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

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

For the transition period from                      to                     

TERRA INDUSTRIES INC.

(Exact name of registrant as specified in its charter)

Maryland		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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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 smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

At the close of business on July 24, 2009 the following shares of the registrant’s stock were outstanding:

Common Shares, without par value		99,786,406 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 Equity			7
Notes to Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			39
Item 3. Quantitative and Qualitative Disclosures about Market Risk			48
Item 4. Controls and Procedures			48
Part II — OTHER INFORMATION
Item 1. Legal Proceedings			50
Item 1A. Risk Factors			50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			50
Item 3. Defaults upon Senior Securities			50
Item 4. Submission of Matters to a Vote of Security Holders			50
Item 5. Other Information			50
Item 6. Exhibits			51
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)

		June 30,				December 31,				June 30,
		2009				2008				2008
Assets
Cash and cash equivalents		$	1,001,582			$	966,700			$	752,008
Accounts receivable, less allowance for doubtful accounts of $1,373, $290 and $300			91,200				130,390				236,112
Inventories, net			128,048				197,091				168,950
Margin deposits with derivative counterparties			—				36,945				38
Other current assets			48,212				61,338				111,962
Current assets of discontinued operations			—				—				45,785
Total current assets			1,269,042				1,392,464				1,314,855
Property, plant and equipment, net			426,495				403,313				386,800
Equity method investments			269,113				270,915				360,805
Deferred plant turnaround costs, net			26,331				23,467				37,116
Other assets			29,995				22,858				30,109
Total assets		$	2,020,976			$	2,113,017			$	2,129,685
Liabilities
Accounts payable		$	68,677			$	99,893			$	146,846
Customer prepayments			27,846				111,592				91,605
Derivative hedge liabilities			7,821				125,925				10,094
Accrued and other current liabilities			92,236				127,770				120,051
Current liabilities of discontinued operations			—				—				3,773
Total current liabilities			196,580				465,180				372,369
Long-term debt			330,000				330,000				330,000
Deferred taxes			83,580				61,443				153,754
Pension liabilities			8,394				9,170				9,251
Other liabilities			78,796				78,553				82,550
Total liabilities			697,350				944,346				947,924
Preferred Shares — liquidation value of $1,600; $1,600 and $120,000			1,544				1,544				115,800
Common Stockholders’ Equity
Capital stock
Common Shares, authorized 133,500 shares; 99,701; 99,330 and 91,836 outstanding			152,481				152,111				144,431
Paid-in capital			581,542				579,164				617,744
Accumulated other comprehensive loss			(112,683	)			(175,529	)			(6,097	)
Retained earnings			598,060				507,299				197,799
Total common stockholders’ equity			1,219,400				1,063,045				953,877
Noncontrolling interest			102,682				104,082				112,084
Total equity			1,322,082				1,167,127				1,065,961
Total liabilities and equity		$	2,020,976			$	2,113,017			$	2,129,685

See Accompanying Notes to the Consolidated Financial Statements.

TERRA INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per-share amounts)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Revenues
Product revenues		$	452,339			$	836,924			$	870,701			$	1,410,126
Other income			1,164				6,173				2,555				7,675
Total revenues			453,503				843,097				873,256				1,417,801
Cost and Expenses
Cost of sales			296,690				547,070				639,647				954,059
Selling, general and administrative expense			13,906				27,233				32,474				39,937
Other operating expenses			12,560				—				14,260				—
Equity earnings of North American affiliates			(1,522	)			(16,518	)			(4,774	)			(29,808	)
Total cost and expenses			321,634				557,785				681,607				964,188
Income from operations			131,869				285,312				191,649				453,613
Interest income			1,165				5,513				2,975				13,921
Interest expense			(6,757	)			(6,756	)			(13,485	)			(13,814	)
Income before income taxes, noncontrolling interest and equity earnings (loss) of GrowHow UK Limited			126,277				284,069				181,139				453,720
Income tax provision			(38,215	)			(107,069	)			(50,800	)			(166,573	)
Equity earnings (loss) of GrowHow UK Limited			1,886				37,611				(2,488	)			46,895
Income from continuing operations, net of tax			89,948				214,611				127,851				334,042
Income from discontinued operations, net of tax			—				7,319				—				7,471
Net income before noncontrolling interest			89,948				221,930				127,851				341,513
Less: Net income attributable to the noncontrolling interest			(9,474	)			(18,495	)			(17,382	)			(36,621	)
Net income attributable to Terra Industries Inc.			80,474				203,435				110,469				304,892
Less: Net income attributable to preferred share dividends			(17	)			(1,275	)			(34	)			(2,550	)
Income Available to Common Stockholders		$	80,457			$	202,160			$	110,435			$	302,342
Basic income per common share attributable to Terra Industries Inc.:
Continued operations		$	0.81			$	2.14			$	1.11			$	3.26
Discontinued operations			—				0.08				—				0.08
Basic income per common share		$	0.81			$	2.22			$	1.11			$	3.34
Diluted income per common share attributable to Terra Industries Inc.:
Continuing operations		$	0.81			$	1.87			$	1.11			$	2.84
Discontinued operations			—				0.07				—				0.07
Diluted income per common share		$	0.81			$	1.94			$	1.11			$	2.91
Weighted average shares outstanding:
Basic			99,318				91,011				99,224				90,588
Diluted			99,710				104,678				99,704				104,652
Amounts attributable to Terra Industries Inc.:
Income from continuing operations, net of tax		$	80,474			$	196,116			$	110,469			$	297,421
Income from discontinued operations, net of tax			—				7,319				—				7,471
Net income attributable to Terra Industries Inc.		$	80,474			$	203,435			$	110,469				304,892

