================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 1-8520
TERRA INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
MARYLAND 52-1145429
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Terra Centre
P.O. Box 6000
600 Fourth Street
Sioux City, Iowa 51102-6000
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (712) 277-1340
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of October 31, 2002, the following shares of the registrant's stock were
outstanding:
Common Shares, without par value 76,901,669 shares
================================================================================
PART I. FINANCIAL INFORMATION
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands)
(unaudited)
September 30, December 31, September 30,
2002 2001 2001
------------- ------------ -------------
ASSETS
Cash and short-term investments $ 41,879 $ 7,125 $ 44,132
Accounts receivable, less allowance for
doubtful accounts of $191, $936, $879 97,455 101,363 97,947
Inventories 86,838 110,027 123,627
Other current assets 30,528 35,142 32,414
---------------------------------------------------------------------------------------------------------------------
Total current assets 256,700 253,657 298,120
---------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 792,182 824,982 849,188
Excess of cost over net assets of acquired businesses -- 206,209 211,098
Other assets 53,434 51,195 39,959
---------------------------------------------------------------------------------------------------------------------
Total assets $ 1,102,316 $ 1,336,043 $ 1,398,365
=====================================================================================================================
LIABILITIES
Debt due within one year $ 140 $ 68 $ 5,108
Accounts payable 66,883 75,077 73,742
Accrued and other liabilities 54,555 42,134 53,435
---------------------------------------------------------------------------------------------------------------------
Total current liabilities 121,578 117,279 132,285
---------------------------------------------------------------------------------------------------------------------
Long-term debt 400,394 436,534 453,921
Deferred income taxes 99,626 112,645 121,537
Other liabilities 80,898 69,639 50,115
Minority interest 100,021 99,167 98,947
---------------------------------------------------------------------------------------------------------------------
Total liabilities and minority interest 802,517 835,264 856,805
---------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Capital stock
Common Shares, authorized 133,500 shares;
outstanding 76,902, 76,451 and 76,441 shares 128,654 128,363 128,363
Paid-in capital 555,167 554,850 554,850
Accumulated other comprehensive loss (43,572) (78,470) (66,571)
Retained deficit (340,450) (103,964) (75,082)
---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 299,799 500,779 541,560
---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,102,316 $ 1,336,043 $ 1,398,365
=====================================================================================================================
See Accompanying Notes to the Consolidated Financial Statements.
2
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
REVENUES
Net sales $ 257,875 $ 237,224 $ 770,681 $ 802,076
Other income, net 799 481 1,051 1,001
----------------------------------------------------------------------------------------------------------------------
Total revenues 258,674 237,705 771,732 803,077
----------------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales 238,546 255,519 733,900 803,064
Selling, general and administrative expense 10,328 8,394 28,810 26,254
Product claim costs -- -- -- 14,023
----------------------------------------------------------------------------------------------------------------------
248,874 263,913 762,710 843,341
----------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 9,800 (26,208) 9,022 (40,264)
Interest income 116 977 277 2,852
Interest expense (13,408) (12,034) (40,052) (37,857)
Minority interest (492) 2,785 (1,777) 2,468
----------------------------------------------------------------------------------------------------------------------
Loss from continuing operations
before income taxes (3,984) (34,480) (32,530) (72,801)
Income tax benefit 2,048 10,344 13,012 21,840
----------------------------------------------------------------------------------------------------------------------
Loss from continuing operations (1,936) (24,136) (19,518) (50,961)
Discontinued operations, net of income taxes of
$6.0 million (11,000) -- (11,000) --
Cumulative effect of change in accounting
principle -- -- (205,968) --
----------------------------------------------------------------------------------------------------------------------
NET LOSS $ (12,936) $ (24,136) $ (236,486) $ (50,961)
======================================================================================================================
Basic and diluted loss per share:
Loss from continuing operations $ (0.03) $ (0.32) $ (0.25) $ (0.68)
Discontinued operations (0.15) (0.15)
Cumulative effect of change in accounting
principle -- -- (2.74) --
----------------------------------------------------------------------------------------------------------------------
Net loss per share $ (0.18) $ (0.32) $ (3.14) $ (0.68)
======================================================================================================================
Basic and diluted weighted
average shares outstanding 75,468 75,175 75,276 75,033
======================================================================================================================
See Accompanying Notes to the Consolidated Financial Statements.
3
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
--------------------------------
2002 2001
------------ -------------
OPERATING ACTIVITIES
Net loss $ (236,486) $ (50,961)
Cumulative effect of change in accounting
principle 205,968 --
Adjustments to reconcile net loss from
operations to net cash flows from operating activities:
Depreciation and amortization 73,109 84,870
Deferred income taxes (12,854) (31,080)
Minority interest in earnings 1,777 (2,470)
Discontinued operations 11,000 --
Changes in current assets and liabilities:
Accounts receivable 5,931 8,221
Inventories 25,646 (23,652)
Other current assets 12,989 (16,388)
Accounts payable (9,733) 11,847
Accrued and other liabilities 15,136 (11,550)
Other (98) 9,022
------------------------------------------------------------------------------------------------
Net cash flows from operating activities 92,385 (22,141)
------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (16,589) (11,136)
Other items (4,780) (5,887)
------------------------------------------------------------------------------------------------
Net cash flows from investing activities (21,369) (17,023)
------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Principal payments on long-term debt (36,068) (14,325)
Stock issuance-net 608 180
Repurchases of TNCLP common units -- (1,671)
Distributions to minority interests (923) (2,028)
------------------------------------------------------------------------------------------------
Net cash flows from financing activities (36,383) (17,844)
------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 121 (285)
------------------------------------------------------------------------------------------------
Increase (decrease) to cash and short-term investments 34,754 (57,293)
Cash and short-term investments at beginning of period 7,125 101,425
------------------------------------------------------------------------------------------------
Cash and short-term investments at end of period $ 41,879 $ 44,132
================================================================================================
See Accompanying Notes to the Consolidated Financial Statements.
