UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

(Mark One)

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

For the fiscal year ended December 31, 2006

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 Identification No.)
incorporation or organization)
Terra Centre		51102-6000
600 Fourth Street		(Zip Code)
P. O. Box 6000
Sioux City, Iowa		(712) 277-1340
(Address of principal executive offices)		(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:

		Name of each exchange
Title of each class		on which registered
Common Shares, without par value		New York Stock Exchange

Securities registered pursuant to section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yeso No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large Accelerated Filer o      Accelerated Filer þ      Non-accelerated Filer o

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

The aggregate market value of the voting and non-voting common shares held by non-affiliates computed by reference to the price at which the common shares were last sold, or the average bid and asked price of such common shares, as of the last business day of the registrant’s most recently completed second fiscal quarter was $580,794,088.42.

The number of Common Shares, without par value, outstanding as of March 1, 2007 was 92,756,438.

Documents Incorporated by Reference

Certain portions of the proxy statement for the Annual Meeting of Shareholders of Registrant to be held on May 8, 2007 are incorporated herein by reference into Part III hereof.

 

 

Table of Contents

Part I
Item 1. Business			1
Item 1A. Risk Factors			14
Item 1B. Unresolved Staff Comments			18
Item 2. Properties			18
Item 3. Legal Proceedings			20
Item 4. Submission of Matters to a Vote of Security Holders			20
Executive Officers of Terra			20
Part II
Item 5. Market for Terra’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			21
Item 6. Selected Financial Data			22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			37
Item 8. Financial Statements and Supplementary Data			40
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures			90
Item 9A. Controls and Procedures			90
Item 9B. Other Information			93
Part III
Item 10. Directors and Executive Officers of Terra			93
Item 11. Executive Compensation			93
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			93
Item 13. Certain Relationships and Related Transactions			94
Item 14. Principal Accounting Fees and Services			94
Part IV
Item 15. Exhibits and Financial Statement Schedules			95
Signatures			104
Index to Financial Statement Schedules, Reports and Consents			S-1
Ratio of Earnings to Financial Charges
Subsidiaries
Consent
Certification
Certification
Certification
Financial Statements

PART I

Item 1. Business

Terra Industries Inc., a Maryland corporation, is referred to as “Terra,” or “the Company” throughout this report. References to Terra also include the direct and indirect subsidiaries of Terra Industries Inc. where required by the context. Subsidiaries not wholly-owned by Terra include a limited partnership, Terra Nitrogen Company, L.P. (“TNCLP”), which, through its subsidiary, Terra Nitrogen, Limited Partnership, operates Terra’s manufacturing facility at Verdigris, Oklahoma. Terra is the sole general partner and the majority limited partner of TNCLP. Terra’s principal corporate office is located at Terra Centre, 600 Fourth Street, P.O. Box 6000, Sioux City, Iowa 51102-6000 and its telephone number is (712) 277-1340.

Terra makes available free of charge through its website, www.terraindustries.com, its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission. Terra’s internet website and the information contained or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K.

Business Overview

Terra is a leading North American and U.K. producer and marketer of nitrogen products, serving agricultural and industrial markets. In addition, Terra owns a 50% interest in Point Lisas Nitrogen Limited (“PLNL”), an ammonia production joint venture in the Republic of Trinidad and Tobago. Terra is one of the largest North American producers of ammonia, the basic building block of nitrogen fertilizers. The Company upgrades a significant portion of the ammonia it produces into higher value products, which are easier for distributors and farmers to transport, store and apply to crops than ammonia. Terra owns nine manufacturing facilities in North America and the U.K. capable of producing nitrogen products. Two of these facilities (Beaumont, Texas and Woodward, Oklahoma) can also produce methanol. The Beaumont, Texas facility, which historically had been a significant methanol producer, was mothballed in December 2004 and the Donaldsonville, Louisiana ammonia plant was mothballed in the first quarter of 2005. These two facilities remain out of production.

Terra’s business is organized into a nitrogen business segment and a methanol business segment. The methanol segment has become less significant to the Company’s business since the closing of the Beaumont, Texas facility.

Nitrogen is both a global and local commodity: global because it is produced and traded in almost all regions of the world, local because fertilizer customers display preferences for nitrogen in one of four basic forms based upon local conditions. The principal forms of globally traded nitrogen fertilizer are ammonia (82% nitrogen by weight) and urea (46% nitrogen by weight). Ammonium nitrate (AN) (34% nitrogen by weight) is traded in international markets. Urea ammonium nitrate solution (UAN) (28% to 32% nitrogen by weight) is used principally in North America and has only recently been traded in international markets to a lesser extent. UAN’s high water content and need to be transported in tankers can cause transportation costs per ton of nitrogen to be higher than other forms of internationally traded nitrogen products. Because transportation is a significant component of a customer’s total product cost, a key to competitiveness in the nitrogen business is proximity to the end user, which allows a supplier to have the lowest delivered cost for the customer’s product of choice. In addition, a supplier must provide a reliable source of product.

The locations of Terra’s North American production facilities provide Terra a competitive advantage in serving agricultural customers in the Corn Belt and other major agricultural areas in the United States and Canada. Terra’s U.K. facilities are able to serve competitively the entire British agricultural market. The Point Lisas ammonia production facility in Trinidad and Tobago serves U.S. and international nitrogen markets and benefits from access to low-cost natural gas supplies. Terra’s facilities have the following production capacities:

		Annual Capacity1
Location		Ammonia2				UAN3				AN4				Urea5				Methanol6
Beaumont, Texas7			255,000				—				—				—				225,000,000
Donaldsonville, Louisiana8			500,000				—				—				—				—
Port Neal, Iowa			370,000				840,000				—				60,000				—
Verdigris, Oklahoma			1,050,000				2,200,000				—				—				—
Woodward, Oklahoma9			440,000				340,000				—				25,000				40,000,000
Yazoo City, Mississippi10			500,000				600,000				775,000	11			7,000				—
Courtright, Ontario			480,000				400,000				—				175,000				—
Severnside, U.K.			265,000				—				500,000				—				—
Billingham, U.K.12			550,000				—				520,000				—				—
Point Lisas, Trinidad and Tobago13			360,000				—				—				—				—
Total			4,770,000				4,380,000				1,795,000				267,000				265,000,000

The principal customers for Terra’s North American nitrogen products are national agricultural retail chains, farm cooperatives, independent dealers and industrial customers. Industrial customers use nitrogen products to manufacture chemicals, plastics and other products such as acrylonitrile, polyurethanes, fibers, explosives and adhesives; to reduce nitrogen oxides (NOx) and other emissions from power plants; and in water treatment processes.

Agricultural customers accounted for approximately 70% and industrial customers approximately 30% of Terra’s North American nitrogen product revenue in 2006. For more information on the nitrogen business, see the discussion under “Nitrogen Business Segment” below.

		% of Total				U.S.				U.K.
		2006 Terra				Capacity				Capacity
Product		Revenues1				Position				Position
Ammonia			34.9	%			1				1
UAN			31.4	%			1				*
AN			16.6	%			1				1
Solid Urea			2.2	%			4	*			*
Methanol			2.0	%			1				*

In December 2003, Terra entered into contracts with the Methanex Corporation (“Methanex”), providing it exclusive rights to all methanol production at the Beaumont facility for five years. In December 2004, this facility was mothballed. As long as the Beaumont facility remains idle through the December 2008 termination of the Methanex contract, Terra will continue to realize revenues relating to the facility of up to $16.4 million per year consisting of $4.4 million from annual amortization of deferred revenues plus one-half of the annual cash margin, if any, based on the plant’s methanol production capacity, reference prices and natural gas costs. In 2006, the Company recorded $12.0 million in revenue related to the cash margin clause of the Methanex agreement. No revenue was recorded in 2005 relating to the cash margin clause of the Methanex agreement due to the high natural gas prices. Terra also entered into an agreement for Methanex to market, under a commission arrangement, all methanol produced at the Woodward facility. For more information on the methanol business, see the discussion under “Methanol Business Segment” below.

Nitrogen Business Segment

Terra is a leading producer and marketer of nitrogen products, principally fertilizers. The Company upgrades a significant portion of the ammonia it produces into other nitrogen products, such as urea, ammonium nitrate (AN) and urea ammonium nitrate solutions (UAN). Ammonia, AN, urea and UAN are the principal nitrogen products the Company produces and sells in North America. Terra produces and sells primarily ammonia and AN in the U.K. The Point Lisas production facility in Trinidad provides ammonia for sale into both the U.S. and international nitrogen markets. Other products Terra manufactures include nitric acid, dinitrogen tetroxide and carbon dioxide. These products, along with a portion of Terra’s ammonia, AN and urea production, are used in non-agricultural applications. In 2003, Terra formed its Terra Environmental Technologies division to provide products and services to customers using nitrogen products (primarily ammonia, aqua ammonia and liquid and dry urea) to reduce nitrogen oxides (NOx) emissions from various sources, including power plants, and in other environmental processes such as water treatment plants.

Although the different nitrogen fertilizer products are interchangeable to some extent, each has its own characteristics which make one product or another preferable to the end-user. Terra’s plants are designed to provide the fertilizer products preferred by end-users in the regions in which they are located. These preferences vary according to the crop planted, soil and weather conditions, regional farming practices,

relative prices, and the cost and availability of storage, handling and application equipment. Terra’s nitrogen products and its 2006 production are described in greater detail below.

Anhydrous Ammonia

Anhydrous ammonia (or “ammonia”) is the simplest form of nitrogen fertilizer and the feedstock for the production of other nitrogen fertilizers, including urea, AN and UAN. Ammonia is also a vital raw material for many industrial applications. Terra is the leading U.S. producer of ammonia. Ammonia is produced when natural gas reacts with steam and air at high temperatures and pressures in the presence of catalysts. Ammonia has a nitrogen content of 82% by weight and is generally the least expensive form of fertilizer on a per-pound-of- contained-nitrogen basis. Although generally the cheapest source of nitrogen available to agricultural customers, ammonia can be less desirable to end-users than urea, AN and UAN because of its need for specialized application equipment and its limited application flexibility.

In 2006, Terra produced approximately 2,632,000 tons of ammonia at its North American facilities and approximately 505,000 tons of ammonia at its U.K. facilities. The Company is obligated by contract through 2018 to purchase one-half of the ammonia produced by Point Lisas Nitrogen in Trinidad at a discount to market, subject to a minimum price. In 2006, Terra purchased approximately 307,000 tons pursuant to its contract with Point Lisas Nitrogen. Terra sold a total of 1,897,000 tons of ammonia worldwide in 2006 and consumed approximately 2,204,000 tons of ammonia as a raw material to manufacture its other nitrogen products.

Urea Ammonium Nitrate Solutions (UAN)

UAN is a liquid fertilizer and, unlike ammonia, is odorless and does not require refrigeration or pressurization for transportation or storage. UAN is produced by combining liquid urea, liquid ammonium nitrate and water. The nitrogen content of UAN ranges from 28% to 32% by weight. (Unless specifically stated to the contrary, all references to UAN herein shall be to 28%.) Because of its high water content, UAN is relatively expensive to transport, making it largely a regionally distributed product.

UAN can be applied to crops directly or mixed with crop protection products, permitting the application of several materials simultaneously, reducing energy and labor costs and accelerating field preparation for planting. UAN may be applied from ordinary tanks and trucks and sprayed or injected into the soil, or applied through irrigation systems. In addition, UAN may be applied throughout the growing season, providing significant application flexibility. Due to its stability, UAN (like AN) may be used for no-till row crops where fertilizer is spread on the surface of the soil and is subject to evaporation losses.

Terra produced approximately 3,710,000 tons of UAN at its North American facilities in 2006 and sold approximately 4,368,000 tons of UAN in 2006, primarily to U.S. fertilizer dealers and distributors.

Ammonium Nitrate (AN)

Terra is the largest manufacturer and marketer of agricultural-grade AN fertilizer in the U.S. and produces AN at two facilities in the U.K. AN is produced by combining nitric acid and ammonia into a liquid form which is then converted to a solid, largely for fertilizer applications. The nitrogen content of AN is 34% by weight. AN is less subject to volatilization (evaporation) losses than other nitrogen products. Due to its stability, AN is often the product of choice for pastures and “no-till” crops (that is, where the soil is not plowed prior to planting) where fertilizer is spread upon the surface and is subject to evaporation losses.

Industrial grade AN prills and ammonium nitrate solution is utilized as explosives in the mining industry as well as a raw material in the production of catalyst materials.

The Company produced approximately 508,000 tons of solid AN, 452,000 agricultural grade AN and 54,000 industrial grade ammonium nitrate (IGAN), at its Yazoo City, Mississippi facility and approximately 775,000 tons of solid AN at its U.K. facilities in 2006. During this period, the Company sold approximately 555,000 tons in the U.S. and 561,000 tons in the U.K.

Urea

Urea is produced by converting ammonia and carbon dioxide into liquid urea, which can be further processed into a solid, granular form. Urea is used for fertilizer and animal feed as well as in industrial applications as a raw material to produce resins and environmentally as a reagent to reduce NOx emissions. Granular urea has a nitrogen content of 46% by weight, the highest level of any solid nitrogen product. Terra produces both a granulated form of urea, generally for the fertilizer market, and urea liquor (liquid) for animal feed supplements and industrial applications.

In 2006, Terra produced approximately 220,000 tons of urea and urea liquor, all of it at North American plants. During this period, the Company sold approximately 244,000 tons of urea and urea liquor.

Nitric Acid

Nitric acid is made by oxidizing ammonia with air. The product is used as a raw material for other nitrogen products and by industrial customers to produce such products as nylon fibers, polyurethane foams and specialty fibers. In 2006, the Company produced approximately 893,000 tons of nitric acid worldwide. Approximately 366,000 of these tons were sold to industrial users and the remainder was used as a raw material for the production of Terra’s other nitrogen products.

Dinitrogen Tetroxide

Dinitrogen tetroxide (N2O4) is the propellant oxidizer used in various satellite, rocket and missile propulsion systems. It is also used by industrial customers in the manufacturing of pharmaceuticals. Dinitrogen tetroxide is produced by cooling and condensing a slipstream of process gas from a nitric acid plant containing various oxides of nitrogen. The recovered product is filtered and its composition adjusted to meet final product specifications. Terra manufactured approximately 90,000 pounds of the product in 2006.

Marketing and Distribution

Terra’s customers are broadly segregated into two groups: (1) North American customers, including those receiving shipments of imported product from the Point Lisas Nitrogen facility, and (2) U.K. customers, including export sales to continental Europe and Australia.

The principal customers for Terra’s North American manufactured nitrogen products fall into two broad categories – agricultural fertilizer customers and industrial customers. The agriculture customers consist of independent dealers, national retail chains, and cooperatives. These agricultural customers, in turn, sell product to dealers, farmers and other users. Industrial customers use nitrogen products as a feedstock for a variety of chemical processes, in the manufacture of pulp, paper, fibers and to control nitrous oxide (NOx) emissions from power plants. Nearly all of Terra’s industrial customers are end-users. The Company’s agricultural and industrial customers are located primarily in the Gulf, midwestern plains and southern regions of the U.S. where the Company’s facilities are located. It is Terra’s objective to ship as much of its North American production as possible directly from its manufacturing facilities to its

customers. Its five North American production facilities have total storage capacity for 190,000 tons of ammonia and 240,000 tons of UAN.

