UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2008

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

At the close of business on October 24, 2008 the following shares of the registrant’s stock were outstanding:

Common Shares, without par value		102,131,215 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 Stockholders’ Equity			7
Notes to Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			40
Item 3. Quantitative and Qualitative Disclosures about Market Risk			46
Item 4. Controls and Procedures			46
Part II — OTHER INFORMATION
Item 1. Legal Proceedings			48
Item 1A. Risk Factors			48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			48
Item 3. Defaults upon Senior Securities			48
Item 4. Submission of Matters to a Vote of Security Holders			49
Item 5. Other Information			49
Item 6. Exhibits			50
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TERRA INDUSTRIES INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

		September 30,				December 31,				September 30,
		2008				2007				2007
Assets
Cash and cash equivalents		$	680,666			$	698,238			$	360,478
Accounts receivable, less allowance for doubtful accounts of $316, $264 and $326			235,587				171,183				159,660
Inventories			175,920				129,321				123,950
Margin deposits with derivative counterparties			132,058				638				538
Other current assets			62,193				28,195				12,503
Current assets held for sale — discontinued operations (Note 2)			45,607				2,335				2,475
Total current assets			1,332,031				1,029,910				659,604
Property, plant and equipment, net			407,037				389,728				392,891
Equity method investments			382,606				351,986				369,605
Deferred plant turnaround costs, net			29,303				42,190				35,029
Other assets			31,965				31,484				20,335
Noncurrent assets held for sale — discontinued operations (Note 2)			—				43,029				43,029
Total assets		$	2,182,942			$	1,888,327			$	1,520,493
Liabilities
Accounts payable			124,138				110,687				80,293
Customer prepayments			195,039				299,351				85,313
Derivative hedge liabilities			218,652				14,733				26,167
Accrued and other current liabilities			113,042				87,922				65,354
Current liabilities held for sale — discontinued operations (Note 2)			2,749				4,993				4,833
Total current liabilities			653,620				517,686				261,960
Long-term debt			330,000				330,000				330,000
Deferred taxes			53,135				99,854				49,691
Pension liabilities			10,018				9,268				38,041
Other liabilities			78,779				84,876				88,342
Minority interest			105,456				109,729				102,854
Noncurrent liabilities held for sale — discontinued operations (Note 2)			—				739				1,849
Total liabilities and minority interest			1,231,008				1,152,152				872,737
Preferred Shares — liquidation value of $2,100; $120,000 and $120,000 (Note 7)			2,027				115,800				115,800
Common Stockholders’ Equity
Capital stock
Common Shares, authorized 133,500 shares; 102,081; 89,587 and 89,501 outstanding			154,866				142,170				142,069
Paid-in capital			625,058				618,874				617,085
Accumulated other comprehensive loss			(183,607	)			(45,328	)			(63,480	)
Retained earnings (accumulated deficit)			353,590				(95,341	)			(163,718	)
Total stockholders’ equity			949,907				620,375				531,956
Total liabilities and stockholders’ equity		$	2,182,942			$	1,888,327			$	1,520,493

See Accompanying Notes to the Consolidated Financial Statements.

TERRA INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per-share amounts)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Revenues
Product revenues		$	788,272			$	577,916			$	2,198,398			$	1,768,377
Other income			1,942				2,560				9,617				5,558
Total revenues			790,214				580,476				2,208,015				1,773,935
Costs and Expenses
Cost of sales			578,310				441,863				1,532,369				1,396,480
Selling, general and administrative expense			18,301				21,936				58,238				67,187
Equity earnings of unconsolidated affiliates (Note 10)			(15,857	)			(5,566	)			(45,665	)			(10,379	)
Total cost and expenses			580,754				458,233				1,544,942				1,453,288
Income from operations			209,460				122,243				663,073				320,647
Interest income			5,409				4,709				19,330				11,078
Interest expense			(6,773	)			(6,905	)			(20,587	)			(22,685	)
Loss on early retirement of debt			—				—				—				(38,836	)
Income before income taxes and minority interest			208,096				120,047				661,816				270,204
Income tax provision			(63,169	)			(40,654	)			(229,742	)			(87,390	)
Minority interest			(15,748	)			(11,144	)			(52,369	)			(33,720	)
Equity earnings of unconsolidated affiliates (Note 10)			42,091				2,202				88,986				2,202
Income from continuing operations			171,270				70,451				468,691				151,296
Income (loss) from discontinued operations, net of tax (Note 2)			141				(16,071	)			7,612				(19,052	)
Net income			171,411				54,380				476,303				132,244
Inducement payment of preferred stock conversion			(5,248	)			—				(5,248	)			—
Preferred share dividends			(1,275	)			(1,275	)			(3,825	)			(3,825	)
Income Available to Common Stockholders		$	164,888			$	53,105			$	467,230			$	128,419
Weighted average shares outstanding:
Basic			94,259				90,092				91,821				91,143
Diluted			104,605				105,946				104,851				106,899
Earnings per share — basic
Income from continuing operations		$	1.75			$	0.77			$	5.01			$	1.62
Income (loss) from discontinued operations (Note 2)			—				(0.18	)			.08				(0.21	)
Net income		$	1.75			$	0.59			$	5.09			$	1.41
Earnings per share — diluted
Income from continuing operations		$	1.64			$	0.66			$	4.47			$	1.41
Income (loss) from discontinued operations (Note 2)			—				(0.15	)			.07				(0.17	)
Net Income		$	1.64			$	0.51			$	4.54			$	1.24

