10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2003

Commission file number: 1-8520

TERRA INDUSTRIES INC.

(Exact name of registrant as specified in its charter)

Maryland

(State or other jurisdiction of incorporation or organization)

52-1145429

(I.R.S. Employer Identification No.)

Terra Centre 600 Fourth Street P.O. Box 6000 Sioux City, Iowa

(Address of principal executive offices)

51102-6000

(Zip Code)

Registrant’s telephone number, including area code: (712) 277-1340

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

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

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.)    Yes  x    No  ¨

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 $40,716,528.10

The number of shares of Common Shares, without par value, outstanding as of March 1, 2004 was 77,597,647.

Documents Incorporated by Reference

Certain portions of the proxy statement for the Annual Meeting of Stockholders of Registrant to be held on May 4, 2004 are incorporated herein by reference into Part III hereof.

TABLE OF CONTENTS

	PART I
Items 1 and 2.	Business and Properties	3
Item 3.	Legal Matters	15
Item 4.	Submission of Matters to a Vote of Security Holders	16
	Executive Officers of Terra	16
	PART II
Item 5.	Market for Terra’s Common Equity and Related Stockholder Matters	17
Item 6.	Selected Financial Data	18
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 7a.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 8.	Financial Statements and Supplementary Data	38
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosures	76
Item 9a.	Controls and Procedures	76
	PART III
Item 10.	Directors and Executive Officers of Terra	76
Item 11.	Executive Compensation	76
Item 12.	Security Ownership of Certain Beneficial Owners and Management	77
Item 13.	Certain Relationships and Related Transactions	77
Item 14.	Principal Accounting Fees and Services	77
	PART IV
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	78
Signatures		86
Index to Financial Statement Schedules, Reports and Consents		S1

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ITEMS 1 AND 2. BUSINESS AND PROPERTIES

Terra Industries Inc., a Maryland corporation, is referred to as “Terra,” “we” or “our” 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., which, through its subsidiary, Terra Nitrogen, L.P., operates Terra’s manufacturing facilities in Blytheville, Arkansas and Verdigris, Oklahoma. Terra is the sole general partner and the majority limited partner in Terra Nitrogen Company, L.P. 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 web site, 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 web site 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 both agricultural and industrial end-use markets. Terra is one of the largest North American producers of ammonia, the basic building block of nitrogen fertilizers. We upgrade a significant portion of the ammonia we produce into higher value products, which are easier for agricultural end-users to transport, store and apply to crops than ammonia. In addition, Terra is the largest U.S. producer of merchant methanol. We own eight manufacturing facilities in North America and the U.K. that produce nitrogen products. Two of these facilities also produce methanol.

Nitrogen is both a global and local commodity: global because it is both produced and traded in almost all regions of the world, local because local fertilizer customers display preferences for nitrogen in one of four basic forms based upon local conditions. The principal forms of nitrogen fertilizer products that are traded globally are ammonia (82% nitrogen by weight) and, to a lesser extent, urea (46% nitrogen by weight) and ammonium nitrate (AN), (34% nitrogen by weight). Urea ammonium nitrate (UAN) has only recently been traded in international markets. It is less likely to be traded because it has a high cost of transportation due to its high water content. Because transportation is a significant component of a customer’s total cost, a key to competitiveness in the nitrogen business is to have the lowest delivered cost for the customer’s product of choice, while providing a reliable source of supply.

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The locations of Terra’s North American production facilities provide it with a competitive advantage in serving agricultural customers in the Corn Belt and other major agricultural areas of the United States and Canada. Terra’s U.K. facilities are able to serve competitively the entire British agricultural market. Terra’s facilities have the following production capacities:

	Annual Capacity1
Location	Ammonia2	UAN3	AN4	Urea5	Methanol6
Beaumont, Texas7	255,000	—	—	—	225,000,000
Blytheville, Arkansas8	420,000	30,000	—	480,000	—
Port Neal, Iowa	370,000	810,000	—	60,000	—
Verdigris, Oklahoma	1,050,000	2,200,000	—	—	—
Woodward, Oklahoma7	440,000	340,000	—	25,000	40,000,000
Courtright, Ontario	480,000	400,000	—	175,000	—
Severnside, U.K.	265,000	—	500,000	—	—
Billingham, U.K.9	550,000	—	500,000	—	—
Total	3,830,000	3,780,000	1,000,000	740,000	265,000,000

1. Annual capacity includes an allowance for planned maintenance shutdowns.

2. Measured in gross tons of ammonia produced; net tons available for sale will vary with upgrading requirements.

3. Measured in tons of UAN containing 28% nitrogen by weight.

4. Measured in tons.

5. Urea is sold as urea liquor from our Port Neal and Woodward facilities and as granular urea from the Blytheville and Courtright facilities. Production capacities shown are for urea sold in tons.

6. Measured in gallons.

7. The Beaumont capacities represent the design capacity of the ammonia loop and revised capacity of the methanol plant following the loss of CO2 feedstock due to shutdown of the DuPont ammonia plant. Plant capacity for Beaumont and Woodward depends on the product mix (ammonia/methanol).

8. During 2003, management concluded that future market conditions may not justify the ongoing investment in maintenance and replacement capital necessary to extend operations for the remainder of the Blytheville, Arkansas facility’s useful life. The facility is expected to remain in operation through at least April 2004.

9. The Billingham, England facility also produces merchant nitric acid; 2003 sales were 258,373 product tons.

The principal customers for Terra’s North American nitrogen products are national agricultural retail chains (such as UAP and Cargill), farm cooperatives, independent dealers and industrial customers (such as DuPont). Industrial customers use our products to manufacture chemicals and plastics such as acrylonitrile, polyurethanes, fibers, explosives and adhesives. Agricultural customers accounted for approximately 76% and industrial customers approximately 24% of Terra’s North American nitrogen product revenue in 2003. In the U.K., revenues are evenly divided between agricultural and industrial customers.

Product	% of Total 2003 Terra Revenues1		U.S. Capacity Position	U.K. Capacity Position
Ammonia	24.2	%	2	1
UAN	28.1	%	1	*
AN	9.8	%	*	1
Urea	8.2	%	4	*
Methanol	15.5	%	1	*

1 Revenues from sales of carbon dioxide, nitric acid and other nitrogen products and services, as well as industrial sales in the U.K., represented 14.2% of our total revenues for 2003.

* Terra does not compete in these markets.

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During 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. Methanex paid $25 million for the exclusive rights and will purchase production from Terra at values expected to approximate cash production costs. Methanex will also pay Terra 50% of gross profits earned from its sales of Beaumont product up to maximum payments to Terra of $12 million per year. Methanex has the right to terminate Beaumont production during the agreement, and Terra would be responsible for the costs of shutting down the facility. Terra also entered into an agreement for Methanex to market, under a commission arrangement, all methanol produced at the Woodward facility. The customers under these arrangements are primarily large domestic chemical producers.

Company Strategies

Enhance Competitive Position Through Continued Efficiency Improvement

Terra intends to continue to improve its competitive position in the worldwide nitrogen fertilizer industry by enhancing the operating and energy efficiency of its plants while rigorously controlling fixed costs. We have upgraded and will continue to upgrade our equipment and processes through prudent investment and personnel training.

Use Natural Gas Contracts to Protect Margins

Natural gas costs in 2003 accounted for approximately 66% of total costs and expenses for Terra’s North American nitrogen products business, 44% of total costs and expenses for the U.K. nitrogen products business and 72% of total costs and expenses for the methanol business. It is Terra’s normal practice to fix or cap the price of a substantial portion of its future natural gas requirements through supply contracts, financial derivatives and other instruments. These tools are used to lock in natural gas costs and protect against an adverse impact on margins due to increases in natural gas costs.

Pursue New Market Opportunities

Terra will pursue new market opportunities such as those presented as a result of recent environmental regulations promoting the use of ammonia to clean airborne pollutants emitted by power generating plants. We believe these regulations could increase the annual demand for ammonia by up to 2 million tons, or 13% of total U.S. capacity, by 2012. Terra is working with customers, including power producers, to provide the nitrogen products, storage facilities and handling expertise they need for these purposes.

Maintain Leadership Positions in Our Key Products

Terra intends to maintain its leading market positions in its key markets by focusing on being a reliable, low-cost supplier of our products to our existing customers and by identifying new customers and end markets for our products.

Reduce Financial Leverage

Terra’s primary financial strategy is to use operating cash flows to reduce net debt balances and/or issue new equity to finance opportunities expected to improve operating cash flows.

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Nitrogen Business Segment

Terra is a leading producer and marketer of nitrogen products, principally fertilizers. We upgrade a significant portion of the ammonia that we produce into other nitrogen products, such as urea, ammonium nitrate (AN) and urea ammonium nitrate (UAN). Ammonia, urea and UAN are the principal nitrogen products we produce and sell in North America. Terra produces and sells primarily ammonia and AN in the U.K. Other important products that we manufacture in both the U.S. and U.K. include nitric acid and carbon dioxide. These products, along with a portion of our ammonia and urea production, are used as non-agricultural industrial feedstocks.

Although these different nitrogen 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 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 appropriate storage, handling and application equipment. Terra’s nitrogen products are described in greater detail below.

Ammonia

Ammonia is the simplest form of nitrogen fertilizer and is the feedstock for the production of other nitrogen fertilizers, including urea, AN and UAN. Ammonia is also widely used in industrial applications. 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 UAN or urea because of the need for specialized application equipment and the lack of application flexibility.

Urea

Terra produces urea for both the fertilizer and animal feed markets by converting ammonia and carbon dioxide into liquid urea, which can be further processed into a solid, granular form. Urea is also used in industrial applications. 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.

Ammonium Nitrate

Terra 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 the preferred fertilizer in the British agricultural market.

Urea Ammonium Nitrate

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. Because of its high water content, UAN is relatively expensive to transport, making this largely a regionally distributed product.

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

Manufacturing Facilities

Terra’s eight fertilizer manufacturing facilities 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 our nitrogen products manufacturing facilities was 91%, 97% and 81% in 2003, 2002 and 2001, respectively. Our capacity utilization was reduced in 2003 and 2001, reflecting several plant shutdowns due to natural gas prices increasing faster than nitrogen prices. Capacity utilization increased in 2002 due to lower gas price, high production rates, good plant reliability, and reduced shutdowns for planned maintenance.

Terra owns all of its manufacturing facilities, unless otherwise indicated below. (See “Methanol Business Segment—Manufacturing Facilities” for a description of our Beaumont, Texas facility.)

The Verdigris, Oklahoma facility is one of the largest UAN production facilities in North America. Located at the Verdigris, Oklahoma facility are two ammonia plants, two nitric acid plants, two UAN plants and a port terminal. Terra owns the plants, while the port terminal is leased from the Tulsa-Rogers County Port Authority. The leasehold interest on the port terminal is scheduled to expire in April 2004, and Terra has an option to renew the lease for an additional five-year term. We also have UAN upgrading capability at our facilities in Port Neal, Iowa; Courtright, Ontario; Woodward, Oklahoma and Blytheville, Arkansas.

Terra believes it has some of the most efficient UAN plants in North America, including three of the five lowest-cost plants in terms of delivered cost to end-users. The location of our Port Neal, Iowa and Courtright, Ontario plants, with low-cost access to nearby Corn Belt markets, allows these plants to be among the most efficient in North America as measured by delivered cost to the end-user. Because of UAN’s relatively high transportation costs due to its water content, there is less competition from importers than for ammonia or urea. Four of our facilities are able to provide UAN locally by truck which also offers a competitive advantage in serving agricultural customers due to the high cost of transporting UAN.

The Blytheville, Arkansas facility consists of an ammonia plant, a granular urea plant and a UAN plant. The ammonia plant is leased from the City of Blytheville at a nominal annual rate. The ammonia plant lease is scheduled to expire in November 2009, and we have an option to extend the lease for eleven successive terms of five years each at the same rental rate. Terra has an unconditional option to purchase the plant for a nominal price at the end of the lease term (including any renewal term). The urea plant is also leased from the City of Blytheville. The urea plant lease is scheduled to expire in November 2005,

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and we have an option to extend the lease for three successive terms of five years each at the same rental rate. Terra also has a similar, unconditional option to purchase the urea plant for a nominal price. During 2003, management concluded that future market conditions may not justify the ongoing investment in maintenance and replacement capital necessary to extend operations for the remainder of the facility’s established useful life and a $53.1 million impairment charge was recorded. The facility is currently in production and is expected to be operating at least through April 2004.

Marketing and Distribution

The principal customers for Terra’s North American manufactured nitrogen products are independent dealers, national retail chains, cooperatives and industrial customers. Industrial customers accounted for approximately 24% of Terra’s North American nitrogen product revenues in 2003. At December 31, 2003, we had contracted to sell 14% of our 2004 scheduled nitrogen production at prices indexed to published sources.

Terra’s production facilities, combined with significant storage capacity at over 52 locations throughout the major fertilizer consuming regions of the U.S. and Canada, position Terra to respond competitively to demand in our markets. This is a distinct advantage over imports, which face logistical challenges and higher costs in transporting product to end-users in a timely fashion.

Terra U.K. sales are divided about equally between agricultural and industrial customers. Terra engages merchants and buying groups to sell its Nitram brand bagged AN fertilizer directly to British farmers. AN is also bagged for other U.K. suppliers and sold in bulk to suppliers who blend it with potash and phosphates, bag it and distribute it to farmers. A small quantity of AN is exported to continental Europe.

Terra U.K.’s industrial products include ammonia, nitric acid, and liquid carbon dioxide. Most industrial sales are to customers where Terra has a freight advantage.

Methanol Business Segment

Product

Terra is the leading U.S. producer of merchant methanol. Methanol is used as a feedstock to produce chemical products such as formaldehyde, acetic acid and a variety of chemical intermediates. Another major market for methanol is as a feedstock in the production of MTBE, an oxygenate used as an additive in reformulated gasoline and as an octane enhancer in non-reformulated gasoline.

Manufacturing Facilities

Terra has two U.S. facilities that produce methanol. Our Beaumont, Texas facility is the largest methanol production plant in the U.S., with 225 million gallons of annual methanol production capacity. This plant produced 204 million, 235 million and 235 million gallons of methanol in 2001, 2002 and 2003, respectively. The Woodward, Oklahoma facility produced 31.5 million, 33.8 million and 33.8 million gallons of methanol in 2001, 2002 and 2003, respectively, and has an annual methanol production capacity of 40 million gallons.

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Terra owns the plant and processing equipment at the Beaumont facility. The land is leased from E. I. DuPont de Nemours and Company (“DuPont”) for a nominal annual rate under a lease agreement which expires in 2090. Because the Beaumont facility is entirely contained within an industrial complex owned and operated by DuPont, Terra depends on DuPont for access to the facility as well as certain essential services. Most of the finished methanol product is shipped to customers through wharf facilities located on DuPont property. Terra depends on DuPont for access to the pipelines used to transport methanol and to obtain natural gas, as well as for certain utilities, wastewater treatment facilities and other essential services.

Marketing and Distribution

During December 2003, Terra entered into contracts with Methanex providing it exclusive rights to purchase or market all of Terra’s methanol production as discussed more fully in the previous Business Overview section.

Nitrogen Industry Overview

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 as it promotes protein formation and is a major component of chlorophyll, which helps to promote green healthy growth and high yields. There are no 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 as 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 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.

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.

Supply

Increased ammonia prices in 1995 led to capacity expansion projects globally that resulted in capacity growth that was, in the short term, substantially greater than demand, causing a structural imbalance in ammonia supply and demand. In addition, foreign government support for domestic production in India, China and the former Soviet Union, has kept uneconomical plants running, further increasing supply.

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This new global capacity has been partially offset by permanent plant closings in the U.S. and Europe since 1998. Recent increases in natural gas costs in many regions of the world has forced temporary plant closures which, in addition to permanent plant closures, have provided support for nitrogen prices.

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 of close proximity 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.

Methanol Industry Overview

Overview

Methanol is a liquid made primarily from natural gas and is used as a feedstock in the production of formaldehyde, acetic acid, MTBE, and a variety of other chemical intermediates which form the foundation of a large number of secondary derivatives. Formaldehyde is used to produce urea-formaldehyde and phenol-formaldehyde resins, which are used as wood adhesives for plywood, particleboard, oriented strand board, medium-density fiberboard and other engineered wood products. In addition, formaldehyde is also used in the manufacture of elastomers, paints, foams, polyurethane and automotive products. Acetic acid is used as a chemical intermediate to produce adhesives, paper, paints, plastics, resins, solvents, and textiles. MTBE, an oxygenate and octane enhancer, is used to reduce hydrocarbon and carbon monoxide emissions from motor vehicles. Chemical intermediates are used to manufacture de-icer and windshield fluid, antifreeze, herbicides, pesticides, and poultry feed products.

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 as demand rises and exceeds supply until increased prices justify new plant investments or the re-start of idled capacity. However, the expanding number of different uses for methanol and its derivatives over the last several years has resulted in the methanol industry becoming more complex and subject to increasingly diverse influences on supply and demand.

Demand

Due to an increasing range of end uses for methanol, demand has tended to move with the general level of economic activity in methanol’s major markets. The significant use of methanol for the production of chemicals used in the building products industry means that building and construction cycles are important factors in determining demand for methanol-based chemicals.

MTBE accounts for over 25% of global demand for methanol. MTBE is considered the preferred oxygenate by the refining industry and its production has grown rapidly until 2003. Initiatives in California and other states resulted in regulations that prohibit the addition of MTBE to gasoline beginning in 2003.

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Supply

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 from major markets. Industry analysts have identified approximately 7.0 million metric tonnes of new methanol capacity (20% of current global demand) that will start up from 2004 through 2006.

Credit

Our 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. Bad debt writeoffs have been less than $1.5 million annually for each of the past three years.

Seasonality and Volatility

The fertilizer business is 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 fall 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 North America and the U.K.;

• Current and projected grain inventories and prices, which are heavily influenced by U.S. exports and worldwide grain markets; 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.

Price spikes in North American natural gas markets prompted industry-wide curtailment of both nitrogen fertilizer and methanol production in 2003 and 2001. We substantially reduced our North American production rates at the end of February through March 2003 due to high natural gas costs. During 2001, most of our North American production was idled for the month of January due to high natural gas costs. There were no shutdowns in 2002 driven by natural gas costs.

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.

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Raw Materials

The principal raw material used to produce manufactured nitrogen products and methanol is natural gas. Natural gas costs in 2003 accounted for about 66% of total costs and expenses for our North American nitrogen products business, 44% of total costs and expenses for our U.K. nitrogen products business, and 72% of total costs and expenses associated with our methanol business. We believe there is 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.

Terra’s natural gas hedging policy is to fix or cap the price of 20% to 80% of our natural gas requirements for a rolling 12-month period, and up to 50% of our natural gas requirements for the subsequent 24-month period, provided that such arrangements would not result in costs greater than expected selling prices for our finished products. Departures from policy are permitted with the approval of the Board of Directors. Capping natural gas prices is accomplished through various supply contracts, financial derivatives and other instruments. A significant portion of the global nitrogen products production occurs at facilities with access to fixed-priced natural gas supplies. These facilities’ natural gas costs have been and likely will continue to be substantially lower than Terra’s.

If natural gas prices rise, we may benefit from our use of forward-pricing techniques. Conversely, if natural gas prices fall, we may incur costs above the then-available spot market price. The settlement dates of forward-pricing contracts coincide with gas purchase dates. 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. We use approximately 50 liquid, dry and anhydrous ammonia fertilizer terminal storage facilities in 18 U.S. states and one Canadian province.

Railcars are the major mode of transportation at our North American manufacturing facilities. Terra leases approximately 2,100 railcars. Terra also owns 10 nitric acid railcars. In the U.K., Terra’s AN production is transported primarily by contract carrier trucks, and ammonia production is transported primarily by pipelines that we own.

Terra transports purchased natural gas to our 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. We transport purchased natural gas for both our Port Neal, Iowa and Blytheville, Arkansas facilities 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.

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Research and Development

We are currently not undertaking any significant, ongoing research and development efforts.

Competition

The industries in which Terra operates are highly competitive. Competition in agricultural input markets takes place largely on the basis of price, reliability of supply, 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 that a plant negotiates 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 include a large farm cooperative and other independent fertilizer companies. In addition, 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. Importers face higher transportation costs, which reduce their advantage of inexpensive natural gas.

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. Industry analysts have identified approximately 7.0 million metric tonnes of new foreign methanol capacity (20% of current global demand) that will start up from 2004 through 2006.

Nitrogen sales are made through independent retailers, resellers, farmer co-operatives affiliated dealer organizations and brokers. Methanol sales are conducted through Methanex as described in the preceding Business Overview section.

Environmental and Other Regulatory Matters

Terra’s operations are subject to various federal, state and local environmental, health and safety laws and regulations, including laws relating to air quality, hazardous and 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,

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transportation and worker health and safety. We are 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. We take 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 a potentially responsible party (“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 releases of acidic metal-bearing solutions from past copper mining and production facilities. The remedial actions are governed by a 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) and Inspiration (collectively with us, the “Group”). The Group’s members are jointly and severally financing and performing the work, but Inspiration no longer owns assets at the Pinal Site. Also, the Group has filed an action for cost-recovery against other former owners and operators at the Pinal Site. In a related matter, residents in an area of the Pinal Site brought a class action against the Group seeking property damages and medical monitoring for potential personal injuries allegedly related to the acidic metal-bearing groundwater. All claims have been settled, although plaintiffs reserved the right to assert personal injury claims individually. After consideration of such factors as the number of PRPs and levels of financial responsibility, including the ongoing litigation, claims against historic insurance carriers, and contractual indemnities, we believe that our liability with respect to these matters will not be material. Existing contractual indemnities may be subject to legal challenge, however, and there can be no guarantee that they will be upheld or sufficient to cover all costs, or that material expenditures will not be incurred for these matters.

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 we have retained liability. We do not believe that such environmental costs and liabilities will have a material effect on our results of operations, financial position or net cash flows.

With respect to our Verdigris and Blytheville facilities, Freeport-McMoRan Resource Partners, Limited Partnership (a former owner and operator of these facilities) retained liability for certain environmental matters. With respect to our Beaumont 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 in 1991. Likewise, with respect to our Billingham and Severnside, England facilities, the seller, ICI, indemnified us, 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.

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Terra may be required to install additional air and water quality control equipment, such as low NOx burners, scrubbers, ammonia sensors and continuous emission monitors, at certain facilities in order to maintain compliance with applicable environmental requirements. We estimate that the cost of additional equipment to comply with these requirements in 2004 and the next two years will be less than $10 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. We do not expect our compliance with such regulations to have a material adverse effect on our results of operations, financial position or net cash flows. However, there can be no guarantee that new regulations will not result in material costs.

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 2001-2003 appear in Item 8.

Employees

We had 1,138 full-time employees at December 31, 2003, with all 407 U.K. employees covered by a wage and working conditions arrangement similar to a collective bargaining agreement.

ITEM 3. LEGAL MATTERS

Terra Nitrogen (U.K.) Limited was found liable for damages, plus interest and attorney fees, associated with May 1998 recalls of carbonated beverages containing carbon dioxide tainted with benzene. Appeals against those judgments were unsuccessful. Management estimated total claims against Terra from these lawsuits may be £10 million, or $14 million in 2001 when Terra established reserves to cover estimated losses. Terra’s insurer denied coverage under Terra’s insurance policy and Terra was required to pay the beverage manufacturers’ claims with its own funds.

Terra filed suit against its insurer in U.S. District Court in Sioux City, Iowa seeking a declaration of insurance coverage and reimbursement of the claim payments. In August 2002, the court granted summary judgment in Terra’s favor and ordered the insurer to pay the claims. The U.S. Court of Appeals for the Eighth Circuit affirmed the district court’s decision in October 2003 and later denied a motion by the insurer for a rehearing. Terra’s insurer is seeking an appeal to the U.S. Supreme Court. Management will continue to pursue Terra’s rights against the insurer and will not modify the product claim cost reserve from the insurer’s reimbursement of the claims until final resolution of the matter.

On January 29, 2003, an Arizona jury awarded $10.1 million in damages and subsequently, $1.1 million in attorney fees to a former Terra employee whose distribution and crop consulting business Terra acquired in 1997. The plaintiff alleged bad faith and fraud against Terra in connection with the sale of his business to Terra. On June 6, 2003, Terra filed an appeal of the judgment with the Arizona Court of Appeals. Both parties have filed opening briefs. Oral argument on the appeal has not yet been scheduled.

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We are involved in various other legal actions and claims, including environmental matters, arising from the normal course of business. While it is not possible to predict with certainty the final outcome of these proceedings, we do not believe that these matters, the U.K. benzene claims, or the Arizona business purchase litigation will have a material adverse effect on our 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 2003.

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:

Name	Present positions and offices with the Company and principal occupations during the past five years
Michael L. Bennett	President and Chief Executive Officer of Terra since April 2001; Executive Vice President and Chief Operating Officer of Terra from February 1997 to April 2001; President and Chief Executive Officer of Terra Nitrogen Division since June 1998. Age 50.
Joseph D. Giesler	Vice President of Industrial Sales and Operations of Terra since December 2002; Global Director, Industrial Sales of Terra from September 2001 to December 2002; Director of Marketing of Terra from June 2000 to August 2001; Director of Western Division of Terra from July 1998 to May 2000; Regional Manager of Terra from February 1996 to July 1998. Age 45.
Mark A. Kalafut	Vice President, General Counsel and Corporate Secretary of Terra since June 2001; Vice President and Associate General Counsel of Terra from April 1997 through June 2001. Age 50.
Francis G. Meyer	Senior Vice President and Chief Financial Officer of Terra since November 1995. Age 51.
W. Mark Rosenbury	Senior Vice President and Chief Administrative Officer of Terra since August 1999; Vice President, European Operations of Terra and Managing Director of Terra Nitrogen U.K. from January 1998 to August 1999. Age 56.
Richard S. Sanders Jr.	Vice President, Manufacturing of Terra since August 2003; Plant Manager, Verdigris, OK manufacturing facility from 1995 to August, 2003. Age 46.
Wynn S. Stevenson	Vice President, Taxes and Corporate Development of Terra since May 1998. Age 49.

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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

The main markets in which Terra’s common shares trade are the NYSE and the TSE. 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
2003
Common Share Price:
High	$	1.77	$	1.69	$	2.23	$	3.55
Low		1.06		1.07		0.97		1.88
2002
Common Share Price:
High	$	3.97	$	2.99	$	2.23	$	2.05
Low		2.40		1.76		1.45		1.53

As of March 1, 2004 there were approximately 3,440 record holders of Terra’s common stock.

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ITEM 6. SELECTED FINANCIAL DATA

Financial Summary

(in thousands, except per-share and employee data)	2003			2002			2001			2000			1999
Financial Position
Working capital	$	132,948		$	85,902		$	136,378		$	199,008		$	152,959
Total Assets		1,125,062			1,128,110			1,336,043			1,512,552			1,601,445
Long-term debt		402,206			400,358			436,534			473,354			480,461
Stockholders’ equity		265,131			257,864			500,779			610,797			657,002
Results of Operations
Revenues	$	1,351,055		$	1,043,983		$	1,037,310		$	1,063,010		$	833,443
Costs and expenses		(1,374,615	)		(1,049,390	)		(1,099,128	)		(1,020,203	)		(896,485	)
Insurance settlement costs		—			—			—			(5,968	)		—
Interest income		534			543			3,364			3,869			8,361
Interest expense		(55,072	)		(53,800	)		(53,594	)		(51,511	)		(53,076	)
Minority interest		8,617			1,510			2,247			(5,379	)		(8,341	)
Loss on early retirement of debt		—			—			(3,042	)		—			(15,188	)
Income tax benefit		57,000			24,000			33,000			6,000			51,923
Loss from continuing operations		(12,481	)		(36,174	)		(79,843	)		(10,182	)		(79,363	)
Loss from discontinued operations		—			(16,183	)		—			—			(10,524	)
Cumulative effect of change in accounting principle		—			(205,968	)		—			—			—
Net Loss	$	(12,481	)	$	(258,325	)	$	(79,843	)	$	(10,182	)	$	(89,887	)
Basic and Diluted Loss Per Share:
Continuing operations	$	(0.16	)	$	(0.48	)	$	(1.06	)	$	(0.14	)	$	(1.06	)
Discontinued operations		—			(0.22	)		—			—			(0.14	)
Cumulative effect of change in accounting principle		—			(2.73	)		—			—			—
Net Loss	$	(0.16	)	$	(3.43	)	$	(1.06	)	$	(0.14	)	$	(1.20	)
Dividends Per Share	$	—		$	—		$	—		$	—		$	0.07
Capital Expenditures	$	8,639		$	25,186		$	14,838		$	12,219		$	51,899
Full-time employees at end of period (unaudited)		1,138			1,207			1,248			1,279			1,351

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

We produce and market nitrogen products for agricultural and industrial markets with production facilities located in North America and the United Kingdom. Nitrogen products are commodity chemicals that are sold at prices reflecting global supply and demand conditions. 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. In order 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.

In recent periods, high nitrogen margins in 1995 led to capacity expansion projects globally that resulted in capacity increases that were, in the short term, substantially greater than demand growth, causing oversupply conditions that reduced nitrogen prices. Since 1998, that new global capacity has been partially offset by demand growth as well as permanent plant closings in the U.S. and Europe but, nonetheless, the industry generally has remained in an oversupply situation.

Natural gas is the most significant raw material in the production of nitrogen products. North American natural gas costs have increased substantially since 1999. Since we compete with nitrogen products imported from regions with lower natural gas costs, we and other North American producers have not been able to increase selling prices to levels necessary to cover the natural gas cost increases. This resulted in curtailments of North American nitrogen production by Terra and other producers. These curtailments contributed to reductions in global nitrogen product supplies. Our United Kingdom operations benefited from the reduction in global supplies and also realized higher selling prices, but incurred natural gas costs lower than those in North America.

Imports, most of which are produced at facilities with access to fixed-price 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 the point of entry for imports, including the Gulf Coast and East Coast of North America. Our sales volumes depend primarily on our plants’ operating rates. We may purchase product from other manufacturers or importers for resale, but gross margins on those volumes are rarely significant. Profitability and cash flows from our nitrogen products business are affected by our ability to manage our costs and expenses (other than natural gas), most of which do not materially change for different levels of production or sales. Other factors affecting our nitrogen products results include the level of planted acres, transportation costs, weather conditions (particularly during the planting season), grain prices and other variables described in Items 1 and 2 “Business and Properties” of this report.

We also produce methanol in the U.S. Like 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. Industry analysts have identified approximately 7.0 million metric tonnes of new methanol capacity (20% of current global demand) that should start up from 2004 through 2006 in regions with low

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natural gas costs. U.S. methanol demand has declined over the past year and is expected to continue to decline due to reduced U.S. consumption of MTBE, a gasoline oxygenate and octane enhancer that uses methanol as a feedstock. In December 2003, we entered into contracts with the Methanex Corporation (“Methanex”) assigning it our sales contracts and providing it exclusive rights to all methanol production at the Beaumont facility for five years as more fully described in Items 1 and 2 “Business and Properties” of this report.

Overview of Consolidated Results

Terra reported net losses of $12 million in 2003, $258 million in 2002 and $80 million in 2001 with a loss per share of $0.16, $3.43 and $1.06, respectively. Revenues from continuing operations totaled $1,351 million in 2003, $1,044 million in 2002 and $1,037 million in 2001.

Our 2002 net loss included a $206 million charge for the cumulative effect of a change in accounting for goodwill ($2.73 per share) and a $16 million loss from discontinued operations ($0.22 per share). At the beginning of 2002, we implemented Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” and determined that $206 million of assets classified as “excess of cost over net assets of acquired businesses” suffered impairment and had no value. The loss from discontinued operations was for a $25 million increase to reserves for discontinued operations, net of a $9 million income tax benefit. Approximately $13 million of the charge was attributable to discontinued coal operations in response to higher-than-expected retiree health care costs and increased payments to union funds for which the company is contingently liable under the Coal Industry Retiree Health Benefit Act of 1992. The remaining $12 million was provided to cover a jury award of $10 million to an individual employed by Terra’s distribution business that was sold in 1999 and to provide reserves against notes receivable and other assets associated with previously discontinued operations.

The net loss from continuing operations was $12 million in 2003, $36 million in 2002 and $80 million in 2001. During 2003, we recorded a $27.0 million net charge for the impairment of our Blytheville facility (representing a $53.1 million impairment charge to operating income less $9.9 million allocated to minority interest and $16.2 million of income tax benefit). The 2003 net loss was reduced by approximately $36.4 million of income tax benefits for a reduced assessment by a foreign taxing authority and reversals of tax reserves that had been provided in prior years. The 2001 net loss from continuing operations included $18.8 million of goodwill amortization that did not recur in subsequent years because of an accounting change and $8.4 million (net of $5.6 million in related income tax benefits) of product recall costs. Other fluctuations to our net loss from continuing operations for 2001 through 2003 are primarily related to changes in the selling prices of nitrogen products and methanol and changes in the cost of natural gas, our primary raw material.

Factors That Affect Operating Results

Factors that may affect our 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 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 our 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.

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The principal raw material used to produce nitrogen products and methanol is natural gas. Natural gas costs in 2003 accounted for about 66% of total costs and expenses for our North American nitrogen products business, 44% of total costs and expenses for our U.K. nitrogen products business and 72% of total costs and expenses for our methanol business. A significant increase in the price of natural gas that is not hedged or recovered through an increase in the price of our nitrogen and methanol products would have an adverse effect on our business, financial condition and results. During parts of 2001 and 2003, price spikes in North American natural gas markets prompted industry-wide curtailments of nitrogen production. We produced only 81% and 91% of our total nitrogen capacity in 2001 and 2003, respectively, because of plant shutdowns and production curtailments related to high natural gas costs and to balance inventory levels with demand. During 2001, we produced only 89% of our methanol capacity for similar reasons. 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 our natural gas.

We enter into forward pricing contracts for some of our natural gas requirements, so long as such arrangements would not result in costs greater than expected for selling prices for our finished products. Our current natural gas forward pricing policy is to fix or cap the price of between 20% and 80% of our natural gas requirements for a rolling 12-month period and up to 50% of our natural gas requirements for the subsequent 24-month period through supply contracts, financial derivatives and other instruments. We notify the Board of Directors when we deviate from the policy. December 31, 2003 forward positions covered 25% of our expected 2004 natural gas requirements and none beyond.

