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 March 31, 2007

OR

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

For the transition period from                                          to                                         

Commission file number: 1-8520

TERRA INDUSTRIES INC.

(Exact name of registrant as specified in its charter)

Maryland (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)

Registrant’s telephone number, including area code: (712) 277-1340

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

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

Large accelerated 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). Yes o No þ

     As of April 20, 2007, the following shares of the registrant’s stock were outstanding:

Common Shares, without par value		92,846,067 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			7
Notes to Consolidated Financial Statements			8
Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures about Market Risk			31
Item 4. Controls and Procedures			32
Part II – OTHER INFORMATION
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			33
Item 3. Defaults ipon Senior Securities			33
Item 4. Submission of Matters to a Vote of Security Holders			33
Item 5. Other Information			34
Item 6. Exhibits			35
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification Pursuant to Section 906

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TERRA INDUSTRIES INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

		March 31,				December 31,				March 31,
		2007				2006				2006
Assets
Cash and cash equivalents		$	233,310			$	179,017			$	92,011
Accounts receivable, less allowance for doubtful accounts of $410, $333 and $104			196,309				198,791				133,264
Inventories			232,854				211,017				209,455
Other current assets			26,667				31,680				26,744
Total current assets			689,140				620,505				461,474
Property, plant and equipment, net			708,645				720,897				728,475
Equity method investments			166,746				164,099				172,702
Deferred plant turnaround costs, net			36,615				44,558				29,995
Intangible assets, net			5,174				5,645				7,213
Other assets			23,942				17,009				27,751
Total assets		$	1,630,262			$	1,572,713			$	1,427,610
Liabilities
Accounts payable			130,572				156,493				77,546
Customer prepayments			136,047				77,091				58,372
Accrued expenses and other current liabilities			63,002				75,863				69,816
Total current liabilities			329,621				309,447				205,734
Long-term debt and capital lease obligations			330,000				331,300				331,300
Pension liabilities			124,667				134,444				120,069
Other liabilities			126,063				104,039				91,235
Minority interest			98,850				94,687				91,662
Total liabilities and minority interest			1,009,201				973,917				840,000
Preferred Stock - liquidation value of $120,000			115,800				115,800				115,800
Common Shareholders’ Equity
Capital stock
Common Shares, authorized 133,500 shares; 92,846, 92,630 and 95,171 outstanding			145,192				144,976				146,994
Paid-in capital			694,621				693,896				708,089
Accumulated other comprehensive loss			(48,350	)			(63,739	)			(66,757	)
Accumulated deficit			(286,202	)			(292,137	)			(316,516	)
Total common shareholders’ equity			505,261				482,996				471,810
Total liabilities and minority interest, preferred stock and common shareholders’ equity		$	1,630,262			$	1,572,713			$	1,427,610

See Accompanying Notes to the Consolidated Financial Statements.

TERRA INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per-share amounts)

		Three Months Ended
		March 31,
		2007				2006
Revenues
Product revenues		$	499,630			$	397,744
Other income			2,656				1,176
Total revenues			502,286				398,920
Costs and Expenses
Cost of sales			426,176				423,517
Selling, general and administrative expense			17,057				11,710
Equity in earnings of unconsolidated affiliates			(5,617	)			(8,141	)
			437,616				427,086
Income (loss) from operations			64,670				(28,166	)
Interest income			2,887				1,584
Interest expense			(8,909	)			(11,772	)
Loss on early retirement of debt			(38,662	)			—
Income (loss) before income taxes and minority interest			19,986				(38,354	)
Income tax (provision) benefit			(4,140	)			13,766
Minority interest			(8,636	)			597
Net income (loss)			7,210				(23,991	)
Preferred share dividends			(1,275	)			(1,275	)
Net Income (Loss) Available to Common Shareholders		$	5,935			$	(25,266	)
Basic and diluted income (loss) per share:
Basic		$	0.06			$	(0.27	)
Diluted		$	0.06			$	(0.27	)
Basic and diluted weighted average shares outstanding:
Basic			91,860				93,870
Diluted			95,258				93,870

     See Accompanying Notes to the Consolidated Financial Statements.

