<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to _____________
Commission file number: 1-8520
TERRA INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1145429
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Terra Centre 51102-6000
P.O. Box 6000 (Zip Code)
600 Fourth Street
Sioux City, Iowa
(Address of principal executive offices)
Registrant's telephone number, including area code: (712) 277-1340
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of October 30, 2000, the following shares of the registrant's stock were
outstanding:
Common Shares, without par value 75,988,940 shares
===============================================================================
<PAGE>
PART I. FINANCIAL INFORMATION
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
2000 1999 1999
------------ ----------- ------------
<S> <C> <C> <C>
ASSETS
Cash and short-term investments $ 101,916 $ 9,790 $ 5,555
Accounts receivable, less allowance for
doubtful accounts of $443, $491, $837 119,184 102,776 90,118
Inventories 92,865 133,634 131,449
Other current assets 21,633 47,482 118,416
-----------------------------------------------------------------------------------------------------
Total current assets 335,598 293,682 345,538
-----------------------------------------------------------------------------------------------------
Equity and other investments 2,370 1,822 2,101
Property, plant and equipment, net 919,258 997,801 1,009,893
Excess of cost over net assets of acquired businesses 235,924 253,162 257,207
Other assets 54,466 54,978 78,317
-----------------------------------------------------------------------------------------------------
Total assets $1,547,616 $1,601,445 $1,693,056
=====================================================================================================
LIABILITIES
Debt due within one year $ 5,968 $ 17,152 $ 32,321
Accounts payable 89,851 88,413 67,743
Accrued and other liabilities 54,707 35,158 54,166
-----------------------------------------------------------------------------------------------------
Total current liabilities 150,526 140,723 154,230
-----------------------------------------------------------------------------------------------------
Long-term debt 469,101 469,309 477,550
Deferred income taxes 163,323 163,733 196,876
Other liabilities 50,197 67,409 83,070
Minority interest 108,629 103,269 103,668
-----------------------------------------------------------------------------------------------------
Total liabilities 941,776 944,443 1,015,394
-----------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Capital stock
Common Shares, authorized 133,500 shares;
outstanding 75,989, 75,309 and 75,308 shares 127,890 127,890 127,890
Paid-in capital 552,903 552,903 552,903
Accumulated other comprehensive loss (46,763) (9,852) (11,814)
Retained earnings (deficit) (28,190) (13,939) 8,683
-----------------------------------------------------------------------------------------------------
Total stockholders' equity 605,840 657,002 677,662
-----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,547,616 $1,601,445 $1,693,056
=====================================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
2
<PAGE>
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per-share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES
Net sales $248,239 $169,275 $734,559 $572,675
Other income, net 3,401 4,203 7,971 12,727
---------------------------------------------------------------------------------------------
Total Revenues 251,640 173,478 742,530 585,402
---------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of sales 215,221 176,636 679,086 590,284
Selling, general and administrative expense 10,289 14,492 39,852 39,785
Equity in earnings of unconsolidated affiliates (248) 210 (548) (465)
---------------------------------------------------------------------------------------------
225,262 191,338 718,390 629,604
---------------------------------------------------------------------------------------------
Income (loss) from operations 26,378 (17,860) 24,140 (44,202)
Interest income 1,231 255 2,090 7,463
Interest expense (12,981) (12,495) (38,684) (38,070)
Minority interest (985) 2,043 (5,360) (7,585)
---------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes 13,643 (28,057) (17,814) (82,394)
Income tax provision (benefit) 7,447 (11,150) (3,563) (32,950)
---------------------------------------------------------------------------------------------
Income (loss) from continuing operations 6,196 (16,907) (14,251) (49,444)
Loss from discontinued operations:
Loss from operations, net of taxes --- --- --- (5,800)
Loss on disposition, net of taxes --- --- --- (4,724)
---------------------------------------------------------------------------------------------
Income (loss) before extraordinary items 6,196 (16,907) (14,251) (59,968)
Extraordinary loss on early retirement of debt --- --- --- (7,295)
---------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 6,196 $(16,907) $(14,251) $(67,263)
=============================================================================================
