverse effect on the results of the Companys operations,
financial position or net cash flows.
11. Preferred Shares
The components of preferred shares outstanding at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
Number |
|
|
Carrying |
|
|
Number |
|
|
Carrying |
|
(in thousands) |
|
of shares |
|
|
Value |
|
|
of shares |
|
|
Value |
|
|
Series A Preferred Shares
(120,000 shares authorized,
$1,000 per share liquidation value) |
|
|
120,000 |
|
|
$ |
115,800 |
|
|
|
120,000 |
|
|
$ |
115,800 |
|
During the 2004 fourth quarter, the Company issued 120,000 shares of cumulative convertible
perpetual Series A preferred shares with a liquidation value of $1,000 per share for net proceeds
of $115.8 million. Cumulative dividends of $10.625 per share are payable quarterly. The Series A
preferred shares are not redeemable, but are convertible into the Companys common stock at the
option of the holder for a conversion price of $9.96 per common share. The Series A shares may
automatically be converted to common shares after December 20, 2009 if the closing price for the
Companys common shares exceeds 140% of the conversion price for any twenty days within a
consecutive thirty day period prior to such conversion. Upon the occurrence of a fundamental
change to the Companys capital structure, including a change of control, merger, or sale of the
Company, holders of the Series A preferred shares may require the Company to purchase any or all
of their shares at a price equal to their liquidation value plus any accumulated, but unpaid,
dividends. The Company also has the right, under certain conditions, to require holders of the
Series A preferred shares to exchange their shares for convertible subordinated debentures with
similar terms.
59
12. Financial Instruments and Concentrations of Credit Risk
The following table represents the carrying amounts and estimated fair values of Terras
financial instruments at December 31, 2006 and 2005. SFAS 107 defines the fair value of a
financial instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
(in millions) |
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
|
Financial Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term investments |
|
$ |
179.0 |
|
|
$ |
179.0 |
|
|
$ |
86.4 |
|
|
$ |
86.4 |
|
Receivables |
|
|
198.8 |
|
|
|
198.8 |
|
|
|
206.4 |
|
|
|
206.4 |
|
Equity and other investments |
|
|
164.1 |
|
|
|
164.1 |
|
|
|
183.9 |
|
|
|
183.9 |
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
331.3 |
|
|
|
321.8 |
|
|
|
331.3 |
|
|
|
322.7 |
|
Preferred shares |
|
|
115.8 |
|
|
|
161.7 |
|
|
|
115.8 |
|
|
|
102.6 |
|
|
The following methods and assumptions were used to estimate the fair value of each class of
financial instrument:
|
|
|
Cash and receivables: The carrying amounts approximate fair value because of the short
maturity of those instruments. |
|
|
|
|
Equity and other investments: Investments in untraded companies are valued on the basis
of managements estimates and, when available, comparisons with similar companies whose shares are publicly traded. |
|
|
|
|
Short-term borrowings and long-term debt: The fair value of Terras short-term
borrowings and long-term debt is estimated by discounting expected cash flows at the rates
currently offered for debt of the same remaining maturities. |
|
|
|
|
Preferred shares: Preferred shares are valued on the basis of market quotes, when
available and management estimates based on comparisons with similar instruments that are
publicly traded. |
Concentration of Credit Risk: Terra is subject to credit risk through trade receivables and
short-term investments. Although a substantial portion of its debtors ability to pay depends upon
the agribusiness economic sector, credit risk with respect to trade receivables generally is
minimized due to its geographic dispersion. Short-term cash investments are placed in short
duration corporate and government debt securities funds with well-capitalized, high quality
financial institutions.
Financial Instruments: At December 31, 2006, Terra had letters of credit outstanding totaling
$17.7 million, guaranteeing various insurance and financing activities.
13. Common Stockholders Equity
Terra allocates $1.00 per share upon the issuance of Common Shares to the Common Share
capital account. The Common Shares have no par value. At December 31, 2006, 1.8 million common
shares were reserved for issuance upon award of restricted shares and exercise of employee stock
options.
In connection with the MCC acquisition, Terra issued warrants to purchase 4.0 million of its
common shares at $5.48 per share. These warrants were valued at $21.1 million at the MCC closing.
During 2005, shareholders approved the issuance of the underlying shares and the warrant value was
reclassified to common stockholders equity.
60
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 September 30, 2008, and at such prices, as determined appropriate by the Company. Purchases may
be commenced or suspended at any time without notice. During 2006, the Companys repurchases under
the stock buyback program were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Average Price |
|
|
Total Cost |
|
(in thousands, except average |
|
Shares |
|
|
of Shares |
|
|
of Shares |
|
price of shares repurchased) |
|
Repurchased |
|
|
Repurchased |
|
|
Repurchased |
|
|
April 2006 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
May 2006 |
|
|
488 |
|
|
|
7.49 |
|
|
|
3,655 |
|
June 2006 |
|
|
1,557 |
|
|
|
6.92 |
|
|
|
10,767 |
|
July 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
August 2006 |
|
|
560 |
|
|
|
6.93 |
|
|
|
3,879 |
|
September 2006 |
|
|
70 |
|
|
|
7.03 |
|
|
|
495 |
|
October 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
November 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
December 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,675 |
|
|
$ |
7.03 |
|
|
$ |
18,796 |
|
|
14. Acquisition
On December 21, 2004, Terra acquired Mississippi Chemical Corporation (MCC) for a purchase
price valued at $213.5 million consisting of 15 million common shares, 172,690 Series B preferred
shares and cash of $54.2 million, including costs directly related to the acquisition. MCC
manufactured nitrogen-based fertilizers and industrial use products; had a 50% ownership interest
in Point Lisas Nitrogen Limited (PLNL), an ammonia production plant in Trinidad; and had a 50%
interest in an ammonia storage joint venture located in Houston, Texas. These equity investments
were acquired by the Company with the purchase of MCC. In connection with the acquisition, Terra
assumed $125.0 million of MCC long-term debt and $34.1 million of unfunded pension liabilities.
61
The following table summarizes the fair market values of the assets acquired and the liabilities
assumed at the acquisition date to the final purchase price allocation:
|
|
|
|
|
|
|
Final |
|
|
Purchase |
|
|
Price |
(in thousands) |
|
Allocation |
|
Current assets |
|
$ |
99,177 |
|
Property, plant and equipment |
|
|
140,955 |
|
Equity investments |
|
|
201,520 |
|
Other assets |
|
|
3,464 |
|
Intangible assets |
|
|
9,408 |
|
|
Total assets acquired |
|
|
454,524 |
|
|
|
|
|
|
|
Current liabilities |
|
|
37,169 |
|
Long-term debt and warrants |
|
|
125,000 |
|
Pension and other long-term liabilities |
|
|
36,314 |
|
Deferred income taxes |
|
|
42,527 |
|
|
Total liabilities assumed |
|
|
241,010 |
|
|
|
|
|
|
|
Net Assets acquired |
|
$ |
213,514 |
|
|
Intangible assets acquired represent customer relationships that will be amortized on a
straight-line basis over a period of approximately five years. The useful life of five years for
the customer base intangible asset was based on managements forecasts of customer turnover.
The following represents unaudited pro forma summary results of operations as if the acquisition
of MCC had occurred at the beginning of 2004.
|
|
|
|
|
|
|
Year ended |
|
(in thousands, except per share data) |
|
December 31, 2004 |
|
|
Revenues |
|
$ |
1,886,953 |
|
Operating income (loss) |
|
|
179,349 |
|
Net income (loss) |
|
|
78,204 |
|
Basic income (loss) per share |
|
|
0.85 |
|
|
|
|
|
|
Selected costs included above: |
|
|
|
|
Interest expense |
|
|
72,639 |
|
Depreciation and amortization |
|
|
117,994 |
|
Impairment losses included above |
|
|
|
|
The pro forma operating results were adjusted to include depreciation of the fair value of
acquired assets based on estimated useful lives at the acquisition dates, amortization of
intangible assets, interest expense on acquisition borrowings, the issuance of common stock and
the effect of income taxes. Pro forma operating results were also adjusted to exclude MCC
discontinued operations as well as reorganization expenses and gains on the extinguishment of
pre-petition liabilities in connection with MCCs emergence from Chapter 11.
62
The pro forma information listed above does not purport to be indicative of the results that would
have been obtained if the operations were combined during the above periods, and is not intended
to be a projection of future operating results or trends.
15. Share-Based Compensation
The Company sponsors three share-based compensation plans the Inspiration Resources
Corporation 1992 Stock Incentive Plan (the 1992 Plan), the Terra Industries Inc. 1997 Stock
Incentive Plan (the 1997 Plan) and the Terra Industries Inc. Stock Incentive Plan of 2002 (the
2002 Plan). Upon the adoption of the 2002 Plan, the Company no longer issues share-based awards
from the 1992 Plan or the 1997 Plan, however, approximately 458,000 authorized shares have been
reserved for awards that were issued prior to the adoption of the 2002 plan. As of December 31,
2006, there were approximately 3,958,000 shares of common stock authorized for issuance under the
plans, including approximately 3,500,000, 454,000 and 4,000 authorized for the 2002 Plan, 1997
Plan and 1992 Plan, respectively. Shares for approximately 1,620,000 and 1,834,000 were available
and reserved, respectively, for share-based compensation grants as of December 31, 2006.
Awards granted under the plans may consist of incentive stock options (ISOs) or non-qualified
stock options (NQSOs), stock appreciation rights (SARs), nonvested stock awards or other
share-based awards (i.e. performance shares), with the exception that non-employee directors may
not be granted SARs and only employees of the Company may be granted ISOs.
The Compensation Committee of the Companys Board of Directors administers the plans and
determines the exercise price, exercise period, vesting period and all other terms of the grant.
All share-based awards to directors, officers and employees expire ten years after the date of the
grant. ISOs and NQSOs, which are not exercised after vesting, expire ten years after the date of
the award. The vesting period for nonvested stock is determined at the grant date of the award;
the vesting period is usually three years. The vesting date for other share-based awards is also
set at the time of the award but can vary in length; there is usually no expiration date for other
share-based awards.
Prior to January 1, 2006, the Company accounted for awards issued under its share-based
compensation plans using the intrinsic-value method. The Company did not recognize compensation
expense on stock options in the year ended December 31, 2005 and 2004 as all options granted under
the Companys plans had an exercise price equal to the market price of the Companys stock on the
date of grant and were fully vested. The Company recognized compensation expense of $2.0 million
and $1.5 million on nonvested stock awards and phantom share awards in the year ended December 31,
2005 and 2004, respectively, based on intrinsic value, which was equal to the market price of the
Companys stock on the date of grant.
On January 1, 2006, the Company adopted SFAS 123 R using the modified prospective method. This
Statement requires the Company to recognize in net income an estimate of expense for stock awards
and options over their vesting periods, typically determined as of the date of grant. Under the
modified prospective application, this Statement applies to new awards and to awards modified,
repurchased or cancelled after January 1, 2006. Additionally, the Company recognized compensation
cost for the portion of awards for which the requisite service has not been rendered that were
outstanding on January 1, 2006. The compensation cost for that portion of awards was based on the
grant-date fair value of those awards as calculated for either recognition or pro forma
disclosures under SFAS No. 123. Beginning January 1, 2006, the unearned compensation related to
the unvested awards was reclassified as a component of paid-in capital. The cumulative effect of
the adoption of SFAS 123 R related to estimating forfeitures of outstanding awards was not
significant. Results for prior periods have not been restated.
63
The following table illustrates the effect on net income and net income per share if the Company
had accounted for share-based compensation using the fair value method in the year ended December
31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(in thousands, except per-share amounts) |
|
2005 |
|
|
2004 |
|
|
Net income available to common shareholders |
|
$ |
16,953 |
|
|
$ |
66,567 |
|
Add: Share based employee compensation expense
included in reported net income, net of related tax effects |
|
|
1,218 |
|
|
|
1,205 |
|
Deduct: Share based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects |
|
|
(1,218 |
) |
|
|
(1,205 |
) |
|
Pro forma net income available to common shareholders |
|
$ |
16,953 |
|
|
$ |
66,567 |
|
|
|
|
|
|
|
|
|
|
|
Income per share: |
|
|
|
|
|
|
|
|
Basic as reported |
|
$ |
0.18 |
|
|
$ |
0.87 |
|
|
Basic pro forma |
|
$ |
0.18 |
|
|
$ |
0.87 |
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported |
|
$ |
0.18 |
|
|
$ |
0.85 |
|
|
Diluted pro forma |
|
$ |
0.18 |
|
|
$ |
0.85 |
|
|
Compensation cost charged against income and the total income tax benefit recognized for
share-based compensation arrangements is included below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Compensation cost charged to SG&A expense |
|
$ |
7,010 |
|
|
$ |
2,431 |
|
|
$ |
1,205 |
|
|
Total compensation cost charged to income |
|
$ |
7,010 |
|
|
$ |
2,431 |
|
|
$ |
1,205 |
|
|
Income tax benefit |
|
$ |
2,454 |
|
|
$ |
851 |
|
|
$ |
422 |
|
|
Stock Options
The Company has stock options with service conditions. No compensation cost is recognized for the
stock options as these instruments were fully vested upon adoption of SFAS 123 R.
64
A summary of stock option activity as of December 31, 2006, and changes during the year then ended
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Exercise |
(options in thousands) |
|
Number |
|
Price |
|
Outstanding beginning of period |
|
|
592 |
|
|
$ |
5.24 |
|
Expired/terminated |
|
|
(39 |
) |
|
|
14.01 |
|
Exercised |
|
|
(95 |
) |
|
|
3.82 |
|
|
Outstanding end of period |
|
|
458 |
|
|
$ |
4.78 |
|
|
The aggregate intrinsic value of the vested stock options outstanding at December 31, 2006 was
$3.3 million.
The following table summarizes information about stock options outstanding and exercisable at
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(options in thousands) |
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Range of |
|
|
Number |
|
|
Remaining |
|
|
Exercise |
|
|
Number |
|
|
Exercise |
|
|
|
Exercise Prices |
|
|
Outstanding |
|
|
Life (years) |
|
|
Price |
|
|
Exercisable |
|
|
Price |
|
|
|
|
$ |
1.43 - $3.88 |
|
|
|
399 |
|
|
|
2.6 |
|
|
$ |
3.72 |
|
|
|
399 |
|
|
$ |
3.72 |
|
|
|
|
7.81 - 7.81 |
|
|
|
6 |
|
|
|
1.6 |
|
|
|
7.81 |
|
|
|
6 |
|
|
|
7.81 |
|
|
|
|
12.13 - 14.75 |
|
|
|
53 |
|
|
|
0.9 |
|
|
|
12.33 |
|
|
|
53 |
|
|
|
12.33 |
|
|
Total |
|
|
|
|
|
|
458 |
|
|
|
2.4 |
|
|
$ |
4.78 |
|
|
|
458 |
|
|
$ |
4.78 |
|
|
No options were granted during 2006, 2005 and 2004.