See Accompanying Notes to the Consolidated Financial Statements.

TERRA INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

		Six Months Ended
		June 30,
		2009				2008
Operating Activities
Net income attributable to Terra Industries Inc.		$	110,469			$	304,892
Income from discontinued operations			—				7,471
Income from continuing operations			110,469				297,421
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			41,628				39,449
Loss on sale of property, plant and equipment			657				727
Deferred income taxes			(1,393	)			48,940
Noncontrolling interest in earnings			17,382				36,621
Distributions in excess of equity earnings of North American affiliates			4,204				3,881
Equity loss (earnings) of GrowHow UK Limited			2,488				(46,895	)
Non-cash loss (gain) on derivatives			1,491				(4,954	)
Share-based compensation			8,562				9,772
Amortization of intangible and other assets			4,598				4,070
Changes in operating assets and liabilities:
Accounts receivable			40,261				(65,675	)
Inventories			68,436				(36,478	)
Accounts payable and customer prepayments			(116,095	)			(171,404	)
Margin deposits with derivative counterparties			36,945				600
Other assets and liabilities, net			(92,101	)			(15,174	)
Net cash flows from operating activities — continuing operations			127,532				100,901
Net cash flows from operating activities — discontinued operations			—				10,051
Net cash flows from operating activities			127,532				110,952
Investing Activities
Capital expenditures and plant turnaround expenditures			(65,992	)			(35,916	)
Proceeds from sale of property, plant and equipment			101				1,632
Distributions received from North American affiliates			11,597				7,196
Contribution settlement received from GrowHow UK Limited			—				28,055
Balancing consideration and other payments from GrowHow UK Limited			7,893				—
Net cash flows from investing activities			(46,401	)			967
Financing Activities
Preferred share dividends paid			(34	)			(2,550	)
Common stock dividends paid			(19,940	)			(9,202	)
Common stock issuances and vestings			(5,334	)			(6,842	)
Excess tax benefits from equity compensation plans			3,921				7,817
Payments under share repurchase program			—				(7,500	)
Distributions to noncontrolling interests			(23,391	)			(39,899	)
Net cash flows from financing activities			(44,778	)			(58,176	)
Effect of exchange rate changes on cash			(1,471	)			27
Increase to cash and cash equivalents			34,882				53,770
Cash and cash equivalents at beginning of period			966,700				698,238
Cash and cash equivalents at end of period		$	1,001,582			$	752,008

Consolidated Statements of Cash Flows (continued)

		Six Months ended
		June 30,
		2009				2008
Supplemental cash flow information:
Interest paid		$	12,117			$	12,140
Income tax refunds received			784				206
Income taxes paid			97,360				92,368
Supplemental schedule of non-cash investing and financing activities:
Conversion of warrants to common stock		$	—			$	1,672
Supplemental schedule of unconsolidated affiliates distributions received from GrowHow UK Limited:
Contribution settlement payments, balancing consideration and other payments received from GrowHow UK Limited		$	7,893			$	28,055
Supplemental schedule of unconsolidated affiliates distributions received from North America:
Distributions received from unconsolidated affiliates		$	11,597			$	7,196
Equity in earnings of unconsolidated affiliates			4,774				29,808
Distribution in excess of equity earnings			4,204				3,881
Total cash distributions received from North American unconsolidated affiliates		$	20,575			$	40,885

See Accompanying Notes to the Consolidated Financial Statements.