TERRA INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

		Three Months Ended
		March 31,
		2007				2006
Operating Activities
Net income (loss)		$	7,210			$	(23,991	)
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			26,642				26,282
Deferred income taxes			7,273				(13,766	)
Minority interest in earnings			8,636				(597	)
Distributions in excess of (less than) equity earnings			(5,617	)			8,140
Non-cash (gain) loss on derivatives			(2,832	)			5,861
Share-based compensation			2,868				1,141
Amortization of intangible and other assets			2,341				1,396
Non cash loss on early retirement of debt			4,662				—
Changes in operating assets and liabilities:
Accounts receivable			2,867				73,752
Inventories			(18,472	)			(17,350	)
Accounts payable and customer prepayments			32,836				(43,278	)
Other assets and liabilities, net			11,174				4,793
Net cash flows from operating activities			79,588				22,383
Investing Activities
Purchase of property, plant and equipment			(6,736	)			(12,104	)
Plant turnaround expenditures			(8,842	)			(11,467	)
Distributions received from unconsolidated affiliates			—				1,594
Changes in restricted cash			—				8,595
Net cash flows from investing activities			(15,578	)			(13,382	)
Financing Activities
Issuance of debt			330,000				—
Payments under borrowings arrangements			(328,800	)			(26	)
Payments for debt issuance costs			(5,429	)			—
Preferred share dividends paid			(1,275	)			(1,275	)
Proceeds from exercise of stock options			276				—
Distributions to minority interests			(4,474	)			—
Net cash flows from financing activities			(9,702	)			(1,301	)
Effect of exchange rate changes on cash			(15	)			(2,055	)
Increase (decrease) to cash and cash equivalents			54,293				5,645
Cash and cash equivalents at beginning of period			179,017				86,366
Cash and cash equivalents at end of period		$	233,310			$	92,011

See Accompanying Notes to the Consolidated Financial Statements.

Consolidated Statements of Cash Flows (continued)

		Three Months ended
		March 31
(in thousands)		2007				2006
Supplemental cash flow information:
Interest paid		$	10,619			$	316
Income tax refunds received		$	100			$	600
Income taxes paid		$	4,566			$	281
Supplemental schedule of unconsolidated affiliates distributions received:
Equity in earnings of unconsolidated affiliates		$	5,617			$	8,141
Distribution in excess of (less than) equity earnings			(5,617	)			8,140
Distributions received from unconsolidated affiliates			—				1,594
Total cash distributions received from unconsolidated affiliates		$	—			$	17,875

See Accompanying Notes to the Consolidated Financial Statements.

TERRA INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2007 AND 2006

(in thousands)

										Accumulated
										Other
		Common				Paid-In				Comprehensive				Accumulated								Comprehensive
(in thousands)		Stock				Capital				Loss				Deficit				Total				Income
Balance at January 1, 2007		$	144,976			$	693,896			$	(63,739	)		$	(292,137	)		$	482,996
Comprehensive income (loss):
Net income			—				—				—				7,210				7,210			$	7,210
Foreign currency translation adjustment			—				—				817				—				817				817
Change in fair value of derivatives, net of taxes of $7,848			—				—				14,572				—				14,572				14,572
Comprehensive income																						$	22,599
Preferred share dividends			—				—				—				(1,275	)			(1,275	)
Exercise of stock options			216				60				—				—				276
Share-based compensation			—				665				—				—				665
Balance at March 31, 2007		$	145,192			$	694,621			$	(48,350	)		$	(286,202	)		$	505,261

										Accumulated
										Other
		Common				Paid-In				Comprehensive				Accumulated								Comprehensive
(in thousands)		Stock				Capital				Loss				Deficit				Total				Income
Balance at January 1, 2006		$	146,994			$	707,302			$	(70,143	)		$	(291,250	)		$	492,903
Comprehensive income (loss):
Net loss			—				—				—				(23,991	)			(23,991	)		$	(23,991	)
Foreign currency translation adjustment			—				—				876				—				876				876
Change in fair value of derivatives, net of taxes of $1,414			—				—				2,510				—				2,510				2,510
Comprehensive loss																						$	(20,605	)
Preferred share dividends			—				—				—				(1,275	)			(1,275	)
Share-based compensation			—				787				—				—				787
Balance at March 31, 2006		$	146,994			$	708,089			$	(66,757	)		$	(316,516	)		$	471,810

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 2006 Annual Report on Form 10-K to Shareholders.
		Revenue Recognition
		Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, no obligations remain and collectibility is probable.
		Revenues are primarily comprised of sales of the Company’s nitrogen- and methanol-based products, including any realized hedging gains or losses related to nitrogen product derivatives, and are reduced by estimated discounts and trade allowances. Revenues also include profit sharing revenue under the Methanex supply contract when the estimated margin on an annualized basis is probable. 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.
		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-month periods ended March 31, 2007 and 2006:

		Three Months Ended
		March 31,
(in thousands, except per-share amounts)		2007				2006
Basic income (loss) per share computation:
Income (loss) from continuing operations		$	7,210			$	(23,991	)
Less: Preferred share dividends			(1,275	)			(1,275	)
Income (loss) available to common shareholders		$	5,935			$	(25,266	)
Weighted average shares outstanding			91,860				93,870
Basic income (loss) per common share		$	0.06			$	(0.27	)
Diluted income (loss) per share computation:
Income (loss) available to common shareholders		$	5,935			$	(25,266	)
Add: Preferred share dividends			—				—
Income (loss) available to common shareholders and assumed conversions		$	5,935			$	(25,266	)
Weighted average shares outstanding			91,860				93,870
Add incremental shares from assumed conversions:
Preferred shares			—				—
Nonvested stock			607				—
Common stock warrants			2,610				—
Common stock options			181				—
Dilutive potential common shares			95,258				93,870
Diluted income (loss) per common share		$	0.06			$	(0.27	)

For the three-month periods ended March 31, 2006, common stock options totaling 0.1 million shares were excluded from the computation of diluted income per share because the exercise prices of these options exceeded the average market price of the Company’s stock for the respective periods, and the effect of their inclusion would have been antidilutive.

For the three-month periods ending March 31, 2007 and 2006, 120,000 preferred shares were excluded from the computation of diluted earnings per share. These preferred shares were antidilutive using the if-converted method.

3.		Inventories
		Inventories consisted of the following:

		March 31,				December 31,				March 31,
(in thousands)		2007				2006				2006
Raw materials		$	20,694			$	26,583			$	17,371
Supplies			55,445				54,542				54,077
Finished goods			156,715				129,892				138,007
Total		$	232,854			$	211,017			$	209,455

		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 may also use a collar structure where it will enter into a swap, sell a call at a higher price and buy a put. The collar structure allows for greater participation in a decrease to natural gas prices and protects against moderate price increases. However, the collar exposes Terra to large price increases. At March 31, 2007 there were no collars outstanding.

The following summarizes open natural gas derivative contracts at March 31, 2007 and 2006 and December 31, 2006:

		Other				Other
		Current				Current				Deferred				Net
(in thousands)		Assets				Liabilities				Taxes				Asset (Liability)
March 31, 2007		$	11,037			$	(3,949	)		$	(1,474	)		$	5,614
December 31, 2006			4,731				(22,591	)			6,373				(11,487	)
March 31, 2006			6,307				(16,686	)			1,363				(9,016	)

Certain derivatives outstanding at March 31, 2007 and 2006, which settled during April 2007 and 2006, respectively, are included in the position of open natural gas derivatives in the table above. The April 2007 derivatives settled for an approximate $1.0 million gain. All open derivatives will settle during the next 12 months.

At March 31, 2007, the Company determined that certain derivative contracts were ineffective hedges for accounting purposes and recorded a credit of $2.9 million to cost of sales for the three-month period ending March 31, 2007. Derivatives outstanding at March 31, 2006 included a loss of $6.4 million that was recorded as an ineffective position and a charge to cost of sales for the three-month period ending March 31, 2006.

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 March 31, 2007 and 2006 follows:

		Three Months Ended
		March 31,
		2007								2006
(in thousands)		Gross				Net of tax				Gross				Net of tax
Beginning accumulated gain (loss)		$	(18,210	)		$	(11,836	)		$	(7,886	)		$	(5,109	)
Reclassification into earnings			2,727				1,773				(30,939	)			(20,151	)
Net increase in market value			19,693				12,799				34,863				22,661
Ending accumulated gain (loss)		$	4,210			$	2,736			$	(3,962	)		$	(2,599	)