Nonvested Stock Shares and Phantom Share Awards
The Company currently has outstanding nonvested shares and phantom share awards with both service
conditions and performance conditions. Nonvested stock shares and phantom share awards with
service and performance conditions usually cliff vest in three years from the grant date. The
performance conditions of the nonvested shares and phantom share awards are based on a calculated
return on capital over a three-year period. For awards with performance conditions, the grants
will be forfeited if the performance conditions are not achieved.
The Company recognizes compensation expense for nonvested stock share awards over the vesting
periods based on fair value, which is equal to the market price of the Companys stock on the date
of grant. During 2006, 2005 and 2004, the Company recorded compensation expense of $4.3 million,
$1.9 million and $1.0 million, respectively. The Company recognizes compensation expense for the
phantom share awards over the vesting periods based on fair value, which is equal to the market
price of the Companys stock at each reporting period date. The phantom share awards settle in
cash. During 2006, 2005 and 2004, the Company recorded compensation expense of $2.7 million, $0.5
million and $0.2 million, respectively. Compensation costs for nonvested stock shares and phantom
share awards are reduced for estimated forfeitures and then amortized to expense using the
straight-line method. For awards with performance conditions, the Company estimates the expected
number of awards to vest at the time of the award grant. The Company records the compensation
expense for the awards with
65
performance conditions ratably over the requisite service period related to the performance
condition, taking into consideration any changes to the expected shares to vest as such matters
arise.
A summary of the status of the Companys nonvested share awards as of December 31, 2006, and
changes during the year then ended, is:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant-Date |
|
(in thousands, except fair values) |
|
Shares |
|
|
Fair Value |
|
|
Outstanding at January 1, 2006 |
|
|
1,590 |
|
|
$ |
5.12 |
|
Granted |
|
|
686 |
|
|
|
6.74 |
|
Vested |
|
|
(697 |
) |
|
|
2.03 |
|
Terminated |
|
|
(203 |
) |
|
|
6.95 |
|
|
Outstanding at December 31, 2006 |
|
|
1,376 |
|
|
$ |
7.23 |
|
|
The fair value of the nonvested shares that vested during 2006 was $4.9 million.
At December 31, 2006, the total unrecognized compensation cost related to all nonvested share
awards was $9.9 million. That cost is expected to be recognized over a weighted-average period of
1.5 years.
16. Retirement Benefit Plans
The Company maintains defined benefit pension plans that cover certain salaried and hourly
employees. Benefits are based on a pay formula. The Company uses September 30 as its measurement
date. 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. The Company accrues pension costs based upon annual independent
actuarial valuations for each plan and funds these costs in accordance with statutory
requirements.
The components of net periodic pension expense follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Service cost |
|
$ |
2,991 |
|
|
$ |
2,976 |
|
|
$ |
2,731 |
|
Interest cost |
|
|
24,926 |
|
|
|
23,550 |
|
|
|
15,669 |
|
Expected return on plan assets |
|
|
(24,224 |
) |
|
|
(21,575 |
) |
|
|
(12,280 |
) |
Amortization of prior service cost |
|
|
(36 |
) |
|
|
(28 |
) |
|
|
21 |
|
Amortization of actuarial loss |
|
|
5,636 |
|
|
|
5,632 |
|
|
|
4,889 |
|
Amortization of net assets |
|
|
|
|
|
|
|
|
|
|
49 |
|
Termination charge |
|
|
492 |
|
|
|
1,165 |
|
|
|
|
|
|
Pension expense |
|
$ |
9,785 |
|
|
$ |
11,720 |
|
|
$ |
11,079 |
|
|
The Company has defined benefit plans in the U.S., Canada and the U.K. The Company administers its
plans to comply with the laws set forth by each countrys regulators.
66
The following table reconciles, by geographic location, the plans funded status to amounts
included in the Consolidated Statements of Financial Position at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
U.S. |
|
|
Canada |
|
|
U.K. |
|
|
Total |
|
|
Change in Projected Benefit Obligation Present Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligationbeginning of year |
|
$ |
267,100 |
|
|
$ |
38,637 |
|
|
$ |
148,774 |
|
|
$ |
454,511 |
|
Service cost |
|
|
1,976 |
|
|
|
1,015 |
|
|
|
|
|
|
|
2,991 |
|
Interest cost |
|
|
14,972 |
|
|
|
2,058 |
|
|
|
7,896 |
|
|
|
24,926 |
|
Actuarial (gain) loss |
|
|
(8,247 |
) |
|
|
3,109 |
|
|
|
23,575 |
|
|
|
18,437 |
|
Termination charge |
|
|
|
|
|
|
|
|
|
|
492 |
|
|
|
492 |
|
Foreign currency exchange rate changes |
|
|
|
|
|
|
36 |
|
|
|
22,563 |
|
|
|
22,599 |
|
Benefits paid |
|
|
(15,204 |
) |
|
|
(905 |
) |
|
|
(3,686 |
) |
|
|
(19,795 |
) |
|
Projected benefit obligationend of year |
|
|
260,597 |
|
|
|
43,950 |
|
|
|
199,614 |
|
|
|
504,161 |
|
|
Change in Plan Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value plan assetsbeginning of year |
|
|
180,574 |
|
|
|
31,042 |
|
|
|
103,691 |
|
|
|
315,307 |
|
Actual return on plan assets |
|
|
18,239 |
|
|
|
2,415 |
|
|
|
8,565 |
|
|
|
29,219 |
|
Foreign currency exchange rate changes |
|
|
|
|
|
|
15 |
|
|
|
15,047 |
|
|
|
15,062 |
|
Employer contribution |
|
|
7,683 |
|
|
|
3,373 |
|
|
|
4,030 |
|
|
|
15,086 |
|
Participants contributions |
|
|
171 |
|
|
|
|
|
|
|
|
|
|
|
171 |
|
Benefits paid |
|
|
(15,204 |
) |
|
|
(905 |
) |
|
|
(3,686 |
) |
|
|
(19,795 |
) |
|
Fair value plan assetsend of year |
|
|
191,463 |
|
|
|
35,940 |
|
|
|
127,647 |
|
|
|
355,050 |
|
|
Funded Status |
|
|
(69,134 |
) |
|
|
(8,010 |
) |
|
|
(71,967 |
) |
|
|
(149,111 |
) |
Unrecognized net actuarial loss |
|
|
35,058 |
|
|
|
11,006 |
|
|
|
61,817 |
|
|
|
107,881 |
|
Unrecognized prior service cost |
|
|
(319 |
) |
|
|
|
|
|
|
|
|
|
|
(319 |
) |
|
Accrued benefit cost |
|
$ |
(34,395 |
) |
|
$ |
2,996 |
|
|
$ |
(10,150 |
) |
|
$ |
(41,549 |
) |
|
67
The following table reconciles, by geographic location, the plans funded status to amounts
included in the Consolidated Statements of Financial Position at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
U.S. |
|
|
Canada |
|
|
U.K. |
|
|
Total |
|
|
Change in Projected Benefit Obligation Present Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligationbeginning of year |
|
$ |
253,932 |
|
|
$ |
29,149 |
|
|
$ |
144,988 |
|
|
$ |
428,069 |
|
Service cost |
|
|
2,078 |
|
|
|
898 |
|
|
|
|
|
|
|
2,976 |
|
Interest cost |
|
|
14,196 |
|
|
|
1,854 |
|
|
|
7,499 |
|
|
|
23,549 |
|
Actuarial (gain) loss |
|
|
10,506 |
|
|
|
6,008 |
|
|
|
12,753 |
|
|
|
29,267 |
|
Termination charge |
|
|
|
|
|
|
|
|
|
|
1,165 |
|
|
|
1,165 |
|
Foreign currency exchange rate changes |
|
|
|
|
|
|
1,460 |
|
|
|
(16,142 |
) |
|
|
(14,682 |
) |
Benefits paid |
|
|
(13,612 |
) |
|
|
(732 |
) |
|
|
(1,489 |
) |
|
|
(15,833 |
) |
|
Projected benefit obligationend of year |
|
|
267,100 |
|
|
|
38,637 |
|
|
|
148,774 |
|
|
|
454,511 |
|
|
Change in Plan Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value plan assetsbeginning of year |
|
|
162,415 |
|
|
|
25,443 |
|
|
|
101,287 |
|
|
|
289,145 |
|
Actual return on plan assets |
|
|
16,332 |
|
|
|
3,008 |
|
|
|
10,497 |
|
|
|
29,837 |
|
Foreign currency exchange rate changes |
|
|
|
|
|
|
1,173 |
|
|
|
(11,263 |
) |
|
|
(10,090 |
) |
Employer contribution |
|
|
15,439 |
|
|
|
2,150 |
|
|
|
4,659 |
|
|
|
22,248 |
|
Benefits paid |
|
|
(13,612 |
) |
|
|
(732 |
) |
|
|
(1,489 |
) |
|
|
(15,833 |
) |
|
Fair value plan assetsend of year |
|
|
180,574 |
|
|
|
31,042 |
|
|
|
103,691 |
|
|
|
315,307 |
|
|
Funded Status |
|
|
(86,526 |
) |
|
|
(7,595 |
) |
|
|
(45,083 |
) |
|
|
(139,204 |
) |
Unrecognized net actuarial loss |
|
|
49,288 |
|
|
|
8,859 |
|
|
|
35,705 |
|
|
|
93,852 |
|
Unrecognized prior service cost |
|
|
(355 |
) |
|
|
|
|
|
|
|
|
|
|
(355 |
) |
Contributions |
|
|
170 |
|
|
|
|
|
|
|
|
|
|
|
170 |
|
|
Accrued benefit cost |
|
$ |
(37,423 |
) |
|
$ |
1,264 |
|
|
$ |
(9,378 |
) |
|
$ |
(45,537 |
) |
|
The amount recognized in the balance sheet for the plans described above are as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
Accrued benefit cost |
|
$ |
41,549 |
|
|
$ |
46,974 |
|
Accumulated other comprehensive loss |
|
|
73,123 |
|
|
|
55,934 |
|
Deferred tax asset |
|
|
34,439 |
|
|
|
27,279 |
|
Funding subsequent to valuation |
|
|
(1,709 |
) |
|
|
(1,625 |
) |
|
Amount recognized |
|
|
147,402 |
|
|
|
128,562 |
|
Less: current portion |
|
|
(12,958 |
) |
|
|
(8,326 |
) |
|
Pension liabilities |
|
$ |
134,444 |
|
|
$ |
120,236 |
|
|
The accumulated benefit obligation for the Companys pension plans was $493.4 million and $444.2
million at December 31, 2006 and 2005, respectively. The projected benefit obligation for the
Companys pension plans was $504.2 million and $454.5 million at December 31, 2006 and 2005,
respectively. The Companys fair value of plan assets for the pension plans with an accumulated
benefit obligation in excess of plan assets was $138.5 million and $128.9 million at December 31, 2006 and
2005, respectively.
68
The assumptions used to determine the actuarial present value of benefit obligations and pension
expense during each of the years ended December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Weighted average discount rate |
|
|
5.5 |
% |
|
|
5.4 |
% |
|
|
5.7 |
% |
Long-term per annum compensation increase |
|
|
3.3 |
% |
|
|
3.3 |
% |
|
|
3.5 |
% |
Long-term return on plan assets |
|
|
7.6 |
% |
|
|
7.7 |
% |
|
|
7.7 |
% |
|
The Company employs a total return investment approach whereby a mix of equities and fixed income
investments are used to maximize the long-term return of plan assets for a prudent level of risk.
The intent of this strategy is to minimize plan expenses by outperforming plan liabilities over
the long run. Risk tolerance is established through careful consideration of plan liabilities,
plan funded status, and the Companys corporate financial condition. The investment portfolio
contains a diversified blend of equity and fixed income investments. Derivatives may be used to
gain market exposure in an efficient and timely manner; however, derivatives may not be used to
leverage the portfolio beyond the market value of the underlying investments. Investment risk is
measured and monitored on an ongoing basis through annual liability measurements, periodic
asset/liability studies, and quarterly investment portfolio reviews.
The Company selects a long-term rate of return of each of its plans individually. The Company
consults with each of its three actuaries, as well as each of the funds money managers. The
expected long-term rate of return is based on the portfolio as a whole and not on the sum of the
returns on individual asset categories. While historical returns are taken into consideration,
current market trends such as inflation and current equity and fixed income returns are also taken
into consideration.
The percentage of the Fair Market Value of the total plan assets for each major asset category of
the plans assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
|
Asset Allocation |
|
|
|
|
|
|
|
|
Equities |
|
|
58.3 |
% |
|
|
56.4 |
% |
Bonds |
|
|
18.4 |
% |
|
|
14.2 |
% |
Cash equivalents |
|
|
23.3 |
% |
|
|
29.4 |
% |
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
The Company expects to contribute $20.4 million to its pension plans in 2007.
The expected benefits to be paid from the pension plan are as follows:
|
|
|
|
|
(in thousands) |
|
Payments |
|
|
Estimated Future Benefit Payments |
|
|
|
|
2007 |
|
$ |
17,902 |
|
2008 |
|
|
18,474 |
|
2009 |
|
|
19,052 |
|
2010 |
|
|
19,850 |
|
2011 |
|
|
21,280 |
|
2012-2016 |
|
|
126,515 |
|
69
The amounts in accumulated other comprehensive income that have not yet been recognized as
components of pension expense at December 31, 2006, and the expected amortization of these amounts
as components of net periodic benefit cost for the year ended December 31, 2007 are:
Components of accumulated other comprehensive income:
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Net actuarial loss |
|
$ |
107,881 |
|
Net prior service cost (credit) |
|
|
(319 |
) |
Net transition obligation (asset) |
|
|
|
|
|
|
|
$ |
107,562 |
|
|
Expected amortization during 2007:
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Amortization of net transition obligation |
|
$ |
|
|
Amortization of prior service cost |
|
|
(37 |
) |
Amortization of net losses |
|
|
6,066 |
|
|
|
|
$ |
6,029 |
|
|
The Company 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 Companys contributions to these plans totaled $5.3
million in 2006, $4.8 million in 2005 and $1.5 million in 2004.
17. Post-Retirement Benefits
The Company 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. The plan is unfunded.