TERRA INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

SIX MONTHS ENDED JUNE 30, 2009 AND 2008

(in thousands)

										Accumulated
										Other
		Common				Paid-In				Comprehensive				Noncontrolling				Retained								Comprehensive
		Stock				Capital				Loss				Interest				Earnings				Total				Income
Balance at January 1, 2009		$	152,111			$	579,164			$	(175,529	)		$	104,082			$	507,299			$	1,167,127
Comprehensive income (loss):
Net income			—				—				—				17,382				110,469				127,851			$	127,851
Foreign currency translation adjustment			—				—				30,267				—				—				30,267				30,267
Change in fair value of derivatives, net of taxes of $23,530			—				—				32,579				4,609				—				37,188				37,188
Comprehensive income before noncontrolling interest																										$	195,306
Distributions to noncontrolling interest			—				—				—				(23,391	)			—				(23,391	)
Preferred share dividends			—				—				—				—				(34	)			(34	)
Common stock dividends			—				—				—				—				(19,940	)			(19,940	)
Excess tax benefit			—				3,921				—				—				—				3,921
Net vested stock			370				(5,704	)			—				—				—				(5,334	)
Share-based compensation			—				4,161				—				—				—				4,161
Other			—				—				—				—				266				266
Balance June 30, 2009		$	152,481			$	581,542			$	(112,683	)		$	102,682			$	598,060			$	1,322,082

										Accumulated								(Accumulated
										Other								Deficit)
		Common				Paid-In				Comprehensive				Noncontrolling				Retained								Comprehensive
		Stock				Capital				Loss				Interest				Earnings				Total				Income
Balance at January 1, 2008		$	142,170			$	618,874			$	(44,180	)		$	108,581			$	(95,341	)		$	730,104
Comprehensive income (loss):
Net income			—				—				—				36,621				304,892				341,513			$	341,513
Foreign currency translation adjustment			—				—				(1,756	)			—				—				(1,756	)			(1,756	)
Change in fair value of derivatives, net of taxes of $29,145			—				—				39,839				6,781				—				46,620				46,620
Comprehensive income before noncontrolling interest																										$	386,377
Distributions to noncontrolling interest			—				—				—				(39,899	)			—				(39,899	)
Preferred share dividends			—				—				—				—				(2,550	)			(2,550	)
Common stock dividends			—				—				—				—				(9,202	)			(9,202	)
Shares purchased and retired under the share repurchase program			(190	)			(7,310	)			—				—				—				(7,500	)
Exercise of stock options			11				23				—				—				—				34
Net vested stock			303				(9,729	)			—				—				—				(9,426	)
Net conversion of warrants			2,137				412				—				—				—				2,549
Share-based compensation			—				5,177				—				—				—				5,177
Excess tax benefit			—				10,297				—				—				—				10,297
Balance June 30, 2008		$	144,431			$	617,744			$	(6,097	)		$	112,084			$	197,799			$	1,065,961

See Accompanying Notes to the Consolidated Financial Statements.

TERRA INDUSTRIES INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.

Background and Basis of Presentation

Terra Industries Inc. together with its subsidiaries (Terra, we, our, or us) is a leading North American producer and marketer of nitrogen products made from natural gas. We also operate production assets in Trinidad, and the United Kingdom, through joint venture agreements. Our six North American and our international production locations, along with a robust distribution capability, provide us with the ability to effectively serve key agricultural, industrial and environmental markets. Our principal products are anhydrous ammonia (ammonia), ammonium nitrate solutions (UAN), ammonium nitrate (AN), and urea. Our principal customers are national agricultural retail chains, farm cooperatives, independent dealers and industrial customers. We operate in one principal industry segment — Nitrogen Products, which is based upon the guidance provided in Statement of Financial Accounting Standards (SFAS) 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131). As a wholesale nitrogen producer, we do not report industry segments in a separate disclosure because our only reportable industry segment is nitrogen.

The accompanying unaudited consolidated financial statements and notes thereto have been prepared in accordance with the requirements of the U.S. Securities and Exchange Commission (SEC) for interim reporting. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2008, included in our 2008 Annual Report on Form 10-K.

Terra’s significant accounting policies are described in the notes to consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2008. Management is responsible for the unaudited consolidated financial statements included in this document. The consolidated financial statements included in this document are unaudited; however, they contain all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of Terra’s financial position, results of operations and cash flows for the periods presented.

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 future quarters or the full year.

2.

New Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141R, Business Combinations (SFAS 141R), which changes the way we account for business acquisitions. SFAS 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of SFAS 141R will, among other things, impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquired contingencies, acquisition-related restructuring costs, in-process research and development, indemnification assets, and tax benefits. SFAS 141R became effective for us on January 1, 2009 and the adoption did not have an impact on our financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS 160). SFAS 160 improves the comparability and transparency of financial statements when reporting minority interest. Entities with a noncontrolling interest are required to clearly identify and present the ownership interest in the consolidated statement of financial position within equity, but separate from the parent’s equity. The amount of consolidated net income attributable to the parent and to the noncontrolling interest is identified and presented on the face of the consolidated statement of income. The statement offers further guidance on changes in ownership interest, deconsolidation, and required disclosures. SFAS 160 became effective for us on January 1, 2009. The adoption of SFAS 160 recharacterized minority interest as noncontrolling interest and reclassified minority interest as a component of equity on our financial statements. The adoption also recharacterized a portion of other comprehensive income (loss) by allocating a portion of other comprehensive income (loss) to the noncontrolling interest. Prior year amounts relating to noncontrolling interests have been reclassified to conform to the current year presentation as required by SFAS 160.

In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 is an amendment of SFAS 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). To address concerns that the existing disclosure requirements of SFAS 133 do not provide adequate information, SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. SFAS 161 became effective for us on January 1, 2009 and we have included the additional disclosure information required by SFAS 161 within Note 6, Derivative Financial Instruments, of the Notes to the Consolidated Financial Statements.

In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities (FSP EITF 03-6-1). The FASB decided that unvested share-based payout awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method under SFAS 128, Earnings per Share. FSP EITF 03-6-1 became effective for us on January 1, 2009 and the adoption did not have an impact on our financial statements.

In December 2008, the FASB issued FSP 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets, which amends Statement 132(R) to require more detailed disclosures about employers’ pension plan assets. New disclosures will include more information on investment strategies, major categories of plan assets, concentrations of risk within plan assets and valuation techniques used to measure the fair value of plan assets. This new standard requires new disclosures only, and will have no impact on our consolidated financial position, results of operations or cash flows. These new disclosures will be required for us beginning in our Form 10-K for the 2009 fiscal year.

In April 2009, the FASB issued FASB Staff Position (FSP) FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. (FSP FAS 157-4), which provides additional guidance in accordance with FASB No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability has significantly decreased. FSP FAS 157-4 became effective for us on April 1, 2009 and the adoption did not have an impact on our financial statements.

In April 2009, the FASB issued FASB Staff Position FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2). This FSP amends the other-than-temporary impairment guidance in U.S. generally accepted accounting principles (U.S. GAAP) for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in a company’s financial statements. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. FSP FAS 115-2 and FAS 124-2 became effective for us on April 1, 2009 and the adoption did not have an impact on our financial statements.

In April 2009, the FASB issued FASB Staff Position FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and APB 28-1 enhance consistency in financial reporting by increasing the frequency of fair value disclosures. This FSP relates to fair value disclosures for any financial instruments that are not currently reflected in a company’s balance sheet at fair value. Prior to the effective date of this FSP, fair values for these assets and liabilities were only disclosed once a year. This FSP will now require these disclosures to be made on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. FSP FAS 107-1 and APB 28-1 became effective for us on April 1, 2009 and we have included the additional disclosure information required by FSP FAS 107-1 and APB 28-1 within Note 7, Fair Value Measurements, of the Notes to the Consolidated Financial Statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165), to be effective for interim or annual financial periods ending after June 15, 2009. SFAS 165 does not materially change the existing guidance but introduces the concept of financial statements being available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether the date represents the date the financial statements were issued or were “available to be issued”. This disclosure is intended to alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. SFAS 165 became effective for us on April 1, 2009 and the adoption did not have an impact on our financial statements. We have evaluated subsequent events through July 24, 2009, which is the date of our Form 10-Q filing.

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets (SFAS 166), which amends the derecognition guidance in SFAS 140, Accounting for Transfers and Servicing of Financial Assts and Extinguishments of Liabilities (SFAS 140). SFAS 166 addresses concerns expressed by the SEC, members of Congress, and financial statement users about the accounting and disclosures required by SFAS 140 in the wake of the subprime mortgage crisis and the deterioration of the global credit markets. This guidance is effective for financial asset transfers occurring after the beginning of an entity’s first fiscal year that begins after November 15, 2009. We are currently assessing the impact SFAS 166 will have on our financial statements.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS 167), which amends the consolidation guidance applicable to variable interest entities under FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities. SFAS 167 is intended to improve financial reporting by enterprises involved with variable interest entities. This guidance is effective as of the beginning of the first fiscal year that begins after November 15, 2009. We are currently assessing the impact SFAS 167 will have on our financial statements.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (SFAS 168), which amends SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS 168 will become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date, SFAS 168 will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in SFAS 168 will become nonauthoritative. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We are currently assessing the impact SFAS 168 will have on our financial statements.