4
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(in thousands)
(unaudited)
Accumulated
Other
Capital Paid-In Comprehensive Retained
Stock Capital Loss Deficit Total
-------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2002 $ 128,363 $ 554,850 $ (78,470) $ (103,964) $ 500,779
Comprehensive loss:
Net loss -- -- -- (236,486) (236,486)
Foreign currency
translation adjustment -- -- -- 25,131 25,131
Change in fair value of derivatives,
net of taxes of $3,503 -- -- 9,767 -- 9,767
-----------
Comprehensive loss (201,588)
Exercise of stock options 291 317 -- -- 608
-------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2002 $ 128,654 $ 555,167 $ (43,572) $ (340,450) $ 299,799
=========================================================================================================================
Accumulated
Other
Capital Paid-In Comprehensive Retained
Stock Capital Loss Deficit Total
-------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2001 $ 128,283 $ 554,750 $ (48,115) $ (24,121) $ 610,797
Comprehensive loss:
Net loss -- -- -- (50,961) (50,961)
Foreign currency
translation adjustment -- -- (12,343) -- (12,343)
Cumulative effect of change in
accounting for derivatives, net
of taxes of $10,990 -- -- 20,410 -- 20,410
Change in fair value of
derivatives, net of taxes of $15,221 -- -- (26,523) -- (26,523)
-----------
Comprehensive loss (69,417)
Exercise of stock options 80 100 -- -- 180
-------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2001 $ 128,363 $ 554,850 $ (66,571) $ (75,082) $ 541,560
=========================================================================================================================
See Accompanying Notes to the Consolidated Financial Statements.
5
TERRA INDUSTRIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. The accompanying unaudited consolidated financial statements and notes
thereto contain all adjustments necessary, in the opinion of management, to
summarize fairly the financial position of Terra Industries Inc. and all
majority-owned subsidiaries ("Terra") and the results of Terra's operations
for the periods presented. Because of the seasonal nature of Terra's
operations and effects of weather-related conditions in several of its
marketing areas, results of any interim reporting period should not be
considered as indicative of results for a full year. These statements
should be read in conjunction with Terra's 2001 Annual Report to
Stockholders. Certain reclassifications have been made to prior years'
financial statements to conform with current year presentation.
Basic earning (loss) per share data are based on the weighted-average
number of Common Shares outstanding during the period. Diluted earnings per
share data are based on the weighted-average number of Common Shares
outstanding and the effect of all dilutive potential common shares
including stock options, restricted shares and contingent shares.
Inventories consisted of the following:
September 30, December 31, September 30,
(in thousands) 2002 2001 2001
---------------------------------------------------------------------
Raw materials $ 21,619 $ 27,904 $ 28,696
Supplies 26,590 21,471 21,587
Finished goods 38,629 60,652 73,344
---------------------------------------------------------------------
Total $ 86,838 $ 110,027 $ 123,627
=====================================================================
The components of accumulated other comprehensive loss at September 30,
2002 consisted of foreign currency translation adjustment, derivatives (net
of taxes) and minimum pension liability (net of taxes) in the amounts of
$37.9 million, ($5.2) million and $10.9 million, respectively. At September
30, 2001, accumulated other comprehensive loss consisted of foreign
currency translation adjustment and derivatives (net of taxes) in the
amounts of $60.5 million and $6.1 million, respectively.
Revenue is recognized when title to finished product passes to the
customer. Revenue is recognized as the net amount to be received after
deducting estimated amounts for discounts and trade allowances. Revenues
include amounts paid by customers for shipping and handling.
Realized gains and losses from hedging activities and premiums paid for
option contracts are deferred and recognized in the month in which the
hedged transactions closed. Swaps, options and other derivative instruments
that do not qualify for hedge accounting treatment are marked to market
each accounting period. Costs associated with settlement of natural gas
purchase contracts and costs for shipping and handling are included in cost
of sales.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting
for Asset Retirement Obligations". This standard requires Terra to record
the fair value of a liability for an asset retirement obligation in the
period in which it is incurred and is effective for Terra's fiscal year
2003. Terra does not expect the impact, if any, arising from the adoption
of this standard to be material to our financial position.
6
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This standard requires Terra
to recognize a liability for a cost associated with an exit or disposal
activity when the liability is incurred rather than recognition of the
liability at the date of a commitment to an exit plan and is effective for
exit or disposal activities that are initiated after December 31, 2002.
2. On July 13, 2001, a British court found Terra Nitrogen (U.K.) Ltd. liable
for damages associated with May 1998 recalls of carbonated beverages
containing carbon dioxide tainted with benzene, plus interest and attorney
fees. In addition, there are two similar cases awaiting trial and certain
other beverage manufacturers have indicated their intention to file claims
for unspecified amounts. Management estimates total claims against Terra
from these lawsuits may be (pound)10 million, or $14 million. Terra has
established contingency reserves to cover estimated losses.
Terra's management believes it has recourse for these claims against both
its insurer and the previous owner of Terra's U.K. operations. Management
is pursuing Terra's rights against these parties, but there will be no
income recognition for those rights until settlements are finalized.
Terra is involved in various other legal actions and claims, including
environmental matters, arising from the normal course of business. While it
is not feasible to predict with certainty the final outcome of these
proceedings, management does not believe that these matters, or the U.K.
benzene claims, will have a material adverse effect on the results of
operations, financial position or net cash flows.
3. Natural gas is the principal raw material used in Terra's production of
nitrogen products and methanol. Natural gas prices are volatile and we
manage this volatility through the use of derivative commodity instruments.
Terra's policy is to hedge 20-80% of our natural gas requirements for the
upcoming 12 months and up to 50% of the requirements for the following
24-month period, provided that such arrangements would not result in costs
greater than expected selling prices for our finished products. The
financial derivatives are traded in months forward and settlement dates are
scheduled to coincide with gas purchases during those future periods. These
contracts reference physical natural gas prices or appropriate NYMEX
futures contract prices. Contract prices are frequently based on prices at
the most common and financially liquid location of reference for financial
derivatives related to natural gas. However, natural gas supplies for
Terra's facilities are purchased for each plant at locations other than
reference points, which often creates a location basis differential between
the contract price and the physical price of natural gas. Accordingly, the
use of financial derivatives may not exactly offset the change in the price
of physical gas.
Terra has entered into forward pricing positions for a portion of its
natural gas requirements for the remainder of 2002 and part of 2003,
consistent with its policy. As a result of its policies, Terra has reduced
the potential adverse financial impact of natural gas price increases
during the forward pricing period, but conversely, if natural gas prices
were to fall, Terra will incur higher costs. Contracts were in place at
September 30, 2002 to cover 11% of natural gas requirements for the
succeeding twelve months. We also use basis swaps to manage some of the
basis risk.