Terra’s Donaldsonville terminal has ready access to rail, truck and ammonia pipeline transportation and permits economical oceangoing vessel and barge transportation for imports and exports of nitrogen products. The terminal includes two ammonia storage tanks, each with a capacity of 30,000 tons, and can receive ocean-going vessels carrying 50,000 tons or more of ammonia. During 2006, the terminal received and shipped approximately 729,000 and 729,000 tons of ammonia, respectively. Terra expanded the terminal’s capabilities by constructing a new UAN solution tank with a 50,000-ton capacity. This tank and related receiving and shipping equipment was completed in December 2006 at a cost of $9.2 million.

In July 2005 Terra sold to a subsidiary of Kinder Morgan Energy Partners its terminal assets in Blytheville, Arkansas, consisting of storage and supporting infrastructure for 40,000 tons of ammonia, 9,500 tons of UAN and 40,000 tons of urea. In conjunction with this sale of assets, Terra has entered into a long-term agreement to lease from Kinder Morgan exclusively these terminal assets. This arrangement will maintain Terra’s distribution capabilities in the Blytheville, Arkansas region.

Terra owns a 50% interest in the Houston Ammonia Terminal, located on the Houston Ship Channel near Pasadena, Texas. This entity has two 15,000 ton ammonia storage tanks which provide ammonia to industrial customers in the area via a pipeline system capable of shipping approximately 1,000 tons per day. The terminal can receive ocean-going vessels.

In the U.K., agricultural customers accounted for approximately 57% and industrial customers approximately 43% of sales in 2006. Terra engages merchants and buying groups to sell its Nitram brand bagged AN fertilizer directly to British farmers. Terra also bags AN for other U.K. suppliers and sells it in bulk to suppliers who blend it with potash and phosphates, bag it and distribute it to farmers. Terra exports a small quantity of AN to continental Europe. Terra’s U.K. industrial products include ammonia, nitric acid and liquid carbon dioxide. Most industrial sales are to customers where Terra has a freight advantage.

Industry Overview

The three major nutrients required for plant growth are phosphorous, mined as phosphate rock; potassium, mined as potash; and nitrogen, produced from natural gas. Phosphorus plays a key role in the photosynthesis process. Potassium is an important regulator of plants’ physiological functions. Nitrogen is an essential element for most organic compounds in plants because it promotes protein formation. Nitrogen is also a major component of chlorophyll, which helps promote green healthy growth and high yields. There are no known substitutes for nitrogen fertilizers in the cultivation of high-yield crops. These three nutrients occur naturally in the soil to a certain extent, but must be replaced because crops remove them from the soil. Nitrogen, to a greater extent than phosphate and potash, must be reapplied each year in areas of intense agricultural usage because of nitrogen absorption by crops and its tendency to escape from the soil by evaporation or leaching. Consequently, demand for nitrogen fertilizer tends to be more consistent on a year-by-year, per-acre-planted basis than is demand for phosphate or potash fertilizer.

The major nitrogen consuming crop in North America is corn and in the United Kingdom, wheat. Certain crops, such as soybeans and other legumes, can use atmospheric nitrogen and do not require nitrogen fertilizers.

Demand

Global demand for fertilizers typically grows at predictable rates and tends to correspond to growth in grain production. Global fertilizer demand is driven in the long term primarily by population growth, increases in disposable income and associated improvements in diet. Short-term demand depends on world economic growth rates and factors creating temporary imbalances in supply and demand. These factors include weather patterns, the level of world grain stocks relative to consumption, agricultural commodity prices, energy prices, crop mix, fertilizer application rates, farm income and temporary disruptions in fertilizer trade from government intervention, such as changes in the buying patterns of China or India. Grain consumption has historically grown at approximately 1.2% per year. According to IFA, International Fertilizer Industry Association, over the last 45 years global fertilizer demand has grown 3.7% annually and global nitrogen fertilizer demand has grown at a faster rate of 4.8% annually. During that period, North American nitrogen fertilizer demand has grown 3.3% annually.

Supply

Over the past six years, global ammonia capacity has remained relatively flat, growing at an average of less than 1% per annum. This result was the combination of new project capacity being offset by permanent plant closing in the U.S. and Europe. As global operating rates and prices have risen, so have plans for new capacity.

This new global capacity will likely come from advantaged natural gas regions of the world, such as the Middle East and Africa. This expansion of capacity could be limited, however, by high capital and construction costs, lower nitrogen prices and increasing natural gas prices. Russia has recently announced plans to raise domestic gas prices as well as prices paid by their export customers. This will raise the production costs for new and existing plants in the former Soviet Union and Europe.

Imports account for a significant portion of U.S. nitrogen product supply. Producers from the former Soviet Union, Canada, the Middle East, Trinidad and Venezuela are major exporters to the U.S. These export producers are often competitive in regions close to the point of entry for imports, primarily the Gulf coast and east coast of North America. Due to higher freight costs and limited distribution infrastructure, importers are less competitive in serving the main corn-growing regions of the U.S., which are more distant from these ports. According to Fertecon, a leading industry publication, world trade in ammonia grew from 15.4 million tons in 2000 to 19 million tons by 2005 due to the exceptional increase in gas prices in the U.S. and Europe during this period and the consequent closure of U.S. capacity.

Outlook

Fertecon forecasts that global nitrogen fertilizer demand is expected to rise by around 1.8% per year from 2005 to 2015, increasing by 16 million tons or close to 18% over the period. In North America, nitrogen fertilizer consumption is expected to increase from 2005 to 2015 from 12.3 million tons to 14.1 million tons, a 14%increase.

Global grain inventories are currently at levels significantly below the ten-year average, and current corn prices have increased significantly to $3.85 per bushel as of January 18, 2007 versus $1.90 per bushel one year prior. Both of these factors influence the improved outlook for demand.

The emergence of ethanol as an alternative energy source has the potential to drive incremental fertilizer demand. Corn, the primary feedstock for U.S. ethanol production, represents approximately 40% of fertilizer demand in North America. New ethanol capacity is increasing demand for corn and, according

to Fertecon, is expected to contribute to a forecasted 21 million hectare increase in planted corn area in the world by 2030. The amount of corn used in the U.S. for ethanol production has doubled in the last four years. In 2005-2006, around 1.6 billion bushels of corn were used for ethanol production. According to Fertecon, a 34% increase is forecast for the current 2006-2007 crop year, bringing the total bushels used for ethanol to 2.15 billion. This number is expected to rise to over 3 billion bushels by 2007-2008, equivalent to 25% of the U.S. corn crop.

Due to the Clean Air Act, energy providers are required to reduce emissions of nitrogen oxides, or NOx. This presents a new market opportunity for ammonia, which can be used to reduce NOx from air emissions. We believe that this new application could increase ammonia demand by up to 1 million tons, or 10% of U.S. capacity in 2010.

The continued growth in demand for nitrogen products has helped stabilize global ammonia utilization rates, which averaged 86% between 2004 and 2005. According to Fertecon, global ammonia utilization rates are forecasted to remain in the mid-80’s through 2015. North American ammonia utilization rates are forecast to decrease from 84% in 2006 to 78% by 2015 due in part to projected long-term growth in worldwide capacity and in imports.

To help meet the growing global demand for fertilizers, especially in high growth areas like China and India, new ammonia capacity is expected to come on stream globally in the next nine years. According to Fertecon, global ammonia capacity is forecast to increase by a new 37.5 million tons by 2015, a total increase of 22%. There are a number of new capacity projects expected or underway in gas advantaged regions; however, increased construction costs and changes in market dynamics have delayed a number of projects.

World trade in ammonia is expected to increase by 1.6 million tons or 8% in the period to 2010, according to Fertecon, representing more modest growth than seen from 2000 to 2005. Fertecon projects that higher gas costs for Russian and Ukrainian exporters and the lower-than-previous gas price outlook for the U.S. would appear to support continued operating rates at the remaining U.S. ammonia capacity, limiting the near-term growth in ammonia imports.

Methanol Business Segment

Terra’s methanol business segment has shrunk considerably since it mothballed its principal methanol production facility at Beaumont, Texas in December 2004. The facility remained closed throughout 2005 and 2006 and remains closed to date. Terra’s remaining manufacturing facility capable of producing methanol is in Woodward, Oklahoma.

In December 2003, Terra entered into contracts with Methanex Corporation (“Methanex”) providing Methanex exclusive rights to all methanol production at Terra’s Beaumont, Texas facility for five years. Methanex paid $25 million for these rights and agreed to purchase Terra’s methanol production at amounts expected to approximate cash production costs. Methanex also agreed to pay Terra 50% of any gross profits earned from its sales of Beaumont product up to maximum payments of $12 million per year. The agreement also gave Methanex the right to terminate Beaumont’s production, with Terra being responsible for the costs of shutting down the facility. On December 1, 2004, at the request of Methanex and under the terms of the parties’ agreement, Terra ceased production at the Beaumont facility and mothballed the plant. The parties’ agreement stipulates that, beginning two years from the date of the shutdown, Terra may terminate the agreement by paying Methanex approximately $417,000 per month remaining in the agreement’s term. As long as the Beaumont facility remains idle through the December 2008 termination of the Methanex contract, Terra will continue to realize revenues relating to the facility of up to $16.4 million per year consisting of $4.4 million from annual amortization of deferred revenues

plus one-half of the annual cash margin, if any, attributable to idled methanol production based on reference prices and natural gas costs. Terra received the maximum payment of $12 million in 2006.

Terra has retained some employees to operate the Beaumont methanol storage and distribution terminal and potentially to operate the ammonia plant.

Manufacturing Facilities

Terra owns the plant and processing equipment at the Beaumont facility, which has an annual methanol production capacity of 225 million gallons. Terra did not produce any methanol at the Beaumont plant in 2006. For a description of the Beaumont facility, see the Beaumont, Texas description under Item 2 Properties. The Woodward, Oklahoma facility produced 24.1 million, 30.4 million and 37.3 million gallons of methanol in 2006, 2005 and 2004, respectively, and has an annual methanol production capacity of 40 million gallons. For a description of the Woodward facility, see the Woodward, Oklahoma listing under Item 2 Properties, Marketing and Distribution

In addition to the Beaumont production agreement, Terra also entered into an agreement with Methanex to market, under a commission arrangement, all methanol produced at the Woodward, Oklahoma facility. The customers served under these arrangements are primarily large domestic chemical producers.

Industry Overview

Methanol is a liquid made primarily from natural gas that is used as a feedstock in the production of formaldehyde, acetic acid, methyl tertiary-butyl ether (MTBE), and a variety of other chemical intermediates which form the foundation of a large number of secondary derivatives.

Methanol is a typical commodity chemical and the methanol industry is characterized by cycles of oversupply resulting in lower prices and idled capacity, followed by periods of shortage and rapidly rising prices until increased prices justify new plant investments or the re-start of idled capacity. Over the past several years significant industry restructuring has taken place with most North American methanol capacity shut down. New methanol production facilities have generally been constructed in locations with access to low-cost natural gas, although this advantage is partially offset by higher distribution costs due to distance form major markets.

Credit

Terra’s credit terms are generally 15-30 days in the U.S. and 30 days in the U.K., but may be extended for longer periods during certain sales seasons, consistent with industry practices.

Seasonality and Volatility

The fertilizer business is highly seasonal, based upon the planting, growing and harvesting cycles. Nitrogen fertilizer inventories must be accumulated to permit uninterrupted customer deliveries, and require significant storage capacity. This seasonality generally results in higher fertilizer prices during peak periods, with prices normally reaching their highest point in the spring, decreasing in the summer, and increasing again in the late fall – early winter period as depleted inventories are restored.

Nitrogen fertilizer prices can also be volatile as a result of a number of other factors. The most important of these factors are:

	•		Weather patterns and field conditions (particularly during periods of high fertilizer consumption);
	•		Quantities of fertilizers imported to primary markets;

	•		Current and projected grain inventories and prices, which are heavily influenced by U.S. exports, worldwide grain markets, and domestic demand (food, feed, biofuel); and
	•		Price fluctuations in natural gas, the principal raw material used to produce nitrogen fertilizer.

Governmental policies may directly or indirectly influence the number of acres planted, the level of grain inventories, the mix of crops planted and crop prices, as well as environmental demands.

While most U.S. methanol is sold pursuant to long-term contracts based on market index pricing and fixed volumes, the spot market price of methanol can be volatile. The industry has experienced cycles of oversupply, resulting in depressed prices and idled capacity, followed by periods of shortages and rapidly rising prices. Future demand for methanol will depend in part on the emerging regulatory environment with respect to reformulated gasoline.

Raw Materials

The principal raw material used to produce manufactured nitrogen products and methanol is natural gas. Natural gas costs in 2006 accounted for approximately 46% of Terra’s total manufacturing costs and expenses. Significant increases in natural gas costs that are not hedged or recovered through increased prices to customers would have an adverse impact on the Company’s business, financial condition and results. Terra management believes there will be a sufficient supply of natural gas for the foreseeable future and will, as opportunities present themselves, enter into firm transportation contracts to minimize the risk of interruption or curtailment of natural gas supplies during the peak-demand winter season. The Company uses a combination of spot and term purchases of varied duration from a variety of suppliers to obtain natural gas supply.

Natural gas prices have moderated, averaging $6.54 and$6.46 per MMBtu in the third and fourth quarters of 2006. This follows a period of significant cost pressure after hurricanes hit the U.S. in late 2005 causing natural gas prices to increase and peak at an average price of $12.79 per MMBtu in November 2005. This significantly increased costs for North American producers in the fourth quarter of 2005 and first quarter 2006. Currently, natural gas storage in North America exceeds five-year historic levels.

Terra owns a 50% interest in Point Lisas Nitrogen Limited, a 50/50 ammonia production joint venture with KNC Trinidad Limited. Point Lisas Nitrogen Limited has a contract to purchase natural gas from the National Gas Company of Trinidad and Tobago. The joint venture’s cost of natural gas has historically been significantly lower than U.S. natural gas costs, which has resulted in the joint venture being substantially more profitable than comparable North American facilities.

Pursuant to a policy approved by the board of directors, Terra employs natural gas hedges with a goal of mitigating risk from increases to natural gas prices. The Company has implemented a policy setting boundaries to ensure coverage of fixed forward sales as well as potential outstanding forward priced quotes and prepay programs. The Company’s policy is designed to achieve an acceptable gross margin on forward sales estimates. Terra hedges natural gas prices through the use of supply contracts, financial derivatives and other instruments. Terra enters into these positions when it believes such arrangements would not result in costs greater than expected selling prices for the finished products.

