Cash and cash equivalents

Accounts receivable, less allowance for doubtful accounts of $267, $264 and $410

Inventories

Other current assets

Current assets held for sale - discontinued operations

 

 

Property, plant and equipment, net

Equity method investments

Deferred plant turnaround costs, net

Intangible assets, net

Other assets

Noncurrent assets held for sale - discontinued operations

 

 

 

Accounts payable

Customer prepayments

Accrued and other current liabilities

Current liabilities held for sale - discontinued operations

 

 

Long-term debt

Deferred taxes

Pension liabilities

Other liabilities

Minority interest

Noncurrent liabilities held for sale - discontinued operations

 

 

 

Preferred Shares - liquidation value of $120,000

 

Capital stock

Common Shares, authorized 133,500 shares; 91,382; 89,587 and 92,486 outstanding

Paid-in capital

Accumulated other comprehensive loss

Retained earnings (accumulated deficit)

 

 

 

 

Product revenues

Other income

 

Total revenues

 

 

Cost of sales

Selling, general and administrative expense

Equity earnings of unconsolidated affiliates (Note 8)

 

Total cost and expenses

 

Income from operations

Interest income

Interest expense

Loss on early retirement of debt

 

Income before income taxes and minority interest

Income tax provision

Minority interest

Equity earnings of affiliates (Note 8)

 

Income from continuing operations

Income (loss) from discontinued operations, net of tax (Note 2)

 

Net income

Preferred share dividends

 

 

 

Basic

Diluted

 

Income from continuing operations

Income (loss) from discontinued operations (Note 2)

 

Net income

 

 

Income from continuing operations

Income (loss) from discontinued operations (Note 2)

 

Net Income

 

Net income

Income (loss) from discontinued operations

 

Income from continuing operations

Adjustments to reconcile income from continuing operations to net cash flows from operating activities:

Depreciation of property, plant and equipment and amortization of deferred plant turnaround costs

Loss on sale of property, plant and equipment

Deferred income taxes

Minority interest in earnings

Distributions less than equity earnings

Equity earnings GrowHow UK Limited

Non-cash gain on derivatives

Share-based compensation

Amortization of intangible and other assets

Non-cash loss on early retirement of debt

 

Changes in operating assets and liabilities:

Accounts receivable

Inventories

Accounts payable and customer prepayments

Other assets and liabilities, net

 

Net cash flows from operating activities — continuing operations

Net cash flows from operating activities — discontinued operations

 

 

Purchase of property, plant and equipment

Plant turnaround expenditures

Proceeds from sale of property, plant and equipment

Distributions received from unconsolidated affiliates

Contribution settlement received from GrowHow UK Limited

 

Net cash flows from investing activities — continuing operations

Net cash flows from investing activities — discontinued operations

 

 

Issuance of debt

Payments under borrowing arrangements

Payments for debt issuance costs

Preferred share dividends paid

Common stock issuances and vestings

Excess tax benefits from equity compensation plans

Distributions to minority interests

 

Net cash flows from financing activities — continuing operations

Net cash flows from financing activities — discontinued operations

 

 

 

 

 

 

Interest paid

Income tax refunds received

Income taxes paid

 

Conversion of warrants to common stock

 

Equity earnings of unconsolidated affiliates

Distribution less than equity earnings

Distributions received from unconsolidated affiliates

 

 

 

Balance at January 1, 2008

Comprehensive income (loss):

Net income

Foreign currency translation adjustment

Change in fair value of derivatives, net of taxes of $12,337

 

Comprehensive income

 

Preferred share dividends

Exercise of stock options

Nonvested stock

Conversion of warrants

Share-based compensation

 

Balance March 31, 2008

 

 

Balance at January 1, 2007

Comprehensive income (loss):

Net income

Foreign currency translation adjustment

Change in fair value of derivatives, net of taxes of $7,848

 

Comprehensive income

 

Preferred share dividends

Share-based compensation

Exercise of stock options

 

Balance at March 31, 2007

 

Financial Statement Presentation

The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments necessary, in the opinion of management, to summarize fairly the financial position of Terra Industries Inc. and all majority-owned subsidiaries (“Terra”, “the Company”, “our” “we” and “us”) and the results of operations for the periods presented. Because of the seasonal nature of our operations and effects of weather-related conditions in several of its marketing areas, results of any interim reporting period should not be considered as indicative of results for a full year. These statements should be read in conjunction with our 2007 Annual Report on Form 10-K to Shareholders.