70
The following table indicates the components of the post-retirement medical benefits obligation
included in the Companys Consolidated Statements of Financial Position at December 31:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
Change in Benefit Obligation |
|
|
|
|
|
|
|
|
Projected benefit obligationbeginning of year |
|
$ |
4,202 |
|
|
$ |
4,171 |
|
Service cost |
|
|
11 |
|
|
|
12 |
|
Interest cost |
|
|
228 |
|
|
|
230 |
|
Participants contributions |
|
|
202 |
|
|
|
222 |
|
Actuarial (gain) loss |
|
|
1,737 |
|
|
|
346 |
|
Foreign currency exchange rate changes |
|
|
|
|
|
|
28 |
|
Benefits paid |
|
|
(916 |
) |
|
|
(807 |
) |
|
Projected benefit obligationend of year |
|
|
5,464 |
|
|
|
4,202 |
|
|
Change in Plan Assets |
|
|
|
|
|
|
|
|
Fair value plan assetsbeginning of year |
|
|
|
|
|
|
|
|
Employer contribution |
|
|
715 |
|
|
|
585 |
|
Participants contributions |
|
|
202 |
|
|
|
222 |
|
Benefits paid |
|
|
(917 |
) |
|
|
(807 |
) |
|
Fair value plan assetsend of year |
|
|
|
|
|
|
|
|
|
Funded Status |
|
|
(5,464 |
) |
|
|
(4,202 |
) |
Unrecognized net actuarial gain |
|
|
1,655 |
|
|
|
(220 |
) |
Unrecognized prior service cost |
|
|
761 |
|
|
|
982 |
|
Employer contribution |
|
|
179 |
|
|
|
138 |
|
|
Accrued benefit cost |
|
$ |
(2,869 |
) |
|
$ |
(3,302 |
) |
|
Net periodic post-retirement medical benefit (income) expense consisted of the following
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Service cost |
|
$ |
11 |
|
|
$ |
12 |
|
|
$ |
11 |
|
Interest cost |
|
|
226 |
|
|
|
230 |
|
|
|
172 |
|
Amortization of prior service cost |
|
|
77 |
|
|
|
44 |
|
|
|
(43 |
) |
Amortization of actuarial gain |
|
|
|
|
|
|
(13 |
) |
|
|
(45 |
) |
|
Post-retirement medical benefit expense |
|
$ |
314 |
|
|
$ |
273 |
|
|
$ |
95 |
|
|
The projected benefit obligation (PBO) and accumulated benefit obligation (ABO) at December 31,
2006 was $5.5 million. The PBO and ABO at December 31, 2005 was $4.2 million.
The Company limits its future obligation for post-retirement medical benefits by capping at 5% the
annual rate of increase in the cost of claims it assumes under the plan. The weighted average
discount rate used in determining the accumulated post-retirement medical benefit obligation was
5.98% in 2006, 5.63% in 2005 and 5.83% in 2004. The assumed annual health care cost trend rate was
5% in 2006, 2005 and 2004. The impact on the benefit obligation of a 1% increase in the assumed
health care cost trend rate would be approximately $0.6 million while a 1% decline in the rate
would decrease the benefit obligation by approximately $0.5 million.
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
Act) was signed into law. The Act introduced a prescription drug benefit under Medicare Part D and
a federal subsidy to sponsors of retirement health care plans that provide a benefit that is at
least actuarially equivalent to Medicare Part D. The subsidy is based on approximately 28% of an
individual
71
beneficiarys annual prescription drug costs between $250 and $5,000. The effects of the subsidy
were factored into the 2005 annual year-end valuation. The reduction in the benefit obligation
attributable to
past service cost was approximately $0.8 million and has been reflected as an actuarial gain.
Future benefit payments expected to be paid for post-retirement medical benefits are as follows:
Estimated future benefit payments
|
|
|
|
|
(in thousands) |
|
Payments |
|
|
2007 |
|
$ |
513 |
|
2008 |
|
|
505 |
|
2009 |
|
|
535 |
|
2010 |
|
|
523 |
|
2011 |
|
|
555 |
|
2012-2016 |
|
|
2,997 |
|
The amounts in accumulated other comprehensive income that have not yet been recognized as
components of retiree medical expense at December 31, 2006, and the expected amortization of these
amounts as components of net periodic benefit cost for the year ended December 31, 2007 are:
Components of accumulated other comprehensive income:
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Net actuarial loss |
|
$ |
1,655 |
|
Net prior service cost (credit) |
|
|
761 |
|
Net transition obligation (asset) |
|
|
|
|
|
|
|
$ |
2,416 |
|
|
Expected amortization during 2007:
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Amortization of net transition obligation |
|
$ |
|
|
Amortization of prior service cost |
|
|
69 |
|
Amortization of net losses |
|
|
88 |
|
|
|
|
$ |
157 |
|
|
18. 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. Terras accumulated other
comprehensive income (loss) is comprised of (a) adjustments that result from translation of
Terras 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 Terras 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) minimum pension liability
adjustments.
72
|
|
The components of accumulated other comprehensive income (loss), net of tax, for the years
ended December 31, 2006 and 2005 are: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
|
|
|
Pension and |
|
|
|
|
Currency |
|
|
|
|
|
Post-retirement |
|
|
|
|
Translation |
|
Fair Value of |
|
Benefit |
|
|
(in thousands) |
|
Adjustment |
|
Derivatives |
|
Liabilities |
|
Total |
|
Balance December 31, 2004 |
|
$ |
14,287 |
|
|
$ |
(19,307 |
) |
|
$ |
(50,974 |
) |
|
$ |
(55,994 |
) |
Change in foreign currency translation adjustment |
|
|
(23,387 |
) |
|
|
|
|
|
|
|
|
|
|
(23,387 |
) |
Reclassification to earnings |
|
|
|
|
|
|
3,059 |
|
|
|
|
|
|
|
3,059 |
|
Change in fair value of derivatives |
|
|
|
|
|
|
11,139 |
|
|
|
|
|
|
|
11,139 |
|
Change in minimum pension liabilities |
|
|
|
|
|
|
|
|
|
|
(4,960 |
) |
|
|
(4,960 |
) |
|
Balance December 31, 2005 |
|
|
(9,100 |
) |
|
|
(5,109 |
) |
|
|
(55,934 |
) |
|
|
(70,143 |
) |
|
Change in foreign currency translation adjustment |
|
|
33,618 |
|
|
|
|
|
|
|
|
|
|
|
33,618 |
|
Reclassification to earnings |
|
|
|
|
|
|
31,693 |
|
|
|
|
|
|
|
31,693 |
|
Change in fair value of derivatives |
|
|
|
|
|
|
(38,420 |
) |
|
|
|
|
|
|
(38,420 |
) |
Change in pension and post-retirement
benefit liabilities |
|
|
|
|
|
|
|
|
|
|
(11,850 |
) |
|
|
(11,850 |
) |
Adoption of SFAS 158 |
|
|
|
|
|
|
|
|
|
|
(8,637 |
) |
|
|
(8,637 |
) |
|
Balance December 31, 2006 |
|
$ |
24,518 |
|
|
$ |
(11,836 |
) |
|
$ |
(76,421 |
) |
|
$ |
(63,739 |
) |
|
19. |
|
Income Taxes |
|
|
|
Components of the income tax provision (benefit) applicable to continuing operations are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
719 |
|
|
$ |
|
|
|
$ |
|
|
Foreign |
|
|
4,351 |
|
|
|
679 |
|
|
|
1,058 |
|
State |
|
|
400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
5,470 |
|
|
|
679 |
|
|
|
1,058 |
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
6,417 |
|
|
|
4,196 |
|
|
|
2,570 |
|
Foreign |
|
|
(2,710 |
) |
|
|
9,102 |
|
|
|
(8,628 |
) |
State |
|
|
70 |
|
|
|
240 |
|
|
|
|
|
|
|
|
|
3,777 |
|
|
|
13,538 |
|
|
|
(6,058 |
) |
|
Total income tax provision (benefit) |
|
$ |
9,247 |
|
|
$ |
14,217 |
|
|
$ |
(5,000 |
) |
|
73
The following table reconciles the income tax provision (benefit) per the Consolidated Statements
of Operations to the federal statutory provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Income (loss) from continuing
operations before taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
6,570 |
|
|
$ |
560 |
|
|
$ |
(7,516 |
) |
Foreign |
|
|
6,890 |
|
|
|
35,744 |
|
|
|
70,112 |
|
|
|
|
|
13,460 |
|
|
|
36,304 |
|
|
|
62,596 |
|
|
Statutory income tax provision (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
2,432 |
|
|
|
196 |
|
|
|
(2,631 |
) |
Foreign |
|
|
2,841 |
|
|
|
11,057 |
|
|
|
21,934 |
|
|
|
|
|
5,273 |
|
|
|
11,253 |
|
|
|
19,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction to foreign tax assessments
and reserves |
|
|
|
|
|
|
|
|
|
|
(27,877 |
) |
Foreign exchange gain (loss) |
|
|
3,553 |
|
|
|
(1,302 |
) |
|
|
1,548 |
|
Debt repayment losses |
|
|
|
|
|
|
7,807 |
|
|
|
|
|
Warrant fair value gain |
|
|
|
|
|
|
(3,278 |
) |
|
|
|
|
Valuation reserve |
|
|
(367 |
) |
|
|
964 |
|
|
|
2,460 |
|
Other |
|
|
788 |
|
|
|
(1,227 |
) |
|
|
(434 |
) |
|
Income tax provision (benefit) |
|
$ |
9,247 |
|
|
$ |
14,217 |
|
|
$ |
(5,000 |
) |
|
The tax effect of net operating loss (NOL), tax credit carryforwards and significant temporary
differences between reported and taxable earnings that gave rise to net deferred tax assets
(liabilities) were as follows:
|
|
|
|
|
|
|
|
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
Current deferred tax asset |
|
|
|
|
|
|
|
|
Accrued liabilities |
|
$ |
8,323 |
|
|
$ |
1,944 |
|
Inventory valuation |
|
|
(685 |
) |
|
|
(1,019 |
) |
Unsettled derivative losses |
|
|
(3,521 |
) |
|
|
1,341 |
|
|
Net current deferred tax asset |
|
|
4,117 |
|
|
|
2,266 |
|
|
Non-current deferred tax liability |
|
|
|
|
|
|
|
|
Depreciation |
|
|
(185,044 |
) |
|
|
(188,977 |
) |
Investments in partnership |
|
|
(7,352 |
) |
|
|
(7,235 |
) |
Investment in affiliates |
|
|
(34,537 |
) |
|
|
(37,589 |
) |
Intangible asset |
|
|
(2,089 |
) |
|
|
(2,785 |
) |
Unfunded employee benefits |
|
|
9,111 |
|
|
|
13,117 |
|
Discontinued business costs |
|
|
8,202 |
|
|
|
8,257 |
|
Valuation allowance |
|
|
(61,361 |
) |
|
|
(61,728 |
) |
NOL, capital loss and tax credit carryforwards |
|
|
166,386 |
|
|
|
180,548 |
|
Accumulated other comprehensive income |
|
|
42,592 |
|
|
|
30,141 |
|
Other |
|
|
241 |
|
|
|
253 |
|
|
Net noncurrent deferred tax liability |
|
|
(63,851 |
) |
|
|
(65,998 |
) |
|
Net deferred tax liability |
|
$ |
(59,734 |
) |
|
$ |
(63,732 |
) |
|
The Companys NOLs were established in tax years 2000-2005. These NOLs, if unused, will begin to
expire in 2020.