Unrealized gains from forward pricing positions in North America totaled
$3.1 million as of September 30, 2002. In addition, Terra had contracts
which would reduce, assuming no decrease in forward natural gas prices at
September 30, 2002, the purchase price of about 4 percent of its next 12
months' natural gas needs by $1.3 million. The amount ultimately recognized
by Terra will be dependent on published prices in effect at the time of
settlement. Terra also had $2 million of realized gains on closed North
America contracts relating to future periods that have been deferred to the
respective period.
7
On September 30, 2002, the fair value of derivatives resulted in a $7.9
million increase to current assets, a $2.0 million reduction to current
liabilities, a $1.1 million increase in long-term liabilities and a $8.8
million increase, before deferred taxes of $3.5 million to Accumulated
Other Comprehensive Loss, which reflected the effective portion of the
derivatives designated as cash flow hedges.
The increase to current assets was to recognize the value of open natural
gas contracts; the reduction to current liabilities was to reclassify
deferred gains on closed contracts relating to future periods and the
increase to long-term debt related to interest rate hedges.
4. Terra classifies its continuing operations into two business segments:
nitrogen products and methanol. The nitrogen products business produces and
distributes ammonia, urea, nitrogen solutions and ammonium nitrate to farm
distributors and industrial users. The methanol business manufactures and
distributes methanol which is used in the production of a variety of
chemical derivatives and in the production of methyl tertiary butyl ether
(MTBE), an oxygenate and an octane enhancer for gasoline. Terra does not
allocate interest, income taxes or infrequent items to continuing business
segments. Included in Other are general corporate activities not
attributable to a specific industry segment. The following summarizes
operating results by business segment:
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ---------------------------
(in thousands) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------
Revenues - Nitrogen Products $ 211,103 $ 209,224 $ 653,753 $ 661,065
- Methanol 46,772 28,000 116,928 141,011
- Other 799 481 1,051 1,001
--------------------------------------------------------------------------------------------------
Total revenues $ 258,674 $ 237,705 $ 771,732 $ 803,077
==================================================================================================
Income (loss) from operations
- Nitrogen Products $ 4,241 $ (21,328) $ 7,111 $ (35,176)
- Methanol 6,696 (5,109) 3,782 (6,082)
- Other (1,137) 229 (1,871) 994
--------------------------------------------------------------------------------------------------
Total income (loss) from operations $ 9,800 $ (26,208) $ 9,022 $ (40,264)
==================================================================================================
5. Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," Terra determined that $206.0
million of assets classified as "Excess of cost over net assets of acquired
businesses" suffered impairment and had no value. Consequently, these
assets were written off through a charge that is reported as a change in
accounting principle during the 2002 first quarter.
8
A reconciliation of the historical impact of the change in accounting principle
to earnings per share follows:
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ---------------------------
(in thousands) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------
Reported net loss $ (12,936) $ (24,136) $ (236,486) $ (50,961)
Goodwill amortization, net of taxes -- 4,704 -- 14,120
--------------------------------------------------------------------------------------------------
Adjusted net loss $ (12,936) $ (19,432) $ (236,486) $ (36,841)
==================================================================================================
Reported basic and diluted loss
per share $ (0.18) $ (0.32) $ (3.14) $ (0.68)
Goodwill amortization, net of taxes -- .06 -- .19
--------------------------------------------------------------------------------------------------
Adjusted basic and diluted loss per
share $ (0.18) $ (0.26) $ (3.14) $ (0.49)
==================================================================================================
6. The third quarter results include an $11 million charge to increase
reserves for expected future cash payments related to retained liabilities
of discontinued operations. The charge consists of a $17 million increase
to reserve balances less income tax benefits totaling $6 million.
Approximately $13 million of the increase to reserve balances is related
primarily to higher-than-expected future retiree health care costs of the
coal operations that Terra sold in 1992. The remaining $4 million
represents the estimated costs to settle remaining obligations of the
distribution operations that Terra sold in 1999.
Including the $17 million third quarter charge, Terra's discontinued
operations reserves at September 30, 2002 totaled approximately $30
million, of which $26 million is attributable to expected future payments
for the coal operation's retirees and other former employees. Payments for
retiree health care and other benefits for former coal employees were $2.3
million in 2001 and are expected to total $2.5 million in 2002 and less
than $3 million in 2003. Terra 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 Energy Company. No provision for such
recoveries has been made in Terra's financial statements.
7. Condensed consolidating financial information regarding the Parent, Terra
Capital, Inc. ("TCAPI"), the Guarantor Subsidiaries and subsidiaries of the
Parent that are not guarantors of the Senior Secured Notes for September
30, 2002 and 2001 are presented below for purposes of complying with the
reporting requirements of the Guarantor Subsidiaries.
Guarantor subsidiaries include subsidiaries that own the Woodward,
Oklahoma, Port Neal, Iowa and Beaumont, Texas plants as well as the
corporate headquarters facility in Sioux City, Iowa. All other company
facilities are owned by non-guarantor subsidiaries.