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

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

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

We enter into derivative financial instruments, including swaps, basis swaps, purchased put and call options and sold call options, to manage the effect of changes in natural gas costs and to manage the prices of our nitrogen products. We report the fair value of the derivatives on our balance sheet. If the derivative is not designated as a hedging instrument, changes in fair value are recognized in earnings in the period of change. If the derivative is designated as a hedge, and to the extent such hedge is determined to be effective, changes in fair value are reported as a component of accumulated other comprehensive income (loss) in the period of change, and subsequently recognized in cost of sales in the period the offsetting hedged transaction occurs.

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

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

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

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

Costs related to the periodic scheduled major maintenance of continuous process production facilities (plant turnarounds) are deferred and charged to product costs on a straight-line basis during the period until the next scheduled turnaround, generally two years.

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows expected to result from the use of the asset (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized based on the difference between the carrying amount and the fair value of the asset.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Discontinued Operations

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

Pursuant to the requirements of SFAS 144, we classified and accounted for certain assets as held for sale at March 31, 2008. As the anticipated sales date is within one year of our quarterly reporting date, the property, plant and equipment has been reclassified to other current assets as of March 31, 2008. SFAS 144 requires that assets held for sale are valued on an asset-by-asset basis at the lower of carrying amount or fair value less costs to sell. In applying those provisions, we considered cash flow analyses, and offers related to those assets. In accordance with the provisions of SFAS 144, assets for sale are not depreciated.

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

Operating revenue

Operating and other expenses

 

Pretax income from operations of discontinued components

Income tax expense

 

Income from discontinued operations

 

 

2007

Operating revenue

Operating and other expenses

 

Pretax loss from operations of discontinued components

Income tax benefit

 

Loss from discontinued operations

 

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

Trade receivables

Inventory

Other current assets

 

Current Assets

 

 

Property, plant and equipment — net

Other non-current assets

 

Non-current assets

 

 

Accounts payable

Other current liabilities

 

Current liabilities

 

 

Other non-current liabilities

 

Non-current liabilities

 

Income (Loss) Per Share

Basic income (loss) per share data is based on the weighted-average number of common shares outstanding during the period. Diluted income (loss) per share data is based on the weighted-average number of common shares outstanding and the effect of all dilutive potential common shares including stock options, nonvested shares, convertible preferred shares and common stock warrants. Nonvested stock carries dividend and voting rights, but is not involved in the weighted average number of common shares outstanding used to compute basic income (loss) per share.

The following table provides a reconciliation between basic and diluted income (loss) per share for the three-month period ended March 31, 2008 and 2007:

Income from continuing operations

Less: Preferred share dividends

 

Income from continuing operations available to common shareholders

Income (loss) from discontinued operations available to common shareholders

 

 

Weighted average shares outstanding

 

 

Income per share — continuing operations

Income (loss) per share — discontinued operations

 

Net income per share

 

 

Income from continuing operations available to common shareholders

Add: Preferred share dividends

 

Income available to common shareholders and assumed conversions

 

 

Weighted average shares outstanding

Add incremental shares from assumed conversions:

Preferred shares

Nonvested stock

Common stock warrants

Common stock options

 

Dilutive potential common shares

 

 

Income per share — continuing operations

Income (loss) per share — discontinued operations

 

Net income per share

 

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

Inventories

Inventories consisted of the following:

Raw materials

Supplies

Finished goods

 

Total

 

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

Derivative Financial Instruments

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

To manage credit risk, we enter into derivative transactions only with counter-parties who are currently rated as BBB or better or equivalent as recognized by a national rating agency. We will not enter into transactions with a counter-party if the additional transaction will result in credit exposure exceeding $20 million. The credit rating of counter-parties may be modified through guarantees, letters of credit or other credit enhancement vehicles.

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

The item to be hedged must expose us to price risk.

It must be probable that the results of the hedge position substantially offset the effects of price changes on the hedged item (e.g., there is a high correlation between the hedge position and changes in market value of the hedge item).