74
|
|
During 1996, after receiving a favorable ruling from Revenue Canada, Terra refreshed its tax basis
in plants and equipment at its Canadian subsidiary by entering into a transaction with a Canadian
subsidiary of Anglo American plc, resulting in a deferred tax asset. In 2000, Revenue Canada
challenged the refreshed amount of this tax basis, and Terra established a reserve against the
previously recorded tax asset. Terra contested Revenue Canadas position and realized a reduction
to the tax assessment during 2003 with a final settlement during 2004. In connection with the tax
assessment reductions, final settlement of the issues and new company structure opportunities,
Terra eliminated tax reserves of $27.9 million in 2004. |
|
20. |
|
Industry Segment Data |
|
|
|
Terra operates in two principal industry segmentsNitrogen Products and Methanol. The
Nitrogen Products business produces and distributes ammonia, urea, nitrogen solutions, ammonium
nitrate and other nitrogen products to agricultural and industrial users. The Methanol business
manufactures and, prior to 2004, distributed methanol, which is principally used as a raw material
in the production of a variety of chemical derivatives and in the production of methyl tertiary
butyl ether (MTBE), an oxygenate and octane enhancer for gasoline. Management evaluates
performance based on operating earnings of each segment. Terra does not allocate interest, income
taxes or infrequent items to the business segments. Included in Other are general corporate
activities not attributable to a specific industry segment. |
75
The following summarizes additional information about Terras industry segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nitrogen |
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Products |
|
|
Methanol |
|
|
Other |
|
|
Total |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,793,759 |
|
|
$ |
34,955 |
|
|
$ |
8,008 |
|
|
$ |
1,836,722 |
|
Operating income (loss) |
|
|
63,275 |
|
|
|
4,952 |
|
|
|
(1,947 |
) |
|
|
66,280 |
|
Total assets |
|
|
1,377,471 |
|
|
|
98,916 |
|
|
|
96,326 |
|
|
|
1,572,713 |
|
Depreciation and amortization |
|
|
74,031 |
|
|
|
13,386 |
|
|
|
20,652 |
|
|
|
108,069 |
|
Capital expenditures |
|
|
50,626 |
|
|
|
2 |
|
|
|
228 |
|
|
|
50,856 |
|
Equity earnings |
|
|
17,013 |
|
|
|
|
|
|
|
|
|
|
|
17,013 |
|
Equity investments |
|
|
164,099 |
|
|
|
|
|
|
|
|
|
|
|
164,099 |
|
Minority interest in losses |
|
|
11,286 |
|
|
|
|
|
|
|
|
|
|
|
11,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,899,236 |
|
|
$ |
31,347 |
|
|
$ |
8,482 |
|
|
$ |
1,939,065 |
|
Operating income (loss) |
|
|
131,474 |
|
|
|
(14,089 |
) |
|
|
(3,689 |
) |
|
|
113,696 |
|
Total assets |
|
|
1,298,289 |
|
|
|
102,811 |
|
|
|
122,525 |
|
|
|
1,523,625 |
|
Depreciation and amortization |
|
|
90,638 |
|
|
|
10,993 |
|
|
|
8,711 |
|
|
|
110,342 |
|
Capital expenditures |
|
|
29,967 |
|
|
|
59 |
|
|
|
794 |
|
|
|
30,820 |
|
Equity earnings |
|
|
21,415 |
|
|
|
|
|
|
|
|
|
|
|
21,415 |
|
Equity investments |
|
|
183,884 |
|
|
|
|
|
|
|
|
|
|
|
183,884 |
|
Minority interest in earnings |
|
|
13,667 |
|
|
|
|
|
|
|
|
|
|
|
13,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,320,142 |
|
|
$ |
186,823 |
|
|
$ |
2,145 |
|
|
$ |
1,509,110 |
|
Operating income (loss) |
|
|
138,745 |
|
|
|
1,479 |
|
|
|
(5,478 |
) |
|
|
134,746 |
|
Total assets |
|
|
1,440,103 |
|
|
|
122,273 |
|
|
|
123,132 |
|
|
|
1,685,508 |
|
Depreciation and amortization |
|
|
76,175 |
|
|
|
13,019 |
|
|
|
13,036 |
|
|
|
102,230 |
|
Capital expenditures |
|
|
17,038 |
|
|
|
53 |
|
|
|
1,381 |
|
|
|
18,472 |
|
Equity earnings |
|
|
442 |
|
|
|
|
|
|
|
|
|
|
|
442 |
|
Equity investments |
|
|
215,939 |
|
|
|
|
|
|
|
|
|
|
|
215,939 |
|
Minority interest in earnings |
|
|
11,207 |
|
|
|
|
|
|
|
|
|
|
|
11,207 |
|
|
76
|
|
The following summarizes geographic information about Terra: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
Long-lived Assets |
|
(in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
United States |
|
$ |
1,397,994 |
|
|
$ |
1,464,375 |
|
|
$ |
1,061,261 |
|
|
$ |
663,994 |
|
|
$ |
512,572 |
|
|
$ |
570,031 |
|
Canada |
|
|
63,902 |
|
|
|
55,641 |
|
|
|
61,395 |
|
|
|
49,637 |
|
|
|
55,625 |
|
|
|
51,036 |
|
United Kingdom |
|
|
374,826 |
|
|
|
419,049 |
|
|
|
386,454 |
|
|
|
238,577 |
|
|
|
219,045 |
|
|
|
257,520 |
|
|
|
|
$ |
1,836,722 |
|
|
$ |
1,939,065 |
|
|
$ |
1,509,110 |
|
|
$ |
952,208 |
|
|
$ |
787,242 |
|
|
$ |
878,587 |
|
|
21. |
|
Agreements of Limited Partnerships |
|
|
|
Terra Nitrogen Company L.P. (TNCLP) |
|
|
|
Terra owns a 1% General Partnership interest and 75.3% of the Common Units of TNCLP at December
31, 2006. Terra consolidates TNCLP results with the publicly held TNCLP Common Units reflected in
Terras financial statements as a minority interest. |
|
|
|
In accordance with the TNCLP limited partnership agreement, quarterly distributions to unitholders
and Terra are made in an amount equal to 100% of its available cash, as defined in the partnership
agreement. The General Partner receives a combined minimum 2% of total cash distributions, and as
an incentive, the general partners participation increases if cash distributions exceed specified
target levels. |
|
|
|
If at any time less than 25% of the issued and outstanding units are held by non-affiliates of the
General Partner, TNCLP may call, or assign to the General Partner or its affiliates, its right to
acquire all such outstanding units held by non-affiliated persons with at least 30 but not more
than 60 days notice of its decision to purchase the outstanding units. The purchase price per
unit will be the greater of (1) the average of any previous twenty trading days closing prices as
of the date five days before the purchase is announced and (2) the highest price paid by the
General Partner or any of its affiliates for any unit within the 90 days preceding the date the
purchase is announced. |
|
22. |
|
Subsequent Events |
|
|
|
In February 2007, the Company repaid its $200.0 million, 12.875% due 2008 and $131.3 million,
11.50% due 2010 bonds that were outstanding at December 31, 2006. The repayment proceeds were
obtained from a new $330.0 million, 7.0% unsecured note with a maturity date of 2017. The Company
incurred costs related to bond tender premiums and transaction fees of approximately $40 million
that will be recorded as an earnings charge in the first quarter of 2007. In connection with the
bond refinancing, the Companys revolving bank credit facility was extended until February 2012. |
|
|
|
During the 2006 fourth quarter, the Company entered into a Memorandum of Understanding with Kemira
GrowHow Oyj to create a joint venture to operate the fertilizer and associated process chemical
businesses of both companies in the U.K. The Memorandum of Understanding is a non-legally binding
agreement and is subject to approval by the U.K. competition authorities, negotiation of
definitive documents and lender consent. During the 2007 first quarter, the U.K. Office of Fair
Trading referred the proposed joint venture to the Competition Commission. |
|
23. |
|
Guarantor Subsidiaries |
|
|
|
The Parent files a consolidated United States federal income tax return. Beginning in 1995,
the Parent adopted the tax sharing agreements, under which all domestic operating subsidiaries
provide for and remit income taxes to the Parent based on their pretax accounting income, adjusted
for permanent differences between pretax accounting income and taxable income. The tax sharing
agreements allocated |
77
|
|
the benefits of operating losses and temporary differences between financial reporting and tax
basis income to the Parent. |
|
|
|
Condensed consolidating financial information regarding the Parent, TCAPI, the Guarantor
Subsidiaries and subsidiaries of the Parent that are not guarantors of the Senior Secured Notes
(see Note 7) for December 31, 2006, 2005 and 2004 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. |
78
Condensed Consolidating Statement of Financial Position for the Year Ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
TCAPI |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
restricted cash |
|
$ |
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 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt due within one year |
|
$ |
|
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
(1 |
) |
|
$ |
|
|
Accounts payable |
|
|
109 |
|
|
|
|
|
|
|
63,634 |
|
|
|
92,750 |
|
|
|
|
|
|
|
156,493 |
|
Accrued and other
liabilities |
|
|
28,119 |
|
|
|
5,927 |
|
|
|
61,781 |
|
|
|
62,354 |
|
|
|
(5,227 |
) |
|
|
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 |
|
Deferred income taxes |
|
|
22,214 |
|
|
|
|
|
|
|
|
|
|
|
43,848 |
|
|
|
(2,211 |
) |
|
|
63,851 |
|
Pension and other liabilities |
|
|
166,032 |
|
|
|
|
|
|
|
7,386 |
|
|
|
1,212 |
|
|
|
2 |
|
|
|
174,632 |
|
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 |
|
|
115,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders 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
income (loss) and
unearned compensation |
|
|
(92,187 |
) |
|
|
|
|
|
|
6,373 |
|
|
|
30,828 |
|
|
|
(8,753 |
) |
|
|
(63,739 |
) |
Retrained earnings (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 and
stockholders equity |
|
$ |
759,705 |
|
|
$ |
457,115 |
|
|
$ |
2,210,818 |
|
|
$ |
1,292,008 |
|
|
$ |
(3,146,933 |
) |
|
$ |
1,572,713 |
|
|
79
Condensed Consolidating Statement of Operations for the Year Ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
TCAPI |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
859,454 |
|
|
$ |
969,261 |
|
|
$ |
(1 |
) |
|
$ |
1,828,714 |
|
Other income, net |
|
|
|
|
|
|
|
|
|
|
5,795 |
|
|
|
2,213 |
|
|
|
|
|
|
|
8,008 |
|
|
Total revenues |
|
|
|
|
|
|
|
|
|
|
865,249 |
|
|
|
971,474 |
|
|
|
(1 |
) |
|
|
1,836,722 |
|
|
Cost and Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
|
|
|
|
|
|
|
|
882,352 |
|
|
|
901,940 |
|
|
|
(52,070 |
) |
|
|
1,732,222 |
|
Selling, general and
administrative expenses |
|
|
2,358 |
|
|
|
(8,142 |
) |
|
|
(7,601 |
) |
|
|
16,549 |
|
|
|
52,069 |
|
|
|
55,233 |
|
Equity in the (earnings) loss
of subsidiaries |
|
|
29,853 |
|
|
|
(184,740 |
) |
|
|
(91,993 |
) |
|
|
(46,002 |
) |
|
|
275,869 |
|
|
|
(17,013 |
) |
|
Total cost and expenses |
|
|
32,211 |
|
|
|
(192,882 |
) |
|
|
782,758 |
|
|
|
872,487 |
|
|
|
275,868 |
|
|
|
1,770,442 |
|
|
Income (loss) from operations |
|
|
(32,211 |
) |
|
|
192,882 |
|
|
|
82,491 |
|
|
|
98,987 |
|
|
|
(275,869 |
) |
|
|
66,280 |
|
Interest income |
|
|
|
|
|
|
(167 |
) |
|
|
7,004 |
|
|
|
(1,267 |
) |
|
|
887 |
|
|
|
6,457 |
|
Interest expense |
|
|
(1,860 |
) |
|
|
(42,320 |
) |
|
|
(8 |
) |
|
|
1,610 |
|
|
|
(5,413 |
) |
|
|
(47,991 |
) |
|
Income (loss) before tax
and minority interests |
|
|
(34,071 |
) |
|
|
150,395 |
|
|
|
89,487 |
|
|
|
99,330 |
|
|
|
(280,395 |
) |
|
|
24,746 |
|
Income tax benefit (provision) |
|
|
(7,607 |
) |
|
|
|
|
|
|
|
|
|
|
(1,642 |
) |
|
|
2 |
|
|
|
(9,247 |
) |
Minority interest |
|
|
|
|
|
|
(2,178 |
) |
|
|
(9,108 |
) |
|
|
|
|
|
|
|
|
|
|
(11,286 |
) |
|
Net Income (Loss) |
|
$ |
(41,678 |
) |
|
$ |
148,217 |
|
|
$ |
80,379 |
|
|
$ |
97,688 |
|
|
$ |
(280,393 |
) |
|
$ |
4,213 |
|
|
80
Condensed Consolidating Statement of Cash Flows for the Year Ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
TCAPI |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(41,678 |
) |
|
$ |
148,217 |
|
|
$ |
80,379 |
|
|
$ |
97,688 |
|
|
$ |
(280,393 |
) |
|
$ |
4,213 |
|
Depreciation and amortization |
|
|
|
|
|
|
2,928 |
|
|
|
45,789 |
|
|
|
35,154 |
|
|
|
31,076 |
|
|
|
114,947 |
|
Non-cash loss on derivatives |
|
|
|
|
|
|
|
|
|
|
589 |
|
|
|
344 |
|
|
|
|
|
|
|
933 |
|
Deferred taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,777 |
|
|
|
|
|
|
|
3,777 |
|
Minority interest in earnings
(loss) |
|
|
|
|
|
|
452 |
|
|
|
10,838 |
|
|
|
|
|
|
|
(4 |
) |
|
|
11,286 |
|
Equity earnings in excess of
profit distributions |
|
|
(29,853 |
) |
|
|
184,740 |
|
|
|
91,993 |
|
|
|
46,002 |
|
|
|
(283,680 |
) |
|
|
9,202 |
|
Amortization of unearned
compensation |
|
|
7,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,010 |
|
Change in operating assets
and liabilities |
|
|
33,137 |
|
|
|
(73,758 |
) |
|
|
(33,997 |
) |
|
|
31,657 |
|
|
|
50,853 |
|
|
|
7,892 |
|
|
Net Cash Flows from
Operating Activities |
|
|
(31,384 |
) |
|
|
262,579 |
|
|
|
195,591 |
|
|
|
214,622 |
|
|
|
(482,148 |
) |
|
|
159,260 |
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property,
plant and equipment |
|
|
|
|
|
|
|
|
|
|
(29,115 |
) |
|
|
(21,741 |
) |
|
|
|
|
|
|
(50,856 |
) |
Plant turnaround costs |
|
|
|
|
|
|
|
|
|
|
(13,755 |
) |
|
|
(21,526 |
) |
|
|
|
|
|
|
(35,281 |
) |
Distributions received from
unconsolidated affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,660 |
|
|
|
|
|
|
|
9,660 |
|
Proceeds from the sale of
property, plant
and equipment |
|
|
|
|
|
|
|
|
|
|
16,400 |
|
|
|
2,700 |
|
|
|
|
|
|
|
19,100 |
|
Restricted cash |
|
|
|
|
|
|
|
|
|
|
8,595 |
|
|
|
|
|
|
|
|
|
|
|
8,595 |
|
|
Net Cash Flows from
Investing Activities |
|
|
|
|
|
|
|
|
|
|
(17,875 |
) |
|
|
(30,907 |
) |
|
|
|
|
|
|
(48,782 |
) |
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments under
borrowing arrangements |
|
|
|
|
|
|
|
|
|
|
(25 |
) |
|
|
(12 |
) |
|
|
|
|
|
|
(37 |
) |
Proceeds from exercise of
stock options |
|
|
363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
363 |
|
Tax benefit of unvested stock |
|
|
1,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,255 |
|
Change in investments and
advances from (to)
affiliates |
|
|
53,652 |
|
|
|
(173,351 |
) |
|
|
(236,202 |
) |
|
|
(126,256 |
) |
|
|
482,157 |
|
|
|
|
|
Preferred share dividends paid |
|
|
(5,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,100 |
) |
Repurchases of TRA stock |
|
|
(18,786 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10 |
) |
|
|
(18,796 |
) |
Changes in overdraft
protection arrangements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,443 |
|