3.

Unsolicited Exchange Offer by CF Industries Holdings, Inc.

On January 15, 2009, CF Industries Holdings, Inc. (CF) presented a letter to our Board of Directors proposing CF’s acquisition of Terra in an all-stock transaction. Terra’s Board rejected the proposal on the grounds that it was not in the best interest of Terra or its stockholders and substantially undervalued the Company. CF subsequently announced that they remained committed to the proposal, and on February 3, 2009, announced that they would nominate three director candidates to Terra’s Board and commence an exchange offer for all of Terra’s outstanding common shares.

On February 23, 2009, CF announced that it had commenced an unsolicited exchange offer to acquire all of the outstanding common shares of Terra at a fixed exchange ratio of 0.4235 CF shares for each Terra common share. In response, Terra’s Board of Directors announced on February 23, 2009, that it would review and consider CF’s exchange offer and make a formal recommendation to shareholders within ten business days, and further advised Terra’s shareholders to take no action pending the review of the proposed exchange offer by Terra’s Board. On March 3, 2009, Terra’s Board of Directors unanimously concluded that CF’s offer did not present a compelling case to create additional value for the stockholders of either Terra or CF, substantially undervalues Terra on an absolute basis and relative to CF and is not in the best interests of Terra and its stockholders.

On March 9, 2009, CF sent a letter to Terra’s Board of Directors stating CF would be prepared to enter into a negotiated merger agreement with Terra on the basis of an exchange ratio based on $27.50 for each Terra common share, with an exchange ratio of not less than 0.4129 of a CF common share and not more than 0.4539 of a CF common share. On March 11, 2009, Terra’s Board of Directors unanimously concluded that CF’s proposal continues to run counter to Terra’s strategic objectives, substantially undervalues Terra both absolutely and relative to CF, and would deliver less value to Terra’s stockholders than would owning Terra on a stand-alone basis.

On March 23, 2009, CF sent a letter to Terra’s Board of Directors stating CF would be prepared to enter into a negotiated merger agreement with Terra on the basis of an exchange ratio based on $30.50 for each Terra share, with an exchange ratio of not less than 0.4129 of a CF common share and not more than 0.4539 of a CF common share, the same collar as CF’s proposal of March 9, 2009. On March 24, 2009, Terra’s Board of Directors unanimously concluded CF’s proposal continues to run counter to Terra’s strategic objectives, substantially undervalues Terra both absolutely and relative to CF and would deliver less value to Terra’s stockholders than would owning Terra on a stand-alone basis.

As of the date of this Form 10-Q, CF’s unsolicited exchange offer to acquire all of the outstanding common shares of Terra is still outstanding and is set to expire on August 7, 2009, unless further extended. For the three and six month periods ended June 30, 2009, Terra incurred due diligence defense costs of $12.6 million and $14.3 million, respectively, related to CF’s unsolicited exchange offer.

4.

Income Per Share

Basic income per share data is based on the weighted-average number of common shares outstanding during the period. Diluted income 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 per share since they are contingently returnable.

The following table provides a reconciliation between basic and diluted income per share attributable to Terra Industries Inc. for the three and six month periods ended June 30, 2009 and 2008:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(in thousands, except per-share amounts)		2009				2008				2009				2008
Basic income per common share attributable to Terra Industries Inc.:
Income from continuing operations		$	80,474			$	196,116			$	110,469			$	297,421
Less: Preferred share dividends			(17	)			(1,275	)			(34	)			(2,550	)
Income from continuing operations available to common stockholders			80,457				194,841				110,435				294,871
Income from discontinued operations available to common stockholders			—				7,319				—				7,471
Income available to common stockholders		$	80,457			$	202,160			$	110,435			$	302,342
Weighted average shares outstanding			99,318				91,011				99,224				90,588
Income per share — continuing operations		$	0.81			$	2.14			$	1.11			$	3.26
Income per share — discontinued operations			—				0.08				—				0.08
Net income per share		$	0.81			$	2.22			$	1.11			$	3.34
Diluted income per common share attributable to Terra Industries Inc.:
Income from continuing operations available to common stockholders		$	80,457			$	194,841			$	110,435			$	294,871
Add: Preferred share dividends			17				1,275				34				2,550
Income available to common stockholders and assumed conversions		$	80,474			$	196,116			$	110,469			$	297,421
Weighted average shares outstanding			99,318				91,011				99,224				90,588
Add incremental shares from assumed conversions:
Preferred shares			161				12,048				161				12,048
Non vested stock			231				572				319				590
Common stock warrants			—				1,047				—				1,424
Common stock options			—				—				—				2
Dilutive potential common shares			99,710				104,678				99,704				104,652
Income per share — continuing operations		$	0.81			$	1.87			$	1.11			$	2.84
Income per share — discontinued operations			—				0.07				—				0.07
Net income per share		$	0.81			$	1.94			$	1.11			$	2.91

5.