The global supply and demand balance for ammonia and other nitrogen-based products influences prices for Terra’s nitrogen 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. For example, 2001 demand was reduced, in part, due to relatively high nitrogen prices and low 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.

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, will significantly affect demand for methanol.

Weather can have a significant effect on demand for our 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 our sales. 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 for crop inputs purchased from our dealer customers.

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Our nitrogen business segment is seasonal, with more nitrogen products consumed 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 customers consume nitrogen products, our customers and we generally build inventories during the second half of the year in order to ensure product availability during the peak sales season. For our current level of sales, we require lines of credit to fund inventory increases and to support customer credit terms. We believe that our credit facilities are adequate for expected production levels in 2004.

Our manufacturing operations may be subject to significant interruption if one or more of our facilities were to experience a major accident or were damaged by severe weather or other natural disaster. We currently maintain insurance, including business interruption insurance, which we believe is sufficient to allow us to withstand major damage to any of our facilities.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America for reporting purposes. The preparation of these financial statements requires us to make estimates and judgments that affect the amount of assets, liabilities, revenues and expenses at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that reflect significant judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. Our critical accounting policies are described below.

Impairment of Long-Lived Assets

We will record impairment losses on long-lived assets used in operations when events and circumstances indicated that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of these items. Our cash flow estimates are based on historical results adjusted to reflect our best estimate of future market and operating conditions. The net carrying value of assets not recoverable is reduced to fair value. Our estimates of fair value represent our best estimate based on industry trends and reference to market rates and transactions. Estimates of future cash flows are subject to significant uncertainties and assumptions. Accordingly, actual results could vary significantly from such estimates. During 2003, events occurred that necessitated an evaluation of recoverability of assets at our Blytheville and Beaumont facilities.

On June 26, 2003, we suspended production at our Blytheville facility due to expectations that the facility would not cover its cash costs because of continuing high natural gas costs and the seasonal decline in nitrogen fertilizer demand and prices. In response to this action and as required by Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, we commenced a review to determine if the Blytheville facility’s carrying value was impaired. This review led us to conclude that future market conditions may not justify the ongoing investment in maintenance and replacement capital necessary to extend operations for the remainder of the facility’s useful life. Accordingly a $53.1 million charge was recorded during the second quarter as an “Impairment of

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long-lived assets”. While the plant’s value is permanently impaired, we resumed production in October 2003 in response to higher urea selling prices and improved seasonal demand. We anticipate $4.0 to $6.0 million of spending will be required when the facility is permanently idled.

At December 31, 2003, the Beaumont facility had a carrying value, net of $25 million of deferred revenues, of about $115 million. We estimated the remaining useful life of this facility at 15 years assuming normal investment in maintenance and replacement capital throughout this period. Our estimated cash flows over this period, based on our best estimate of future market and operating conditions at December 31, 2003, exceeded the carrying value of these assets and consequently, no impairment charge was recorded for the Beaumont facility. These cash flow estimates are subject to significant uncertainties and assumptions. Consequently, actual results for the Beaumont facility could vary substantially from such estimates.

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. Our pension liabilities were $260 million at December 31, 2003, which was $95 million higher than pension plan assets. The December 31, 2003 liability was computed based on an average 5.8% discount rate, which was based on yields for high-quality corporate bonds with a maturity approximating the duration of our pension liability. Declines in comparable bond yields would increase our pension liability. Our 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.

Post-Retirement Benefits

Post-retirement benefits are determined on an actuarial basis and are affected by assumptions including the discount rate and expected trends in health care costs. Changes in the discount rate and differences between actual and expected health care costs will affect the recorded amount of post-retirement benefits expense ultimately recognized.

Revenue Recognition

Revenue is recognized when title to finished product passes to the customer. Revenue is recognized as the net amount to be received after deducting estimated amounts for discounts and trade allowances. Revenue includes amounts paid by customers for shipping and handling.

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 our net operating losses. We regularly review deferred tax assets for recoverability and reduce them if we can not sufficiently determine that they will be realized. We base this determination on projected future taxable income and the expected timing of the reversals of existing temporary differences.

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At December 31, 2003, deferred tax assets representing future benefits for our U.S. net operating loss carryforwards totaled $133 million. We have not generated U.S. taxable income since 1997 and, in consideration of the substantial increases to North American natural gas costs since 1999, we do not have a basis to conclude that future taxable earnings are likely to be available to utilize benefits associated with loss carryforwards. Accordingly, at December 31, 2003 for U.S. operations, we have reduced our deferred tax assets to equal net deferred tax liabilities. Further, we do not expect to recognize additional U.S. tax benefits for future losses until we realize taxable income or generate additional deferred tax liabilities for temporary differences. If there is a material change in the effective tax rates or time period when temporary difference become taxable or deductible, we may have to additionally reduce all or a significant portion of our deferred tax assets.

Inventory Valuation

Inventories are stated at the lower of cost and estimated net realizable value. The average cost of inventories is determined by using the first-in, first-out method. The nitrogen and methanol industries are characterized by rapid change in both demand and pricing. Rapid declines in demand could result in temporary or permanent curtailment of production, while rapid declines in price could result in a lower cost or market adjustment.

Derivative and Financial Instruments

Terra accounts for derivatives in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133 “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 133 requires the recognition of derivatives in the balance sheet and the measurement of these instruments at fair value. Changes in the fair value of derivatives are recorded in earnings unless the normal purchase or sale exception applies or hedge accounting is elected.

Terra enters into derivative instruments including future contracts, swap agreements, and purchased options to cap or fix prices for a portion of natural gas production requirements. Terra has designated, documented and assessed accounting hedge relationships, which mostly resulted in cash flow hedges that require the recording of the derivative assets or liabilities at their fair value on the balance sheet with an offset in other comprehensive income. Amounts are removed from other comprehensive income as the underlying transactions occur and realized gains or losses are recorded.

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RESULTS OF CONTINUING OPERATIONS—2003 COMPARED WITH 2002

Consolidated Results

We reported a 2003 loss from continuing operations of $12.5 million on revenues of $1,351 million compared with a loss from continued operations of $36.2 million on revenues of $1,044 million in 2002. Basic and diluted loss per share from continuing operations for 2003 was $0.16 compared with $0.48 for 2002. The 2003 net loss included a $27.0 million net charge for the impairment of our Blytheville facility (representing a $53.1 million impairment charge to operating income less $9.9 million allocated to minority interest and $16.2 million of income tax benefit). The 2003 net loss was reduced by approximately $36.4 million of income tax benefits for a reduced assessment by a foreign taxing authority and reversals of tax reserves that had been provided in prior years.

We classify our operations into two business segments: Nitrogen Products and Methanol. The Nitrogen Products segment represents the sale of nitrogen products including that produced at our ammonia manufacturing and upgrading facilities. The Methanol segment represents wholesale sales of methanol including that produced at our two methanol manufacturing facilities.

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Total revenues and operating income (loss) by segment for the years ended December 31, 2003 and 2002 follow:

(in thousands)	2003			2002
Revenues:
Nitrogen products	$	1,139,379		$	883,971
Methanol		209,870			158,458
Other revenues		1,806			1,554
	$	1,351,055		$	1,043,983
Operating Income (Loss):
Nitrogen products	$	33,721		$	(9,351	)
Impairment of long-lived assets (nitrogen products)		(53,091	)		—
Methanol		1,866			7,325
Other expense—net		(6,056	)		(3,381	)
	$	(23,560	)	$	(5,407	)

Nitrogen Products

Volumes and prices for 2003 and 2002 follow:

Volumes and Prices	2003			2002
(quantities in thousands of tons)	Sales Volumes	Average Unit Price*		Sales Volumes	Average Unit Price*
Ammonia	1,400	$	229	1,504	$	147
Nitrogen solutions	3,840		99	3,966		73
Urea	545		173	633		121
Ammonium nitrate	934		142	912		119

* After deducting outbound freight costs

Nitrogen products revenues increased by $255 million to $1,139 million for 2003 compared with $884 million in 2002 as the result of higher sales prices, partially offset by lower sales volumes. Sales prices were higher as the result of lower fertilizer supplies caused by increased demand and industry-wide production curtailments. Sales volumes in 2003 were lower than the previous year due to our own production curtailments including a decision to suspend production during the 2003 third quarter at the Blytheville facility because of high natural gas costs and the seasonal decline in nitrogen fertilizer demand and prices.

Higher selling prices contributed $265 million to 2003 results and were only partially offset by higher natural gas costs. Natural gas costs increased $228 million from 2002 as unit costs, net of forward pricing gains and losses, were $4.76 per million British thermal units (“MMBtu”) during 2003 compared to $3.03/MMBtu during 2002. As a result of forward price contracts, 2003 natural gas costs for the nitrogen products segment were $5.4 million higher than spot prices.

Impairment of Long-Lived Assets

On June 26, 2003, we suspended production at our Blytheville facility due to expectations that the facility would not cover its cash costs because of continuing high natural gas costs and the seasonal decline in

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nitrogen fertilizer demand and prices. In response to this action and as required by Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, a $53.1 million charge was recorded during the second quarter as discussed more fully above under “Critical Accounting Policies”.

Methanol

Methanol revenues were $210 million and $158 million for the years ended December 31, 2003 and 2002, respectively. Sales prices increased from $0.49/gallon in 2002 to $0.71/gallon in 2003, but sales volumes declined 10% from 2002 to 295 million gallons. The sales decline was due, in part, to production outages related to a scheduled plant turnaround.

The methanol segment generated $1.9 million operating income in 2003 compared to $7.3 million operating income in 2002. The lower 2003 operating income reflects increased costs and lower volumes, only partially offset by higher prices. The major cost increase was to natural gas costs which, net of $1.5 million of cost increases from forward pricing contracts, were $5.16/MMBtu for 2003 compared to $3.08/MMBtu for 2002.

Other Operating Activities—Net

We had $6.1 million of losses from other operating activities in 2003 compared to $3.4 million in 2002. These losses represent charges for amortization of deferred financing costs and legal fees related to general corporate activities not allocable to any particular business segment. The increased 2003 loss from 2002 was primarily due to amortization of financing costs on the 2003 refinancing of Senior Notes due in 2005.

Interest Expense—Net

Net interest expense was $54.5 million in 2003 compared with $53.3 million in 2002. The increased interest expense primarily related to higher interest rates paid on the 2003 refinancing of Senior Notes due in 2005.

Minority Interest

Minority interest represents interest in the earnings of the publicly held common units of Terra Nitrogen Company, L.P. (TNCLP). Minority interest benefits of $8.6 million were recorded in 2003 as the result of TNCLP losses, which included an impairment charge for the Blytheville facility, that were included in their entirety in consolidated operating results. The 2002 minority interest charge of $1.5 million reflected nitrogen earnings for TNCLP, which were included in their entirety in consolidated operating results. These amounts are directly related to TNCLP losses and earnings.

Income Taxes

Income tax benefits were recorded at an effective rate of 82% for 2003 compared with 40% for 2002. The 2003 benefit includes reductions to tax reserves totaling $36.4 million for a reduced assessment by a foreign taxing authority and reversal of tax reserves provided in prior years. These benefits were offset by $0.8 million of income tax provisions that reduced our deferred tax assets to equal net deferred tax liabilities for reasons discussed more fully above under “Critical Accounting Policies”.

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RESULTS OF CONTINUING OPERATIONS—2002 COMPARED WITH 2001

Consolidated Results

We reported a 2002 loss from continuing operations of $36.2 million on revenues of $1,044 million compared with a loss of $79.8 million on revenues of $1,037 million in 2001. Basic and diluted loss per share from continuing operations for 2002 was $0.48 compared with $1.06 for 2001. The decline in the 2002 loss was primarily related to lower natural gas costs, increased sales volumes, the change in accounting that eliminated goodwill amortization and the absence of 2001 product recall costs, partially offset by lower product prices.

Total revenues and operating income (loss) by segment for the years ended December 31, 2002 and 2001 follow:

(in thousands)	2002			2001
Revenues:
Nitrogen products	$	883,971		$	863,512
Methanol		158,458			169,098
Other revenues		1,554			4,700
	$	1,043,983		$	1,037,310
Operating Income (Loss):
Nitrogen products	$	(9,351	)	$	(48,476	)
Methanol		7,325			(11,739	)
Other expense—net		(3,381	)		(1,603	)
	$	(5,407	)	$	(61,818	)

Nitrogen Products

Volumes and prices for 2002 and 2001 follow:

Volumes and Prices	2002			2001
(quantities in thousands of tons)	Sales Volumes	Average Unit Price*		Sales Volumes	Average Unit Price*
Ammonia	1,504	$	147	1,195	$	187
Nitrogen solutions	3,966		73	3,296		97
Urea	633		121	451		142
Ammonium nitrate	912		119	682		127

* After deducting outbound freight costs

Nitrogen products revenues increased by $20 million to $884 million for 2002 compared with $864 million in 2001. Selling prices declined $178 million as the result of increased nitrogen fertilizer supplies in contrast to 2001 when high natural gas costs resulted in industry-wide production curtailments. The revenue shortfall from lower prices was more than offset by higher 2002 volumes compared to 2001. Sales volumes in 2001 were depressed due to lower production rates, reduced demand in response to high prices and increased competition from imports.

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The nitrogen products segment reported operating losses of $9.4 million and $48.5 million in 2002 and 2001, respectively. Most of the improvement to operating results was due to $16.6 million of 2001 goodwill amortization that was eliminated in 2002 through an accounting change (SFAS 142) and $14 million of product claims costs realized during 2001. The remaining improvement to operating results was due to lower natural gas costs and higher production rates, net of declines in selling prices.

The 2002 cost of natural gas, net of $6.3 million of cost decreases from forward pricing contracts, was $122 million lower than in 2001 as unit costs declined to $3.03/MMBtu from $3.93/MMBtu in 2001. During 2002, our nitrogen production was 97% of capacity compared to 81% in 2001 when production was curtailed in response to high natural gas costs, reduced customer demand and increased competition from imports. The higher capacity utilization reduced the average cost of production by spreading fixed costs over increased volumes.

Methanol

Methanol revenues were $158 million compared with $169 million for the years ended December 31, 2002 and 2001, respectively. Sales volumes increased 5% from prior-year levels, to 327 million gallons, but selling prices declined to $0.49 per gallon in 2002 from $0.56 per gallon in 2001.

The methanol segment reported operating income of $7.3 million for 2002 compared to an operating loss of $11.7 million for 2001. The improvement to operating results was primarily due to lower costs and increased volumes that were only partially offset by lower pries. The major cost decrease was to natural gas costs which, net of $3.6 million of cost decreases from forward pricing contracts, declined to $3.08/MMBtu during 2002 from $4.04/MMBtu in 2001. As compared to 2001, the reduction to natural gas costs reduced total 2002 methanol production costs by about $28 million. Other cost declines resulted from lower unit costs for purchased methanol, an increase in production rates from 89% of capacity in 2001 to 101% in 2002 and accounting changes that eliminated goodwill amortization in 2002 (amortization in 2001 was $2.2 million).

Other Operating Activities—Net

We had $3.4 million of losses from other operating activities in 2002 compared to $1.6 million in 2001. These losses represent charges for amortization of deferred financing costs and legal fees related to general corporate activities not allocable to any particular business segment.

Interest Expense—Net

Net interest expense was $53.3 million in 2002 compared with $50.2 million in 2001. Interest expense was $0.2 million higher in 2002; however, interest income declined $2.8 million as the result of lower invested cash and lower interest rates.

Minority Interest

Minority interest represents interest in the earnings of the publicly held common units of Terra Nitrogen Company, L.P. (TNCLP). Minority interest changes totaled $1.5 million in 2002 compared to $2.2 million of minority interest benefits in 2001. These amounts are directly related to TNCLP’s results of operations.

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Income Taxes

Income tax benefits were recorded at an effective rate of 40% for 2002 compared with 29% for 2001. The increase in the 2002 benefit rate reflects the absence of non-deductible goodwill amortization in 2002 and foreign income tax adjustments during 2001.

LIQUIDITY AND CAPITAL RESOURCES

Our primary uses of funds are to fund our working capital requirements, make payments on our debt and other obligations and make plant turnarounds and capital expenditures. The principle sources of funds will be cash flow from operations and borrowings under available bank facilities.

During 2003, cash and short-term investments increased $28.9 million. Net cash provided by operating activities was $82.4 million, which was more than cash used for investing activities, primarily capital expenditures and plant turnaround costs, of $46.3 million. An additional $7.8 million was used in financing activities, primarily for fees in connection with the refinancing of long-term debt obligations.

Net cash provided by 2003 operating activities was $82.4 million, composed of $78.8 million of cash provided from operating activities, $25.0 million of deferred revenue received for the methanol distribution agreement with Methanex, less $21.4 million used by higher working capital needs. Working capital needs primarily consisted of increases to accounts receivable for higher selling prices than the 2002 fourth quarter and reductions to trade accounts payable as the result of lower credit availability from natural gas suppliers. We had $71.9 million in customer prepayments at December 31, 2003 that we anticipate will be satisfied during our first and second quarters.

During 2003 and 2002, we funded plant and equipment purchases of $8.6 million and $25.2 million, respectively, primarily for replacement or stay-in-business capital needs. We expect 2004 plant and equipment purchases to be less than $20 million consisting primarily of expenditures for replacement of equipment at manufacturing facilities.

Plant turnaround costs represent cash used for the periodic scheduled major maintenance of our continuous process production facilities that is performed at each plant generally every two years. We funded $28.1 million and $24.3 million of plant turnaround costs in 2003 and 2002. We estimate 2004 plant turnaround costs will approximate $30 million.

During 2003, we issued $202 million of 11.5% Second Priority Senior Secured Notes due June 1, 2010. The notes were priced at 99.402% to yield 11.625%. They are unconditionally guaranteed by Terra Industries Inc. and its U.S. subsidiaries. These notes and guarantees are secured by a second priority security interest in all domestic inventory, domestic accounts receivable, intellectual property of Terra Industries Inc. and its domestic subsidiaries and certain subsidiary capital stock. 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 investments (other than in Terra Capital, Inc. or any guarantor), use assets as security in other

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transactions, 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 to us, 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. In addition, 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. Offering proceeds were used to repay our 10.5% Senior Notes due in 2005.

During 2001, we issued $200 million of senior secured notes due 2008. These notes will mature on October 15, 2008, bear interest at a rate of 12.875%, payable semi-annually and are unconditionally guaranteed by Terra Industries Inc. and its wholly-owned U.S. subsidiaries. These notes and guarantees are secured by a first priority security interest in our ownership and leasehold interest in substantially all of the real property, machinery and equipment owned or leased by Terra Capital, Inc. and the guarantors and certain other assets. The Indenture governing these notes contains covenants comparable to those contained in the 2010 notes described above. We are also 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. Offering proceeds, existing cash balances and revolving credit lines were used to retire $159 million of senior notes and $99 million of bank term notes due in 2003.

We have a $175 million revolving credit facility that expires in June 2005. 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. At December 31, 2003, borrowing availability exceeded the credit facility’s $175 million maximum. There were no revolving credit borrowings and there were $31.1 million in outstanding letters of credit, resulting in remaining borrowing availability of approximately $143.9 million under the facility. We are required to maintain a minimum unused borrowing availability of $30 million. The credit facility also requires 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. In addition, if our borrowing availability falls below $60 million, we are 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 amount of operating cash flows to measure credit facility compliance is different than amounts that can be derived from Terra’s financial statements. For the 12 months ended December 31, 2003, operating cash flows as defined in the credit facility was $122.1 million.

Our 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 our operating cash needs. Based on current market conditions for our finished products and natural gas, we anticipate that we will be able to meet our covenants through 2004. Nevertheless, if product margins were to be as depressed as during portions of the 2003 first half or if there were to be any adverse changes in the factors discussed above, we may need a waiver of our credit facility covenants and there is no assurance we could receive such waivers.

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Our ability to manage our exposure to commodity price risk in the purchase of natural gas through the use of financial derivatives may be affected by limitations imposed by our bank agreement covenants.

Contractual obligations and commitments to make future payments were as follows at December 31, 2003:

	Payments Due In
(in millions)	Less than One Year		One to Three Years		Three to Five Years		Thereafter
Long-term debt	$	—	$	—	$	200.0	$	202.0
Operating leases		14.7		21.9		12.2		3.6
Capital lease obligations		0.2		0.2		—		—
Purchase obligations		40.5		—		—		—
Total	$	55.4	$	22.1	$	212.2	$	205.6

As of the date of this filing, the following table sets forth the ratings information from Standard and Poor’s Rating Services (“S&P”), Moody’s Investor Services (“Moody’s”) and Fitch, IBCA, Duff & Phelps Ratings (“Fitch”):

	S&P	Moody’s	Fitch
Corporate/Senior Implied	B+	B3	Not applicable
Senior Secured Notes due 2008	B+	B3	B+
Second Priority Senior Secured
Notes due 2010	B-	Caal	B-

A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization. Each rating should be evaluated independently of any other rating.

Our pension liabilities were $260 million at December 31, 2003, which was $95 million higher than our pension plan assets. The pension liability was computed based on a 5.8% 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 our pension liability. Future declines in comparable bond yields would increase our pension liability and future increases in bond yields would decrease our pension liability. Our pension liability 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. Our cash contributions to pension plans were $9 million in 2003 and are estimated at $20 million in 2004, $15 million in 2005 and $7 million in 2006. Actual contributions could vary from these estimates depending on 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 operation costs that totaled $6.2 million in 2003. 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. We do not expect compliance with such regulations will have a material adverse effect on the results of operations, financial position or net cash flows.

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We incurred $1.3 million of 2003 capital expenditures to ensure compliance with environmental, health and safety regulations. We 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. We estimate that the cost of complying with these existing requirements in 2004 and beyond will be less than $20 million.

We own 75.1% of the common units of TNCLP which, in accordance with the partnership agreement, permits us to call all common units that we do not own. We have not yet met the financial tests in our revolving credit agreement required to allow us to call the common units.

During 2003, 2002 and 2001, we distributed $1.2 million, $1.8 million and $2.0 million, respectively, to the minority TNCLP common unitholders. TNCLP distributions are based on “Available Cash” (as defined in the Partnership Agreement).

Cash balances at December 31, 2003 were $87.3 million, all of which is unrestricted.

RECENTLY ISSUED ACCOUNTING STANDARDS

Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations”, was effective for our financial statements as of January 1, 2003. This standard required us to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The adoption of this standard did not have a material effect on our financial statements.

SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”, amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The adoption of this standard did not have an impact on our financial statements.

SFAS No. 149, “Amendments of Statement 133 on Derivative Instruments and Hedging Activities”, amends and clarifies financial accounting for derivative instruments. This standard was effective for our 2003 third quarter and adoption of this standard did not have a material effect on our financial statements.

SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”, establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This standard became effective for contracts entered into after May 31, 2003. The adoption of this standard did not have an effect on our financial statements.

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FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements, Including Indirect Guarantees of Indebtedness of Others”, clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing certain guarantees. FIN 45 also expands the disclosure to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. The provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 became effective for Terra in 2003, and did not impact our financial statements.

FASB Interpretation No. 46 (“FIN 46”), an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, was issued in January 2003. FIN 46 addresses the consolidation of variable interest entities. In December 2003, the FASB issued revised FIN 46 (“FIN 46R”) to clarify provisions of FIN 46 and exempt certain entities from its requirements. If it is reasonably possible that an enterprise will initially consolidate or disclose information about a variable interest entity on December 24, 2003, certain disclosures are required for financial statements issued after December 31, 2003, regardless of the date on which the variable interest entity was created. For an interest entity to which the provisions of FIN 46 have not been applied, it should apply FIN 46R no later than March 31, 2004. This effective date includes those entities to which FIN 46 was previously applied. The provisions of FIN 46R will not impact our financial statements.

FASB Staff Position No. 106-1 (“FSP 106-1”), “Accounting and Disclosure Requirements Related to Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“the Act”) introduces a prescription drug benefit under Medicare (“Medicare Part D”) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. FSP 106-1 permits a sponsor of postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Act. Authoritative guidance on accounting for the federal subsidy is pending and could require a change in previously reported information. Disclosures are required regardless of a change in previously reported information. Disclosures are required regardless of whether the sponsor elects deferral. FSP 106-1 is effective for fiscal years or interim periods ending after December 7, 2003 and interim periods beginning after December 15, 2003. Terra has chosen to defer recognition of the potential effects of the Act in the 2003 disclosures.

PENDING CHANGE OF CONTROL

Anglo American plc, through a subsidiary, owns 48.4% of our outstanding shares. Anglo American has announced its intention to dispose of its interest in Terra with the timing based on market and other considerations.

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.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk Management and Financial Instruments

Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in financial and commodity market prices and rates. We use derivative financial instruments to manage risk in the areas of (a) foreign currency fluctuations, (b) changes in natural gas prices and (c) changes in interest rates. See Note 13 to the Consolidated Financial Statements for additional information on the use of derivative financial instruments.

Our policy is to avoid unnecessary risk and to limit, to the extent practical, risks associated with operating activities. Our management may not engage in activities that expose Terra to speculative or non-operating risks and is expected to limit risks to acceptable levels. The use of derivative financial instruments is consistent with our 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, 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 Terra 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. Terra continuously monitors the valuation of identified risks and adjusts the portfolio based on current market conditions.

Foreign Currency Fluctuations

Our 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 we are exposed are the Canadian dollar and the British pound. At December 31, 2003, we had no forward positions in any foreign currency.

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 we mitigate some of this volatility through the use of derivative commodity instruments. Our current policy is to hedge 20-80% of our natural gas requirements for the upcoming 12 months and up to 50% of requirements for the following 24-month period, provided that such arrangements would not result in costs greater than expected selling prices for our finished products. We notify the Board of Directors when we deviate from this policy. Annual North American natural gas requirements are

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approximately 105 million MMBtu. We have hedged 25% of our expected 2004 North American requirements and none of our requirements beyond December 31, 2004. The fair value of these instruments is estimated based on quoted market prices from brokers, realized gains or losses and our computations. These instruments fixed natural gas prices at $8.9 million less than published prices for December 31, 2003 forward markets. Market risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in price. As of December 31, 2003 our market risk exposure related to future natural gas requirements being hedged was $9.8 million based on a sensitivity analysis. Changes in the market value of these derivative instruments have a high correlation to changes in the spot price of natural gas. Since we forward price only a portion of our natural gas requirements, this hypothetical adverse impact on natural gas derivative instruments would be more than offset by lower costs for all natural gas we purchase.

Natural Gas Prices—United Kingdom Operations

To meet natural gas production requirements at our United Kingdom production facilities, we generally enter into one- or two-year gas supply contracts and fix prices for 20-80% of total volume requirements. Annual procurement requirements for U.K. natural gas are approximately 26 million MMBtu. As of December 31, 2003, we had fixed-price contracts for 24% of our expected 2004 U.K. natural gas requirements and none of our 2005 natural gas requirements. Our U.K. fixed-price contracts for 2004 natural gas were at prices $2.2 million less than published prices for December 31, 2003 forward markets. We do not use derivative commodity instruments for our United Kingdom natural gas needs.

Interest Rate Fluctuations

The table below provides information about our 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. We had no financial derivatives outstanding at December 31, 2003.

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Interest Rate Sensitivity

(in millions)	Expected Maturity Date
	2004			2005			2006			2007			2008			Thereafter			Total		Fair Value
Long-Term Debt
Senior Secured Notes, fixed rate ($US)	$	—		$	—		$	—		$	—		$	200.0		$	—		$	200.0	$	205.6
Average interest rate		12.88	%		12.88	%		12.88	%		12.88	%		12.88	%		—			—		—
Senior Second Priority Secured Notes, fixed rate ($US)		—			—			—			—			—			202.0			202.0		193.2
Average interest rate		11.50	%		11.50	%		11.50	%		11.50	%		11.50	%		11.50	%		—		—
Other debt, various rates ($US)		0.2			0.2			—			—			—			—			0.4		0.4
Average interest rate		9.85	%		9.96	%		—			—			—			—			—		—
Total Long-Term Debt	$	0.2		$	0.2		$	—		$	—		$	200.0		$	202.0		$	402.4	$	399.2
Short-Term Borrowings
Revolving credit facility, notional amount ($US)	$	175.0		$	175.0		$	—			—			—			—			—		—
Variable interest rate, LIBOR based		3.88	%		3.88	%		—			—			—			—			—		—

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Statements of Financial Position

	At December 31,
(in thousands)	2003			2002
Assets
Cash and short-term investments	$	87,334		$	58,479
Accounts receivable, less allowance for doubtful accounts of $87 and $135		133,480			101,013
Inventories		90,869			88,598
Other current assets		43,319			31,201
Total current assets		355,002			279,291
Property, plant and equipment, net		707,665			790,475
Deferred plant turnaround costs		28,103			29,177
Other assets		34,292			29,167
Total assets	$	1,125,062		$	1,128,110
Liabilities
Debt due within one year	$	153		$	143
Accounts payable		79,563			94,916
Accrued and other liabilities		142,338			98,330
Total current liabilities		222,054			193,389
Long-term debt and capital lease obligations		402,206			400,358
Deferred income taxes		17,831			72,748
Pension liabilities		63,453			60,722
Other liabilities		65,325			44,197
Minority interest		89,062			98,832
Commitments and contingencies (Note 12)		—			—
Total liabilities and minority interest		859,931			870,246
Stockholders’ Equity
Capital stock
Common Shares, authorized 133,500 shares; 77,563 and 76,920 shares outstanding		128,968			128,654
Paid-in capital		555,529			555,167
Accumulated other comprehensive loss		(44,596	)		(63,668	)
Retained deficit		(374,770	)		(362,289	)
Total stockholders’ equity		265,131			257,864
Total liabilities and stockholders’ equity	$	1,125,062		$	1,128,110

See accompanying Notes to the Consolidated Financial Statements

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Consolidated Statements of Operations

	Year ended December 31,
(in thousands, except per-share amounts)	2003			2002			2001
Revenues
Net Sales	$	1,349,249		$	1,042,429		$	1,032,610
Other income, net		1,806			1,554			4,700
		1,351,055			1,043,983			1,037,310
Cost and Expenses
Cost of sales		1,281,663			1,009,970			1,047,219
Selling, general and administrative expense		39,861			39,420			37,886
Impairment of long-lived assets		53,091			—			—
Product claim costs		—			—			14,023
		1,374,615			1,049,390			1,099,128
Loss from operations		(23,560	)		(5,407	)		(61,818	)
Interest income		534			543			3,364
Interest expense		(55,072	)		(53,800	)		(53,594	)
Minority interest		8,617			(1,510	)		2,247
Loss on early retirement of debt		—			—			(3,042	)
Loss from continuing operations before income taxes		(69,481	)		(60,174	)		(112,843	)
Income tax benefit		(57,000	)		(24,000	)		(33,000	)
Loss from continuing operations		(12,481	)		(36,174	)		(79,843	)
Discontinued operations, net of income taxes of $9.5 million (Note 12)		—			(16,183	)		—
Cumulative effect of change in accounting principle (Note 2)		—			(205,968	)		—
Net Loss	$	(12,481	)	$	(258,325	)	$	(79,843	)
Basic and Diluted Loss Per Share:
Continuing operations	$	(0.16	)	$	(0.48	)	$	(1.06	)
Discontinued operations		—			(0.22	)		—
Cumulative effect of change in accounting principle		—			(2.73	)		—
Net Loss Per Share	$	(0.16	)	$	(3.43	)	$	(1.06	)

See accompanying Notes to the Consolidated Financial Statements

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Consolidated Statements of Cash Flows

	Year ended December 31,
(in thousands)	2003			2002			2001
Operating Activities
Net loss	$	(12,481	)	$	(258,325	)	$	(79,843	)
Adjustments to reconcile net loss to net cash flows from operating activities:
Impairment of long-lived assets		53,091			—			—
Loss from discontinued operations		—			16,183			—
Cumulative effect of change in accounting principle		—			205,968			—
Loss on early retirement of debt		—			—			3,042
Depreciation and amortization		107,370			105,856			130,772
Deferred income taxes		(60,516	)		(29,246	)		(32,533	)
Minority interest in earnings (loss)		(8,617	)		1,510			(2,247	)
Change in current assets and liabilities:
Accounts receivable		(27,569	)		2,929			4,184
Inventories		(354	)		24,263			(10,635	)
Other current assets		8,570			9,567			(20,808	)
Accounts payable		(19,983	)		17,461			13,366
Accrued and other liabilities		18,585			52,931			(20,790	)
Deferred revenue		25,000			—			—
Other		(674	)		(2,861	)		(354	)
Net Cash Flows from Operating Activities		82,422			146,236			(15,846	)
Investing Activities
Purchase of property, plant and equipment		(8,639	)		(25,186	)		(14,838	)
Plant turnaround costs		(28,080	)		(24,260	)		(30,408	)
Other		(9,603	)		(6,632	)		18,638
Net Cash Flows from Investing Activities		(46,322	)		(56,078	)		(26,608	)
Financing Activities
Issuance of long-term debt		202,000			—			200,000
Principal payments on long-term debt and capital lease obligations		(200,142	)		(36,101	)		(236,752	)
Stock issuance—net		68			37			180
Distributions to minority interests		(1,153	)		(1,846	)		(2,028	)
Repurchase of TNCLP common units		—			—			(1,671	)
Deferred financing costs		(8,581	)		(1,173	)		(11,442	)
Net Cash Flows from Financing Activities		(7,808	)		(39,083	)		(51,713	)
Effect of Exchange Rate Changes on Cash		563			279			(133	)
Increase (Decrease) in Cash and Short-Term Investments		28,855			51,354			(94,300	)
Cash and Short-Term Investments at Beginning of Year		58,479			7,125			101,425
Cash and Short-Term Investments at End of Year	$	87,334		$	58,479		$	7,125
Supplemental disclosure of cash flow information:
Interest Paid	$	50,983		$	54,267		$	50,130
Income Taxes Received (paid)	$	(4,297	)	$	5,292		$	288
Supplemental schedule of non-cash investing and financing activities:
Stock Incentive Plan		608			571			—
Capital Lease Obligations	$	—		$	292		$	366

See accompanying Notes to the Consolidated Financial Statements

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Consolidated Statements of Changes in Stockholders’ Equity

(in thousands)	Comprehensive Income (Loss)			Capital Stock			Paid-In Capital		Accumulated Other Comprehensive Income			Retained Earnings (Deficit)			Total
				Shares	Amount
January 1, 2001				75,885	$	128,283	$	554,750	$	(48,115	)	$	(24,121	)		610,797
Comprehensive Income (Loss)
Net loss		(79,843	)	—		—		—		—			(79,843	)		(79,843	)
Foreign currency translation adjustments		(14,957	)	—		—		—		(14,957	)		—			(14,957	)
Cumulative effect of change in accounting for derivative financial instruments		31,400		—		—		—		31,400			—			31,400
Income tax effect of change in accounting		(10,990	)	—		—		—		(10,990	)		—			(10,990	)
Change in fair value of derivatives, net of taxes of $13,752		(24,922	)	—		—		—		(24,922	)		—			(24,922	)
Minimum pension liability, net of taxes of $7,257		(10,886	)	—		—		—		(10,886	)		—			(10,886	)
Total	$	(110,198	)
Exercise of stock options, net				80		80		100		—			—			180
Stock Incentive Plan				486		—		—		—			—			—
December 31, 2001				76,451	$	128,363	$	554,850	$	(78,470	)	$	(103,964	)	$	500,779
Comprehensive Income (Loss)
Net loss	$	(258,325	)	—		—		—		—			(258,325	)		(258,325	)
Foreign currency translation adjustments		24,514		—		—		—		24,514			—			24,514
Change in fair value of derivatives, net of taxes of $5,414		8,490		—		—		—		8,490			—			8,490
Minimum pension liability, net of taxes of $10,053		(18,202	)	—		—		—		(18,202	)		—			(18,202	)
Total	$	(243,523	)
Exercise of stock options, net				26		26		11		—			—			37
Stock Incentive Plan				443		265		306		—			—			571
December 31, 2002				76,920	$	128,654	$	555,167	$	(63,668	)	$	(362,289	)	$	257,864
Comprehensive Income (Loss)
Net loss	$	(12,481	)	—		—		—		—			(12,481	)		(12,481	)
Foreign currency translation adjustments		27,631		—		—		—		27,631			—			27,631
Change in fair value of derivatives, net of taxes of $614		1		—		—		—		1			—			1
Minimum pension liability, net of taxes of $1,806		(8,560	)	—		—		—		(8,560	)		—			(8,560	)
Total	$	6,591
Exercise of stock options, net				48		48		20		—			—			68
Stock Incentive Plan				595		266		342		—			—			608
December 31, 2003				77,563	$	128,968	$	555,529	$	(44,596	)	$	(374,770	)	$	265,131

See accompanying Notes to the Consolidated Financial Statements

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Basis of presentation: The Consolidated Financial Statements include the accounts of Terra Industries Inc. and all majority owned subsidiaries (Terra). All significant intercompany accounts and transactions have been eliminated. Minority interest in earnings and ownership has been recorded for the percentage of limited partnership common units not owned by Terra Industries Inc. for each respective period presented.