		At times, the Company also uses forward derivative instruments to fix or set floor prices for a portion of its nitrogen sales volumes. At March 31, 2007, the Company had no open contracts covering nitrogen solutions. When outstanding, the nitrogen solution contracts do not qualify for hedge treatment due to inadequate trading history to demonstrate effectiveness. Consequently, these contracts are marked-to-market and unrealized gains or losses are reflected in revenue in the statement of operations. For the three-month period ending March 31, 2007, the Company recognized a loss of $0.9 million on nitrogen forward derivative instruments. For the three-month period ending March 31, 2006, there were no gains or losses on nitrogen forward derivative instruments.
5.		Unrecognized Tax Benefit
		The Company adopted the provision of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty to Income Taxes” (FIN 48), on January 1, 2007. Under FIN 48, tax benefits are recorded only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in the Company's tax returns that do not meet these recognition and measurement standards.
		The primary jurisdictions in which the Company or one of its subsidiaries files income tax returns are the United States, Canada and the United Kingdom. In most United States jurisdictions, the Company has significant net operating loss (“NOL”) carryforwards that date back to 1999 and will remain subject to examination by tax authorities as those NOL positions may be used to offset future taxable earnings. For jurisdictions in Canada and the United Kingdom, income tax returns remain subject to examination by tax authorities for calendar years beginning in 2001 and 2005, respectively.
		The adoption of FIN 48 had no impact on the Company's financial statements. The Company’s other liabilities include an unrecognized tax benefit of $33.5 million at March 31, 2007, which had been previously recognized under FASB Statement No. 5 "Accounting for Contingencies" or FASB Statement No. 109 "Accounting for Income Taxes." There were no changes in unrecognized tax positions during the period, and there are no expected changes in the next twelve months. If recognized, the $33.5 million of unrecognized tax benefit would have an impact on the effective tax rate.
		When applicable, the Company recognizes interest accrued and penalties related to unrecognized tax benefits in income taxes on the statement of operations. Due to the Company’s NOL carryforward position, no interest or penalties were recognized at March 31, 2007.
6.		Other Liabilities
		Other liabilities consisted of the following:

		March 31,				December 31,				March 31,
(in thousands)		2007				2006				2006
Deferred income taxes		$	37,758			$	63,851			$	51,075
Unrecognized tax benefit			33,560				—				—
Long-term medical and closed facilities reserve			23,323				23,206				24,139
Other			31,422				16,982				16,021
		$	126,063			$	104,039			$	91,235

7.		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 $166.7 million at March 31, 2007. 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
		March 31,
(in thousands)		2007				2006
Condensed income statement information:
Net sales		$	29,363			$	54,668
Net income		$	7,112			$	16,282
Terra’s equity in earnings of unconsolidated affiliates		$	5,617			$	8,141

		March 31,				March 31,
(in thousands)		2007				2006
Condensed balance sheet information:
Current assets		$	53,018			$	61,501
Long-lived assets			204,146				204,268
Total assets		$	257,164			$	265,769
Current liabilities		$	25,356			$	35,045
Long-term liabilities			—				—
Equity			231,808				230,724
Total liabilities and equity		$	257,164			$	265,769

The carrying value of these investments at March 31, 2007 was $50.8 million more than Terra’s share of the affiliates’ book value. The excess is attributable primarily to the step-up in basis for fixed asset values, which is being depreciated over a period of approximately 15 years. Terra’s equity in earnings of unconsolidated subsidiaries is different than its ownership interest in income reported by the unconsolidated subsidiaries due to different accounting policies, deferred profits on intergroup transactions and amortization of basis differences.

Terra has transactions in the normal course of business with PLNL whereby Terra is obliged to purchase 50 percent of the ammonia produced by PLNL at current market prices. During the three-month period ending March 31, 2007, Terra purchased approximately $22.2 million of ammonia from PLNL. During the 2007 first quarter, PLNL performed a turnaround, resulting in lower production levels and consequently, lower purchases by the Company. During the first three months of 2006, Terra purchased approximately $31.5 million of ammonia from PLNL.

		During the first three months of 2007 there were no cash distributions from any of the Company’s investments. During the first three months of 2006, there were $17.5 million of distributions from PLNL to the Company. The total distributions from all investments were $17.9 million for the three-month periods ended March 31, 2006.
8.		Long-term Debt and Capital Lease Obligation
		Long-term debt and capital lease obligations consisted of the following:

		March 31,				December 31,				March 31,
(in thousands)		2007				2006				2006
Unsecured Senior Notes, 7.0% due 2017		$	330,000			$	—			$	—
Secured Senior Notes, 12.875% due 2008			—				200,000				200,000
Second Priority Senior Secured Notes, 11.5%, due 2010			2,500				131,300				131,300
Other			—				1				12
Total long-term debt and capital lease obligations			332,500				331,301				331,312
Less current maturities			2,500				1				12
Total long-term debt and capital lease obligations		$	330,000			$	331,300			$	331,300