Inventories, net

Inventories consisted of the following:

		June 30,				December 31,				June 30,
(in thousands)		2009				2008				2008
Raw materials		$	17,523			$	17,805			$	16,791
Supplies			35,439				33,825				33,702
Finished goods			75,086				145,461				118,457
Total		$	128,048			$	197,091			$	168,950

Production costs include the cost of direct labor and materials, depreciation and amortization, and overhead costs related to manufacturing activities. We allocate fixed production overhead costs based on the normal capacity of our production facilities and unallocated overhead costs are recognized as expense in the period incurred. We determine the cost of inventories using the first-in, first-out method.

Inventories are stated at the lower of cost or market. Market is defined as current replacement cost, except that market should not exceed the net realizable value and should not be less than net realizable value reduced by an allowance for an approximately normal profit margin. We perform a monthly analysis of our inventory balances to determine if the carrying amount of inventories exceeds our net realizable value. Our determination of estimated net 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.

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

6.

Derivative Financial Instruments

We enter into derivative financial instruments, including swaps, basis swaps, purchased put and call options and sold call options, to manage the effect of changes in natural gas costs and the price 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 our statement of operations in the period the offsetting hedged transaction occurs. If an instrument or the hedged item is settled early, we evaluate whether the hedged forecasted transaction is still probable of occurring when determining whether to reclassify any gains or losses immediately in cost of sales or wait until the forecasted transaction occurs.

Until our derivatives settle, we test derivatives for ineffectiveness. This includes assessing the correlation of New York Mercantile Exchange (NYMEX) pricing, which is commonly used as an index in natural gas derivatives, to the natural gas pipelines’ pricing at our manufacturing facilities. This assessment requires management judgment to determine the statistically and industry appropriate analysis of prior operating relationships between the NYMEX prices and the natural gas pipelines’ prices at our facilities.

To the extent possible, we base our market value calculations on third party data. Due to multiple types of settlement methods available, not all settlement methods for future period trades are available from third party sources. In the event that a derivative is measured for fair value based on a settlement method that is not readily available, we estimate the fair value based on forward pricing information for similar types of settlement methods.

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. As of June 30, 2009, we did not have any credit risk related contingent features that would require us to settle the derivative instruments or to post collateral upon the occurrence of a credit event.

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 currency, interest or price risk;
	2.		It must be probable that the results of the hedge position substantially offset the effects of currency, interest or price changes on the hedged item (e.g., there is a high correlation between the hedge position and changes in market value of the hedge item); and
	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 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. Natural gas derivatives are designated as cash flow hedges, provided that the derivatives meet the conditions discussed above. The contracts are traded in months forward and settlement dates are scheduled to coincide with gas purchases during that future period.

A swap is a contract between us and a third party to exchange cash based on a designated price. Option contracts give the holder the right to either own or sell a futures or swap contract. The 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 NYMEX natural gas futures during a specified period. There are no initial cash requirements related to the swap and basis swap agreements; however, the counterparties require maintenance of cash margin balances generally 10% to 20% of the contract value.

As of June 30, 2009 and 2008, we had open derivative contracts of 13.8 million MMBtus and 37.3 million MMBtus, respectively, of natural gas.

The following summarizes the gross fair market value of all derivative instruments and their location in our Consolidated Balance Sheet are shown by those in an asset or liability position and are categorized as commodity derivatives.

Asset Derivatives (a)
						June 30,				December 31,				June 30,
Derivative Instrument		Location				2009				2008				2008
Commodity Derivatives		Other current assets				$	8,004			$	25,773			$	83,968

Liability Derivatives (a)
						June 30,				December 31,				June 30,
Derivative Instrument		Location				2009				2008				2008
Commodity Derivatives		Derivative hedge liabilities				$	(7,821	)		$	(125,925	)		$	(10,094	)

Certain derivatives outstanding at June 30, 2009 and 2008, which settled during July 2009 and July 2008, respectively, are included in the position of open natural gas derivatives in the table above. The July 2009 derivatives settled for an approximate $2.8 million loss compared to the July 2008 derivatives which settled for an approximate $15.6 million gain. All material open derivatives at June 30, 2009 will settle during the next twelve months.

