UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2006

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

For the transition period from                     to                     

TERRA INDUSTRIES INC.

(Exact name of registrant as specified in its charter)

Maryland (State or other jurisdiction of incorporation or organization)		52-1145429 (I.R.S. Employer Identification No.)
Terra Centre P.O. Box 6000 600 Fourth Street Sioux City, Iowa (Address of principal executive offices)		51102-6000 (Zip Code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

Large accelerated 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 Exchange Act). o Yes þ No

     As of October 23, 2006, the following shares of the registrant’s stock were outstanding:

Common Shares, without par value		92,605,538 shares

 

 

TABLE OF CONTENTS

Part I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets			3
Consolidated Statements of Operations			4
Consolidated Statements of Cash Flows			5
Consolidated Statements of Changes in Common Shareholders’ Equity			6
Notes to Consolidated Financial Statements			7
Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations			31
Item 3. Quantitative and Qualitative Disclosures About Market Risk			38
Item 4. Controls and Procedures			38
Part II — OTHER INFORMATION
Item 1. Legal Proceedings			39
Item 1A. Risk Factors			39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 3. Defaults Upon Senior Securities			39
Item 4. Submission of Matters to a Vote of Security Holders			39
Item 5. Other Information			40
Item 6. Exhibits			41
Amendment No.3 to Amended and Restated Credit Agreement
302 Certification of Chief Executive Officer
302 Certification of Chief Financial Officer
Section 906 Certification

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TERRA INDUSTRIES INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

		September 30,				December 31,				September 30,
		2006				2005				2005
Assets
Cash and cash equivalents		$	122,170			$	86,366			$	166,704
Restricted cash			—				8,595				8,861
Accounts receivable, less allowance for doubtful accounts of $371, $234 and $233			193,339				206,407				176,487
Inventories			160,191				190,314				144,963
Other current assets			26,158				54,578				84,792
Total current assets			501,858				546,260				581,807
Property, plant and equipment, net			722,952				733,536				764,737
Equity method investments			161,455				183,884				190,805
Deferred plant turnaround costs, net			40,577				27,447				22,272
Intangible assets, net			6,115				7,526				20,166
Other assets			27,164				24,972				5,316
Total assets		$	1,460,121			$	1,523,625			$	1,585,103
Liabilities
Accounts payable		$	115,734			$	125,863			$	105,163
Customer prepayments			27,949				52,913				34,081
Accrued expenses and other current liabilities			80,970				84,996				123,118
Debt due within one year			4				38				77
Total current liabilities			224,657				263,810				262,439
Long-term debt and capital lease obligations			331,300				331,300				331,304
Deferred income taxes			58,922				65,998				95,655
Pension liabilities			112,729				120,236				102,322
Other liabilities			37,619				41,320				51,138
Minority interest			95,014				92,258				95,698
Total liabilities and minority interest			860,241				914,922				938,556
Preferred Stock — liquidation value of $120,000			115,800				115,800				115,800
Common Shareholders’ Equity
Capital stock
Common Shares, authorized 133,500 shares; 92,639 outstanding; 95,171 and 93,870			144,968				146,994				146,997
Paid-in capital			693,944				712,671				712,681
Accumulated other comprehensive loss			(52,362	)			(70,143	)			(48,003	)
Unearned compensation			—				(5,369	)			(6,085	)
Accumulated deficit			(302,470	)			(291,250	)			(274,843	)
Total common shareholders’ equity			484,080				492,903				530,747
Total liabilities and minority interest, preferred stock and common shareholders’ equity		$	1,460,121			$	1,523,625			$	1,585,103

See Accompanying Notes to the Consolidated Financial Statements.

TERRA INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per-share amounts)
(unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Revenues
Product revenues		$	461,533			$	484,082			$	1,381,084			$	1,419,420
Other income			3,248				1,612				6,135				6,279
Total revenues			464,781				485,694				1,387,219				1,425,699
Costs and Expenses
Cost of sales			422,523				446,908				1,337,210				1,269,238
Selling, general and administrative expense			13,679				10,139				38,395				36,638
Equity in earnings of unconsolidated affiliates			(809	)			(3,330	)			(15,830	)			(12,737	)
			435,393				453,717				1,359,775				1,293,139
Income from operations			29,388				31,977				27,444				132,560
Interest income			2,091				2,970				5,499				6,391
Interest expense			(11,786	)			(11,829	)			(35,340	)			(41,812	)
Loss on early retirement of debt			—				—				—				(27,193	)
Change in fair value of warrant liability			—				—				—				8,860
Income (loss) before income taxes and minority interest			19,693				23,118				(2,397	)			78,806
Income tax benefit (provision)			(6,000	)			(7,704	)			2,002				(25,864	)
Minority interest			(3,352	)			(4,328	)			(7,000	)			(15,723	)
Net income (loss)			10,341				11,086				(7,395	)			37,219
Preferred share dividends			(1,275	)			(1,275	)			(3,825	)			(3,859	)
Net Income (Loss) Available to Common Shareholders		$	9,066			$	9,811			$	(11,220	)		$	33,360
Basic and diluted income (loss) per share:
Basic		$	0.10			$	0.10			$	(0.12	)		$	0.36
Diluted		$	0.10			$	0.10			$	(0.12	)		$	0.35
Basic and diluted weighted average shares outstanding:
Basic			91,817				93,416				92,994				92,087
Diluted			93,405				95,219				92,994				106,942

See Accompanying Notes to the Consolidated Financial Statements.