Basic and diluted earnings per share:
Income (loss) from continuing operations $ 0.08 $ (0.23) $ (0.19) $ (0.67)
Loss from discontinued operations --- --- --- (0.14)
Extraordinary loss on early retirement of debt --- --- --- (0.10)
---------------------------------------------------------------------------------------------
Net income (loss) $ 0.08 $ (0.23) $ (0.19) $ (0.91)
=============================================================================================
Basic weighted average shares outstanding 74,704 74,168 74,761 74,168
Diluted weighted average shares outstanding 75,995 74,168 75,793 74,168
=============================================================================================
Cash dividends declared per share $ --- $ --- $ --- $ 0.07
=============================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
3
<PAGE>
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
2000 1999
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss from continuing operations $ (14,251) $ (49,444)
Adjustments to reconcile net loss from continuing
operations to net cash flows from operating activities:
Depreciation and amortization 86,147 75,586
Deferred income taxes 13,576 (5,506)
Minority interest in earnings 5,359 7,585
Other non-cash items --- 1,079
Changes in current assets and liabilities excluding
working capital purchased/sold during the period:
Accounts receivable (20,704) (131,897)
Inventories 37,461 37,783
Other current assets 9,982 (11,667)
Accounts payable 2,439 (24,290)
Accrued and other liabilities 7,705 (86,605)
Other (548) (502)
-------------------------------------------------------------------------------------------------
Net cash flows from operating activities 127,166 (187,878)
-------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (11,019) (32,056)
Discontinued operations --- 315,627
Other items (5,932) 1,069
-------------------------------------------------------------------------------------------------
Net cash flows from investing activities (16,951) 284,640
-------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net changes in short-term borrowings (6,000) 21,000
Principal payments on long-term debt (5,392) (8,159)
Redemption of preferred minority interest --- (224,998)
Repurchases of TNCLP common units --- (5,994)
Distributions to minority interests --- (9,429)
Dividends --- (5,283)
Deferred financing costs (6,697) ---
Other --- 13
-------------------------------------------------------------------------------------------------
Net cash flows from financing activities (18,089) (232,850)
-------------------------------------------------------------------------------------------------
Increase (decrease) to cash and short-term investments 92,126 (136,088)
Cash and short-term investments at beginning of period 9,790 141,643
-------------------------------------------------------------------------------------------------
Cash and short-term investments at end of period $ 101,916 $ 5,555
=================================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements. 4
<PAGE>
TERRA INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Capital Paid-In Comprehensive Retained
Stock Capital Loss Earnings (Deficit) Total
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999 $127,890 $552,903 $ (9,852) $(13,939) $657,002
Comprehensive loss:
Net loss --- --- --- (14,251) (14,251)
Foreign currency
translation adjustment --- - (36,911) --- (36,911)
----------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 127,890 $552,903 $(46,763) $(28,190) $605,840
==========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Capital Paid-In Comprehensive Retained
Stock Capital Loss Earnings Total
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $127,887 $552,893 $(14,157) $ 81,229 $747,852
Comprehensive loss:
Net loss --- --- --- (67,263) (67,263)
Foreign currency
translation adjustment --- --- 2,343 --- 2,343
Exercise of stock options 3 10 --- --- 13
Dividends --- --- --- (5,283) (5,283)
----------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 $127,890 $552,903 $(11,814) $ 8,683 $677,662
==========================================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements. 5
<PAGE>
TERRA INDUSTRIES INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. The accompanying unaudited consolidated financial statements and notes
thereto contain all adjustments necessary, in the opinion of management, to
summarize fairly the financial position of Terra Industries Inc. and all
majority-owned subsidiaries ("Terra") and the results of Terra's operations
for the periods presented. Because of the seasonal nature of Terra's
operations and effects of weather-related conditions in several of its
marketing areas, results of operations of any single reporting period
should not be considered as indicative of results for a full year. Certain
reclassifications have been made to prior years' financial statements to
conform with current year presentation. These statements should be read in
conjunction with Terra's 1999 Annual Report to Stockholders.