|
|
|
|
|
|
11,443 |
|
Distributions to minority
interests |
|
|
|
|
|
|
|
|
|
|
(8,861 |
) |
|
|
|
|
|
|
|
|
|
|
(8,861 |
) |
|
Net Cash Flows from
Financing Activities |
|
|
31,384 |
|
|
|
(173,351 |
) |
|
|
(245,088 |
) |
|
|
(114,825 |
) |
|
|
482,147 |
|
|
|
(19,733 |
) |
|
81
Condensed Consolidating Statement of Cash Flows for the Year Ended December 31, 2006
(continued):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
TCAPI |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
|
Effect of Foreign Exchange
Rate on Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,906 |
|
|
|
|
|
|
|
1,906 |
|
|
Increase (Decrease) in Cash
and Cash Equivalents |
|
|
|
|
|
|
89,228 |
|
|
|
(67,372 |
) |
|
|
70,796 |
|
|
|
(1 |
) |
|
|
92,651 |
|
|
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 |
|
|
$ |
100,736 |
|
|
$ |
|
|
|
$ |
78,282 |
|
|
$ |
(2 |
) |
|
$ |
179,017 |
|
|
82
Condensed Consolidating Statement of Financial Position for the Year Ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
TCAPI |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and
restricted cash |
|
$ |
1 |
|
|
$ |
11,508 |
|
|
$ |
75,967 |
|
|
$ |
7,486 |
|
|
$ |
(1 |
) |
|
$ |
94,961 |
|
Accounts receivable, net |
|
|
|
|
|
|
1,563 |
|
|
|
54,486 |
|
|
|
150,357 |
|
|
|
1 |
|
|
|
206,407 |
|
Inventories |
|
|
|
|
|
|
|
|
|
|
60,350 |
|
|
|
119,061 |
|
|
|
10,903 |
|
|
|
190,314 |
|
Other current assets |
|
|
9,198 |
|
|
|
12,704 |
|
|
|
9,720 |
|
|
|
22,763 |
|
|
|
193 |
|
|
|
54,578 |
|
|
Total current assets |
|
|
9,199 |
|
|
|
25,775 |
|
|
|
200,523 |
|
|
|
299,667 |
|
|
|
11,096 |
|
|
|
546,260 |
|
|
Property, plant and
equipment, net |
|
|
|
|
|
|
|
|
|
|
275,223 |
|
|
|
458,313 |
|
|
|
|
|
|
|
733,536 |
|
Equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183,884 |
|
|
|
|
|
|
|
183,884 |
|
Deferred plant turnaround
costs, intangible and
other assets |
|
|
|
|
|
|
10,861 |
|
|
|
7,299 |
|
|
|
42,139 |
|
|
|
(354 |
) |
|
|
59,945 |
|
Investments in and advances
to (from) affiliates |
|
|
747,233 |
|
|
|
536,937 |
|
|
|
1,358,920 |
|
|
|
618,155 |
|
|
|
(3,261,245 |
) |
|
|
|
|
|
Total Assets |
|
$ |
756,432 |
|
|
$ |
573,573 |
|
|
$ |
1,841,965 |
|
|
$ |
1,602,158 |
|
|
$ |
(3,250,503 |
) |
|
$ |
1,523,625 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt due within one year |
|
$ |
|
|
|
$ |
|
|
|
$ |
26 |
|
|
$ |
12 |
|
|
$ |
|
|
|
$ |
38 |
|
Accounts payable |
|
|
210 |
|
|
|
|
|
|
|
48,501 |
|
|
|
77,152 |
|
|
|
|
|
|
|
125,863 |
|
Accrued and other
liabilities |
|
|
3,119 |
|
|
|
92,984 |
|
|
|
54,855 |
|
|
|
63,670 |
|
|
|
(76,719 |
) |
|
|
137,909 |
|
|
Total current liabilities |
|
|
3,329 |
|
|
|
92,984 |
|
|
|
103,382 |
|
|
|
140,834 |
|
|
|
(76,719 |
) |
|
|
263,810 |
|
|
Long-term debt and capital
Lease obligations |
|
|
|
|
|
|
331,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
331,300 |
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,088 |
|
|
|
(4,090 |
) |
|
|
65,998 |
|
Pension and other liabilities |
|
|
148,793 |
|
|
|
|
|
|
|
11,173 |
|
|
|
1,591 |
|
|
|
(1 |
) |
|
|
161,556 |
|
Minority interest |
|
|
|
|
|
|
18,049 |
|
|
|
74,209 |
|
|
|
|
|
|
|
|
|
|
|
92,258 |
|
|
Total liabilities and
minority interest |
|
|
152,122 |
|
|
|
442,333 |
|
|
|
188,764 |
|
|
|
212,513 |
|
|
|
(80,810 |
) |
|
|
914,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
115,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
146,994 |
|
|
|
|
|
|
|
73 |
|
|
|
49,709 |
|
|
|
(49,782 |
) |
|
|
146,994 |
|
Paid in capital |
|
|
712,671 |
|
|
|
150,218 |
|
|
|
1,741,688 |
|
|
|
1,473,065 |
|
|
|
(3,364,971 |
) |
|
|
712,671 |
|
Accumulated other
comprehensive income
income (loss) and
unearned compensation |
|
|
(63,728 |
) |
|
|
|
|
|
|
|
|
|
|
5,232 |
|
|
|
(17,016 |
) |
|
|
(75,512 |
) |
Retrained earnings (deficit) |
|
|
(307,427 |
) |
|
|
(18,978 |
) |
|
|
(88,560 |
) |
|
|
(138,361 |
) |
|
|
262,076 |
|
|
|
(291,250 |
) |
|
Total stockholders equity |
|
|
488,510 |
|
|
|
131,240 |
|
|
|
1,653,201 |
|
|
|
1,389,645 |
|
|
|
(3,169,693 |
) |
|
|
492,903 |
|
|
Total liabilities and
stockholders equity |
|
$ |
756,432 |
|
|
$ |
573,573 |
|
|
$ |
1,841,965 |
|
|
$ |
1,602,158 |
|
|
$ |
(3,250,503 |
) |
|
$ |
1,523,625 |
|
|
83
Condensed Consolidating Statement of Operations for the Year Ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
TCAPI |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
576,993 |
|
|
$ |
1,353,589 |
|
|
$ |
1 |
|
|
$ |
1,930,583 |
|
Other income, net |
|
|
|
|
|
|
|
|
|
|
7,189 |
|
|
|
1,293 |
|
|
|
|
|
|
|
8,482 |
|
|
Total revenues |
|
|
|
|
|
|
|
|
|
|
584,182 |
|
|
|
1,354,882 |
|
|
|
1 |
|
|
|
1,939,065 |
|
|
Cost and Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
|
|
|
|
3,510 |
|
|
|
603,372 |
|
|
|
1,242,991 |
|
|
|
(49,637 |
) |
|
|
1,800,236 |
|
Selling, general and
administrative expenses |
|
|
2,817 |
|
|
|
(8,183 |
) |
|
|
(4,425 |
) |
|
|
6,848 |
|
|
|
49,491 |
|
|
|
46,548 |
|
Equity in the (earnings) loss
of subsidiaries |
|
|
40,800 |
|
|
|
(209,743 |
) |
|
|
(89,609 |
) |
|
|
(79,915 |
) |
|
|
317,052 |
|
|
|
(21,415 |
) |
|
Total cost and expenses |
|
|
43,617 |
|
|
|
(214,416 |
) |
|
|
509,338 |
|
|
|
1,169,924 |
|
|
|
316,906 |
|
|
|
1,825,369 |
|
|
Income (loss) from operations |
|
|
(43,617 |
) |
|
|
214,416 |
|
|
|
74,844 |
|
|
|
184,958 |
|
|
|
(316,905 |
) |
|
|
113,696 |
|
Interest income |
|
|
|
|
|
|
2,049 |
|
|
|
5,291 |
|
|
|
(612 |
) |
|
|
1,358 |
|
|
|
8,086 |
|
Interest expense |
|
|
(1,860 |
) |
|
|
(44,843 |
) |
|
|
(16 |
) |
|
|
(6,758 |
) |
|
|
(1 |
) |
|
|
(53,478 |
) |
Loss on early retirement
of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,193 |
) |
|
|
|
|
|
|
(27,193 |
) |
Change in fair value
of warrant liability |
|
|
8,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,860 |
|
|
Income (loss) before tax
and minority interests |
|
|
(36,617 |
) |
|
|
171,622 |
|
|
|
80,119 |
|
|
|
150,395 |
|
|
|
(315,548 |
) |
|
|
49,971 |
|
Income tax benefit (provision) |
|
|
(4,435 |
) |
|
|
|
|
|
|
|
|
|
|
(9,782 |
) |
|
|
|
|
|
|
(14,217 |
) |
Minority interest |
|
|
|
|
|
|
(2,679 |
) |
|
|
(10,989 |
) |
|
|
|
|
|
|
1 |
|
|
|
(13,667 |
) |
|
Net Income (Loss) |
|
$ |
(41,052 |
) |
|
$ |
168,943 |
|
|
$ |
69,130 |
|
|
$ |
140,613 |
|
|
$ |
(315,547 |
) |
|
$ |
22,087 |
|
|
84
Condensed Consolidating Statement of Cash Flows for the Year Ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
TCAPI |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(41,052 |
) |
|
$ |
168,943 |
|
|
$ |
69,130 |
|
|
$ |
140,613 |
|
|
$ |
(315,547 |
) |
|
$ |
22,087 |
|
Non-cash loss on early
retirement of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,543 |
|
|
|
|
|
|
|
22,543 |
|
Change in fair value
of warrant liability |
|
|
(8,860 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,860 |
) |
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
43,506 |
|
|
|
64,838 |
|
|
|
7,241 |
|
|
|
115,585 |
|
Non-cash loss on derivatives |
|
|
|
|
|
|
|
|
|
|
4,091 |
|
|
|
|
|
|
|
|
|
|
|
4,091 |
|
Deferred taxes |
|
|
13,538 |
|
|
|
|
|
|
|
|
|
|
|
(5,400 |
) |
|
|
5,400 |
|
|
|
13,538 |
|
Minority interest in earnings
(loss) |
|
|
|
|
|
|
2,679 |
|
|
|
10,989 |
|
|
|
|
|
|
|
(1 |
) |
|
|
13,667 |
|
Equity earnings in excess of
profit distributions |
|
|
40,800 |
|
|
|
(209,743 |
) |
|
|
|
|
|
|
(79,915 |
) |
|
|
241,917 |
|
|
|
(6,941 |
) |
Amortization of unearned
compensation |
|
|
2,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,431 |
|
Term loan discount accretion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,773 |
|
|
|
|
|
|
|
1,773 |
|
Change in operating assets
and liabilities |
|
|
11,211 |
|
|
|
147,075 |
|
|
|
(56,723 |
) |
|
|
(107,064 |
) |
|
|
(163,538 |
) |
|
|
(169,039 |
) |
|
Net Cash Flows from
Operating Activities |
|
|
18,068 |
|
|
|
108,954 |
|
|
|
70,993 |
|
|
|
37,388 |
|
|
|
(224,528 |
) |
|
|
10,875 |
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property,
plant and equipment |
|
|
|
|
|
|
|
|
|
|
(3,331 |
) |
|
|
(27,489 |
) |
|
|
|
|
|
|
(30,820 |
) |
Plant turnaround costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,331 |
) |
|
|
|
|
|
|
(22,331 |
) |
Distributions received from
unconsolidated affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,901 |
|
|
|
|
|
|
|
31,901 |
|
Proceeds from the sale of
property, plant
and equipment |
|
|
168 |
|
|
|
|
|
|
|
|
|
|
|
7,392 |
|
|
|
|
|
|
|
7,560 |
|
Restricted cash |
|
|
|
|
|
|
|
|
|
|
(8,595 |
) |
|
|
|
|
|
|
|
|
|
|
(8,595 |
) |
|
Net Cash Flows from
Investing Activities |
|
|
168 |
|
|
|
|
|
|
|
(11,926 |
) |
|
|
(10,527 |
) |
|
|
|
|
|
|
(22,285 |
) |
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments under
borrowing arrangements |
|
|
|
|
|
|
|
|
|
|
(104 |
) |
|
|
(125,063 |
) |
|
|
|
|
|
|
(125,167 |
) |
Proceeds from exercise of
stock options |
|
|
142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142 |
|
Stock issuance |
|
|
|
|
|
|
|
|
|
|
(9,190 |
) |
|
|
|
|
|
|
9,190 |
|
|
|
|
|
Change in investments and
advances from (to)
affiliates |
|
|
(12,428 |
) |
|
|
(299,473 |
) |
|
|
|
|
|
|
239,000 |
|
|
|
72,901 |
|
|
|
|
|
Preferred share dividends paid |
|
|
(5,950 |
) |
|
|
|
|
|
|
|
|
|
|
(133,875 |
) |
|
|
133,875 |
|
|
|
(5,950 |
) |
85
Condensed Consolidating Statement of Cash Flows for the Year Ended December 31, 2005
(continued):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
TCAPI |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
|
Distributions to minority
interests |
|
|
|
|
|
|
(2,664 |
) |
|
|
(10,944 |
) |
|
|
|
|
|
|
1 |
|
|
|
(13,607 |
) |
|
Net Cash Flows from
Financing Activities |
|
|
(18,236 |
) |
|
|
(302,137 |
) |
|
|
(20,238 |
) |
|
|
(19,938 |
) |
|
|
215,967 |
|
|
|
(144,582 |
) |
|
Effect of Foreign Exchange
Rate on Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,560 |
|
|
|
8,560 |
|
|
Increase (Decrease) in Cash
and Cash Equivalents |
|
|
|
|
|
|
(193,183 |
) |
|
|
38,829 |
|
|
|
6,923 |
|
|
|
(1 |
) |
|
|
(147,432 |
) |
|
Cash and Cash Equivalents
at Beginning of Year |
|
|
1 |
|
|
|
204,691 |
|
|
|
28,543 |
|
|
|
563 |
|
|
|
|
|
|
|
233,798 |
|
|
Cash and Cash Equivalents
at End of Year |
|
$ |
1 |
|
|
$ |
11,508 |
|
|
$ |
67,372 |
|
|
$ |
7,486 |
|
|
$ |
(1 |
) |
|
$ |
86,366 |
|
|
86
Condensed Consolidating Statement of Operations for the Year Ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
Non-Guarantor |
|
|
|
|
(in thousands) |
|
Parent |
|
TCAPI |
|
Subsidiaries |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
535,977 |
|
|
$ |
961,472 |
|
|
$ |
9,516 |
|
|
$ |
1,506,965 |
|
Other income, net |
|
|
|
|
|
|
|
|
|
|
10,972 |
|
|
|
689 |
|
|
|
(9,516 |
) |
|
|
2,145 |
|
|
Total revenues |
|
|
|
|
|
|
|
|
|
|
546,949 |
|
|
|
962,161 |
|
|
|
|
|
|
|
1,509,110 |
|
|
Cost and Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales |
|
|
|
|
|
|
|
|
|
|
504,037 |
|
|
|
848,825 |
|
|
|
(4,785 |
) |
|
|
1,348,077 |
|
Selling, general and
administrative expenses |
|
|
3,780 |
|
|
|
(9,823 |
) |
|
|
30,173 |
|
|
|
11,294 |
|
|
|
8,766 |
|
|
|
44,190 |
|
Product claim costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,903 |
) |
|
|
|
|
|
|
(17,903 |
) |
Equity in the (earnings)
loss of subsidiaries |
|
|
(45,792 |
) |
|
|
(97,064 |
) |
|
|
(74,338 |
) |
|
|
(442 |
) |
|
|
217,636 |
|
|
|
|
|
|
Total cost and expenses |
|
|
(42,012 |
) |
|
|
(106,887 |
) |
|
|
459,872 |
|
|
|
841,774 |
|
|
|
221,617 |
|
|
|
1,374,364 |
|
|
Income (loss) from
operations |
|
|
42,012 |
|
|
|
106,887 |
|
|
|
87,077 |
|
|
|
120,387 |
|
|
|
(221,617 |
) |
|
|
134,746 |
|
Interest income |
|
|
1 |
|
|
|
1,856 |
|
|
|
4,261 |
|
|
|
1,838 |
|
|
|
(4,649 |
) |
|
|
3,307 |
|
Interest expense |
|
|
(3,077 |
) |
|
|
(49,643 |
) |
|
|
(29 |
) |
|
|
(5,172 |
) |
|
|
4,787 |
|
|
|
(53,134 |
) |
Loss on early retirement
of debt |
|
|
|
|
|
|
(11,116 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11.116 |
) |
|
Income (loss) before
income taxes and
minority interest |
|
|
38,936 |
|
|
|
47,984 |
|
|
|
91,309 |
|
|
|
117,053 |
|
|
|
(221,479 |
) |
|
|
73,803 |
|
Income tax benefit (provision) |
|
|
28,660 |
|
|
|
|
|
|
|
|
|
|
|
(23,660 |
) |
|
|
|
|
|
|
5,000 |
|
Minority interest |
|
|
|
|
|
|
(2,192 |
) |
|
|
(9,015 |
) |
|
|
|
|
|
|
|
|
|
|
(11,207 |
) |
|
Net Income |
|
$ |
67,596 |
|
|
$ |
45,792 |
|
|
$ |
82,294 |
|
|
$ |
93,393 |
|
|
$ |
(221,479 |
) |
|
$ |
67,596 |
|
|
87
Condensed Consolidating Statement of Cash Flows for the Year Ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
Non-Guarantor |
|
|
|
|
(in thousands) |
|
Parent |
|
TCAPI |
|
Subsidiaries |
|
Subsidiaries |
|
Eliminations |
|
Consolidated |
|
Operating
Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
67,596 |
|
|
$ |
45,792 |
|
|
$ |
82,294 |
|
|
$ |
93,393 |
|
|
$ |
(221,479 |
) |
|
$ |
67,596 |
|
Adjustments to reconcile net
loss to net cash flows from
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on early retirement
of debt |
|
|
|
|
|
|
2,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,985 |
|
Depreciation and
amortization |
|
|
|
|
|
|
4,086 |
|
|
|
47,676 |
|
|
|
50,468 |
|
|
|
|
|
|
|
102,230 |
|
Deferred income taxes |
|
|
(49,601 |
) |
|
|
|
|
|
|
|
|
|
|
46,362 |
|
|
|
(2,819 |
) |
|
|
(6,058 |
) |
Minority interest in earnings |
|
|
|
|
|
|
2,192 |
|
|
|
9,015 |
|
|
|
|
|
|
|
|
|
|
|
11,207 |
|
Equity in earnings (loss)
of subsidiaries |
|
|
45,792 |
|
|
|
97,064 |
|
|
|
74,338 |
|
|
|
442 |
|
|
|
(217,636 |
) |
|
|
|
|
Unearned compensation |
|
|
1,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,205 |
|
Change in operating assets
and liabilities |
|
|
55,980 |
|
|
|
(29,562 |
) |
|
|
48,867 |
|
|
|
(10,533 |
) |
|
|
(18,571 |
) |
|
|
46,181 |
|
Claim cost recovery |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,874 |
) |
|
|
|
|
|
|
(12,874 |
) |
|
Net Cash Flows from
Operating Activities |
|
|
120,972 |
|
|
|
122,557 |
|
|
|
262,190 |
|
|
|
167,258 |
|
|
|
(460,505 |
) |
|
|
212,472 |
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property,
plant and equipment |
|
|
|
|
|
|
|
|
|
|
(4,250 |
) |
|
|
(14,222 |
) |
|
|
|
|
|
|