See Accompanying Notes to the Consolidated Financial Statements.

TERRA INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

		Nine Months Ended
		September 30,
		2008				2007
Operating Activities
Net income		$	476,303			$	132,244
Income (loss) from discontinued operations			7,612				(19,052	)
Income from continuing operations			468,691				151,296
Adjustments to reconcile income from continuing operations to net cash flows from operating activities:
Depreciation of property, plant and equipment and amortization of deferred plant turnaround costs			58,406				75,025
Loss on sale of property, plant and equipment			2,235				—
Deferred income taxes			(51,772	)			61,629
Minority interest in earnings			52,369				33,720
Distributions in excess of equity earnings			2,524				5,121
Equity earnings GrowHow UK Limited			(88,986	)			(2,202	)
Non-cash (gain) loss on derivatives			(1,610	)			176
Share-based compensation			10,333				16,838
Amortization of intangible and other assets			6,193				6,655
Non-cash loss on early retirement of debt			—				4,662
Changes in operating assets and liabilities:
Accounts receivable			(65,639	)			(29,137	)
Inventories			(42,221	)			49,473
Accounts payable and customer prepayments			(90,559	)			(25,023	)
Margin deposits with derivative counterparties			(131,420	)			(501	)
Other assets and liabilities, net			67,471				19,433
Net cash flows from operating activities — continuing operations			196,015				367,165
Net cash flows from operating activities — discontinued operations			9,439				14,572
Net cash flows from operating activities			205,454				381,737
Investing Activities
Capital expenditures and plant turnaround expenditures			(70,123	)			(59,109	)
Cash retained by GrowHow UK Limited			—				(17,249	)
Proceeds from sale of property, plant and equipment			1,660				—
Distributions received from unconsolidated affiliates			7,196				—
Contribution settlement received from GrowHow UK Limited			27,427				—
Net cash flows from investing activities — continuing operations			(33,840	)			(76,358	)
Net cash flows from investing activities — discontinued operations			—				—
Net cash flows from investing activities			(33,840	)			(76,358	)
Financing Activities
Issuance of debt			—				330,000
Payments under borrowing arrangements			—				(331,300	)
Payments for debt issuance costs			—				(6,403	)
Preferred share dividends paid			(3,825	)			(3,825	)
Inducement payment to preferred stockholders			(5,248	)			—
Common stock dividends paid			(18,299	)			—
Common stock issuances and vestings			(9,839	)			89
Excess tax benefits from equity compensation plans			12,122				—
Payments under share repurchase program			(107,500	)			(87,426	)
Distributions to minority interests			(56,642	)			(25,554	)
Net cash flows from financing activities — continuing operations			(189,231	)			(124,419	)
Net cash flows from financing activities — discontinued operations			—				—

Consolidated Statements of Cash Flows (continued)

		Nine Months ended
		September 30,
		2008				2007
Net cash flows from financing activities			(189,231	)			(124,419	)
Effect of exchange rate changes on cash			45				501
Increase (decrease) to cash and cash equivalents			(17,572	)			181,461
Cash and cash equivalents at beginning of period			698,238				179,017
Cash and cash equivalents at end of period		$	680,666			$	360,478
Supplemental cash flow information:
Interest paid		$	23,975			$	22,900
Income tax refunds received		$	206			$	555
Income taxes paid		$	197,239			$	8,743
Supplemental schedule of non-cash investing and financing activities:
Conversion of warrants to common stock		$	2,496			$	568
Supplemental schedule of unconsolidated affiliates distributions received:
Equity earnings of unconsolidated affiliates		$	45,665			$	10,379
Distribution more than equity earnings			2,524				5,121
Distributions received from unconsolidated affiliates			7,196				—
Total cash distributions received from unconsolidated affiliates		$	55,385			$	15,500

See Accompanying Notes to the Consolidated Financial Statements.