9
Condensed Consolidating Statement of Financial Position as of September 30,
2002:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash $ -- $ 35,702 $ -- $ 57,889 $ (51,712) $ 41,879
Accounts Receivable -- 1,019 33,544 62,891 1 97,455
Inventories -- -- 23,159 63,678 1 86,838
Other current assets 9,427 -- 5,509 17,462 (1,870) 30,528
------------------------------------------------------------------------------------------------------------------------
Total current assets 9,427 36,721 62,212 201,920 (53,580) 256,700
------------------------------------------------------------------------------------------------------------------------
Property, plant and
equipment, net -- -- 406,228 390,453 (4,499) 792,182
Investments in and advanced
to (from) affiliates 656,334 396,235 1,224,495 136,664 (2,413,728) --
Other assets 22 14,558 13,221 25,634 (1) 53,434
------------------------------------------------------------------------------------------------------------------------
Total assets $ 665,783 $ 447,514 $ 1,706,156 $ 754,671 $ (2,471,808) $ 1,102,316
========================================================================================================================
LIABILITIES
Debt due within one year $ -- $ -- $ 86 $ 54 $ -- $ 140
Accounts payable 19 2,372 80,307 37,769 (53,584) 66,883
Accrued and other liabilities 8,442 13,602 19,628 13,036 (153) 54,555
------------------------------------------------------------------------------------------------------------------------
Total current liabilities 8,461 15,974 100,021 50,859 (53,737) 121,578
------------------------------------------------------------------------------------------------------------------------
Long-term debt 200,000 200,000 247 147 -- 400,394
Deferred income taxes 102,059 19,802 (7,257) (15,132) 154 99,626
Other liabilities 55,464 13,247 2,031 10,153 3 80,898
Minority interest -- 19,564 80,457 -- -- 100,021
------------------------------------------------------------------------------------------------------------------------
Total liabilities 365,984 268,587 175,499 46,027 (53,580) 802,517
------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock 128,654 -- 73 49,709 (49,782) 128,654
Paid in capital 555,167 150,218 1,656,742 892,448 (2,699,408) 555,167
Accumulated other
comprehensive loss (43,572) (43,572) -- (16,335) 59,907 (43,572)
Retained earnings (deficit) (340,450) 72,281 (126,158) (217,178) 271,055 (340,450)
------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 299,799 178,927 1,530,657 708,644 (2,418,228) 299,799
------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders equity $ 665,783 $ 447,514 $ 1,706,156 $ 754,671 $ (2,471,808) $ 1,102,316
========================================================================================================================
10
Condensed Consolidating Statement of Operations for the nine months ended
September 30, 2002:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
------------------------------------------------------------------------------------------------------------------------
REVENUES
Net sales $ -- $ -- $ 287,417 $ 477,365 $ 5,899 $ 770,681
Other income, net -- -- 2,969 3,980 (5,898) 1,051
------------------------------------------------------------------------------------------------------------------------
-- -- 290,386 481,345 1 771,732
------------------------------------------------------------------------------------------------------------------------
COST AND EXPENSES
Cost of sales -- -- 285,198 450,643 (1,941) 733,900
Selling, general and
administrative expenses 2,219 (464) 18,942 7,650 463 28,810
Equity in the (earnings) loss
of subsidiaries 222,575 202,382 (4,450) (7,996) (412,511) --
------------------------------------------------------------------------------------------------------------------------
224,794 201,918 299,690 450,297 (413,989) 762,710
------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations (224,794) (201,918) (9,304) 31,048 413,990 9,022
Interest income 36 191 -- 50 -- 277
Interest expense (16,393) (20,500) 4,070 (7,205) (24) (40,052)
Minority interest -- (348) (1,429) -- -- (1,777)
------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations (241,151) (222,575) (6,663) 23,893 413,966 (32,530)
Income tax benefit (provision) 15,665 -- -- (2,653) -- 13,012
------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations (225,486) (222,575) (6,663) 21,240 413,966 (19,518)
Discontinued operations,
net of income taxes (11,000) -- -- -- -- (11,000)
Cumulative effect of change
in accounting principle -- -- (189,971) (15,997) -- (205,968)
------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (236,486) $ (222,575) $ (196,634) $ 5,243 $ 413,966 $ (236,486)
========================================================================================================================
11
Condensed Consolidating Statement of Cash Flows for the nine months ended
September 30, 2002:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ (236,486) $ (222,575) $ (196,634) $ 5,243 $ 413,966 $ (236,486)
Cumulative effect of change
in accounting principle -- -- 189,971 15,997 -- 205,968
Adjustments to reconcile net
loss to net cash flows from
operating activities:
Depreciation and amortization -- 2,085 38,224 32,800 -- 73,109
Deferred income taxes (8,859) -- (3,887) (6,860) 6,752 (12,854)
Minority interest in earnings -- 348 1,429 -- -- 1,777
Discontinued operations 11,000 -- -- -- -- 11,000
Equity in earnings (loss)
of subsidiaries 222,575 202,382 (4,450) (7,996) (412,511) --
Change in operating assets
and liabilities 3,804 (27,778) 59,194 27,087 (12,338) 49,969
Other -- -- -- -- (98) (98)
------------------------------------------------------------------------------------------------------------------------
Net cash flows from
operating activities (7,966) (45,538) 83,847 66,271 (4,229) 92,385
------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property,
plant and equipment -- -- (2,239) (14,350) -- (16,589)
Other -- -- -- -- (4,780) (4,780)
------------------------------------------------------------------------------------------------------------------------
Net cash flows from
investing activities -- -- (2,239) (14,350) (4,780) (21,369)
------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Principal payments on
long-term debt -- (36,277) 9 201 (1) (36,068)
Change in investments and
advances from (to)
affiliates 7,961 125,051 (90,049) 2,530 (45,493) --
Stock (repurchase) issuance -
net 608 -- -- -- -- 608
Distributions to minority
interests -- (220) (703) -- -- (923)
Other (603) (7,314) (7,798) (21,508) 37,223 --
------------------------------------------------------------------------------------------------------------------------
Net cash flows from
financing activities 7,966 81,240 (98,541) (18,777) (8,271) (36,383)
------------------------------------------------------------------------------------------------------------------------
Effect of foreign exchange
rate on cash -- -- -- -- 121 121
------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash
and short-term investments -- 35,702 (16,933) 33,144 (17,159) 34,754
------------------------------------------------------------------------------------------------------------------------
Cash and short-term investments
at beginning of period -- -- 16,933 24,745 (34,553) 7,125
------------------------------------------------------------------------------------------------------------------------
Cash and short-term investments
at end of period $ -- $ 35,702 $ -- $ 57,889 $ (51,712) $ 41,879
========================================================================================================================
12
Condensed Consolidating Statement of Financial Position as of September 30,
2001:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash $ -- $ 29,590 $ 16,017 $ 1,916 $ (3,391) $ 44,132
Accounts Receivable -- -- 34,939 63,008 -- 97,947
Inventories -- -- 35,417 88,210 -- 123,627
Other current assets 5,568 4,215 6,871 25,777 (10,017) 32,414
------------------------------------------------------------------------------------------------------------------------
Total current assets 5,568 33,805 93,244 178,911 (13,408) 298,120
------------------------------------------------------------------------------------------------------------------------
Property, plant and
equipment, net -- -- 448,789 403,138 (2,739) 849,188
Excess of cost over net assets