If natural gas prices rise, Terra may benefit from the use of forward-pricing techniques. Conversely, if natural gas prices fall, the Company may incur costs above the then-available spot market price. The settlement dates of forward-pricing contracts coincide with gas purchase dates as well as shipment periods on forward committed sales. Forward-pricing contracts are based on a specified price referenced to spot market prices or appropriate NYMEX futures contract prices.

Transportation

Terra uses several modes of transportation to distribute products to customers, including railroad cars, common carrier trucks, barges and common carrier pipelines.

Railcars are the major mode of transportation at Terra’s North American manufacturing facilities. At December 31, 2006, Terra had 2,858 railcars under lease. Terra owns 10 nitric acid railcars. In addition, Terra operates Terra Express, Inc., a common carrier covering the 48 contiguous United States which is most active in the middle third of the country. Terra Express specializes in transporting liquid bulk products, including UAN, urea liquor, ethanol, ammonia and propane. Terra Express employs two drivers and 42 owner-operators. In the U.K., Terra’s AN production is transported primarily by contract carrier trucks, and ammonia is transported primarily by pipelines that the Company owns.

Terra transports purchased natural gas to its Woodward, Oklahoma facility via both intrastate and interstate pipelines and to Terra’s Verdigris, Oklahoma facility via intrastate pipeline. The intrastate pipelines serving Woodward and Verdigris are not open-access carriers, but are nonetheless part of a widespread regional system through which Woodward and Verdigris can receive natural gas from any major Oklahoma source. Terra also has limited access to out-of-state natural gas supplies for these facilities. Terra’s Beaumont, Texas facility sources natural gas via four intrastate pipelines. The Courtright, Ontario facility sources natural gas at delivery points at Parkway and Dawn, Ontario and a local utility. Terra transports purchased natural gas for its Port Neal, Iowa facility via interstate, open-access pipelines. At the Billingham and Severnside, England locations, purchased natural gas is transported to the facilities via a nationwide, open-access pipeline system. Terra’s Donaldsonville, Louisiana facility sources purchased natural gas from two intrastate pipelines. Terra’s Yazoo City facility is served by three interstate pipelines and one intrastate pipeline.

FMCL Limited Liability Company, Terra’s 50/50 ammonia shipping joint venture with KNC Trinidad Limited, leases a vessel for transportation of ammonia, primarily between the Point Lisas Nitrogen Limited facility in Trinidad and the United States. Use of this vessel is shared between the joint venture partners, Terra and KNC Trinidad Limited.

Research and Development

At the present time, Terra is not undertaking any significant, ongoing research and development efforts.

Competition

The markets in which Terra operates are highly competitive. Competition in agricultural input markets takes place largely on the bases of price, supply reliability, delivery time and quality of service. Feedstock availability to production facilities and the cost and efficiency of production, transportation and storage facilities are also important competitive factors. Government intervention in international trade can distort the competitive environment. The relative cost and availability of natural gas are also important competitive factors. Significant determinants of a plant’s competitive position are the natural gas acquisition and transportation contracts negotiated with its major suppliers as well as proximity to natural gas sources and/or end-users.

Terra’s domestic competitors in the nitrogen fertilizer markets are primarily other independent fertilizer companies. Nitrogen fertilizers imported into the United States compete with domestically produced nitrogen fertilizers, including those produced by Terra. Countries with inexpensive sources of natural gas (whether as a result of government regulation or otherwise) can produce nitrogen fertilizers at a low cost. A substantial amount of new ammonia capacity is expected to be added abroad in the foreseeable future.

In the methanol segment, production and trade have become increasingly globalized and a number of foreign competitors produce methanol primarily for the export market. Many of these foreign competitors have access to favorably priced sources of natural gas and are relatively insensitive to raw material price fluctuations. However, because of low domestic demand, foreign competitors aggressively pursue the U.S. and other export markets.

Environmental and Other Regulatory Matters

Terra’s U.S. operations are subject to various federal, state and local environmental, health and safety laws and regulations, including laws relating to air quality, hazardous or solid wastes and water quality. Terra’s operations in Canada are subject to various federal and provincial regulations regarding such matters, including the Canadian Environmental Protection Act administered by Environment Canada, and the Ontario Environmental Protection Act administered by the Ontario Ministry of the Environment. Terra’s U.K. operations are subject to similar regulations under a variety of acts governing hazardous chemicals, transportation and worker health and safety. All of Terra’s facilities require operating permits that are subject to review by governmental agencies. Terra is also involved in the manufacturing, handling, transportation, storage and disposal of materials that are or may be classified as hazardous or toxic by federal, state, provincial or other regulatory agencies. The Company takes precautions to reduce the likelihood of accidents involving these materials. If such materials have been or are disposed of at sites that are targeted for investigation and/or remediation by federal or state regulatory agencies, Terra may be responsible under CERCLA or analogous laws for all or part of the costs of such investigation and remediation, and damages to natural resources.

The State of Arizona designated Inspiration Consolidated Copper Company (“Inspiration”), a Terra subsidiary that disposed of its assets in 1988 and no longer operates a business, as one of several potentially responsible parties (“PRP”) under the state Superfund law at the Pinal Creek Drainage Basin Site (“Pinal Site”) in Globe/Miami, Arizona, based upon Inspiration’s prior ownership and operation of copper mining and production facilities. Under state and federal Superfund laws, all PRPs may be jointly and severally liable for the costs of investigation and/or remediation of an environmentally impaired site regardless of fault or the legality of original disposals. The Pinal Site is the subject of ongoing investigation and cleanup to address groundwater releases of acidic metal-bearing solutions from past copper mining and production facilities. The remedial actions are governed by a 1997 consent decree (“1997 Consent Decree”) between the Arizona Department of Environmental Quality and the two current owners/operators of the copper mining and production facilities (one of whom is the successor to Inspiration’s buyer), both of whom the State designated as PRPs, and Inspiration (collectively with Terra, the “Group”). The Group’s members are jointly financing and performing the work, but Inspiration no longer owns assets or is conducting any activities at the Pinal Site. Also, the Group has filed an action for cost-recovery against other former owners and operators at the Pinal Site, a substantial portion of which has been settled. In a related matter, more than a decade ago, residents in an area of the Pinal Site brought a class action lawsuit against the Group seeking property damages and medical monitoring for potential personal injuries allegedly related to the acidic metal-bearing groundwater. The class action lawsuit was settled in September 2000, although plaintiffs reserved the right to assert personal injury claims individually. In the 1988 sale agreement, Inspiration was contractually indemnified by its buyer (which includes the buyer’s successor) for all environmental claims relating to the Pinal Site. In April 2005, Inspiration and its successor settled most claims relating to the 1988 indemnity, confirming that the successor will indemnify Inspiration for past and future costs arising out of the 1997 Consent decree, for allocation claims arising out of the cost-recovery lawsuit, and for legal fees of common counsel in the various lawsuits. After consideration of such factors as the number of

PRPs and levels of financial responsibility, including the ongoing litigation and contractual indemnities, Terra believes its liability with respect to these matters will not be material.

Terra retained a small number (less than 10%) of its retail locations after the sale of its distribution business in 1999. Some of these locations are now, or are expected in the future to be, the subject of environmental clean-up activities for which the Company has retained liability. Terra does not believe that such environmental costs and liabilities will have a material effect on its results of operations, financial position or net cash flows. As of November 30, 2006, there were 12 remaining locations, six of which were undergoing environmental clean-up activities prior to the sale or release of those properties to the landowner. The total net cost associated with the former retail locations in 2007 and beyond (including environmental expenditures and proceeds from voluntary clean-up reimbursements and sale of properties) is not expected to exceed $2 million.

With respect to the Verdigris, Oklahoma facility, Freeport-McMoRan Resource Partners, Limited Partnership (a former owner and operator of the facility) retained liability for certain environmental matters. With respect to the Beaumont, Texas facility, DuPont retains responsibility for certain environmental costs and liabilities stemming from conditions or operations to the extent such conditions or operations existed or occurred prior to its sale of the facility to Terra in 1991. Likewise, with respect to the Billingham and Severnside, England facilities, the seller, ICI, indemnified Terra, subject to certain conditions, for pre-December 31, 1997 environmental contamination associated with the purchased assets. Known conditions are not expected to result in material expenditures but discovery of unknown conditions or the failure of prior owners and operators and indemnitors to meet their obligations could require significant expenditures.

In the wake of the September 11 tragedy, both the U.S. Congress and U.K. Parliament are considering various additional security and handling requirements for hazardous chemicals, including AN, which can be used to manufacture explosives. Terra’s facilities already have the basic plans and vulnerability assessments in place that may be required under new legislation. Accordingly, such legislation is unlikely to have an adverse impact on Terra’s operations, financial position, or cash flow.

Terra may be required to install additional air and water quality control equipment, such as low nitrous oxide burners, scrubbers, ammonia sensors and continuous emission monitors, at certain facilities to comply with applicable environmental requirements. Terra estimates that the total cost of additional equipment to comply with these requirements in 2007 and the next two years will be less than $15 million.

Terra endeavors to comply in all material respects with applicable environmental, health and safety regulations and has incurred substantial costs in connection with such compliance. Because these regulations are expected to continue to change and generally to be more restrictive than current requirements, the costs of compliance will likely increase. Terra does not expect its compliance with such regulations to have a material adverse effect on its results of operations, financial position or net cash flows. However, there can be no guarantee that new regulations will not result in material costs.

Terra’s capital expenditures related to environmental control in 2006, 2005 and 2004 were approximately $1.2 million, $1.3 million and $2.4 million, respectively. Projected environmental capital expenditures are $6.7 million for 2007 and $5.2 million for 2008.

Terra believes that its policies and procedures now in effect are in compliance with applicable environmental laws and with the permits relating to the facilities in all material respects. However, in the normal course of its business, Terra is exposed to risks relating to possible releases of hazardous substances into the environment. Such releases could cause substantial damages or injuries. Although

environmental expenditures have not been material during the past year, it is impossible to predict or quantify the impact of future environmental liabilities associated with releases of hazardous substances from Terra’s facilities. Such liabilities could have a material adverse impact on the results of operations, financial position or net cash flows.

Revenues and Assets

Terra’s revenues from external customers, measure of profit and loss, total assets and revenues and assets according to geography for the years 2004-2006 are set forth in Item 8 of this Annual Report on Form 10-K under the caption “Note 21 – Industry Segment Data” contained in the “Notes to Consolidated Financial Statements.”

Employees

Terra had 1,238 full-time employees at December 31, 2006. All 372 U.K. employees are covered by a wage and working conditions arrangement similar to a collective bargaining agreement.

Item 1A. Risk Factors

In addition to the other information contained in this Form 10-K, the following risk factors should be considered carefully in evaluating Terra’s business. The Company’s business, financial condition, or results of operations could be materially adversely affected by any of these risks. Please note that additional risks not presently known to Terra or that its management currently deems immaterial may also impair the Company’s business and operations.

A substantial portion of Terra’s operating expense is related to the cost of natural gas, and an increase in such cost that is either unexpected or not accompanied by increases in selling prices of products could result in reduced profit margins and lower product production.

The principal raw material used to produce nitrogen products is natural gas. Natural gas costs in 2006 comprised about 46% of total costs and expenses. A significant increase in the price of natural gas (which can be driven by, among other things, supply disruptions, cold weather and oil price spikes) that is not hedged or recovered through an increase in the price of related nitrogen products could result in reduced profit margins and lower product production. Terra has in the recent past idled one or more of its plants in response to high natural gas prices. A significant portion of Terra’s competitors’ global nitrogen production occurs at facilities with access to fixed-priced and/or product related natural gas supplies, similar to Terra’s gas supply contract in Trinidad. These competitors’ facilities’ natural gas costs have been and likely will continue to be substantially lower than Terra’s costs.

Declines in the prices of Terra’s products may reduce profit margins.

Prices for nitrogen products are influenced by the global supply and demand conditions for ammonia and other nitrogen-based products. Long-term demand is affected by population growth and rising living standards that determine food consumption. Short-term demand is affected by world economic conditions and international trade decisions. Supply is affected by increasing worldwide capacity and the increasing availability of nitrogen product exports from major producing regions such as the former Soviet Union, Canada, the Middle East, Trinidad and Venezuela. New global ammonia capacity is expected abroad in the foreseeable future. If this growth in new capacity exceeds the growth in demand, the price at which Terra sells its nitrogen products may decline, resulting in reduced profit margins, lower production of products and potential plant closures. Supply in the U.S. and Europe is also affected

by trade regulatory measures, which restrict import supply into those markets. Changes in those measures would likely adversely impact available supply and pricing.

Terra’s products are subject to price volatility resulting from periodic imbalances of supply and demand, which may cause the results of operations to fluctuate.

Historically, Terra’s products’ prices have reflected frequent changes in supply and demand conditions. Changes in supply result from capacity additions or reductions and from changes in inventory levels. Demand for products is dependent on demand for crop nutrients by the global agricultural industry and on the level of industrial production. Periods of high demand, high capacity utilization and increasing operating margins tend to result in new plant investment and increased production until supply exceeds demand, followed by periods of declining prices and declining capacity utilization until the cycle is repeated. In addition, markets for Terra’s products are affected by general economic conditions. As a result of periodic imbalances of supply and demand, product prices have been volatile, with frequent and significant price changes. During periods of oversupply, the price at which Terra sells its products may be depressed and this could have a material adverse effect on Terra’s business, financial condition and results of operations.

Terra’s products are global commodities and Terra faces intense competition from other nitrogen fertilizer producers.

Nitrogen fertilizer products are global commodities and can be subject to intense price competition from both domestic and foreign sources. Customers, including end-users, dealers and other crop-nutrients producers and distributors, base their purchasing decisions principally on the delivered price and availability of the product. Terra competes with a number of U.S. producers and producers in other countries, including state-owned and government-subsidized entities. The U.S. and the European Commission each have trade regulatory measures in effect which are designed to address this type of unfair trade. Changes in these measures could have an adverse impact on Terra’s sales and profitability of the particular products involved. Some of Terra’s principal competitors have greater total resources and are less dependent on earnings from nitrogen fertilizer sales. In addition, a portion of global production benefits from natural gas contracts that have been, and could continue to be, substantially lower priced than our natural gas. Terra’s inability to compete successfully could result in the loss of customers, which could adversely affect sales and profitability.

The Company’s business is subject to risks related to weather conditions.

Adverse weather conditions may have a significant effect on demand for the Company’s nitrogen products. Weather conditions that delay or intermittently disrupt field work during the planting and growing season may cause agricultural customers to use less or different forms of nitrogen fertilizer, which may adversely affect demand for the product that Terra sells. Weather conditions following harvest may delay or eliminate opportunities to apply fertilizer in the fall. Weather can also have an adverse effect on crop yields, which lowers the income of growers and could impair their ability to pay Terra’s customers.

Terra’s risk measurement and hedging activities might not prevent losses.