TERRA INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

		Nine Months Ended
		September 30,
		2006				2005
Operating Activities
Net income (loss)		$	(7,395	)		$	37,219
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Depreciation of property, plant and equipment and amortization of deferred plant turnaround costs			78,859				83,569
Deferred income taxes			(2,002	)			29,553
Minority interest in earnings			7,000				15,723
Equity in undistributed earnings			9,135				(12,737	)
Non-cash loss on derivatives			2,775				8,057
Share-based compensation			4,285				1,684
Amortization of intangible and other assets			8,128				7,427
Non-cash loss on early retirement of debt			—				22,543
Change in fair value of warrant liability			—				(8,860	)
Term loan discount accretion			—				1,773
Changes in operating assets and liabilities:
Accounts receivable			25,785				(28,901	)
Inventories			36,592				(1,480	)
Accounts payable and customer prepayments			(38,859	)			(92,737	)
Other assets and liabilities, net			(21,029	)			11,693
Net cash flows from operating activities			103,274				74,526
Investing Activities
Purchase of property, plant and equipment			(40,785	)			(17,406	)
Plant turnaround expenditures			(31,987	)			(9,677	)
Distributions received from unconsolidated affiliates			9,660				33,125
Changes in restricted cash			8,595				(8,861	)
Proceeds from the sale of property, plant and equipment			9,666				6,485
Net cash flows from investing activities			(44,851	)			3,666
Financing Activities
Payments under borrowings arrangements			(34	)			(125,124	)
Preferred share dividends paid			(3,825	)			(4,675	)
Payments under share repurchase program			(18,796	)			—
Proceeds from exercise of stock options			363				160
Distributions to minority interests			(4,244	)			(12,223	)
Net cash flows from financing activities			(26,536	)			(141,862	)
Effect of exchange rate changes on cash			3,917				(3,424	)
Increase (decrease) to cash and cash equivalents			35,804				(67,094	)
Cash and cash equivalents at beginning of period			86,366				233,798
Cash and cash equivalents at end of period		$	122,170			$	166,704
Supplemental cash flow information:
Interest paid		$	21,394			$	24,572
Income tax refunds received		$	—			$	11,049
Income taxes paid		$	1,569			$	398

See Accompanying Notes to the Consolidated Financial Statements.

TERRA INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

(in thousands)

										Accumulated
										Other
		Common				Paid-In				Comprehensive				Unearned				Accumulated								Comprehensive
		Stock				Capital				Loss				Compensation				Deficit				Total				Income
Balance at January 1, 2006		$	146,994			$	712,671			$	(70,143	)		$	(5,369	)		$	(291,250	)		$	492,903
Comprehensive income (loss):
Net loss			—				—				—				—				(7,395	)			(7,395	)		$	(7,395	)
Foreign currency translation adjustment			—				—				22,638				—				—				22,638				22,638
Change in fair value of derivatives, net of taxes of $2,589			—				—				(4,857	)			—				—				(4,857	)			(4,857	)
Comprehensive income																										$	10,386
Preferred share dividends			—				—				—				—				(3,825	)			(3,825	)
Exercise of stock options			95				268				—				—				—				363
Nonvested stock			554				549				—				—				—				1,103
Shares purchased and retired under share repurchase program			(2,675	)			(16,121	)			—				—				—				(18,796	)
Reclassification for adoption of FAS 123 R			—				(5,369	)			—				5,369				—				—
Share-based compensation			—				1,946				—				—				—				1,946
Balance at September 30, 2006		$	144,968			$	693,944			$	(52,362	)		$	—			$	(302,470	)		$	484,080

										Accumulated
										Other
		Common				Paid-In				Comprehensive				Unearned				Accumulated								Comprehensive
		Stock				Capital				Loss				Compensation				Deficit				Total				Income
Balance at January 1, 2005		$	144,531			$	681,639			$	(55,994	)		$	(2,568	)		$	(308,203	)		$	459,405
Comprehensive income (loss):
Net income			—				—				—				—				37,219				37,219			$	37,219
Foreign currency translation adjustment			—				—				(20,924	)			—				—				(20,924	)			(20,924	)
Change in fair value of derivatives, net of taxes of $5,691			—				—				28,915				—				—				28,915				28,915
Comprehensive income																										$	45,210
Preferred share dividends			—				—				—				—				(3,859	)			(3,859	)
Conversion of preferred shares			2,069				14,650				—				—				—				16,719
Reclassification of warrant liability			—				12,240				—				—				—				12,240
Exercise of stock options			57				103				—				—				—				160
Nonvested stock			340				4,049				—				(4,800	)			—				(411	)
Amortization of unearned compensation			—				—				—				1,283				—				1,283
Balance at September 30, 2005		$	146,997			$	712,681			$	(48,003	)		$	(6,085	)		$	(274,843	)		$	530,747

See Accompanying Notes to the Consolidated Financial Statements.