of acquired businesses -- -- 194,391 16,707 -- 211,098
Investments in and advanced
to (from) affiliates 1,064,912 414,516 1,315,157 240,188 (3,034,773) --
Other assets 775 7,005 7,233 24,592 354 39,959
------------------------------------------------------------------------------------------------------------------------
Total assets $ 1,071,255 $ 455,326 $ 2,058,814 $ 863,536 $ (3,050,566) $ 1,398,365
========================================================================================================================
LIABILITIES
Debt due within one year $ -- $ -- $ 47 $ 5,061 $ -- $ 5,108
Accounts payable -- 7,164 17,227 56,540 (7,189) 73,742
Accrued and other liabilities 14,675 629 19,271 7,873 10,987 53,435
------------------------------------------------------------------------------------------------------------------------
Total current liabilities 14,675 7,793 36,546 69,474 3,798 132,285
------------------------------------------------------------------------------------------------------------------------
Long-term debt 358,755 -- 947 94,219 -- 453,921
Deferred income taxes 134,882 9,682 (4,232) (121) (18,674) 121,537
Other liabilities 21,383 13,841 510 13,454 927 50,115
Minority interest -- 19,394 79,553 -- -- 98,947
------------------------------------------------------------------------------------------------------------------------
Total liabilities 529,695 50,710 113,323 177,026 (13,949) 856,805
------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock 128,363 -- 73 49,709 (49,782) 128,363
Paid in capital 554,850 150,218 1,856,742 918,886 (2,925,846) 554,850
Accumulated other
comprehensive loss (66,571) (66,571) 2,204 (69,543) 133,910 (66,571)
Retained earnings (deficit) (75,082) 320,969 86,472 (212,542) (194,899) (75,082)
------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 541,560 404,616 1,945,491 686,510 (3,036,617) 541,560
------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders equity $ 1,071,255 $ 455,326 $ 2,058,814 $ 863,536 $ (3,050,566) $ 1,398,365
========================================================================================================================
13
Condensed Consolidating Statement of Operations for the nine months ended
September 30, 2001:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
------------------------------------------------------------------------------------------------------------------------
REVENUES
Net sales $ -- $ -- $ 328,408 $ 473,592 $ 76 $ 802,076
Other income, net (2) -- 1,369 (291) (75) 1,001
------------------------------------------------------------------------------------------------------------------------
(2) -- 329,777 473,301 1 803,077
------------------------------------------------------------------------------------------------------------------------
Cost and Expenses
Cost of sales -- -- 343,802 445,225 14,037 803,064
Selling, general and
administrative expenses 1,827 2,804 19,087 16,666 (14,130) 26,254
Product claim costs -- -- -- 14,023 -- 14,023
Equity in the (earnings)
loss of subsidiaries 39,757 36,736 (3,436) 10,000 (83,057) --
------------------------------------------------------------------------------------------------------------------------
41,584 39,540 359,453 485,914 (83,150) 843,341
------------------------------------------------------------------------------------------------------------------------
Loss from operations (41,586) (39,540) (29,676) (12,613) 83,151 (40,264)
Interest income 69 2,085 5,861 511 (5,674) 2,852
Interest expense (29,326) (2,786) (147) (11,268) 5,670 (37,857)
Minority interest -- 484 1,984 -- -- 2,468
------------------------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes (70,843) (39,757) (21,978) (23,370) 83,147 (72,801)
Income tax benefit 19,882 -- -- 1,958 -- 21,840
------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (50,961) $ (39,757) $ (21,978) $ (21,412) $ 83,147 $ (50,961)
========================================================================================================================
14
Condensed Consolidating Statement of Cash Flows for the nine months ended
September 30, 2001:
Guarantor Non-Guarantor
(in thousands) Parent TCAPI Subsidiaries Subsidiaries Eliminations Consolidated
------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ (50,961) $ (39,757) $ (21,978) $ (21,412) $ 83,147 $ (50,961)
Adjustments to reconcile net
loss to net cash flows from
operating activities:
Depreciation and amortization -- 2,779 50,911 31,180 -- 84,870
Deferred income taxes (15,839) (7,500) (4,232) (4,076) 567 (31,080)
Minority interest in earnings -- (484) (1,984) -- (2) (2,470)
Equity in earnings (loss)
of subsidiaries 39,758 36,736 (3,436) 9,453 (82,511) --
Change in operating assets
and liabilities 7,776 (2,002) (16,404) (5,466) (15,426) (31,522)
Other -- -- -- -- 9,022 9,022
------------------------------------------------------------------------------------------------------------------------
Net Cash Flows from
Operating Activities (19,266) (10,228) 2,877 9,679 (5,203) (22,141)
------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property,
plant and equipment -- -- (2,272) (8,864) -- (11,136)
Other -- -- -- -- (5,887) (5,887)
------------------------------------------------------------------------------------------------------------------------
Net Cash Flows from
Investing Activities -- -- (2,272) (8,864) (5,887) (17,023)
------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Principal payments on
long-term debt -- -- (7,980) (6,345) -- (14,325)
Change in investments and
advances from (to)
affiliates 19,013 (30,669) 16,693 (14,424) 9,387 --
Stock issuance - net 180 -- -- -- -- 180
Distributions to minority
interests -- (337) (1,691) -- -- (2,028)
Repurchase of TNLP common
Units -- (1,671) -- -- -- (1,671)
Other 73 (4,464) (3,454) 9,249 (1,404) --
------------------------------------------------------------------------------------------------------------------------
Net Cash Flows from
Financing Activities 19,266 (37,141) 3,568 (11,520) 7,983 (17,844)
------------------------------------------------------------------------------------------------------------------------
Effect of exchange rates on cash -- -- -- -- (285) (285)
------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in Cash
and Short-term Investments -- (47,369) 4,173 (10,705) (3,392) (57,293)
------------------------------------------------------------------------------------------------------------------------
Cash and Short-term Investments
at Beginning of Period -- 76,959 11,844 12,622 -- 101,425
------------------------------------------------------------------------------------------------------------------------
Cash and Short-term Investments
At End of Period $ -- $ 29,590 $ 16,017 $ 1,917 $ (3,392) $ 44,132
========================================================================================================================
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim reporting purposes. The preparation of these financial
statements requires us to make estimates and judgments that affect the amount of
assets, liabilities, revenues and expenses at the date of our financial
statements. Actual results may differ from these estimates under different
assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. Our critical
accounting policies are described below.
Impairments of long-lived assets - We record impairment losses on long-lived
assets used in operations when events and circumstances indicate that the assets
might be impaired and the undiscounted cash flows estimated to be generated by
those assets are less than the carrying amount of these items. Our cash flow
estimates are based on historical results adjusted to reflect our best estimate
of future market and operating conditions. The net carrying value of assets not
recoverable is reduced to fair value. Our estimates of fair value represent our
best estimate based on industry trends and reference to market rates and
transactions.
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.
Post-retirement benefits - Post-retirement benefits are determined on an
actuarial basis and are affected by assumptions including the discount rate and
expected trends in health care costs. Changes in the discount rate and
differences between actual and expected health care costs will affect the
recorded amount of post-retirement benefits expense ultimately recognized.