The Company manages commodity price risk for its businesses as a whole. Although the Company has risk measurement systems in place that use various methodologies to quantify risk, these systems might not always be followed or might not always work as planned. Further, such risk measurement systems do not in themselves manage risk, and adverse changes involving volatility, adverse correlation of commodity prices and the liquidity of markets might still adversely affect earnings and cash flows, as

well as the balance sheet under applicable accounting rules, even if risks have been identified. The ability to manage exposure to commodity price risk in the purchase of natural gas through the use of financial derivatives may be affected by limitations imposed by Terra’s bank agreement covenants.

In an effort to manage financial exposure related to commodity price and market fluctuations, Terra has entered into contracts to hedge certain risks associated with its assets and operations. In these hedging activities, the Company has used fixed-price, forward, physical purchase and sales contracts, futures, financial swaps and option contracts traded in the over-the-counter markets or on exchanges. Nevertheless, no single hedging arrangement can adequately address all risks present in a given contract or industry. Therefore, unhedged risks will always continue to exist. The Company may not be able to successfully manage all credit risk and as such, future cash flows could be impacted by counterparty default.

Terra is substantially dependent on its manufacturing facilities, and any operational disruption could result in a reduction of sales volumes and could cause Terra to incur substantial expenditures.

Terra’s manufacturing operations may be subject to significant interruption if one or more of its facilities were to experience a major accident or were damaged by severe weather or other natural disaster. In addition, Terra’s operations are subject to hazards inherent in nitrogen fertilizer manufacturing. Some of those hazards may cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. For example, an explosion at Terra’s Port Neal, Iowa facility in 1994 required Terra to rebuild nearly the entire facility and a June 1, 2006 explosion shut down the ammonia production plant in Billingham, England until repairs were completed in August. In addition, approximately four weeks of unplanned outages at Terra’s Point Lisas Nitrogen facility during the 2006 third quarter to repair failing heat exchangers were only partly successful and the plant will be operating at about 80% of capacity until replacement exchangers are installed during a scheduled turnaround in early 2007. Also, a mechanical outage at the Courtright, Ontario facility in April 2001 required Terra to shut down that facility for approximately two months. Terra currently maintains property insurance, including business interruption insurance, but it may not have sufficient coverage, or may be unable in the future to obtain sufficient coverage at reasonable costs.

Terra may be adversely affected by environmental laws or regulations to which it is subject.

Terra’s U.S., Canadian and U.K. operations and properties are subject to various federal, state and local environmental, safety and health laws and regulations, including laws relating to air quality, hazardous and solid materials and wastes, water quality, investigation and remediation of contamination, transportation and worker health and safety. Terra could incur substantial costs, including capital expenditures for equipment upgrades, fines and penalties and third-party claims for damages, as a result of compliance with, violations of or liabilities under environmental laws and regulations. Terra is also involved in the manufacture, handling, transportation, storage and disposal of materials that are or may be classified as hazardous or toxic by federal, state, provincial or other regulatory agencies. If such materials have been or are disposed of or released at sites that require investigation and/or remediation, Terra may be responsible under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, or “CERCLA,” or analogous laws for all or part of the costs of such investigation and/or remediation, and for damages to natural resources. Under some of these laws, responsible parties may be held jointly and severally liable for such costs, regardless of fault or the legality of the original disposal or release.

Terra has liability as a potentially responsible party at certain sites under certain environmental remediation laws. The Company has also been subject to related claims by private parties alleging property damage and possible personal injury arising from contamination relating to discontinued operations. Terra may be subject to additional liability or additional claims in the future. Some of these matters may require the Company to expend significant amounts for investigation and/or cleanup or other costs.

Terra may be required to install additional pollution control equipment at certain facilities in order to maintain compliance with applicable environmental requirements.

Continued government and public emphasis on environmental issues can be expected to result in increased future investments for environmental controls at ongoing operations. Terra may be required to install additional air and water quality control equipment, such as low emission burners, scrubbers, ammonia sensors and continuous emission monitors, at certain of its facilities in order to maintain compliance with applicable environmental requirements. Such investments would reduce income from future operations. Present and future environmental laws and regulations applicable to operations, more vigorous enforcement policies and discovery of unknown conditions may require substantial expenditures and may have a material adverse effect on results of operations, financial position or net cash flows.

Government regulation and agricultural policy may reduce the demand for Terra’s products.

Existing and future government regulations and laws may reduce the demand for Terra products. Existing and future agricultural and/or environmental laws and regulations may impact the amounts and locations of fertilizer application and may lead to decreases in the quantity of nitrogen fertilizer applied to crops. Any such decrease in the demand for fertilizer products could result in lower unit sales and lower selling prices for nitrogen fertilizer products. U.S. and E.U. governmental policies affecting the number of acres planted, the level of grain inventories, the mix of crops planted and crop prices could also affect the demand and selling prices of Terra’s products. In addition, Terra manufactures and sells ammonium nitrate (AN) in the U.K. and in the U.S. Ammonium nitrate can be used as an explosive and was used in the Oklahoma City bombing in April 1995. It is possible that either the U.S. or U.K. governments could impose limitations on the use, sale or distribution of AN, thereby limiting Terra’s ability to manufacture or sell this product.

Terra is subject to risks associated with international operations.

Terra’s international business operations are subject to numerous risks and uncertainties, including difficulties and costs associated with complying with a wide variety of complex laws, treaties and regulations; unexpected changes in regulatory environments; currency fluctuations; tax rates that may exceed those in the U.S.; earnings that may be subject to withholding requirements; and the imposition of tariffs, exchange controls or other restrictions. During 2006 Terra derived approximately 24% of its net sales from outside of the U.S. Terra’s business operations include a 50% interest in an ammonia production joint venture in the Republic of Trinidad and Tobago and a 50% interest in an ammonia shipping joint venture that provides transportation of ammonia from the Trinidad facility to the U.S. and other world markets.

Terra’s business may be adversely impacted by the Company’s leverage, which may require the use of a substantial portion of excess cash flow to service debt and may limit Terra’s access to additional capital.

Terra’s debt could have important consequences on its business. For example, it could (i) increase Terra’s vulnerability to adverse economic and industry conditions by limiting flexibility in reacting to changes in the business industry, (ii) reduce Terra’s cash flow available to fund working capital, capital expenditures and other general corporate purposes, (iii) place Terra at a competitive disadvantage compared to competitors that have less leverage and (iv) limit Terra’s ability to borrow additional funds and increase the cost of funds that Terra can borrow. Terra may not be able to reduce its financial leverage when it chooses to do so, and may not be able to raise capital to fund growth opportunities.

Terra may not be able to finance a change of control offer.

If Terra considers an offer that would result in a “change of control” (as defined in its bond indentures and the instruments governing its Series A convertible preferred shares), it may need to refinance large amounts of debt. If a change of control occurs, Terra must offer to buy back the notes under its indentures governing its 7% senior notes due 2017 and the Series A convertible preferred shares for a price equal to 101% of the notes’ principal amount or 100% of the liquidation value of the Series A convertible preferred shares, as applicable, plus any interest or dividends which has accrued and remains unpaid as of the repurchase date. There can be no assurance that there will be sufficient funds available for any repurchases that could be required by a change of control.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

Terra’s manufacturing facilities and the Point Lisas manufacturing facility in which it owns a 50% interest, are designed to operate continuously, except for planned shutdowns (usually biennial) for maintenance and efficiency improvements. Capacity utilization (gross tons produced divided by capacity tons at expected operating rates and on-stream factors) of the nitrogen products manufacturing facilities (excluding 2004 production at the Blytheville, Arkansas plant which closed in May 2004, and the 2004 production at the plants acquired in the Mississippi Chemical Corporation acquisition) was approximately 83%, 96% and 99% in 2006, 2005 and 2004, respectively.

Terra owns all of its manufacturing facilities, unless otherwise indicated below. Substantially all of Terra’s manufacturing facilities are mortgaged to secure indebtedness under the Company’s credit agreements.

Beaumont, Texas. The Beaumont facility is located six miles south of Beaumont, Texas on the Neches River. Terra owns the plant and processing equipment at the Beaumont facility, which has an annual methanol production capacity of 225 million gallons. The facility also contains an “ammonia loop” which provides an annual ammonia production capacity of 255,000 tons. The facility’s real estate is leased from E.I. DuPont de Nemours and Company (“DuPont”) at a nominal rate under a lease that expires in 2090. The facility is entirely contained within an industrial complex owned and operated by DuPont, and DuPont provides access to the facility as well as essential services such as security, emergency response, product loading and unloading, and a waste water effluent system. The facility also contains a methanol storage and distribution terminal containing two 7.5 million gallon methanol storage tanks and one 20,000 ton ammonia storage tank. The Beaumont facility is currently out of production,

however Terra continues to operate the terminal. See further discussion of the Beaumont facility under the “Methanol Business Segment” heading.

Donaldsonville, Louisiana. The Donaldsonville facility is located on approximately 766 acres fronting the Mississippi River and, in 2004, included two ammonia plants, a urea plant and two melamine crystal production plants. During 2006 all of these plants, except for one ammonia plant, were decommissioned and sold for parts or scrap. The remaining ammonia plant has been mothballed. The facility contains a deep-water port facility on the Mississippi River, allowing for barge transportation and making Donaldsonville one of the northernmost points on the river capable of receiving economical ocean-going vessels.

Port Neal, Iowa. The Port Neal facility is located approximately 12 miles south of Sioux City, Iowa on the Missouri River. The facility consists of an ammonia plant, two urea plants, two nitric acid plants and a UAN plant.

Verdigris, Oklahoma. The Verdigris facility is located on 650 acres northeast of Tulsa, Oklahoma, near the Verdigris River. It is the second largest UAN production facility in North America. The facility comprises two ammonia plants, two nitric acid plants, two UAN plants and a port terminal. Terra owns the plants and leases the port terminal from the Tulsa-Rogers County Port Authority. Terra renewed its leasehold interest in the port terminal for five years in April 2004, and has an option to renew the lease for an additional five-year term in 2009.

Woodward, Oklahoma. The Woodward facility is located in rural northwest Oklahoma and consists of an integrated ammonia/methanol plant, a nitric acid plant, a urea plant and a UAN plant.

Yazoo City, Mississippi. The Yazoo City facility is located on approximately 2,240 acres in Yazoo County, Mississippi with approximately 60 acres of such land subject to a long-term lease with Yazoo County. The facility includes two ammonia plants, one of which was sold to Dyno Nobel, Inc. in July 2006, five nitric acid plants, an AN plant, two urea plants, a UAN plant and a dinitrogen tetroxide production and storage facility.

In July 2005, Terra entered into a 10-year agreement to supply industrial grade ammonium nitrate (IGAN) and ammonium nitrate solution (ANS) to Orica USA Inc. Under the terms of this arrangement, Terra modified the smaller of its Yazoo City facility ammonium nitrate (AN) towers, which was currently limited to converting ANS to agricultural grade AN. The modifications are complete and the tower is now equipped to convert ANS to either agricultural grade AN or IGAN, a prilled, low-density industrial grade product.

Courtright, Ontario, Canada. The Courtright facility is located on 700 acres south of Sarnia, Ontario near the St. Clair River. The facility consists of one ammonia plant, a UAN plant, a nitric acid plant and two urea plants.

Billingham, U.K. The Billingham facility, located in the Teesside chemical area, is geographically split among three separate areas: the main site contains an ammonia plant, three nitric acid plants and a carbon dioxide plant; the Portrack site approximately two miles away contains an AN fertilizer plant and the north Tees site approximately five miles away has an ammonia storage which Terra operates under a 99-year lease with a third-party and import/export facility that Terra uses under license from the Crown and under an agreement with a third-party operator.

Severnside, U.K. The Severnside facility is located in southwestern England. The facility consists of two ammonia plants, two nitric acid plants and an AN plant.

Trinidad. The Point Lisas Nitrogen facility in the Republic of Trinidad and Tobago is owned by a 50/50 joint venture with KNC Trinidad Limited. This facility has the capacity to produce annually 720,000 tons of ammonia from natural gas supplied under contract with the National Gas Company of Trinidad and Tobago. Terra is obligated to buy 50% of the joint venture’s ammonia output at market prices, which is transported primarily to the U.S. Gulf Coast and resold to Terra’s customers. The joint venture’s natural gas costs have recently been significantly lower than U.S. natural gas costs, which has made the joint venture substantially more profitable than comparable North American facilities.

Point Lisas produced 593,000 tons of ammonia in 2006 of which Terra purchased 307,000 tons. All of the Point Lisas ammonia tons purchased by Terra was delivered to Terra’s Donaldsonville terminal for subsequent sale or delivery. In 2006 Terra received $33.8 million of cash distributions from Point Lisas.

Item 3. Legal Proceedings

From time to time, the Company is involved in litigation, administrative proceedings and claims, including environmental matters, arising in the ordinary course of business. Terra does not believe that the matters in which it is currently involved, either individually or in the aggregate, will have a material adverse effect on its business, results of operations, financial position or net cash flows.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders of Terra during the fourth quarter of 2006.

Executive Officers of Terra

The following paragraphs set forth the name, age and offices of each present executive officer of Terra, the period during which each executive officer has served as such and each executive officer’s business experience during the past five years:

		Present positions and offices with the Company
Name		and principal occupations during the past five years
Michael L. Bennett		President and Chief Executive Officer of Terra since April 2001. Age 53.
Joe A. Ewing		Vice President, Investor Relations and Human Resources of Terra since December 2004; Vice President, Human Resources of Mississippi Chemical Corporation from April 2003 to December 2004; Vice President, Marketing and Distribution of Mississippi Chemical Corporation from 1999 to April 2003. Age 56.
Joseph D. Giesler		Senior Vice President, Commercial Operations of Terra since December 2004; Vice President of Industrial Sales and Operations of Terra from December 2002 to December 2004; Global Director, Industrial Sales of Terra from September 2001 to December 2002. Age 48.
Daniel D. Greenwell		Vice President, Controller of Terra since April 2005; Corporate Controller for Belden CDT Inc. from 2002 to 2005; and Chief Financial Officer of Zoltek Companies Inc. from 1996 to 2002. Age 44.
John W. Huey		Vice President, General Counsel and Corporate Secretary of Terra since October 2006; Counsel with Shughart Thomson & Kilroy, P.C. from 2005-2006; Attorney with Butler Manufacturing Company from 1978-2004, Vice President of Administration from 1993-1998, Vice President, General Counsel and Corporate Secretary from 1998-2004. Age 59.
Francis G. Meyer		Senior Vice President and Chief Financial Officer of Terra since November 1995. Age 54.
Richard S. Sanders Jr.		Vice President, Manufacturing of Terra since August 2003; Plant Manager, Verdigris, Oklahoma manufacturing facility from 1995 to August 2003. Age 49.
Douglas M. Stone		Vice President, Corporate Development and Strategic Planning since 2006; Director, Industrial sales from 2003 to 2006; Manager, Methanol and Industrial Nitrogen from 2000 to 2003. Age 41.
Paul Thompson		Vice President, Sales and Marketing of Terra since December 2004; Global Director, Ag Sales and Terra U.K. Managing Director from August 1999 to December 2004. Age 52.