TERRA INDUSTRIES INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.		Financial Statement Presentation
		Basis of Presentation
		The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments necessary, in the opinion of management, to summarize fairly the financial position of Terra Industries Inc. and all majority-owned subsidiaries (“Terra”, “the Company” and “it”) and the results of operations for the periods presented. Because of the seasonal nature of Terra’s operations and effects of weather-related conditions in several of its marketing areas, results of any interim reporting period should not be considered as indicative of results for a full year. These statements should be read in conjunction with the Company’s 2005 Annual Report on Form 10-K to Shareholders.
		Revenue Recognition
		Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, no obligations remain and collectibility is probable.
		Revenues are primarily comprised of sales of the Company’s nitrogen- and methanol-based products, including any realized hedging gains or losses related to nitrogen product derivatives, and are reduced by estimated discounts and trade allowances. Revenues also include profit sharing revenue under the Methanex supply contract when the estimated margin on an annualized basis is probable. Revenues include amounts related to shipping and handling charges to the Company’s customers.
		Cost of Sales
		Costs of sales are primarily related to manufacturing costs related to the Company’s nitrogen- and methanol-based products, including any realized hedging gains or losses related to natural gas derivatives. Cost of sales includes amounts related to shipping and handling charges to the Company’s customers.
		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.

		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 Company’s 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 provisions 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 11).
		On November 10, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. SFAS 123 R-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Awards.” The alternative transition method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee share-based compensation, and to determine the subsequent impact on the APIC pool and consolidated statements of cash flows of the tax effects of employee share-based compensation awards that are outstanding upon adoption of SFAS 123 R.
		Plant Turnaround Costs
		Costs related to the periodic scheduled major maintenance of continuous process production facilities (plant turnarounds) are deferred and charged to product costs on a straight-line basis during the period until the next scheduled turnaround , generally two years.
		Impairment of Long-Lived Assets
		Terra reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows expected to result from the use of the asset (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized based on the difference between the carrying amount and the fair value of the asset.
		Use of Estimates in Preparation of the Financial Statements
		The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2.		Income (Loss) Per Share
		Basic income (loss) per share data is based on the weighted-average number of Common Shares outstanding during the period. Diluted income (loss) per share data is based on the weighted-average number of Common Shares outstanding and the effect of all dilutive potential common shares including stock options, nonvested shares, convertible preferred shares and common stock warrants. Nonvested stock carries dividend and voting rights, but is not involved in the weighted average number of common shares outstanding used to compute basic income (loss) per share.
		The following table provides a reconciliation between basic and diluted income (loss) per share for the three- and nine-month periods ended September 30, 2006 and 2005:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(in thousands, except per-share amounts)		2006				2005				2006				2005
Basic income (loss) per share computation:
Income (loss) from continuing operations		$	10,341			$	11,086			$	(7,395	)		$	37,219
Less: Preferred share dividends			(1,275	)			(1,275	)			(3,825	)			(3,859	)
Income (loss) available to common shareholders		$	9,066			$	9,811			$	(11,220	)		$	33,360
Weighted average shares outstanding			91,817				93,416				92,994				92,087
Basic income (loss) per common share		$	0.10			$	0.10			$	(0.12	)		$	0.36
Diluted income (loss) per share computation:
Income (loss) available to common shareholders		$	9,066			$	9,811			$	(11,220	)		$	33,360
Add: Preferred share dividends			—				—				—				3,859
Income (loss) available to common shareholders and assumed conversions		$	9,066			$	9,811			$	(11,220	)		$	37,219
Weighted average shares outstanding			91,817				93,416				92,994				92,087
Add incremental shares from assumed conversions:
Preferred shares			—				—				—				13,450
Nonvested stock			596				518				—				610
Common stock warrants			846				1,093				—				598
Common stock options			146				192				—				197
Dilutive potential common shares			93,405				95,219				92,994				106,942
Diluted income (loss) per common share		$	0.10			$	0.10			$	(0.12	)		$	0.35

For the three- and nine-month periods ended September 30, 2006 and 2005, common stock options totaling 0.1 million shares were excluded from the computation of diluted income per share because the exercise prices of these options exceeded the average market price of the Company’s stock for the respective periods, and the effect of their inclusion would have been antidilutive.