2. On June 30, 1999, Terra sold its Distribution business segment to
Cenex/Land O Lakes Agronomy Company ("Buyer") for $335.1 million, net of
seasonal working capital from December 31, 1998 and closing costs. Included
in the sale were Terra's approximately 400 retail farm service centers in
the U.S. and Canada, and it's 50% ownership position in Omnium, Inc., a
chemical formulation joint venture. Terra retained ownership of
approximately $25 million in accounts receivable and approximately 40
storage or retail sites associated with Distribution operations. Reserves
for doubtful accounts of approximately $15 million have been recorded to
value the retained accounts receivable at estimated net realizable value.
The retained sites have a zero net book value as costs of disposal are
estimated to approximate sales proceeds.
The accompanying unaudited consolidated statements of operations, financial
position and cash flows have been restated for prior periods to segregate
results of operations and net assets associated with the discontinued
Distribution business segment.
6
<PAGE>
The results of discontinued operations for the nine month period ended
September 30, 1999 were as follows:
(in thousands) 1999
--------------------------------------------------------------------------
Total revenue $ 228,991
Cost of sales (186,647)
Selling, general and
administrative expense (64,711)
Equity in earnings of affiliates 696
--------------------------------------------------------------------------
Operating loss as reported (21,671)
Allocated general and
administrative expense 3,466
--------------------------------------------------------------------------
Operating loss as restated (18,205)
Gain on sale of unconsolidated
affiliate 9,804
Interest income 938
Interest expense (2,202)
Income taxes 3,865
--------------------------------------------------------------------------
Loss from
discontinued operations (5,800)
Loss on disposition, net of taxes (4,724)
--------------------------------------------------------------------------
Net loss from
discontinued operations $ (10,524)
==========================================================================
The sale of the Distribution business segment was effective April 1, 1999
with respect to segment operating results. Distribution revenues and cost
of sales are net of inter-company sales from Terra's Nitrogen business
segment of $8.9 million for the nine month period ended September 30, 1999.
Interest income and expense allocated to the Distribution business
represents interest earned or expensed from short-term investments or
borrowings caused by seasonal fluctuations to Distribution working capital
balances. None of Terra's long-term interest expense was allocated to
earnings from discontinued operations.
The Buyer and Terra have also entered into a three-year nitrogen fertilizer
supply agreement through which the Buyer will purchase approximately the
quantity that Terra's Nitrogen Products segment supplied to both the
Distribution business and the Buyer.
3. Basic earnings per share data are based on the weighted-average number of
Common Shares outstanding during the period. Diluted earnings per share
data are based on the weighted-average number of Common Shares outstanding
and the effect of all dilutive potential common shares including stock
options, restricted shares and contingent shares.
7
<PAGE>
4. Inventories consisted of the following:
September 30, December 31, September 30,
(in thousands) 2000 1999 1999
------------------------------------------------------------------
Raw materials $47,915 $ 57,772 $ 54,014
Finished goods 44,950 75,862 77,435
------------------------------------------------------------------
Total $92,865 $133,634 $131,449
==================================================================
5. Five lawsuits by U.K. soft drink producers and distributors have been filed
against Terra and other defendants seeking in excess of (Pounds)14.1
million in damages, plus costs and interest. The lawsuits seek to recover
the costs of a product recall the plaintiffs initiated in reaction to 1998
newspaper accounts concerning trace amounts of benzene found in carbon
dioxide used as an ingredient to the recalled products. Terra produced the
carbon dioxide at one of its U.K. plants. A sixth lawsuit seeking
(Pounds)12.5 million in damages was settled by Terra's insurer in January
2000, with Terra making no contribution toward the settlement. The first
trial is scheduled for January 2001. In addition to the filed lawsuits,
certain other soft drink producers have indicated their intention to file
claims in unspecified amounts.
Terra has denied liability for these claims and intends to vigorously
defend its position. Terra believes it has insurance coverage for any
damages. Its insurer is paying Terra's defense costs and has funded the
January 2000 settlement, but has reserved the right to deny coverage in
whole or in part for any adverse judgements in the remaining cases. While
it is not feasible to predict with certainty the final outcome of these
proceedings, management does not believe this matter should have a material
adverse effect on Terra's financial condition.