Description of business: Terra produces nitrogen products for agricultural dealers and industrial users, and methanol for industrial users.

Foreign exchange: Results of operations for the foreign subsidiaries are translated using average currency exchange rates during the period; assets and liabilities are translated using current rates. Resulting translation adjustments are recorded as foreign currency translation adjustments in accumulated other comprehensive income in stockholders’ equity. Intercompany accounts of foreign subsidiaries are translated at historical rates.

Cash and short-term investments: Terra considers short-term investments with an original maturity of three months or less to be cash equivalents, which are reflected at their approximate fair value.

Inventories: Inventories are stated at the lower of average cost and estimated net realizable value. The average cost of inventories is determined using the first-in, first-out method.

Property, plant and equipment: Expenditures for plant and equipment additions, replacements and major improvements are capitalized. Related depreciation is charged to expense on a straight-line basis over estimated useful lives ranging from 15 to 22 years for buildings and 3 to 18 years for plants and equipment. Equipment under capital leases is recorded in property with the corresponding obligations in long-term debt. The amount capitalized is the present value at the beginning of the lease term of the aggregate future minimum lease payments. Maintenance and repair costs are expensed as incurred.

Plant turnaround costs: 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.

Amortization expense of $29.0 million, $24.3 million and $23.3 million was recorded for the years ended December 31, 2003, 2002 and 2001, respectively.

Debt issuance costs: The costs related to the issuance of debt are amortized over the life of the debt on a straight-line method, which approximates the effective interest method.

Amortization expense of deferred financing costs of $3.8 million, $2.8 million and $3.1 million was recorded for the years ended 2003, 2002 and 2001, respectively. The estimated amortization expense is $4.2 million, $3.5 million, $2.8 million, $2.8 million and $2.5 million for the years ending December 31, 2004, 2005, 2006, 2007 and 2008, respectively.

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Impairment of long-lived assets: Terra reviews its 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.

On June 26, 2003, Terra suspended production at the Blytheville facility due to expectations that the facility would not cover its cash costs because of continuing high natural gas costs and the seasonal decline in nitrogen fertilizer demand and prices. In response to this action and as required by Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, Terra commenced a review to determine if the Blytheville facility’s carrying value was impaired. This review led us to conclude that future market conditions may not justify the ongoing investment in maintenance and replacement capital necessary to extend operations for the remainder of the facility’s useful life. Accordingly, a $53.1 million charge was recorded as an “Impairment of long-lived assets”. While the plant’s value is permanently impaired, we resumed production in October 2003 in response to higher urea selling prices and improved seasonal demand. Terra expects production will continue through April 30, 2004 and anticipate $4.0 to $6.0 million of spending will be required when the facility is permanently idled.

Derivatives and financial instruments: Terra accounts for derivatives in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 133 requires the recognition of derivatives in the balance sheet and the measurement of these instruments at fair value. Changes in the fair value of derivatives are recorded in earnings unless the normal purchase or sale exception applies or hedge accounting is elected.

Terra enters into derivative instruments including future contracts, swap agreements and purchased options to fix prices for a portion of future natural gas production requirements. Terra has designated, documented and assessed for hedge relationships, which mostly resulted in cash flow hedges that require Terra to record the derivatives assets and liabilities at their fair value on the balance sheet with an offset in other comprehensive income as (“OCI”). Amounts are removed from other comprehensive income as the underlying transactions occur and realized gains or losses are recorded.

Accumulated other comprehensive (income) loss: Accumulated other comprehensive loss consisted of the following at December 31:

(in thousands)	2003			2002
Foreign currency translation adjustment	$	10,927		$	38,558
Derivatives, net of taxes of ($3,266) and $(2,652)		(3,979	)		(3,978	)
Minimum pension liability, net of taxes of $19,116 and $17,310		37,648			29,088
Total	$	44,596		$	63,668

Revenue recognition: Revenue is recognized when title to finished product passes to the customer. Revenue is recognized as the net amount to be received after deducting estimated amounts for discounts and trade allowances. Revenues include amounts paid by customers for shipping and handling.

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Cost of sales and hedging transactions: Realized gains and losses from hedging activities and premiums paid for option contracts are deferred and recognized in the month to which the hedged transactions relate (see Note 14—Derivative Financial Instruments).

Costs associated with settlement of natural gas purchase contracts and for shipping and handling are included in cost of sales.

Stock-based compensation: Terra accounts for its employee stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations, which utilizes the intrinsic value method. Terra follows the disclosure provisions and accounts for non-employee based compensation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.”

The pro forma impact on net loss and diluted loss per share of accounting for stock-based compensation using the fair value method required by SFAS 123, follows:

(in thousands, except per-share data)	2003			2002			2001
Net loss
As reported	$	(12,481	)	$	(258,325	)	$	(79,843	)
Pro forma		(12,481	)		(258,385	)		(80,031	)
Diluted loss per share
As reported		(0.16	)		(3.43	)		(1.06	)
Pro forma		(0.16	)		(3.43	)		(1.07	)

Per share results: Basic earnings per share data are based on the weighted-average number of Common Shares outstanding during the period. Diluted earnings per share data are based on the weighted-average number of Common Shares outstanding and the effect of all dilutive potential common shares including stock options, restricted shares and contingent shares.

Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications: Certain reclassifications have been made to prior years’ financial statements and notes to conform with current year presentation.

Recently issued accounting standards: Financial Accounting Standards Board (“FASB”) SFAS No. 143, “Accounting for Asset Retirement Obligations”, became effective for Terra’s fiscal year beginning January 1, 2003. This standard requires Terra to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The adoption of this standard did not have a material effect on our financial statements.

On adoption of SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections”, Terra has reclassified an extraordinary loss on early retirement of debt in 2001 to continuing operations.

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SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The adoption of this standard did not have an impact on our financial position.

SFAS No. 149, “Amendments of Statement 133 on Derivative Instruments and Hedging Activities”, amends and clarifies the financial accounting for derivative instruments. This standard was effective in our third quarter. The adoption of this standard did not have a material effect on our financial statements.

SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This standard became effective for contracts entered into after May 31, 2003. The adoption of this standard did not have a material effect on our financial statements.

FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements, Including Indirect Guarantees of Indebtedness of Others”, clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing certain guarantees. FIN 45 also expands the disclosure to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. The provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 became effective for us in 2003 and did not impact our financial statements.

FASB Interpretation No. 46 (“FIN 46”), an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, was issued in January 2003. FIN 46 addresses the consolidation of variable interest entities. In December 2003, the FASB issued revised FIN 46 (“FIN 46R”) to clarify provisions of FIN 46 and exempt certain entities from its requirements. If it is reasonably possible that an enterprise will initially consolidate or disclose information about a variable interest entity on December 24, 2003, certain disclosures are required for financial statements issued after December 31, 2003, regardless of the date on which the variable interest entity was created. For an interest entity to which the provisions of FIN 46 have not been applied, it should apply FIN 46R no later than March 31, 2004. This effective date includes those entities to which FIN 46 was previously applied. The provisions of FIN 46R will not impact our financial statements.

FASB Staff Position No. 106-1 (“FSP 106-1”), “Accounting and Disclosure Requirements Related to Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“the Act”) introduces a prescription drug benefit under Medicare (“Medicare Part D”) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. FSP 106-1 permits a sponsor of postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Act. Authoritative guidance on accounting for the federal subsidy is pending and could require a change in previously reported information. Disclosures are required regardless of a change in previously reported information.

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Disclosures are required regardless of whether the sponsor elects deferral. FSP 106-1 is effective for fiscal years or interim periods ending after December 7, 2003 and interim periods beginning after December 15, 2003. Terra has chosen to defer recognition of the potential effects of the Act in the 2003 disclosures.

2. Cumulative Effect of Change in Accounting Principle

In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested for impairment on an annual basis. Adoption of these standards on January 1, 2002 resulted in the determination that $206 million of assets classified as “Excess of cost over net assets of acquired businesses” suffered impairment and had no value. Consequently, these assets were written off through a charge that was reported as a change in accounting principle during the 2002 first quarter. A reconciliation of the historical impact of the change in accounting principle to earnings per share follows:

(in thousands, except per-share data)	2001
Reported net loss	$	(79,843	)
Goodwill amortization, net of taxes		18,829
Adjusted net loss	$	(61,014	)
Reported basic and diluted loss per share	$	(1.06	)
Goodwill amortization, net of taxes		0.25
Adjusted basic and diluted loss per share	$	(0.81	)

3. Earnings Per Share

The following table provides a calculation of Basic and Diluted Loss Per Share.

(in thousands, except per-share data)	2003			2002			2001
Basic and diluted loss per share computation:
Loss from continuing operations	$	(12,481	)	$	(36,174	)	$	(79,843	)
Loss from discontinued operations		—			(16,183	)		—
Loss before change in accounting principle		(12,481	)		(52,357	)		(79,843	)
Cumulative effect of change in accounting principle		—			(205,968	)		—
Loss applicable to common shareholders	$	(12,481	)	$	(258,325	)	$	(79,843	)
Basic and diluted weighted average shares outstanding		75,676			75,349			75,118
Loss per share from continuing operations	$	(0.16	)	$	(0.48	)	$	(1.06	)
Loss per share from discontinued operations		—			(0.22	)		—
Loss per share before change in accounting principle and extraordinary item		(0.16	)		(0.70	)		(1.06	)
Cumulative effect of change in accounting principle		—			(2.73	)		—
Basic and diluted loss per share	$	(0.16	)	$	(3.43	)	$	(1.06	)

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4. Inventories

Inventories consisted of the following at December 31:

(in thousands)	2003		2002
Raw materials	$	22,937	$	22,546
Supplies		26,058		26,765
Finished goods		41,874		39,287
Total	$	90,869	$	88,598

5. Other Current Assets

Other current assets consisted of the following at December 31:

(in thousands)	2003		2002
Prepaid insurance	$	13,894	$	15,651
Prepaid natural gas		13,781		—
Deferred gains on natural gas hedges		8,164		4,777
Other current assets		7,480		10,773
Total	$	43,319	$	31,201

6. Property, Plant and Equipment, Net

Property, plant and equipment, net consisted of the following at December 31:

(in thousands)	2003			2002
Land	$	14,153		$	13,669
Buildings and improvements		52,057			56,258
Plant and equipment		1,206,407			1,249,373
Capital lease assets		571			633
Construction in progress		6,457			13,669
		1,279,645			1,333,602
Less accumulated depreciation and amortization		(571,980	)		(543,127	)
Total	$	707,665		$	790,475

7. Product Claim Costs

Terra Nitrogen (U.K.) Limited was found liable for damages associated with May 1998 recalls of carbonated beverages containing carbon dioxide tainted with benzene, plus interest and attorney fees. Appeals against those judgments were unsuccessful. Certain other beverage manufacturers have indicated their intention to file claims for various and unspecified amounts. Management estimated total claims against Terra from these lawsuits may be £10 million, or $14 million when Terra, in 2001, established reserves to cover estimated losses.

During October 2003, the U.S. Court of Appeals for the Eighth Circuit upheld a lower court decision ordering Terra Industries Inc.’s insurer to pay all past and future judgments, settlements and defense and other associated costs arising from the recall of carbonated beverages containing carbon dioxide tainted with benzene. The insurer has appealed this decision to the U.S. Supreme Court. Terra will not modify the product claim cost reserve from this insurance claim until final resolution of the matter.

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8. Current Maturities of Long-Term Debt and Capital Lease Obligations

Debt due within one year consisted of the following at December 31:

(in thousands)	2003			2002
Current maturities of long-term debt and capital lease obligations	$	153		$	143
Weighted average short-term borrowings	$	12,353		$	—
Weighted average interest rate		4.8	%		5.59	%

Terra has a $175 million revolving credit facility that expires June 30, 2005. The revolving credit facility is secured by substantially all of the assets of Terra Industries Inc. and its subsidiaries other than the assets collateralizing the Senior Secured Notes. 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. Borrowings under the revolving credit facility will bear interest at a floating rate, which can be either a base rate, or, at Terra’s option, a LIBOR rate, which was 3.88% at December 31, 2003. 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 margin for base rate loans and LIBOR loans are 1.75% and 2.75%, respectively, at December 31, 2003. 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 December 31, 2003, Terra had no outstanding revolving credit borrowings and $31.1 million in outstanding letters of credit, resulting in remaining borrowing availability of approximately $143.9 million under the facility. Terra expects the facility to be adequate to meet operating cash needs. The credit facility also requires that Terra 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 Terra’s borrowing availability falls below $60 million, Terra is 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. The amount of operating cash flows to measure credit facility compliance is different than amounts that can be derived from Terra’s financial statements. For the years ending December 31, 2003 and 2002, operating cash flows as defined in the credit facility were $122.1 million and $91 million, respectively.

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9. Accrued and Other Liabilities

Accrued and other liabilities consisted of the following at December 31:

(in thousands)	2003		2002
Customer deposits	$	71,852	$	40,500
Payroll and benefit costs		6,602		6,243
Pension liabilities		20,403		7,062
Deferred taxes		3,230		11,718
Accrued jury award		12,220		10,139
Accrued interest		7,450		6,363
Deferred revenue		5,000		—
Other		15,581		16,305
Total	$	142,338	$	98,330

10. Other Liabilities

Other liabilities consisted of the following at December 31:

(in thousands)	2003		2002
Discontinued operations reserve	$	26,149	$	26,453
Post retirement benefits		8,443		9,558
Product claim costs reserve and other		10,733		8,186
Deferred revenue		20,000		—
Total	$	65,325	$	44,197

11. Long-Term Debt and Capital Lease Obligations

Long-term debt and capital lease obligations consisted of the following at December 31:

(in thousands)	2003		2002
Senior Secured Notes, 12.875%, due 2008	$	200,000	$	200,000
Senior Notes, 10.5% due 2005		—		200,000
Second Priority Senior
Secured Notes, 11.5%, due 2010		202,000		—
Other		359		501
	$	402,359	$	400,501
Less current maturities		153		143
Total	$	402,206	$	400,358

During 2003, Terra Capital, Inc., (“TCAPI”) a subsidiary of Terra Industries Inc., issued $202 million of 11.5% Second Priority Senior Secured Notes due June 1, 2010. The notes were priced at 99.402% to Yield 11.625% and are unconditionally guaranteed by Terra Industries Inc. and its U.S. subsidiaries. Fees and expenses of the transaction totaled $6.7 million. These notes and guarantees are secured by a second priority security interest in all domestic inventory, domestic accounts receivable, intellectual property of Terra Industries Inc. and its domestic subsidiaries and certain subsidiary capital stock. The security interest is second in priority to a first priority security interest in the same assets in favor of the lenders under our revolving credit facility and is shared equally and ratably with our outstanding 12.875% Senior

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Secured Notes due 2008. 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 investments (other than in Terra Capital, Inc. or any guarantor), use assets as security in other transactions, 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 to us, 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. In addition, 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. Offering proceeds were used to repay our 10.5% Senior Notes due in 2005.

On October 10, 2001, TCAPI issued $200 million of 12.875% Senior Secured Notes due in 2008. The notes were priced at 99.43% to yield 13%. Fees and expenses of the transaction totaled $11.4 million. The proceeds were used to repay existing debt. The notes are secured by a first priority interest in ownership or leasehold interest in substantially all real property, machinery and equipment owned or leased by TCAPI and the guaranteeing subsidiaries, the limited partnership’s interest in Terra Nitrogen Company, L.P. (“TNCLP) owned by TCAPI and the guaranteeing subsidiaries, and certain intercompany notes issued to TCAPI by non-guaranteeing subsidiaries.

Payment obligations under the Senior Secured Notes are fully and unconditionally guaranteed on a joint and several basis by Terra Industries Inc. (“Parent”) and its U.S. subsidiaries (“the Guarantor Subsidiaries”). Terra Nitrogen, Limited Partnership, TNCLP and the Parent’s foreign subsidiaries do not guarantee the notes (see Note 21—Guarantor Subsidiaries for condensed consolidating financial information). The Parents’ ability to receive dividends from its subsidiaries is limited by our revolving credit facility to amounts required for the funding of operating expenses and debt service (not to exceed $40 million per year), income tax payments on the earnings of TCAPI and its subsidiaries and liabilities associated with discontinued operations (not to exceed $5 million per year). The Indenture governing the Senior Secured Notes consists of covenants that limit, among other things, Terra’s ability to: incur additional debt, pay dividends on common stock of Terra Industries Inc. or repurchase shares of such common stock, make investments (other than in Terra Capital or any guarantor), use assets as security in other transactions, sell any of Terra’s principle production facilities or sell other assets outside the ordinary course of business, enter into transactions with affiliates, limit dividends or other payments by Terra’s restricted subsidiaries, enter into sale and leaseback transactions, engage in other businesses, sell all or substantially all of Terra’s assets or merge with or into other companies, and reduce Terra’s insurance coverage. In addition, Terra is 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, 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. Offering proceeds, existing cash balances and revolving credit lines were used to retire $159 million of senior notes and $99 million of bank term notes due in 2003.

Scheduled principal payments for each of the five years 2004 through 2008 are $0.2 million, $0.2 million, $0 million, $0 million and $200 million, respectively, and $202.0 million thereafter.

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12. Commitments and Contingencies

Terra and its subsidiaries are committed to various non-cancelable operating leases for equipment, railcars and production, office and storage facilities expiring on various dates through 2017. Total minimum rental payments are as follows:

(in thousands)
2004	$	14,696
2005		12,577
2006		9,340
2007		8,076
2008		4,180
2009 and thereafter		3,514
Net minimum lease payments	$	52,383

Total rental expense for continuing operations under all leases, including short-term cancelable operating leases, was $16.4 million, $15.6 million and $15.3 million for the years ended December 31, 2003, 2002 and 2001, respectively.

Following is a summary of future minimum payments under capital leases, together with the present value of the net minimum payments as of December 31, 2003:

(in thousands)
2004	$	180
2005		179
2006		39
Total minimum lease payments	$	398
Less amount representing interest		39
Total present value of minimum payments	$	359
Less current portion of such obligations		153
Long-term lease obligation	$	206

The effective interest rates pertaining to the capital leases range from 6.8% to 13.9%.

Terra is liable for retiree medical benefits of employees of coal mining operations sold in 1993, under the Coal Industry Retiree Health Benefit Act of 1992, which mandated liability for certain retiree medical benefits for union coal miners. Terra has provided reserves adequate to cover the estimated present-value of these liabilities at December 31, 2003.

Terra’s discontinued operations reserves at December 31, 2003, includes $25 million for expected future payments for the coal operation’s retirees and other former employees. Terra may recover a portion of these payments through its rights in bankruptcy against Harman Coal Company (a former coal subsidiary), and subject to damages received by Harman Coal Company through its on-going litigation with Massey Energy Company. No provision for such recoveries has been made in Terra’s financial statements.

Terra is involved in various legal actions and claims, including environmental matters, arising from the normal course of business. Management believes that the ultimate resolution of these matters will not have a material adverse effect on the results of Terra’s operations, financial position or net cash flows.

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13. Derivative Financial Instruments

Terra manages risk using derivative financial instruments for (a) changes in natural gas supply prices (b) interest rate fluctuations and (c) currency. Derivative financial instruments have credit risk and market risk.

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

Terra classifies a derivative financial instrument as a hedge if all of the following conditions are met:

1. The item to be hedged must expose Terra to currency, interest or price risk.

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

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

Natural Gas Prices—United Kingdom Operations: To meet natural gas production requirements at Terra’s United Kingdom production facilities, Terra enters into one- or two-year gas supply contracts with fixed prices for a portion of the supply to be delivered to our production facilities. As of December 31, 2003, Terra had fixed-price contracts for 24% of its 2004 United Kingdom natural gas requirements and none of its 2005 United Kingdom gas requirements. Terra does not use derivative financial instruments for its United Kingdom natural gas needs.

Natural Gas Prices—North American Operations: Natural gas supplies to meet production requirements at Terra’s production facilities are purchased at market prices. Natural gas market prices are volatile and Terra effectively fixes prices for a portion of its natural gas production requirements and inventory through the use of futures contracts, swaps and options. These contracts reference physical natural gas prices or appropriate NYMEX futures contract prices. Contract physical price 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 for Terra’s six production facilities is 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.

Annual consolidated production requirements are approximately 150 million MMBtu. Derivative contracts and firm purchase commitments were in place at December 31, 2003 to cover approximately 25% of 2004 natural gas requirements.

A swap is a contract between Terra and a third party to exchange cash based on a designated price. Option contracts give the holder the right to either own or sell a futures or swap contract. The futures contracts require maintenance of cash balances generally 10% to 20% of the contract value and option contracts

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require initial premium payments ranging from 2% to 5% of contract value. Basis swap contracts require payments to or from Terra for the amount, if any, that monthly published gas prices from the source specified in the contract differ from prices of NYMEX natural gas futures during a specified period. There are no initial cash requirements related to the swap and basis swap agreements.

The following summarizes open natural gas derivative contracts at December 31, 2003 and 2002:

(in thousands)	2003				2002
	Contract MMBtu	Unrealized Gain (Loss)			Contract MMBtu	Unrealized Gain
Swaps	14,000	$	9,275		5,520	$	2,649
Options	4,790		(396	)	2,330		690
	18,790		8,879		7,850		3,339

Gains and losses on settlement of these contracts and premium payments on option contracts are credited or charged to cost of sales in the month in which the hedged transaction closes. 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. Realized gains on closed contracts relating to future periods as of December 31, 2003 were $3.6 million. Cash flows related to natural gas hedging are reported as cash flows from operating activities.

Compared with spot prices, natural gas derivative activities increased Terra’s 2003 natural gas costs by $6.9 million, reduced 2002 natural gas costs by $16.3 million and increased 2001 natural gas costs by $15.2 million.

Interest Rate Fluctuations: In 1997, Terra entered into interest rate swap agreements to fix the interest rate on $100 million of its floating rate obligations at an average base rate of approximately 6.05% per annum. The interest rate swap agreements that were designated as hedges expired December 31, 2002. The differential paid or received on interest rate swap agreements has been recognized as an adjustment to interest expense. Cash flows for the interest rate swap agreements are classified as cash flows from operations.

The following table presents the carrying amounts and estimated fair values of Terra’s derivative financial instruments at December 31, 2003 and 2002. SFAS 107, “Disclosures about Fair Value of Financial Instruments” defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.

(in millions)	2003				2002
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Natural gas	$	3.6	$	12.5	$	1.9	$	5.2

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

Natural gas futures, swaps, options and basis swaps: Estimated based on published referenced prices and quoted market prices from brokers.

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On December 31 the fair value of derivatives resulted in the following increases (decreases) to reflect the effective portion of the derivatives designated as cash flow hedges:

(in thousands)	2003			2002
Current assets	$	3,387		$	7,349
Current liabilities		1,852			(2,764	)
Long-term liabilities		—			(3,791	)
Deferred income tax liability		614			5,414
Accumulated other comprehensive income		(1	)		8,490

The increase to current assets was to recognize the value of open natural gas contracts; the increase (decrease) to current liabilities was to reclassify deferred gains or losses on closed contracts relating to future periods and the decrease to long-term liabilities related to interest rate hedges.

14. Financial Instruments and Concentrations of Credit Risk

The following table represents the carrying amounts and estimated fair values of Terra’s financial instruments at December 31, 2003 and 2002. SFAS 107 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.

(in millions)	2003				2002
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial Assets
Cash and short-term investments	$	87.3	$	87.3	$	58.5	$	58.5
Receivables		133.5		133.5		101.0		101.0
Equity and other investments		2.3		2.3		2.5		2.5
Financial liabilities
Long-term debt		402.2		399.2		400.4		427.6

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

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

• Equity and other investments: Investments in untraded companies are valued on the basis of management’s estimates and, when available, comparisons with similar companies whose shares are publicly traded.

• Other assets: The amounts reported relate to notes receivable obtained from sale of previous operating assets. The fair value is estimated based on current interest rates and repayment terms of the individual notes.

• Short-term borrowings and long-term debt: The fair value of Terra’s short-term borrowings and long-term debt is estimated by discounting expected cash flows at the rates currently offered for debt of the same remaining maturities.

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

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Financial Instruments: At December 31, 2003, Terra had letters of credit outstanding totaling $31.1 million, guaranteeing various insurance and financing activities.

15. Stockholders’ Equity

Terra allocates $1.00 per share upon the issuance of Common Shares to the Common Share capital account. The Common Shares have no par value. At December 31, 2003, 2.2 million common shares were reserved for issuance upon award of restricted shares and exercise of employee stock options.

Terra has authorized 16,500,000 Trust Shares for issuance. There were no Trust Shares outstanding at December 31, 2003.

16. Stock-Based Compensation

Terra accounts for its stock-based compensation under the provisions of Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees”, which utilizes the intrinsic value method. Compensation expense related to stock-based compensation was $1.2 million, $0.9 million and ($0.7) million for the years ended December 31, 2003, 2002 and 2001, respectively.

Terra’s Stock Incentive Plan of 2002 authorized granting directors and key employees awards in the form of options, rights, performance units or restricted stock. The aggregate number of Common Shares that may be subject to awards under the plan may not exceed 3.5 million shares. There were no outstanding rights or performance units at December 31, 2003. Options generally may not be exercised prior to one year or more than 10 years from the date of grant. Stock options and restricted shares vest over specified periods, or in some cases upon the attainment, prior to a termination date, of pre-established market price objectives for Terra’s Common Shares. The restricted shares are entitled to normal voting rights and earn dividends as declared during the performance periods. At December 31, 2003, 2.2 million Common Shares were available for grant under the 2002 plan.

A summary of Terra’s stock-based compensation activity related to stock options for the years ended December 31 follows:

(options in thousands)

	2003			2002			2001
	Number	Weighted Average Exercise Price		Number	Weighted Average Exercise Price		Number	Weighted Average Exercise Price
Outstanding— beginning of year	1,657	$	5.28	2,084	$	5.19	2,256	$	5.16
Expired/terminated	679		6.32	401		5.03	92		6.98
Exercised	48		1.43	26		1.43	80		2.47
Outstanding—end of year	930	$	4.72	1,657	$	5.28	2,084	$	5.19

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The following table summarizes information about stock options outstanding and exercisable at December 31, 2003:

(options in thousands)

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Life	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$1.00 - $3.99	796	6.0 years	$	3.39	796	$	3.39
4.00 - 7.99	9	5.0		7.81	9		7.81
8.00 - 14.99	125	3.7		13.05	125		13.05
Total	930	5.7	$	4.72	930	$	4.72

There were 1,543,840 and 1,597,000 options exercisable at December 31, 2002 and 2001, respectively. No options were granted during 2003, 2002 and 2001.

There were 684,000 restricted shares granted during 2003 with a weighted average fair value of $1.46 per share, 599,000 restricted shares granted during 2002 with a weighted fair value of $1.84 per share and 591,000 restricted shares granted during 2001 with a weighted average fair value of $2.92 per share. In 2001, 105,900 shares previously awarded at a weighted average fair value of $14.60 per share were forfeited by the recipients.

17. Retirement Benefit Plans

Terra and its subsidiaries maintain defined benefit 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. Terra and its subsidiaries also have certain non-qualified pension plans covering executives, which are unfunded. Terra accrues pension costs based upon annual independent actuarial valuations for each plan and funds these costs in accordance with statutory requirements.

The components of net periodic pension expense follow:

(in thousands)	2003			2002			2001
Service cost	$	5,076		$	6,182		$	6,351
Interest cost		13,323			13,073			11,815
Expected return on plan assets		(13,024	)		(12,629	)		(15,050	)
Amortization of prior service cost		38			38			37
Amortization of actuarial loss		6,007			1,989			—
Amortization of net assets		(114	)		(306	)		(401	)
Termination charge		1,773			1,535			1,560
Pension expense	$	13,079		$	9,882		$	4,312

Terra has three defined benefit plans, one in each country in which it has operations, namely the U.S., Canada and the U.K. Terra administers its plans to comply with the laws set forth by each country’s regulators.

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The following table reconciles, by geographic location, the plans’ funded status to amounts included in the Consolidated Statements of Financial Position at December 31, 2003:

(in thousands)	U.S.			Canada			U.K.			Total
Change in Projected Benefit Obligation Present Value
Projected benefit obligation—beginning of year	$	101,942		$	18,608		$	105,102		$	225,652
Service cost		1,587			648			2,841			5,076
Interest cost		6,733			1,427			5,163			13,323
Participants’ contributions		—			—			306			306
Termination charge		—			—			1,773			1,773
Actuarial (gain) loss		12,695			1,072			(7,462	)		6,305
Foreign currency exchange rate changes		—			4,382			11,406			15,788
Benefits paid		(4,711	)		(600	)		(2,656	)		(7,967	)
Projected benefit obligation—end of year		118,246			25,537			116,473			260,256
Change in Plan Assets
Fair value plan assets—beginning of year		54,847			15,296			64,137			134,280
Actual return on plan assets		7,901			2,192			7,471			17,564
Foreign currency exchange rate changes		—			3,661			8,005			11,666
Employer contribution		2,359			1,118			5,824			9,301
Participants’ contributions		—			—			306			306
Benefits paid		(4,711	)		(600	)		(2,656	)		(7,967	)
Fair value plan assets—end of year		60,396			21,667			83,087			165,150
Funded Status		(57,850	)		(3,870	)		(33,386	)		(95,106	)
Unrecognized net actuarial loss		39,596			4,001			23,407			67,004
Unrecognized prior service cost		67			—			—			67
Unrecognized net transition asset		49			—			—			49
Contributions		416			—			764			1,180
Accrued benefit cost	$	(17,722	)	$	131		$	(9,215	)	$	(26,806	)

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The following table reconciles, by geographic location, the plans’ funded status to amounts included in the Consolidated Statements of Financial Position at December 31, 2002:

(in thousands)	U.S.			Canada			U.K.			Total
Change in Projected Benefit Obligation Present Value
Projected benefit obligation—beginning of year	$	89,153		$	17,382		$	79,719		$	186,254
Service cost		1,605			547			4,030			6,182
Interest cost		6,537			1,200			5,336			13,073
Participants’ contributions		—			—			361			361
Termination charge		—			—			1,534			1,534
Actuarial (gain) loss		9,074			(202	)		5,890			14,762
Foreign currency exchange rate changes		—			131			9,701			9,832
Benefits paid		(4,427	)		(450	)		(1,469	)		(6,346	)
Projected benefit obligation—end of year		101,942			18,608			105,102			225,652
Change in Plan Assets
Fair value plan assets—beginning of year		62,183			16,003			64,423			142,609
Actual return on plan assets		(3,244	)		(1,121	)		(11,006	)		(15,371	)
Foreign currency exchange rate changes		—			134			6,375			6,509
Employer contribution		335			730			5,453			6,518
Participants’ contributions		—			—			361			361
Benefits paid		(4,427	)		(450	)		(1,469	)		(6,346	)
Fair value plan assets—end of year		54,847			15,296			64,137			134,280
Funded Status		(47,095	)		(3,312	)		(40,965	)		(91,372	)
Unrecognized net actuarial loss		32,466			3,406			32,203			68,075
Unrecognized prior service cost		103			—			—			103
Unrecognized net transition asset		(65	)		—			—			(65	)
Contributions		73			—			1,793			1,866
Accrued benefit cost	$	(14,518	)	$	94		$	(6,969	)	$	(21,393	)

The present value of future pension payments for benefits earned prior to December 31, 2003 and 2002 based on current or past compensation levels (“accumulated benefit obligation”) was $250.3 million and $203.5 million, or $83.9 million and $67.8 million more than the fair value of plan assets (this is different than the funding shortfall of $95.1 million and 91.4 million at December 31, 2003 and 2002 set forth in the preceding tables because the projected benefit obligation assumes additional liabilities for future service and normal compensation increases.). The unfunded accumulated benefit obligation of $67.8 million on December 31, 2002 is included as other current liabilities and long-term liabilities of $7.1 million and $60.7 million, respectively, in the Consolidated Statements of Financial Position. Through December 31, 2003, the unfunded accumulated benefit obligation has been recorded through $26.8 million of accrued benefit costs and $57.1 million as a charge to other comprehensive income. .