		For the three-month periods ending September 30, 2006 and 2005, preferred shares of 0.1 million were excluded from the computation of diluted earnings per share. These preferred shares were antidilutive using the if-converted method.
		For the nine-month period ended September 30, 2006, all preferred shares, nonvested stock, common stock warrants and common stock options were antidilutive because the Company was in a net loss position. As such, these instruments were excluded from the computation of the diluted income (loss) per share for the nine-month period ended September 30, 2006.
3.		Inventories
		Inventories consisted of the following:

		September 30,				December 31,				September 30,
(in thousands)		2006				2005				2005
Raw materials		$	29,679			$	22,487			$	21,593
Supplies			53,642				55,647				53,763
Finished goods			76,870				112,180				69,607
Total		$	160,191			$	190,314			$	144,963

		Inventory is valued at actual first in — first out cost. Costs include raw material, labor and overhead.
4.		Derivative Financial Instruments
		Terra manages risk using derivative financial instruments for (a) changes in natural gas supply prices (b) interest rate fluctuations (c) changes in nitrogen prices and (d) currency. Derivative financial instruments have credit risk and market risk.
		To manage credit risk, Terra enters into derivative transactions only with counter-parties who are currently rated as BBB or better or equivalent as recognized by a national rating agency. Terra will not enter into transactions with a counter-party if the additional transaction will result in credit exposure exceeding $20 million. The credit rating of counter-parties may be modified through guarantees, letters of credit or other credit enhancement vehicles.
		Terra classifies a derivative financial instrument as a hedge if all of the following conditions are met:

	1.		The item to be hedged must expose Terra to currency, interest or price risk.
	2.		It must be probable that the results of the hedge position substantially offset the effects of currency, interest or price changes on the hedged item (e.g., there is a high correlation between the hedge position and changes in market value of the hedge item).
	3.		The derivative financial instrument must be designated as a hedge of the item at the inception of the hedge.

Natural gas supplies to meet production requirements at Terra’s North American and United Kingdom (U.K.) production facilities are purchased at market prices. Natural gas market prices are volatile and Terra effectively fixes prices for a portion of its natural gas production requirements and inventory through the use of futures contracts, swaps and options. The North American contracts reference physical natural gas prices or appropriate NYMEX futures contract prices. Contract physical prices for North America are frequently based on prices at the Henry Hub in Louisiana, the most common and financially liquid location of reference for financial derivatives related to natural gas. However, natural gas supplies for Terra’s North American production facilities are purchased at

		locations other than Henry Hub, which often creates a location basis differential between the contract price and the physical price of natural gas. Accordingly, the use of financial derivatives may not exactly offset the change in the price of physical gas. The U.K. contracts are based on the Intercontinental Exchange (ICE) index price. Physical delivery prices in the U.K. are based on the ICE index. The contracts are traded in months forward and settlement dates are scheduled to coincide with gas purchases during that future period.
		A swap is a contract between Terra and a third party to exchange cash based on a designated price. Option contracts give the holder the right to either own or sell a futures or swap contract. The futures contracts require maintenance of cash balances generally 10% to 20% of the contract value and option contracts require initial premium payments ranging from 2% to 5% of contract value. Basis swap contracts require payments to or from Terra for the amount, if any, that monthly published gas prices from the source specified in the contract differ from the prices of a NYMEX natural gas futures during a specified period. There are no initial cash requirements related to the swap and basis swap agreements.
		Terra 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 open natural gas derivative contracts at September 30, 2006 and 2005:

		Other				Other
		Current				Current				Deferred				Net
(in thousands)		Assets				Liabilities				Taxes				Asset (Liability)
September 30, 2006		$	7,050			$	(22,129	)			5,365			$	(9,714	)
December 31, 2005			22,152				(34,213	)			2,861				(9,200	)
September 30, 2005			61,734				(45,419	)			(5,691	)			10,624

		Certain derivatives outstanding at September 30, 2006 and 2005, which settled during October 2006 and 2005, respectively, are included in the position of open natural gas derivatives in the table above. The October 2006 derivatives settled for an approximate $14.5 million loss. All open derivatives will settle during the next 12 months.
		At September 30, 2006, the Company determined that certain derivative contracts were ineffective hedges for accounting purposes and recorded a charge of $1.2 million and $2.8 million to cost of sales for the three- and nine-month periods ending September 30, 2006, respectively. Derivatives outstanding at September 30, 2005 included gains of $0.5 million and $1.0 million that were recorded as an ineffective position and credited to cost of sales for the three- and nine-month periods ending September 30, 2005, respectively.
		The effective portion of gains and losses on derivative contracts that qualify for hedge treatment are carried as accumulated other comprehensive income (loss) and credited or charged to cost of sales in the month in which the hedged transaction settles. Gains and losses on the contracts that do not qualify for hedge treatment are credited or charged to cost of sales based on the positions’ fair value. The risk and reward of outstanding natural gas positions are directly related to increases or decreases in natural gas prices in relation to the underlying NYMEX and ICE natural gas contract prices.
		The activity to accumulated other comprehensive income (loss), net of income taxes, relating to current period hedging transactions for the three-month periods ended September 30, 2006 and 2005 follows:

		Three Months Ended
		September 30,
		2006								2005
(in thousands)		Gross				Net of tax				Gross				Net of tax
Beginning accumulated gain (loss)		$	(7,034	)		$	(4,578	)		$	9,049			$	6,135
Net increase (decrease) in market value			(8,263	)			(5,374	)			20,697				12,835
Reclassification into earnings			(34	)			(14	)			(14,406	)			(9,362	)
Ending accumulated gain (loss)		$	(15,331	)		$	(9,966	)		$	15,340			$	9,608

The activity to accumulated other comprehensive income (loss), net of income taxes, relating to current period hedging transactions for the nine-month periods ended September 30, 2006 and 2005 follows:

		Nine Months Ended
		September 30,
		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			(50,001	)			(32,454	)			38,256				32,884
Reclassification into earnings			42,556				27,597				(6,087	)			(3,969	)
Ending accumulated gain (loss)		$	(15,331	)		$	(9,966	)		$	15,340			$	9,608

		Approximately $10.0 million of the accumulated other comprehensive loss, net of tax, at September 30, 2006 will be reclassified into earnings during the next twelve-month period ending September 30, 2007.
		At times, the Company uses forward derivative instruments to fix or set floor prices for a portion of its nitrogen sales volumes. At September 30, 2006, the Company had no open nitrogen sales swap contracts.
5.		Equity Investments
		Terra’s investments in companies that are accounted for on the equity method of accounting consist of the following: (1) 50% ownership interest in Point Lisas Nitrogen Limited, (“PLNL”) which operates an ammonia production plant in Trinidad (2) 50% interest in an ammonia storage joint venture located in Houston, Texas and (3) 50% interest in a joint venture in Oklahoma CO2 at Terra’s nitrogen plant. These investments were $161,455 at September 30, 2006. Terra includes the net earnings of these investments as an element of income from operations since the investees’ operations provide additional capacity to Terra.

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(in thousands)		2006				2005				2006				2005
Condensed income statement information:
Net sales		$	28,078			$	45,726			$	129,943			$	125,462
Net income		$	4,483			$	13,752			$	32,964			$	43,521
Terra’s equity in earnings of unconsolidated affiliates		$	809			$	3,330			$	15,830			$	12,737

		September 30,				September 30,
(in thousands)		2006				2005
Condensed balance sheet information:
Current assets		$	45,964			$	64,646
Long-lived assets			194,549				199,878
Total assets		$	240,513			$	264,524
Current liabilities		$	26,473			$	22,999
Long-term liabilities			—				188
Equity			214,040				241,337
Total liabilities and equity		$	240,513			$	264,524

		The carrying value of these investments at September 30, 2006 was $54.4 million more than Terra’s share of the affiliates’ book value. The excess is attributable primarily to the step-up in basis for fixed asset values, which is being depreciated over a period of approximately 15 years.
		Terra has transactions in the normal course of business with PLNL whereby Terra is obliged to purchase 50 percent of the ammonia produced by PLNL at current market prices. During the nine-month period ending September 30, 2006, Terra purchased approximately $63.4 million of ammonia from PLNL. As of September 30, 2006 PLNL made cash distributions to its shareholders, of which Terra’s portion was $33.8 million during the nine-month period. During the first nine months of 2005, Terra purchased approximately $59.1 million of ammonia from PLNL. During the first nine months of 2005, Terra’s portion of cash distributions from PLNL was $31.3 million.
		The total distributions from all investments were $34.6 million and $33.1 million for the nine-month periods ended September 30, 2006 and 2005, respectively.

6.		Long-term Debt and Capital Lease Obligation
		Long-term debt and capital lease obligations consisted of the following:

		September 30,				December 31,				September 30,
(in thousands)		2006				2005				2005
Secured Senior Notes, 12.875% due 2008		$	200,000			$	200,000			$	200,000
Second Priority Senior Secured Notes, 11.5%, due 2010			131,300				131,300				131,300
Other			4				38				81
Total long-term debt and capital lease obligations			331,304				331,338				331,381
Less current maturities			4				38				77
Total long-term debt and capital lease obligations		$	331,300			$	331,300			$	331,304

		The Company has revolving credit facilities totaling $200 million that expire September 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. As of September 30, 2006, the Company had borrowing availability of $200 million. These facilities include $50 million only available for the use of Terra Nitrogen Company, L.P. (TNCLP), one of the Company’s consolidated subsidiaries. Borrowings under the revolving credit facility will bear interest at a floating rate plus an applicable margin, which can be either a base rate, or, at the Company’s option, a London Interbank Offered Rate (LIBOR). At September 30, 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 September 30, 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 September 30, 2006, the Company had no outstanding revolving credit borrowings and $17.6 million in outstanding letters of credit. The $17.6 million in outstanding letters of credit reduced the Company’s borrowing availability to $182.4 million at September 30, 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. If the Company’s borrowing availability falls below $60 million, the Company is required to have achieved minimum operating cash flows or earnings before interest, income taxes, depreciation, amortization and other non-cash items of $60 million during the most recent four quarters.
		In March 2005, Terra repaid $50.0 million of the term loan. The discounted book value of debt prior to repayment was $41.9 million. As a result, Terra recognized a loss on the repayment of $8.1 million and other related prepayment charges of $2.7 million during the first quarter of 2005.