Terra and certain of its subsidiaries are involved in various legal actions
and claims, including environmental matters, arising during the normal
course of business. Although it is not possible to predict with any
certainty the Terra and certain of its subsidiaries are involved in various
other legal actions and claims, including environmental matters, arising
during the normal course of business. Although it is not possible to
predict with any certainty the outcome of such matters, it is the opinion
of management that these matters will not have a material adverse effect on
the results of operations, financial position or cash flow of the
Corporation.
6. Natural gas is the principal raw material used in Terra's production of
nitrogen products and methanol. Terra enters into forward pricing
arrangements for natural gas provided that such arrangements would not
result in costs that would be greater than expected selling prices for
nitrogen products and methanol. Under those conditions, Terra's normal
natural gas procurement policy is to effectively fix or cap the price of
between 25% and 80% of its natural gas requirements for a one-year period
and up to 50% of its natural gas requirements for the subsequent two-year
period through supply contracts, financial derivatives and other forward
pricing techniques. The financial derivatives are traded in months forward
and settlement dates are scheduled to coincide with gas purchases during
that future period. These contracts reference physical natural gas prices
or appropriate NYMEX futures contract prices. Contract physical prices are
frequently based on prices at the most common and financially liquid
location of reference for financial derivatives related to natural gas.
However, natural gas supplies for the Corporation's facilities are
purchased for each plant at locations other than reference points, which
often creates a location basis differential between the contract price and
the physical price of natural gas. Accordingly, the use of financial
derivatives may not exactly offset the change in the price of physical gas.
The Corporation has entered into forward pricing positions for a portion of
its natural gas requirements for the remainder of 2000 and part of 2001,
consistent with its policy. As a result
8
<PAGE>
of its policies, the Corporation has reduced the potential adverse
financial impact of natural gas price increases during the forward pricing
period, but conversely, if natural gas prices were to fall, the Corporation
will incur higher costs. Contracts were in place at September 30, 2000 to
cover 25% of natural gas requirements for the succeeding twelve months. The
September 30, 2000 contracts covered 18% of Terra's expected North American
natural gas requirements and 60% of its expected U.K. natural gas
requirements. Most of Terra's North American contracts expire during 2000
fourth quarter whereas U.K. contracts generally expire at an equal rate
through September 2001.
Unrealized gains from forward pricing positions totaled $27.5 million as of
September 30, 2000. In addition, Terra had purchase commitments for natural
gas at prices $21.9 million lower than September 30, 2000 forward markets.
The amount ultimately recognized by the Corporation will be dependent on
published prices in effect at the time of settlement. Terra also had $12.0
million of realized gains on closed contracts relating to future periods
that have been deferred to the respective period.
7. Prior to April 7, 2000, Terra had a revolving credit facility with an
available line of credit to $62 million for working capital needs and other
corporate purposes. Interest on borrowings under this line was charged at
current market rates.
On April 7, 2000, Terra entered into a $225 million asset based financing
agreement that replaced its $62 million revolving credit facility and
amended and restated its $109 million long-term bank notes. The new
financing agreement, which expires January 2003, bears interest at floating
rates comparable to the previous facilities and is secured by substantially
all of Terra's assets. Debt repayments of $1.25 million are required
quarterly commencing June 30, 2000, with remaining outstanding balances due
at maturity. The new agreement also requires Terra to adhere to certain
limitations on additional debt, capital expenditures, acquisitions, liens,
asset sales, investments, prepayments of subordinated indebtedness, changes
in lines of business and transactions with affiliates. In addition, Terra
is required to maintain minimum levels of earnings before interest, income
taxes, depreciation and amortization (as defined in the financing
agreement) computed on a quarterly basis.
8. On June 1, 2000, Terra announced it would not restart its Blytheville,
Arkansas ammonia and urea production facility as the result of high natural
gas costs. The plant resumed production on August 19, 2000, when market
conditions improved as the result of higher ammonia and urea prices.