In January 2007, Terra Capital, Inc., (“TCAPI”) a subsidiary of Terra Industries Inc., issued $330 million of 7.0% Senior Notes due 2017. The notes are unconditionally guaranteed by Terra Industries Inc. and its U.S. subsidiaries. Fees and expenses of the transaction totaled $5.4 million. These notes and guarantees are unsecured and will rank equal in right of payment with any existing and future senior obligations of such guarantors. The Indenture governing these notes contains covenants that limit, among other things, the Company’s ability to: incur additional debt, pay dividends on common stock of Terra Industries Inc. or repurchase shares of such common stock, make certain investments, sell any of the Company’s principal production facilities or sell other assets outside the ordinary course of business, enter into transactions with affiliates, limit dividends or other payments by our restricted subsidiaries to us, enter into sale and leaseback transactions, engage in other businesses, sell all or substantially all of the Company’s assets or merge with or into other companies, and reduce our insurance coverage. In addition, the Company is obligated to offer to repurchase these notes upon a Change of Control (as defined in the Indenture) at a cash price equal to 101% of the aggregate principal amount outstanding at that time, plus accrued interest to the date of purchase. The Indenture governing these notes contains events of default and remedies customary for a financing of this type. Offering proceeds were used to repurchase the Company’s 12.875% Senior Secured Notes and 11.5% Second Priority Secured Notes pursuant to a tender offer.

Both the 12.875% Senior Secured Notes and 11.5% Second Priority Secured Notes were repurchased pursuant to a tender offer. Following completion of the tender offer, $2.5 million face value of 11.5% Secured Notes were not tendered and remained outstanding at March 31, 2007. On April 2, 2007, Terra Capital, Inc. (TCAPI) exercised its right to redeem the remaining bonds effective June 1, 2007. On April 2, 2007, sufficient proceeds were deposited with the trustee of the 11.5% Secured Notes to defease the bonds and allow remaining liens to be released.

As a result of the Company’s debt refinancing the Company incurred costs of approximately $31.9 million for tender premiums, and approximately $2.1 million for make-whole payments and administrative expenses. In addition, the Company recognized approximately $4.7 million of expense related to deferred fees on the bonds that were repaid. In connection with the new bond offering the Company paid approximately $5.4 million for fees and administrative costs.

		In the first quarter of 2007, the Company amended the $200 million revolving credit facility to extend the expiration date to January 31, 2012. The revolving credit facility is secured by substantially all of the assets of the Company. Borrowing availability is generally based on 100% of eligible cash balances, 85% of eligible accounts receivable and 60% of eligible finished goods inventory less outstanding letters of credit issued under the facility. These facilities include $50 million only available for the use of Terra Nitrogen Company, L.P. (TNCLP), one of the Company’s consolidated subsidiaries. Borrowings under the revolving credit facility will bear interest at a floating rate plus an applicable margin, which can be either a base rate, or, at the Company’s option, a London Interbank Offered Rate (LIBOR). At March 31, 2007, the LIBOR rate was 3.86%. The base rate is the highest of (1) Citibank, N.A.’s base rate (2) the federal funds effective rate, plus one-half percent (0.50%) per annum and (3) the base three month certificate of deposit rate, plus one-half percent (0.50%) per annum, plus an applicable margin in each case. LIBOR loans will bear interest at LIBOR plus an applicable margin. The applicable margins for base rate loans and LIBOR loans are 0.50% and 1.75%, respectively, at March 31, 2007. The revolving credit facility requires an initial one-half percent (0.50%) commitment fee on the difference between committed amounts and amounts actually borrowed.
		At March 31, 2007, the Company had no outstanding revolving credit borrowings and $16.6 million in outstanding letters of credit. The $16.6 million in outstanding letters of credit reduced the Company’s borrowing availability to $183.4 million at March 31, 2007. The credit facilities require that the Company adhere to certain limitations on additional debt, capital expenditures, acquisitions, liens, asset sales, investments, prepayments of subordinated indebtedness, changes in lines of business and transactions with affiliates. If the Company’s borrowing availability falls below $60 million, the Company is required to have achieved minimum operating cash flows or earnings before interest, income taxes, depreciation, amortization and other non-cash items of $60 million during the most recent four quarters.
9.		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
		March 31,
(in thousands)		2007				2006
Service cost		$	748			$	744
Interest cost			6,231				5,888
Expected return on plan assets			(6,056	)			(5,394	)
Amortization of prior service cost			(9	)			(7	)
Amortization of actuarial loss			1,409				1,408
Termination charge			123				291
Pension Expense		$	2,446			$	2,930