TERRA INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(in thousands)

										Accumulated				(Accumulated
										Other				Deficit)
		Common				Paid-In				Comprehensive				Retained								Comprehensive
		Stock				Capital				Loss				Earnings				Total				Income
Balance at January 1, 2008		$	142,170			$	618,874			$	(45,328	)		$	(95,341	)		$	620,375
Comprehensive income (loss):
Net income			—				—				—				476,303				476,303			$	476,303
Foreign currency translation adjustment			—				—				(30,356	)			—				(30,356	)			(30,356	)
Change in fair value of derivatives, net of taxes of $69,651			—				—				(107,923	)			—				(107,923	)			(107,923	)
Comprehensive income																						$	338,024
Preferred share dividends			—				—				—				(3,825	)			(3,825	)
Common stock dividends			—				—				—				(18,299	)			(18,299	)
Shares repurchased and retired under the share repurchase program			(2,588	)			(104,912	)			—				—				(107,500	)
Excess tax benefit			—				14,603				—				—				14,603
Exercise of stock options			11				23				—				—				34
Net vested stock			475				(12,897	)			—				—				(12,422	)
Conversion of warrants			2,961				(413	)			—				—				2,548
Inducement of preferred stock			11,837				101,936				—				(5,248	)			108,525
Share-based compensation			—				7,844				—				—				7,844
Balance September 30, 2008		$	154,866			$	625,058			$	(183,607	)		$	353,590			$	949,907

										Accumulated
										Other
		Common				Paid-In				Comprehensive				Accumulated								Comprehensive
		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			—				—				—				132,244				132,244			$	132,244
Foreign currency translation adjustment			—				—				(42,361	)			—				(42,361	)			(42,361	)
Change in fair value of derivatives, net of taxes of $1,381			—				—				(2,565	)			—				(2,565	)			(2,565	)
Pension and post retirement benefit liabilities			—				—				1,913				—				1,913				1,913
Comprehensive income																						$	89,231
Transfer of UK pension plan to GrowHow UK Limited			—				—				43,272				—				43,272
Preferred share dividends			—				—				—				(3,825	)			(3,825	)
Exercise of stock options			252				320				—				—				572
Net vested stock			273				(757	)			—				—				(484	)
Conversion of warrants			568				(568	)			—				—				—
Shares repurchased and retired under the share repurchase program			(4,000	)			(83,426	)			—				—				(87,426	)
Share-based compensation			—				7,620				—				—				7,620
Balance September 30, 2007		$	142,069			$	617,085			$	(63,480	)		$	(163,718	)		$	531,956

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”, “our” “we” and “us”) and the results of operations for the periods presented. All of these adjustments are of a normal and recurring nature. Because of the seasonal nature of our 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 our 2007 Annual Report on Form 10-K to Stockholders.

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 our nitrogen-based products, including any realized hedging gains or losses related to nitrogen product derivatives, and are reduced by estimated discounts and trade allowances. We classify amounts directly or indirectly billed to our customers for shipping and handling as revenue.

Cost of Sales

Cost of sales are primarily manufacturing costs related to our nitrogen-based products, including any realized hedging gains or losses related to natural gas derivatives. We classify amounts directly or indirectly billed for delivery of products to our customers or our terminals as cost of sales.

Derivatives and Financial Instruments

We enter into derivative financial instruments, including swaps, basis swaps, and options, to manage the effect of changes in natural gas costs and to manage the prices of our nitrogen products. We report the fair value of the derivatives on our 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 cash flow hedge, and to the extent such hedge is determined to be effective, changes in fair value are 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.

Segment Reporting

We review our reportable industry segments based upon the guidance provided in Statement of Financial Accounting Standards (SFAS) 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”). The methanol industry segment does not meet the quantitative thresholds of SFAS 131 because we have reclassified the Beaumont, Texas related assets and liabilities as held for sale and have included earnings related to these assets in discontinued operations as required by SFAS 144, Accounting for the Impairment or Disposal of Long-lived Assets (“SFAS 144”). As a wholesale nitrogen producer we are no longer reporting industry segments in a separate disclosure because the only reportable industry segment is nitrogen.

Inventories

Inventories are stated at the lower of average cost or estimated net realizable value. We perform a monthly analysis of our inventory balances to determine if the carrying amount of inventories exceeds its net realizable value. The analysis of estimated realizable value is based on customer orders, market trends, and historical pricing. If the carrying amount exceeds the estimated net realizable value, the carrying amount is reduced to the estimated net realizable value.