9
<PAGE>
9. Terra classifies its continuing operations into two business segments:
Nitrogen Products and Methanol. The Nitrogen Products business produces and
distributes ammonia, urea, nitrogen solutions and ammonium nitrate to farm
distributors and industrial users. The Methanol business manufactures and
distributes methanol which is used in the production of a variety of
chemical derivatives and in the production of methyl tertiary butyl ether
(MTBE), an oxygenate and an octane enhancer for gasoline. Terra does not
allocate interest, income taxes or infrequent items to continuing business
segments. Included in Other are general corporate activities not
attributable to a specific industry segment. The following summarizes
operating results by business segment:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- --------------------
(in thousands) 2000 1999 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues - Nitrogen Products $206,996 $144,606 $639,575 $519,904
- Methanol 42,710 28,569 96,995 62,133
- Other 1,934 303 5,960 3,365
--------------------------------------------------------------------------------
Total revenues $251,640 $173,478 $742,530 $585,402
================================================================================
Income (loss) from operations
- Nitrogen Products $ 17,506 $(16,884) $ 19,318 $(26,237)
- Methanol 9,974 (801) 9,561 (13,785)
- Other (1,102) (175) (4,739) (4,180)
--------------------------------------------------------------------------------
Total income (loss) from operations $ 26,378 $(17,860) $ 24,140 $(44,202)
================================================================================
</TABLE>
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
---------------------
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED WITH
QUARTER ENDED SEPTEMBER 30, 1999
Consolidated Results
Terra reported net income from continuing operations of $6.2 million for the
2000 third quarter compared with a net loss of $16.9 million in 1999. The
increase in 2000 profits from continuing operations was primarily related to
increased operating income as the result of higher product prices offset partly
by higher natural gas costs.
Terra classifies its operations into two business segments: Nitrogen Products
and Methanol. The Nitrogen Products segment represents operations directly
related to the wholesale sales of nitrogen products from Terra's ammonia
production and upgrading facilities. The Methanol segment represents wholesale
sales of methanol produced at Terra's two methanol manufacturing facilities.
Total revenues and operating income (loss) by segment for the three-month
periods ended September 30, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
(in thousands) 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Nitrogen Products $206,996 $144,606
Methanol 42,710 28,569
Other 1,934 303
--------------------------------------------------------------------------------
$251,640 $173,478
================================================================================
OPERATING INCOME (LOSS):
Nitrogen Products $ 17,506 $(16,884)
Methanol 9,974 (801)
Other expense - net (1,102) (175)
--------------------------------------------------------------------------------
$ 26,378 $(17,860)
================================================================================
</TABLE>
Nitrogen Products
Volumes and prices for the three-month periods ended September 30, 2000 and 1999
were as follows:
VOLUMES AND PRICES
<TABLE>
<CAPTION>
2000 1999
--------------------------------------------------------------------------------------
Sales Average Sales Average
(quantities in thousands of tons) Volumes Unit Price Volumes Unit Price
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ammonia 311 $ 175 303 $ 115
Nitrogen solutions 887 87 794 58
Urea 69 149 114 95
Ammonium nitrate 283 128 189 114
--------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
Nitrogen revenues increased $62.4 million to $207.0 million in the 2000 third
quarter compared with $144.6 million in the 1999 quarter. Higher 2000 revenues
reflect price increases of $50.0 million from the 1999 third quarter in response
to substantially lower industry-wide nitrogen inventories. Ammonium nitrate
sales volumes in the 2000 third quarter were higher than in 1999, which for the
most part represented demand shifted from late 1999 into 2000 as customers
deferred purchases where possible in response to expected price declines.
The Nitrogen segment had operating income of $17.5 million for the third quarter
of 2000 compared with operating loss of $16.9 million for the 1999 third
quarter. The increase in operating income was primarily related to higher
selling prices offset partly by higher natural gas costs. Natural gas costs
increased almost $26 million over the 1999 third quarter as unit costs, net of
forward pricing gains and losses, increased to $3.14/MMBtu, during the 2000
third quarter compared to $2.24/MMBtu during the same 1999 period. Third quarter
2000 natural gas costs were reduced $23.3 million from spot prices as the result
of forward price contracts.