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The assumptions used to determine the actuarial present value of benefit obligations and pension expense during each of the years in the three-year period ended December 31 were as follows:

	2003		2002		2001
Weighted average discount rate	5.8	%	6.3	%	7.3	%
Long-term per annum compensation increase	3.5	%	3.9	%	4.0	%
Long-term return on plan assets	7.5	%	7.6	%	8.8	%

The unfounded accumulated benefit obligation of $67.8 million on December 31, 2002 is included as other current liabilities and long-term liabilities of $7.1 million and $60.7 million, respectively, in the Consolidated Statements of Financial Position.

Terra employs a total return investment approach whereby a mix of equities and fixed income investments are used to maximize the long-term return of plan assets for a prudent level of risk. The intent of this strategy is to minimize plan expenses by outperforming plan liabilities over the long run. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and Terra’s corporate financial condition. The investment portfolio contains a diversified blend of equity and fixed income investments. Derivatives may be used to gain market exposure in an efficient and timely manner; however, derivatives may not be used to leverage the portfolio beyond the market value of the underlying investments. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies, and quarterly investment portfolio reviews.

Terra selects a long-term rate of return of each of its plans individually. Primarily, Terra consults with each of its three actuaries, as well as each of the fund’s money managers. The expected long-term rate of return is based on the portfolio as a whole and not on the sum of the returns on individual asset categories. While historical returns are taken into consideration, current market trends such as inflation and current equity and fixed income returns are also taken into consideration.

The percentage of the Fair Market Value of the total plan assets for each major asset category of the plan’s assets is as follows:

	September 30,
	2003		2002
Asset Allocation
Equities	50.8	%	62.2	%
Bonds	40.9	%	25.5	%
Cash equivalents	8.4	%	11.6	%
Real Estate	0.0	%	0.7	%
	100.0	%	100.0	%

Terra also sponsors 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 Terra’s contributions to these plans totaled $1.5 million in 2003, $1.6 million in 2002 and $1.4 million in 2001.

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18. Post-Retirement Benefits

Terra provides 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. The plan is unfunded.

The following table indicates the components of the post-retirement medical benefits obligation included in Terra’s Consolidated Statements of Financial Position at December 31:

(in thousands)	2003			2002
Change in Benefit Obligation
Projected benefit obligation—beginning of year	$	3,031		$	3,136
Service cost		8			8
Interest cost		195			215
Participants’ contributions		260			294
Actuarial (gain) loss		31			60
Foreign currency exchange rate changes		113			3
Benefits paid		(652	)		(685	)
Projected benefit obligation—end of year		2,986			3,031
Change in Plan Assets
Fair value plan assets—beginning of year		—			—
Employer contribution		392			391
Participants’ contributions		260			294
Benefits paid		(652	)		(685	)
Fair value plan assets—end of year		—			—
Funded Status		(2,986	)		(3,031	)
Unrecognized net actuarial gain		(939	)		(887	)
Unrecognized prior service cost		73			(86	)
Employer contribution		93			94
Accrued benefit cost	$	(3,759	)	$	(3,910	)

Net periodic post-retirement medical benefit (income) expense consisted of the following components:

(in thousands)	2003			2002			2001
Service cost	$	8		$	8		$	12
Interest cost		195			215			260
Amortization of prior service cost		(40	)		(36	)		(36	)
Amortization of actuarial gain		(43	)		(50	)		(129	)
Post-retirement medical benefit expense	$	120		$	137		$	107

Terra limits its future obligation for post-retirement medical benefits by capping at 5% the annual rate of increase in the cost of claims it assumes under the plan. The weighted average discount rate used in determining the accumulated post-retirement medical benefit obligation was 6.16% in 2003, 6.75% in 2002 and 7.4% in 2001. The assumed annual health care cost trend rate was 5% in 2001 and is assumed to remain at that level thereafter. The impact on the benefit obligation of a 1% increase in the assumed health care cost trend rate would be $19,000 while a 1% decline in the rate would decrease the benefit obligation by $309,000.

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On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The Act expands Medicare, primarily by adding a prescription drug benefit for Medicare-eligibles starting in 2006. The Act provides employers currently sponsoring prescription drug programs for Medicare-eligibles with a range of options for coordinating with the new government-sponsored program to potentially reduce program cost. These options include supplementing the government program on a secondary payor basis or accepting a direct subsidy from the government to support a portion of the cost of the employer’s program.

Paragraph 40 of FASB Statement No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”, requires that presently enacted changes in law impacting employer-sponsored retiree health care programs which take effect in future periods be considered in current-period measurements for benefits expected to be provided in those future periods. Therefore, under FAS 106 guidance, measures of plan liabilities and annual expense on or after the date of enactment should reflect the effects of the Act.

Pursuant to guidance from the FASB under FSP FAS 106-1, Terra has chosen to defer recognition of the potential effects of the Act in these 2003 disclosures. Therefore, the retiree health obligations and costs reported in this financial statement do not yet reflect any potential impact of the Act. Specific authoritative guidance on the accounting for the government subsidy is pending and that guidance, when issued, could require Terra to change previously reported information.

Terra intends to review its retiree health care strategy in light of the Act. Terra will most likely amend its retiree health program to coordinate with the new Medicare prescriptions drug program or to receive the direct subsidy from the government. As a result, Terra anticipates that its retiree health obligations and costs could be reduced once those amendments are adopted and or the government subsidies are considered.

19. Income Taxes

Components of the income tax provision (benefit) applicable to continuing operations are as follows:

(in thousands)	2003			2002			2001
Current:
Federal	$	—		$	(28,863	)	$	(33,684	)
Foreign		398			218			(52	)
State		—			(5,227	)		(5,447	)
		398			(33,872	)		(39,183	)
Deferred:
Federal		(79,400	)		9,284			9,899
Foreign		22,002			(11	)		(4,670	)
State		—			599			1,866
		(57,398	)		9,872			7,095
Total income tax benefit	$	(57,000	)	$	(24,000	)	$	(32,088	)

61

The following table reconciles the income tax provision (benefit) per the Consolidated Statements of Operations to the federal statutory provision:

(in thousands)	2003			2002			2001
Loss from continuing operations before taxes:
Domestic	$	(100,117	)	$	(60,345	)	$	(77,469	)
Foreign		30,636			171			(35,374	)
		(69,481	)		(60,174	)		(112,843	)
Statutory income tax provision (benefit):
Domestic		(34,915	)		(21,121	)		(26,961	)
Foreign		9,785			208			(11,521	)
		(25,130	)		(20,913	)		(38,482	)
Reduction to foreign tax assessments and reserves		(36,421	)		—			—
Foreign exchange gains		4,883			—			6,801
Non-deductible expenses, primarily goodwill		—			70			6,216
State and local income taxes		—			(2,353	)		(2,482	)
Valuation reserve		840			—			—
Other		(1,172	)		(804	)		(5,053	)
Income tax benefit	$	(57,000	)	$	(24,000	)	$	(33,000	)

The tax effect of net operating loss (NOL), tax credit carryforwards and significant temporary differences between reported and taxable earnings that gave rise to net deferred tax assets (liabilities) were as follows:

in thousands)	2003			2002
Current deferred tax liability
Accrued liabilities	$	(3,106	)	$	(11,898	)
Inventory valuation		(124	)		180
Net current deferred tax liability		(3,230	)		(11,718	)
Non-current deferred tax liability
Depreciation		(203,086	)		(202,912	)
Investments in partnership		(7,246	)		(20,278	)
U.S. international tax allowance		—			(19,421	)
Foreign tax deposits		8,808			4,733
Unfunded employee benefits		17,751			7,269
Discontinued business costs		14,789			12,707
Valuation allowance		(22,122	)		(21,276	)
NOL, capital loss and tax credit carryforwards		154,471			151,629
Accumulated other comprehensive income		15,850			14,658
Other		2,954			143
Net noncurrent deferred tax liability		(17,831	)		(72,748	)
Net deferred tax liability	$	(21,061	)	$	(84,466	)

During 1996, after receiving a favorable ruling from Revenue Canada, Terra refreshed its tax basis in plants and equipment at its Canadian subsidiary by entering into a transaction with a Canadian subsidiary of Anglo American plc, resulting in a deferred tax asset for Terra. The refreshed amount of this tax basis was challenged by Revenue Canada in 2000 at which time Terra established a reserve against the stepped-

62

up basis previously recorded. In 2003, Revenue Canada rendered a decision, which while increasing the allowance for the company to refresh the basis in its Canadian assets, fell short of the company’s valuation. While Terra has decided to contest Revenue Canada’s position, it has resulted in the company reducing its tax reserve by $17 million. Terra has eliminated its $19 million international tax reserve due to available U.S. NOL benefits coupled with new developments in Revenue Canada’s position and new company structure opportunities. Terra has also come to the conclusion that it will no longer book any additional NOL tax benefits in the U.S. in excess of its deferred tax liabilities.

Components of income tax provision (benefit) included in net income other than from continuing operations are as follows:

(in thousands)	2003		2002			2001
Current:
Federal	$	—	$	(9,456	)	$	—
	$	—	$	(9,456	)	$	—

20. Industry Segment Data

Terra operates in two principal industry segments—Nitrogen Products and Methanol. The Nitrogen Products business produces and distributes ammonia, urea, nitrogen solutions, ammonium nitrate and other nitrogen products to agricultural and industrial users. The Methanol business manufactures and, prior to 2004, distributed methanol, which is principally used as a raw material in the production of a variety of chemical derivatives and in the production of methyl tertiary butyl ether (MTBE), an oxygenate and octane enhancer for gasoline. Management evaluates performance based on operating earnings of each segment. Terra does not allocate interest, income taxes or infrequent items to the business segments. Included in Other are general corporate activities not attributable to a specific industry segment.

63

The following summarizes additional information about Terra’s industry segments:

(in thousands)	Nitrogen Products			Methanol			Other			Total
2003
Revenues	$	1,139,379		$	209,870		$	1,806		$	1,351,055
Operating income (loss)		(19,370	)		1,866			(6,056	)		(23,560	)
Total assets		898,437			157,187			69,438			1,125,062
Depreciation and amortization		80,246			13,242			13,882			107,370
Capital expenditures		6,708			1,571			360			8,639
Equity earnings		803			—			—			803
Equity investments		2,255			—			—			2,255
Minority interest in loss		(8,617	)		—			—			(8,617	)
2002
Revenues	$	883,971		$	158,458		$	1,554		$	1,043,983
Operating income (loss)		(9,351	)		7,325			(3,381	)		(5,407	)
Total assets		938,559			152,735			36,816			1,128,110
Depreciation and amortization		82,774			13,047			10,035			105,856
Capital expenditures		22,267			749			2,170			25,186
Equity earnings		982			—			—			982
Equity investments		2,501			—			—			2,501
Minority interest in earnings		1,510			—			—			1,510
2001
Revenues	$	863,512		$	169,098		$	4,700		$	1,037,310
Operating loss		(48,476	)		(11,739	)		(1,603	)		(61,818	)
Total assets		1,161,797			152,540			21,706			1,336,043
Depreciation and amortization		100,614			17,209			12,949			130,772
Capital expenditures		12,885			1,861			92			14,838
Equity earnings		953			—			—			953
Equity investments		2,218			—			—			2,218
Minority interest in loss		(2,247	)		—			—			(2,247	)

The following summarizes geographic information about Terra:

	Revenues						Long-lived Assets
(in thousands)	2003		2002		2001		2003		2002		2001
United States	$	983,936	$	756,946	$	741,586	$	461,690	$	554,466	$	797,064
Canada		57,618		42,138		59,993		55,010		47,403		46,172
United Kingdom		309,501		244,899		235,731		251,105		246,950		239,150
	$	1,351,055	$	1,043,983	$	1,037,310	$	767,805	$	848,819	$	1,082,386

64

21. Guarantor Subsidiaries

The Parent files a consolidated United States federal income tax return. Beginning in 1995, the Parent adopted the tax sharing agreements, under which all domestic operating subsidiaries provide for and remit income taxes to the Parent based on their pretax accounting income, adjusted for permanent differences between pretax accounting income and taxable income. The tax sharing agreements allocated the benefits of operating losses and temporary differences between financial reporting and tax basis income to the Parent.

Condensed consolidating financial information regarding the Parent, TCAPI, the Guarantor Subsidiaries and subsidiaries of the Parent that are not guarantors of the Senior Secured Notes (see Note 11—Long-term Debt) for December 31, 2003, 2002 and 2001 are presented below for purposes of complying with the reporting requirements of the Guarantor Subsidiaries.

Guarantor subsidiaries include subsidiaries that own the Woodward, Oklahoma; Port Neal, Iowa and Beaumont, Texas plants as well as the corporate headquarters facility in Sioux City, Iowa. All other company facilities are owned by non-guarantor subsidiaries.

65

Condensed Consolidating Statement of Financial Position for the Year Ended December 31, 2003:

(in thousands)	Parent			TCAPI			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Cash and short-term investments	$	—		$	74,631		$	5,739		$	6,964		$	—		$	87,334
Accounts receivable		—			—			49,642			83,838			—			133,480
Inventories		—			—			26,337			64,532			—			90,869
Other current assets		7,541			6,267			16,836			12,221			454			43,319
Total current assets		7,541			80,898			98,554			167,555			454			355,002
Property, plant and equipment, net		—			—			343,379			366,321			(2,035	)		707,665
Investment in and advanced to (from) affiliates		380,076			425,301			1,257,814			82,676			(2,145,867	)		—
Other assets and deferred plant turnaround costs		—			18,650			10,037			34,126			(418	)		62,395
Total Assets	$	387,617		$	524,849		$	1,709,784		$	650,678		$	(2,147,866	)	$	1,125,062
Liabilities
Debt due within one year	$	—		$	—		$	95		$	58		$	—		$	153
Accounts payable		669			—			29,426			49,468			—			79,563
Accrued and other liabilities		851			27,456			41,213			72,818			—			142,338
Total current liabilities		1,520			27,456			70,734			122,344			—			222,054
Long-term debt and capital lease obligations		—			402,000			130			76			—			402,206
Deferred income taxes		30,279			—			—			(12,448	)		—			17,831
Pension and other liabilities		90,687			(3,680	)		23,019			18,750			2			128,778
Minority interest		—			17,421			71,641			—			—			89,062
Total liabilities and minority interest		122,486			443,197			165,524			128,722			2			859,931
Stockholders’ Equity
Common stock		128,968			—			72			49,709			(49,781	)		128,968
Paid in capital		555,529			150,218			1,819,036			725,546			(2,694,800	)		555,529
Accumulated other comprehensive income (loss)		(44,596	)		(44,596	)		—			16,090			28,506			(44,596	)
Retained earnings (deficit)		(374,770	)		(23,970	)		(274,848	)		(269,389	)		568,207			(374,770	)
Total stockholders’ equity		265,131			81,652			1,544,260			521,956			(2,147,868	)		265,131
Total liabilities and stockholders’ equity	$	387,617		$	524,849		$	1,709,784		$	650,678		$	(2,147,866	)	$	1,125,062

66

Condensed Consolidating Statement of Operations for the Year Ended December 31, 2003:

(in thousands)	Parent			TCAPI			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues
Net sales	$	—		$	—		$	518,188		$	828,702		$	2,359		$	1,349,249
Other income, net		—			—			3,387			778			(2,359	)		1,806
Total revenues		—			—			521,575			829,480			—			1,351,055
Cost and Expense
Cost of sales		—			—			511,940			776,073			(6,350	)		1,281,663
Selling, general and administrative expenses		5,620			(1,046	)		24,403			11,240			(356	)		39,861
Impairment of long-lived assets		—			—			12,436			40,655			—			53,091
Equity in the (earnings) loss of subsidiaries		78,197			41,861			57,354			(804	)		(176,608	)		—
Total cost and expenses		83,817			40,815			606,133			827,164			(183,314	)		1,374,615
Income (loss) from continuing operations before income taxes		(83,817	)		(40,815	)		(84,558	)		2,316			183,314			(23,560	)
Interest income		47			3,043			3,989			145			(6,690	)		534
Interest expense		(12,911	)		(42,110	)		(39	)		(6,679	)		6,667			(55,072	)
Minority interest		—			1,685			6,932			—			—			8,617
Loss before income taxes		(96,681	)		(78,197	)		(73,676	)		(4,218	)		183,291			(69,481	)
Income tax benefit (provision)		84,200			—			—			(27,200	)		—			57,000
Net Loss	$	(12,481	)	$	(78,197	)	$	(73,676	)	$	(31,418	)	$	183,291		$	(12,481	)

67

Condensed Consolidating Statement of Cash Flows for the Year Ended December 31, 2003:

(in thousands)	Parent			TCAPI			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Operating Activities
Net loss	$	(12,481	)	$	(78,197	)	$	(73,676	)	$	(31,418	)	$	183,291		$	(12,481	)
Adjustments to reconcile net loss to net cash flows from operating activities:
Impairment of long-lived assets		—			—			12,436			40,655			—			53,091
Depreciation and amortization		—			3,816			49,753			53,801			—			107,370
Deferred income taxes		(39,873	)		(19,422	)		—			4,379			(5,600	)		(60,516	)
Minority interest in earnings		—			(1,685	)		(6,932	)		—			—			(8,617	)
Equity in earnings (loss) of subsidiaries		(78,197	)		(41,861	)		(57,354	)		804			176,608			—
Change in operating assets and liabilities		(7,462	)		(1,893	)		(86,180	)		23,734			75,376			3,575
Net Cash Flows from Operating Activities		(138,013	)		(139,242	)		(161,953	)		91,955			429,675			82,422
Investing Activities
Purchase of property, plant and equipment	$	—		$	—		$	(2,831	)	$	(5,808	)	$	—		$	(8,639	)
Plant turnaround costs		—			—			(5,981	)		(22,099	)		—			(28,080	)
Pension contributions and other		(479	)		—			13,923			(1,538	)		(21,509	)		(9,603	)
Net Cash Flows from Investing Activities		(479	)		—			5,111			(29,445	)		(21,509	)		(46,322	)
Financing Activities
Principal payments on long-term debt		(200,000	)		—			(88	)		(54	)		—			(200,142	)
Change in investments and advances from (to) affiliates		338,423			5,291			163,597			(164,672	)		(342,639	)		—
Issuance of long-term debt		—			202,000			—			—			—			202,000
Deferred financing costs		—			(8,581	)		—			—			—			(8,581	)
Distributions to minority interests		—			(225	)		(928	)		—			—			(1,153	)
Stock issuance		68			—			—			—			—			68
Net Cash Flows from Financing Activities		138,491			198,485			162,581			(164,726	)		(342,639	)		(7,808	)
Effect of Foreign Exchange Rate on Cash		—			—			—			—			563			563
Increase (Decrease) in Cash and Short-term Investments		(1	)		59,243			5,739			(102,216	)		66,090			28,855
Cash and Short-term Investments at Beginning of Year		1			15,388			—			109,180			(66,090	)		58,479
Cash and Short-term Investments at End of Year	$	—		$	74,631		$	5,739		$	6,964		$	—		$	87,334

68

Condensed Consolidating Statement of Financial Position for the Year Ended December 31, 2002:

(in thousands)	Parent			TCAPI			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Cash and short-term investments	$	1		$	15,388		$	—		$	109,180		$	(66,090	)	$	58,479
Accounts receivable		—			—			38,102			62,911			—			101,013
Inventories		—			—			25,475			63,123			—			88,598
Other current assets		6,391			—			6,950			18,213			(353	)		31,201
Total current assets	$	6,392		$	15,388		$	70,527		$	253,427		$	(66,443	)	$	279,291
Property, plant and equipment, net		—			—			396,722			397,753			(4,000	)		790,475
Investment in and advanced to (from) affiliates		621,231			397,043			1,438,412			(76,472	)		(2,380,214	)		—
Other assets and deferred plant turnaround costs		(479	)		13,886			11,560			33,377			—			58,344
Total Assets	$	627,144		$	426,317		$	1,917,221		$	608,085		$	(2,450,657	)	$	1,128,110
Liabilities
Debt due within one year	$	—		$	—		$	88		$	55		$	—		$	143
Accounts payable		201			1,525			107,647			51,985			(66,442	)		94,916
Accrued and other liabilities		25,695			5,676			34,802			32,157			—			98,330
Total current liabilities		25,896			7,201			142,537			84,197			(66,442	)		193,389
Long-term debt		200,000			200,000			225			133			—			400,358
Deferred income taxes		70,154			19,422			—			(16,828	)		—			72,748
Pension and other liabilities		73,230			12,202			2,668			16,818			1			104,919
Minority interest		—			19,332			79,500			—			—			98,832
Total liabilities		369,280			258,157			224,930			84,320			(66,441	)		870,246
Stockholders’ Equity
Common stock		128,654			—			73			49,709			(49,782	)		128,654
Paid in capital		555,167			150,218			1,817,591			724,088			(2,691,897	)		555,167
Accumulated other comprehensive income (loss)		(63,668	)		(36,285	)		—			(18,238	)		54,523			(63,668	)
Retained earnings (deficit)		(362,289	)		54,227			(125,373	)		(231,794	)		302,940			(362,289	)
Total stockholders’ equity		257,864			168,160			1,692,291			523,765			(2,384,216	)		257,864
Total liabilities and stockholders’ equity	$	627,144		$	426,317		$	1,917,221		$	608,085		$	(2,450,657	)	$	1,128,110

69

Condensed Consolidating Statement of Operations for the Year Ended December 31, 2002:

(in thousands)	Parent			TCAPI			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues
Net sales	$	—		$	—		$	391,516		$	643,745		$	7,168		$	1,042,429
Other income, net		—			—			4,640			4,082			(7,168	)		1,554
		—			—			396,156			647,827			—			1,043,983
Cost and Expense
Cost of sales		—			—			390,281			622,414			(2,725	)		1,009,970
Selling, general and administrative expenses		3,634			(1,062	)		25,627			10,159			1,062			39,420
		3,634			(1,062	)		415,908			632,573			(1,663	)		1,049,390
Loss from operations		(3,634	)		1,062			(19,752	)		15,254			1,663			(5,407	)
Interest income		47			4,682			5,238			140			(9,564	)		543
Interest expense		(22,134	)		(31,608	)		(48	)		(9,542	)		9,532			(53,800	)
Minority interest		—			(295	)		(1,215	)		—			—			(1,510	)
Equity in the earnings (loss) of subsidiaries		(240,629	)		(214,470	)		9,898			983			444,218			—
Loss from continuing operations before income taxes		(266,350	)		(240,629	)		(5,879	)		6,835			445,849			(60,174	)
Income tax benefit (provision)		24,208			—			—			(208	)		—			24,000
Income (loss) from continuing operations and cumulative effect of change in accounting principle		(242,142	)		(240,629	)		(5,879	)		6,627			445,849			(36,174	)
Discontinued operations, net of income taxes		(16,183	)		—			—			—			—			(16,183	)
Cumulative effect of change in accounting principle		—			—			(189,971	)		(15,997	)		—			(205,968	)
Net Loss	$	(258,325	)	$	(240,629	)	$	(195,850	)	$	(9,370	)	$	445,849		$	(258,325	)

70

Condensed Consolidating Statement of Cash Flows for the Year Ended December 31, 2002:

(in thousands)	Parent			TCAPI			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Operating Activities
Net loss	$	(258,325	)	$	(240,629	)	$	(195,850	)	$	(9,370	)	$	445,849		$	(258,325	)
Cumulative effect of change in accounting principle		—			—			189,971			15,997			—			205,968
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization		—			2,790			51,143			51,923			—			105,856
Deferred income taxes		(37,308	)		(380	)		3,370			(8,555	)		13,627			(29,246	)
Minority interest in earnings		—			295			1,215			—			—			1,510
Equity in earnings (loss) of subsidiaries		240,629			214,470			(9,898	)		(983	)		(444,218	)		—
Change in operating assets and liabilities		24,275			(35,532	)		94,027			65,320			(40,939	)		107,151
Discontinued operations		16,183			—			—			—			—			16,183
Other		(2,578	)		—			—			—			(283	)		(2,861	)
Net Cash Flows from Operating Activities		(17,124	)		(58,986	)		133,978			114,332			(25,964	)		146,236
Investing Activities
Purchase of property, plant and equipment	$	—		$	—		$	(3,004	)	$	(22,182	)	$	—		$	(25,186	)
Plant turnaround costs		—			—			(8,191	)		(16,069	)		—			(24,260	)
Pension contributions and other		571			—			8,099			5,806			(21,108	)		(6,632	)
Net Cash Flows from Investing Activities		571			—			(3,096	)		(32,445	)		(21,108	)		(56,078	)
Financing Activities
Principal payments on long-term debt		—			(36,277	)		(11	)		187			—			(36,101	)
Change in investments and advances from (to) affiliates		4,914			119,442			(137,668	)		38,385			(25,073	)		—
Stock issuance—net		37			—			—			—			—			37
Distributions to minority interests		—			(440	)		(1,406	)		—			—			(1,846	)
Deferred financing costs		—			(1,173	)		—			—			—			(1,173	)
Other		11,603			(7,178	)		(8,730	)		(36,024	)		40,329			—
Net Cash Flows from Financing Activities		16,554			74,374			(147,815	)		2,548			15,256			(39,083	)
Effect of Foreign Exchange Rate on Cash		—			—			—			—			279			279
Increase (Decrease) in Cash and Short-term Investments		1			15,388			(16,933	)		84,435			(31,537	)		51,354
Cash and Short-term Investments at Beginning of Year		—			—			16,933			24,745			(34,553	)		7,125
Cash and Short-term Investments at End of Year	$	1		$	15,388		$	—		$	109,180		$	(66,090	)	$	58,479

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Condensed Consolidating Statement of Operations for the Year Ended December 31, 2001:

(in thousands)	Parent			TCAPI			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues
Net sales	$	—		$	—		$	411,346		$	621,163		$	101		$	1,032,610
Other income, net		(2	)		—			1,932			2,071			699			4,700
		(2	)		—			413,278			623,234			800			1,037,310
Cost and Expense
Cost of sales		—			—			438,444			605,122			3,653			1,047,219
Selling, general and administrative expenses		2,533			3,960			25,977			9,313			(3,897	)		37,886
Product claim costs		—			—			—			14,023			—			14,023
		2,533			3,960			464,421			628,458			(244	)		1,099,128
Loss from operations		(2,535	)		(3,960	)		(51,143	)		(5,224	)		1,044			(61,818	)
Interest income		465			3,685			—			600			(1,386	)		3,364
Interest expense		(36,558	)		(10,352	)		7,081			(14,997	)		1,232			(53,594	)
Minority interest		—			440			1,807			—			—			2,247
Loss on early retirement of debt		—			(3,042	)		—			—			—			(3,042	)
Equity in the earnings (loss) of subsidiaries		(64,503	)		(56,264	)		6,088			(8,154	)		122,833			—
Loss from continuing operations before income taxes		(103,131	)		(69,493	)		(36,167	)		(27,775	)		123,723			(112,843	)
Income tax benefit (provision)		(23,288	)		(4,990	)		—			(4,721	)		(1	)		(33,000	)
Loss from continuing operations		(79,843	)		(64,503	)		(36,167	)		(23,054	)		123,724			(79,843	)
Net Loss	$	(79,843	)	$	(64,503	)	$	(36,167	)	$	(23,054	)	$	123,724		$	(79,843	)

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Condensed Consolidating Statement of Cash Flows for the Year Ended December 31, 2001:

(in thousands)	Parent			TCAPI			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Operating Activities
Net loss	$	(79,843	)	$	(64,503	)	$	(36,167	)	$	(23,054	)	$	123,724		$	(79,843	)
Adjustments to reconcile net loss to net cash flows from operating activities:
Loss on early retirement of debt		—			3,042			—			—			—			3,042
Depreciation and amortization		—			3,271			66,336			61,165			—			130,772
Deferred income taxes		(33,803	)		2,620			(3,370	)		(12,227	)		14,247			(32,533	)
Minority interest in earnings		—			(440	)		(1,807	)		—			—			(2,247	)
Equity in earnings (loss) of subsidiaries		64,503			56,264			(6,088	)		8,154			(122,833	)		—
Change in operating assets and liabilities		(6,101	)		36,247			4,376			(14,945	)		(54,260	)		(34,683	)
Other		—			—			—			—			(354	)		(354	)
Net Cash Flows from Operating Activities		(55,244	)		36,501			23,280			19,093			(39,476	)		(15,846	)
Investing Activities
Purchase of property, plant and equipment		—			—			(4,443	)		(10,395	)		—			(14,838	)
Plant turnaround costs		—			—			(7,427	)		(22,981	)		—			(30,408	)
Pension contributions and other		—			—			7,061			13,390			(1,813	)		18,638
Net Cash Flows from Investing Activities		—			—			(4,809	)		(19,986	)		(1,813	)		(26,608	)
Financing Activities
Issuance of long-term debt		—			200,000			—			—			—			200,000
Principal payments on long-term debt		(158,755	)		36,278			(8,650	)		(105,625	)		—			(236,752	)
Change in investments and advances from (to) affiliates		197,032			(339,731	)		495			114,397			27,807			—
Stock issuance - net		180			—			—			—			—			180
Distributions to minority interests		—			(337	)		(1,691	)		—			—			(2,028	)
Repurchase of TNCLP common units		—			(1,671	)		—			—			—			(1,671	)
Deferred financing costs and bond discounts		—			(11,442	)		—			—			—			(11,442	)
Other		16,787			3,443			(3,536	)		4,377			(21,071	)		—
Net Cash Flows from Financing Activities		55,244			(113,460	)		(13,382	)		13,149			6,736			(51,713	)
Effect of Foreign Exchange Rate on Cash		—			—			—			(133	)		—			(133	)
Increase (Decrease) in Cash and Short-term Investments		—			(76,959	)		5,089			12,123			(34,553	)		(94,300	)
Cash and Short-term Investments at Beginning of Year		—			76,959			11,844			12,622			—			101,425
Cash and Short-term Investments at End of Year	$	—		$	—		$	16,933		$	24,745		$	(34,553	)	$	7,125

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22. Agreements of Limited Partnerships

Terra Nitrogen Company L.P. (TNCLP)

Terra owns a 2% General Partnership interest and 75.1% of the Common Units of TNCLP at December 31, 2003. Terra consolidates TNCLP results with the publicly held TNCLP Common Units reflected in Terra’s financial statements as a minority interest.

In accordance with the TNCLP limited partnership agreement, quarterly distributions to unitholders and Terra are made in an amount equal to 100% of its available cash, as defined in the partnership agreement. The General Partner receives a combined minimum 2% of total cash distributions, and as an incentive, the general partner’s participation increases if cash distributions exceed specified target levels.

If at any time less than 25% of the issued and outstanding units are held by non-affiliates of the General Partner, TNCLP may call, or assign to the General Partner or its affiliates, its right to acquire all such outstanding units held by non-affiliated persons with at least 30 but not more than 60 days’ notice of its decision to purchase the outstanding units. The purchase price per unit will be the greater of (1) the average of any previous twenty trading days’ closing prices as of the date five days before the purchase is announced and (2) the highest price paid by the General Partner or any of its affiliates for any unit within the 90 days preceding the date the purchase is announced.

23. Pending Change of Control

Anglo American plc, through a subsidiary, owns 48.4% of Terra’s outstanding shares. Anglo American has made public its intention to dispose of its interest in Terra with the timing based on market and other conditions.

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INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders of Terra Industries Inc.:

We have audited the accompanying consolidated statements of financial position of Terra Industries Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, cash flows and changes in stockholders’ equity for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of Terra’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Terra Industries Inc. and subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Notes 1 and 2 to the consolidated financial statements, in 2003 the Company applied the provisions of Statement of Financial Accounting Standards No.145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections” and reclassified an extraordinary loss on early retirement of debt in 2001 to continuing operations and in 2002 the Company changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142.

Deloitte & Touche LLP

Omaha, Nebraska

February 19, 2004

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the filing date of this report, that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF TERRA

Information with respect to directors of Terra is set forth under the caption “Election of Directors” in the proxy statement for the Annual Meeting of Stockholders of Terra to be held on May 4, 2004, and is incorporated herein by reference. Information with respect to executive officers of Terra is set forth under the caption “Executive Officers of Terra” in Part I hereof and is incorporated herein by reference.

Terra has a Code of Ethics and Business Conduct that applies to its principal executive officer and its principal financial officer. The code also applies to Terra’s other officers, directors and employees. The Code of Ethics and Business Conduct is posted on Terra’s web site, www.terraindustries.com, in the “Investor Information” section. In addition, the information set forth under “Equity Security Ownership” in “Section 16(a) Beneficial Ownership Reporting Compliance” in the proxy statement is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information with respect to executive and director compensation is set forth under the captions “Executive Compensation and Other Information” and “Board of Directors and Committees” in “Director Compensation” and “Compensation Committee Interlocks and Insider Participation” in the proxy statement for the Annual Meeting of Stockholders of Terra to be held on May 4, 2004, is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information with respect to security ownership of certain beneficial owners and management under the caption “Equity Security Ownership” in the proxy statement for the Annual Meeting of Stockholders of Terra to be held on May 4, 2004 is incorporated herein by reference.

Equity Compensation Plan Information

	(a)	(b)		(c)
Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders	930,000	$	4.72	2,200,000
Equity compensation plans not approved by security holders	-0-		-0-	-0-
Total	930,000	$	4.72	2,200,000

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Principal Accountant Audit Fees and Services Fees

Information with respect to principal accountant audit fees and service fees is set forth under the caption “Proposal 2: Ratification of Selection of Independent Accounts—Principal Accountant Audit Fees and Service Fees” in the proxy statement, is incorporated herein by reference.