The derivative financial instrument must be designated as a hedge of the item at the inception of the hedge.

Natural gas supplies to meet production requirements at our North American production facilities are purchased at market prices. Natural gas market prices are volatile and we effectively fix prices for a portion of our natural gas production requirements and inventory through the use of swaps, basis swaps and options. The North American contracts reference physical natural gas prices or appropriate NYMEX futures contract prices. Contract physical prices for North America are frequently based on prices at the Henry Hub in Louisiana, the most common and financially liquid location of reference for financial derivatives related to natural gas. However, natural gas supplies for our North American production facilities are purchased at locations other than Henry Hub, which often creates a location basis differential between the contract price and the physical price of natural gas. Accordingly, the use of financial derivatives may not exactly offset the change in the price of physical gas. The contracts are traded in months forward and settlement dates are scheduled to coincide with gas purchases during that future period.

A swap is a financial instrument whereby we agree to pay a counterparty a fixed rate, and the counterparty pays us a variable rate. Option contracts give the holder the right to either own or sell a futures or swap contract. The option contracts require initial premium payments ranging from 2% to 5% of contract value. Basis swap contracts require payments to or from us for the amount, if any, that monthly published gas prices from the source specified in the contract differ from the prices of a NYMEX natural gas futures during a specified period. There are no initial cash requirements related to the swap and basis swap agreements.

We may also use a collar structure where we will enter into a swap, sell a call at a higher price and buy a put. The collar structure allows for greater participation in a decrease to natural gas prices and protects against moderate price increases. However, the collar exposes us to large price increases. At March 31, 2008 there were no collars outstanding.

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

March 31, 2008

December 31, 2007

March 31, 2007

Certain derivatives outstanding at March 31, 2008 and 2007, which settled during April 2008 and 2007, respectively, are included in the position of open natural gas derivatives in the table above. The April 2008 derivatives settled for an approximate $9.4 million gain compared to the April 2007 derivatives which settled for an approximate $1.0 million gain. Substantially all open derivatives will settle during the next twelve months.

We determined that certain derivative contracts were ineffective hedges for accounting purposes and recorded a credit of $0.5 million and $2.9 million, respectively, to cost of sales for the three-month period ending March 31, 2008 and 2007, respectively.

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

The activity to accumulated other comprehensive income (loss), net of income taxes, relating to current period hedging transactions for the three-month periods ended March 31, 2008 and 2007 follows:

Beginning accumulated loss

Reclassification into earnings

Net change in market value

 

Ending accumulated gain

 

Approximately $26.6 million of the net accumulated gain at March 31, 2008 will be reclassified into earnings during the next twelve months.

At times, we also use forward derivative instruments to fix or set floor prices for a portion of our nitrogen sales volumes. At March 31, 2008, we did not have any open contracts for nitrogen solutions. When outstanding, the nitrogen solution contracts do not qualify for hedge treatment due to inadequate trading history to demonstrate effectiveness. Consequently, these contracts are marked-to-market and unrealized gains or losses are reflected in revenue in the statement of operations. For the three-month period ending March 31, 2008, there were no gains or losses on nitrogen forward derivative instruments. For the three-month period ending March 31, 2007, we recognized a loss of $0.9 million on nitrogen forward derivative instruments.

Fair Value Measurements

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

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

The three levels are defined as follows:

Level 1 — inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement.

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

The following table summarizes the valuation of our assets and liabilities in accordance with SFAS 157 fair value hierarchy levels as of March 31, 2008:

 

Derivative contracts

 

Total

 

 

Derivative contracts

 

Total

 

Other Liabilities

Other liabilities consisted of the following:

Unrecognized tax benefit

Long-term medical and closed facility reserve

Long-term deferred revenue

Accrued phantom shares

Long-term retiree medical and post employment reserve

Other

 

 

 

Equity Investments

Our investment in companies that are accounted for on the equity method of accounting and included in operations consist of the following: (1) 50% ownership interest in Point Lisas Nitrogen Limited, (“PLNL”) which operates an ammonia production plant in Trinidad (2) 50% interest in an ammonia storage joint venture located in Houston, Texas and (3) 50% interest in a joint venture in Oklahoma CO₂ at our Verdigris nitrogen plant. These investments were $145.4 million at March 31, 2008. We include the net earnings of these investments as an element of income from operations as the investees’ operations provide additional capacity to our operations.