Methanol
For the three months ended September 30, 2000 and 1999, respectively, the
Methanol segment had revenues of $42.7 million and $28.6 million. Sales volumes
decreased 7.5% from prior year levels, but selling prices increased from
$0.39/gallon in 1999 to $0.62/gallon in 2000 as the result of more balanced
industry inventories in relation to demand than was the case in the 1999 third
quarter.
The Methanol segment generated a $10.0 million operating profit in the 2000
third quarter compared to a $0.8 million operating loss in 1999. The increase in
operating income was primarily related to higher selling prices offset partly by
higher natural gas costs. Natural gas costs increased almost $8 million over the
1999 third quarter as unit costs, net of forward pricing gains and losses,
increased to $3.50/MMbtu, during the 2000 third quarter compared to $2.25/MMBtu
during the 1999 period. In addition, cost reductions of $1.0 million were
realized due to improved plant operations as compared to 1999. Third quarter
2000 natural gas costs were reduced $5.3 million by forward pricing contracts.
Other Expense - Net
Other operating expense of $1.1 million in the 2000 third quarter was $0.9
million unfavorable to 1999 due primarily to 2000 legal expenses associated with
a lawsuit in which Terra was a plaintiff.
Interest Expense - Net
Interest expense, net of interest income, totaled $11.8 million during the 2000
third quarter compared with $12.2 million for the prior year period.
Minority Interest
Minority interest represents third-party interests in the earnings of the
publicly held common units of Terra Nitrogen Company, L.P. (TNCLP). Minority
interest charges of $1.0 million were recorded for the 2000 third quarter as the
result of TNCLP earnings that were included in their entirety in consolidated
operating results. The increased charge as compared to the 1999 third quarter
reflected higher nitrogen earnings for TNCLP.
12
<PAGE>
Income Taxes
Income taxes for the third quarter 2000 were recorded at an effective tax rate
of 55%, to adjust year-to-date provisions to Terra's estimated annual effective
tax rate.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH
NINE MONTHS ENDED SEPTEMBER 30, 1999
Consolidated Results
Terra reported a net loss of $14.3 million for the nine months ended September
30, 2000 compared with net loss of $67.3 million in 1999. During the 1999 second
quarter, Terra sold its Distribution business segment, which generated a $10.5
million net loss during the 1999 period. In connection with sale of the
Distribution business segment, Terra repaid outstanding bank obligations and
realized a $7.3 million extraordinary loss on early retirement of debt.
Terra had a $14.3 million net loss from continuing operations during the nine
months ending September 30, 2000 compared to a $49.4 million loss in 1999. The
smaller 2000 loss was related primarily to higher prices for the nitrogen and
methanol products manufactured and sold by the Corporation.
Total revenues and operating income (loss) by segment for the nine-month periods
ended September 30, 2000 and 1999 were as follows:
(in thousands) 2000 1999
--------------------------------------------------------------------------------
REVENUES:
Nitrogen Products $639,575 $519,904
Methanol 96,995 62,133
Other 5,960 3,365
--------------------------------------------------------------------------------
$742,530 $585,402
================================================================================
OPERATING INCOME (LOSS):
Nitrogen Products $ 19,318 $(26,237)
Methanol 9,561 (13,785)
Other expense - net (4,739) (4,180)
--------------------------------------------------------------------------------
$ 24,140 $(44,202)
================================================================================
Nitrogen Products
Volumes and prices for the nine-month periods ended September 30, 2000 and 1999
were as follows:
VOLUMES AND PRICES
2000 1999
-------------------------------------------------------------------------------
Sales Average Sales Average
(quantities in thousands of tons) Volumes Unit Price Volumes Unit Price
-------------------------------------------------------------------------------
Ammonia 1,130 $ 153 1,120 $120
Nitrogen solutions 3,066 75 2,698 62
Urea 353 131 428 98
Ammonium nitrate 819 114 624 115
-------------------------------------------------------------------------------
13
<PAGE>
Nitrogen revenues increased $119.7 million to $639.6 million in the 2000 first
nine months compared with $519.9 million in the 1999 period due to higher
selling prices for most products and increased sales volumes of nitrogen
solutions and ammonium nitrate. The stronger demand for nitrogen solutions was
due to more attractive prices compared to ammonia and lower industry
inventories. Higher prices for ammonia, nitrogen solution and urea were due to
lower North American and U.K. nitrogen supplies as a result of reduced industry-
wide production levels since mid-1999. Ammonium nitrate demand increased for the
first nine months due primarily to the shift from late 1999 into 2000 as
customers deferred purchases where possible in response to expected price
declines.