(18,472 |
) |
Plant turnaround costs |
|
|
|
|
|
|
|
|
|
|
(12,103 |
) |
|
|
(16,775 |
) |
|
|
|
|
|
|
(28,878 |
) |
Acquisitions, net of cash
received |
|
|
175,250 |
|
|
|
|
|
|
|
|
|
|
|
(229,418 |
) |
|
|
|
|
|
|
(54,168 |
) |
|
Net Cash Flows from
Investing Activities |
|
|
175,250 |
|
|
|
|
|
|
|
(16,353 |
) |
|
|
(260,415 |
) |
|
|
|
|
|
|
(101,518 |
) |
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on
long-term debt |
|
|
|
|
|
|
(70,700 |
) |
|
|
(95 |
) |
|
|
(59 |
) |
|
|
|
|
|
|
(70,854 |
) |
Stock issuance |
|
|
116,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116,247 |
|
Deferred financing costs |
|
|
|
|
|
|
(2,598 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,598 |
) |
Distributions to minority
interests |
|
|
|
|
|
|
(1,575 |
) |
|
|
(6,497 |
) |
|
|
|
|
|
|
|
|
|
|
(8,072 |
) |
Change in investments and
advances from (to)
affiliates |
|
|
(412,468 |
) |
|
|
82,376 |
|
|
|
(216,441 |
) |
|
|
86,815 |
|
|
|
459,718 |
|
|
|
|
|
|
Net Cash Flows from
Financing Activities |
|
|
(296,221 |
) |
|
|
7,503 |
|
|
|
(223,033 |
) |
|
|
86,756 |
|
|
|
459,718 |
|
|
|
34,723 |
|
|
Effect of Foreign Exchange
Rate on Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
787 |
|
|
|
787 |
|
|
Increase (Decrease) in Cash
and Short-term Investments |
|
|
1 |
|
|
|
130,060 |
|
|
|
22,804 |
|
|
|
(6,401 |
) |
|
|
|
|
|
|
146,464 |
|
|
Cash and Short-term Investments
at Beginning of Year |
|
|
|
|
|
|
74,631 |
|
|
|
5,739 |
|
|
|
6,964 |
|
|
|
|
|
|
|
87,334 |
|
|
Cash and Short-term
Investments at End of Year |
|
$ |
1 |
|
|
$ |
204,691 |
|
|
$ |
28,543 |
|
|
$ |
563 |
|
|
$ |
|
|
|
$ |
233,798 |
|
|
88
24. Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per-share data) |
|
March 31 |
|
June 30 |
|
Sept 30 |
|
Dec 31 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
398,920 |
|
|
$ |
523,520 |
|
|
$ |
464,781 |
|
|
$ |
449,501 |
|
Operating income (loss) |
|
$ |
(28,166 |
) |
|
$ |
26,224 |
|
|
$ |
29,388 |
|
|
$ |
38,834 |
|
Net income (loss) |
|
$ |
(23,991 |
) |
|
$ |
6,257 |
|
|
$ |
10,341 |
|
|
$ |
11,606 |
|
Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share |
|
$ |
(0.27 |
) |
|
$ |
0.05 |
|
|
$ |
0.10 |
|
|
$ |
0.11 |
|
Diluted income (loss) per share |
|
$ |
(0.27 |
) |
|
$ |
0.05 |
|
|
$ |
0.10 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
450,012 |
|
|
$ |
489,993 |
|
|
$ |
485,694 |
|
|
$ |
513,366 |
|
Operating income (loss) |
|
$ |
30,823 |
|
|
$ |
69,761 |
|
|
$ |
31,977 |
|
|
$ |
(18,865 |
) |
Net income (loss) |
|
$ |
4,431 |
|
|
$ |
21,702 |
|
|
$ |
11,086 |
|
|
$ |
(15,132 |
) |
Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share |
|
$ |
0.03 |
|
|
$ |
0.22 |
|
|
$ |
0.10 |
|
|
$ |
(0.17 |
) |
Diluted income (loss) per share |
|
$ |
0.03 |
|
|
$ |
0.20 |
|
|
$ |
0.10 |
|
|
$ |
(0.17 |
) |
89
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Terra Industries Inc.:
We have audited the accompanying consolidated statements of financial position of Terra Industries
Inc. and subsidiaries (Terra) as of December 31, 2006 and 2005, and the related consolidated
statements of operations, cash flows and changes in stockholders equity for each of the three
years in the period ended December 31, 2006. Our audits also included the consolidated financial
statement schedule listed in the Index as Item 15. These financial statements and the financial
statement schedule are the responsibility of Terras management. Our responsibility is to express
an opinion on the financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Terra Industries Inc. and subsidiaries at December 31, 2006 and 2005,
and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2006, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in 2006 the Company adopted
Statement of Financial Accounting Standard No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans relating to the recognition and related disclosure
provisions effective December 31, 2006.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Terras internal control over financial reporting as
of December 31, 2006, based on the criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 12, 2007 expressed an unqualified opinion on managements assessment of the
effectiveness of Terras internal control over financial reporting and an unqualified opinion on
the effectiveness of Terras internal control over financial reporting.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 12, 2007
90
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Companys management, including the
Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of
the design and operation of the Companys disclosure controls and procedures as of December 31,
2006. Based upon that evaluation, the Companys Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls and procedures are effective as of
December 31, 2006.
Managements Annual Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing and maintaining adequate internal
control over financial reporting. Under the supervision and with the participation of the
Companys management, including the Chief Executive Officer and Chief Financial Officer, the
Company evaluated the effectiveness of the design and operation of its internal control over
financial reporting based on the framework in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, the
Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys
internal control over financial reporting was effective as of December 31, 2006.
Deloitte & Touche LLP, the Companys independent registered public accounting firm, audited
managements assessment of the effectiveness of internal control over financial reporting and,
based on that audit, issued the report set forth on the following page, which is incorporated
herein by reference.
Changes in Internal Controls Over Financial Reporting
There were no changes in the Companys internal controls over financial reporting during the
quarterly period ending December 31, 2006, that have materially affected, or are reasonably likely
to materially affect, the Companys internal controls over financial reporting.
91
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Terra Industries Inc.:
We have audited managements assessment, included in the accompanying Managements Annual Report
on Internal Control Over Financial Reporting, that Terra Industries Inc. and subsidiaries
(Terra) maintained effective internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Terras management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an opinion on the effectiveness of Terras
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinions.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records, that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due
to error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Terra maintained effective internal control over
financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on
the criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, Terra
maintained, in all material respects, the effective internal control over financial reporting as
of December 31, 2006, based on the criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
92
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements and financial statement schedule as
of and for the year ended December 31, 2006 of Terra and our report dated March 12, 2007 expressed
an unqualified opinion on those financial statements and financial statement schedule and included
an explanatory paragraph regarding the adoption of Statement of Financial Accounting Standard No.
158, Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans relating to the recognition and
related disclosure provisions effective December 31, 2006.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 12, 2007
93
|
|
|
Item 9B. |
|
Other Information |
None.
Part III
|
|
|
Item 10. |
|
Directors and Executive Officers of Terra |
Information with respect to directors of Terra is set forth under the caption Election of
Directors in the proxy statement for the Annual Meeting of Stockholders of Terra to be held on
May 8, 2007, and is incorporated herein by reference. Information with respect to executive
officers of Terra is set forth under the caption Executive Officers of Terra in Part I hereof
and is incorporated herein by reference.
Terra has a Code of Ethics and Business Conduct that applies to its principal executive officer
and its principal financial officer. The code also applies to Terras other officers, directors
and employees. The Code of Ethics and Business Conduct is posted on Terras web site,
www.terraindustries.com, in the Investor Information section and is available on hard copy upon
request. In addition, the information set forth under Equity Security Ownership in Section
16(a) Beneficial Ownership Reporting Compliance in the proxy statement is incorporated herein by
reference.
|
|
|
Item 11. |
|
Executive Compensation |
Information with respect to executive and director compensation is set forth under the
captions Executive Compensation and Other Information and Board of Directors and Committees in
Director Compensation and Compensation Committee Interlocks and Insider Participation in the
proxy statement for the Annual Meeting of Stockholders of Terra to be held on May 8, 2007, is
incorporated herein by reference.
|
|
|
Item 12. |
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Information with respect to security ownership of certain beneficial owners and management
under the caption Equity Security Ownership in the proxy statement for the Annual Meeting of
Stockholders of Terra to be held on May 8, 2007 is incorporated herein by reference.
94
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Compensation Plan Information |
|
|
(a) |
|
(b) |
|
(c) |
|
|
Number of securities to be |
|
Weighted-average |
|
Number of securities remaining available for |
|
|
issued upon exercise of |
|
exercise price of |
|
future issuance under equity compensation |
|
|
outstanding options, warrants |
|
outstanding options, |
|
plans (excluding securities reflected in column |
Plan category |
|
and rights |
|
warrants and rights |
|
(a)) |
|
Equity compensation plans
approved by security
holders |
|
|
592,000 |
|
|
$ |
5.24 |
|
|
|
1,458,000 |
|
Equity compensation plans
not approved by security
holders |
|
|
-0- |
|
|
|
-0- |
|
|
|
-0- |
|
|
Total |
|
|
592,000 |
|
|
$ |
5.24 |
|
|
|
1,458,000 |
|
|
Item 13. Certain Relationships and Related Transactions
Information with respect to certain relationships and related transactions is set forth under
the caption Certain Relationships and Related Transactions in the proxy statement and is
incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Principal Accountant Audit Fees and Services Fees
Information with respect to principal accountant audit fees and service fees is set forth
under the caption Proposal 3: Ratification of Selection of Independent AccountantsPrincipal
Accountant Audit Fees and Service Fees in the proxy statement, and is incorporated herein by
reference.
Audit Committee Pre-Approval Policies and Procedures
Pursuant to its charter, the Audit Committee is responsible for reviewing and approving, in
advance, any audit and any permissible non-audit engagement or relationship between Terra and its
independent auditors. Deloitte & Touche LLPs engagement to conduct the audit of Terra was
approved by the Audit Committee on February 27, 2007. Additionally, each permissible non-audit
engagement or relationship between Terra and services performed by Deloitte & Touch LLP since May
2003 has been reviewed and approved in advance by the Audit Committee, as provided in its charter.
95
Part IV
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Item 15. |
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Exhibits and Financial Statement Schedules |
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(a) Documents Filed as a Part of this Report |
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1. |
|
Consolidated Financial Statements of Terra and its subsidiaries are included in Item 8
herein. |
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|
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|
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Consolidated Statements of Financial Position at December 31, 2006 and 2005 |
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Consolidated Statements of Operations for the years ended December 31, 2006,
2005 and 2004 |
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Consolidated Statements of Cash Flows for the years ended December 31, 2006,
2005 and 2004 |
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Consolidated Statements of Changes in Stockholders Equity for the years ended
December 31, 2006, 2005 and 2004 |
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Notes to the Consolidated Financial Statements |
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|
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|
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Report of Independent Registered Accounting Firm |
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2. |
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Index to Financial Statement Schedules, Reports and Consents |
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See Index to Financial Statement Schedules of Terra and its subsidiaries at page
S-1 |
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3. |
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Other Financial Statements |
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|
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|
|
Individual financial statements of the Companys 50% owned joint venture in
Trinidad, Point Lisas Nitrogen Limited, accounted for on the equity method, have
been included because the equity investment constitutes a significant
subsidiary. Other 50% owned joint ventures accounted for on the equity basis
considered in the aggregate would not constitute a significant subsidiary.