		In June 2005, the Company repaid the remaining $75.0 million of the term loan. The discounted book value of the debt prior to repayment was $63.7 million. As a result, the Company recognized a loss on the repayment of $11.3 million and other prepayment charges of $5.1 million during the second quarter of 2005.
7.		Pension Plans
		Terra maintains defined benefit and defined contribution pension plans that cover substantially all salaried and hourly employees. Benefits are based on a pay formula. The defined benefit plans’ assets consist principally of equity securities and corporate and government debt securities. The Company also has certain non-qualified pension plans covering executives, which are unfunded. Terra accrues pension costs based upon annual actuarial valuations for each plan and funds these costs in accordance with statutory requirements.
		The estimated components of net periodic pension expense follow:

		Three Months Ended								Nine Months Ended
		September 30								September 30
(in thousands)		2006				2005				2006				2005
Service cost		$	744			$	683			$	2,232			$	2,048
Interest cost			5,888				3,917				17,664				11,752
Expected return on plan assets			(5,394	)			(3,070	)			(16,182	)			(9,210	)
Amortization of prior service cost			(7	)			6				(21	)			16
Amortization of actuarial loss			1,408				1,222				4,224				3,667
Amortization of net assets			—				12				—				37
Termination charge			291				—				873				—
Pension Expense		$	2,930			$	2,770			$	8,790			$	8,310

		Cash contributions to the defined benefit pension plans for the three months ended September 30, 2006 and 2005 were $8.8 million and $15.1 million, respectively. Cash contributions to the defined benefit pension plans for the nine months ended September 30, 2006 and 2005 were $12.3 million and $19.4 million, respectively.
		In the 2006 third quarter, the Pension Protection Act (PPA) was signed into law. Beginning in 2008, the PPA requires the Company’s qualified pension plans to meet a funding target over seven years. Annual cash funding is expected to equal the value of benefits accrued during the year plus one-seventh of any under-funded amount. The Company is currently evaluating the effects of this legislation.
		Terra also sponsors defined contribution savings plans covering most full-time employees. Contributions made by participating employees are matched based on a specified percentage of employee contributions. The cost of the Company contributions to these plans for the three-month periods ending September 30, 2006 and 2005 totaled $1.2 million and $1.4 million, respectively. Contributions to these plans for the nine-month periods ending September 30, 2006 and 2005 were $4.0 million and $3.7 million, respectively.
		Terra provides health care benefits for certain U.S. employees who retired on or before January 1, 2002. Participant contributions and co-payments are subject to escalation. The plan pays a stated percentage of most medical expenses reduced for any deductible and payments made by government programs. These costs are funded as paid.

8.		Accumulated other comprehensive income (loss)
		Accumulated other comprehensive income (loss) refers to revenues, expenses, gains and losses that under accounting principles generally accepted in the United States are recorded as an element of shareholders’ equity but are excluded from net (loss) income. Terra’s accumulated other comprehensive income (loss) is comprised of (a) adjustments that result from translation of Terra’s foreign entity financial statements from their functional currencies to United States dollars, (b) adjustments that result from translation of intercompany foreign currency transactions that are of a long-term investment nature (that is, settlement is not planned or anticipated in the foreseeable future) between entities that are consolidated in Terra’s financial statements, (c) the offset to the fair value of derivative assets and liabilities (that qualify as hedged relationships) recorded on the balance sheet, and (d) minimum pension liability adjustments.
		The components of accumulated other comprehensive income (loss) for the nine months ended September 30, 2006 and 2005 follow:

		Foreign								Minimum
		Currency				Fair Value of				Pension
		Translation				Derivatives,				Liability, net of
(in thousands)		Adjustment				net of taxes				taxes				Total
Balance December 31, 2005		$	(9,100	)		$	(5,109	)		$	(55,934	)		$	(70,143	)
Change in foreign translation adjustment			22,638				—				—				22,638
Reclassification to earnings			—				27,597				—				27,597
Change in fair value of derivatives			—				(32,454	)			—				(32,454	)
Balance September 30, 2006		$	13,538			$	(9,966	)		$	(55,934	)		$	(52,362	)
Balance December 31, 2004		$	14,287			$	(19,307	)		$	(50,974	)		$	(55,994	)
Change in foreign translation adjustment			(20,924	)			—				—				(20,965	)
Reclassification to earnings			—				3,192				—				3,192
Change in fair value of derivatives			—				25,723				—				25,764
Balance September 30, 2005		$	(6,637	)		$	9,608			$	(50,974	)		$	(48,003	)

9.		Industry Segment Data
		Terra classifies its operations into two business segments: nitrogen products and methanol. The nitrogen products business produces and distributes ammonia, urea, nitrogen solutions, ammonium nitrate and other products to farm distributors and industrial users. The methanol business manufactures and distributes methanol which is used in the production of a variety of chemical derivatives and in the production of methyl tertiary butyl ether (MTBE), an oxygenate and an octane enhancer for gasoline. Terra does not allocate interest, income taxes or corporate-related charges to business segments. Included in Other are general corporate activities not attributable to a specific industry segment.