The Nitrogen segment had an operating profit of $19.3 million during the nine
months ended September 30, 2000 compared with operating loss of $26.2 million
for the same 1999 period. The increase in operating income was primarily related
to selling prices that were $85.5 million higher than in 1999. In addition,
higher sales volumes, reduced freight costs and lower maintenance spending
contributed to 2000 operating income. These factors were partially offset by
higher natural gas costs. Natural gas costs, net of forward pricing gains or
losses, increased to $2.76/MMBtu during the 2000 first nine months from
$2.27/MMBtu during the same 1999 period, which increased total 2000 costs by
$45.9 million. Natural gas cost increases were mitigated by forward pricing
contracts that reduced 2000 costs by $45.2 million.
Methanol
For the nine months ended September 30, 2000 and 1999, respectively, the
Methanol segment had revenues of $97.0 million and $62.1 million. The Beaumont
plant was shut down for two months during the 1999 first quarter, because raw
material costs exceeded selling prices, which caused a significant decline in
1999 revenues. Methanol selling prices averaged $0.48/gallon during the 2000
first nine months, compared to $0.34/gallon during the same 1999 period.
The methanol segment had an operating profit of $9.6 million for the first nine
months of 2000 compared with operating loss of $13.8 million for the 1999
period. The reduced operating loss was a result of the higher selling prices
partly offset by higher natural gas costs. Natural gas costs, net of forward
pricing gains or losses, increased to $2.92/MMBtu during the 2000 first nine
months from $2.29/MMBtu during the same 1999 period, which increased total 2000
costs by $13.7 million. Natural gas costs for the methanol segment were $10.4
million lower than spot purchase prices as the result of forward pricing
contracts.
Other Expense - Net
Terra had $4.7 million of other operating expenses during the 2000 first nine
months, compared to $4.2 million during the 1999 period. Other expense in 2000
related primarily to legal expenses associated with a lawsuit in which Terra was
a plaintiff. Most of the 1999 expenses represent allocations of shared service
expenses to discontinued Distribution operations, which amounted to $3.5 million
for the first nine months of 1999.
Interest Expense - Net
Interest expense, net of interest income, totaled $36.6 million during the 2000
first nine months compared with $30.6 million for the prior year period. The
increase is primarily related to interest income of $6.3 million realized during
the 1999 second quarter in connection with the sale of the Distribution business
segment.
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Minority Interest
Minority interest represents third-party interests in the earnings of the
publicly held common units of Terra Nitrogen Company, L.P. (TNCLP). Minority
interest charges of $5.4 million were recorded for the 2000 first nine months as
the result of TNCLP earnings that were included in their entirety in
consolidated operating results. The 1999 first nine months minority interest
charge of $7.6 million included approximately $9.4 million for a third-party's
limited partnership interest in Beaumont Methanol, Limited Partnership (BMLP)
net of $1.8 million for the third-party share of TNCLP losses. On June 30, 1999,
the Corporation redeemed the third-party's BMLP interest and thereby eliminated
future charges to earnings relating to the minority BMLP partnership interest.
Income Taxes
Income taxes for the first nine months of 2000 were recorded at an effective tax
rate of 20%, representing the Corporation's estimated annual effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's primary uses of funds will be to fund its working capital
requirements, make payments on its indebtedness and other obligations, make
capital expenditures and acquisitions and fund repurchases of TNCLP common
units. The principal sources of funds will be cash flow from operations and
borrowings under available bank facilities.
Net cash flows from operations in the first nine months of 2000 were $127.2
million comprised of $36.4 million generated from changes to net working capital
balances, plus $90.8 million of operating profits after non-cash charges.