Production costs include the cost of direct labor and materials, depreciation and amortization, and overhead costs related to manufacturing activity. The cost of inventories is determined using the first- in, first-out method.

We estimate a reserve for obsolescence and excess of our materials and supplies inventory. Inventory is stated net of the reserve.

Plant Turnaround Costs

Plant turnarounds are periodically performed to extend the useful life, increase output and/or efficiency and ensure the long-term reliability and safety of integrated plant machinery at our continuous process production facilities. The nature of a turnaround is such that it occurs on less than an annual basis and requires a multi-week shutdown of plant operations. Specific procedures performed during the turnaround include the disassembly, inspection and replacement or overhaul of plant machinery (boilers, pressure vessels, piping, heat exchangers, etc.) and rotating equipment (compressors, pumps, turbines, etc.), equipment recalibration and internal equipment efficiency assessments.

Preceding a turnaround, plants experience decreased efficiency in resource conversion to finished products. Replacement or overhaul of equipment and items such as compressors, turbines, pumps, motors, valves, piping and other parts that have an estimated useful life of at least two years, the internal assessment of production equipment, replacement of aged catalysts, and new installation/recalibration of measurement and control devices result in increased production output and/or improved plant efficiency after the turnaround. Turnaround activities are betterments that meet at least one of the following criteria: 1) extend the equipment useful life, or 2) increase the output and/or efficiency of the equipment. As a result, we follow the deferral method of accounting for these turnaround costs and thus they are capitalized and amortized over the period benefited, which is generally the two-year period until the next turnaround. Turnaround activities may extend the useful life of the assets since the overhaul of heat exchangers, pressure vessels, compressors, turbines, pumps, motors, etc. allow the continued use beyond the original design. If criteria for betterment or useful life extension are not met, we expense the turnaround expenditures as repair and maintenance activities in the period performed.

In addition, state and certain other regulatory agencies require a scheduled biennial safety inspection of plant components, such as steam boilers and registered pressure vessels and piping, which can only be performed during the period of shut down. A full shutdown and dismantling of components of the plant is generally mandatory to facilitate the inspection and certification. We defer costs associated with regulatory safety inspection mandates that are incurred during the turnaround. These costs are amortized over the period benefited, which is generally the two-year period until the next turnaround.

During a turnaround event, there will also be routine repairs and maintenance activities performed for normal operating purposes. The routine repairs and maintenance costs are expensed as incurred. We do not classify routine repair and maintenance activities as part of the turnaround cost capitalization since they are not considered asset betterments.

The installation of major equipment items can occur at any time, but frequently occur during scheduled plant outages, such as a turnaround. During a plant turnaround, expenditures for replacing major equipment items are capitalized as separate fixed assets.

Terra classifies capitalized turnaround costs as an investing activity under the caption “Capital expenditures and plant turnaround expenditures” in the Statement of Cash Flows, since this cash outflow relates to expenditures related to productive assets. Repair and maintenance costs are expensed as incurred and are included in the operating cash flow.

There are three acceptable methods of accounting for turnaround costs: 1) direct expensing method, 2) built-in overhaul method and 3) deferral method. Terra utilizes the deferral method and recognizes turnaround expense over the period benefited since these expenditures are asset betterments. If the direct expense method was utilized, all turnaround expenditures would be recognized in the income statement as a period cost when incurred and reflected in cash flows from operating activities in the statement of cash flows.

Impairment of Long-Lived Assets

We review our 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.

Discontinued Operations

During 2007, we entered into an agreement for Eastman Chemical Company to purchase our Beaumont, Texas assets, including the methanol and ammonia production facilities. We anticipate closing the sale on or before January 1, 2009. In connection with this sales agreement, we evaluated our Beaumont facility for impairment. We determined that this facility’s carrying values were impaired and we recorded a $39 million impairment charge in the third quarter of 2007.

Pursuant to the requirements of SFAS 144, we classified and accounted for certain assets as held for sale as the anticipated sales date is within one year. SFAS 144 requires that assets held for sale are valued on an asset-by-asset basis at the lower of carrying amount or fair value less costs to sell. In applying those provisions, we considered cash flow analyses, and offers related to those assets. In accordance with the provisions of SFAS 144, assets for sale are not depreciated.

Results of the Beaumont operations are reported for all periods presented on a net of tax basis as discontinued operations. In addition, assets and liabilities of the business held for sale have been classified as assets and liabilities held for sale in the accompanying Consolidated Balance Sheets.