We are required to maintain certain margin deposits on account with derivative counterparties. At June 30, 2009, we had no margin deposits with derivative counterparties, which are reported as “Margin deposits with derivative counterparties” on the Consolidated Statements of Financial Position. At December 31, 2008 and June 30, 2008, we had margin deposits with derivative counterparties of $36.9 million and less than $0.1 million, respectively.

At June 30, 2009 and 2008, we determined that a portion of certain derivative contracts were ineffective for accounting purposes and, as a result, recorded a $3.4 million charge and $6.1 million credit to cost of sales, respectively. At June 30, 2009 and 2008, we excluded a portion of the loss on certain derivative contracts from the effectiveness assessment and, as a result, recorded a $1.9 million credit and a $1.3 million charge, respectively, to cost of sales.

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.

All of our commodity derivatives are designated as cash flow hedging instruments under SFAS 133. See footnote 1 and 5 of our 2008 Annual Report Form 10-K for additional information on our overall risk management strategies. The following table presents the effect of our commodity derivative instruments on the Consolidated Statement of Operations for the three and six months ended June 30, 2009 and 2008.

Three Months Ended
										Amount of Gain (Loss)
Amount of Gain (Loss)								Location of Gain		Reclassified from AOCI												Amount of Gain (Loss)
Recognized in OCI								(Loss) Reclassified		into Income												Recognized in Income (b)
June 30,				June 30,				from AOCI into		June 30,				June 30,				Location of Gain (Loss)				June 30,				June 30,
2009				2008				Income (a)		2009				2008				Recognized in Income (b)				2009				2008
$	(4,439	)		$	77,085			Cost of Sales		$	(25,135	)		$	36,570			Cost of Sales				$	(1,492	)		$	4,846

Six Months Ended
										Amount of Gain (Loss)
Amount of Gain (Loss)								Location of Gain		Reclassified from AOCI												Amount of Gain (Loss)
Recognized in OCI								(Loss) Reclassified		into Income												Recognized in Income (b)
June 30,				June 30,				from AOCI into		June 30,				June 30,				Location of Gain (Loss)				June 30,				June 30,
2009				2008				Income (a)		2009				2008				Recognized in Income (b)				2009				2008
$	(37,309	)		$	119,832			Cost of Sales		$	(98,026	)		$	44,067			Cost of Sales				$	(1,492	)		$	4,846

Approximately $4.6 million of the net accumulated loss at June 30, 2009 will be reclassified into earnings during the next twelve months as compared to $67.1 million of the net accumulated income at June 30, 2008.

At times, we also use forward derivative instruments, such as nitrogen solution contracts, to fix or set floor prices for a portion of our nitrogen sales volumes. At June 30, 2009, we had open nitrogen solution contracts. 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 both the three and six month periods ending June 30, 2009, we recognized a gain of $0.1 million on nitrogen forward derivative instruments. For the three and six month periods ending June 30, 2008, there were no gains or losses on nitrogen forward derivative instruments.

7.

Fair Value Measurements

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 contracts use adjusted quoted prices from an active market, which are classified as level 2 as a significant other observable input in the disclosure hierarchy framework as defined by SFAS 157. Our gas derivative contracts, which are classified as a level 2 input, are comprised of swaps, basis swaps and options. The valuation techniques for these contracts are observable market data for inputs, including prices quoted on the NYMEX, prices quoted in spot markets and commonly referenced industry publications and prices quoted by market makers. There have been no changes in valuation techniques during the quarter ended June 30, 2009.

The following table summarizes the valuation of our assets and liabilities in accordance with SFAS 157 fair value hierarchy levels as of June 30, 2009:

		Quoted Market				Significant Other				Significant
		Prices in Active				Observable				Unobservable
		Markets				Inputs				Inputs
(in thousands)		(Level 1)				(Level 2)				(Level 3)
Assets
Derivative contracts		$	—			$	8,004			$	—
Total		$	—			$	8,004			$	—
Liabilities
Derivative contracts		$	—			$	(7,821	)		$	—
Total		$	—			$	(7,821	)		$	—

The following table summarized the valuation of our assets and liabilities in accordance with SFAS 157 fair value hierarchy levels of December 31, 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		$	—			$	25,773			$	—
Total		$	—			$	25,773			$	—
Liabilities
Derivative contracts		$	—			$	(125,925	)		$	—
Total		$	—			$	(125,925	)		$	—

The following table summarized the valuation of our assets and liabilities in accordance with SFAS 157 fair value hierarchy levels of June 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		$	—			$	83,968			$	—
Total		$	—			$	83,968			$	—
Liabilities
Derivative contracts		$	—			$	(10,094	)		$	—
Total		$	—			$	(10,094	)		$	—

The following table represents the carrying amounts and estimated fair values of Terra’s financial instruments as of June 30, 2009 and 2008.