Cash contributions to the defined benefit pension plans for the three months ended March 31, 2007 and 2006 were $8.9 million and $1.7 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.
		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 March 31, 2007 and 2006 totaled $1.2 million and $1.5 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.
10.		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) pension and post-retirement benefit liabilities adjustments.
		The components of accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2007 and 2006 follow:

		Foreign
		Currency								Pension and Post-
		Translation				Fair Value of				Retirement Benefit
(in thousands)		Adjustment				Derivatives				Liabilities				Total
Balance January 1, 2007		$	24,518			$	(11,836	)		$	(76,421	)		$	(63,739	)
Change in foreign translation adjustment			817				—				—				817
Reclassification to earnings			—				1,773				—				1,773
Change in fair value of derivatives			—				12,799				—				12,799
Balance March 31, 2007		$	25,335			$	2,736			$	(76,421	)		$	(48,350	)
Balance January 1, 2006		$	(9,100	)		$	(5,109	)		$	(55,934	)		$	(70,143	)
Change in foreign translation adjustment			876				—				—				876
Reclassification to earnings			—				(20,151	)			—				(20,151	)
Change in fair value of derivatives			—				22,661				—				22,661
Balance March 31, 2006		$	(8,224	)		$	(2,599	)		$	(55,934	)		$	(66,757	)

11.		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
		March 31,
(in thousands)		2007				2006
Revenues — Nitrogen Products		$	487,099			$	396,371
— Methanol			12,531				1,373
— Other			2,656				1,176
Total revenues		$	502,286			$	398,920
Income (loss) from operations
— Nitrogen Products		$	64,061			$	(24,987	)
— Methanol			788				(2,792	)
— Other			(179	)			(387	)
Income (loss) from operations		$	64,670			$	(28,166	)

The following summarizes geographic revenues information:

		Three Months Ended
		March 31,
(in thousands)		2007				2006
United States		$	398,546			$	307,364
Canada			13,873				16,323
United Kingdom			89,867				75,233
		$	502,286			$	398,920

12.		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 47.6 million MMBtu’s. As of March 31, 2007, these natural gas commitments were $1.9 million above the respective index prices.

13.		Share Information
		On April 25, 2006, the Board of Directors authorized the Company to repurchase a maximum of 10 percent, or 9,516,817 shares, of its outstanding common stock. The stock buyback program has been and will be conducted on the open market, in private transactions or otherwise at such times prior to June 30, 2008, and at such prices, as determined appropriate by the Company. Purchases may be commenced or suspended at any time without notice. In 2006 there were 2.7 million shares repurchased which resulted in a balance of 6.8 million shares available for repurchase under the program. There were no stock repurchases during the first quarter of 2007.
14.		New Accounting Pronouncements
		In September 2006, the FASB issued SFAS 157, “Fair Value Measurements,” (SFAS 157). SFAS 157 is definitional and disclosure oriented and addresses how companies should approach measuring fair value when required by generally accepted accounting principles (GAAP); it does not create or modify any current GAAP requirements to apply fair value accounting. SFAS 157 provides a single definition for fair value that is to be applied consistently for all accounting applications, and also generally describes and prioritizes according to reliability the methods and input used in valuations. SFAS 157 prescribes various disclosures about financial statement categories and amounts which are measured at fair value, if such disclosures are not already specified elsewhere in GAAP. The new measurement and disclosure and requirements of SFAS 157 are effective for the Company in 2008 first quarter and the Company expects no significant impact from adopting the Standard.
		In February 2007, the FASB issued Statement of Financial Accounting Standards (SFAS 159), “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. SFAS 159 is effective for the Company beginning in the first quarter of 2008. The Company is currently assessing the impact SFAS 159 may have on its financial statements.
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 2012 for March 31, 2007; December 31, 2006; and March 31, 2006 are presented below for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. Statements of operations and statements of cash flows for the three months ended March 31, 2007 and 2006 are presented below for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. The guarantees of the Guarantor Subsidiaries are full and unconditional. The Subsidiary issuer and the Guarantor Subsidiaries guarantees are joint and several with the Parent.
		Guarantor subsidiaries include subsidiaries that own the Woodward, Oklahoma; Port Neal, Iowa; Yazoo City, Mississippi, and Beaumont, Texas plants as well as the corporate headquarters facility in Sioux City, Iowa. All guarantor subsidiaries are wholly owned by the Parent. All other company facilities are owned by non-guarantor subsidiaries.