Audit Committee Pre-Approval Policies and Procedures

Pursuant to its charter, the Audit Committee is responsible for reviewing and approving, in advance, any audit and any permissible non-audit engagement or relationship between TNC and its independent auditors. Deloitte & Touche LLP’s engagement to conduct the audit of Terra was approved by the Audit Committee on July 28, 2003. Additionally, each permissible non-audit engagement or relationship between Terra and services performed by Deloitte & Touch LLP since May, 2003 has been reviewed and approved in advance by the Audit Committee, as provided in its charter.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Financial Statements and Financial Statement Schedules

1. Consolidated Financial Statements of Terra and its subsidiaries is included in Item 8 herein.

Consolidated Statements of Financial Position at December 31, 2003 and 2002

Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001

Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2003, 2002 and 2001

Notes to the Consolidated Financial Statements

Independent Auditors’ Report

2. Index to Financial Statement Schedules

See Index to Financial Statement Schedules of Terra and its subsidiaries at page S-1

3. Other Financial Statements

Individual financial statements of Terra’s subsidiaries are omitted because all such subsidiaries are included in the consolidated financial statements being filed. Individual financial statements of 50% or less owned persons accounted for on the equity method have been omitted because such 50% or less owned are persons considered in the aggregate, as a single subsidiary, would not constitute a significant subsidiary.

(b) Reports on Form 8-K

Form 8-K dated October 20, 2003 reporting under Item 5 the Court of Appeals decision against Terra’s insurer to cover benzene claim costs.

Form 8-K dated October 30, 2003 furnishing under Item 12 Terra’s third quarter earnings.

Form 8-K filed December 15, 2003 reporting under Item 5 Terra’s methanol distribution agreement with Methanex.

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(c) Exhibit

3.1.1	Articles of Restatement of Terra Industries as amended filed with the State of Maryland on September 11, 1990, filed as Exhibit 3.1 to Terra Industries’ Form 10-K for the year ended December 31, 1990, is incorporated herein by reference.
3.1.2	Articles of Amendment of Terra Industries filed with the State of Maryland on May 6, 1992, filed as Exhibit 3.1.2 to Terra Industries’ Form 10-K for the year ended December 31, 1992, is incorporated herein by reference.
3.1.3	Articles Supplementary of Terra Industries filed with the State of Maryland on October 13, 1994, filed as Exhibit 4.1.3 to Terra Industries’ Form 8-K/A dated November 3, 1994, is incorporated herein by reference.
3.2	By-Laws of Terra Industries, as amended through August 7, 1991, filed as Exhibit 3 to Terra Industries’ Form 8-K dated September 30, 1991, is incorporated herein by reference.
3.3	Certificate of Incorporation of Terra Capital, Inc. filed as Exhibit 3.i.(a) to Terra Capital, Inc.’s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.
3.4	Certificate of Incorporation of Beaumont Ammonia Inc. filed as Exhibit 3.i.(b) to Terra Capital, Inc.’s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.
3.5	Certificate of Incorporation of Beaumont Holdings Corporation filed as Exhibit 3.i.(c) to Terra Capital, Inc.’s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.
3.6	Certificate of Incorporation of BMC Holdings Inc. filed as Exhibit 3.i.(d) to Terra Capital, Inc.’s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.
3.7	Certificate of Incorporation of Port Neal Corporation filed as Exhibit 3.i.(e) to Terra Capital, Inc.’s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.
3.8	Certificate of Incorporation of Terra (UK) Holdings Inc. filed as Exhibit 3.i.(f) to Terra Capital, Inc.’s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.
3.9	Certificate of Incorporation of Terra Capital Holdings, Inc. filed as Exhibit 3.i.(g) to Terra Capital, Inc.’s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.

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3.10	Certificate of Incorporation of Terra International (Oklahoma) Inc. filed as Exhibit 3.i.(k) to Terra Capital, Inc.’s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.
3.11	Certificate of Incorporation of Terra International, Inc. filed as Exhibit 3.i.(l) to Terra Capital, Inc.’s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.
3.12	Certificate of Incorporation of Terra Methanol Corporation filed as Exhibit 3.i.(m) to Terra Capital, Inc.’s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.
3.13	Certificate of Incorporation of Terra Nitrogen Corporation filed as Exhibit 3.i.(n) to Terra Capital, Inc.’s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.
3.14	Certificate of Incorporation of Terra Real Estate Corporation filed as Exhibit 3.i.(o) to Terra Capital, Inc.’s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.
3.15	By-Laws of Terra Capital, Inc. filed as Exhibit 3.ii.(a) to Terra Capital, Inc.’s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.
3.16	By-Laws of Beaumont Ammonia Inc. filed as Exhibit 3.ii.(b) to Terra Capital, Inc.’s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.
3.17	By-Laws of Beaumont Holdings Corporation filed as Exhibit 3.ii.(c) to Terra Capital, Inc.’s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.
3.18	By-Laws of BMC Holdings, Inc. filed as Exhibit 3.ii.(d) to Terra Capital, Inc.’s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.
3.19	By-Laws of Port Neal Corporation filed as Exhibit 3.ii.(e) to Terra Capital, Inc.’s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.
3.20	By-Laws of Terra (UK) Holdings Inc. filed as Exhibit 3.ii.(f) to Terra Capital, Inc.’s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.

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3.21	By-Laws of Terra Capital Holdings, Inc. filed as Exhibit 3.ii.(g) to Terra Capital, Inc.’s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.
3.22	By-Laws of Terra International (Oklahoma) Inc. filed as Exhibit 3.ii.(i) to Terra Capital, Inc.’s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.
3.23	By-Laws of Terra International, Inc. filed as Exhibit 3.ii.(j) to Terra Capital, Inc.’s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.
3.24	By-Laws of Terra Methanol Corporation filed as Exhibit 3.ii.(k) to Terra Capital, Inc.’s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.
3.25	By-Laws of Terra Nitrogen Corporation filed as Exhibit 3.ii.(l) to Terra Capital, Inc.’s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.
3.26	By-Laws of Terra Real Estate Corporation filed as Exhibit 3.ii.(m) to Terra Capital, Inc.’s Registration Statement filed on Form S-4 on November 13, 2001, is incorporated herein by reference.
4.1	Indenture dated as of October 10, 2001 among Terra Capital, Inc., Certain guarantors and U.S. Bank National Association, as trustee, including the form of note, filed as Exhibit 4.1 to Terra Industries’ Form 8-K dated October 10, 2001, is incorporated herein by reference.
4.2	Amended and Restated Credit Agreement dated as of October 10, 2001 among Terra Capital, Inc., Terra Nitrogen (U.K.) Limited, and Terra Nitrogen, Limited Partnership, certain guarantors, certain lenders, certain issuing banks and Citicorp USA, Inc., filed as Exhibit 4.2 to Terra Industries’ Form 8-K dated October 10, 2001, is incorporated herein by reference.
4.3	Amendment No. 1 to Credit Agreement dated June 27, 2002, filed as Exhibit 4.1 to Terra Industries’ Form 8-K dated June 27, 2002, is incorporated herein by reference.
4.4	Amendment No. 2 to the Amended and Restated Credit Agreement dated May 12, 2003 among Terra Capital, Inc., Terra Nitrogen (U.K.) Limited, and Terra Nitrogen, Limited Partnership, certain guarantors, certain lenders, certain issuing banks and Citicorp USA Inc., filed as Exhibit 4.5 to Terra Industries’ Form 10-Q for the quarter ended June 30, 2003, is incorporated herein by reference.

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4.5	Indenture dated May 21, 2003 between the Company, the guarantors party hereto, and U.S. National Bank Association as Trustee, with respect to the 11.5% Second Priority Senior Secured Notes due 2010 (including the form of 11.5% Second Priority Senior Secured Notes), previously filed as Exhibit 4.i to Amendment No. 1 to the Registrant’s Registration Statement of Form S-4 filed on June 12, 2003 and incorporated by reference herein, filed as Exhibit 4.6 to Terra Industries’ Form10-Q for the quarter ended June 30, 2003, is incorporated herein by reference.
10.1.1	Resolution adopted by the Personnel Committee of the Board of Directors of Terra Industries with respect to supplemental retirement benefits for certain senior executive officers of Terra Industries, filed as Exhibit 10.4.2 to Terra Industries’ Form 10-Q for the fiscal quarter ended March 31, 1991, is incorporated herein by reference.
10.1.2	1992 Stock Incentive Plan of Terra Industries filed as Exhibit 10.1.6 to Terra Industries’ Form 10-K for the year ended December 31, 1992, is incorporated herein by reference.
10.1.3	Form of Restricted Stock Agreement of Terra Industries under its 1992 Stock Incentive Plan filed as Exhibit 10.1.7 to Terra Industries’ Form 10-K for the year ended December 31, 1992, is incorporated herein by reference.
10.1.4	Form of Incentive Stock Option Agreement of Terra Industries under its 1992 Stock Incentive Plan, filed as Exhibit 10.1.8 to Terra Industries’ Form 10-K for the year ended December 31, 1992, is incorporated herein by reference.
10.1.5	Form of Nonqualified Stock Incentive Agreement of Terra Industries under its 1992 Stock Incentive Plan, filed as Exhibit 10.1.9 to Terra Industries’ Form 10-K for the year ended December 31, 1992, is incorporated herein by reference.
10.1.6	Excess Benefit Plan of Terra Industries, as amended effective as of January 1, 1992, filed as Exhibit 10.1.13 to Terra Industries’ Form 10-K for the year ended December 31, 1992, is incorporated herein by reference.
10.1.6.a	Amendment to the Terra Industries Inc. Excess Benefit Plan, dated July 26, 2000, filed as Exhibit 10.1.6.a to Terra Industries’ Form 10-K for the year ended December 31, 2000, is incorporated herein by reference.
10.1.7	Terra Industries Inc. Supplemental Deferred Compensation Plan effective as of December 20, 1993 filed as Exhibit 10.1.9 to Terra Industries’ Form 10-K for the year ended December 31, 1993, is incorporated herein by reference.

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10.1.8	Amendment No. 1 to the Terra Industries Inc. Supplemental Deferred Compensation Plan, filed as Exhibit 10.1.15 to Terra Industries’ Form 10-Q for the quarter ended September 30, 1995, is incorporated herein by reference.
10.1.8.a	Amendment No. 2 to the Terra Industries Inc. Supplemental Deferred Compensation Plan, dated July 26, 2000, filed as Exhibit 10.1.8.a to the Terra Industries’ Form 10-K for the year ended December 31, 2000, is incorporated herein by reference.
10.1.8.b	Amendment No. 3 to the Terra Industries Inc. Supplemental Deferred Compensation Plan, dated March 29, 2002, filed as Exhibit 10.1.8.b. to the Terra Industries’ Form 10-K for the year ended December 31, 2001, is incorporated herein by reference.
10.1.9	Revised Form of Incentive Stock Option Agreement of Terra Industries under its 1992 Stock Incentive Plan, filed as Exhibit 10.1.12 to Terra Industries’ Form 10-K for the year ended December 31, 1996, is incorporated herein by reference.
10.1.10	Revised Form of Nonqualified Stock Option Agreement of Terra Industries under its 1992 Stock Incentive Plan, filed as Exhibit 10.1.13 to Terra Industries’ Form 10-K for the year ended December 31, 1996, is incorporated herein by reference.
10.1.11	1997 Stock Incentive Plan of Terra Industries, filed as Exhibit 10.1.14 to Terra Industries’ Form 10-K for the year ended December 31, 1996, is incorporated herein by reference.
10.1.12	Form of Incentive Stock Option Agreement of Terra Industries under its 1997 Stock Incentive Plan filed as Exhibit 10.1.13 to Terra Industries’ Form 10-K for the year ended December 31, 1999, is incorporated herein by reference.
10.1.13	Form of Nonqualified Stock Option Agreement of Terra Industries under its 1997 Stock Incentive Plan filed as Exhibit 10.1.14 to Terra Industries’ Form 10-K for the year ended December 31, 1999, is incorporated herein by reference.
10.1.14	Form of Performance Share Award of Terra Industries under its 1997 Stock Incentive Plan, filed as Exhibit 10.1.15 to Terra Industries’ Form 10-K for the year ended December 31, 1998, is incorporated herein by reference.
10.1.15	Retirement and Consulting Agreement for Burton M. Joyce, dated April 26, 2001 filed as Exhibit 10.1.16 to Terra Industries’ Form 10-K for the year ended December 31, 2001, is incorporated herein by reference.

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10.1.16	Form of Executive Retention Agreement for Other Executive Officers, filed as Exhibit 10.1.19 to Terra Industries’ Form 10-K for the year ended December 31, 1998, is incorporated herein by reference.
10.1.17	Form of Non-Employee Director Stock Option Agreement under the 1997 Stock Incentive Plan, filed as Exhibit 10.2.21 to Terra Industries’ Form 10-Q for the quarter ended September 30, 1999, is incorporated herein by reference.
10.1.18	Amendment No. 1 dated as of February 20, 1997 to the 1997 Stock Incentive Plan filed as Exhibit 10.1.21 to Terra Industries’ Form 10-K for the year ended December 31, 1999, is incorporated herein by reference.
10.1.19	Form of Performance Share Award of Terra Industries under its 1997 Stock Incentive Plan, dated February 16, 2000, filed as Exhibit 10.1.22 of the Terra Industries’ Form 10-K for the year ended December 31, 2000, is incorporated herein by reference.
10.1.20	Form of Non-Employee Director Performance Share Award of Terra Industries under its 1997 Stock Incentive Plan, dated May 2, 2000, filed as Exhibit 10.1.23 to the Terra Industries’ Form 10-K for the year ended December 31, 2000, is incorporated herein by reference.
10.1.21	Terra Industries Inc. Stock Incentive Plan of 2002, filed as Exhibit 10.1.23 to the Terra Industries’ Form 10-K for the year ended December 31, 2001, is incorporated herein by reference.
10.1.22	Form of Restricted Stock Award to Non-Employee Directors under the Terra Industries Inc. Stock Incentive Plan of 2002, filed as Exhibit 10.1.23 to the Terra Industries’ Form 10-K for the year ended December 31, 2002, is incorporated herein by reference.
10.1.23	Form of Restricted Stock Award to Officers and Other Key Employees under the Terra Industries Inc. Stock Incentive Plan of 2002, filed as Exhibit 10.1.24 to the Terra Industries’ Form 10-K for the year ended December 31, 2002, is incorporated herein by reference.
10.2	Agreement of Limited Partnership of TNCLP (formerly known as Agricultural Minerals Company, L.P.) dated as of December 4, 1991, filed as Exhibit 99.3 to Terra Industries’ Registration Statement on Form S-3, as amended, is incorporated herein by reference.
10.3	Agreement of Limited Partnership of TNLP (formerly known as Agricultural Minerals, Limited Partnership) dated as of December 4, 1991, filed as Exhibit 99.4 to Terra Industries’ Registration Statement on Form S-3, as amended, is incorporated herein by reference.

84

10.4	General and Administrative Services Agreement Regarding Services by Terra Industries Inc., filed as Exhibit 10.11 to Terra Industries Inc. Form 10-Q for the quarter ended March 31, 1995, is incorporated herein by reference.
10.5	General and Administrative Services Agreement Regarding Services by Terra Nitrogen Corporation, filed as Exhibit 10.12 to Terra Industries Inc. Form 10-Q for the quarter ended March 31, 1995, is incorporated herein by reference.
10.6	Sale of Business Agreement dated November 20, 1997 between ICI Chemicals & Polymers Limited, Imperial Chemical Industries PLC, Terra Nitrogen (U.K.) Limited (f/k/a Terra Industries Limited) and Terra Industries Inc. filed as Exhibit 2 to Terra Industries’ Form 8-K/A dated December 31, 1997, is incorporated herein by reference.
10.7	Ammonium Nitrate Agreement dated December 31, 1997 between Terra International (Canada) Inc and ICI Chemicals & Polymers Limited filed as Exhibit 99 to Terra Industries’ Form 8-K/A dated December 31, 1997, is incorporated herein by reference.
10.8	Asset Sale and Purchase Agreement dated as of May 3, 1999 by and between Terra Industries Inc. and Cenex/Land O’Lakes Agronomy Company, filed as Exhibit 10.12 to Terra Industries’ Form 8-K dated May 3, 1999, is incorporated herein by reference.
10.9*†	Asset Purchase and Methanol Exclusivity Agreement among Terra Industries Inc., BMC Holdings Inc., and Methanex Methanol Company dated December 15, 2003.
10.9.1*†	Services Agreement among Terra Industries Inc., BMC Holdings Inc., and Methanex Methanol Company dated December 15, 2003 included as Schedule E to Exhibit 10.9 herein.
10.10*†	First Amendment to Asset Purchase and Methanol Exclusivity Agreement dated February 20, 2004.
21	Subsidiaries of Terra Industries, filed as Exhibit 21 to Terra Industries’ Form 10-K for the year ended December 31, 2002, is incorporated herein by reference.
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

† Confidential treatment has been requested for portions of this document.

Exhibits 10.1.1 through 10.1.24 are management contracts or compensatory plans or arrangements.

85

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	TERRA INDUSTRIES INC.
Date: March 8, 2004	By:	/s/ FRANCIS G. MEYER
		Francis G. Meyer
		Senior Vice President and Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

Signature	Title
/s/ HENRY R. SLACK	Chairman of the Board
Henry R. Slack
/s/ MICHAEL L. BENNETT	Director, President and Chief Executive Officer (Principal Executive Officer)
Michael L. Bennett
/s/ FRANCIS G. MEYER	Senior Vice President and Chief Financial Officer (Principal Financial Officer and Controller/Principal Accounting Officer)
Francis G. Meyer
/s/ PHILIP M. BAUM	Director
Philip M. Baum
/s/ DAVID E. FISHER	Director
David E. Fisher
/s/ DOD A. FRASER	Director
Dod A. Fraser
/s/ MARTHA O. HESSE	Director
Martha O. Hesse
/s/ BEN L. KEISLER	Director
Ben L. Keisler

Date: March 8, 2004

86

INDEX TO FINANCIAL STATEMENT SCHEDULES, REPORTS AND CONSENTS

Report of Deloitte & Touche LLP on Financial Statement Schedules		S-2
Consent of Deloitte & Touche LLP		S-2
Schedule No.
I	Condensed Financial Information of Registrant, is included in Item 8 herein, Footnote 21, Column 1, “Parent.”
II	Valuation and Qualifying Accounts: Years Ended December 31, 2003, 2002 and 2001	S-3

Financial statement schedules not included in this report have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or the notes thereto.

S-1

INDEPENDENT AUDITORS’ REPORT ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Stockholders of Terra Industries Inc.:

We have audited the consolidated financial statements of Terra Industries Inc. and subsidiaries as of December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003, and have issued our report thereon dated February 19, 2004 (which report expresses an unqualified opinion and includes an explanatory paragraph related to the Company’s 2003 application of Statements of Financial Accounting Standard No. 145, reclassifying an extraordinary loss on early retirement of debt in 2001 to continuing operations and the Company’s 2002 change in methods of accounting for goodwill and other intangible assets); such report is included elsewhere in this Form 10-K. Our audits also included the consolidated financial statement schedule of Terra Industries Inc. and subsidiaries listed in Item 15 of this Form 10-K. This consolidated financial statement schedule is the responsibility of the management of Terra Industries Inc. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

DELOITTE & TOUCHE LLP

Omaha, Nebraska

February 19, 2004

INDEPENDENT AUDITORS’ CONSENT

We consent to the incorporation by reference in Registration Statements Nos. 333-32869, 33-46735, 33-46734 and 33-30058 of Terra Industries Inc. and subsidiaries on Forms S-8 and Registration Statements Nos. 333-68766, 2-90808, 2-84876 and 2-84669 of Terra Industries Inc. and subsidiaries on Form S-3 of our reports dated February 19, 2004 (which reports express an unqualified opinion and include an explanatory paragraph related to the Company’s 2003 application of Statements of Financial Accounting Standard No. 145 reclassifying an extraordinary loss on early retirement of debt in 2001 to continuing operations and the Company’s 2002 change in methods of accounting for goodwill and other intangible assets), appearing in and incorporated by reference in this Annual Report on Form 10-K of Terra Industries Inc. and subsidiaries for the year ended December 31, 2003.

DELOITTE & TOUCHE LLP

Omaha, Nebraska

March 8, 2004

S-2

SCHEDULE II

Terra Industries Inc.

Valuation and Qualifying Accounts

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001

(IN THOUSANDS)

Description	Balance at Beginning of Period		Additions Charged to Costs and Expenses			Less Write- offs, and Transfers, Net of Recoveries			Balance at End of Period
Year Ended December 31, 2003:
Allowance for Doubtful Accounts
Continuing operations	$	135	$	1,510		$	(1,558	)	$	87
Discontinued operations—Included in other assets		3,953		0			(176	)		3,777
	$	4,088	$	1,510		$	(1,734	)	$	3,864
Year Ended December 31, 2002:
Allowance for Doubtful Accounts
Continuing operations	$	936	$	(445	)	$	(356	)	$	135
Discontinued operations—Included in other assets		4,319		0			(366	)		3,953
	$	5,255	$	(445	)	$	(722	)	$	4,088
Year Ended December 31, 2001:
Allowance for Doubtful Accounts
Continuing operations	$	889	$	7		$	40		$	936
Discontinued operations—Included in other assets		6,359		0			(2,040	)		4,319
	$	7,248	$	7		$	(2,000	)	$	5,255

S-3

Terra Industries Inc.

600 Fourth Street

Sioux City, Iowa 51101

(712) 277-1340

EX-10.9

Exhibit 10.9

“CONFIDENTIAL TREATMENT REQUESTED FOR PORTIONS OF THIS DOCUMENT. PORTIONS FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ARE DENOTED BY [***]. MATERIAL OMITTED HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24b-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.”

ASSET PURCHASE AND METHANOL EXCLUSIVITY AGREEMENT

AMONG

TERRA INDUSTRIES INC.

AND

BMC HOLDINGS INC.

AND

METHANEX METHANOL COMPANY

Dated as of December 15, 2003

TABLE OF CONTENTS

1.	INTERPRETATION			1
	1.1.	Definitions		1
	1.2.	Interpretation		2
	1.3.	Jurisdiction, Consent to Service of Process		2
	1.4.	Schedules		2
2.	PURCHASE, SALE AND PURCHASE PRICE			3
	2.1.	Purchase and Sale		3
	2.2.	Purchase Price		3
	2.3.	Method of Payment		3
	2.4.	Sales Taxes		3
3.	TRANSFER OF CONTRACTS			4
	3.1.	Delivery of Contracts and Customer List		4
	3.2.	Notice Requirements and Third Party Consents		4
	3.3.	Assumption of Contracts		4
	3.4.	Non-Assignable Rights		4
4.	TIME OF CLOSING			5
5.	RIGHTS TO METHANOL PRODUCTION/BEAUMONT FACILITY			5
	5.1.	Exclusive Rights		5
	5.2.	Facility Operation/Personnel		5
		5.2.1.	Facility Operation	5
		5.2.2.	Quarterly Review of Operations	5
		5.2.3.	Responsible Care®/Codes of Practice	6
		5.2.4.	Personnel	6
		5.2.5.	Beaumont Facility Supply Contracts	6
	5.3.	Facility Suspension		6
		5.3.1.	Suspension for Operation Matters	6
		5.3.2.	Economic Hardship/Temporary Suspension	7
		5.3.3.	Methanex Suspension of Supply Notice	9
		5.3.4.	Methanex Right to Restart Supply	9
		5.3.5.	Terra Production Right	9
	5.4.	Ownership of Assets/Depreciation		11
	5.5.	Insurance		11
		5.5.1.	Obligation to Insure	11
		5.5.2.	Damage to Beaumont Facility	11
6.	FEES			12
	6.1.	Lump Sum Exclusivity Fee		12
	6.2.	Methanol Exclusivity Fees		12
	6.3.	Combined Production Fees/Methanol Production Fees		13
	6.4.	Calculation of Formulas		15

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7.	PAYMENT TERMS/AUDIT RIGHTS		15
	7.1.	Payment of Methanol Exclusivity Fees	15
	7.2.	Terra Invoice	15
	7.3.	Payment Terms	16
	7.4.	Late Payments	16
	7.5.	Audit Rights	16
8.	CONTRACT COVENANTS		17
	8.1.	Terra Contracts	17
	8.2.	Assumed Customers	17
	8.3.	Injunctive Relief	17
9.	TERM AND TERMINATION		17
	9.1.	Term	17
	9.2.	Termination	17
	9.3.	Effect of Termination	18
10.	CONFIDENTIALITY		18
	10.1.	Information	18
	10.2.	Exception	18
	10.3.	Disclosure Required by Law	18
	10.4.	Return of Information	19
	10.5.	Restriction on Disclosure of this Agreement	19
	10.6.	Public Announcements	19
	10.7.	Remedies	19
11.	REPRESENTATIONS AND WARRANTIES OF TERRA		19
	11.1.	Corporate Status	19
	11.2.	Authority to Sell	19
	11.3.	No Conflicts	20
	11.4.	No Governmental Consents Required	20
	11.5.	Ownership and Good Title	20
	11.6.	Litigation	20
	11.7.	Contracts	20
	11.8.	Product/Inventory	20
	11.9.	Beaumont Facility	20
12.	REPRESENTATIONS AND WARRANTIES OF METHANEX		20
	12.1.	Status	20
	12.2.	Authority to Purchase	21
	12.3.	No Conflicts	21
13.	COVENANTS OF TERRA		21
14.	CLOSING CONDITIONS		22
	14.1.	Fulfilment of Conditions in Favour of Methanex	22
	14.2.	Failure to Fulfil Conditions	22
	14.3.	Fulfilment of Conditions in Favour of Terra	22

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	14.4.	Failure to Fulfil Conditions	23
15.	DELIVERIES		23
	15.1.	Closing Deliveries by Terra	23
	15.2.	Closing Deliveries by Methanex	23
	15.3.	Closing Procedures	24
16.	INDEMNIFICATION/LIMITATION OF LIABILITY		24
	16.1.	Indemnification of Terra	24
	16.2.	Indemnification of Methanex	24
	16.3.	Indemnification Procedures	25
	16.4.	Defence of Third Party Claim	25
	16.5.	Payment	26
	16.6.	Limitation of Liability	26
17.	FORCE MAJEURE		26
	17.1.	Force Majeure Event	26
18.	DISPUTE RESOLUTION		27
	18.1.	Amicable Settlement	27
	18.2.	Inadmissibility	27
	18.3.	Arbitration	27
	18.4.	Interim Relief	28
	18.5.	Continuing Obligations	29
19.	MISCELLANEOUS		29
	19.1.	Relationship of Parties	29
	19.2.	Notices	29
	19.3.	Counterparts	30
	19.4.	Benefit and Burden	30
	19.5.	Amendments and Waiver	30
	19.6.	Assignments	30
	19.7.	Severability	30
	19.8.	Applicable Law	30
	19.9.	Expenses	30
	19.10.	Entire Agreement	30
SCHEDULE A			A-1
SCHEDULE B			B-1
SCHEDULE C			C-1
SCHEDULE D			D-1
SCHEDULE E			E-1
SCHEDULE F			F-1
SCHEDULE G			G-1
SCHEDULE H			H-1
SCHEDULE I			I-1

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ASSET PURCHASE AND METHANOL EXCLUSIVITY AGREEMENT

THIS ASSET PURCHASE AND METHANOL EXCLUSIVITY AGREEMENT (the “Agreement”) is made the 15^th day of December, 2003 between TERRA INDUSTRIES INC. (“Terra Industries”), a Maryland corporation and BMC HOLDINGS INC. (“BMC”), a Delaware corporation, each having its head office at 600 Fourth Street, Sioux City, Iowa (Terra Industries and BMC are together “Terra”) and METHANEX METHANOL COMPANY (“Methanex”), a Texas partnership having an office at 15301 Dallas Parkway, Suite 1150, Addison, Texas 75001

BACKGROUND:

A. Terra Industries and BMC are Affiliated (defined below) corporations;

B. Terra Industries and BMC are producers of certain chemical products for use in the manufacture of fertilizer and otherwise, including, ammonia, urea, urea ammonium nitrate and methanol;

C. BMC produces methanol at its Beaumont Facility (defined in Schedule A). BMC is the 100% owner and operator of the Beaumont Facility and BMC owns 100% of the methanol produced at that facility. Methanol produced at the Beaumont Facility is sold by BMC to its customers;

D. Effective as of December 31, 2003, BMC wishes to sell, assign and transfer to Methanex, and Methanex wishes to purchase from BMC, all of BMC’s right, title and interest in and to the methanol sales and related contracts and the customer list in respect of methanol sales by BMC from the Beaumont Facility and the methanol inventory located at the Beaumont Facility and certain other storage locations;

E. Ancillary to the rights set out in Recital D above, Methanex wishes to acquire the exclusive right to purchase 100% of the methanol produced at the Beaumont Facility during the period December 31, 2003 through December 31, 2008 and BMC wishes to grant Methanex such exclusive right to 100% of the methanol produced at the Beaumont Facility during such period, in order for Methanex to realize certain supply efficiencies and cost savings; and

F. On September 3, 2003, Terra Industries and Methanex Corporation, an Affiliate (defined in Schedule A) of Methanex, entered into a confidentiality agreement (the “Confidentiality Agreement”), in respect of certain confidential information provided by Terra Industries to Methanex Corporation in the course of Methanex Corporation’s exploring a potential arrangement with Terra.

AGREEMENT:

NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the premises, mutual covenants and agreements contained in this Agreement, and other good and valuable consideration (the receipt and sufficiency of which is acknowledged by the parties), the parties covenant and agree as follows:

1. INTERPRETATION

1.1. Definitions: In this Agreement terms with an initial capital letter shall have the meaning given to such terms as set forth in Schedule A.

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1.2. Interpretation: In this Agreement:

(a) all terms defined in the singular shall have the same meanings in the plural and vice versa;

(b) all references to currency in this Agreement are references to the lawful currency of the United States;

(c) all references to Sections and Subsections shall be references to the Sections and Subsections of this Agreement;

(d) the captions and headings contained in this Agreement are for convenience of reference only and shall not be considered or given any effect in construing the provisions hereof if any question of intent should arise;

(e) reference to any Law or Laws means such Law or Laws as amended, modified, codified, re-enacted, supplemented or superseded in whole or in part, and in effect from time to time; and

(f) no provision of this Agreement shall be interpreted or construed against either Party solely because that Party or its legal representative drafted such provision.

1.3. Jurisdiction, Consent to Service of Process: Subject to the agreement of the Parties to resolve all disputes arising out of or relating to this Agreement in accordance with the procedures set forth in Section 18 of this Agreement, any action or Proceedings which is permitted to be brought by a Party against a Party to this Agreement arising out of or relating to this Agreement, whether in tort or contract or at law or in equity, shall be brought in a federal or state court in the State of New York, Manhattan Borough and each Party: (i) irrevocably submits to the personal and exclusive jurisdiction of such courts; (ii) waives any objection to laying venue in any such action or Proceedings in such courts; (iii) waives any objection that such courts are an inconvenient forum or do not have jurisdiction over it; and (iv) agrees that service of process upon such Party may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to it at its address specified in Subsection 19.2. The foregoing consents to jurisdiction and service of process shall not constitute general consents to service of process in the State of New York for any purpose except as provided herein and shall not be deemed to confer rights on any Person other than the Parties to this Agreement. The provisions of this Subsection 1.3 shall not affect a Party’s right to bring any Proceedings related to the enforcement of any arbitration award in any other jurisdiction.

1.4. Schedules: The following schedules are attached to this Agreement and are incorporated into and form an integral part of this Agreement:

Schedule		Description
Schedule A	-	Definitions
Schedule B	-	Product Delivery Terms
Schedule C	-	Notice of Assignment
Schedule D	-	Methanol Specifications
Schedule E	-	Services Agreement
Schedule F	-	Methanol Exclusivity Fees (Sample Calculations)
Schedule G	-	Contract Price (Sample Calculations)
Schedule H	-	Efficiency Factors
Schedule I	-	Disclosure Schedule

- 2 -

2. PURCHASE, SALE AND PURCHASE PRICE

2.1. Purchase and Sale: At the Time of Closing, subject to the terms and conditions contained in this Agreement, BMC shall sell, transfer and assign to Methanex, and Methanex shall purchase from BMC all of BMC’s right, title and interest in and to the following:

(a) all agreements, arrangements, contracts, purchase orders or other commitments in any way relating to the sale, distribution or marketing of methanol from the Beaumont Facility, whether written or oral, including, without limitation, customer contracts, distributor contracts, sales orders and the ITC Storage Contract (the “Contracts” and each a “Contract”);

(b) the list of BMC’s, or its Affiliate’s, customers who have purchased methanol from BMC, or its Affiliates, during the period January 1, 2000 to and including the Time of Closing, together with applicable addresses, telephone numbers, facsimile numbers, e-mail addresses and other relevant contact information (the “Customer List”); and

(c) all inventories of methanol owned by BMC or Terra (legally and beneficially), located at the Beaumont Facility and in the ITC Storage Tank at the Time of Closing (the “Inventory”),

(collectively, the “Assets”).

2.2. Purchase Price: The purchase price (“Purchase Price”) for the Assets is as follows:

(a) as to the Contracts and Customer List, [***] payable by Methanex to BMC at the Time of Closing; and

(b) as to the Inventory, an amount equal to [***] multiplied by the Actual Closing Inventory (the “Inventory Purchase Price”).

The Actual Closing Inventory means (i) the actual quantity of Inventory contained in the Beaumont Storage Tanks and the ITC Storage Tank as of midnight (Central Standard Time) on December 31, 2003, as measured by an independent surveyor selected by the Parties, acting reasonably and (ii) the positive or negative methanol exchange balances under any swap arrangements between Methanex and BMC as of the Time of Closing as determined by the Parties. The findings of the surveyor shall be final and binding upon the Parties for all purposes. The Actual Closing Inventory shall also include exchange balances under any swap agreements.

Promptly after the Time of Closing the Parties will jointly instruct an independent surveyor to measure the quantity of methanol located in the Beaumont Storage Tanks and the ITC Storage Tank. The independent surveyor will be instructed to provide the quantity information to BMC and Methanex. BMC shall prepare and deliver an invoice to Methanex setting forth the amount of the Inventory Purchase Price. Methanex shall pay the Inventory Purchase Price to BMC within seven Business Days after receipt by Methanex of an invoice from BMC in respect of such Inventory.

2.3. Method of Payment: Payment of the Purchase Price by Methanex, under Subsection 2.2(a) and Subsection 2.2(b), shall be by wire transfer directly to BMC’s bank account as designated by BMC in writing.