There are no family relationships among the executive officers and directors of Terra or arrangements or understandings between any executive officer and any other person pursuant to

which any executive officer was selected as such. Officers of Terra are elected annually to serve until their respective successors are elected and qualified.

PART II

Item 5. Market for Terra’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

The main market in which Terra’s common shares are traded is the NYSE. Set forth below are the high and low sales prices of Terra’s common shares during each quarter specified as reported on the NYSE.

(per-share data and stock prices)		March 31				June 30				Sept. 30				Dec. 31
2006
Common Share Price:
High		$	7.40			$	9.19			$	7.99			$	12.40
Low			5.45				5.93				6.07				7.80
2005
Common Share Price:
High		$	9.27			$	7.88			$	8.59			$	6.65
Low			7.29				6.27				6.10				4.87

As of March 1, 2007 there were approximately 6,005 record holders of Terra’s common stock.

Terra does not currently intend to declare or pay dividends on its common stock. Further, Terra’s ability to pay dividends is restricted by certain covenants contained in its credit facility, as well as certain restrictions contained in the indenture governing its senior notes. See Note 7 of Notes to the Consolidated Financial Statements.

Company Purchases of Equity Securities

On April 25, 2006, the Board of Directors authorized the Company to repurchase a maximum of 10 percent, or 9,516,817 shares, of its outstanding common stock. The stock buyback program has been and will be conducted on the open market, in private transactions or otherwise at such times prior to June 30, 2008, and at such prices, as determined appropriate by the Company. During 2006, the Company repurchased 2,675,100 shares at an average price of $7.03. The remaining number of shares that the Company is authorized to repurchase is 6,841,717 at December 31, 2006.

The following table provides information about shared repurchases by the Company during the quarter ended December 31, 2006.

										Total Number of
		Total								Shares Purchased as				Maximum Number of
Month of		Number of				Average				Part of Publicly				Shares that May Yet Be
Share		Shares				Price Paid				Announced Plans or				Purchased Under the
Purchases		Purchased				per Share				Programs				Plans or Programs
April 2006			—			$	—				—				9,516,817
May 2006			488,100				7.49				488,100				9,028,717
June 2006			1,556,500				6.92				2,044,600				7,472,217
July 2006			—				—				2,044,600				7,472,217
August 2006			560,000				6.93				2,604,600				6,912,217
September 2006			70,500				7.03				2,675,100				6,841,717
October 2006			—				—				2,675,100				6,841,717
November 2006			—				—				2,675,100				6,841,717
December 2006			—				—				2,675,100				6,841,717

The calculation of the average price paid per share does not include the effect for any fees, commissions or other costs associated with the repurchase of such shares.

Item 6.Selected Financial Data

Financial Summary

(in thousands, except per share data)		2006				2005				2004(1)				2003(2)				2002(3)
Income Statement Data:
Revenues		$	1,836,722			$	1,939,065			$	1,509,110			$	1,351,055			$	1,043,983
Income (loss) from operations			66,280				113,696				134,746				(23,560	)			(5,407	)
Net income (loss) from continuing operations			4,213				22,087				67,596				(12,481	)			(36,174	)
Net income (loss)			4,213				22,087				67,596				(12,481	)			(258,325	)
Preferred share dividends			(5,100	)			(5,134	)			(1,029	)			—				—
Basic income per share:
Continuing operations			(0.01	)			0.18				0.87				(0.16	)			(3.43	)
Discontinued operation			—				—				—				—				(0.22	)
Cumulative effect of change in accounting principle			—				—				—				—				(2.73	)
Basic income per share			(0.01	)			0.18				0.87				(0.16	)			(3.43	)
Diluted income per share		$	(0.01	)		$	0.18			$	0.85			$	(0.16	)		$	(3.43	)
Balance Sheet Data:
Total assets		$	1,572,713			$	1,523,625			$	1,685,508			$	1,125,062			$	1,128,110
Long-term debt and capital leases		$	331,300			$	331,300			$	435,238			$	402,206			$	400,358
Preferred stock		$	115,800			$	115,800			$	133,069			$	—			$	—

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of historical results of operations and financial condition should be read in conjunction with the audited financial statements and notes thereto which appear elsewhere in this report.

Introduction

Terra Industries Inc. (“Terra” or “the Company”) produces and markets nitrogen products for agricultural and industrial markets with production facilities located in North America and the United Kingdom. During December 2004, the Company acquired Mississippi Chemical Corporation (MCC). As a result of the acquisition, the Company owns a 50% interest in Point Lisas Nitrogen Limited (“PLNL”), an ammonia production joint venture in the Republic of Trinidad and Tobago.

During the 2006 fourth quarter, the Company entered into a Memorandum of Understanding with Kemira GrowHow Oyj to create a joint venture to operate the fertilizer and associated process chemical businesses of both companies in the U.K. The Memorandum of Understanding is a non-legally binding agreement and is subject to clearance from the U.K. competition authorities, negotiation of definitive documents and lender consent. During the 2007 first quarter, the U.K. Office of Fair Trading referred the proposed joint venture to the Competition Commission.

The Company classifies its operations into two business segments: nitrogen products and methanol. The nitrogen products segment represents operations directly related to the wholesale sales of nitrogen products from its ammonia production and upgrading facilities. The methanol segment represents wholesale sales of methanol produced by its methanol manufacturing plant.

Natural gas is the most significant raw material in the production of nitrogen and methanol products. During periods of significant increases in natural gas prices, the Company may curtail or shut down its production facilities if finished goods prices do not allow the Company to cover variable production costs. The Company’s cost of natural gas increased to unprecedented levels in the 2005 third quarter due to supply disruptions caused by Hurricanes Katrina and Rita. During the 2006 second quarter, North American natural gas prices declined to pre-hurricane prices.

Nitrogen products are commodity chemicals that are sold at prices reflecting global supply and demand conditions. Imported nitrogen products, most of which are produced at facilities with access to fixed-priced natural gas supplies, account for a significant portion of U.S. nitrogen product supply. Imported products’ natural gas costs have been and could continue to be substantially lower than the delivered cost of natural gas to our facilities. Off-shore producers are most competitive in regions close to North American points of entry for imports, including the Gulf Coast and East Coast. Since some of the Company’s products compete with nitrogen products imported from regions with lower natural gas costs, the Company and other North American producers have not always been able to increase selling prices to levels necessary to cover the natural gas cost increases. This led to curtailments of North American nitrogen production in late 2005 and early 2006.

During the nine month period ending September 30, 2006, the Company’s U.S. and U.K. manufacturing plants operated at approximately 79% of capacity in response to slow demand and high natural gas costs. Much of the curtailed production was replaced with purchased product from other suppliers. During the three month period ending December 31, 2006, the same plants operated at approximately 97% of capacity as operations normalized in response to higher grain prices and stable natural gas costs.

During the 2006 second quarter, the Company’s ammonia plant at Billingham, England incurred damage due to an explosion from a ruptured pipe. The repairs were completed and ammonia production resumed during the 2006 third quarter.

The nitrogen products industry has cycles of oversupply, resulting in lower prices and idled capacity, followed by supply shortages, resulting in high selling prices and higher industry-wide production rates. To be viable in this industry, a producer must be among the low-cost suppliers in the markets it serves and have a financial position that can sustain it during periods of oversupply.

The Company’s nitrogen sales volumes depend primarily on its plants’ operations and imports from PLNL. The Company may purchase product from other manufacturers or importers for resale; however, gross margins on those volumes have historically been insignificant. Profitability and cash flows from the Company’s nitrogen products business are affected by the Company’s ability to manage its costs and expenses (other than natural gas), most of which do not materially change for different levels of production or sales. Other factors affecting the Company’s nitrogen products results include the number

of planted acres, transportation costs, weather conditions (particularly during planting season), grain prices and other variables described in Item 1 “Business” and Item 2 “Properties.”

The Company also produces methanol in the U.S. Similar to nitrogen products, methanol is a commodity chemical manufactured from natural gas. Consequently, natural gas costs and the supply/demand balance for methanol significantly affect methanol earnings and cash flows. A significant portion of U.S. methanol demand is met by imports from regions with natural gas costs lower than those available to U.S. producers. In December 2003, the Company entered into contracts with the Methanex Corporation (“Methanex”) assigning it the Company’s sales contracts and providing it exclusive rights to all methanol production at the Beaumont facility for five years as more fully described in Item 1 “Business” and Item 2 “Properties.” As permitted under these contracts, Methanex elected to shut down the Beaumont facility as of December 1, 2004. As long as the Beaumont, Texas facility remains idle through the December 2008 termination of the Methanex contract, the Company may realize revenues relating to the facility of up to $16.4 million per year due to $4.4 million from annual amortization of deferred revenues plus one-half of the annual cash margin based on the plant’s methanol production capacity, methanol reference prices and natural gas costs. Profit sharing cash margin during 2006 was $12.0 million. Due to the high cost of natural gas, there was no cash margin realized during 2005.

Overview of Consolidated Results

The Company’s revenues were $1.8 billion, $1.9 billion and $1.5 billion during 2006, 2005 and 2004, respectively. Terra generated net income of $4.2 million, $22.1 million and $67.6 million in 2006, 2005 and 2004, respectively. Diluted income (loss) per share was $(0.01), $0.18 and $0.85 in 2006, 2005 and 2004, respectively.

Income from operations was $66.3 million in 2006, $113.7 million in 2005 and $134.7 million in 2004. The 2006 revenues decreased $102.3 million from 2005 primarily as a result of lower UAN and ammonium nitrate sales volumes, which were affected by lower overall fertilizer consumption during the 2006 planting season. The 2006 operating income decreased $47.4 million from 2005 due primarily to curtailed production rates during the first half of 2006. The 2006 first half operating rates averaged 74% of plant capacity, which resulted in higher costs for purchased product and reduced plant efficiencies.

The 2005 revenues and cost of sales increased $430.0 million and $452.2 million from 2004, primarily as a result of the acquisition of Mississippi Chemical Company (MCC) in December 2004. Natural gas prices increased in 2005 due to Hurricanes Katrina and Rita, which also increased cost of sales. The 2005 net income included a $27.2 million charge related to early retirement of debt and a $8.9 million gain in a change in fair value of warrants issued in connection with the MCC acquisition.

The 2004 net income included a $27.9 million income tax benefits due to a favorable settlement with a foreign taxing authority. The 2004 net income also included $11.6 million attributable to an insurance recovery of product claim costs (representing $17.9 million of operating income less $6.3 million of related income taxes) and a $7.1 million loss from the early retirement of long-term debt (representing $11.1 million of losses less $4.0 million of related income taxes).

Factors That Affect Operating Results

Factors that may affect the Company’s operating results include: the relative balance of supply and demand for nitrogen fertilizers, industrial nitrogen and methanol, the availability and cost of natural gas, the number of agriculture-planted acres (which is affected by both worldwide demand and government policies), the types of crops planted, the effect of general weather patterns on the timing and duration of field work for crop planting and harvesting, the effect of environmental legislation on supply and

demand for the Company’s products, the availability of financing sources to fund seasonal working capital needs, and the potential for interruption to operations due to accidents or natural disasters.

The principal raw material used to produce nitrogen products and methanol is natural gas. Natural gas purchases in 2006 and 2005 accounted for approximately 46% and 53%, respectively, of the Company’s total operating costs and expenses. A significant increase in the price of natural gas that is not hedged or recovered through an increase in the price of the Company’s nitrogen and methanol products would have an adverse effect on the Company’s business, financial condition and results of operations. A portion of global nitrogen products and methanol production is at facilities with access to fixed-price natural gas supplies that have been, and could continue to be, substantially lower priced than natural gas costs at the Company’s North American and U.K. facilities. The Company’s facility at Point Lisas Nitrogen Limited, an unconsolidated subsidiary, is located in Trinidad with access to such lower-cost natural gas.

The Company enters into forward pricing contracts for a portion of its natural gas requirements when such arrangements would not result in costs greater than expected North American and U.K. selling prices for the Company’s finished products. The Company’s December 31, 2006 forward positions covered 17% of the Company’s expected 2007 natural gas requirements (excluding the natural gas requirements of Point Lisas Nitrogen Limited which purchases its gas under contract with the Natural Gas Company of Trinidad and Tobago).

Prices for nitrogen products are influenced by the world supply and demand balance for ammonia and other nitrogen-based products. Long-term demand is affected by population growth and rising living standards that determine food consumption. Short-term demand is affected by world economic conditions, international trade decisions and grain prices. Supply is affected by increasing worldwide capacity and the availability of nitrogen product exports from major producing regions such as the former Soviet Union, the Middle East and South America.

Weather can have a significant effect on demand for the Company’s nitrogen products. Weather conditions that delay or intermittently disrupt field work during the planting and growing seasons may cause agricultural customers to use forms of nitrogen fertilizer that are more or less favorable to the Company’s products. Weather conditions following harvest may delay or eliminate opportunities to apply fertilizer in the fall. Weather can also have an adverse effect on crop yields, which lowers the income of growers and could affect their ability to pay for crop inputs purchased from the Company’s dealer customers.

The Company’s nitrogen business segment is seasonal, with the majority of nitrogen products consumed during the second quarter in conjunction with spring planting activity. Due to the business’ seasonality and the relatively brief periods during which customers consume nitrogen products, the Company and its customers generally build inventories during the second half of the year in order to ensure product availability during the peak sales season. For the Company’s current level of sales, it maintains lines of credit to fund inventory increases and to support customer credit terms. The Company believes that its credit facilities are adequate for expected 2007 sales levels.

Methanol is used as a raw material in the production of formaldehyde, methyl tertiary-butyl ether (MTBE), acetic acid and numerous other chemical derivatives. The price of methanol is influenced by the supply and demand for each of these products. Environmental initiatives to ban or reduce the use of MTBE as a fuel additive, such as those currently underway in the United States, could affect demand for methanol.

The Company’s manufacturing operations may be subject to significant interruption if one or more of its facilities were to experience a major accident or were damaged by severe weather or other natural disaster. The Company currently maintains insurance, including business interruption insurance, which it believes is sufficient to allow it to recover from major damage to any of its facilities.

Application of Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported in the Company’s Consolidated Financial Statements and accompanying notes. Note 1 to the Consolidated Financial Statements in Item 8 of this Form 10-K describes the significant accounting policies and methods used in preparing the Consolidated Financial Statements. Management considers the accounting policies described below to be the Company’s most critical accounting policies because they are impacted significantly by estimates that management makes. Management bases its estimates on historical experience or various assumptions that they believe to be reasonable under the circumstances, and the results form the basis for making judgments about the reported values of assets, liabilities, revenues and expenses. Management has discussed the development and selection of the Company’s critical accounting estimates, and the disclosure regarding them, with the audit committee of the Company’s Board of Directors, and do so on a regular basis. Actual results may differ materially from these estimates.