Revenue recognition - Revenue is recognized when title to finished product
passes to the customer. Revenue is recognized as the net amount to be received
after deducting estimated amounts for discounts and trade allowances. Revenue
includes amounts paid by customers for shipping and handling.
Deferred income taxes - Deferred income tax assets and liabilities are based on
the differences between the financial statement carrying amounts and the tax
bases as well as temporary differences resulting from differing treatment of
items for tax and accounting purposes. Deferred tax assets are regularly
reviewed for recoverability and a valuation allowance is established based on
historical taxable income, projected future taxable income, and the expected
timing of the reversals of existing temporary differences. If we continue to
operate at a loss or are unable to generate sufficient future taxable income, or
if there is a material change in the actual effective tax rates or time period
within which the underlying temporary differences become taxable or deductible,
a valuation allowance against all or a significant portion of our deferred tax
assets may be required.
Inventory valuation - Inventories are stated at the lower of cost or estimated
net realizable value. The average cost of inventories is determined using the
first-in, first-out method. The nitrogen and methanol
16
industries are characterized by rapid change in both demand and pricing. Rapid
declines in demand could result in temporary or permanent curtailment of
production, while rapid declines in price could result in a lower of cost or
market adjustment.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2002 COMPARED WITH
QUARTER ENDED SEPTEMBER 30, 2001
CONSOLIDATED RESULTS
The loss for the three months ending September 30, 2002 was $12.9 million and
included an $11 million loss on discontinued operations. The loss from
discontinued operations is due to a $17 million increase to our reserves for
contingent liabilities related to discontinued operations. Approximately $13
million of the charge is attributable to discontinued coal operations in
response to higher-than-expected retiree health care costs and increased
payments to UMWA funds for which the company is contingently liable under the
Coal Industry Retiree Health Benefit Act of 1992. In response to recent benefit
cost increases, we revised our future cost projections. The remaining $4 million
was provided to cover estimated litigation damages and to provide reserves
against notes receivable and other assets associated with previously
discontinued operations. The $11 million charge represents the $17 million
increase to reserve balances net of $6 million income tax benefit.
Terra reported a net loss from continuing operations of $1.9 million for the
2002 third quarter compared with a 2001 net loss of $24.1 million. The reduced
2002 loss was primarily related to increased operating income as the result of
lower natural gas costs. Goodwill amortization was $4.7 million during the 2001
third quarter and zero in 2002 due to the January 1, 2002 goodwill accounting
change.
Terra classifies its operations into two business segments: nitrogen products
and methanol. The nitrogen products segment represents operations directly
related to the wholesale sales of nitrogen products from Terra's ammonia
production and upgrading facilities. The methanol segment represents wholesale
sales of methanol produced by Terra's two methanol manufacturing plants.
Total revenues and operating income (loss) by segment for the three-month period
ended September 30, 2002 and 2001 follow:
(in thousands) 2002 2001
-----------------------------------------------------------------------------
REVENUES:
Nitrogen Products $ 211,103 $ 209,224
Methanol 46,772 28,000
Other 799 481
-----------------------------------------------------------------------------
$ 258,674 $ 237,705
=============================================================================
OPERATING INCOME (LOSS):
Nitrogen Products, before product claim costs $ 4,241 $ (21,328)
Methanol 6,696 (5,109)
Other income - net (1,137) 229
-----------------------------------------------------------------------------
$ 9,800 $ (26,208)
=============================================================================
17
NITROGEN PRODUCTS
Volumes and prices for the three-month periods ended September 30, 2002 and 2001
follow:
VOLUMES AND PRICES
2002 2001
--------------------------------------------------------------------------------------------------------
Sales Average Sales Average
(quantities in thousands of tons) Volumes Unit Price Volumes Unit Price
--------------------------------------------------------------------------------------------------------
Ammonia 354 $ 140 315 $ 154
Nitrogen solutions 967 73 989 80
Urea 138 126 65 128
Ammonium nitrate 239 118 257 124
--------------------------------------------------------------------------------------------------------
Nitrogen products segment revenues increased $1.9 million to $211.1 million in
the 2002 third quarter compared with $209.2 million in the 2001 third quarter.
The effects of higher 2002 sales volumes were mostly offset by lower selling
prices. Sales volumes in 2002 were affected by the availability of product due
to the plant turnarounds. Selling prices in the third quarter approximated the
second quarter of 2002, but declined from last year as the result of increased
global nitrogen supplies.
The nitrogen products segment had operating income of $4.2 million for the third
quarter of 2002 compared with an operating loss of $21.3 million for the 2002
third quarter. The effect of lower selling prices on 2002 operating income was
more than offset by higher sales volumes and lower product costs. Third quarter
2002 product costs were lower due to lower natural gas costs during the 2002
second and third quarters. Third quarter natural gas costs declined $10.6
million from the 2001 third quarter as unit costs, net of forward pricing gains
and losses, were $2.81/MMBtu during the 2002 third quarter compared to
$3.11/MMBtu during the same 2001 period. In addition, a considerable amount of
2001 third quarter product costs represented products manufactured during the
2001 second quarter when gas costs averaged $4.45/MMBtu; in contrast, during
2002 there was substantially less second quarter carryover inventory and most
sales were sourced from current production. As a result of forward price
contracts, third quarter 2002 natural gas costs for the nitrogen products
segment were $2.5 million lower than spot prices. During the 2001 third quarter,
$4.2 million of goodwill amortization was charged to the nitrogen products
segment.
METHANOL
For the three months ended September 30, 2002 and 2001 the Methanol segment had
revenues of $46.8 million and $28.0 million, respectively. Sales volumes
increased 29% from prior year levels and selling prices increased from
$.43/gallon in 2001 to $.56/gallon in 2002.
The methanol segment had operating income of $6.7 million for the 2002 third
quarter compared to an operating loss of $5.1 million for the 2001 third
quarter. The increase to operating income was due to higher prices and volumes
and lower natural gas costs, which net of forward pricing gains and losses, were
$3.06/MMBtu during the 2002 third quarter compared to $3.31/MMBtu during the
2001 period. As a result of forward pricing contracts, third quarter 2002
natural gas costs for the methanol were $1.1 million lower than spot prices.
During the 2001 third quarter, $544,000 of goodwill amortization was charged to
the methanol segment.
18
OTHER INCOME - NET
Terra had other operating losses of $1.1 million in the 2002 third quarter
compared to $0.2 million operating income in the 2001 third quarter. The
increase to expenses relate primarily to legal expenses related to discontinued
operations.