2.4. Sales Taxes: Methanex shall be responsible for and shall pay when due, any sales tax, transfer tax and other similar taxes or registration fees payable in respect of the purchase of the Assets by

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Methanex under this Agreement. Notwithstanding the foregoing, to the extent there is any ad valorem tax relating to Inventory located in Texas at the Time of Closing, then Methanex shall pay the relevant taxing authority the amount of such ad valorem tax on behalf of Terra and Terra shall reimburse Methanex within 10 days, upon receipt of written notice from Methanex, for the full amount of such ad valorem tax, including any penalties or charges related thereto.

3. TRANSFER OF CONTRACTS

3.1. Delivery of Contracts and Customer List: Concurrently with the signing of this Agreement, Terra shall deliver to Methanex complete and accurate copies of all Contracts and the Customer List.

3.2. Notice Requirements and Third Party Consents: Promptly after the signing of this Agreement, and in any event not later than December 18, 2003, Terra shall deliver to each Customer, by courier and facsimile, an assignment notice in the form attached as Schedule C. From and after December 15, 2003 through to the Time of Closing, Terra shall cooperate with Methanex in all communications with Customers and shall make available to Methanex, Terra’s personnel as may be necessary, to facilitate the orderly transfer of the Contracts from BMC to Methanex at the Time of Closing and thereafter, if necessary.

3.3. Assumption of Contracts: From and after the Time of Closing, Methanex shall assume, perform and discharge all of BMC’s obligations and liabilities under the Contracts that arise after the Time of Closing. Methanex shall not assume, nor shall Methanex be liable for, any obligations or liabilities under the Contracts, or any Contract, arising prior to the Time of Closing.

3.4. Non-Assignable Rights: Nothing in this Agreement shall be construed as an assignment by BMC, or an attempt to assign by BMC, to Methanex any Contract which, as a matter of law or by its terms, is: (i) not assignable; or (ii) not assignable without the approval or consent of the issuer thereof or the other party or parties thereto, without first obtaining such approval or consent (collectively, the “Non-Assignable Rights”). In connection with any and all such Non-Assignable Rights, BMC shall:

(a) as the holder of such Non-Assignable Rights, continue its existence and hold or cause the holder to hold the Non-Assignable Rights in trust for Methanex to the fullest extent lawful;

(b) comply with the terms and provisions of the Non-Assignable Rights as agent for, and on behalf of, Methanex to the fullest extent lawful;

(c) apply for and use its reasonable efforts to obtain all consents or approvals contemplated by the Contracts, in a form satisfactory to Methanex, acting reasonably;

(d) cooperate with Methanex in any reasonable and lawful arrangements designed to provide the benefits of the Non-Assignable Rights to Methanex;

(e) diligently enforce any rights of the holder thereof arising from such Non-Assignable Rights against the issuer thereof or the other party or parties thereto;

(f) take or cause to be taken all such actions and do, or cause to be done, all such things at the request of Methanex as shall reasonably be necessary and proper in order that the value of the Non-Assignable Rights shall be preserved and shall inure to the benefit of Methanex; and

- 4 -

(g) pay over or cause to be paid over to Methanex all monies collected by or paid to the holder of the Non-Assignable Rights in respect of such Non-Assignable Rights.

4. TIME OF CLOSING

The sale and purchase of the Assets contemplated by this Agreement shall be closed as of the close of business (Central Standard Time) on December 31, 2003 or such other date and time as the parties may mutually agree to in writing (the “Time of Closing”).

5. RIGHTS TO METHANOL PRODUCTION/BEAUMONT FACILITY

5.1. Exclusive Rights: Subject to Subsection 5.3 below, effective as of the Time of Closing, Terra shall produce and sell exclusively to Methanex and Methanex agrees to purchase and take delivery of, 100% of the methanol produced at the Beaumont Facility (the “Product”), during each Year, for the period commencing as of the Time of Closing and expiring on December 31, 2008 (the “Effective Period”). Neither Terra, nor any Terra Affiliate, shall, at any time prior to the expiration or termination of this Agreement, produce Product at the Beaumont Facility for their own use or for sale to any Person other than Methanex. All Delivery terms regarding the Delivery of Product by Terra to Methanex under this Agreement are as set forth in the attached Schedule B.

5.2. Facility Operation/Personnel

5.2.1. Facility Operation: Subject to the terms and conditions of this Agreement, Terra shall: (i) have the sole right to operate the Beaumont Facility and to determine operating procedures with respect thereto; (ii) operate the Beaumont Facility in a commercially reasonable manner and in compliance in all material respects with applicable Laws and industry standards; and (iii) be responsible for obtaining and maintaining all authorizations, licenses, permits and certificates issued, granted, given or otherwise made available by or under the authority of any Governmental Authority that are required for the operation of the Beaumont Facility (or obtaining exemptions therefrom). For greater certainty, Terra shall operate the Beaumont Facility under this Agreement in accordance with industry standard practices that shall be, at a minimum, consistent with the scope and quality of the operations by Terra of its other chemical manufacturing plant facilities, such as Blytheville, Arkansas, Verdigris, Oklahoma and Port Neal, Iowa. In addition, the terms and conditions regarding the operation of the Beaumont Facility as contained in the Warehouse and Services Agreement attached at Schedule E, are expressly incorporated herein by reference.

During the Effective Period, Methanex shall not require that Terra make any extraordinary capital expenditures on the Beaumont Facility. Notwithstanding the foregoing, Terra shall make any and all capital expenditures as would be reasonably required in the ordinary course of Terra’s operation of the Beaumont Facility and in accordance with Terra’s historical practice.

5.2.2. Quarterly Review of Operations: Representatives of Terra and Methanex shall meet quarterly (“Quarterly Review”), within 10 Business Days after the end of each calendar quarter, in person or by teleconference, to discuss any and all matters that either Party may have relating to or arising out of the operation of the Beaumont Facility including, without limitation, deficiencies in the operation of the Beaumont Facility and operating procedures that may improve the operation of the Beaumont Facility or the administration by the Parties of this Agreement. Each Party shall use reasonable commercial efforts to address, accommodate or rectify, as the case may be, any and all matters raised by the other Party at a Quarterly Review, prior to the next Quarterly Review.

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5.2.3. Responsible Care^® Codes of Practice: With respect to the operation of the Beaumont Facility, Terra shall comply with the applicable principles and codes of practice of the Responsible Care^® initiatives in existence as of the date of execution of this Agreement as established by the American Chemistry Council or such principles and codes of practice that are the same or substantially similar to such Responsible Care^® initiatives. Methanex may conduct assessments of the Beaumont Facility in accordance with principles or codes of practice upon providing 90 days written notice to Terra of its intent to conduct an assessment. After having conducted an assessment of the Beaumont Facility if Methanex is of the opinion, acting reasonably, that the Beaumont Facility is not operating in accordance with the principles and codes of practice of Responsible Care^® initiatives or such codes of practice that are the same or substantially similar to such Responsible Care^® initiatives then, upon the request of Methanex, the Parties shall meet and Terra shall cooperate with Methanex in using reasonable efforts to implement corrective steps to bring the Beaumont Facility into compliance with such principles and codes of practice.

5.2.4. Personnel: During the Effective Period, Terra shall, at all times, have sole authority with respect to all personnel matters involving the employees, consultants and third-party contractors at the Beaumont Facility, including salaries, benefits, compensation, indirect personnel costs, training, insurance, labour matters, working hours, job responsibilities, health and safety procedures, bonding and all other employee, personnel-related and contracting matters.

5.2.5. Beaumont Facility Supply Contracts: Notwithstanding anything to the contrary contained in this Subsection 5.2, the terms of any and all new arrangements regarding the supply of natural gas to the Beaumont Facility (excluding the supply of natural gas pursuant to any Hedge Agreements) shall be subject to the prior approval by Methanex.

5.3. Facility Suspension

5.3.1. Suspension for Operation Matters: The Parties acknowledge and agree that Terra may, in its sole discretion, acting reasonably:

(a) suspend methanol production or reduce methanol production at the Beaumont Facility for such periods of time as are necessary to accomplish scheduled maintenance on the Beaumont Facility (“Scheduled Suspension”); and

(b) suspend methanol production or reduce methanol production at the Beaumont Facility without notice to Methanex, for such periods of time as are necessary in the event of any emergency repair or unplanned maintenance of the Beaumont Facility (“Unscheduled Suspension”).

Terra shall provide Methanex with at least 90 days written notice in advance of any and all Scheduled Suspensions and shall provide Methanex with notice, as soon as possible in the circumstances, in the event of an Unscheduled Suspension, and in any event, not more than two days after the commencement of an Unscheduled Suspension. In addition to the foregoing, Terra shall deliver a copy of its latest annual maintenance schedule to Methanex on July 1^st in each Year, which annual maintenance schedule shall set forth the dates and times when scheduled maintenance by Terra is expected to occur on the Beaumont Facility and any and all relevant details in respect of such scheduled maintenance. Terra shall deliver to Methanex, at the Time of Closing, a copy of its 2003 annual maintenance schedule, as up-dated. Terra shall up-date its annual maintenance schedule on a quarterly basis and shall deliver such up-dated maintenance schedule to Methanex within 20 days after the end of each calendar quarter.

- 6 -

5.3.2. Economic Hardship/Temporary Suspension: During the Effective Period, Methanex may request, upon five days prior written notice to Terra (“Temporary Suspension Notice”), that Terra temporarily suspend the supply of methanol to Methanex for a period not exceeding 30 days (“Temporary Suspension”) if, upon the calculation of the Estimated Cash Contribution (“Estimated Cash Contribution”), the resultant amount is equal to or less than $1 million. Upon receipt of a Temporary Suspension Notice, Terra shall, within the five days, cease all production of methanol at the Beaumont Facility.

The Estimated Cash Contribution is calculated as follows:

Estimated Cash Contribution = [***]

For the purposes of the formulas set forth above, the following definitions shall apply:

[***]

[***]

Where:

[***]

[***]

[***]

[***]

[***]

[***]

Upon a Temporary Suspension, Methanex shall:

(a) if the Estimated Cash Contribution is equal to or less [***] for any given month, notwithstanding whether the Ammonia Loop is Operational or not Operational, reimburse Terra for:

(i) any and all reasonably incurred costs, expenses and penalties payable under BMC’s natural gas supply arrangements for the Beaumont Facility (excluding natural gas arrangements under any Hedge Agreements), that result from any reduction in the amount of natural gas consumed at the Beaumont Facility caused by or attributable to such Temporary Suspension;

(ii) 50% of the monthly Fixed Costs and Capital Costs (as set forth in Subsection 6.3(a) or Subsection 6.3(b) below, as applicable), prorated for the period of such Temporary Suspension; and

(iii) 50% of the costs reasonably incurred by BMC to restart the production of methanol at the Beaumont Facility after the Temporary Suspension.

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(b) if the Estimated Cash Contribution is equal to or less than [***] but greater than [***] and the Ammonia Loop is Operational at any time during any Temporary Suspension, reimburse Terra for:

(i) any and all reasonably incurred penalties payable under BMC’s natural gas arrangements for the Beaumont Facility (excluding natural gas arrangements under any Hedge Agreements) that result from any reduction in the amount of natural gas consumed at the Beaumont Facility caused by or attributable to such Temporary Suspension;

(ii) the monthly Fixed Costs and Capital Costs (as set forth in Subsection 6.3(a)), pro-rated for the period of such Temporary Suspension (for greater certainty, except as expressly provided in this Subsection 5.3.2(b) (ii), Methanex shall not be responsible for any fixed costs, variable cost, or capital costs or other similar costs that Terra would have incurred notwithstanding the Temporary Suspension);

(iii) the costs reasonably incurred by BMC to restart the production of methanol at the Beaumont Facility after such Temporary Suspension; and

(iv) Terra’s incremental costs and expenses incurred to arrange an alternate supply of ammonia from a third party in order for Terra to meet its contractual commitments for the supply of ammonia from the Ammonia Loop to its customers. For the purposes of calculating any and all incremental costs and expenses in connection with Terra arranging an alternate supply of ammonia in accordance with this Section 6.2(b)(iv), the Ammonia Loop’s natural gas efficiency factor to be applied in determining such costs shall be 35.9 MMbtu/metric tonne.

(c) if the Estimated Cash Contribution is equal to or less [CONFIDENTIAL TREATMENT REQUESTED] but greater than [CONFIDENTIAL TREATMENT REQUESTED] and the Ammonia Loop is not Operational, reimburse Terra for:

(i) any and all reasonably incurred penalties payable under BMC’s natural gas arrangements for the Beaumont Facility (excluding natural gas arrangements under any Hedge Agreements) that result from any reduction in the amount of natural gas consumed at the Beaumont Facility caused by or attributable to such Temporary Suspension;

(ii) the monthly Fixed Costs and Capital Costs (as set forth in Subsection 6.3(b)), pro-rated for the period of such Temporary Suspension; and

(iii) the costs reasonably incurred by BMC to restart the production of methanol at the Beaumont Facility after such Temporary Suspension.

Notwithstanding the foregoing, Terra shall use reasonable commercial efforts to transfer or assign its natural gas commitments, excluding any Hedge Agreement, that arise during the period of any Temporary Suspension and to the extent Terra realizes any gain from such transfer or assignment of commitments, such gains shall be for the account of Methanex and Terra shall pay the full of any such gains to Methanex promptly.

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Methanex and Terra shall both use reasonable commercial efforts to mitigate any losses, costs or expenses that may be incurred as a result of a Temporary Suspension at the Beaumont Facility and the Ammonia Loop, if applicable.

5.3.3. Methanex Suspension of Supply Notice: At any time during the Effective Period, Methanex may, in its sole discretion, elect to have Terra suspend the supply of methanol from the Beaumont Facility to Methanex (“Extended Suspension”), by providing Terra with written notice of such election at least 60 days prior to the requested date for such suspension of supply (“Methanex Suspension Notice”). Following receipt of a Methanex Suspension Notice, Terra shall use commercially reasonable efforts to suspend methanol supply from the Beaumont Facility to Methanex on the date requested in the Methanex Suspension Notice. Methanex may elect to suspend the supply of methanol from the Beaumont Facility to Methanex under this Section on more than one occasion during the Effective Period.

In the event that Methanex requests an Extended Suspension, all costs and expenses incurred by Terra related to carrying out the first of such Extended Suspensions including, without limitation, continuing expenses for materials and equipment purchased in connection therewith or in anticipation thereof, moth-balling equipment and materials and ongoing operating and maintenance personnel (“Suspension Costs”), shall be borne by Terra. If Methanex elects to restart the production of methanol at the Beaumont Facility in accordance with Subsection 5.3.4, and then requests further Extended Suspensions, Methanex shall be responsible for all subsequent Suspension Costs relating to any Extended Suspension requested by Methanex after the first Extended Suspension. Notwithstanding the foregoing, Terra shall, at all times, be responsible for any and all costs, expenses, penalties payable under Terra’s natural gas supply arrangements, including under the Natural Gas Transfer Agreement between E.I. du Pont de Nemours and Company and Beaumont Methanol Corporation and under any Hedge Agreement, that result from any reduction in the amount of natural gas consumed at the Beaumont Facility caused by or attributable to such Extended Suspension.

5.3.4. Methanex Right to Restart Supply: Methanex may, in its sole discretion, elect to have the supply from the Beaumont Facility to Methanex restarted at any time after the commencement of an Extended Suspension by providing Terra with written notice of such election (“Methanex Restart Notice”). Upon receipt of a Methanex Restart Notice, Terra shall use commercially reasonable efforts to restart the supply of methanol to Methanex from the Beaumont Facility at the time requested in the Methanex Restart Notice or as soon as reasonably practicable thereafter. Methanex shall reimburse Terra for any and all costs and expenses reasonably incurred by Terra to restart the Beaumont Facility, including the costs and expenses of hiring and training operating and maintenance personnel, preparing and testing previously moth-balled equipment and materials, acquiring additional equipment or materials and obtaining proper licenses and permits.

5.3.5. Terra Production Right: Notwithstanding any other provision of this Agreement, [***] then Terra may, in its sole discretion, restart the production of methanol at the Beaumont Facility for the remainder of the Effective Period. Terra shall deliver written notice of its election under this Subsection 5.3.5 to Methanex (“Terra Restart Notice”), at least 30 days prior to the commencement date for production stipulating, at a minimum, the date that Terra will commence production of methanol at the Beaumont Facility (“Production Commencement Date”).

In the event that Terra elects to restart the production of methanol at the Beaumont Facility in accordance with this Subsection 5.3.5, Terra shall: (a) pay to Methanex a lump sum amount that is equal to [***] per Year for the remainder of the Effective Period (pro-rated for any period shorter than an entire Year), with such lump sum payment to be delivered by Terra to Methanex, by way of certified cheque, with the Terra Restart Notice; and (b) be responsible for any and all costs and expenses reasonably incurred by Terra to restart the Beaumont Facility, including the costs and expenses of hiring and training operating and

- 9 -

maintenance personnel, preparing and testing previously moth-balled equipment and materials, acquiring additional equipment or materials and obtaining proper licenses and permits. For greater certainty, Methanex shall not be responsible for any costs or expense associated with Terra’s election to restart the production of methanol at the Beaumont Facility in accordance with this Subsection 5.3.5. Subject to Terra’s compliance with the provisions of this Section, this Agreement shall automatically terminate on the later of the Production Commencement Date and 30 days after Methanex’s receipt of a Terra Restart Notice.

Sale of Pipeline Customers to Terra

The Parties acknowledge and agree that supply and delivery of Product to the Pipeline Customers can only occur using the equipment, methanol storage tanks, personnel and other facilities of the Beaumont Facility including, without limitation, the pipeline system connecting the Beaumont Facility to the Pipeline Customers’ facilities. As a result, in the event Terra delivers a Terra Restart Notice to Methanex, Terra shall, effective as of the Production Commencement Date, purchase from Methanex, and Methanex shall sell, transfer and assign to Terra, all of Methanex’s right, title and interest in and to the contracts between Methanex and the Pipeline Customers (“Pipeline Customer Contracts”) and the inventory located in the Beaumont Storage Tanks as of the Production Commencement Date (“Restart Inventory”).

The purchase price (“Contract Price”) for the Pipeline Customer Contracts shall be calculated as follows:

Contract Price = [***]

Where:

[***]

[***]

If the Beaumont Premium is a positive number, then Terra shall pay the Contract Price to Methanex and if the Beaumont Premium is a negative number, then Methanex will pay the Contract Price to Terra.

The price for the Restart Inventory shall be an amount that is equal to the [***]. The Restart Inventory means the actual quantity of methanol inventory contained in the Beaumont Storage Tanks as of midnight (Central Standard Time) on the day before the Production Commencement Date, as measured by an independent surveyor selected by the Parties, acting reasonably. The findings of the surveyor shall be final and binding upon the Parties for all purposes. The Parties will jointly instruct an independent surveyor to measure the quantity of Product located in the Beaumont Storage Tanks as of midnight the day before the Production Commencement Date. The independent surveyor will be instructed to provide the quantity information to Methanex and Terra.

Promptly after the Production Commencement Date, Methanex shall calculate the:

(a) Contract Price; and

(b) price for the Restart Inventory,

and Methanex shall prepare and deliver to Terra: (i) an invoice setting forth the price for the Restart Inventory; and (ii) a notice setting forth the amount of the Contract Price payable by Methanex to

- 10 -

Terra, or by Terra to Methanex, as the case may be. Terra shall pay the full amount of the price for the Restart Inventory within seven Business Days after receipt by Terra of an invoice from Methanex in respect of such Restart Inventory. Either Terra or Methanex, as the case may be, will pay to the other Party the full amount of the Contract Price within seven Business Days after receipt by Terra of the notice referred to above.

5.4. Ownership of Assets/Depreciation: The Parties hereto agree that at all times: (a) Terra has been and shall be the legal and beneficial owner of the assets (other than the Assets) comprising the Beaumont Facility; (b) Terra is entitled to all available depreciation, amortization, expense and/or casualty loss deductions with respect to such assets; and (c) Methanex is not and shall not be entitled to the benefit of any depreciation, amortization, expense, and/or casualty loss deductions with respect to such assets. Terra expressly does not by the terms of this Agreement sell, transfer or assign to Methanex any right, title or interest in such assets comprising the Beaumont Facility, other than the Assets, and Methanex does not by the terms of this Agreement acquire any right, title or interest in the assets comprising the Beaumont Facility, other than the Assets.

5.5. Insurance

5.5.1. Obligation to Insure: At all times during the Effective Period, Terra shall take out and maintain with financially sound and reputable insurers, at its own cost, the insurance coverage listed below:

Coverage	Amount
General Public Liability covering bodily injury and property damage	$25 million per occurrence
Employer’s Liability	$25 million per occurrence
All risk insurance on methanol in tanks for the full replacement cost of the Product	$10 million per occurrence
Workers’ Compensation	Required Statutory Minimum
Sudden and Accidental Pollution	$25 million per occurrence
Environmental Pollution	$25 million per occurrence

Upon request, Terra shall furnish Methanex with certification of such insurance providing for at least 30 days’ prior written notice of cancellation or material modification. To the extent necessary under the indemnity provisions of this Agreement, Terra shall name Methanex and the other Methanex Indemnified Persons as an additional insured under all of such policies. Each insurance policy shall provide a waiver of subrogation in favour of Methanex.

5.5.2. Damage to Beaumont Facility: If, prior to the expiration or termination of this Agreement, all or any portion of the Beaumont Facility is damaged by fire or other casualty and such damage involves less than [***], Terra shall, to the extent permitted by Terra Industries’ credit agreements and indentures, apply the proceeds of the applicable insurance policies maintained by it toward the repair of the Beaumont Facility. Any costs and expenses in conducting such repairs that are not covered by such insurance shall be the sole responsibility of Terra. If, prior to the expiration or termination of this Agreement, all or any portion of the Beaumont Facility is damaged or destroyed by fire or other casualty and such damage or destruction involves, or if more than one in the aggregate involve, an amount greater than or equal to [***] (in each case, a “Major Casualty”), Terra may, in its sole discretion but at its sole cost and expense, elect to have the Beaumont Facility repaired or replaced by providing Methanex written notice of its election to do so. In the event that Terra elects to have the Beaumont Facility repaired or replaced following a Major Casualty, such repair shall be conducted by

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Terra at its sole cost and expense without contribution from Methanex. In the event of a Major Casualty, any and all payment obligations of Methanex under this Agreement, including without limitation, Subsections 5.3.2 and 5.3.5 and Section 6, shall be suspended for so long as the Beaumont Facility is not fully Operational. In the event the Beaumont Facility becomes Operational after a Major Casualty but prior to the expiration of this Agreement, then Methanex’s payment obligations under this Agreement shall resume and continue for the remaining term of this Agreement. For greater certainty, Methanex will not be required to pay, at any time, any amounts under this Agreement that are suspended as a result of a Major Casualty.

6. FEES

6.1. Lump Sum Exclusivity Fee: At the Time of Closing, Methanex shall pay to BMC, on account of the methanol exclusivity rights granted by Terra to Methanex under this Agreement, [***].

6.2. Methanol Exclusivity Fees: During the Effective Period, Methanex shall pay to BMC a monthly methanol exclusivity fee (“Methanol Exclusivity Fee”) calculated as follows:

(a) Beaumont Facility and Ammonia Loop Both Operating – In the event that the Beaumont Facility and the Ammonia Loop are both Operational, then:

[***]

(b) Beaumont Facility Operating/Ammonia Loop Not Operating – In the event that the Beaumont Facility is Operational but the Ammonia Loop is not Operational, then:

[***]

(c) Beaumont Facility Under an Extended Suspension – In the event that the Beaumont Facility is subject to an Extended Suspension, then:

[***]

For the purposes of the formulas set forth above, the following definitions shall apply:

[***]

[***]

[***]

[***]

[***]

[***]

[***]

[***]

[***]

[***]

[***]

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If, in any given month, the Cash Margin/Gallon or the Deemed Cash Margin/Gallon, as the case may be, is:

(i) zero or a negative number (“Negative Margin”), then the Methanol Exclusivity Fee for such month shall be $0; and

(ii) a positive number (“Positive Margin”), then Methanex shall pay the amount of the Methanol Exclusivity Fee, as required under Subsection 6.2(a), or Subsection 6.2(b), or Subsection 6.2(c), as applicable, less the aggregate amount of any negative Exclusivity Fee achieved during the preceding months of such Year and not otherwise set-off against such positive Methanol Exclusivity Fee in a preceding month (in no event will the cumulative monthly Methanol Exclusivity Fees exceed [***] in any given Year).

For greater certainty, the obligation of Methanex to pay the Methanol Exclusivity Fee, in any given month, is contingent upon the Cash Margin/Gallon or the Deemed Cash Margin/Gallon, as the case may be, for such month being a positive number and the cumulative Cash Margin/Gallon or Deemed Cash Margin/Gallon, in any given Year, being a positive number.

Notwithstanding the foregoing, the maximum cumulative amount payable by Methanex to Terra in any given Year on account of the Methanol Exclusivity Fees shall be [***] (“Exclusivity Fee Cap”), which amount shall be pro-rated for any period shorter than an entire Year. At the end of each Year (or a portion thereof, if applicable), the Parties will add the Positive Margin amounts for those months in which a Positive Margin was achieved and the Negative Margin amounts for those months in which a Negative Margin was achieved.

In the event that the net amount after adding the Positive Margin amounts and the Negative Margin amounts, for any given Year, is a negative number (“Negative Result”), then Terra shall reimburse Methanex for any Methanol Exclusivity Fees paid by Methanex to Terra on or before January 25^th of the Year following the Year for which the calculation is made.

In the event that the net amount after adding the Positive Margin amounts and the Negative Margin amounts, for any given Year, is a positive number (“Positive Result”), then Terra shall refund to Methanex the full amount of any Methanol Exclusivity Fees paid by Methanex to Terra in excess of the Positive Result (“Excess Fees”). Terra shall pay to Methanex the full amount of any Excess Fees on or before January 25^th of the Year following the Year for which the calculation is made.

Methanex shall be entitled in its discretion to off-set the full amount of any Excess Fees or any other amounts owing by Terra to Methanex under this Agreement, against any amounts owing by Methanex to Terra under this Agreement.

Sample calculations illustrating the calculation of the Methanol Exclusivity Fees are set forth in the attached Schedule F.

6.3. Combined Production Fees/Methanol Production Fees: In addition to the Methanol Exclusivity Fees, Methanex shall pay the following fees to BMC in connection with the operation of the Beaumont Facility:

(a) Monthly Combined Production Fees – In the event that the Beaumont Facility and the Ammonia Loop are both Operational, then:

[***]

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For the purposes of calculating the Monthly Combined Production Fees, the following definitions shall apply:

[***]

[***]

[***]

- 14 -

[***]

[***]

[***]

[***]

[***]

Where:

[***]

[***]

[***]

[***]

(b) Monthly Methanol Production Fee – In the event that the Beaumont Facility is Operational but the Ammonia Loop is not Operational, then:

[***]

For the purposes of calculating the Monthly Methanol Production Fees/Gallon:

[***]

[***]

with the exception of Fixed Costs and Capital Costs, the definitions set forth in Subsection 6.3(a) shall apply

The Inflation component of the formulas set forth in this Subsection 6.3 shall be calculated as of the first day of each calendar quarter and once calculated, shall be effective for the entire calendar quarter and until the next quarterly calculation is performed by the Parties.

6.4. Calculation of Formulas: Each Party agrees to promptly provide to the other Party, upon request, any and all information as may be reasonably required by such other Party to calculate a formula and/or verify a calculation of a formula set forth in this Section 6. Each Party will retain all back-up documentation used by such Party to calculate the formulas set forth in this Section 6 and will provide copies of such back-up information to the other Party upon reasonable request in accordance with Subsection 7.5 below.

7. PAYMENT TERMS/AUDIT RIGHTS

7.1. Payment of Methanol Exclusivity Fees: Methanex shall, on or before the 20^th day of each month, deliver to BMC a statement in reasonable detail setting forth the amount of the Methanol Exclusivity Fee payable by Methanex under Section 6 for the immediately preceding month. Methanex shall pay the Methanol Exclusivity Fee for the immediately preceding month, on or before the 25^th day of each month.

7.2. Terra Invoice: On or before the last Business Day of each week Terra shall invoice Methanex for the Monthly Methanol Production Fees or the Monthly Combined Production Fee, as the

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case may be, incurred during the preceding week or any part thereof. Each invoice shall set forth, in reasonable detail, the calculation of the Monthly Methanol Production Fee or the Monthly Combined Production Fee, as applicable. All invoices rendered by Terra during any given month shall be payable by Methanex on the fifth day of the next month; provided, however, that any delay in submission of any such invoice shall not constitute a waiver of any right to receive payment hereunder.

7.3. Payment Terms: All sums and amounts payable or to be payable pursuant to this Agreement shall: (a) be payable in immediately available funds; and (b) be made by electronic (EDI or equivalent) transfer (or other means satisfactory to the Parties). Whenever a Party is required to pay or reimburse the other Party, upon receipt of a statement or an invoice, or otherwise make any payment or reimbursement where no due date for payment is specifically provided herein, payment shall be due on the 10th day after receipt of such statement or invoice (or if either such day is not a Business Day, on the Business Day next following).

7.4. Late Payments: In the event that Methanex fails to pay any undisputed amount when due under Subsection 7.1 or Subsection 7.2, Terra shall promptly provide written notice of such late payment to Methanex. If Methanex fails to pay such undisputed amount within two Business Days of receipt of written notice from Terra, then: (a) such amount outstanding shall bear interest at the rate of 2% per annum above the LIBOR rate applicable to borrowings for a term of one year, or the maximum rate permitted by Law, whichever is lower.

7.5. Audit Rights: During the Effective Period, each of the Parties shall keep and maintain proper, detailed, accurate and complete records and supporting documentation, regardless of the medium by which they are created or stored, in respect of all matters referred to in Subsections 5.3.2 and 5.3.5, Section 6 and this Section 7 (collectively, the “Records”). For greater certainty, as part of the Records retained by Terra, Terra shall retain all invoices, receipts for disbursements, electronic records and related computer programs, payroll records for the employees, agents and subcontractors, and other similar books and records. Each Party will keep and retain all Records for a period of 24 months following the expiration of this Agreement (“Record Retention Period”).

The Parties acknowledge and agree that the Records of each Party contain sensitive and confidential information, the disclosure of which would cause irreparable injury to a Party. At any time prior to the expiry of the Record Retention Period, either Party may, in order to verify and validate the calculation of any formula or the amount of any payment under this Agreement, audit the Records of the other Party provided that; such audit may only be conducted by an independent accounting firm (“Independent Auditor”) selected by the Party requesting the audit. The information conveyed by a Parties’ Independent Auditor to such Party requesting the audit shall only relate to the accuracy or correctness of formula calculations or payment amounts and the Independent Auditor shall not provide a copy of the Records or any other information to such Party.

Audits of either Parties’ Records shall be carried out by an Independent Auditor at any time prior to the expiry of the Record Retention Period, during normal business hours but upon prior written request to the other Party. The Independent Auditor may enter the business premises of the other Party where the Records are located, and inspect, audit and copy any or all of the Records. Each Party will co-operate with the other Party and its Independent Auditor in carrying out the inspection, audit and copying of such Records including, without limitation, by providing the Independent Auditor with access to, and assistance with, all computer systems and other electronic means by which any such Records may be kept. The inspection of any or all of the Records by a Party, from time to time, will be done at such Party’s own cost and expense, including, without limitation, such Party’s costs of its Independent Auditor.

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8. CONTRACT COVENANTS

8.1. Terra Contracts: From the execution of this Agreement to the Time of Closing, Methanex shall not, and shall cause its Affiliates not to, interfere with BMC’s valid contractual relationship with the Customers.

8.2. Assumed Customers: Terra shall not, and shall cause its Affiliates not to, directly or indirectly sell, solicit or aid in the solicitation of, or accept the solicitation of, any Person that is a party to a Contract (“Assumed Customers”) for the purpose of selling methanol, assisting any other Person to sell methanol, or otherwise for the purpose of depriving Methanex of any right or opportunity to sell methanol to such Assumed Customers, in accordance with the terms of this Agreement.

8.3. Injunctive Relief: Methanex and Terra acknowledge and agree that a breach of the covenants set out in Subsections 8.1 and 8.2 above may cause substantial economic loss and irreparable harm to Terra and Methanex, respectively, that could not be compensated solely by monetary damages. Accordingly, Terra and Methanex agree that the other Party shall be entitled to injunctive and preliminary relief, in addition to any Claims for monetary damages, to remedy any actual or threatened breach of the covenants set out in Subsection 8.1 above by Methanex and Subsection 8.2 above by Terra or its Affiliates.

9. TERM AND TERMINATION

9.1. Term: This Agreement shall commence on the date of execution of this Agreement by both Parties and shall terminate on December 31, 2008.

9.2. Termination: This Agreement may be terminated:

(a) by agreement of the Parties in writing;

(b) by a Party if the other Party:

(i) is in breach of any material covenant, agreement, term, provision or condition of this Agreement and has failed to cure such breach within 14 days after receipt from the non-defaulting Party of a written notice of such breach;

(ii) is unable to pay its debts as they become due, has made a general assignment for the benefit of creditors, filed a voluntary bankruptcy petition, become the subject of an order for relief or been declared insolvent in any bankruptcy or insolvency Proceedings, instituted a Proceedings or filed an answer in a Proceedings seeking to adjudicate itself insolvent or seeking reorganization, arrangement, composition, readjustment, protection, liquidation, winding-up, dissolution or similar relief of such Party or such Party’s debts or liabilities under any dissolution, liquidation, bankruptcy, moratorium, readjustment of debt, compromise, rearrangement, receivership, insolvency, fraudulent transfer or conveyance, reorganization or similar debtor relief Law from time to time in effect affecting the rights of creditors generally; or

(iii) has had any Proceedings of the type referred to in Subsection 9.2(b)(ii) above filed or commenced against it or has by any act indicated its approval thereof, consented thereto or acquiesced therein, or has had or an order, judgment or decree entered appointing a trustee, receiver, custodian, liquidator or similar official or adjudicating such Party insolvent, or approving the petition in any

- 17 -

such Proceedings, and such order, judgment or decree has remained in effect and unstayed for 90 days; or

(c) in accordance with Subsection 5.3.5.