Derivative and Financial Instruments

The Company enters into derivative financial instruments, including swaps, basis swaps and put and call options, to manage the effect of changes in natural gas costs, the prices of the Company’s nitrogen products and foreign currency risk. Management evaluates each derivative transaction and makes an election of whether to designate the derivative as a fair-value or cash flow hedge or not to elect hedge designation for the derivative. Upon election of hedge designation, and to the extent such hedge is determined to be effective, changes in fair value are either (a) offset by the change in fair value of the hedged asset or liability or (b) reported as a component of accumulated other comprehensive income (loss) in the period of change, and subsequently recognized in the determination of net income in the period that the offsetting hedged transaction occurs. For derivatives that are not designated as hedges, or to the extent a hedge-designated derivative is determined to be ineffective, changes in fair value are recognized in earnings in the period of change.

Until the Company’s derivatives settle, management tests the derivatives for ineffectiveness. This includes assessing the correlation of NYMEX pricing, which is commonly used as an index in natural gas derivatives, to the natural gas pipelines’ pricing at the Company’s 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 the Company’s facilities.

To the extent possible, the Company bases its 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, management estimates the fair value based on forward pricing information for similar types of settlement methods.

Revenue Recognition

Revenue is recognized when persuasive evidence of a transaction exists, delivery has occurred, the price is fixed or determinable, no obligations remain and collectibility is probable.

Revenue from sales is generally recognized upon shipment of product to the customer in accordance with the terms of the sales agreement. As part of the revenue recognition process, the Company determines whether collection of trade receivables are reasonably assured based on various factors, including evaluation of whether there has been deterioration in the credit quality of the Company’s customers that could result in the inability to collect the receivable balance. In situations where it is unclear whether the Company will be able to collect the receivable, revenue and related costs are deferred. Related costs are recognized when it has been determined that the collection of the receivable is unlikely.

Inventory Valuation

Inventories are stated at the lower of cost or estimated net realizable value. The cost of inventories is determined by using the first-in, first-out method. The Company performs a monthly analysis of its inventory balances to determine if the carrying amount of inventories exceeds their 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.

Pension Assets and Liabilities

Pension assets and liabilities are affected by the estimated market value of plan assets, estimates of the expected return on plan assets and discount rates. Actual changes in the fair market value of plan assets and differences between the actual return on plan assets and the expected return on plan assets will affect the amount of pension expense ultimately recognized. The Company’s pension projected benefit obligation was $504.2 million at December 31, 2006, which was $149.1 million higher than pension plan assets. The December 31, 2006 liability was computed based on an average 5.5% discount rate, which was based on yields for high-quality corporate bonds with a maturity approximating the duration of the Company’s pension liability. The long-term return on plan assets is determined based on historical portfolio results and management’s expectations of the future economic environment. In addition, the pension liability for the Company’s U.K. pension plan, which includes provisions to adjust benefit payments for general inflation rates, was estimated based on an average 3.0% annual inflation rate. Declines in comparable bond yields or higher U.K. inflation rates would increase the Company’s pension liability. The Company’s net pension liability, after deduction of plan assets, could increase or decrease depending on the extent to which returns on pension plan assets are lower or higher than the discount rate. The Company engages third party actuarial specialists to assist management in appropriately measuring pension expense and valuing pension liabilities.

Deferred Income Taxes

Deferred income tax assets and liabilities reflect (a) differences between financial statement carrying amounts and corresponding tax bases and (b) temporary differences resulting from differing treatment of items for tax and accounting purposes. Deferred tax assets also include the expected benefits of carrying forward the Company’s net operating losses. The Company regularly reviews deferred tax assets for recoverability and reduces them if the Company cannot sufficiently determine that they will be realized. The Company bases this determination on projected future taxable income and the expected timing of the reversals of existing temporary differences.

At December 31, 2006, deferred tax assets, net of valuation allowances, representing future benefits for the Company’s U.S. net operating loss carryforwards totaled $105 million. If there is a material change in the effective tax rates or time period when temporary differences become taxable or deductible, the Company may have to additionally reduce all or a significant portion of its deferred tax assets.

Impairment of Long-Lived Assets

Management assesses the recoverability of long-lived assets when indicators of impairment exist. The assessment of the recoverability of long-lived assets reflects management’s assumptions and estimates. Factors that management must estimate when performing impairment tests include sales demand, production levels, prices and costs, inflation, discount rates, currency exchange rates and capital spending. Significant management judgment is involved in estimating these factors, and they include inherent uncertainties. All assumptions utilized in the impairment analysis are consistent with management’s internal planning.

During 2006, no events occurred that indicated that the carrying amount of any of the Company’s assets may not be recoverable. However, due to the mothballed status of the Beaumont, Texas facility, management performs an annual impairment analysis of such assets. As of December 31, 2006, the Beaumont assets had a carrying value, net of $10 million of deferred revenues, of approximately $86 million. The Company estimated the remaining useful life of the Beaumont facility at 12 years, assuming normal investment in maintenance and replacement capital throughout this 12-year period. The estimated cash flows over this 12-year period were based on the Company’s best estimate of future market and operating conditions at December 31, 2006. The estimated cash flows exceeded the carrying value of the Beaumont assets, therefore, no impairment charge was recorded. The cash flow estimates were made with the assumption that the Beaumont facility will remain idle through 2008, the term of the Company’s contract with Methanex, and that once restarted, the Beaumont facility will produce at historic rates and selling prices will be adequate to realize historic margins.

Results of Continuing Operations—2006 Compared with 2005

Consolidated Results

The Company reported 2006 net income of $4.2 million on revenues of $1.8 billion compared with a 2005 net income of $22.1 million on revenues of $1.9 billion. Diluted income (loss) per share for 2006 was $(0.01) compared with $0.18 for 2005. The 2005 net income included a $27.2 million ($24.9 million, net of tax) loss related to the early retirement of debt and a $8.9 million ($8.9 million, net of tax) gain relating to change in fair value of warrants.

The Company classifies its operations into two business segments: Nitrogen Products and Methanol. The Nitrogen Products segment represents the sale of nitrogen products including that produced at the Company’s ammonia manufacturing and upgrading facilities. The Methanol segment represents sales of methanol including that produced at the Company’s two methanol manufacturing facilities.

Total revenues and operating income (loss) by segment for the years ended December 31, 2006 and 2005 were:

(in thousands)		2006				2005
Revenues:
Nitrogen products		$	1,793,759			$	1,899,236
Methanol			34,955				31,347
Other revenues			8,008				8,482
		$	1,836,722			$	1,939,065
Operating Income (Loss):
Nitrogen products		$	63,275			$	131,474
Methanol			4,952				(14,089	)
Other expense—net			(1,947	)			(3,689	)
		$	66,280			$	113,696

Nitrogen Products

Volumes and prices for 2006 and 2005 were:

Volumes and Prices		2006								2005
(quantities in		Sales				Average				Sales				Average
thousands of tons)		Volumes				Unit Price*				Volumes				Unit Price*
Ammonia			1,897			$	315				1,898			$	303
Nitrogen solutions			3,894				140				4,368				151
Urea			147				262				151				262
Ammonium nitrate			1,116				224				1,581				202

*		After deducting outbound freight costs

Nitrogen product revenues decreased by $105.5 million to $1.8 billion for 2006, compared to $1.9 billion for 2005. The decrease is primarily due to lower UAN and ammonium nitrate sales volumes, which were affected by lower overall fertilizer consumption during the 2006 planting season.

Nitrogen product operating income decreased by $68.2 million to $63.3 million for 2006, compared to $131.5 million for 2005. This decrease was primarily due to curtailed production rates during the first half of 2006 as a result of high natural gas prices. Operating rates averaged 74% of plant capacity during the 2006 first half, which resulted in higher costs for purchased product and reduced plant efficiencies. These effects were partially mitigated during the 2006 second half as operating results normalized in response to higher grain prices and stable natural gas costs.

Natural gas unit costs, net of forward pricing gains and losses, were $7.14 per million British thermal units (“MMBtu”) during 2006 compared to $7.50 per MMBtu during 2005. Most of the 2005 higher costs were absorbed into 2006 beginning inventory values and charged against first quarter 2006 cost of sales. The Company enters into forward sales commitments by utilizing forward pricing and prepayment programs with customers. The Company hedges natural gas associated with the products sold forward in order to achieve an acceptable gross margin. As a result of forward price contracts, 2006 natural gas costs for the nitrogen products segment were $50.3 million higher than spot prices.

Methanol

Methanol revenues were $35.0 million and $31.3 million for the years ended December 31, 2006 and 2005. The 2006 revenues included $12.0 million of cash margin revenue under the Methanex contract; there was no cash margin revenue realized in 2005 due to high fourth quarter natural gas costs. Methanol sales in 2006 and 2005 were 18.6 million and 31.6 million gallons, respectively. The decreased

sales volumes in 2006 were primarily due to partial production curtailment of the Woodward facility due to the high natural gas prices during the 2006 first half.

The methanol segment had 2006 operating income of $5.0 million compared to an operating loss of $14.1 million in 2005. The 2006 improvement to operating results included was primarily due to $12.0 million of cash margin revenue under the Methanex contract and $4.6 million of higher margins on 2006 sales volumes. Ongoing costs at the idled Beaumont facility also declined $2.7 million from 2005.

Other Operating Activities—Net

The Company had $1.9 million of charges from other operating activities in 2006 compared to $3.7 million in 2005. The decrease in expense relates primarily to administrative fees for general corporate activities not allocable to any particular business segment.

Interest Expense—Net

Net interest expense was $41.5 million in 2006 compared with $45.4 million in 2005. The reduction in interest expense is primarily related to repayment of term debt during the 2005 first half.

Income Taxes

The Company’s income tax expense in 2006 and 2005 was $9.2 million and $14.2 million, respectively. The 2006 effective tax rate was 69%, compared to 39% in 2005. The increase in the 2006 effective tax rate was due primarily to currency fluctuations and disallowed interest expense on intercompany loans to non-U.S subsidiaries.

Results of Continuing Operations—2005 Compared with 2004

Consolidated Results

The Company reported 2005 net income of $22.1 million on revenues of $1.9 billion compared with a 2004 net income of $67.6 million on revenues of $1.5 billion. Diluted income per share for 2005 was $0.18 compared with $0.85 for 2004. The 2005 net income included a $27.2 million ($24.9 million, net of tax) loss related to the early retirement of debt and a $8.9 million ($8.9 million, net of tax) gain relating to change in fair value of warrants.

The 2004 net income also included $27.9 million of income tax benefits due to a favorable settlement with a foreign taxing authority, $11.6 million of income attributable to an insurance recovery of product claim costs (representing $17.9 million of operating income less $6.3 million of related income taxes) and a $7.1 million loss from the early retirement of long-term debt (representing $11.1 million of losses less $4.0 million of related income taxes.

Total revenues and operating income (loss) by segment for the years ended December 31, 2005 and 2004 were:

(in thousands)		2005				2004
Revenues:
Nitrogen products		$	1,899,236			$	1,320,142
Methanol			31,347				186,823
Other revenues			8,482				2,145
		$	1,939,065			$	1,509,110
Operating Income (Loss):
Nitrogen products		$	131,474			$	138,745
Methanol			(14,089	)			1,479
Other expense—net			(3,689	)			(5,478	)
		$	113,696			$	134,746

Nitrogen Products

Volumes and prices for 2005 and 2004 were:

Volumes and Prices		2005								2004
(quantities in		Sales				Average				Sales				Average
thousands of tons)		Volumes				Unit Price*				Volumes				Unit Price*
Ammonia			1,898			$	303				1,391			$	266
Nitrogen solutions			4,368				151				3,869				120
Urea			151				262				376				195
Ammonium nitrate			1,581				202				988				178

*		After deducting outbound freight costs

Nitrogen products revenues increased by $579.1 million to $1.9 billion for 2005 compared with $1.3 billion for 2004 primarily as the result of the December 2004 acquisition of MCC and higher sales prices. Higher selling prices contributed $253.7 million to 2005 revenues as the result of increased demand and lower fertilizer supplies due to reduced production capacity in North America. Sales volumes in 2005 were higher than those of the previous year due primarily to the MCC acquisition.

Nitrogen products operating income decreased by $7.3 million to $131.5 million for 2005 from $138.7 million for 2004. Operating income in 2005 from the MCC business totaled $34.5 million, but was more than offset by lower nitrogen margins on other operations and the absence of the $17.9 million 2004 insurance recovery of product claim costs. Nitrogen margins declined principally as the result of increases to natural gas costs that outpaced selling price changes.

Natural gas costs increased $272.5 million from 2004 as unit costs, net of forward pricing gains and losses, and were $7.50 per million MMBtu during 2005 compared to $5.37 per MMBtu during 2004. As a result of forward price contracts, 2005 natural gas costs for the nitrogen products segment were $0.7 million lower than spot prices.

Methanol

Methanol revenues were $31.3 million and $186.8 million for the years ended December 31, 2005 and 2004, respectively. Sales volumes declined approximately 87% from the prior year primarily due to cessation of production from the Beaumont facility.

The methanol segment had an operating loss of $14.1 million during 2005 compared to operating income of $1.5 million in 2004. The 2005 operating loss reflected lower sales volumes and idle facility costs.

Other Operating Activities—Net

The Company had $3.7 million of charges from other operating activities in 2005 compared to $5.5 million in 2004. The decrease in expense relates primarily to administrative and legal fees for general corporate activities not allocable to any particular business segment.

Interest Expense—Net

Net interest expense was $45.4 million in 2005 compared with $49.8 million in 2004. The reduction in interest expense primarily related to higher cash balances during 2005 as compared to 2004, increased yields on the cash balances and a decrease in interest expense due to a 2004 fourth quarter $70.7 million redemption of Senior Notes due in 2010.

Minority Interest

Minority interest represents interest in the earnings of the publicly held common units of Terra Nitrogen Company, L.P. (TNCLP). The 2005 minority interest charge of $13.7 million reflected nitrogen earnings for TNCLP, which were included in their entirety in consolidated operating results. Minority interest charge of $11.2 million was recorded in 2004, which were included in their entirety in consolidated operating results.

Income Taxes

Terra’s income tax expense was $14.2 million in 2005, or 39% of pretax income, based primarily on statutory rates in the jurisdictions where the earnings arise.

Terra’s income tax benefit was $5.0 million in 2004 and included reductions to tax reserves totaling $27.9 million for a reduced assessment by a foreign taxing authority.

Liquidity and Capital Resources

The Company’s primary uses of cash and cash equivalents is to fund its working capital requirements, make payments on its debt and other obligations and make payments for plant turnarounds and capital expenditures. The principal sources of funds are cash flow from operations and borrowings under available bank facilities.

Unrestricted cash and cash equivalent balances at December 31, 2006, were $179.0 million. During 2006, cash and cash equivalents increased $92.7 million. Net cash provided by operating activities was $159.3 million. Cash used in financing activities was $19.7 million, primarily related to the payments under the Company’s share repurchase program, distributions to minority interests and preferred share dividend payments. Cash used for investing activities was $48.8 million, primarily for capital expenditures and plant turnaround costs, offset by distributions received from unconsolidated affiliates and proceeds from the sale of property, plant and equipment.