Consolidating Balance Sheet as of March 31, 2007:

										Guarantor				Non-Guarantor
(in thousands)		Parent				TCAPI				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Assets
Cash and cash equivalents		$	1			$	124,896			$	—			$	108,415			$	(2	)		$	233,310
Accounts receivable, net			—				—				89,668				106,642				(1	)			196,309
Inventories			—				—				113,286				125,653				(6,085	)			232,854
Other current assets			7,460				37				11,194				8,644				(668	)			26,667
Total current assets			7,461				124,933				214,148				349,354				(6,756	)			689,140
Property, plant and equipment, net			—				34				370,873				337,736				2				708,645
Equity investments			—				—				11,544				155,202				—				166,746
Intangible assets, other assets and deferred plant turnaround costs			(1,839	)			8,851				19,614				50,464				(11,359	)			65,731
Investments in and advanced to (from) affiliates			690,275				276,800				1,675,902				394,957				(3,037,934	)			—
Total assets		$	695,897			$	410,618			$	2,292,081			$	1,287,713			$	(3,056,047	)		$	1,630,262
Liabilities
Accounts payable		$	21			$	—			$	60,456			$	70,094			$	1			$	130,572
Accrued expenses and other current liabilities			14,319				5,894				221,102				86,913				(129,179	)			199,049
Total current liabilities			14,340				5,894				281,558				157,007				(129,178	)			329,621
Long-term debt and capital lease obligations			—				330,000				—				—				—				330,000
Pension and other liabilities			128,538				(171	)			(104,736	)			171,341				55,758				250,730
Minority interest			—				19,304				79,545				—				1				98,850
Total liabilities and minority interest			142,878				355,027				256,367				328,348				(73,419	)			1,009,201
Preferred stock			115,800				—				—				—				—				115,800
Common Shareholders’ Equity
Common stock			145,192				—				73				49,709				(49,782	)			145,192
Paid-in capital			694,621				150,218				2,035,412				1,274,009				(3,459,639	)			694,621
Accumulated other comprehensive income (loss) compensation			(77,432	)			—				—				14,031				15,051				(48,350	)
Retained earnings (deficit)			(325,162	)			(94,627	)			229				(378,384	)			511,742				(286,202	)
Common shareholders’ equity			437,219				55,591				2,035,714				959,365				(2,982,628	)			505,261
Total liabilities and minority interest, preferred stock and common shareholders equity		$	695,897			$	410,618			$	2,292,081			$	1,287,713			$	(3,056,047	)		$	1,630,262

Consolidating Statement of Operations for the three months ended March 31, 2007:

										Guarantor				Non-Guarantor
(in thousands)		Parent				TCAPI				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Revenues
Product revenues		$	—			$	—			$	242,091			$	257,539			$	—			$	499,630
Other revenues			—				—				1,947				708				1				2,656
Total revenues			—				—				244,038				258,247				1				502,286
Cost and Expenses
Cost of sales			—				—				227,160				211,764				(12,748	)			426,176
Selling, general and administrative expenses			531				(2,291	)			918				5,152				12,747				17,057
Equity in the (earnings) loss of subsidiaries			45,796				(73,344	)			(6,147	)			(13,741	)			41,819				(5,617	)
Total cost & expenses			46,327				(75,635	)			221,931				203,175				41,818				437,616
Income (loss) from operations			(46,327	)			75,635				22,107				55,072				(41,817	)			64,670
Interest income			—				572				1,769				546				—				2,887
Interest expense			(465	)			(8,330	)			(4	)			45				(155	)			(8,909	)
Loss on debt			—				(38,662	)			—				—				—				(38,662	)
Income (loss) before income taxes and minority interest			(46,792	)			29,215				23,872				55,663				(41,972	)			19,986
Income tax benefit			(4,914	)			—				—				774				—				(4,140	)
Minority interest			—				(1,667	)			(6,970	)			—				1				(8,636	)
Net income		$	(51,706	)		$	27,548			$	16,902			$	56,437			$	(41,971	)		$	7,210

Consolidating Statement of Cash Flows for the three months ended March 31, 2007:

										Guarantor				Non-Guarantor
(in thousands)		Parent				TCAPI				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Operating Activities
Net income (loss)		$	(51,706	)		$	27,548			$	16,902			$	56,437			$	(41,971	)		$	7,210
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Depreciation and amortization			—				—				20,964				5,678				—				26,642
Deferred income taxes			—				—				—				7,273								7,273
Minority interest in earnings			—				803				7,833				—				—				8,636
Distributions in excess of (less than) equity earnings			68,102				70,678				(5,617	)			25,666				(164,446	)			(5,617	)
Non-cash loss on derivatives			—				—				1,830				(4,336	)			(326	)			(2,832	)
Share-based compensation			3,085				—				—				—				(217	)			2,868
Amortization of intangible and other assets			—				—				2,341				—				—				2,341
Non-cash loss on early retirement			—				4,662				—				—				—				4,662
Change in operating assets and liabilities			(65,338	)			576				2,651				117,646				(27,130	)			28,405
Net Cash Flows from Operating Activities			(45,857	)			104,267				46,904				208,364				(234,090	)			79,588
Investing Activities
Purchase of property, plant and equipment			—				(34	)			(1,796	)			(4,940	)			34				(6,736	)
Plant turnaround expenditures			—				—				(7,511	)			(1,157	)			(174	)			(8,842	)
Net Cash Flows from Investing Activities			—				(34	)			(9,307	)			(6,097	)			(140	)			(15,578	)
Financing Activities
Issuance of debt			—				330,000				—				—				—				330,000
Principal payments under borrowing arrangements			—				(331,300	)			(1	)			—				2,501				(328,800	)
Payments for debt issuance costs			—				(5,429	)			—				—				—				(5,429	)
Proceeds from options			61				—				—				—				215				276
Preferred share dividends paid			(1,275	)			—				—				—				—				(1,275	)
Change in investments and advances from (to) affiliates			47,071				(73,344	)			(33,122	)			(172,119	)			231,514				—
Distributions to minority interests			—				—				(4,474	)			—				—				(4,474	)
Net Cash Flows from Financing Activities			45,857				(80,073	)			(37,597	)			(172,119	)			234,230				(9,702	)
Effect of Foreign Exchange Rate on Cash			—				—				—				(15	)			—				(15	)
Increase (decrease) in Cash and Cash Equivalents			—				24,160				—				30,133				—				54,293
Cash and Cash Equivalents at Beginning of Year			1				100,736				—				78,282				(2	)			179,017
Cash and Cash Equivalents at End of Year		$	1			$	124,896			$	—			$	108,415			$	(2	)		$	233,310

Consolidating Balance Sheet for the Year Ended December 31, 2006:

										Guarantor				Non-Guarantor
		Parent				TCAPI				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Assets
Cash, cash equivalents and restricted cash		$	1			$	100,736			$	—			$	78,282			$	(2	)		$	179,017
Accounts receivable, net			—				—				75,466				123,325				—				198,791
Inventories			—				—				84,924				117,958				8,135				211,017
Other current assets			3,166				1,319				12,918				18,355				(4,078	)			31,680
Total current assets			3,167				102,055				173,308				337,920				4,055				620,505
Property, plant and equipment, net			—				—				381,987				338,912				(2	)			720,897
Equity investments			—				—				10,710				153,389				—				164,099
Deferred plant turnaround costs, intangible and other assets			(1,839	)			7,582				22,117				39,351				1				67,212
Investments in and advances to (from) affiliates			758,377				347,478				1,622,696				422,436				(3,150,987	)			—
Total Assets		$	759,705			$	457,115			$	2,210,818			$	1,292,008			$	(3,146,933	)		$	1,572,713
Liabilities
Accounts payable		$	109			$	—			$	63,634			$	92,750			$	—			$	156,493
Accrued and other liabilities			28,119				5,927				61,782				62,354				(5,228	)			152,954
Total current liabilities			28,228				5,927				125,416				155,104				(5,228	)			309,447
Long-term debt and capital lease obligations			—				331,300				—				—				—				331,300
Pension and other liabilities			188,246				—				7,386				45,060				(2,209	)			238,483
Minority interest			—				18,501				76,186				—				—				94,687
Total liabilities and minority interest			216,474				355,728				208,988				200,164				(7,437	)			973,917
Preferred stock			115,800				—				—				—				—				115,800
Stockholders’ equity
Common stock			144,975				—				73				49,709				(49,781	)			144,976
Paid in capital			693,895				150,218				2,007,811				1,246,129				(3,404,157	)			693,896
Accumulated other comprehensive income (loss)			(92,187	)			—				6,373				30,828				(8,753	)			(63,739	)
Retrained earnings (deficit)			(319,252	)			(48,831	)			(12,427	)			(234,822	)			323,195				(292,137	)
Total stockholders’ equity			427,431				101,387				2,001,830				1,091,844				(3,139,496	)			482,996
Total liabilities and stockholders’ equity		$	759,705			$	457,115			$	2,210,818			$	1,292,008			$	(3,146,933	)		$	1,572,713