9.3. Effect of Termination: Upon the expiration or termination of this Agreement, this Agreement shall immediately become void and there shall be no liability on the part of either Party as a result of such termination; provided, however, that Subsections 5.3.5, 9.3, 19.1, 19.8 and 19.9, Sections 10, 16 and 18, shall survive the expiration or termination of this Agreement. Notwithstanding anything to the contrary contained in this Agreement, a termination of this Agreement for any reason shall not affect any rights or remedies of either Party arising out of any breach of this Agreement prior to such termination or the right of either of the Parties to receive any amount earned or accrued hereunder prior to such termination or otherwise payable with respect to any period prior to such termination. For greater certainty, upon termination of this Agreement in accordance with this Section 9, the covenants set out in Section 8 of this Agreement shall terminate.

10. CONFIDENTIALITY

10.1. Information: Each Party (“Disclosing Party”) has disclosed, and may from time to time hereafter disclose, certain Confidential Information to another Party (“Recipient”). The Recipient shall treat the Confidential Information as confidential and shall not use any Confidential Information for any purpose other than in connection with the transactions contemplated by this Agreement. The Recipient shall not disclose any Confidential Information to any Person without the prior written consent of the Disclosing Party. The Recipient further agrees to limit dissemination of and access to the Confidential Information to its employees and representatives who have a need to know such Confidential Information for the purposes contemplated by this Agreement provided that such employees and representatives are informed of and agree to comply with the terms of this Subsection 10.1.

10.2. Exception: Subsection 10.1 shall not apply to the disclosure of Confidential Information by the Recipient which:

(a) at the time of its disclosure or thereafter becomes generally available to the public other than as a result of a breach of this Agreement;

(b) is already known to the Recipient through proper means prior to disclosure as evidenced by written or other tangible records and practices;

(c) is independently and lawfully developed by the Recipient completely without reference to the Confidential Information as evidenced by written or other tangible records and practices; or

(d) is disclosed without restriction by a third party who is in lawful possession of the information and who has the right to make disclosure.

10.3. Disclosure Required by Law: The Recipient shall not be in breach of its obligation to disclose Confidential Information of the Disclosing Party if that disclosure is required by Law, a court order or similar Proceedings, or is formally requested by a Governmental Authority, provided that the Recipient gives the Disclosing Party as much notice as is reasonably possible in the circumstances prior to disclosing any Confidential Information and the Recipient cooperates with the Disclosing Party in any application, Proceedings or other action the Disclosing Party may undertake to obtain a protective order or other means of protecting the confidentiality of the Confidential Information required to be disclosed.

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10.4. Return of Information: Prior to the Time of Closing, within 15 days of demand by a Disclosing Party or termination of this Agreement, whichever occurs first, the Recipient shall return all Confidential Information, including any copies of that information, to the Disclosing Party.

10.5. Restriction on Disclosure of this Agreement: Except as may be required by applicable Law or a stock exchange upon which a Party is listed, each Party agrees not to disclose any terms or conditions of this Agreement to any Person who is not a representative of such Party, absent consent by the other Party, which shall not be unreasonably withheld.

10.6. Public Announcements: Except as may be required by Law or a stock exchange upon which a Party is listed, no Party shall, without prior written approval of the other Party, issue, or permit any representative of such Party to issue, any press release or otherwise make, or permit any representatives of such Party to make, any public statement or announcement with respect to this Agreement. The Parties hereto shall consult with each other prior to issuing any such press release or public statement, announcement or the filing of any document that is public record and that in any way references this Agreement or the transactions contemplated by this Agreement.

10.7. Remedies: The Parties agree that the covenants and obligations contained in this Section 10 relate to special, unique and extraordinary matters and that a violation of any of the terms hereof would cause irreparable injury in an amount which would be impossible to estimate or determine and for which any remedy at law would be inadequate. As such, the Parties agree that if either Party fails or refuses to fulfill any of its obligations under this Section 10, then the other Party shall have the right to seek the remedy of specific performance, which remedy shall be cumulative and nonexclusive and shall be in addition to any other rights and remedies otherwise available under any other contract or at law or in equity and to which such Party might be entitled. Each Party agrees to waive, and to use commercially reasonable efforts to cause each of its representatives to waive, any requirement for the securing or posting of any bond in connection with the exercise of such remedy. Each Party agrees not to oppose any request, motion or petition made or filed by the other Party for such remedy.

11. REPRESENTATIONS AND WARRANTIES OF TERRA

BMC and Terra Industries hereby jointly and severally represent and warrant to Methanex and acknowledge that Methanex is relying on the representations and warranties of BMC and Terra in entering into this Agreement and completing the purchase of the Assets, that:

11.1. Corporate Status: Terra Industries is duly incorporated, organized, validly exists and is in good standing under the Laws of Maryland. BMC is duly incorporated, organized, validly exists and is in good standing under the Laws of Texas, and is duly qualified to conduct its business in the State of Texas.

11.2. Authority to Sell: BMC has good and sufficient capacity, power, authority and right to hold and assign and transfer the Assets, to enter into this Agreement and to observe and perform each of its obligations contained in this Agreement. The execution, delivery and performance of this Agreement have been duly and effectively authorized by all necessary corporate action and this Agreement has been duly executed and delivered by and constitutes a legal, valid and binding obligation, enforceable in accordance with its terms. At the Time of Closing, all necessary corporate actions and Proceedings will have been taken to permit the due and valid transfer of the Assets free of Encumbrances from BMC to Methanex.

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11.3. No Conflicts: None of the execution and delivery of this Agreement, the consummation of the transactions contemplated by this Agreement or the due observance and performance by Terra of its obligations contained in this Agreement shall:

(a) materially conflict with or result in a breach of or a default under any provision, term or condition of:

(i) the incorporating documents of BMC and Terra Industries or any resolution of their respective directors or shareholders;

(ii) to the knowledge of BMC and Terra Industries any order, declaration, injunction, decree, writ, judgment or award of any Governmental Authority, court or arbitrator; or

(iii) any contract to which BMC or Terra Industries is a party or by which it is bound; or

(b) result in the creation of any Encumbrance on or in respect of any of the Assets.

11.4. No Governmental Consents Required: No consent, approval, authorization, license, order or permit of any Governmental Authority is required for Terra to duly observe and substantially perform the provisions, terms and conditions of this Agreement.

11.5. Ownership and Good Title: Either Terra Industries or BMC is the sole legal and beneficial owner of the Assets with good and marketable title to the Assets, free and clear of any Encumbrance.

11.6. Litigation: There are no Claims, Proceedings, or investigations, pending or to the knowledge of Terra threatened, that could interfere with the use of all or any part of the Assets by Methanex or the performance by BMC or Terra of their respective obligations under this Agreement.

11.7. Contracts: Each Contract is valid and binding upon BMC. BMC has performed, in all material respects, all of the obligations required to be performed by it, is entitled to all benefits of and is not in or alleged to be in material default or breach under any of the terms and provisions of the Contracts. All of the Contracts are in good standing and have not been assigned to any other Person.

11.8. Product/Inventory: The Inventory and any and all Product purchased by Methanex pursuant to this Agreement shall meet the Specifications and Terra shall convey good and marketable title to the Inventory and any and all Product to Methanex free and clear of any Encumbrances.

11.9. Beaumont Facility: Except as disclosed in Schedule I, all buildings, fixtures, leasehold improvements and facilities comprising the Beaumont Facility are in good operating condition and in a state of good maintenance and repair and, based upon industry standards, are adequate for the purposes for which they are currently being used. All other tangible assets comprising the Beaumont Facility have been properly maintained and are in good working order and contain no defects known to Terra.

12. REPRESENTATIONS AND WARRANTIES OF METHANEX

Methanex hereby represents and warrants to Terra and acknowledges that Terra is relying on such representations and warranties of Methanex entering into this Agreement and completing the purchase of the Assets, that:

12.1. Status: Methanex is duly formed, organized, validly exists and is in good standing under the Laws of the State of Texas, and is duly qualified to conduct business in the State of Texas.

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12.2. Authority to Purchase: Methanex has good and sufficient capacity, power, authority and right to take an assignment of and purchase the Assets, to enter into this Agreement and to observe and perform each of its obligations contained in this Agreement. The execution, delivery and performance of this Agreement have been duly and effectively authorized by all necessary action and this Agreement has been duly executed and delivered by and constitutes its legal, valid and binding obligation, enforceable in accordance with its terms.

12.3. No Conflicts: Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated by this Agreement nor the due observance and performance by Methanex of its obligations contained in this Agreement shall materially conflict with or result in a breach of or a default under any provision, term or condition of:

(a) the establishing documents of Methanex;

(b) to the knowledge of Methanex, any order, declaration, injunction, decree, writ, judgment or award of any Governmental Authority, court or arbitrator; or

(c) any contract to which Methanex is a party or by which it is bound.

13. COVENANTS OF TERRA

During the period from the date of execution of this Agreement up to and including the Time of Closing, Terra shall:

(a) Due Diligence: In order for Methanex to up-date its due diligence, upon reasonable prior written notice, Terra shall provide to Methanex and its representatives, at Methanex’s expense and at reasonable times during normal business hours, access to Terra’s books, records and accounts relating to the operation of the Beaumont Facility and access to Terra’s books and records regarding the Contracts and the Customer Lists;

(b) New Contracts: Promptly upon a new contract relating to the sale, distribution or marketing of methanol, being entered into by Terra, or any Affiliate thereof, Terra shall notify Methanex of the existence of that new contract, provide Methanex with a true and complete copy of that new contract, and advise Methanex if that is a contract for which a Contractual Consent is required;

(c) Perform Contracts: Diligently undertake all commercially reasonable efforts to perform each and every obligation of Terra under the Contracts in accordance with the terms of the Contracts and all Laws;

(d) Maintenance of Good Business Relations: Use commercially reasonable efforts to maintain and preserve for Methanex a good relationship with each Person who is a party to a Contract;

(e) Introductions / Obtaining Contractual Consents: Introduce Methanex to each Customer upon the reasonable request of Methanex ; and

(f) Governmental Consents: Cooperate with Methanex and shall take all actions as are within its control, using reasonable commercial efforts, such that all consents that required to be obtained from Governmental Authorities, in order to complete the transactions contemplated by this Agreement, are obtained prior to the Time of Closing.

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14. CLOSING CONDITIONS

14.1. Fulfilment of Conditions in Favour of Methanex: The obligation of Methanex to close the transactions contemplated by this Agreement shall be subject to the following conditions, each of which must be satisfied or waived in writing by Methanex on or before the Time of Closing:

(a) the Board of Directors of Methanex Corporation shall have approved this Agreement and the purchase of the Assets from Terra;

(b) Methanex shall have obtained all required approvals, if any, from relevant Governmental Authorities to the transactions contemplated by this Agreement;

(c) the representations and warranties of Terra as set forth in this Agreement shall be true in all material respects as of the Time of Closing with the same effect as though such representations and warranties had been made at and as of the Time of Closing;

(d) Terra shall have performed or complied with all of the covenants, agreements and conditions agreed to be performed or complied with by Terra, as the Time of Closing, under the terms of this Agreement;

(e) no action or Proceedings shall have been instituted and no order, decree or judgment of any court having jurisdiction shall exist that challenges the validity or enforceability of this Agreement or seeks to restrain the consummation of the transactions contemplated by this Agreement; and

(f) Terra shall have executed and delivered to Methanex all such documents as may be necessary in the opinion of counsel to Methanex to transfer the Assets to Methanex in compliance with the terms and conditions of this Agreement, including, without limitation, those items listed in Subsection 15.1 below.

14.2. Failure to Fulfil Conditions: If any of the conditions contained in Subsection 14.1 above are not performed or fulfilled at or prior to the Time of Closing to the satisfaction of Methanex, Methanex may, upon notice to Terra, terminate this Agreement and the obligations of the parties under this Agreement provided that Methanex may also bring an action against Terra for damages suffered by Methanex where the non-performance or non-fulfilment of the relevant condition is as a result of a breach of a covenant, representation or warranty by Terra. Any such condition may be waived in whole or in part by Methanex in writing without prejudice to any Claims it may have for breach of any covenant, representation or warranty.

14.3. Fulfilment of Conditions in Favour of Terra: The obligation of Terra to close the transactions contemplated by this Agreement shall be subject to the following conditions, each of which must be satisfied or waived in writing by Terra on or before the Time of Closing:

(a) the Board of Directors of Terra Industries shall have approved this Agreement and the sale of the Assets to Methanex;

(b) the representations and warranties of Methanex as set forth in this Agreement shall be true in all material respects as of the Time of Closing with the same effect as though such representations and warranties had been made at and as of the Time of Closing;

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(c) Methanex shall have performed or complied with all of the covenants, agreements and conditions agreed to be performed or complied with by Methanex under the terms of this Agreement;

(d) no action or Proceedings shall have been instituted and no order, decree or judgment of any court having jurisdiction shall exist that challenges the validity or enforceability of this Agreement or seeks to restrain the consummation of the transactions contemplated by this Agreement;

(e) Methanex shall have executed and delivered to Terra those items listed in Subsection 15.2 below; and

(f) the banks that have provided financing to Terra Industries’ revolving credit agreement shall have consented to the transaction contemplated by this Agreement.

14.4. Failure to Fulfil Conditions: If any of the conditions contained in Subsection 14.3 above are not performed or fulfilled at or prior to the Time of Closing to the satisfaction of Terra, Terra may, upon notice to Methanex, terminate this Agreement and the obligations of the parties under this Agreement provided that Terra may also bring an action against Methanex for damages suffered by Terra where the non-performance or non-fulfilment of the relevant condition is as a result of a breach of a covenant, representation or warranty by Methanex. Any such condition may be waived in whole or in part by Terra in writing without prejudice to any claims it may have for breach of any covenant, representation or warranty.

15. DELIVERIES

15.1. Closing Deliveries by Terra: Terra shall deliver or cause to be delivered the following to Methanex at the Time of Closing, all in a form acceptable to Methanex acting reasonably:

(a) Resolutions: A certified copy of resolutions of the directors of BMC and Terra Industries approving this Agreement and the sale of the Assets to Methanex;

(b) Bring-down Certificate: A certificate signed by a senior officer of BMC and Terra confirming that all of the representations, warranties, covenants and agreements of BMC and Terra contained in this Agreement have been complied with and that all of the representations and warranties made by BMC and Terra in this Agreement are true and correct at the Time of Closing;

(c) Customer List: A complete and accurate Customer List as at the Time of Closing;

(d) Contracts: Complete copies of all Contracts along with all Contractual Consents duly signed by the appropriate parties;

(e) Miscellaneous: All other certificates or other documents as may be necessary or reasonably requested by Methanex to give effect to the terms of this Agreement.

15.2. Closing Deliveries by Methanex: Methanex shall deliver the following to Terra at the Time of Closing, all in a form acceptable to Terra acting reasonably:

(a) Resolutions: A certified copy of resolutions of the directors of Methanex Corporation approving this Agreement and the purchase of the Assets from BMC;

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(b) Bring-down Certificate: A certificate signed by a senior officer of Methanex confirming that all of the representations, warranties, covenants and agreements of Methanex contained in this Agreement have been complied with and that all of the representations and warranties made by Methanex in this Agreement are true and correct at the Time of Closing;

(c) Purchase Price: A certified cheque, bank draft or wire transfer payable to or to the order of BMC in an amount equal to the Purchase Price;

(d) Lump Sum Exclusivity Fee: A certified cheque, bank draft or wire transfer payable to or to the order of BMC in an amount equal to the lump sum exclusivity fee (under Subsection 6.1); and

(e) Miscellaneous: All other certificates or other documents as may be necessary or reasonably requested by Terra to give effect to the terms of this Agreement.

15.3. Closing Procedures : All documents and instruments to be delivered and all transactions at the Time of Closing shall be deemed to take place simultaneously. No transactions shall be deemed to have been completed and no document or instrument shall be deemed to have been delivered until all transactions are otherwise completed and all documents and instruments delivered. The tender of any document or instrument may be made upon a Party directly or upon that Party’s solicitors.

16. INDEMNIFICATION/LIMITATION OF LIABILITY

16.1. Indemnification of Terra: Methanex agrees to indemnify, defend and hold harmless Terra and its directors, officers, employees, consultants, agents and representatives (the “Terra Indemnified Persons”), from and against any and all Claims and Proceedings to the extent arising out of:

(a) the negligence or intentional misconduct of Methanex or any other Methanex Indemnified Person;

(b) any Product related incident or occurrence (other than for manufacturer’s liability), during the Effective Period when Methanex has the risk of loss of such Product, except to the extent that such Claim is attributable to the negligence or intentional misconduct of Terra or any other Terra Indemnified Person;

(c) any breach by Methanex, or any inaccuracy of, any representation or warranty of Methanex contained in this Agreement; and

(d) any breach or non-performance by Methanex of any covenant to be performed by it that is contained in this Agreement.

16.2. Indemnification of Methanex: Terra agrees to indemnify, defend and hold harmless Methanex and its partners, directors, officers, employees, consultants, agents and representatives (the “Methanex Indemnified Persons”), from and against any and all Claims and Proceedings to the extent arising out of;

(a) any incident or occurrence relating to or arising out of any Contract or relating to the Inventory, prior to the Time of Closing;

(b) any past, present or future violation of Environmental Laws by Terra with respect to the Beaumont Facility;

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(c) the presence of any Hazardous Substance in, on or under the Beaumont Facility or in, on or under adjacent lands or waterbodies where such Hazardous Substance have migrated from or been Released from the Beaumont Facility;

(d) any use, handling, production, generation, manufacture, transportation, storage, handling, disposal, spill or Release of any Hazardous Substances by Terra at, on, under, about or from the Beaumont Facility;

(e) any spill or Release of methanol or any other substance from any asset comprising the Beaumont Facility assets, including, without limitation: (a) all Environmental Costs and Liabilities arising out of such spill or Release of materials; (b) any damage to the Beaumont Facility or to other property; and (c) the cost of the Product owned by Methanex that has been spilled or Released;

(f) the negligence or intentional misconduct of Terra or any other Terra Indemnified Person;

(g) any Product related incident or occurrence during the Effective Period when Terra has the risk of loss of such Product, except to the extent that such Claim is attributable to the negligence, or intentional misconduct of Methanex or any other Methanex Indemnified Person;

(h) any manufacturer’s liability regarding the Product;

(i) any breach by Terra of, or any inaccuracy of, any representation or warranty of Terra contained in this Agreement; and

(j) any breach or non-performance by Terra of any covenant to be performed by it that is contained in this Agreement.

16.3. Indemnification Procedures: Within a reasonable period of time after a Terra Indemnified Person or a Methanex Indemnified Person (whether one or more, an “Indemnified Party”) establishes a basis for or receives actual notice of any Claim covered by Subsection 16.1 or Subsection 16.2, as the case may be, the Indemnified Person shall notify the Party from whom indemnification is sought (the “Indemnifying Party”) in writing of such Claim, provided, however, that the failure to so notify the Indemnifying Party shall not relieve the Indemnifying Party from any liability which it may have to the Indemnified Person pursuant to Subsection 16.1 or Subsection 16.2, as the case may be, except to the extent of material detriment suffered by the Indemnifying Party as a result of such failure. In the event that a Claim arises out of or results from matters with respect to third parties (a “Third Party Claim”), the Indemnifying Party shall undertake the defence thereof by attorneys chosen by it, which are reasonably acceptable to the Indemnified Person. So long as the Indemnifying Party is defending any Third Party Claim actively and in good faith, the Indemnified Person shall not settle such Third Party Claim without the consent of the Indemnifying Party.

16.4. Defence of Third Party Claim: If the Indemnifying Party, within a reasonable time after notice of any Third Party Claim, fails to defend such Third Party Claim actively and in good faith, the Indemnified Party shall (upon further notice) have the right to undertake the defence, compromise or settlement of such Third Party Claim or consent to the entry of a judgment with respect to such Third Party Claim, on behalf of and for the account and risk of the Indemnifying Party, and the Indemnifying Party shall thereafter have no right to challenge the Indemnified Party’s defence, compromise, settlement or consent to judgment. Irrespective of which Party has the right to defend, compromise or settle any Third Party Claim pursuant to this Subsection 16.4, each of the Indemnifying Party and the Indemnified Party shall be entitled to consult with each other, to the extent it reasonably requests, in respect of the

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defence of such Third Party Claim and shall cooperate in the defence of any such Third Party Claim, including making its partners (if applicable), officers, directors, employees and books and records available for use in such Third Party Claim, and shall take those actions reasonably within its power which are reasonably necessary to preserve any legal defences to such matters, without the necessity of formal subpoena or court action.

16.5. Payment: The Indemnifying Party shall promptly pay each Indemnified Party any amount properly due under this Section 16 upon demand therefor and reimburse each Indemnified Party for all reasonable expenses (including reasonable attorneys’ fees and costs of court) for which the Indemnified Party is entitled to be indemnified hereunder as they are incurred by such Indemnified Party. Upon judgment, determination, settlement or compromise of any Third Party Claim, the Indemnifying Party shall, upon demand therefor, promptly pay on behalf of the Indemnified Party, and/or shall promptly reimburse the Indemnified Party for its payment of, the amount so determined by such judgment, determination, settlement or compromise and all other Claims of the Indemnified Party with respect thereto, unless, in the case of a judgment or determination, an appeal is made therefrom; provided, however, that if the Indemnifying Party desires to appeal from an adverse judgment or determination, then the Indemnifying Party shall post and pay the cost of the security or bond to stay execution of the judgment or determination pending appeal. Upon the payment in full by the Indemnifying Party of all of such amounts, the Indemnifying Party shall succeed to the rights of the Indemnified Party, to the extent such rights are not waived in settlement, against the third party who made such Third Party Claim.

16.6. Limitation of Liability: NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, EXCEPT AS PROVIDED IN SUBSECTION 18.3(f) BELOW OR SECTION 4 OF SCHEDULE B, NO PARTY, NOR ANY RESPECTIVE REPRESENTATIVE, SHALL BE LIABLE TO ANY OTHER PARTY FOR ANY CONSEQUENTIAL, INDIRECT, SPECIAL OR PUNITIVE DAMAGES FROM ANY CAUSE WHATSOEVER, WHETHER BASED IN CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY OR ANY OTHER LEGAL THEORY UNLESS (I) SUCH DAMAGES RESULT FROM THE GROSS NEGLIGENCE OR INTENTIONAL MISCONDUCT OF SUCH PARTY OR ANY OF ITS REPRESENTATIVES; OR (II) SUCH DAMAGES ARE PAYABLE BY AN INDEMNIFIED PARTY PURSUANT TO A THIRD PARTY CLAIM MADE BY A NON-AFFILIATE OF THE INDEMNIFIED PARTY AND FOR WHICH INDEMNIFICATION IS OTHERWISE AVAILABLE HEREUNDER.

17. FORCE MAJEURE

17.1. Force Majeure Event: If, as a result of the occurrence of a Force Majeure Event, a Party (after the exercise of reasonable diligence) is rendered unable, in whole or in part, to carry out its obligations under this Agreement, with the exception of payment obligations under this Agreement, the obligations of such Party, to the extent that they are affected by such Force Majeure Event, shall be suspended during the continuance of such Force Majeure Event provided that the Party prevented from performing by such Force Majeure Event:

(a) provides the other Party with written notice of the occurrence of such Force Majeure Event within three days following the occurrence of such Force Majeure Event, which notice shall describe such Force Majeure Event in reasonable detail and, to the extent practicable, include an estimate of the anticipated duration thereof;

(b) takes all actions reasonable necessary to remedy such Force Majeure Event or its resulting effects, or otherwise remove the basis for non-performance, as soon as practicable; and

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(c) upon such remedy or removal of the Force Majeure Event, resumes performance of its obligations under this Agreement.

18. DISPUTE RESOLUTION

18.1. Amicable Settlement: All disputes arising out of or in connection with this Agreement or its performance, including without limitation the validity, scope, meaning, construction, interpretation or application of this Agreement or any provision hereof shall be settled, to the extent reasonably practicable, by amicable negotiation, discussion and agreement between the Parties’ respective Chief Executive Officers, or their designees.

18.2. Inadmissibility: The parties agree that any discussions pursuant to Subsection 18.1 are settlement negotiations and, to the extent allowed by Law, the subject matter of such discussions is not admissible in any future Proceedings. The parties shall not subpoena or otherwise require any mediator to testify or produce any records, notes or documents in any future Proceedings.

18.3. Arbitration: Any dispute arising out of or in connection with this Agreement that the Parties have not resolved in accordance with Subsection 18.1 shall be, at the election of Terra or Methanex, submitted to arbitration in accordance with the following terms and procedures:

(a) The Party seeking arbitration shall notify the American Arbitration Association (the “AAA”) and the other Party in writing describing in reasonable detail the nature of the dispute (the “Dispute Notice”). The resolution of such dispute shall be determined by a panel of three arbitrators (the “Arbitration Panel”); one to be appointed by Methanex, one to be appointed by Terra and a neutral arbitrator to be appointed by the arbitrators appointed by Methanex and Terra. The neutral arbitrator shall be an attorney and shall act as chairman. If either Party fails to appoint an arbitrator within 15 Business Days after the dispute is submitted to arbitration, or the two arbitrators appointed by or on behalf of each Party fail to appoint a neutral arbitrator within 15 Business Days after the date of the appointment of the last arbitrator appointed by or on behalf of each Party, then, the third arbitrator shall be appointed under the provisions of the Commercial Arbitration Rules of the AAA. Each Party appointed arbitrator shall have knowledge of or experience in the chemical industry. In the event that any arbitrator is unable to serve, his or her replacement shall be selected in the same manner as the arbitrator to be replaced. The vote of two of the three arbitrators shall be required for any decision under this Subsection 18.3. The arbitration shall be conducted in New York City or such other location that the Parties may mutually agree in writing;

(b) The arbitration shall be subject to the Federal Arbitration Act as supplemented by the conditions set forth in this Subsection 18.3. The arbitration shall be administered by the AAA and shall be governed by the AAA Commercial Arbitration Rules, other than as specifically modified herein;

(c) The decision of, and award rendered by, the Arbitration Panel shall be in writing and shall be final and binding on each Party. The award of the Arbitration Panel shall be reasoned and shall include written findings of fact and conclusions of Law. The fees and expenses of the Party appointed arbitrators shall be paid by the Party appointing such arbitrator and the fees and expenses of the neutral arbitrator shall be shared equally by Methanex and Terra, provided, however, the Arbitration Panel may assess such fees and expenses in the manner it deems appropriate in connection with its decision;

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(d) During the arbitration of the dispute, each Party shall make available to the Arbitration Panel and to the other Party all books, records and other information within its control as reasonably requested by the other Party or requested by the Arbitration Panel subject to the confidentiality provisions contained herein, and provided that no such access shall waive or preclude any objection to such production based on any privilege recognized by Law. Recognizing the express desire of each Party for an expeditious means of dispute resolution, the Arbitration Panel may limit the scope of discovery between each Party as may be reasonable under the circumstances;

(e) In deciding the substance of each Party’s Claims, the Laws of the State of New York shall govern the construction, interpretation and effect of this Agreement (including this Subsection 18.3) without giving effect to any conflict of law principles;

(f) The arbitration hearing shall be commenced promptly and conducted expeditiously, with each Party involved in the dispute being allocated an equal amount of time for the presentation of its case. Unless otherwise agreed to by each Party or ordered by the Arbitration Panel, the arbitration hearing shall be conducted on consecutive days. Time is of the essence in the arbitration Proceedings, and the Arbitration Panel shall have the right and authority to issue monetary sanctions against any Party if, upon a showing of good cause, that Party is unreasonably delaying the Proceedings. To the fullest extent permitted by Law, the arbitration Proceedings and award shall be maintained in confidence by the Arbitration Panel and each Party; and

(g) The Arbitration Panel shall decide all disputes and all substantive and procedural issues related thereto, and shall enforce this Agreement in accordance with its terms. Without limiting the generality of the previous sentence, the Arbitration Panel shall have the authority to issue injunctive relief; however, the Arbitration Panel shall not have any power or authority to: (i) award consequential, indirect or incidental damages (other than in Subsection 18.3(f) above), or punitive damages; or (ii) amend this Agreement. The Arbitration Panel shall render the arbitration award in writing following the completion of the arbitration hearing, setting forth the reasons for the award. In the event that the Arbitration Panel awards monetary damages in favour of either Party, the Arbitration Panel must certify in the award that no consequential, indirect or incidental damages (except as specifically set forth under the terms of this Agreement), punitive damages are included in such award. If the Arbitration Panel’s decision results in a monetary award, interest to be granted such award, if any, and the rate of such interest shall be determined by the Arbitration Panel in their discretion. The arbitration award shall be final and binding on each Party, and judgment thereon may be entered in any court of competent jurisdiction, and may not be appealed except to the extent permitted by the Federal Arbitration Act.

18.4. Interim Relief: Each Party may, by summary proceedings (e.g., a plea in abatement or motion to stay further proceedings), bring any action in any court of competent jurisdiction to (i) compel arbitration of any dispute; (ii) obtain interim measures of protection pending arbitration of any dispute, to preserve the status quo pending resolution of the dispute, to prevent the destruction of documents and other information or things related to the dispute or to prevent the transfer, dissipation or hiding of Assets; or (iii) enforce any decision of the Arbitration Panel, including the final award. The bringing of any such action shall not be deemed incompatible with the provisions of this Section 18 or a waiver of a Party’s right to arbitrate. Either Party who fails or refuses to submit to binding arbitration following a lawful demand by the other Party shall bear all costs and expenses incurred by such other Party in compelling arbitration of such dispute.

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18.5. Continuing Obligations: Each of the Parties shall continue to perform its obligations under this Agreement at all times during which any disputes are the subject of the dispute resolution procedures of this Section 18.

19. MISCELLANEOUS

19.1. Relationship of Parties: Neither this Agreement, nor the performance of the Parties under this Agreement, creates between Methanex and Terra, the relationship of principal and agent, partners, joint ventures or any legal relationship, other than that of supplier of methanol.

19.2. Notices: Any and all notices, requests or other communications hereunder shall be given in writing and delivered by courier, personal delivery or facsimile, to the Parties at the following addresses or numbers:

(i) if to Terra, to:

Terra Industries Inc.

600 Fourth Street,

Sioux City, Iowa

USA

Attn: General Counsel

Facsimile No.: (712) 233-5586

(ii) if to BMC, to:

BMC Holdings Inc.

600 Fourth Street,

Sioux City, Iowa

USA

Attn: General Counsel

Facsimile No.: (712) 233-5586

(iii) if to Methanex:

Methanex Methanol Company

15301 Dallas Parkway, Suite 1150,

Addison, Texas

USA

Attn: Director, North American Marketing and Logistics

Facsimile No.: (972) 702-0910

(iv) with a copy to :

Methanex Corporation

1800 Waterfront Centre

200 Burrard Street

Vancouver, British

Columbia

Attn: General Counsel

Facsimile No.: 604-661-2602

or at such other address or number as shall be designated by a Party in a notice to the other Parties given in accordance with this Subsection 19.2. Except as otherwise provided in this Agreement, all such

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communications shall be deemed to have been duly given, in the case of a notice delivered by courier or by hand, when personally delivered and in the case of a notice sent by facsimile, upon transmittal and acknowledgement of receipt by the recipients fax machine, subject to telephone confirmation of receipt.

19.3. Counterparts: This Agreement may be executed by the Parties in any number of counterparts, each of which shall be deemed an original instrument, but all of which when delivered, by facsimile or otherwise, shall constitute but one and the same Agreement.

19.4. Benefit and Burden: This Agreement shall inure to the benefit of, and shall be binding upon, the Parties and their respective successors and permitted assigns.

19.5. Amendments and Waiver: No amendment, modification, restatement or supplement of this Agreement shall be valid unless the same is in writing and signed by the Parties. No waiver of any provision of this Agreement shall be valid unless in writing and signed by the Party against whom that waiver is sought to be enforced. No failure or delay on the part of either Party in exercising any right, power or privilege hereunder, and no course of dealing among the Parties, shall operate as a waiver of any right, power or privilege hereunder. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. No notice to or demand on either Party in any case shall entitle such Party to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of either Party to any other or further action in any circumstances without notice or demand.

19.6. Assignments: Neither this Agreement nor any right, interest or obligation hereunder may be assigned by a Party without the prior written consent of the other Party hereto (such consent not to be unreasonably withheld) and any attempt to do so shall be null and void. A change of control of a Party or the sale by a Party of all or substantially all of the assets or undertaking, shall be deemed to be an assignment under this Subsection 19.6. For the purposes of this Agreement, “change of control” shall mean the change in ownership of at least 50% of the outstanding shares in the capital of a Party or the change in the ability to control or direct the management of such entity. In the event of an assignment of this Agreement, the assigning Party shall not be released from any of its liabilities or obligations hereunder. In the event of any permitted assignment of this Agreement by either Party, the designated assignee shall assume, in writing (in form and substance reasonably satisfactory to the other Party), the rights and obligations of the assigning Party under this Agreement.

19.7. Severability: Should any clause, sentence, paragraph, Subsection or Section of this Agreement be judicially declared to be invalid, unenforceable or void, such decision shall not have the effect of invalidating or voiding the remainder of this Agreement, and the Parties agree that the part or parts of this Agreement so held to be invalid, unenforceable or void shall be deemed to have been stricken herefrom as if such stricken part or parts had never been included herein.

19.8. Applicable Law: This Agreement and the rights and obligations of the Parties hereunder shall be governed by and construed in accordance with the Laws of the State of New York, without giving effect to the conflict of law principles thereof.

19.9. Expenses: Except as otherwise expressly provided in this Agreement, each Party shall pay its own expenses incident to this Agreement, including all legal and accounting fees and disbursements.

19.10. Entire Agreement: This Agreement sets forth all of the promises, agreements, conditions, understandings, warranties and representations between the Parties with respect to the matters contemplated hereby, and supersedes all prior agreements, arrangements and understandings between the Parties with respect to the matters contemplated hereby, whether written, oral or otherwise, including the Confidentiality Agreement. There are no promises, agreements, conditions, understandings, warranties or representations, oral or written, express or implied, between the Parties concerning the subject matter hereof except as set forth herein.

[Signature pages to follow]

- 30 -

IN WITNESS WHEREOF the parties have executed this Agreement as of the day and year written below.