Net cash provided by 2006 operating activities of $159.3 million was composed of $151.4 million of cash provided from operations and $7.9 million provided from net working capital items. Cash from working capital items included $24.2 million of cash provided by additional customer prepayments during 2006. The Company had $77.1 million in total customer prepayments at December 31, 2006 for the selling price and delivery costs of nitrogen products that it expects to ship during the first half of 2007.

During 2006 and 2005, the Company funded plant and equipment purchases of $50.9 million and $30.8 million, respectively. The 2006 capital expenditures included approximately $20 million to expand the capabilities of the Company’s Yazoo City facility to handle industrial grade ammonium nitrate and add UAN solution handling capabilities at the Donaldsonville terminal. Other capital expenditures in 2006 and 2005 were primarily for replacement or stay-in-business capital needs. The Company expects 2007 plant and equipment purchases to approximate $35 million consisting primarily of expenditures for replacement of equipment or to improve operating results at its manufacturing facilities.

Plant turnaround costs represent cash used for the periodic scheduled major maintenance of the Company’s continuous process production facilities that is performed at each plant, generally every two years. The Company funded $35.3 million and $22.3 million of plant turnaround costs in 2006 and 2005, respectively. The increase to 2006 turnaround costs was primarily due to management’s 2005 decision to extend the turnaround cycle to three years for selected facilities. The Company estimates 2007 plant turnaround costs will approximate $35 million.

In February 2007, the Company completed a tender offer for $200.0 million in aggregate principal amount of its 12⁷/8% senior secured notes due 2008 and $131.3 in aggregate principal amount of its 11¹/2% second priority senior secured notes. A total of $189.2 million, or 94.6% of the aggregate principal amount of the 12⁷/8% senior secured notes due 2008 and a total of $128.8 million, or 98.1% of the aggregate principle amount of the 11 ¹/2% second priority senior secured notes due 2010, were validly tendered and not withdrawn prior to the close of the tender offer. The Company will redeem the remaining 12⁷/8% senior secured notes due 2008 in the first quarter of 2007, and plans to announce the redemption of the remaining 11 ¹/2% second priority senior secured notes due 2010 in the second/third quarter of 2007. Proceeds from the Company’s offering of $330.0 million in aggregate principal amount of its new 7% senior notes due 2017 were used to finance the repurchase of the 12⁷/8% and 11 ¹/2 % notes in the tender offer. The Company incurred costs related to tender premiums and transaction fees of approximately $40 million in connection with the tender offer that will be recorded as an earnings charge in the first quarter of 2007. In connection with the notes refinancing, the Company’s revolving bank credit facility was extended until February 2012.

On December 21, 2004, the Company entered into revolving credit facilities totaling $200 million that expire in June 2008. In connection with the 2007 bond refinancing, the term of the credit facility was extended until February 2012. Borrowing availability under the credit facility is generally based on eligible cash balances, 85% of eligible accounts receivable and 60% of eligible inventory, less outstanding letters of credit. These facilities include $50 million only available for the use of TNCLP, one of the Company’s consolidated subsidiaries. There were no outstanding revolving credit borrowings and there were $17.7 million in outstanding letters of credit, resulting in remaining borrowing availability of approximately $182.3 million under the facilities. The Company is required to maintain a combined minimum unused borrowing availability of $30 million. The credit facility also requires that the Company adhere to certain limitations on additional debt, capital expenditures, acquisitions, liens, asset sales, investments, prepayments of subordinated indebtedness, changes in lines of business and transactions with affiliates. In addition, if the Company’s borrowing availability falls below a combined $60 million, it is required to have generated $60 million of operating cash flows, or earnings before interest, income taxes, depreciation, amortization and other non-cash items (as defined in the credit facility) for the preceding four quarters.

The Company’s ability to meet credit facility covenants will depend on future operating cash flows, working capital needs, receipt of customer prepayments and trade credit terms. Failure to meet these covenants could result in additional costs and fees to amend the credit facility or could result in

termination of the facility. Access to adequate bank facilities is critical to funding the Company’s operating cash needs. Based on our December 31, 2006 financial position and the current market conditions for the Company’s finished products and for natural gas, the Company anticipates that it will be able to comply with its covenants through 2007.

In April 2006, the Board of Directors authorized the repurchase of up to 10%, or 9.5 million shares, of the Company’s outstanding stock on the open market. During 2006, the Company repurchased 2.7 million shares for $18.8 million, or an average price of $7.03 per share.

During 2004, the Company issued 4.25% Cumulative Convertible Perpetual Series A Preferred Shares with a liquidation value of $120 million for net proceeds of $115.8 million. The Series A preferred shares are not redeemable by the Company, are convertible into common stock at a conversion price of $9.96 per common share at the option of the holder and may at the Company’s option be automatically converted to common shares after December 20, 2009 if the closing price for common shares exceeds 140% of the conversion price for any twenty days within a consecutive thirty day period prior to such a conversion. Upon the occurrence of a fundamental change to the Company’s capital structure, including a change of control, merger, or sale of the Company, holders of the Series A preferred shares may require the Company to purchase any or all of their shares at a price equal to their liquidation value plus any accumulated, but unpaid, dividends. The Company also has 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. During 2006 and 2005, the Company paid $5.1 million and $6.0 million, respectively, for preferred share dividends.

The Company’s ability to manage its exposure to commodity price risk in the purchase of natural gas through the use of financial derivatives may be affected by limitations imposed by its bank agreement covenants.

Contractual obligations and commitments to make future payments at December 31, 2006 were:

		Payments Due In
(in millions)		2007				2008-2009				2010-2011				Thereafter
Long-term debt (1)		$	—			$	200.0			$	131.3			$	—
Operating leases			22.3				34.7				24.8				17.3
Interest expense on fixed rate debt (1)			40.8				52.7				6.3				—
Ammonia purchase obligations (2)			83.4				166.8				166.8				583.7
Other purchase obligations			267.2				12.6				2.2				3.3
Total		$	413.7			$	466.8			$	331.4			$	604.3

(1)		In February 2007, the Company refinanced its outstanding notes by issuing $330.0 million in aggregate principal amount of its new 7% senior notes due 2017. These notes mature in February 2017. The interest payments on the new notes will be approximately $23.1 million per year through February 2017.
(2)		The Company has a contractual obligation to purchase one-half of the ammonia produced by Point Lisas Nitrogen Limited. The purchase price is based on the average market price of ammonia, F.O.B. Caribbean, less a discount. Obligations in the above table are based on purchasing 360,000 short tons per year at the December 2006 average price paid. This contract expires in October 2018.

The Company’s pension projected benefit obligations were $504.2 million at December 31, 2006, which was $149.1 million higher than its pension plan assets. The pension projected benefit obligations were computed based on a 5.5% discount rate, which was based on yields for high-quality corporate bonds (Moody’s Investor Service “AA” rated or equivalent) with a maturity approximating the duration of the Company’s pension obligation. Future declines in comparable bond yields would increase the Company’s pension obligation and future increases in bond yields would decrease the Company’s pension obligation. The Company’s pension obligation, net of plan assets, could increase or decrease depending on the extent that returns on pension plan assets are lower or higher than the discount rate. In addition, the pension obligation for the Company’s U.K. pension plan, which includes provisions to adjust benefit payments for general inflation rates, was estimated based on a 3.0% inflation rate. The Company’s pension obligation could increase or decrease based on actual U.K. inflation rates. The Company’s cash contributions to pension plans were $15.1 million in 2006 and are estimated at $20.4 million in 2007. Actual contributions could vary from these estimates depending on the Company’s funding decisions, actual returns for plan assets, legislative changes to pension funding requirements and/or plan amendments.

Expenditures related to environmental, health and safety regulation compliance are primarily composed of operating costs that totaled $18.6 million in 2006. Because environmental, health and safety regulations are expected to continue to change and generally to be more restrictive than current requirements, the costs of compliance will likely increase. The Company does not expect compliance with such regulations will have a material adverse effect on the results of operations, financial position or net cash flows.

The Company incurred $2.2 million of 2006 capital expenditures to ensure compliance with environmental, health and safety regulations. The Company may be required to install additional air and water quality control equipment, such as low nitrous oxide burners, scrubbers, ammonia sensors and continuous emission monitors to continue to achieve compliance with the Clean Air Act and similar requirements. These equipment requirements typically apply to competitors as well. The Company estimates that the cost of complying with these existing requirements in 2007, 2008 and 2009 and beyond will be less than $20 million in the aggregate.

The Company owns 75.3% of the common units of TNCLP, which in accordance with the partnership agreement, permits it to call all common units that it does not own.

During 2006, 2005 and 2004, TNCLP distributed $8.9 million, $13.6 million and $8.1 million, respectively, to the minority TNCLP common unitholders. TNCLP distributions are based on “Available Cash” (as defined in the Partnership Agreement).

During 2006 and 2005, the Company paid $5.1 million and $6.0 million, respectively, for preferred share dividends.

Recently Issued Accounting Standards

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (FIN 48). FIN 48 requires that realization of an uncertain income tax position must be “more likely than not” (i.e. greater than 50% likelihood of receiving a benefit) before it can be recognized in the financial statements. Further, FIN 48 prescribes the benefit to be recorded in the financial statements as the amount most likely to be realized assuming a review by tax authorities having all relevant information and applying current conventions. FIN 48 also clarifies the financial statement classification of tax-related penalties and interest and sets forth new disclosures regarding unrecognized tax benefits. FIN 48 is effective in the first quarter 2007 for the

Company. The Company has performed a preliminary analysis of its income tax position and does not expect a significant impact to its financial statements as a result of adopting the Interpretation.

In September 2006, the FASB issued SFAS 157, “Fair Value Measurements,” (SFAS 157). SFAS 157 is definitional and disclosure oriented and addresses how companies should approach measuring fair value when required by generally accepted accounting principles (GAAP); it does not create or modify any current GAAP requirements to apply fair value accounting. SFAS 157 provides a single definition for fair value that is to be applied consistently for all accounting applications, and also generally describes and prioritizes according to reliability the methods and input used in valuations. SFAS 157 prescribes various disclosures about financial statement categories and amounts which are measured at fair value, if such disclosures are not already specified elsewhere in GAAP. The new measurement and disclosure and requirements of SFAS 157 are effective for the Company in 2008 first quarter and the Company expects no significant impact from adopting the Standard.

In September 2006, the FASB issued SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” (SFAS 158). SFAS 158 focuses primarily on balance sheet reporting for the funded status of benefit plans and requires recognition of benefit liabilities for under-funded plans and benefit assets for over-funded plans, with offsetting impacts to shareholders equity. These changes are required to be adopted prospectively, effective with the Company’s December 31, 2006 financial statements. The Company is in a net under-funded position for its pension and retiree health care plans, which resulted in a $13.3 million impact as a result of adopting SFAS 158. The $13.3 million impact of adopting SFAS 158 increased accumulated other comprehensive income and deferred tax assets by $8.6 million and $4.7 million, respectively.

SFAS 158 will also require companies to measure benefit plan assets and liabilities and determine the discount rate for subsequent year expense recognition as of the balance sheet date for financial reporting purposes, thus eliminating the opportunity to use a measurement of date up to 90 days prior to the balance sheet date. The effective date for this change is delayed until year-end 2008. The Company currently uses an October 1 measurement date and will adopt a December 31 measurement date in 2008 as required. Switching to the new measurement date will require a one-time adjustment to retained earnings per the transition guidance in SFAS 158. None of the changes prescribed by SFAS 158 will impact the Company’s results of operations or cash flows.

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). This statement, which is expected to expand fair value measurement, permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for the Company beginning in the first quarter of 2008. The Company is currently assessing the impact SFAS 159 may have on its financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements,” (SAB 108). SAB 108 provides interpretive guidance on how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in the current year financial statements. SAB 108 requires registrants to quantify misstatements using both an income statement and balance sheet approach and then evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial now are considered material based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered. If prior year’s financial statements are not restated, the cumulative effect adjustment is recorded in opening accumulated deficit as of the beginning of the fiscal year of adoption.

SAB 108 is effective for the fiscal year ending after November 15, 2006. The Company adopted the provisions of SAB 108 on December 31, 2006. Adoption of SAB 108 had no impact on the Company’s financial statements.

In December 2006, the FAB issued FASB Staff Position No. EITF 00-19-2, “Accounting for Registration Payment Arrangements,” (FSP EITF 00-19-2). FSP EITF 00-19-2 specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with SFAS 5 “Accounting for Contingencies.” Adoption of FSP EITF 00-19-2 during 2006 had no impact on the Company’s financial statements.

Forward-Looking Precautions

Information contained in this report, other than historical information, may be considered forward-looking. Forward-looking information reflects management’s current views of future events and financial performance that involve a number of risks and uncertainties. The factors that could cause actual results to differ materially include, but are not limited to, the following: changes in financial markets, general economic conditions within the agricultural industry, competitive factors and price changes (principally, sales prices of nitrogen and methanol products and natural gas costs), changes in product mix, changes in the seasonality of demand patterns, changes in weather conditions, changes in agricultural regulations, and other risks detailed in the “Factors that Affect Operating Results” section of this discussion.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Risk Management and Financial Instruments

Market risk represents the risk of loss that may impact the Company’s financial position, results of operations or cash flows due to adverse changes in financial and commodity market prices and rates. The Company uses derivative financial instruments to manage risk in the areas of (a) foreign currency fluctuations, (b) changes in natural gas prices and (c) changes in nitrogen prices and (d) changes in interest rates. See Note 3 to the Consolidated Financial Statements for additional information on the use of derivative financial instruments.

The Company’s policy is to avoid unnecessary risk and to limit, to the extent practical, risks associated with operating activities. The Company’s management may not engage in activities that expose the Company to speculative or non-operating risks and is expected to limit risks to acceptable levels. The use of derivative financial instruments is consistent with the Company’s overall business objectives. Derivatives are used to manage operating risk within the limits established by our Board of Directors, and in response to identified exposures, provided they qualify as hedge activities. As such, derivative financial instruments are used to manage exposure to interest rate fluctuations, to hedge specific assets and liabilities denominated in foreign currency, to hedge firm commitments and forecasted natural gas purchase transactions, to set a floor for nitrogen selling prices and to protect against foreign exchange rate movements between different currencies that impact revenue and earnings expressed in U.S. dollars.

The use of derivative financial instruments subjects the Company to some inherent risks associated with future contractual commitments, including market and operational risks, credit risk associated with counterparties, product location (basis) differentials and market liquidity. The Company continuously monitors the valuation of identified risks and adjusts the portfolio based on current market conditions.

Foreign Currency Fluctuations

The Company’s policy is to manage risk associated with foreign currency fluctuations by entering into forward exchange and option contracts covering specific currency obligations or net foreign currency operating requirements, as appropriate. Such hedging is limited to the amounts and duration of the specific obligations being hedged and, in the case of operating requirements, no more than 75% of the forecasted requirements. The primary currencies to which the Company is exposed are the Canadian dollar and the British pound. At December 31, 2006, the Company had nominal forward currency positions that were matched with committed capital expenditures.