Therefore, those financial statements have been omitted. |
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(b) Exhibits |
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2.1 |
|
Stock Purchase Agreement dated as of August 6, 2004 among Terra Industries
Inc., MissChem Acquisition Inc. and Mississippi Chemical Corporation, filed as
Exhibit 99.2 to Terra Industries Inc.s Form 8-K dated August 9, 2004, is
incorporated herein by reference. |
|
|
3.1 |
|
Articles of Restatement of Terra Industries Inc. filed with the
State Department of Assessments and Taxation of Maryland on August 3, 2005,
restating the Charter of Terra Industries Inc., filed as Exhibit 3.1 to Terra
Industries Inc.s August 4, 2005 Form 8-K, are incorporated herein by
reference. |
|
|
3.2 |
|
Amended and Restated By-Laws of Terra Industries Inc.,
effective as of August 3, 2005, filed as Exhibit 3.2 to Terra Industries Inc.s
August 4, 2005 Form 8-K, are incorporated herein by reference. |
|
|
3.3 |
|
Certificate of Incorporation of Terra Capital, Inc. filed as
Exhibit 3.i.(a) to Terra Capital, Inc.s Registration Statement filed on Form
S-4 on November 13, 2001, is incorporated herein by reference. |
96
|
3.4 |
|
By-Laws of Terra Capital, Inc. filed as Exhibit 3.ii.(a) to
Terra Capital, Inc.s Registration Statement filed on Form S-4 on November 13,
2001, is incorporated herein by reference. |
|
|
3.5 |
|
Certificate of Incorporation of Terra Nitrogen GP Inc., filed
as Exhibit 3.2 to the September 7, 2005 Terra Nitrogen Company, L.P.s Form
8-K, is incorporated herein by reference. |
|
|
3.6 |
|
By-Laws of Terra Nitrogen GP Inc., filed as Exhibit 3.3 to the
September 7, 2005 TNCLP Form 8-K, are incorporated herein by reference. |
|
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4.1 |
|
Indenture dated as of October 10, 2001 among Terra Capital,
Inc., certain guarantors and U.S. Bank National Association, as trustee,
including the form of note, filed as Exhibit 4.1 to Terra Industries Form 8-K
dated October 10, 2001, is incorporated herein by reference. |
|
|
4.2 |
|
Amendment No. 1 to the Amended and Restated Credit Agreement
dated January 26, 2005, among Terra Capital, Inc., Mississippi Chemical
Corporation and Terra Nitrogen (U.K.) Limited (collectively Borrowers), Terra
Industries Inc., Terra Capital Holdings, Inc., the financial institutions from
time to time party thereto as issuing banks (Issuers) and Citicorp USA Inc.,
as administrative agent and collateral agent for Lenders and Issuers, filed as
Exhibit 4.3 to Terra Industries Form 10-Q for the fiscal quarter ended
September 30, 2005, is incorporated herein by reference. |
|
|
4.3 |
|
Amendment No. 2 to the Amended and Restated Credit Agreement
dated July 29, 2005, among Terra Capital, Inc., Terra Mississippi Holdings
Corporation (f/k/a Mississippi Chemical Corporation) and Terra Nitrogen (U.K.)
Limited (collectively Borrowers), Terra Industries Inc., Terra Capital
Holdings, Inc., the Lenders party hereto and Citicorp USA Inc. as
administrative agent and collateral agent for the Lenders and Issuers, filed as
Exhibit 4.4 to Terra Industries Inc.s Form 10-Q for the fiscal quarter ended
September 30, 2005, is incorporated herein by reference. |
|
|
4.4 |
|
Amendment No. 3 to the Amended and Restated Credit Agreement
dated October 30, 2006, among Terra Capital, Inc., Terra Mississippi Holdings
Corporation (f/k/a/ Mississippi Chemical Corporation) and Terra Nitrogen (U.K.)
Limited (collectively Borrowers), Terra Industries Inc., Terra Capital
Holdings, Inc., the Lenders party hereto and Citicorp USA Inc. as
administrative agent and collateral agent for the Lenders and Issuers, filed as
Exhibit 44.1 to Terra Industries Inc.s Form 10-Q for the fiscal quarter ended
September 30, 2006, is incorporated herein by reference. |
|
|
4.5 |
|
Amendment No. 1 to the Credit Agreement dated July 29, 2005
among Terra Nitrogen, Limited Partnership (Borrower), Terra Nitrogen Company,
L.P., the Lenders party hereto and Citicorp USA Inc. as administrative agent
and collateral agent for the Lenders and Issuers, filed as Exhibit 4.5 to Terra
Industries Form 10-Q for the quarter ended September 30, 2005, is incorporated
herein by reference. |
97
|
4.6 |
|
Indenture dated May 21, 2003 between the Company, the
guarantors party hereto, and U.S. National Bank Association as Trustee, with
respect to the 11.5% Second Priority Senior Secured Notes due 2010 (including
the form of 11.5% Second Priority Senior Secured Notes), previously filed as
Exhibit 4.i to Amendment No. 1 to the Registrants Registration Statement of
Form S-4 filed on June 12, 2003 and incorporated by reference herein, filed as
Exhibit 4.6 to Terra Industries Form10-Q for the quarter ended June 30, 2003,
is incorporated herein by reference. |
|
|
4.7 |
|
Articles Supplementary of Terra Industries Inc. relating to the
Retirement of the Companys Trust Shares, filed as Exhibit 3.1 to Terra
Industries Inc.s August 3, 2005 Form 8-K, are incorporated herein by
reference. |
|
|
4.8 |
|
Articles Supplementary of Terra Industries Inc. relating to the
Reclassification of the Companys Series B Cumulative Redeemable Preferred
Shares, filed as Exhibit 3.2 to Terra Industries Inc.s August 3, 2005 Form
8-K, are incorporated herein by reference. |
|
|
4.9 |
|
Registration Rights Agreement dated as of October 7, 2004,
among Terra and Citigroup Global Markets Inc., as Representative of the Initial
Purchasers, filed as Exhibit 4.6 to Terras Form S-3 dated January 4, 2005, is
incorporated herein by reference. |
|
|
4.10 |
|
Registration Rights Agreement, dated as of August 6, 2004,
among Terra Industries Inc., Taurus Investments S.A. and the other shareholders
named therein, filed as Exhibit 99.1 to Terras Form 8-K dated August 16, 2004,
is incorporated herein by reference. |
|
|
4.11 |
|
Registration Rights Agreement, dated as of December 16, 2004,
among Terra Industries Inc. and the initial purchasers named therein, filed as
Exhibit 4.7 to Terras Form S-3/A filed February 9, 2005, is incorporated by
reference. |
|
|
4.12 |
|
Registration Rights Agreement, dated as of December 21, 2004,
among Terra Industries Inc., Värde Investment Partners, L.P., Perry Principals
Investments LLC, Citigroup Global Markets, Inc., filed as Exhibit 10.1 to
Terras Form 8-K dated December 27, 2004, is incorporated by reference. |
|
|
4.13 |
|
Form of Indenture relating to the 4.25% Convertible
Subordinated Debentures, filed as Exhibit 4.7 to Terras Form S-3 dated January
4, 2005, is incorporated herein by reference. |
|
|
4.14 |
|
Purchase Agreement, dated October 7, 2004, among Terra
Industries Inc. and the initial purchasers named therein relating to the sale
of Terras 4.25% Series A Cumulative Convertible Perpetual Preferred Shares,
filed as Exhibit 1 to Terras Form S-3 filed on January 4, 2005, is
incorporated by reference. |
|
|
4.15 |
|
$150,000,000 Amended and Restated Credit Agreement dated as of
December 21, 2004, among Terra Capital, Inc., Terra Nitrogen (U.K.) Limited,
Mississippi Chemical Corporation, as Borrowers; Terra Industries Inc. and Terra
Capital Holdings, Inc., as Guarantors; and the Lenders and Issuers Party
thereto; and |
98
|
|
|
Citicorp USA, Inc., as Administrative Agent and Collateral Agent, Citigroup
Global Markets Inc. as Lead Arranger and Sole Book Runner, filed as Exhibit
4.18 to the Terra Industries Form 10-K for the fiscal year ended December
31, 2004, is incorporated herein by reference. |
|
|
4.16 |
|
$50,000,000 Credit Agreement dated as of December 21, 2004
among Terra Nitrogen, Limited Partnership, as Borrower; Terra Nitrogen Company,
L.P., as a Guarantor; and the Lenders and Issuers Party thereto; and Citicorp
USA, Inc., as Administrative Agent and Collateral Agent; and Citigroup Global
Markets Inc., as Lead Arranger and Sole Book Runner, filed as Exhibit 4.19 to
the Terra Industries Form 10-K for the fiscal year ended December 31, 2004, is
incorporated herein by reference. |
|
|
10.1.1 |
|
Resolution adopted by the Personnel Committee of the Board of Directors of
Terra Industries with respect to supplemental retirement benefits for certain
senior executive officers of Terra Industries, filed as Exhibit 10.4.2 to Terra
Industries Form 10-Q for the fiscal quarter ended March 31, 1991, is
incorporated herein by reference. |
|
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10.1.2 |
|
Excess Benefit Plan of Terra Industries, as amended effective as of January
1, 1992, filed as Exhibit 10.1.13 to Terra Industries Form 10-K for the year
ended December 31, 1992, is incorporated herein by reference. |
|
|
10.1.3 |
|
Amendment to the Terra Industries Inc. Excess Benefit Plan, dated July 26,
2000, filed as Exhibit 10.1.6.a to Terra Industries Form 10-K for the year
ended December 31, 2000, is incorporated herein by reference. |
|
|
10.1.4 |
|
Terra Industries Inc. Supplemental Deferred Compensation Plan effective as of
December 20, 1993 filed as Exhibit 10.1.9 to Terra Industries Form 10-K for
the year ended December 31, 1993, is incorporated herein by reference. |
|
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10.1.5 |
|
Amendment No. 1 to the Terra Industries Inc. Supplemental Deferred
Compensation Plan, filed as Exhibit 10.1.15 to Terra Industries Form 10-Q for
the quarter ended September 30, 1995, is incorporated herein by reference. |
|
|
10.1.5.a |
|
Amendment No. 2 to the Terra Industries Inc. Supplemental Deferred
Compensation Plan, dated July 26, 2000, filed as Exhibit 10.1.8.a to the Terra
Industries Form 10-K for the year ended December 31, 2000, is incorporated
herein by reference. |
|
|
10.1.5.b |
|
Amendment No. 3 to the Terra Industries Inc. Supplemental Deferred
Compensation Plan, dated March 29, 2002, filed as Exhibit 10.1.8.b. to the
Terra Industries Form 10-K for the year ended December 31, 2001, is
incorporated herein by reference. |
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10.1.6 |
|
1992 Stock Incentive Plan of Terra Industries Inc. filed as Exhibit 10.1.6 To
Terra Industries Form 10-K for the year ended December 31, 1992, is
incorporated herein by reference. |
99
|
10.1.7 |
|
Revised Form of Incentive Stock Option Agreement of Terra Industries Inc.
under its 1992 Stock Incentive Plan, filed as Exhibit 10.1.12 to Terra
Industries Form 10-K for the year ended December 31, 1996, is incorporated
herein by reference. |
|
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10.1.8 |
|
Revised Form of Nonqualified Stock Option Agreement of Terra Industries Inc.
under its 1992 Stock Incentive Plan, filed as Exhibit 10.1.13 to Terra
Industries Form 10-K for the year ended December 31, 1996, is incorporated
herein by reference. |
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|
10.1.9 |
|
1997 Stock Incentive Plan of Terra Industries, filed as Exhibit 10.1.14 to
Terra Industries Inc.s Form 10-K for the year ended December 31, 1996, is
incorporated herein by reference. |
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10.1.9.a |
|
Amendment No. 1 dated as of February 20, 1997 to the 1997 Stock Incentive
Plan of Terra Industries Inc. filed as Exhibit 10.1.21 to Terra Industries
Inc.s Form 10-K for the year ended December 31, 1999, is incorporated herein
by reference. |
|
|
10.1.10 |
|
Form of Incentive Stock Option Agreement of Terra Industries Inc. under its
1997 Stock Incentive Plan filed as Exhibit 10.1.13 to Terra Industries Inc.s
Form 10-K for the year ended December 31, 1999, is incorporated herein by
reference. |
|
|
10.1.11 |
|
Form of Nonqualified Stock Option Agreement of Terra Industries Inc. under
its 1997 Stock Incentive Plan filed as Exhibit 10.1.14 to Terra Industries
Inc.s Form 10-K for the year ended December 31, 1999, is incorporated herein
by reference. |
|
|
10.1.12 |
|
Form of Performance Share Award of Terra Industries under its 1997 Stock
Incentive Plan, filed as Exhibit 10.1.15 to Terra Industries Form 10-K for the
year ended December 31, 1998, is incorporated herein by reference. |
|
|
10.1.13 |
|
Form of Executive Retention Agreement for Other Executive Officers, filed as
Exhibit 10.1.19 to Terra Industries Form 10-K for the year ended December 31,
1998, is incorporated herein by reference. |
|
|
10.1.14 |
|
Form of Non-Employee Director Stock Option Agreement under the 1997 Stock
Incentive Plan, filed as Exhibit 10.2.21 to Terra Industries Inc.s Form 10-Q
for the quarter ended September 30, 1999, is incorporated herein by reference. |
|
|
10.1.15 |
|
Form of Performance Share Award of Terra Industries Inc. under its 1997
Stock Incentive Plan, dated February 16, 2000, filed as Exhibit 10.1.22 of the
Terra Industries Form 10-K for the year ended December 31, 2000, is
incorporated herein by reference. |
|
|
10.1.16 |
|
Form of Non-Employee Director Performance Share Award of Terra Industries
Inc. under its 1997 Stock Incentive Plan, dated May 2, 2000, filed as Exhibit
10.1.23 to the Terra Industries Form 10-K for the year ended December 31,
2000, is incorporated herein by reference. |
100
|
10.1.17 |
|
Terra Industries Inc. Stock Incentive Plan of 2002, filed as Exhibit 10.1.23
to the Terra Industries Form 10-K for the year ended December 31, 2001, is
incorporated herein by reference. |
|
|
10.1.18 |
|
Form of Restricted Stock Award to Non-Employee Directors under the Terra
Industries Inc. Stock Incentive Plan of 2002, filed as Exhibit 10.1.23 to the
Terra Industries Form 10-K for the year ended December 31, 2002, is
incorporated herein by reference. |
|
|
10.1.19 |
|
Form of Restricted Stock Award to Officers and Other Key Employees under the
Terra Industries Inc. Stock Incentive Plan of 2002, filed as Exhibit 10.1.24 to
the Terra Industries Form 10-K for the year ended December 31, 2002, is
incorporated herein by reference. |
|
|
10.1.20 |
|
Revised Form of Restricted Stock Award of Terra Industries Inc. under its
Stock Incentive Plan of 2002, filed as Exhibit 10.9 to the Terra Industries
Form 10-Q for the fiscal quarter ended September 30, 2005, is incorporated
herein by reference. |
|
|
10.1.21 |
|
Form of Long-Term Incentive Award for Time and Performance Based Shares of
Terra Industries Inc. under its Stock Incentive Plan of 2002, filed as Exhibit
10.10 to the Terra Industries 10-Q for the fiscal quarter ended September 30,
2005, is incorporated herein by reference. |
|
|
10.1.22 |
|
Form of Long-Term Incentive Award for Phantom Time and Performance Based
Shares of Terra Industries Inc. under its Stock Incentive Plan of 2002, filed
as Exhibit 10.11 to the Terra Industries Form 10-Q for the fiscal quarter ended
September 30, 2005, is incorporated herein by reference. |
|
|
10.1.23 |
|
Form of Long-Term Incentive Award for Performance Shares of Terra Industries
Inc. under its Stock Incentive Plan of 2002 filed as Exhibit 10.1.23 to the
Terra Industries Inc.s Form 10-K for the year ended 2005, is incorporated by
reference. |
|
|
10.1.24 |
|
Form of Long-Term Incentive Award for Phantom Performance Shares of Terra
Industries Inc. under its Stock Incentive Plan of 2002 filed as Exhibit 10.1.24
to the Terra Industries Inc.s Form 10-K for the year ended 2005, is
incorporated by reference. |
|
|
10.1.25 |
|
Form of Indemnity Agreement of Terra Industries Inc., filed as Exhibit
10.1.27 to Terra Industries Inc.s Form 8-K dated July 1, 2006, is incorporated
by reference. |
|
|
10.1.26 |
|
Form of Unrestricted Annual Share Award to Non-Employee Directors under the
Terra Industries Inc. Stock Incentive Plan of 2002, filed as Exhibit 99.1 to
Terra Industries Inc.s Form 8-K dated August 10, 2006, is incorporated herein
by reference. |
|
|
10.1.27 |
|
Employment Severance Agreement between Terra Industries Inc. and Michael L.