		June 30,								June 30,
		2009								2008
		Carrying				Fair				Carrying				Fair
(in millions)		Amount				Value				Amount				Value
Financial Assets
Cash and cash equivalents		$	1,001.6			$	1,001.6			$	752.0			$	752.0
Financial Liabilities
Long-term debt			330.0				301.5				330.0				323.4
Preferred shares			1.5				3.8				115.8				564.2

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

•

Cash and receivables: The carrying amounts approximate fair value because of the short maturity of those instruments.

•

Long-term debt: The fair value of our long-term debt is estimated by discounting expected cash flows at the rates currently offered for debt of the same remaining maturities.

•

Preferred shares: Preferred shares are valued on the basis of market quotes, when available, and management estimates based on comparisons with similar instruments that are publicly traded.

Concentration of Credit Risk: We are subject to credit risk through trade receivables and short-term investments. Although a substantial portion of our debtors’ ability to pay depends upon the agribusiness economic sector, credit risk with respect to trade receivables generally is minimized due to its geographic dispersion. Short-term cash investments are placed in short duration corporate and government debt securities funds with well-capitalized, high quality financial institutions.

Financial Instruments: At June 30, 2009, we had letters of credit outstanding totaling $8.0 million, which guarantees various insurance and financing activities.

8.

Preferred Shares

The components of preferred shares outstanding at June 30, 2009 and 2008:

		June 30,								June 30,
		2009								2008
		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)			1,600			$	1,544				120,000			$	115,800

We had 1,600 shares of cumulative convertible perpetual Series A Preferred Shares with a liquidation value of $1,000 per share outstanding at June 30, 2009 and 120,000 shares with a liquidation value of $1,000 per share at June 30, 2008. 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 offers) 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 common stock. A total of 118,400 shares or 99% of the outstanding shares of Series A Preferred Shares were surrendered and converted as part of the inducement offers. The former holders of the Series A Preferred Shares received, in the aggregate, the following:

•

11,887,550 shares of Terra Industries common stock; and

•

A cash premium of approximately $5.3 million

The $5.3 million 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 offers.

9.

Turnaround Costs

The following represents a summary of the deferred plant turnaround costs for the six months ended June 30, 2009 and 2008:

						Turnaround								Currency
		Beginning				Costs				Turnaround				Translation				Ending
(in thousands)		Balance				Capitalized				Amortization				Adjustments				Balance
Period ended:
June 30, 2009		$	23,467			$	15,058			$	(12,372	)		$	178			$	26,331
June 30, 2008			42,190				10,225				(14,875	)			(424	)			37,116

10.

Accrued and Other Current Liabilities

Accrued and other current liabilities consisted of the following:

		June 30,				December 31,				June 30,
(in thousands)		2009				2008				2008
Income taxes payable		$	25,559			$	63,999			$	51,042
Payroll and benefit costs			13,940				27,104				18,662
Accrued CF defense costs			13,028				—				—
Accrued interest			9,747				9,748				9,745
Current accrued phantom shares			4,867				4,341				10,685
Deferred revenue			3,346				3,346				1,375
Accrued property taxes			3,160				3,291				3,212
Other			18,589				15,941				25,330
		$	92,236			$	127,770			$	120,051

11.

Other Liabilities

Other liabilities consisted of the following:

		June 30,				December 31,				June 30,
(in thousands)		2009				2008				2008
Unrecognized tax benefit		$	37,124			$	35,949			$	33,560
Long-term medical and closed facility reserve			23,835				23,887				24,405
Long-term deferred revenue			9,739				10,488				10,313
Accrued phantom shares			2,262				2,430				7,613
Other			5,836				5,799				6,659
		$	78,796			$	78,553			$	82,550

12.

Equity Investments

North America

Our investment in North American 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 $118.3 million and $137.1 million at June 30, 2009 and 2008, respectively. 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 North American equity method investments are summarized below:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(in thousands)		2009				2008				2009				2008
Condensed income statement information:
Net sales		$	41,436			$	83,993			$	79,415			$	182,528
Net income		$	11,051			$	31,640			$	19,058			$	62,921
Terra’s equity in earnings of unconsolidated affiliates		$	1,522			$	16,518			$	4,774			$	29,808