Natural Gas Prices—North American Operations

Natural gas is the principal raw material used to manufacture nitrogen and methanol. Natural gas prices are volatile and the Company mitigates some of this volatility through the use of derivative commodity instruments. The Company’s current policy is to hedge natural gas provided that such arrangements would not result in costs greater than expected selling prices for its finished products. North American natural gas requirements for 2007 are approximately 100 million MMBtu. The Company has hedged 22% of its expected 2007 North American requirements and none of its requirements beyond December 31, 2007. The fair value of these instruments is estimated based, in part, on quoted market prices from brokers, realized gains or losses and the Company’s computations. These instruments and other natural gas positions fixed natural gas prices at $19.1 million more than published prices for December 31, 2006 forward markets. Market risk is estimated as the potential loss in fair value resulting from a hypothetical price change. Changes in the market value of these derivative instruments have a high correlation to changes in the spot price of natural gas. Based on the Company’s derivatives outstanding at December 31, 2006, which included swaps, basis swaps and put options, a $1 per MMBtu increase in NYMEX would increase the Company’s natural gas costs by approximately $11.1 million and a $1 per MMBtu decrease in NYMEX pricing would decrease the Company’s natural gas costs by approximately $13.4 million.

Natural Gas Prices—Trinidad Operation

The natural gas requirements of Point Lisas Nitrogen Limited are supplied under contract with the Natural Gas Company of Trinidad and Tobago. The cost of natural gas to the joint venture fluctuates based on changes in the market price of ammonia.

Natural Gas Prices—United Kingdom Operations

To meet natural gas production requirements at the Company’s U.K. production facilities, the Company may enter into gas supply contracts to fix prices for approximately 20% to 80% of total annual volume requirements. Procurement requirements for 2007 U.K. natural gas are approximately 32 million MMBtu. As of December 31, 2006, the Company did not have any fixed-price contracts.

Nitrogen Prices

The prices for nitrogen products can be volatile and the Company mitigates some of this volatility through the use of derivative commodity instruments. The Company’s current policy is to hedge no more than 20% of its expected production for the upcoming 12 months and no more than 50% of any single month’s expected production. The Company has hedged less than 5% of its 2007 North American sales of nitrogen solutions.

Interest Rate Fluctuations

The table below provides information about the Company’s financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The Company had no interest rate financial derivatives outstanding at December 31, 2006.

Interest Rate Sensitivity

(in millions)		Expected Maturity Date
		2007				2008				2009				2010				2011				Thereafter				Total				Fair Value
Long Term Debt
Senior Secured Notes (1), fixed rate of 12.88% ($US)		$	—			$	200.0			$	—			$	—			$	—			$	—			$	200.0			$	197.9
Senior Second Priority Secured Notes (1), fixed rate 11.50% ($US)			—				—				—				131.3				—				—				131.3				123.9
Total Long Term Debt		$	—			$	200.0			$	—			$	131.3			$	—			$	—			$	331.3			$	321.8
Short Term Borrowings
Revolving credit facility(2), notional amount ($US)		$	150.0			$	150.0			$	—			$	—			$	—			$	—			$	—			$	—
Variable interest rate, LIBOR based			7.10	%			7.10	%			—				—				—				—				—				—
TNLP revolving credit facility(2), notional amount ($US)		$	50.0			$	50.0			$	—				—			$	—				—				—				—
Variable interest rate, LIBOR based			7.10	%			7.10	%			—				—				—				—				—				—

(1)		In February 2007, the Company refinanced its outstanding notes by issuing new, unsecured notes of $330.0 million with a face interest rate of 7.0%. The new notes have a maturity date of 2017.
(2)		In February 2007, the Company amended its revolving credit facilities to extend the term of the facilities to February 2012.

Item 8. Financial Statements and Supplementary Data

Consolidated Statements of Financial Position

		At December 31,
(in thousands)		2006				2005
Assets
Cash and cash equivalents		$	179,017			$	86,366
Restricted cash			—				8,595
Accounts receivable, less allowance for doubtful accounts of $333 and $234			198,791				206,407
Inventories			211,017				190,314
Other current assets			31,680				54,578
Total current assets			620,505				546,260
Property, plant and equipment, net			720,897				733,536
Deferred plant turnaround costs			44,558				27,447
Equity investments			164,099				183,884
Intangible assets			5,645				7,526
Other assets			17,009				24,972
Total assets		$	1,572,713			$	1,523,625
Liabilities
Accounts payable		$	156,493			$	125,863
Customer prepayments			77,091				52,913
Accrued and other current liabilities			75,863				85,034
Total current liabilities			309,447				263,810
Long term debt and capital lease obligations			331,300				331,300
Deferred income taxes			63,851				65,998
Pension liabilities			134,444				120,236
Other liabilities			40,188				41,320
Minority interest			94,687				92,258
Total liabilities and minority interest			973,917				914,922
Commitments and contingencies (Note 10)			—				—
Preferred Shares liquidation value of $120,000			115,800				115,800
Common Stockholders’ Equity
Capital stock
Common Shares, authorized 133,500 shares; 92,630 and 95,171 shares outstanding			144,976				146,994
Paid in capital			693,896				712,671
Accumulated other comprehensive loss			(63,739	)			(70,143	)
Unearned compensation			—				(5,369	)
Accumulated deficit			(292,137	)			(291,250	)
Total stockholders’ equity			482,996				492,903
Total liabilities and stockholders’ equity		$	1,572,713			$	1,523,625
See accompanying Notes to the Consolidated Financial Statements

Consolidated Statements of Operations

		Year ended December 31,
(in thousands, except per-share amounts)		2006				2005				2004
Revenues		$	1,828,714			$	1,930,583			$	1,506,965
Other income, net			8,008				8,482				2,145
Total Revenue			1,836,722				1,939,065				1,509,110
Cost and Expenses
Cost of sales			1,732,222				1,800,236				1,348,077
Selling, general and administrative expense			55,233				46,548				44,190
Equity in earnings of unconsolidated affiliates			(17,013	)			(21,415	)			—
Recovery of product claim costs			—				—				(17,903	)
			1,770,442				1,825,369				1,374,364
Income from operations			66,280				113,696				134,746
Interest income			6,457				8,086				3,307
Interest expense			(47,991	)			(53,478	)			(53,134	)
Loss on early retirement of debt			—				(27,193	)			(11,116	)
Change in fair value of warrant liability			—				8,860				—
Income before income taxes and minority interest			24,746				49,971				73,803
Income tax benefit (provision)			(9,247	)			(14,217	)			5,000
Minority interest			(11,286	)			(13,667	)			(11,207	)
Net income			4,213				22,087				67,596
Preferred share dividends			(5,100	)			(5,134	)			(1,029	)
Income (Loss) Available to Common Stockholders		$	(887	)		$	16,953			$	66,567
Basic and Diluted Income (Loss) Per Share:
Basic		$	(0.01	)		$	0.18			$	0.87
Diluted			(0.01	)			0.18				0.85
Basic and Diluted Weighted Average Shares Outstanding:
Basic			92,676				92,537				76,478
Diluted			92,676				94,935				79,859
See accompanying Notes to the Consolidated Financial Statements

Consolidated Statements of Cash Flows

		Year ended December 31,
(in thousands)		2006				2005				2004
Operating Activities
Net income		$	4,213			$	22,087			$	67,596
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Depreciation and amortization			108,069				110,342				102,230
Deferred income taxes			3,777				13,538				(6,058	)
Non-cash loss on derivatives			933				4,091				—
Minority interest in earnings (loss)			11,286				13,667				11,207
Distributions in excess of (less than) equity earnings			9,202				(6,941	)			—
Share-based compensation			7,010				2,431				1,205
Amortization of intangible and other assets			6,878				5,243				—
Non-cash loss on early retirement of debt			—				22,543				2,985
Change in fair value of warrant liability			—				(8,860	)			—
Term loan discount accretion			—				1,773				—
Recovery of product claim costs			—				—				(12,874	)
Change in operating assets and liabilities, net of acquisition:
Accounts receivable			16,135				(59,591	)			27,647
Inventories			(14,003	)			(45,579	)			(11,352	)
Accounts payable and customer prepayments			37,960				(60,136	)			48,394
Other assets and liabilities, net			(32,200	)			(3,733	)			(18,508	)
Net Cash Flows from Operating Activities			159,260				10,875				212,472
Investing Activities
Purchase of property, plant and equipment			(50,856	)			(30,820	)			(18,472	)
Plant turnaround costs			(35,281	)			(22,331	)			(28,878	)
Acquisition, net of cash acquired			—				—				(54,168	)
Distributions received from unconsolidated affiliates			9,660				31,901				—
Changes in restricted cash			8,595				(8,595	)			—
Proceeds from the sale of property, plant and equipment			19,100				7,560				—
Net Cash Flows used in Investing Activities			(48,782	)			(22,285	)			(101,518	)
Financing Activities
Payments under share repurchase program			(18,796	)			—				—
Preferred share dividends paid			(5,100	)			(5,950	)			—
Distributions to minority interests			(8,861	)			(13,607	)			(8,072	)
Changes in overdraft protection arrangements			11,443				—				—
Excess tax benefits from equity compensation plans			1,255				—				—
Payments under borrowing arrangements			(37	)			(125,167	)			(70,854	)
Proceeds from exercise of stock options			363				142				447
Preferred share issuance, net of $4,200 issuance costs			—				—				115,800
Deferred financing costs			—				—				(2,598	)
Net Cash Flows used in Financing Activities			(19,733	)			(144,582	)			34,723
Effect of Exchange Rate Changes on Cash			1,906				8,560				787
Increase (Decrease) in Cash and Cash Equivalents			92,651				(147,432	)			146,464
Cash and Cash Equivalents at Beginning of Year			86,366				233,798				87,334
Cash and Cash Equivalents at End of Year		$	179,017			$	86,366			$	233,798

Consolidated Statements of Cash Flows (continued)

		Year ended December 31,
(in thousands)		2006				2005				2004
Supplemental cash flow information:
Interest paid		$	42,150			$	42,110			$	50,455
Income tax refunds received			—				11,933				—
Income taxes paid			1,930				1,526				1,123
Supplemental schedule of non-cash investing and financing activities:
Conversion of Series B preferred stock to common stock:
Common Stock		$	—			$	2,066			$	—
Paid in Capital		$	—			$	14,646			$	—
Consideration to fund acquisitions:
Common shares		$	—			$	—			$	135,750
Series B preferred shares		$	—			$	—			$	17,269
Assumed debt		$	—			$	—			$	125,000
Stock Incentive Plan		$	4,218			$	5,020			$	2,908
Supplemental schedule of unconsolidated affiliates distributions received:
Equity in earnings of unconsolidated affiliates		$	17,013			$	21,415			$	—
Distribution in excess of (less than) equity earnings			9,202				(6,941	)			—
Distributions received from unconsolidated affiliates			9,660				31,901				—
Total cash distributions received from unconsolidated affiliates		$	35,875			$	46,375			$	—
See accompanying Notes to the Consolidated Financial Statements

Consolidated Statements of Change in Common Stockholder’ Equity

														Accumulated
														Other
		Common Stock								Paid-In				Comprehensive				Unearned				Accumulated				Comprehensive
(in thousands)		Shares				Amount				Capital				Loss				Compensation				Deficit				Total				Income
January 1, 2004			77,563			$	128,968			$	555,529			$	(44,596	)		$	—			$	(374,770	)		$	265,131
Comprehensive Income (Loss):
Net income			—				—				—				—				—				67,596				67,596			$	67,596
Foreign currency translation adjustments			—				—				—				25,216				—				—				25,216				25,216
Change in fair value of derivatives, net of taxes of$690			—				—				—				(23,286	)			—				—				(23,286	)			(23,286	)
Minimum pension liability, net of taxes of $3,149			—				—				—				(13,328	)			—				—				(13,328	)			(13,328	)
Comprehensive income																														$	56,198
Preferred share dividends			—				—				—				—				—				(1,029	)			(1,029	)
Issuance of common stock			14,995				14,995				120,755				—				—				—				135,750
Exercise of stock options			198				198				249				—				—				—				447
Nonvested stock			238				370				5,106				—				(4,081	)			—				1,395
Share-based compensation			—				—				—				—				1,513				—				1,513
December 31, 2004			92,994				144,531				681,639				(55,994	)			(2,568	)			(308,203	)			459,405
Comprehensive Income (Loss):
Net income			—				—				—				—				—				22,807				22,087			$	22,087
Foreign currency translation adjustments			—				—				—				(23,387	)			—				—				(23,387	)			(23,387	)
Change in fair value of derivatives, net of taxes of $2,861			—				—				—				14,198				—				—				14,198				14,198
Minimum pension liability, net of taxes of $5,015			—				—				—				(4,960	)			—				—				(4,960	)			(4,960	)
Comprehensive income																														$	7,938
Preferred share dividends			—				—				—				—				—				(5,134	)			(5,134	)
Conversion of preferred shares			2,066				2,066				14,646				—				—				—				16,712
Reclassification of warrant liability			—				—				12,240				—				—				—				12,240
Exercise of stock options			39				39				103				—				—				—				142
Nonvested stock			72				358				4,043				—				(4,798	)			—				(397	)
Share-based compensation			—				—				—				—				1,997				—				1,997
December 31, 2005			95,171				146,994				712,671				(70,143	)			(5,369	)			(291,250	)			492,903

Consolidated Statements of Changes in Common Stockholders’ Equity (continued)

														Accumulated
														Other
		Common Stock								Paid-In				Comprehensive				Unearned				Accumulated				Comprehensive
(in thousands)		Shares				Amount				Capital				Loss				Compensation				Deficit				Total				Income
Comprehensive Income (Loss):
Net income			—				—				—				—				—				4,213				4,213			$	4,213
Foreign currency translation adjustments			—				—				—				33,618				—				—				33,618				33,618
Change in fair value of derivatives, net of taxes of $3,513			—				—				—				(6,727	)			—				—				(6,727	)			(6,727	)
Pension and post-retirement benefit liabilities, net of taxes of $4,289			—				—				—				(11,850	)			—				—				(11,850	)			(11,850	)
Comprehensive income																														$	19,254
Adoption of SFAS 158, net of taxes of $4,650			—				—				—				(8,637	)			—				—				(8,637	)
Preferred share dividends			—				—				—				—				—				(5,100	)			(5,100	)
Exercise of stock options			95				95				268				—				—				—				363
Nonvested stock			39				562				(714	)			—				—				—				(152	)
Shares purchased and retired under share repurchase program			(2,675	)			(2,675	)			(16,121	)			—				—				—				(18,796	)
Reclassification for adoption of SFAS 123 R			—				—				(5,369	)			—				5,369				—				—
Share-based compensation			—				—				3,161				—				—				—				3,161
December 31, 2006			92,630			$	144,976			$	693,896			$	(63,739	)		$	—			$	(292,137	)		$	482,996