PRODUCT CLAIM COSTS
During the 2001 second quarter, and based on the finding of a British court,
Terra recorded a $14 million charge to reflect the estimated value of claims
(plus interest and attorney fees) associated with recalls of carbonated
beverages containing carbon dioxide tainted with benzene. Terra's management
believes it has recourse for these claims against its insurer and the previous
owner of Terra's U.K. operations. Management is pursuing Terra's rights against
these parties, but there will be no income recognition for those rights until
settlements are finalized.
INTEREST EXPENSE - NET
Interest expense, net of interest income, totaled $13.3 million during the 2002
third quarter compared with $11.1 million for the prior year period. The
increase is attributable to the higher cost of borrowing related to the October
2001 issuance of Senior Secured Notes.
MINORITY INTEREST
Minority interest represents third-party interests in the earnings of the
publicly held common units of Terra Nitrogen Company, L.P. (TNCLP). Minority
interest charges of $.5 million were recorded for the 2002 third quarter as the
result of TNCLP income, which were included in their entirety in consolidated
operating results. The increased charge as compared to the 2001 third quarter
reflected higher nitrogen earnings for TNCLP.
INCOME TAXES
Income taxes for the third quarter 2002 were recorded at an effective tax rate
of 40%, Terra's estimated annual effective tax rate.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED WITH
NINE MONTHS ENDED SEPTEMBER 30, 2001
CONSOLIDATED RESULTS
The loss for the nine months ending September 30, 2002 was $236.5 million, which
included a $206 million charge for the cumulative effect of a change in
accounting for goodwill and an $11 million loss on discontinued operations. In
accordance with our implementation of Statement of Financial Accounting
Standards (SFAS") No. 142, "Goodwill and Other Intangible Assets," we determined
that $206 million of assets classified as "Excess of cost over net assets of
acquired businesses" suffered impairment and had no value. These assets were
written off during the 2002 first quarter. The loss from discontinued operations
is due to a $17 million increase to our reserves for contingent liabilities
related to discontinued operations taken during the third quarter. This $11
million charge represents the $17 million increase to reserve balances net of $6
million income tax benefit.
19
Terra reported a net loss from continuing operations of $19.5 million for the
nine months ended September 30, 2002 compared with a net loss of $51.0 million
in 2001. The reduction in the 2002 loss was primarily related to higher
operating income as the result of lower natural gas costs, higher sales volumes,
and 2001 product claim costs, partially offset by lower product prices. Goodwill
amortization was $14.1 million during the first nine months of 2001 and zero in
2002 due to the January 1, 2002 goodwill accounting change.
Terra classifies its operations into two business segments: nitrogen products
and methanol. The nitrogen products segment represents operations directly
related to the wholesale sales of nitrogen products from Terra's ammonia
production and upgrading facilities. The methanol segment represents wholesale
sales of methanol produced by Terra's two methanol manufacturing plants.
Total revenues and operating income (loss) by segment for the nine-month periods
ended September 30, 2002 and 2001 follows:
(in thousands) 2002 2001
-----------------------------------------------------------------------------
REVENUES:
Nitrogen Products $ 653,753 $ 661,065
Methanol 116,928 141,011
Other 1,051 1,001
-----------------------------------------------------------------------------
$ 771,732 $ 803,077
=============================================================================
OPERATING INCOME (LOSS):
Nitrogen Products, before product claim costs $ 7,111 $ (21,153)
Less product claim costs -- (14,023)
-----------------------------------------------------------------------------
Net nitrogen products 7,111 (35,176)
Methanol 3,782 (6,082)
Other income - net (1,871) 994
-----------------------------------------------------------------------------
$ 9,022 $ (40,264)
=============================================================================
NITROGEN PRODUCTS
Volumes and prices for the nine-month periods ended September 30, 2002 and 2001
follow:
VOLUMES AND PRICES
2002 2001
---------------------------------------------------------------------------------------------------------
Sales Average Sales Average
(quantities in thousands of tons) Volumes Unit Price Volumes Unit Price
---------------------------------------------------------------------------------------------------------
Ammonia 1,147 $ 141 854 $ 204
Nitrogen solutions 2,904 72 2,324 108
Urea 482 117 294 157
Ammonium nitrate 690 119 490 129
---------------------------------------------------------------------------------------------------------
Nitrogen products segment revenues declined $7.3 million to $653.8 million in
the 2002 first nine months compared with $661.1 million in the 2001 first nine
months. Selling prices declined $154 million as the result of increased nitrogen
fertilizer supplies in contrast to the previous year when high natural gas costs
resulted in industry-wide production curtailments leading up to the 2001
planting season. Most of the revenue shortfall from lower sales prices was
offset by higher 2002 volumes as compared to last year's first nine months.
Sales volumes in 2001 were depressed due to lower production rates, reduced
demand in response to high prices and increased competition from imports.
20
The nitrogen products segment had operating income of $7.1 million for the first
nine months of 2002 compared with an operating loss of $21.2 million before
product claim costs for the 2001 first nine months, before product claim costs
(discussed below). The increase in operating income was primarily related to
lower natural gas costs and higher selling volumes, offset in part by lower
sales prices. Natural gas costs declined almost $167 million over the 2001 first
nine months as unit costs, net of forward pricing gains and losses, decreased to
$2.80/MMBtu during the 2002 first nine months compared to $4.40/MMBtu during the
2001 period. Lower natural gas costs also reduced the need to curtail production
rates, as was the case in 2001 until nitrogen prices rose to levels covering the
higher gas costs. As a result of forward price contracts, the first nine months
2002 natural gas costs for the nitrogen products segment were $6.8 million lower
than spot prices. Goodwill amortization during the first nine months of 2001 was
$12.5 million.
METHANOL
For the nine months ended September 30, 2002 and 2001 the methanol segment had
revenues of $116.9 million and $141 million, respectively. Sales volumes
increased 16% from prior year levels, but selling prices declined from
$.63/gallon in 2001 to $.46/gallon in 2002.
The methanol segment generated $3.8 million operating income in the 2002 first
nine months compared to a $6.1 million operating loss in the 2001 first nine
months. The higher operating income reflects lower selling prices that were more
than offset by lower costs and increased volumes. The major cost decrease was to
natural gas costs which, net of forward pricing gains and losses, decreased to
$2.89/MMBtu, during the 2002 first nine months compared to $4.41/MMBtu during
the 2001 period. Lower natural gas costs also reduced the need to curtail
production rates, as was the cases in 2001 until methanol prices were below cash
production costs. The first nine months 2002 natural gas costs were $1.8 million
lower than spot prices as a result of forward pricing contracts. Goodwill
amortization during the first nine months of 2001 was $1.6 million.
