| TERRA INDUSTRIES INC 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 |
| Terra’s inability to predict future seasonal nitrogen products demand accurately could result in low or excess inventory, potentially at costs in excess of market value |
| The nitrogen products business is highly seasonal, with more nitrogen products used in North America during the second quarter, in conjunction with spring planting activity, than in any other quarter |
| Due to the seasonality of the business and the relatively brief periods during which products can be used by customers, Terra and/or its customers generally build inventories during the second half of the year in order to ensure timely product availability during the peak sales season |
| This increases Terra’s working capital needs during this period as the Company funds these inventory increases and supports its customers’ inventory carry |
| If Terra underestimates future demand, profitability will be negatively 14 _________________________________________________________________ [56]Table of Contents impacted and customers may acquire products from our competitors |
| If Terra overestimates future demand, it will be left with excess inventory that will incur storage costs and/or Terra may liquidate such additional inventory at sales prices below its costs |
| 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 2005 comprised about 72prca 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 natural gas supplies |
| The competitors’ facilities’ natural gas costs have been and likely will continue to be substantially lower than Terra’s |
| 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 |
| A substantial amount of new ammonia capacity is expected to be added abroad in the foreseeable future |
| When industry oversupply occurs, as is common in commodity businesses, the price at which Terra sells its nitrogen products typically declines, which results in reduced profit margins, lower production of products and plant closures |
| Supply in the US 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 |
| 15 _________________________________________________________________ [57]Table of Contents 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 US producers and producers in other countries, including state-owned and government-subsidized entities |
| The US 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 our 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 forms 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 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 |
| 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 although there can be no assurance that it has sufficient coverage, or can in the future obtain sufficient coverage at reasonable costs |
| Terra may be adversely affected by environmental regulations |
| Terra’s operations are subject to various federal, state and local environmental, safety and health laws and regulations, including laws relating to air quality, hazardous and solid wastes and water quality |
| In the United States, Terra’s operations are subject to a comprehensive federal and state regulatory regime, including the federal Clean Air Act, Clean Water Act, Resource Conservation and Recovery Act, Emergency Planning and Community Right-to-Know Act, Toxic Substances Control Act and their state analogs |
| Terra’s operations in Canada are also 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 UK operations are subject to similar regulations under a variety of 16 _________________________________________________________________ [58]Table of Contents requirements, including those arising under the Integrated Pollution Prevention and Control (“IPPC”) Program |
| 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 cleanup 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 our 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 |
| 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 |
| US and EU 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 UK and in the US 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 US or UK governments could impose limitations on the use, sale or distribution of AN, thereby limiting Terra’s ability to manufacture or sell this product |
| 17 _________________________________________________________________ [59]Table of Contents 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 US; earnings that may be subject to withholding requirements; and the imposition of tariffs, exchange controls or other restrictions |
| During 2005 Terra derived approximately 24prca of its net sales from outside of the US Terra’s business operations include a 50prca interest in an ammonia production joint venture in the Republic of Trinidad and Tobago and a 50prca interest in an ammonia shipping joint venture that provides transportation of ammonia from the Trinidad facility to the US and other world markets |
| Terra’s business may be adversely impacted by the Company’s high-cost leverage, which requires 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 and the Series A convertible preferred shares for a price equal to 101prca of the notes’ principal amount or 100prca 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 |