Working capital reductions during the 2000 first nine months are primarily
related to seasonal changes in inventory balances and inventory reductions
related to third quarter 2000 production curtailments of ammonia and urea. As
market conditions improve, it is likely that production rates will be increased
which would result in higher inventories.
On June 30, 1999, Terra sold its Distribution business segment to Cenex/Land O
Lakes Agronomy Company ("Buyer") for $335.l million, net of seasonal working
capital from December 31, 1998 and closing costs. Sales proceeds were used to
redeem the outstanding preferred minority interest in BMLP for $225 million,
fund termination of its accounts receivable securitization program and repay
outstanding borrowings under the Corporation's revolving credit facility.
In connection with the sale of the Distribution business segment, Terra
renegotiated outstanding bank agreements and reduced amounts available under its
revolving credit facility from $225 million to $62 million.
On April 7, 2000, Terra entered into a $225 million asset based financing
agreement that replaced its $62 million revolving credit facility and amended
and restated its $109 million long-term bank notes. The new financing agreement,
which expires January 2003, bears interest at floating rates comparable to the
previous facilities and is secured by substantially all of Terra's assets. Debt
repayments of $1.25 million are required quarterly commencing June 30, 2000,
with remaining outstanding balances due at maturity. The new agreement also
requires Terra to adhere to certain limitations on additional debt, capital
expenditures, acquisitions, liens, asset sales, investments, prepayments of
subordinated indebtedness, changes in lines of business and transactions with
affiliates. In addition Terra is required to maintain minimum levels of earnings
before interest, income taxes, depreciation and amortization (as defined in the
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financing agreement) computed on a quarterly basis. Failure to meet these
covenants would require Terra to incur additional costs to amend the bank
facilities or could result in termination of the facilities.
Terra management believes that cash from operations and available financing
sources will be sufficient to meet anticipated cash requirements.
The Corporation funded plant and equipment expenditures of $11.0 million during
the first nine months of 2000. The Corporation expects remaining 2000 capital
expenditures to be less than $10 million consisting principally of routine
equipment replacements.
On August 3, 1999, the Board of Directors suspended the Corporation's payment of
a regular quarterly dividend on common stock.
Cash balances at September 30, 2000, were $101.9 million, none of which was used
to collateralize letters of credit.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 is effective for fiscal years
beginning after June 15, 2000, as amended by SFAS 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133". The Corporation has reviewed SFAS 133 and intends to
implement the standard on January 1, 2001. At this time, the Corporation has not
determined the impact SFAS 133 will have on its financial position, results of
operations or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements. SAB 101 summarizes the SEC's view in applying generally accepted
accounting principles to selected revenue recognition issues. The application of
the guidance in SAB 101 will be required in the Company's fourth quarter of
2000. Terra does not expect the adoption of SAB 101 to have a material effect on
its financial statements.
POTENTIAL CHANGE OF CONTROL
Anglo American plc, through its wholly-owned subsidiaries, owns 49.5% of the
Corporation's outstanding shares. Anglo American has made public its intention
to dispose of its interest in the Corporation with the timing based on market
and other conditions.
FORWARD LOOKING PRECAUTIONS
Information contained in this report, other than historical information, may be
considered forward looking. Forward looking information reflects Management's
current views of future events and financial performance that involve a number
of risks and uncertainties. The factors that could cause actual results to
differ materially include, but are not limited to, the following: general
economic conditions within the agricultural industry, competitive factors and
price changes (principally, sales prices of nitrogen and methanol products and
natural gas costs), changes in product mix, changes in the seasonality of demand
patterns, changes in weather conditions, changes in agricultural regulations,
and other risks detailed in the "Factors that Affect Operating Results" section
of the Corporation's most recent Form 10-K.
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PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) Exhibits
27 Financial Data Schedule [EDGAR filing only]
(B) Reports on Form 8-K
Form 8-K dated April 7, 2000, announcing the completion of the
refinancing of Terra's credit line and long-term debt.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
TERRA INDUSTRIES INC.
Date: October 30, 2000 /s/ Francis G. Meyer
--------------------------------
Francis G. Meyer
Senior Vice President and Chief Financial
Officer and a duly authorized signatory
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