PRODUCT CLAIM COSTS
Based on the finding of British court, during the 2001 first half Terra recorded
a $14 million charge to reflect the estimated value of claims (plus interest and
attorney fees) associated with recalls of carbonated beverages containing carbon
dioxide tainted with benzene. Terra's management believes it has recourse for
these claims against its insurer and the previous owner of Terra's U.K.
operations. Management is pursuing Terra's rights against these parties, but
there will be no income recognition for those rights until settlements are
finalized.
OTHER INCOME - NET
Terra had other operating losses of $1.9 million in the 2002 first nine months
compared to $1.0 million operating income in the 2001 first nine months. The
increase in expenses primarily related to fees associated with credit agreement
amendments and legal expenses related to discontinued operations.
INTEREST EXPENSE - NET
Interest expense, net of interest income, totaled $39.8 million during the 2002
first nine months compared with $35 million for the prior year period. The
increase is attributable to the higher cost of borrowing related to the October
2001 issuance of Senior Secured Notes.
21
MINORITY INTEREST
Minority interest represents third-party interests in the earnings of the
publicly held common units of Terra Nitrogen Company, L.P. (TNCLP). Minority
interest charges of $1.8 million were recorded for the 2002 first nine months as
the result of TNCLP earnings, which were included in their entirety in
consolidated operating results. The increased charge as compared to the 2001
first half reflected higher nitrogen earnings for TNCLP.
INCOME TAXES
Income taxes for the first nine months of 2002 were recorded at an effective tax
rate of 40%, Terra's estimated annual effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Our primary uses of funds will be to fund our working capital requirements, make
payments on our debt and other obligations and make capital expenditures. The
principal sources of funds will be cash flow from operations and borrowings
under available bank facilities.
Net cash generated from operations in the first nine months of 2002 was $92.4
million, composed of $42.5 million of cash provided from operating activities
and $49.9 million of decreases to working capital balances. The decrease in
working capital primarily consisted of lower accounts receivable, inventories
and other current assets.
We have a $175 million revolving credit facility that expires in June 2005.
Borrowing availability under the credit facility is generally based on 85% of
eligible accounts receivable and 65% of eligible inventory, less outstanding
letters of credit. At September 30, 2002, we had no outstanding revolving credit
borrowings and $18.8 million in outstanding letters of credit, resulting in
remaining borrowing availability of approximately $117.4 million under the
facility. We expect the facility to be adequate to meet our operating cash
needs. The credit facility also requires that we adhere to certain limitations
on additional debt, capital expenditures, acquisitions, liens, asset sales,
investments, prepayments of subordinated indebtedness, changes in lines of
business and transactions with affiliates. In June, 2002 our credit facility was
amended to remove the required minimum level of earnings before interest, income
taxes, depreciation, amortization and other non-cash items ("EBITDA") as long as
our borrowing availability is $60 million or more. If our borrowing availability
falls below $60 million after December 31, 2002, we are required to have
achieved minimum EBITDA of $60 million during the most recent four quarters.
Prior to December 31, 2002, a reduced EBITDA requirement is in effect, which is
$50 million for the four quarters ending September 30, 2002.
During the first nine months of 2002 and 2001, we funded plant and equipment
purchases of $16.6 million and $11.1 million, respectively, primarily for
replacement or stay-in-business capital needs. We expect 2002 plant and
equipment purchases to approximate $25 million consisting primarily of the
expenditures for routine replacement of equipment at manufacturing facilities.
In addition, a turnaround is scheduled for our Billingham facility with
estimated cash expenditures of $5 million.
On December 17, 1997, we announced that we were resuming purchases of common
units of TNCLP on the open market and through privately negotiated transactions.
We acquired 183,500 common units during the first quarter of 2001 at a cost of
$1.7 million. Additional purchases of TNCLP common units are restricted under
the terms of our revolving credit agreement as described therein. Additional
22
purchases of common units by the General Partner are restricted under the terms
of Terra's bank credit agreement as described therein.
During the first nine months of 2002 and 2001 we distributed $0.9 million and $2
million, respectively, to the minority TNCLP common unitholders. TNCLP
distributions are based on "Available Cash" (as defined in the Partnership
Agreement). On October 24, 2002, the Partnership declared a $3.8 million
distribution ($0.20 per common unit) payable November 22 to record holders as of
November 1, 2002.
Cash balances at September 30, 2002 were $41.9 million, all of which is
unrestricted.
POTENTIAL CHANGE OF CONTROL
Anglo American plc, through its wholly-owned subsidiaries, owns 48.8% of Terra
Industries' outstanding shares. Anglo American has made public its intention to
dispose of its interest in Terra Industries with the timing based on market and
other conditions.
FORWARD-LOOKING PRECAUTIONS
Information contained in this report, other than historical information, may be
considered forward looking. Forward-looking information reflects management's
current views of future events and financial performance that involve a number
of risks and uncertainties. The factors that could cause actual results to
differ materially include, but are not limited to, the following: changes in
financial markets, general economic conditions within the agricultural industry,
competitive factors and price changes (principally, sales prices of nitrogen and
methanol products and natural gas costs), changes in product mix, changes in the
seasonality of demand patterns, changes in weather conditions, changes in
agricultural regulations, and other risks detailed in the "Factors that Affect
Operating Results" section of Terra's most recent Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded, based on
their evaluation within 90 days of the filing date of this report, that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange Commission's
rules and forms. There have been no significant changes in our internal controls
or in other factors that could significantly affect these controls subsequent to
the date of the previously mentioned evaluation.
23
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Exhibit 99.1 Certification pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) REPORTS ON FORM 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TERRA INDUSTRIES INC.
Date: November 1, 2002 /s/ Francis G. Meyer
-----------------------------------------
Francis G. Meyer
Senior Vice President and Chief Financial
Officer and a duly authorized signatory
24
CERTIFICATIONS
I, Michael L. Bennett, President and Chief Executive Officer, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Terra
Industries Inc.;
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 1, 2002
/s/ Michael L. Bennett
-----------------------------------------
Michael L. Bennett
President and Chief Executive Officer
25
I, Francis G. Meyer, Senior Vice President and Chief Financial Officer,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Terra
Industries Inc.;
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 1, 2002
/s/ Francis G. Meyer
-----------------------------------------
Francis G. Meyer
Senior Vice President and
Chief Financial Officer
26