Summarized Financial Results of Discontinued Operations

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(in thousands)		2008				2007				2008				2007
Operating revenue		$	1,770			$	13,240			$	16,415			$	15,882
Operating and other expenses			(1,536	)			(39,980	)			(3,750	)			(47,582	)
Pretax income (loss) from operations of discontinued components			234				(26,740	)			12,665				(31,700	)
Income tax (expense) benefit			(93	)			10,669				(5,053	)			12,648
Income (loss) from discontinued operations		$	141			$	(16,071	)		$	7,612			$	(19,052	)

The major classes of assets and liabilities held for sale and related to discontinued operations as of September 30, 2008, December 31, 2007 and September 30, 2007 are as follows:

		September 30,				December 31,				September 30,
(in thousands)		2008				2007				2007
Trade receivables		$	333			$	45			$	245
Inventory			2,203				2,203				2,203
Other current assets			43,071				87				27
Current assets		$	45,607			$	2,335			$	2,475
Property, plant and equipment — net		$	—			$	42,212			$	42,212
Other non-current assets			—				817				817
Non-current assets		$	—			$	43,029			$	43,029
Accounts payable		$	739			$	18			$	4
Other current liabilities			2,010				4,975				4,829
Current liabilities		$	2,749			$	4,993			$	4,833
Other non-current liabilities		$	—			$	739			$	1,849
Non-current liabilities		$	—			$	739			$	1,849

3.

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 included in the weighted average number of common shares outstanding used to compute basic income (loss) per share since they are contingently returnable.

The following table provides a reconciliation between basic and diluted income (loss) per share for the three- and nine-month periods ended September 30, 2008 and 2007:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(in thousands, except per-share amounts)		2008				2007				2008				2007
Basic income (loss) per share computation:
Income from continuing operations		$	171,270			$	70,451			$	468,691			$	151,296
Less: Preferred share dividends			(1,275	)			(1,275	)			(3,825	)			(3,825	)
Inducement of preferred shares			(5,248	)			—				(5,248	)			—
Income from continuing operations available to common Stockholders			164,747				69,176				459,618				147,471
Income (loss) from discontinued operations available to common stockholders			141				(16,071	)			7,612				(19,052	)
Income (loss) available to common stockholders		$	164,888			$	53,105			$	467,230			$	128,419
Weighted average shares outstanding			94,259				90,092				91,821				91,143
Income per share — continuing operations		$	1.75			$	0.77			$	5.01			$	1.62
Income (loss) per share — discontinued operations			—				(0.18	)			0.08				(0.21	)
Net income per share		$	1.75			$	0.59			$	5.09			$	1.41
Diluted income (loss) per share computation:
Income from continuing operations available to common stockholders		$	164,747			$	69,176			$	459,618			$	147,471
Add: Preferred share dividends			1,275				1,275				3,825				3,825
Inducement of preferred shares			5,248				—				5,248				—
Income available to common stockholders and assumed conversions		$	171,270			$	70,451			$	468,691			$	151,296
Weighted average shares outstanding			94,259				90,092				91,821				91,143
Add incremental shares from assumed conversions:
Preferred shares			8,188				12,049				10,752				12,049
Non vested stock			566				985				581				783
Common stock warrants			1,592				2,710				1,696				2,791
Common stock options			—				110				1				133
Dilutive potential common shares			104,605				105,946				104,851				106,899
Income per share — continuing operations		$	1.64			$	0.66			$	4.47			$	1.41
Income (loss) per share — discontinued operations			—				(0.15	)			0.07				(0.17	)
Net income per share		$	1.64			$	0.51			$	4.54			$	1.24

In September 2008 we commenced individual offers (“the inducement offer”) to pay a cash premium to holders of the Series A Preferred Shares who elected to convert their Series A Preferred Shares into shares of Terra Industries common stock (see Note 7.) A total of 117,900 shares or 98% of the outstanding shares of Series A Preferred Shares were surrendered and converted as part of the inducement offer. The former holders of the Series A Preferred Shares received, in the aggregate, the following:

	•		11,837,349 shares of Terra Industries common stock; and
	•		A cash premium of approximately $5.2 million

When convertible preferred stock is converted pursuant to an inducement offer, the excess of the fair value of the consideration transferred in the transaction to the holders of the convertible preferred stock over the fair value of the securities issuable pursuant to the original conversion terms should be subtracted from net income to arrive at net income applicable to common stockholders in the calculation of earnings per share. As such, the inducement payments and offering costs paid in connection with the inducement offer resulted in a reduction of net income available to common stockholders.