Bennett dated October 5, 2006, filed as Exhibit 10.1 to Terra Industries Inc.s
Form 8-K dated October 5, 2006, is incorporated herein by reference. |
101
|
10.1.28 |
|
Form of Employment Severance Agreement for Section 16(b) Executive Officers,
filed as Exhibit 10.2 to Terra Industries Inc.s Form 8-K dated October 5,
2006, is incorporated herein by reference. |
|
|
10.1.29 |
|
Amendment to Employment Severance Agreement between Terra Industries Inc.
and Mark A. Kalafut dated October 6, 2006, filed as Exhibit 10.1 to Terra
Industries Inc.s Form 8-K dated October 6, 2006 is incorporated herein by
reference. |
|
|
10.2 |
|
First Amended and Restated Agreement of Limited Partnership of
Terra Nitrogen, Limited Partnership dated September 1, 2005, filed as Exhibit
10.3 to the September 7, 2005 Terra Nitrogen Company, L.P.s Form 8-K, is
incorporated herein by reference. |
|
|
10.3 |
|
First Amended and Restated Agreement of Limited Partnership of
Terra Nitrogen, Limited Partnership dated September 1, 2005, filed as Exhibit
10.3 to the September 7, 2005 Terra Nitrogen Company, L.P.s Form 8-K, is
incorporated herein by reference. |
|
|
10.4 |
|
Amendment No. 1 to the General and Administrative Service
Agreement regarding Services by Terra Industries Inc. dated September 1, 2005,
filed as Exhibit 10.4 to the September 7, 2005 Terra Nitrogen Company, L.P.s
Form 8-K, is incorporated herein by reference. |
|
|
10.5 |
|
Amendment No. 1 to the General and Administrative Services
Agreement regarding Services by Terra Nitrogen Corporation dated September 1,
2005, filed as Exhibit 10.5 to the September 7, 2005 Terra Nitrogen Company,
L.P.s Form 8-K, is incorporated herein by reference. |
|
|
10.6 |
|
Reorganization Agreement among Terra Nitrogen Company, L.P.,
(the MLP), Terra Nitrogen, Limited Partnership (the OLP) and Terra Nitrogen
Corporation (the GP) dated September 1, 2005, filed as Exhibit 10.1 to the
September 7, 2005 Terra Nitrogen Company, L.P.s Form 8-K, is incorporated
herein by reference. |
|
|
10.7 |
|
Conveyance, Assignment and Assumption Agreement by and between
Terra Nitrogen Corporation (the Company) and Terra Nitrogen GP Inc. (the New
GP) dated September 1, 2005, filed as Exhibit 10.2 to the September 7, 2005
Terra Nitrogen Company, L.P.s Form 8-K, is incorporated herein by reference. |
|
|
10.8 |
|
Sale of Business Agreement dated November 20, 1997 between ICI
Chemicals & Polymers Limited, Imperial Chemical Industries PLC, Terra Nitrogen
(U.K.) Limited (f/k/a Terra Industries Limited) and Terra Industries Inc. filed
as Exhibit 2 to Terra Industries Form 8-K/A dated December 31, 1997, is
incorporated herein by reference. |
|
|
10.9 |
|
Ammonium Nitrate Agreement dated December 31, 1997 between
Terra International (Canada) Inc and ICI Chemicals & Polymers Limited filed as
Exhibit 99 to Terra Industries Form 8-K/A dated December 31, 1997, is
incorporated herein by reference. |
102
|
10.10 |
|
Asset Sale and Purchase Agreement dated as of May 3, 1999 by
and between Terra Industries Inc. and Cenex/Land OLakes Agronomy Company,
filed as Exhibit 10.12 to Terra Industries Form 8-K dated May 3, 1999, is
incorporated herein by reference. |
|
|
10.11 |
|
Asset Purchase and Methanol Exclusivity Agreement among Terra Industries
Inc., BMC Holdings Inc., and Methanex Methanol Company dated December 15, 2003,
filed as Exhibit 10.9 to Terra Industries From 10-K for the year ended
December 31, 2003, is incorporated herein by reference. |
|
|
10.11.1 |
|
Services Agreement among Terra Industries Inc., BMC Holdings Inc., and
Methanex Methanol Company dated December 15, 2003 included as Schedule E to
Exhibit 10.9 herein, filed as Exhibit 10.91.1 to Terra Industries Form 10-K
for the year ended December 31, 2003, is incorporated herein by reference. |
|
|
10.12 |
|
First Amendment to Asset Purchase and Methanol Exclusivity Agreement dated
February 20, 2004, filed as Exhibit 10.10 to Terra Industries Form 10-K for
the year ended December 31, 2003, is incorporated herein by reference. |
|
|
10.13 |
|
Warrant Agreement dated December 21, 2004 among Terra
Industries Inc., Perry Principals Investments LLC, Citigroup Financial Products
Inc. and Värde Investment Partners, L.P., filed as Exhibit 10.11 to Terra
Industries Form 10-K for the year ended December 31, 2004, is incorporated
herein by reference. |
|
|
10.14 |
|
Ammonium Nitrate Supply Agreement between Terra Mississippi Nitrogen, Inc.
and Orica USA Inc. dated July 21, 2005, filed as Exhibit 10.7 to Terra
Industries Inc.s Form 10-Q for the fiscal quarter ended September 30, 2005, is
incorporated herein by reference. |
|
|
10.15 |
|
Conversion Agreement by and between Terra Mississippi Nitrogen, Inc. and
Orica USA Inc. dated July 21, 2005, filed as exhibit 10.8 to the Terra
Industries Inc. Form 10-Q for the fiscal quarter ended September 30, 2005, is
incorporated herein by reference. |
|
|
12.1* |
|
Ratio of Earnings to Financial Charges |
|
|
21.1* |
|
Subsidiaries of Terra Industries Inc. |
|
|
23.1* |
|
Consent of Deloitte & Touche LLP |
|
|
31.1* |
|
Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
|
|
31.2* |
|
Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
|
|
32* |
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. |
|
|
99* |
|
Financial statements for Point Lisas Nitrogen Limited for the
fiscal year ended December 31, 2006. |
103
|
|
|
* |
|
Filed herewith. |
|
|
|
Confidential treatment has been requested for portions of this document. |
Exhibits 10.1.1 through 10.1.29 are management contracts or compensatory plans or arrangements.
104
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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: March 14, 2007 |
By: |
/s/ FRANCIS G. MEYER
|
|
|
|
Francis G. Meyer |
|
|
|
Senior Vice President and Chief Financial
Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated:
|
|
|
Signature |
|
Title |
|
|
|
/s/HENRY R. SLACK
Henry R. Slack
|
|
Chairman of the Board |
|
|
|
/s/MICHAEL L. BENNETT
Michael L. Bennett
|
|
Director, President and Chief Executive Officer (Principal
Executive Officer) |
|
|
|
/s/FRANCIS G. MEYER
Francis G. Meyer
|
|
Senior Vice President and Chief Financial Officer (Principal
Financial Officer and Principal |
|
|
Accounting Officer) |
|
|
|
/s/DAVID E. FISHER
David E. Fisher
|
|
Director |
|
|
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/s/DOD A. FRASER
Dod A. Fraser
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Director |
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/s/MARTHA O. HESSE
Martha O. Hesse
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Director |
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/s/PETER S. JANSON
Peter S. Janson
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Director |
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/s/ JAMES R. KRONER
James R. Kroner
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Director |
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/s/DENNIS MCGLONE
Dennis McGlone
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Director |
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Date: March 14, 2007 |
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105
Index to Financial Statement Schedules
Schedule No.
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I
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Condensed Financial Information of Registrant, is included in Item 8 herein,
Footnote 22, Column 1, Parent. |
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II
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Valuation and Qualifying Accounts:
Years Ended December 31, 2006, 2005 and 2004
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S-2 |
Financial statement schedules not included in this report have been omitted because they are not
applicable or the required information is shown in the consolidated financial statements or the
notes thereto.
S-1
Schedule II
Terra Industries Inc.
Valuation and Qualifying Accounts
Years Ended December 31, 2006, 2005, and 2004
(in thousands)
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Less Write- |
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Additions |
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offs, and |
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Balance at |
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Charged to |
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Transfers, |
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Balance |
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Beginning of |
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Costs and |
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Net of |
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at End |
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Description |
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Period |
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Expenses |
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Recoveries |
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of Period |
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Year Ended December 31, 2006: |
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|
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|
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|
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|
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Allowance for Doubtful Accounts |
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$ |
234 |
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|
$ |
486 |
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$ |
(388 |
) |
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$ |
332 |
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Year Ended December 31, 2005: |
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Allowance for Doubtful Accounts |
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$ |
262 |
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$ |
824 |
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$ |
(852 |
) |
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$ |
234 |
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Year Ended December 31, 2004: |
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Allowance for Doubtful Accounts |
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$ |
87 |
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$ |
11 |
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$ |
164 |
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$ |
262 |
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S-2
Exhibit 31.1
Certification
I, Michael L. Bennett, certify that:
|
1. |
|
I have reviewed this annual report on Form 10-K of Terra Industries Inc.; |
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|
2. |
|
Based on my knowledge, this annual report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this annual report; |
|
|
3. |
|
Based on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report; |
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|
4. |
|
The registrants other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
|
designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in
which this annual report is being prepared; |
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|
b) |
|
designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. |
|
|
c) |
|
evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this annual
report based on such evaluation; and |
|
|
d) |
|
disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; |
|
5. |
|
The registrants other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of registrants board of directors (or persons performing
the equivalent functions): |
|
a) |
|
all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrants ability to record, process, summarize and report
financial information; and |
|
|
b) |
|
any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal control over
financial reporting. |
Date: March 14, 2007
|
|
|
|
|
|
|
|
|
/s/ MICHAEL L. BENNETT
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|
|
Michael L. Bennett |
|
|
President and Chief Executive Officer
and Director (Principal Executive Officer) |
|
S-3
Exhibit 31.2
Certification
I, Francis G. Meyer, certify that:
|
6. |
|
I have reviewed this annual report on Form 10-K of Terra Industries Inc.; |
|
|
7. |
|
Based on my knowledge, this annual report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this annual report; |
|
|
8. |
|
Based on my knowledge, the financial statements, and other financial information
included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report; |
|
|
9. |
|
The registrants other certifying officer and I are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
|
designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in
which this annual report is being prepared; |
|
|
b) |
|
designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles; |
|
|
c) |
|
evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this annual
report based on such evaluation; and |
|
|
d) |
|
disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrants
internal control over financial reporting; |
|
10. |
|
The registrants other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants
auditors and the audit committee of registrants board of directors (or persons performing
the equivalent functions): |
|
a) |
|
all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrants ability to record, process, summarize and report
financial information; and |
|
|
b) |
|
any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal control over
financial reporting. |
Date: March 14, 2007
|
|
|
|
|
|
|
|
|
/s/ FRANCIS G. MEYER
|
|
|
Francis G. Meyer |
|
|
Senior Vice President and Chief Financial Officer
(Principal Financial Officer) |
|
S-4
Exhibit 32
Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Terra Industries Inc. (the Company) on Form 10-K for
the period ending December 31, 2006 as filed with the Securities and Exchange Commission on the
date hereof (the Report), the undersigned chief Executive Officer and Chief Financial Officer of
the Company hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the
Sarbanes-Oxley Act of 2002 that based on their best knowledge:
|
1) |
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, and |
|
|
2) |
|
The information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company as of and for the periods
covered in the Report. |
|
|
|
/s/ MICHAEL L. BENNETT
|
|
/s/ FRANCIS G. MEYER |
|
|
|
Michael L. Bennett
|
|
Francis G. Meyer |
President and Chief Executive Officer
|
|
Sr. Vice President and Chief Financial Officer |
and Director (Principal Executive Officer)
|
|
(Principal Financial Officer) |
|
|
|
Dated: March 14, 2007
|
|
Dated: March 14, 2007 |
The certification set forth above is being furnished as an exhibit solely pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 and is not being filed as part of the Form 10-K or as a separate
disclosure document of the company or the certifying officers.
S-5