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

Net sales

 

 

Net income

 

 

Terra’s equity in earnings of unconsolidated affiliates

 

Current assets

Long-lived assets

 

Total assets

 

 

Current liabilities

Long-term liabilities

Equity

 

Total liabilities and equity

 

The carrying value of these investments at March 31, 2008 was $45.0 million more than our share of the affiliates’ book value. The excess is attributable primarily to the step-up in basis for fixed asset values, which is being depreciated over a period of approximately fifteen years. Our equity in earnings of unconsolidated subsidiaries is different than our ownership interest in income reported by the unconsolidated subsidiaries due to deferred profits on intergroup transactions and amortization of basis differences.

We have transactions in the normal course of business with PLNL whereby we are obliged to purchase 50% of the ammonia produced by PLNL at current market prices. During the three-month period ending March 31, 2008, we purchased approximately $33.3 million of ammonia from PLNL. During the three-month period ending March 31, 2007, we purchased approximately $22.2 million of ammonia from PLNL. During the first quarter of 2007, PLNL performed a turnaround, resulting in lower production levels and consequently, lower purchases by us.

We received $18.8 million and $17.5 million in distributions from PLNL in the 2008 and 2007 first quarters, respectively.

On September 14, 2007, we completed the formation of GrowHow UK Limited (GrowHow), a joint venture between us and Kemira GrowHow Oyj (Kemira). Pursuant to the joint venture agreement, we contributed our United Kingdom subsidiary Terra Nitrogen (UK) Limited to the joint venture for a 50% interest. Subsequent to September 14, 2007, we have accounted for our investment in GrowHow as an equity method investment. This investment was $185.3 million at March 31, 2008.

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

The results of operations and financial position of our equity method investment in GrowHow at March 31, 2008 were:

 

Net sales

 

Net income

 

Terra’s equity in earnings of unconsolidated affiliates

 

 

Current assets

Long-lived assets

 

Total assets

 

 

Current liabilities

Long-term liabilities

Equity

 

Total liabilities and equity

 

The carrying value of these investments at March 31, 2008 was $81.8 million more than our share of the affiliates’ book value. The excess is attributable primarily to the step-up in basis for fixed asset values, which is being depreciated over a period of approximately twelve years. Our equity earnings of GrowHow are different than our ownership interest in GrowHow’s net income due to the amortization of basis differences.

We contributed Terra Nitrogen (UK) Limited to the joint venture for a 50% interest in the joint venture, and Kemira contributed its Kemira GrowHow UK Limited subsidiary for the remaining 50% interest. The GrowHow joint venture in the United Kingdom includes the Kemira site at Ince and our Teeside and Severnside sites. Pursuant to the GrowHow Agreements with Kemira, we are eligible to receive a balancing consideration payment from GrowHow in 2011. We will receive a minimum balancing consideration payment of £20 million, and have the right to receive up to £60 million, based on GrowHow’s calculation of earnings and cash flows.

In January 2008 GrowHow closed the Severnside manufacturing facility. Pursuant to the agreement with Kemira, we are responsible for any remediation costs required to prepare the Severnside site for disposal. We anticipate remediation costs to be approximately $5.0 million to $10.0 million. We have an option to purchase the Severnside land for a nominal amount at any time prior to sale. If we elect not to exercise this option we are still entitled to receive the sales proceeds. We anticipate that the proceeds related to the sale of the Severnside land would exceed the total cost of reclamation of site.

We received $27.9 million from GrowHow during the 2008 first quarter for the refund of working capital contributions in excess of amounts specified in the Joint Venture Contribution Agreement.

There were no distributions from the United Kingdom equity investment since the inception in 2007.