For purposes of our computation of diluted net income per common share for the period ended September 30, 2008, the portion of our Series A Preferred Shares that was converted was considered separately from the portion of our Series A Preferred Shares that was not converted. The inducement payment was attributed to the portion of the Series A Preferred Shares that was converted. As a result, conversion of the portion of the Series A Preferred Shares that was converted into 11,837,349 weighted average common shares outstanding for the period ended September 30, 2008 was also not assumed because the resulting impact on the calculation of diluted net income per common share would have been anti-dilutive. The portion of our Series A Preferred Shares that was not converted was also not assumed because the resulting impact on the calculation of diluted net income per common share would have been anti-dilutive.

4.

Inventories

Inventories consisted of the following:

		September 30,				December 31,				September 30,
(in thousands)		2008				2007				2007
Raw materials		$	18,269			$	17,765			$	19,558
Supplies			33,570				35,909				34,181
Finished goods			124,081				75,647				70,211
Total		$	175,920			$	129,321			$	123,950

Inventory is valued at actual first-in, first-out cost. Costs include raw materials, labor and overhead.

5.

Derivative Financial Instruments

We manage risk using derivative financial instruments for changes in natural gas supply prices and changes in nitrogen prices. Derivative financial instruments have credit risk and market risk.

To manage credit risk, we enter into derivative transactions only with counter-parties who are currently rated as BBB or better or equivalent as recognized by a national rating agency. We 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.

We classify a derivative financial instrument as a hedge if all of the following conditions are met:

	1.		The item to be hedged must expose us to price risk.
	2.		It must be probable that the results of the hedge position substantially offset the effects of 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 our North American production facilities are purchased at market prices. Natural gas market prices are volatile and we effectively fix prices for a portion of our natural gas production requirements and inventory through the use of swaps, basis 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 our 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 contracts are traded in months forward and settlement dates are scheduled to coincide with gas purchases during that future period.

A swap is a financial instrument whereby we agree to pay a counterparty a fixed rate, and the counterparty pays us a variable rate. Option contracts give the holder the right to either own or sell a futures or swap contract. The option contracts require initial premium payments ranging from 2% to 5% of contract value. Basis swap contracts require payments to or from us 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.

We may also use a collar structure where we 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 us to large price increases. At September 30, 2008 there were no collars outstanding.

The following summarizes open natural gas derivative contracts at September 30, 2008 and 2007 and December 31, 2007:

		Other				Other
		Current				Current				Deferred				Net Asset
(in thousands)		Assets				Liabilities				Taxes				(Liability)
September 30, 2008		$	30,685			$	(218,652	)		$	72,673			$	(115,294	)
December 31, 2007		$	4,798			$	(14,733	)		$	3,022			$	(6,913	)
September 30, 2007		$	4,732			$	(26,167	)		$	7,754			$	(13,681	)

Certain derivatives outstanding at September 30, 2008 and 2007, which settled during October 2008 and 2007, respectively, are included in the position of open natural gas derivatives in the table above. The October 2008 derivatives settled for an approximate $42.2 million loss compared to the October 2007 derivatives which settled for an approximate $7.7 million loss. Substantially all open derivatives will settle during the next twelve months.

We are required to maintain certain margin deposits on account with derivative counterparties. At September 30, 2008 we had $132.0 million on deposit with counterparties, which is reported as margin deposits with derivative counterparties on the consolidated balance sheet.

We determined that certain derivative contracts were ineffective hedges for accounting purposes and recorded a reduction of $1.6 million and a reduction of $1.7 million, respectively, to cost of sales for the period ending September 30, 2008 and 2007, respectively.

The effective portion of gains and losses on derivative contracts that qualify for hedge treatment are carried as accumulated other comprehensive income (loss) and credited or charged to cost of sales in the month in which the hedged transaction settles. Gains and losses on the contracts that do not qualify for hedge treatment are credited or charged to cost of sales based on the positions’ fair value. The risk and reward of outstanding natural gas positions are directly related to increases or decreases in natural gas prices in relation to the underlying NYMEX natural gas contract prices.

The activity to accumulated other comprehensive income (loss), net of income taxes, relating to current period hedging transactions for the three-month periods ended September 30, 2008 and 2007 follows:

		Three Months Ended
		September 30,
		2008								2007
(in thousands)		Gross				Net of tax				Gross				Net of tax
Beginning accumulated gain (loss)		$	67,130			$	41,008			$	(28,684	)		$	(18,644	)
Reclassification into earnings			(27,055	)			(16,478	)			(31,210	)			(20,286	)
Net change in market value			(226,284	)			(138,065	)			37,739				24,529
Ending accumulated gain (loss)		$	(186,209	)		$	(113,535	)		$	(22,155	)		$	(14,401	)

The activity to accumulated other comprehensive income (loss), net of income taxes, relating to current period hedging transactions for the nine-month periods ended September 30, 2008 and 2007 follows:

		Nine Months Ended
		September 30,
		2008								2007
(in thousands)		Gross				Net of tax				Gross				Net of tax
Beginning accumulated gain (loss)		$	(8,635	)		$	(5,612	)		$	(18,210	)		$	(11,836	)
Reclassification into earnings			17,011				10,416				(31,562	)			(20,515	)
Net change in market value			(194,585	)			(118,339	)			27,617				17,950
Ending accumulated gain (loss)		$	(186,209	)		$	(113,535	)		$	(22,155	)		$	(14,401	)

Approximately $186.2 million of the net accumulated loss at September 30, 2008 will be reclassified into earnings during the next twelve months as compared to $22.2 million of the net accumulated loss at September 30, 2007.

At times, we also use forward derivative instruments to fix or set floor prices for a portion of our nitrogen sales volumes. At September 30, 2008, we did not have any open contracts for 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- and nine-month periods ending September 30, 2008, there were no gains or losses on nitrogen forward derivative instruments. For the three- and nine-month periods ending September 30, 2007, we recognized a loss of $1.0 million and $2.9 million, respectively, on nitrogen forward derivative instruments.

6.

Fair Value Measurements

On January 1, 2008, we adopted SFAS 157, Fair Value Measurements (“SFAS 157”), which, among other things, requires enhanced disclosure of assets and liabilities measured and reported at fair value. In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157, which delayed for one year the applicability of SFAS 157’s fair-value measurements to certain nonfinancial assets and liabilities. We adopted SFAS 157 in 2008, except as it applies to those nonfinancial assets and liabilities as affected by the one-year delay. The adoption of SFAS 157 did not have a material impact on our financial statements.

SFAS 157 establishes a three level hierarchal disclosure framework that prioritizes and ranks the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is impacted by a number of factors, including the type of asset or liability and its characteristics. Assets and liabilities with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

The three levels are defined as follows:

	•		Level 1 — inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
	•		Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
	•		Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement.

We evaluated our assets and liabilities to determine which items should be disclosed according to SFAS 157. We currently measure our derivative contracts on a recurring basis at fair value. The inputs included in the fair value measurement of our derivative contract use adjusted quoted prices from an active market which are classified at level 2 as a significant other observable input in the disclosure hierarchy framework as defined by SFAS 157.

The following table summarizes the valuation of our assets and liabilities in accordance with SFAS 157 fair value hierarchy levels as of September 30, 2008:

		Quoted Market				Significant Other				Significant
		Prices in Active				Observable				Unobservable
		Markets				Inputs				Inputs
(in thousands)		(Level 1)				(Level 2)				(Level 3)
Assets
Derivative contracts		$	—			$	30,685			$	—
Total		$	—			$	30,685			$	—
Liabilities
Derivative contracts		$	—			$	(218,652	)		$	—
Total		$	—			$	(218,652	)		$	—

7.

Preferred Shares

The components of preferred shares outstanding at September 30:

		2008								2007
		Number				Carrying				Number				Carrying
(in thousands)		of shares				Value				of shares				Value
Series A Preferred Shares (120,000 shares authorized, $1,000 per share liquidation value)			2,100			$	2,027				120,000			$	115,800

We had 2,100 shares of cumulative convertible perpetual Series A Preferred Shares with a liquidation value of $1,000 outstanding at September 30, 2008 and 120,000 shares with a liquidation value of $1,000 at September 30, 2007. Cumulative dividends of $10.625 per share are payable quarterly. The Series A Preferred Shares are not redeemable, but are convertible into our common stock at the option of the holder for a conversion price of $9.96 per common share. The Series A shares may automatically be converted to common shares after December 20, 2009 if the closing price for our common shares exceeds 140% of the conversion price for twenty days within a consecutive thirty day period prior to such conversion. Upon the occurrence of a fundamental change to our capital structure, including a change of control, merger, or sale of Terra, holders of the Series A Preferred Shares may require us to purchase any or all of their shares at a price equal to their liquidation value plus any accumulated, but unpaid, dividends. We also have the right, under certain conditions, to require holders of the Series A Preferred Shares to exchange their shares for convertible subordinated debentures with similar terms.

In September 2008 we commenced offers (“the inducement offer”) to pay a cash premium to holders of the Series A Preferred Shares who elected to convert their Series A Preferred Shares into shares of Terra Industries common stock. A total of 117,900 shares or 98% of the outstanding shares of Series A Preferred Shares were surrendered and converted as part of the inducement offer. The former holders of the Series A Preferred Shares received, in the aggregate, the following:

	•		11,837,349 shares of Terra Industries common stock; and
	•		A cash premium of approximately $5.2 million

The $5.2 million inducement offer represents the difference between the fair value of all securities and other consideration transferred in the transaction to the preferred stockholders and the fair value of securities issuable pursuant to the original conversion terms of the Series A Preferred Shares less the costs related to the inducement offer.