The following summarizes operating results by business segment:

		Three Months Ended								Nine Months Ended
		September 30								September 30
(in thousands)		2006				2005				2006				2005
Revenues — Nitrogen Products		$	442,612			$	478,118			$	1,355,574			$	1,393,503
— Methanol			18,921				5,964				25,510				25,917
— Other			3,248				1,612				6,135				6,279
Total revenues		$	464,781			$	485,694			$	1,387,219			$	1,425,699
Income (loss) from operations
— Nitrogen Products		$	20,409			$	38,971			$	25,098			$	144,469
— Methanol			9,405				(6,673	)			3,363				(9,762	)
— Other			(426	)			(321	)			(1,017	)			(2,147	)
Income from operations		$	29,388			$	31,977			$	27,444			$	132,560

The following summarizes geographic revenues information for the three- and nine-month period ending September 30:

		Three Months Ended								Nine Months Ended
		September 30								September 30
(in thousands)		2006				2005				2006				2005
United States		$	337,958			$	353,188			$	1,048,142			$	1,084,112
Canada			12,874				11,632				48,755				42,107
United Kingdom			113,949				120,874				290,322				299,480
		$	464,781			$	485,694			$	1,387,219			$	1,425,699

10.		Commitments and Contingencies
		The Company is involved in various claims and legal actions arising in the ordinary course of business, including employee injury claims. Based on the facts currently available, management believes that the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operation or liquidity and that the likelihood that a loss contingency will occur in connection with these claims is remote.
		The Company has entered into natural gas supply agreements through December 31, 2007 for approximately 49.7 million MMBtu’s. As of September 30, 2006, these natural gas commitments were $1.3 million above market prices.
11.		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 497,000 authorized shares have been reserved for awards that were issued prior to the adoption of the 2002 plan. As of September 30, 2006, there were approximately 3,997,000 shares of common stock authorized for issuance under the plans, including approximately 3,500,000, 464,000 and 33,000 authorized for the 2002 Plan, 1997 Plan and 1992 Plan, respectively. Shares for approximately 1,540,000 and 2,000,000 were available and reserved, respectively, for share-based compensation grants as of September 30, 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 Company’s 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 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.
		The Company also issues phantom share awards to certain employees. The phantom share awards settle in cash based on the stock price on the vesting date, which is usually three years after the grant date. The Company has recorded a liability for the phantom share awards. For the three- and nine-month periods ended September 30, 2006, the Company recorded $0.5 million and $1.1 million, respectively, of expense related to the phantom share 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 three- and nine-month periods ended September 30, 2005 as all options granted under the Company’s plans had an exercise price equal to the market price of the Company’s stock on the date of grant and were fully vested. The Company did recognize compensation expense of $0.7 million and $1.7 million on nonvested stock awards and phantom share awards in the three- and nine-month periods ended September 30, 2005, respectively, based on intrinsic value, which was equal to the market price of the Company’s 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. The unearned compensation related to the unvested awards was reclassified against paid-in capital as of January 1, 2006. 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.

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 nine months ended September 30, 2005:

		Three Months Ended				Nine Months Ended
(in thousands, except per-share amounts)		September 30, 2005				September 30, 2005
Net income available to common shareholders		$	9,811			$	33,360
Add: Share based employee compensation expense included in reported net income, net of related tax effects			743				1,684
Deduct: Share based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(743	)			(1,684	)
Pro forma net income available to common shareholders		$	9,811			$	33,360
Income per share:
Basic — as reported		$	0.10			$	0.36
Basic — pro forma			0.10			$	0.36
Diluted — as reported		$	0.10			$	0.35
Diluted — pro forma		$	0.10			$	0.35

Compensation cost charged against income and the total income tax benefit recognized for share-based compensation arrangements is included below:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(in thousands)		2006				2005				2006				2005
Compensation cost charged to SG&A expense		$	1,968			$	743			$	4,285			$	1,684
Total compensation cost charged to income		$	1,968			$	743			$	4,285			$	1,684
Income tax benefit		$	419			$	223			$	913			$	505

		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.
		A summary of stock option activity as of September 30, 2006, and changes during the nine months then ended is presented below:

						Weighted
						Average
						Exercise
(options in thousands)		Number				Price
Outstanding — beginning of period			592			$	5.24
Expired/terminated			—				—
Exercised			(95	)			3.82
Outstanding — end of period			497			$	5.51

		The following table summarizes information about stock options outstanding and exercisable at September 30, 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				2.9			$	3.72				399			$	3.72
7.81 -   7.81			6				1.8				7.81				6				7.81
12.13 - 14.75			92				0.8				13.04				92				13.04
Total			497				2.5			$	5.51				497			$	5.51

		No options were granted during 2006.
		Nonvested Stock Shares and Phantom Share Awards
		The Company currently has outstanding nonvested shares 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. If the financial performance conditions are not satisfied, the grant will be forfeited.
		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 Company’s stock on the date of grant. 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 Company’s stock at each reporting period date. Compensation costs for nonvested stock shares and phantom share awards are discounted for estimated forfeitures and then amortized to expense using the straight-line method.
		A summary of the status of the Company’s nonvested share awards as of September 30, 2006, and changes during the nine months 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			662				6.67
Vested			(687	)			2.01
Forfeited			(111	)			6.88
Outstanding at September 30, 2006			1,454			$	7.16

At September 30, 2006, the total unrecognized compensation cost related to all nonvested share awards was $6.0 million. That cost is expected to be recognized over a weighted-average period of 1.7 years.