Long-term Debt

Long-term debt consisted of the following:

Unsecured Senior Notes, 7.0% due 2017

Second Priority Senior Secured Notes, 11.5%, due 2010

 

Total long-term debt

Less current maturities

 

Total long-term debt

 

In February 2007, Terra Capital, Inc., (“TCAPI”) a subsidiary of Terra Industries Inc., issued $330 million of 7.0% Senior Notes due 2017 to refinance our Senior Secured Notes due in 2008 and 2010. The notes are unconditionally guaranteed by Terra Industries Inc. and its U.S. subsidiaries (see Note 14). These notes and guarantees are unsecured and will rank equal in right of payment with any existing and future senior obligations of such guarantors. We recorded a $38.8 million loss on the early retirement of debt.

The Indenture governing these notes contains covenants that limit, among other things, our ability to: incur additional debt, pay dividends on common stock of Terra Industries Inc. or repurchase shares of such common stock, make certain investments, sell any of our principal production facilities or sell other assets outside the ordinary course of business, enter into transactions with affiliates, limit dividends or other payments by our restricted subsidiaries, enter into sale and leaseback transactions, engage in other businesses, sell all or substantially all of our assets or merge with or into other companies, and reduce our insurance coverage.

We are obligated to offer to repurchase these notes upon a Change of Control (as defined in the Indenture) at a cash price equal to 101% of the aggregate principal amount outstanding at that time, plus accrued interest to the date of purchase. The Indenture governing these notes contains events of default and remedies customary for a financing of this type.

In conjunction with the bond refinancing, we amended the $200 million revolving credit facility to extend the expiration date to January 31, 2012. The revolving credit facility is secured by substantially all of our assets. Borrowing availability is generally based on 100% of eligible cash balances, 85% of eligible accounts receivable and 60% of eligible finished goods inventory less outstanding letters of credit issued under the facility. These facilities include $50 million only available for the use of Terra Nitrogen Company, L.P. (TNCLP), one of our consolidated subsidiaries. Borrowings under the revolving credit facility will bear interest at a floating rate plus an applicable margin, which can be either a base rate, or, at our option, a London Interbank Offered Rate (LIBOR). At March 31, 2008, the LIBOR rate was 2.71%. The base rate is the highest of (1) Citibank, N.A.’s base rate (2) the federal funds effective rate, plus one-half percent (0.50%) per annum and (3) the base three month certificate of deposit rate, plus one-half percent (0.50%) per annum, plus an applicable margin in each case. LIBOR loans will bear interest at LIBOR plus an applicable margin. The applicable margins for base rate loans and LIBOR loans were 0.50% 1.75%, respectively, at March 31, 2008. The revolving credit facility requires an initial one-half percent (0.50%) commitment fee on the difference between committed amounts and amounts actually borrowed.

At March 31, 2008, we had no outstanding revolving credit borrowings and $10.3 million in outstanding letters of credit. The $10.3 million in outstanding letters of credit reduced our borrowing availability to $189.7 million at March 31, 2008. The credit facilities require that we adhere to certain limitations on additional debt, capital expenditures, acquisitions, liens, asset sales, investments, prepayments of subordinated indebtedness, changes in lines of business and transactions with affiliates. If our borrowing availability falls below $60 million, we are required to have achieved minimum operating cash flows or earnings before interest, income taxes, depreciation, amortization and other non-cash items of $60 million during the most recent four quarters.

Pension Plans

We maintain defined benefit and defined contribution pension plans that cover substantially all salaried and hourly employees. Benefits are based on a pay formula. The defined benefit plans’ assets consist principally of equity securities and corporate and government debt securities. We also have certain non-qualified pension plans covering executives, which are unfunded. We accrue pension costs based upon annual actuarial valuations for each plan and fund these costs in accordance with statutory requirements.

The estimated components of net periodic pension expense follow:

Service cost

Interest cost

Expected return on plan assets

Amortization of prior service cost

Amortization of actuarial loss

Termination charge

 

Pension expense

 

Cash contributions to the defined benefit pension plans for the three months ended March 31, 2008 and 2007 were $0.4 million and $8.9 million, respectively.

We also sponsor defined contribution savings plans covering most full-time employees. Contributions made by participating employees are matched based on a specified percentage of employee contributions. The cost of our contributions to these plans for the three-month periods ending March 31, 2008 and 2007 totaled $1.0 million and $1.2 million, respectively.