8.

Turnaround Costs

The following represents a summary of the deferred plant turnaround costs for the nine months ended September 30, 2008:

						Turnaround								Currency
		Beginning				Costs				Turnaround				Translation				Ending
(in thousands)		Balance				Capitalized				Amortization				Adjustments				Balance
Period ended:
September 30, 2008		$	42,190			$	9,290			$	(21,529	)		$	(648	)		$	29,303

9.		Other Liabilities
		Other liabilities consisted of the following:

		September 30,				December 31,				September 30,
(in thousands)		2008				2007				2007
Unrecognized tax benefit		$	33,560			$	33,560			$	33,560
Long-term medical and closed facility reserve			24,529				24,368				24,026
Long-term deferred revenue			10,863				10,885				11,229
Accrued phantom shares			3,137				9,231				11,697
Long-term retiree medical and post employment reserve			6,196				6,112				7,099
Other			494				720				731
		$	78,779			$	84,876			$	88,342

10.		Equity Investments
		Trinidad and United States

Our investment in companies that are accounted for on the equity method of accounting and included in operations 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 our Verdigris nitrogen plant. These investments were $144.4 million at September 30, 2008. We include the net earnings of these investments as an element of income from operations because the investees’ operations provide additional capacity to our operations.

The combined results of operations and financial position of our equity method investments are summarized below:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(in thousands)		2008				2007				2008				2007
Condensed income statement information:
Net sales		$	128,332			$	46,844			$	310,860			$	101,903
Net income		$	46,642			$	13,555			$	109,563			$	23,049
Terra’s equity in earnings of unconsolidated affiliates		$	15,857			$	5,566			$	45,665			$	10,379

		September 30,				September 30,
(in thousands)		2008				2007
Condensed balance sheet information:
Current assets		$	94,886			$	43,130
Long-term assets			177,882				194,310
Total assets		$	272,768			$	237,440
Current liabilities		$	53,457			$	24,193
Long-term liabilities			14,766				—
Equity			204,545				213,247
Total liabilities and equity		$	272,768			$	237,440

The carrying value of these investments at September 30, 2008 was $42.1 million more than our 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 fifteen years. Our equity in earnings of unconsolidated subsidiaries is different than our ownership interest in income reported by the unconsolidated subsidiaries due to deferred profits on intergroup transactions and amortization of basis differences.

We have transactions in the normal course of business with PLNL whereby we are obliged to purchase 50% of the ammonia produced by PLNL at current market prices. During the nine-month period ending September 30, 2008, we purchased approximately $135.7 million of ammonia from PLNL. During the nine-month period ending September 30, 2007, we purchased approximately $52.7 million of ammonia from PLNL. During the first nine months of 2007, PLNL performed a turnaround, resulting in lower production levels and consequently, lower purchases by us.

We received $55.4 million and $15.5 million in distributions from all of our equity investments in the nine-month periods ending September 30, 2008 and 2007, respectively.

United Kingdom

On September 14, 2007, we completed the formation of GrowHow UK Limited (GrowHow), a joint venture between us and Kemira GrowHow Oyj (Kemira). Pursuant to the joint venture agreement, we contributed our United Kingdom subsidiary, Terra Nitrogen (UK) Limited, to the joint venture for a 50% interest. Subsequent to September 14, 2007, we have accounted for our investment in GrowHow as an equity method investment. This investment was $238.2 million at September 30, 2008.

Our interest in the joint venture is classified as a non-operating equity investment. We do not include the net earnings of this investment as an element of income from operations since GrowHow’s operations do not provide additional capacity to us, nor are its operations integrated with our supply chain in North America.

The nine-month results of operations and financial position of our equity method investment in GrowHow at September 30, 2008 and 2007 were:

(in thousands)		2008				2007
Condensed income statement information:
Net sales		$	914,491			$	19,583
Net income		$	184,902			$	2,908
Terra’s equity in earnings of unconsolidated affiliates		$	88,986			$	2,202
Condensed balance sheet information:
Current assets		$	379,078			$	241,590
Long-term assets			248,690				345,814
Total assets		$	627,768			$	587,404
Current liabilities		$	126,311			$	144,198
Long-term liabilities			157,081				190,703
Equity			344,376				252,503
Total liabilities and equity		$	627,768			$	587,404