12.		Share Information
		On April 25, 2006, the Board of Directors authorized the Company to repurchase a maximum of 10 percent, or 9,516,817 shares, of its outstanding common stock. The stock buyback program has been and will be conducted on the open market, in private transactions or otherwise at such times prior to 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 Company’s 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
			2,675			$	7.03			$	18,796

		During 2004 and 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. At December 31, 2004, the value of the warrants was carried as a current liability pending shareholder approval to issue the underlying shares. During 2005, shareholders approved the issuance of the underlying shares and the warrant value was reclassified to common stockholders’ equity.
13.		New Accounting Pronouncements
		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 plans to adopt FIN 48 when required. FIN 48 is currently being evaluated by the Company for its full impact. At this time, the Company believes it has properly and adequately provided for all income tax positions and therefore expects minimal impact from adopting the Interpretation.
		In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) 157, “Fair Value Measurement” (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 the 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 Company’s December 31, 2006 financial statements. The Company is in a net under-funded position for its pension and retiree health care plans and will therefore recognize incremental retirement benefit liabilities on adoption. The Company has not yet quantified these amounts. The new rules 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 Company’s results of operations or cash flows.
		In September 2006, the SEC issued SFAS 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in 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 year’s 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 Company at the end of 2006. The Company is currently assessing the impact the adoption of SAB 108 will have on its Consolidated Financial Statements.
14.		Subsequent Event
		On October 19, 2006, the Company entered into a Memorandum of Understanding with Kemira GrowHow Oyj to create a joint venture to operate the fertilizer and associated process chemicals businesses of both companies in the United Kingdom.
		The Memorandum of Understanding is a non-legally binding agreement and is subject, inter alia, to clearance from the UK competition authorities, negotiation of definitive documents and lender consent. It is not subject to approval of shareholders in either Terra Industries Inc. or Kemira GrowHow Oyj.
		The proposed joint venture is expected to be held 50/50 by Terra Industries Inc. and Kemira GrowHow and to own and operate the sites of Terra Nitrogen (UK) Limited’s facilities on Teeside and Severnside and the site of Kemira GrowHow UK Limited at Ince.

15.		Guarantor Subsidiaries
		The consolidating statement of financial position of Terra Industries Inc. (the “Parent”), Terra Capital, Inc. (“TCAPI”), the Guarantor Subsidiaries and subsidiaries of the Parent that are not guarantors of the Senior Secured Notes due 2008 for September 30, 2006; December 31, 2005; and September 30, 2005 are presented below for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. Statements of operations for the three- and nine months and statements of cash flows for the nine months ended September 30, 2006 and 2005 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.

     Consolidating Balance Sheet as of September 30, 2006:

										Guarantor				Non-Guarantor
(in thousands)		Parent				TCAPI				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Assets
Cash and cash equivalents		$	1			$	(17,081	)		$	89,612			$	49,639			$	(1	)		$	122,170
Accounts receivable, net			—				—				89,173				104,166				—				193,339
Inventories			—				—				62,019				98,172				—				160,191
Other current assets			(857	)			10,863				7,461				5,368				3,323				26,158
Total current assets			(856	)			(6,218	)			248,265				257,345				3,322				501,858
Property, plant and equipment, net			—				—				389,524				333,429				(1	)			722,952
Equity method investments			—				—				7,193				154,262				—				161,455
Intangible assets, other assets and deferred plant turnaround costs			—				8,314				23,898				41,644				—				73,856
Investments in and advanced to (from) affiliates			727,320				551,576				1,453,292				437,194				(3,169,382	)			—
Total assets		$	726,464			$	553,672			$	2,122,172			$	1,223,874			$	(3,166,061	)		$	1,460,121
Liabilities
Debt due within one year		$	—			$	—			$	4			$	—			$	—			$	4
Accounts payable			107				900				36,015				78,712				—				115,734
Accrued expenses and other current liabilities			7,904				100,512				48,556				28,237				(76,290	)			108,919
Total current liabilities			8,011				101,412				84,575				106,949				(76,290	)			224,657
Long-term debt and capital lease obligations			—				331,300				—				—				—				331,300
Deferred income taxes			—				—				18,608				40,314				—				58,922
Pension and other liabilities			140,659				(509	)			9,127				1,071				—				150,348
Minority interest			—				18,564				76,450				—				—				95,014
Total liabilities and minority interest			148,670				450,767				188,760				148,334				(76,290	)			860,241
Preferred stock			115,800				—				—				—				—				115,800
Common Shareholders’ Equity
Common stock			144,968				—				73				49,709				(49,782	)			144,968
Paid-in capital			693,944				150,218				2,026,502				1,265,009				(3,441,729	)			693,944
Accumulated other comprehensive income (loss) compensation			(63,636	)			—				—				30,080				(18,806	)			(52,362	)
Retained earnings (deficit)			(313,282	)			(47,313	)			(93,163	)			(269,258	)			420,546				(302,470	)
Common shareholders’ equity			461,994				102,905				1,933,412				1,075,540				(3,089,771	)			484,080
Total liabilities and minority interest, preferred stock and common shareholders equity		$	726,464			$	553,672			$	2,122,172			$	1,223,874			$	(3,166,061	)		$	1,460,121