We provide health care benefits for certain U.S. employees who retired on or before January 1, 2002. Participant contributions and co-payments are subject to escalation. The plan pays a stated percentage of most medical expenses reduced for any deductible and payments made by government programs. These costs are funded as paid.

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) refers to revenues, expenses, gains and losses that under accounting principles generally accepted in the United States are recorded as an element of shareholders’ equity but are excluded from net income (loss). Our accumulated other comprehensive income (loss) is comprised of (a) adjustments that result from translation of our foreign entity financial statements from their functional currencies to United States dollars, (b) adjustments that result from translation of intercompany foreign currency transactions that are of a long-term investment nature (that is, settlement is not planned or anticipated in the foreseeable future) between entities that are consolidated in our financial statements, (c) the offset to the fair value of derivative assets and liabilities (that qualify as a cash flow hedge) recorded on the balance sheet, and (d) pension and post-retirement benefit liabilities adjustments.

The components of accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2008 and 2007 follow:

 

Balance January 1, 2008

Change in foreign translation adjustment

Reclassification to earnings

Change in fair value of derivatives

 

Balance March 31, 2008

 

 

Balance January 1, 2007

Change in foreign translation adjustment

Reclassification to earnings

Change in fair value of derivatives

 

Balance March 31, 2007

 

Commitments and Contingencies

We are involved in various claims and legal actions arising in the ordinary course of business, including employee injury claims. Based on the facts currently available, management believes that the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operation or liquidity and that the likelihood that a loss contingency will occur in connection with these claims is remote.

We have entered into physical natural gas supply agreements through March 2009 for approximately 44.5 million MMBtu’s. As of March 31, 2008, these natural gas commitments were $1.7 million above the respective index prices.

New Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS 141R, Business Combination (SFAS 141R), which changes the way we account for business acquisitions. SFAS  141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard will, among other things, impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquired contingencies, acquisition-related restructuring costs, in-process research and development, indemnification assets, and tax benefits. SFAS 141R is effective for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances occurring after December 31, 2008. We are currently evaluating the future impacts and disclosures of SFAS 141R.

In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51, (SFAS 160). SFAS 160 improves the comparability and transparency of financial statements when reporting minority interest. Entities with a noncontrolling interest will be required to clearly identify and present the ownership interest in the consolidated statement of financial position within equity, but separate from the parent’s equity. The amount of consolidated net income attributable to the parent and to the noncontrolling interest will be identified and presented on the face of the consolidated statement of income. The statement offers further guidance on changes in ownership interest, deconsolidation, and required disclosures. The statement is effective for fiscal years and interim periods within those fiscal years beginning January 1, 2009. We are currently assessing the impact SFAS 160 may have on our financial statements.

In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 is an amendment of SFAS 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). To address concerns that the existing disclosure requirements of SFAS 133 do not provide adequate information, this Statement requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This statement shall be effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We are currently evaluating the future impacts and disclosures of SFAS 161.

Guarantor Subsidiaries

The consolidating statement of financial position of Terra Industries Inc. (the “Parent”), Terra Capital, Inc. (“TCAPI”), the Guarantor Subsidiaries and subsidiaries of the Parent that are not guarantors of the Unsecured Senior Notes due 2017 for March 31, 2008; December 31, 2007; and March 31, 2007 are presented below for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. Statements of operations and statements of cash flows for the three months ended March 31, 2008 and 2007 are presented below for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. The guarantees of the Guarantor Subsidiaries are full and unconditional. The Subsidiary issuer and the Guarantor Subsidiaries guarantees are joint and several with the Parent.

Guarantor subsidiaries include subsidiaries that own the Woodward, Oklahoma; Port Neal, Iowa; Yazoo City, Mississippi, and Beaumont, Texas plants; Terra Environmental Technologies as well as the corporate headquarters facility in Sioux City, Iowa. The Beaumont, Texas facility is classified as held for sale pursuant to SFAS 144. All guarantor subsidiaries are wholly owned by the Parent. All other company facilities are owned by non-guarantor subsidiaries.

Consolidating Balance Sheet as of March 31, 2008:

Cash and cash equivalents

Accounts receivable, net

Inventories

Other current assets

Current assets held for sale – discontinued operations

 

Total current assets

 

Property, plant and equipment, net