TERRA INDUSTRIES INC.
By:	/s/ MICHAEL L. BENNETT
	Authorized Signatory
	Michael L. Bennett
	Printed Name
	President & CEO
	Title
	December 15, 2003
	Date

BMC HOLDINGS INC.
By:	/s/ MARK A. KALAFUT
	Authorized Signatory
	Mark A. Kalafut
	Printed Name
	Vice President
	Title
	December 15, 2003
	Date

METHANEX METHANOL COMPANY, by its Managing Partner Methanex Gulf Coast, Inc.
By:	/s/ GERRY DUFFY
	Authorized Signatory
	Gerry Duffy
	Printed Name
	Director
	Title
	December 15, 2003
	Date

By:	/s/ Randy Milner
	Authorized Signatory
	Randy Milner
	Printed Name
	Director
	Title
	December 15, 2003
	Date

-31-

Guarantee

Methanex Corporation, a corporation under the Laws of Canada, is an Affiliate of Methanex. To induce Terra to enter into the Agreement and perform its obligations under the Agreement, Methanex Corporation is entering into this guarantee. Methanex Corporation will derive direct and indirect benefit from the Agreement. Methanex Corporation is a signatory to the Agreement for the sole purpose of providing the guarantee set forth in the following paragraph.

In consideration of the Parties entering into the Agreement, Methanex Corporation hereby unconditionally and irrevocably guarantees the full and timely performance by Methanex, of its obligations, covenants and commitments under the Agreement, which guarantee is being provided for the benefit of Terra, and its successors and assigns. Terra has relied upon this guarantee in entering into the Agreement.

METHANEX CORPORATION
By:	/s/ PIERRE CHOQUETTE
	Authorized Signatory
	Pierre Choquette
	Printed Name
	Chairman & CEO
	Title
	December 15, 2003
	Date

By:	/s/ RANDY MILNER
	Authorized Signatory
	Randy Milner
	Printed Name
	Senior VP, General Counsel & Corp Secy.
	Title
	December 15, 2003
	Date

-32-

SCHEDULE A

DEFINITIONS

(a) “AAA” has the meaning set forth in Subsection 18.3(a);

(b) “Actual Closing Inventory” has the meaning set forth in Subsection 2.2;

(c) “Actual Monthly Volumes Produced” has the meaning set forth in Subsection 6.2;

(d) “Affiliate”, “Affiliates” and/or “Affiliated” means, with respect to any Person, any other Person that directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with such Person. The term “control” (including, with correlative meaning, the terms “controlling”, “controlled by” and “under common control with”) means the possession, directly or indirectly, of the power to direct or cause direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise;

(e) “Aggregate Contract Volume” has the meaning set forth in Subsection 5.3.5;

(c) “Agreement” means this Asset Purchase and Methanol Exclusivity Agreement, as amended, supplemented or modified from time to time in accordance with its terms;

(f) “Ammonia Loop” means that portion of Terra’s, or its Affiliate’s, chemical manufacturing facility located at Beaumont, Texas that produces ammonia or such other chemicals other than methanol;

(g) “Arbitration Panel” has the meaning set forth in Subsection 18.3(a);

(h) “Assets” has the meaning set forth in Subsection 2.1;

(i) “AV” has the meaning set forth in Subsection 6.3(a) unless the context of this Agreement otherwise requires;

(j) “Assumed Customers” has the meaning set forth in Subsection 8.2;

(k) “Beaumont Facility” means the methanol facility owned by BMC, located in Jefferson County, Texas, including, without limitation, the Beaumont Storage Tanks, the pipelines connecting the Beaumont Storage Tanks to the existing wharf facility located adjacent to the Beaumont Facility, and owned and operated by E.I. DuPont De Nemours and Company, the pipelines connection the Beaumont Storage Tanks to the Customer pipelines, and any and all relevant pipelines located at the Beaumont Facility use for the movement of methanol;

(l) “Beaumont Premium” has the meaning set forth in Subsection 5.3.5;

(m) “Beaumont Storage Tanks” means the three methanol storage tanks located at the Beaumont Facility as follows: (i) two methanol storage tanks each with a storage capacity of 22,000 metric tonnes; and (ii) one methanol storage tank with a storage capacity of 4,000 metric tonnes;

(n) “BMC” means BMC Holdings Inc.;

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(o) “Business Day” means a day other than Saturdays, Sundays and other days that Federal Banks in Houston, Texas are closed;

(p) “Claims” means any and all rights, claims, counterclaims, complaints, disputes, demands, causes of action, liabilities, obligations, damages, losses, legal fees, costs, expenses, and disbursements of any nature or kind, whatsoever and howsoever arising, whether known or unknown, whether in law or in equity or pursuant to statute, and whether in any court of law or equity or before any arbitrator or other body, board or tribunal;

(q) “Confidential Information” means: (i) all information, regardless of the form in which it is communicated or maintained (and whether prepared by the Disclosing Party or otherwise), that contains or otherwise reflects information concerning the Disclosing Party that the Recipient or its employees and representatives may be provided by or on behalf of the Disclosing Party in the course of the transactions contemplated by this Agreement; and (ii) all reports, notes, analyses and other information (regardless of the form in which it is maintained) that are based on, contain or reflect any of such information;

(r) “Confidentiality Agreement” has the meaning set forth in Recital F;

(s) “Contract” and “Contracts” has the meaning set forth in Subsection 2.1(a);

(t) “Contract Price” has the meaning set forth in Subsection 5.3.5;

(u) “Contractual Consent” means, with respect to each Contract, the consent of any Person that, by the terms of that Contract, is required in order for Terra to validly assign that Contract to Methanex in accordance with this Agreement;

(v) “Customer” any Person, other than Terra, who is a party to a Contract;

(w) “Customer List” has the meaning set forth in Subsection 2.1(b);

(x) “Defective Product” means any Product that is defective or does not meet or exceed the Specifications at the time of Delivery;

(y) “Delivery” or “Deliver” means, with respect to any Product, the transfer of title in such Product from one Party to another Party or to a third party;

(z) “Delivery, Shipment and Storage Instructions” has the meaning set forth in Section 5 of Schedule B;

(aa) “Disclosing Party” has the meaning set forth in Subsection 10.1;

(bb) “Dispute Notice” has the meaning set forth in Subsection 18.3(a);

(cc) “EF” has the meaning set forth in Subsection 6.3(a);

(dd) “Effective Period” has the meaning set forth in Subsection 5.1;

(ee) “Encumbrance” means any encumbrance including, without limitation, any charge, pledge, security interest, adverse claim, or objection, reservation, legal notation or any contract to create any of the foregoing;

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(ff) “Environmental Claims” means any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigations, Proceedings, consent orders or consent agreements relating in any way to any Environmental Law or any Environmental Permit, including, without limitation, (a) any and all claims by Governmental Authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law or Environmental Permit and (b) any and all claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief to the extent resulting from the presence of or exposure to Hazardous Substances or arising from alleged injury or threat of injury to the environment;

(gg) “Environmental Costs and Liabilities” means all costs, expenses, losses and liabilities of any nature (including, but not limited to, liabilities arising out of Environmental Claims) associated with contamination of the air, surface water, soil or ground water by Hazardous Substances or human exposure to Hazardous Substances or arising under any Environmental Law or Environmental Permit;

(hh) “Environmental Laws” includes any federal, state, municipal, county, district or local Laws, regulations, orders, bylaws, rules, codes, standards, guidelines, protocols, Environmental Permits and other lawful requirements of any Governmental Authority, principles of common law and equity and all judicial and administrative decisions, orders and decrees that relate in any way to the environment, environmental assessment, health, occupational health and safety, Hazardous Substances (including, without limitation, the storage, manufacture, processing, labelling, disposal, treatment, generation, use, transport, handling, remediation or Release of Hazardous Substances), product liability or the environmental conditions on, under or about the Beaumont Facility, (including, without limitation, soil, sediments, surface water, groundwater and indoor and ambient air conditions) in effect at any time prior to the date of this Agreement or at the date of this Agreement or at any time after the date of this Agreement;

(ii) “Environmental Permits” includes all permits, licences, approvals, consents, authorizations, registrations, privileges, exemptions, waivers, variations, clearances, orders, certificates, rulings and other concessions under any Environmental Laws;

(jj) “ERA” has the meaning set forth in Subsection 5.3.2;

(kk) “ERM” has the meaning set forth in Subsection 5.3.2;

(ll) “Estimated Cash Contribution” has the meaning set forth in Subsection 5.3.2;

(mm) “Excess Fees” has the meaning set forth in Subsection 6.2;

(nn) “Exclusivity Fee Cap” has the meaning set forth in Subsection 6.2;

(oo) “Extended Suspension” has the meaning set forth in Subsection 5.3.3;

(pp) “FOB” has the meaning given to such term in the standardized definitions relating to the import and export of goods published by the International Chamber of Commerce, as revised in 2000;

(qq) “Force Majeure Event” means any causes or contingencies (whether or not of the same nature as those hereinafter specified) beyond the reasonable control of the Party claiming a force majeure event, including acts of God, wars, blockades, insurrections, riots, epidemics, landslides, lightning, earthquakes, fires, storms, hurricanes, floods, high water, washouts, arrests, restraints of government and people, civil disturbances, explosions, lack of adequate supplies of fuel,

A-3

power, raw materials, labour, containers or transportation facilities, breakage or accident to wells, machines, equipment, apparatus or lines of pipe or property, freezing of wells, machines, equipment, apparatus or lines of pipe or property, partial or entire failure of any wells, machinery, equipment, apparatus or lines of pipe or other property, strikes, work stoppages, labour difficulties, other industrial disturbances, acts of public enemy, sabotage, governmental controls (including price and allocation controls), Laws, orders or actions (including those dealing with pollution, health, ecology, tariffs, duties or other governmental assessments or restrictions or environmental matters), embargoes or unavailability or shortages of ships, barges or other inland water or marine vessels or other transportation equipment;

(rr) “Gallons” means the United States unit of liquid volume;

(ss) “Governmental Authority” means: (i) any government; (ii) any federal, state, county, province, city, town, municipality, local or other political subdivision thereof or thereto; (iii) any court, tribunal, department, commission, board, bureau, instrumentality, agency, council, arbitrator or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government; and (iv) any other governmental entity, agency or authority having or exercising jurisdiction over any relevant Person, item or matter;

(tt) “Hazardous Substance” includes radioactive materials; asbestos and asbestos-containing materials; urea formaldehyde; hydrocarbons; underground and aboveground tanks; lead; pollutants; polychlorinated biphenyls (“PCBs”) and PCB-containing equipment; flammable substances; contaminants; deleterious substances; dangerous substances and goods; hazardous, corrosive and toxic substances, materials, constituents, compounds, recyclables, chemicals (including, without limitation, petroleum, gasoline or associated products or any by-products or fractions thereof); radon gas; waste; special waste; pesticides; defoliants; explosives; any solid, liquid, gas, vapor, odour, heat, sound, vibration, radiation or combination of any of them the storage, manufacture, processing, labelling, disposal, treatment, generation, use, transport, handling, remediation or Release into the environment of which is prohibited, controlled or regulated under Environmental Laws or Environmental Permits or which may or could pose a hazard to the environment;

(uu) “Hedge Agreement” means any and all agreements (whether in writing or oral) between Terra Capital Inc. and a third party, relating to the purchase and sale of natural gas as a means of hedging the fluctuations in price of natural gas;

(vv) “Indemnified Party” has the meaning set forth in Subsection 16.3;

(ww) “Indemnifying Party” has the meaning set forth in Subsection 16.3;

(xx) “Independent Auditor” has the meaning set forth in Subsection 7.5;

(yy) “Inflation” has the meaning set forth in Subsection 6.3(a);

(zz) “Inventory” has the meaning set forth in Subsection 2.1(c);

(aaa) “Inventory Purchase Price” has the meaning set forth in Subsection 2.2(b);

(bbb) “ITC Storage Contract” means the Terminal Service Agreement Number 881 between Intercontinential Terminals Company and Beaumont Methanol Limited Partnership, dated November 30, 1998;

A-4

(ccc) “ITC Storage Tank” means the methanol storage tank located at Deer Park, Texas and owned and operated by Intercontinential Terminals Company (such ITC Storage Tank is used exclusively for the storage of methanol that meets the Specifications);

(ddd) “Law” means all laws, statutes, rules, regulations, ordinances, orders, writs, injunctions or decrees and other pronouncements having the effect of law of any Governmental Authority;

(eee) “LIBOR” means London InterBank Offered Rate;

(fff) “Major Casualty” has the meaning set forth in Subsection 5.5.2;

(ggg) “Methanex” means Methanex Methanol Company;

(hhh) “Methanex Indemnified Persons” has the meaning set forth in Subsection 16.2;

(iii) “Methanex Restart Notice” has the meaning set forth in Subsection 5.3.4;

(jjj) “Methanex Suspension Notice” has the meaning set forth in Subsection 5.3.3;

(kkk) “Methanol Exclusivity Fee” has the meaning specified in Subsection 6.2;

(lll) “Min/Max Range” has the meaning set forth in Section 1 of Schedule B;

(mmm) “MMC” means Methanex Methanol Company;

(nnn) “MNDRP” has the meaning set forth in Subsection 5.3.2;

(ooo) “Monthly Combined Production Fee” has the meaning specified in Subsection 6.3(a);

(ppp) “Monthly Methanol Production Fee” has the meaning specified in Subsection 6.3(b);

(qqq) “Monthly MMC Price” has the meaning set forth in Subsection 6.2;

(rrr) “Negative Margin” has the meaning set forth in Subsection 6.2;

(sss) “Negative Result” has the meaning set forth in Subsection 6.2;

(ttt) “Non-Assignable Rights” has the meaning set forth in Subsection 3.4;

(uuu) “Operational” means:

(i) with respect to the Beaumont Facility, that production of methanol (regardless of the quantity of methanol) is occurring at the Beaumont Facility and, for greater certainty, the Beaumont Facility shall be deemed Operational in the event of, and during, a Scheduled Suspension, Unscheduled Suspension or a Temporary Suspension; and

(ii) with respect to the Ammonia Loop, that ammonia or any other product (regardless of the quantity of such product) is being produced at the Ammonia Loop and, for greater certainty, the Ammonia Loop shall be deemed Operational in the event of any temporary interruption or suspension of the production of ammonia or such other product including, without limitation, the interruption or suspension of production for scheduled or unscheduled maintenance of the Ammonia Loop;

A-5

(vvv) “Parties” means Terra Industries, BMC and Methanex, and “Party” means Terra Industries, BMC or Methanex;

(www) “Person” means any natural person, firm, syndicate, joint venture, partnership, limited partnership, association, corporation, joint stock company, trust, business trust, Governmental Authority or other entity;

(xxx) “Pipeline Customers” means those Customers, at the Time of Closing, to whom Terra delivers methanol directly from the Beaumont Facility to such Customer’s facilities via a pipeline system;

(yyy) “Pipeline Customer Contracts” has the meaning set forth in Subsection 5.3.5;

(zzz) “Positive Margin” has the meaning set forth in Subsection 6.2;

(aaaa) “Positive Result” has the meaning set forth in Subsection 6.2;

(bbbb) “Proceedings” means any and all actions, suits, proceedings, and hearings of any nature and kind in any court of law or equity or before any arbitrator or other body, board or tribunal;

(cccc) “Product” has the meaning set forth in Subsection 5.1;

(dddd) “Production Commencement Date” has the meaning set forth in Subsection 5.3.5;

(eeee) “Purchase Price” has the meaning set forth in Subsection 2.2;

(ffff) “Quarterly Forecast” has the meaning set forth in Section 2 of Schedule B;

(gggg) “Quarterly Review” has the meaning set forth in Subsection 5.2.2;

(hhhh) “Recipient” has the meaning set forth in Subsection 10.1;

(iiii) “Records” has the meaning set forth in Subsection 7.5;

(jjjj) “Record Retention Period” has the meaning set forth in Subsection 7.5;

(kkkk) “Release” has the meaning prescribed in any Environmental Law and includes, without limitation, any release, spill, leak, pumping, pouring, emission, emptying, discharge, injection, escape, leaching, disposal, dumping, deposit, spraying, burial, abandonment, incineration, seepage and placement;

(llll) “Restart Inventory” has the meaning specified in Subsection 5.3.5;

(mmmm) “Scheduled Suspension” has the meaning set forth in Subsection 5.3.1(a);

(nnnn) “Specifications” means the methanol specifications attached hereto as Schedule D, as the same may be amended from time to time by written agreement of the Parties;

(oooo) “Suspension Costs” has the meaning set forth in Subsection 5.3.3;

(pppp) “Temporary Suspension” has the meaning set forth in Subsection 5.3.2;

(qqqq) “Temporary Suspension Notice” has the meaning set forth in Subsection 5.3.2;

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(rrrr) “Terra” means Terra Industries and BMC, together;

(ssss) “Terra Indemnified Persons” has the meaning set forth in Subsection 16.1;

(tttt) “Terra Industries” means Terra Industries Inc.;

(uuuu) “Third Party Claim” has the meaning set forth in Subsection 16.3;

(vvvv) “Terra Restart Notice” has the meaning set forth in Subsection 5.3.5;

(wwww) “Time of Closing” has the meaning set forth in Section 4;

(xxxx) “Unscheduled Suspension” has the meaning set forth in Subsection 5.3.1(b); and

(yyyy) “Year” means a calendar year.

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SCHEDULE B

PRODUCT DELIVERY TERMS

1. Production Volumes: Prior to the first day of each calendar quarter, Terra will deliver to Methanex written notice of its minimum and maximum methanol production volume (“Min/Max Range”) at the Beaumont Facility for the next calendar quarter on the basis of US Gallons/day. The Parties do not expect that minimum methanol production volumes shall be less than 630,000 Gallons/day nor shall maximum methanol production volumes be greater than 660,000 Gallons/day. Methanex will use its reasonable efforts to nominate Product (as set forth in Section 3 below) within the minimum and maximum volume range set forth in this Section.

2. Forecasting: Prior to the first day of each month preceding a calendar quarter Methanex shall provide to Terra a rolling forecast of Product expected to be required by Methanex in each of the next four quarters (“Quarterly Forecast”). For the avoidance of doubt, the Quarterly Forecast does not constitute a commitment by Methanex to purchase such Product set forth in the Quarterly Forecast.

3. Product Nomination: In addition to the Quarterly Forecast required under Section 2 above, on or before the 15th day of each month Methanex shall provide to Terra a rolling three month forecast of its Product requirements, the forecast for the first month of which shall constitute a firm commitment of Methanex to take delivery of and pay for such Product for that month.

4. Supply Limitations: Terra shall notify Methanex, within two days, of any and all potential supply limitations to minimize any impact on Methanex’s business as soon as practical after Terra becomes aware of such event or circumstance that may result in any potential supply limitations. Except with respect to a Force Majeure Event, Terra shall be liable for all costs incurred by Methanex as a result of Terra’s failure to Deliver Product due to an Unscheduled Suspension including, without limitation, incremental costs incurred by Methanex to purchase, ship and store methanol to replace such Product not Delivered (supporting documentation reasonably required by Terra), provided that the Unscheduled Suspension lasts longer than 15 days. If the Unscheduled Suspension is caused by the willful misconduct of Terra, or its officers, directors, employees or contractors, then Terra shall be liable for all costs, as set forth in this Section 4, incurred by Methanex as a result of Terra’s failure to Deliver Product due to an Unscheduled Suspension, notwithstanding the duration of such Unscheduled Suspension and commencing immediately upon the commencement of such Unscheduled Suspension.

5. Delivery of Methanol/Shipping Instructions: At least five Business Days prior to the first day of each month, Methanex shall provide written notice to Terra setting forth its requested dates, volumes of deliveries and shipping requirements for Product for the coming month (the “Delivery, Shipment and Storage Instructions”). Terra shall be entitled to rely on the Delivery, Shipment and Storage Instructions unless the Parties agree otherwise in writing. Terra shall use reasonable commercial efforts to comply with the Delivery, Shipment and Storage Instructions. Methanex may also deliver to Terra from time to time additional shipping instructions for Product and Terra shall use reasonable commercial efforts to Deliver Product at the times specified in such instructions. All such additional shipping instructions shall be given as early as is practicable prior to the requested shipment date. Upon arranging each shipment of Product, Terra shall provide Methanex with written notice of the particulars of such shipment.

6. Access to the Facility: Terra shall ensure that Methanex and its representatives shall be afforded access to the Beaumont Facility at reasonable times, seven days a week, as required by Methanex in connection with the performance of its obligations under this Agreement, in particular, in order to take Delivery of Product under this Agreement. Terra shall make available to Methanex such of Terra’s

B-1

personnel as may be required by Methanex to access the Beaumont Facility under this Section 6, at no cost to Methanex.

7. Title and Risk of Loss: The title to the Product shall at all times remain with Methanex. The risk of loss in the Product while the Product is being manufactured and stored at the Beaumont Facility and while passing through the pipelines shall remain with Terra at all times until it is Delivered to the designated party. For greater certainty, the risk of loss shall transfer from Terra to the Pipeline Customers (on a Pipeline Customer by Pipeline Customer basis) as provided for in each Pipeline Customer Contracts.

8. Product Testing: Confirmatory tests of the quality of the Inventory and each Product shipment from Terra to Methanex shall be performed (prior to delivery of such Product to Methanex) by or in the presence of an independent surveyor acceptable to the Parties, the cost and expense of which shall be borne by Methanex. Quality of each such shipment of Product shall be tested by taking one representative sample from the storage tanks where the Product is stored by Terra, and from the tanks thereof where necessary, onto which such Product is loaded. Terra shall retain such samples for not less than 90 days and shall provide Methanex with access to such samples and all records maintained by Terra with respect thereto. If a Claim regarding the quality of any given shipment is not raised by Methanex within 90 days of a sample being taken by the independent surveyor, then Terra shall be entitled to dispose of the sample. If a Claim regarding the quality of any given shipment is raised by Methanex then Terra shall retain such sample that is the subject matter of the Claim until the Claim has been finally settled. As between Terra and Methanex, all Product delivered to Methanex pursuant to this Agreement shall be conclusively presumed to be in compliance with the Specifications if, when tested in accordance with the procedures set forth in this Section 8, analysis shows that such Product met the Specifications.

9. Defective Product: All Claims and Proceedings by Methanex respecting Defective Product shall be deemed waived unless made in writing and received by Terra within 60 days after receipt of the Product in respect of which such claim is made or 60 days after Methanex discovers the existence of such Claim. Failure of Methanex to provide Terra with written notice of any such claim within the applicable time period shall be deemed an absolute and unconditional waiver by Methanex of such claim.

10. Remedy for Defective Product: Methanex’s remedy with respect to any Product that is Defective Product, shall be a refund of the pro rata portion of the aggregate amount paid by Methanex pursuant to this Agreement during the month in which such Defective Product was produced, such pro rata portion to be the percentage determined by dividing the amount of Product which is Defective Product by the aggregate amount of Product produced during such month. Methanex, in its sole option, may elect the remedy set forth in this Section 10 by providing written notice to Terra.

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SCHEDULE C

FORM OF NOTICE OF ASSIGNMENT

[Customer Legal Entity Name]

Dear [Customer Contact]

Re: Contract Assignment Notice

We are writing to advise you that Terra Industries Inc. has entered into an agreement with Methanex Methanol Company (“Methanex”), an affiliate of Methanex Corporation, pursuant to which, Methanex has purchased, effective as of December 31, 2003, certain assets from Terra including your contract (the “Transaction”). This will notify you that the contract(s) between Terra and [Customer Legal Entity Name (“customer name short form”)] (the “Contract(s)”) will be assigned to Methanex, effective as of December 31, 2003 (the “Assignment”).

The Transaction will not impact your supply of methanol under your Contract. From your perspective, the Transaction will be seamless. In the coming days, a representative of Terra will contact you to discuss the Transaction and answer any questions or concerns that you may have. In the interim, if you have questions and would like to speak to a representative of Terra, please contact Douglas Stone, Director, N.A. Industrial Sales.

Please acknowledge your consent to the Assignment by signing one of the two signature originals of this agreement in the space provided below and returning one of the signed originals to me in the enclosed FEDEX envelope. Since the Transaction will be completed in the next two weeks, your prompt response to this letter is appreciated.

Yours truly,

BMC Holdings Inc. / Terra Industries Inc.
By:
	Authorized Signatory

The terms and conditions of this letter are hereby acknowledged by the undersigned and the undersigned hereby consents to the Assignment as set forth above.

By

Print Name

Title

Date

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SCHEDULE D

SPECIFICATIONS

IMPCA-2002

TEST	LIMIT	TEST METHODS
Appearance	Clear & Free	IMPCA 003-98
Color Pt-Co	Max 5	ASTM D 1209-00
Purity% wt on dry basis	Min 99.85	IMPCA 001-02
Water% w/w	Max 0.1	ASTM E 1064-00
Distillation Range At 760 mm Hg	Max 1.0 C to include 64.6 +- 0.1	ASTM D 1078-01
Specific Gravity 20/20°C	0.791 – 0.793	ASTM D 891-00 or ASTM D 4052-02
Potassium Permanganate Time test at 15C, minutes	Min 60	ASTM D 1363-97
Carbonizable Substances (Sulfuric Acid Wash Test) Pt-Co scale	Max 30	ASTM E 346-99
Acidity as acetic acid	Max 30 mg/kg	ASTM D 1613-02
Acetone	Max 30 mg/kg	IMPCA 001-02
Hydrocarbons	Pass	ASTM D 1722-98
Non Volatile Matter	Max 8 mg/1000 mL	ASTM D 1353-00
Ethanol	Max 50 mg/kg	IMPCA 001-02
Chloride as Cl	Max 0.5 mg/kg	IMPCA 002-98
Sulphur	Max 0.5 mg/kg	ASTM D 3961-98
Total Iron	Max 0.1 mg/kg	ASTM E 394-00

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SCHEDULE E

SERVICES AGREEMENT

See Attached

E-1

SCHEDULE F

METHANOL EXCLUSIVITY FEES (SAMPLE CALCULATIONS)

Sample Calculation #1

[***]

[***]

Sample Calculation #2

[***]

[***]

Sample Calculation #3

[***]

[***]

F-1

SCHEDULE G

CONTRACT PRICE (SAMPLE CALCULATIONS)

Sample calculation for one month

[***]

Where:

1. [***]

[***]

[***]

[***]

2. [***]

[***]

[***]

3. [***]

G-1

SCHEDULE H

EFFICIENCY FACTORS

If Methanex fails to nominate Product, in respect of any given month, within the Min/Max Range, then the EF factor shall be determined as set forth below, based upon the average Gallons/day of Product produced by Terra:

Average Gallons/day produced by Terra	EF
540,000 – 579,999	[***]
580,000 – 609,999	[***]
610,000 – 680,000	[***]

H-1

SCHEDULE I

DISCLOSURE SCHEDULE

The refractory lining system of the south reformer #1 transfer line exchanger (TLX) has been breached and a hotspot has occurred. Terra reported this to Methanex on November 20th, 2003. Terra is monitoring the situation weekly and it is currently controlled. The situation could worsen at any time and force an unplanned outage but it is conceivable that it may not warrant a planned outage over the next six months. If maintenance is necessary it will require 5 to 7 days excluding normal shutdown and start-up.

I-1

EX-10.9.1

Exhibit 10.9.1

“CONFIDENTIAL TREATMENT REQUESTED FOR PORTIONS OF THIS DOCUMENT. PORTIONS FOR WHICH CONFIDENTIAL TREATMENT IS REQUESTED ARE DENOTED BY [***]. MATERIAL OMITTED HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION IN ACCORDANCE WITH RULE 24b-2, PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.”

SERVICES AGREEMENT

Among

TERRA INDUSTRIES INC.

and

BMC HOLDINGS INC.

and

METHANEX METHANOL COMPANY

Dated as of December 15, 2003

TABLE OF CONTENTS

			Page
1. INTERPRETATION			1
	1.1	Definitions	1
	1.2	Interpretation	1
	1.3	Jurisdiction, Consent to Service of Process	2
	1.4	Schedules	2
2. PROVISION OF SERVICES			2
	2.1	Undertaking to Provide and to Accept Services	2
	2.2	Service Standards	2
	2.3	Service Levels	3
	2.4	Coordination of Services	3
	2.5	Terra’s Rights to Provide Services	3
3. TERM AND TERMINATION			3
	3.1	Effective Date	3
	3.2	Term	3
	3.3	Termination of Services for Breach	3
	3.4	Termination of Services for Bankruptcy	4
	3.5	Voluntary Termination by Methanex	4
	3.6	Automatic Termination	4
	3.7	Effect of Termination	4
4. SUSPENSION OF SERVICES			5
	4.1	Temporary Suspension of Services for Repairs/Maintenance	5
	4.2	Emergency Repairs	5
	4.3	Maintenance Schedule	5
	4.4	Suspension or Termination of Operations at Beaumont Facility	5
5. FORCE MAJEURE AND TEMPORARY SUSPENSION OF SERVICES			5
	5.1	Occurrence of Event of Force Majeure	5
	5.2	Notice to Other Party	6
	5.3	Methanex’s Payment Obligations	6
6. PURCHASE OF CONTRACTS			6
	6.1	Purchase/Sale of Pipeline Customers	6
	6.2	Purchase Price for Contracts	6
	6.3	Purchase Price for Inventory	6
	6.4	Payment Terms	7
	6.5	Consents	7
	6.6	Right of First Refusal	7
7. PAYMENT FOR SERVICES AND AUDIT RIGHTS			8
	7.1	Terra Expenses	8

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	7.2	Service Fees	8
	7.3	Taxes	8
	7.4	Payment Terms	8
	7.5	Adjustments for Errors	8
	7.6	Late Payments	8
	7.7	Audit Rights	9
8. REPRESENTATIONS AND WARRANTIES			9
	8.1	Representations and Warranties of Terra	9
9. COVENANTS			11
	9.1	Covenants of Terra	11
10. INSURANCE			13
11. LIMITATION ON LIABILITY/INDEMNITY			13
	11.1	Limitation of Liability	13
	11.2	Indemnification of Terra	14
	11.3	Indemnification of Methanex	14
	11.4	Indemnification Procedures	14
	11.5	Defence of Third Party Claim	15
	11.6	Payment	15
12. CONFIDENTIALITY			15
	12.1	Information	15
	12.2	Exception	16
	12.3	Disclosure Required by Law	16
	12.4	Return of Information	16
	12.5	Restriction on Disclosure of this Agreement	16
	12.6	Public Announcements	16
	12.7	Remedies	16
13. DISPUTE RESOLUTION			17
	13.1	Amicable Settlement	17
	13.2	Inadmissibility	17
	13.3	Arbitration	17
	13.4	Interim Relief	18
	13.5	Continuing Obligations	19
14. MISCELLANEOUS			19
	14.1	Relationship of Parties	19
	14.2	Notices	19
	14.3	Counterparts	19
	14.4	Benefit and Burden	20
	14.5	Amendments and Waiver	20
	14.6	Assignment	20
	14.7	Severability	20
	14.8	Applicable Law	20

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14.9	Expenses	20
14.10	Responsible Care®	20
14.11	Entire Agreement	21

SCHEDULE A	A-1
SCHEDULE B	B-1
SCHEDULE C	C-1
SCHEDULE D	D-1
SCHEDULE E	E-1
SCHEDULE F	F-1

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SERVICES AGREEMENT

THIS SERVICES AGREEMENT (the “Agreement”) is made the 15^th day of December, 2003 between TERRA INDUSTRIES INC. (“Terra Industries”), a Maryland corporation, BMC HOLDINGS INC. (“BMC Holdings”), a Delaware corporation, each having its head office at 600 Fourth Street, Sioux City, Iowa (BMC Holdings and Terra Industries are collectively referred to as “Terra”) and METHANEX METHANOL COMPANY (“Methanex”), a Texas partnership having an office at 15301 Dallas Parkway, Suite 1150, Addison, Texas 75001

BACKGROUND:

A. BMC Holdings is the 100% owner and operator of the Beaumont Facility (defined in Schedule A attached);

B. Pursuant to an Asset Purchase Agreement of even date (“Asset Purchase Agreement”) among Terra Industries, BMC Holdings and Methanex, Terra has agreed to sell to Methanex and Methanex has agreed to purchase from Terra, certain Assets including Contracts (as those terms are defined in the Asset Purchase Agreement) and certain exclusive rights to the production of Methanol at the Beaumont Facility, all as more particularly described in the Asset Purchase Agreement;

C. DuPont provides the Wharf Services and certain Slip Services (as those terms are defined in Schedule A) to Terra at the Beaumont Facility in accordance with the provisions of the DuPont Agreement (defined in Schedule A), and several of the services provided by Terra to Methanex under this Agreement are furnished to Terra by DuPont pursuant to the DuPont Agreement; and

D. In connection with the sale of its Assets to Methanex, Terra agrees to provide certain ongoing services to Methanex on the terms and conditions set forth herein, but subject to the terms of the DuPont Agreement concerning such services.

AGREEMENT:

NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the premises, mutual covenants and agreements contained in this Agreement, and other good and valuable consideration (the receipt and sufficiency of which is acknowledged by the Parties), the Parties covenant and agree as follows:

1. INTERPRETATION

1.1 Definitions: In this Agreement terms with an initial capital letter shall have the meaning given to such terms as set forth in Schedule A.

1.2 Interpretation: In this Agreement:

(a) all terms defined in the singular shall have the same meanings in the plural and vice versa;

(b) all references to currency in this Agreement are references to the lawful currency of the United States;

(c) all references to Sections and Subsections shall be deemed to be references to the Sections and Subsections of this Agreement;

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(d) the captions and headings contained in this Agreement are for convenience of reference only and shall not be considered or given any effect in construing the provisions hereof if any question of intent should arise;

(e) reference to any Law or Laws means such Law or Laws as amended, modified, codified, re-enacted, supplemented or superseded in whole or in part, and in effect from time to time; and

(f) no provision of this Agreement shall be interpreted or construed against either Party solely because that Party or its legal representative drafted such provision.

1.3 Jurisdiction, Consent to Service of Process: Subject to the agreement of the Parties to resolve all disputes arising out of or relating to this Agreement in accordance with the procedures set forth in Section 13 of this Agreement, any action or Proceedings which is permitted to be brought by a Party against a Party to this Agreement arising out of or relating to this Agreement, whether in tort or contract or at law or in equity, shall be brought in a federal or state court in the State of New York, Manhattan Borough and each Party: (i) irrevocably submits to the personal and exclusive jurisdiction of such courts; (ii) waives any objection to laying venue in any such action or Proceedings in such courts; (iii) waives any objection that such courts are an inconvenient forum or do not have jurisdiction over it; and (iv) agrees that service of process upon such Party may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to it at its address specified in Subsection 14.2. The foregoing consents to jurisdiction and service of process shall not constitute general consents to service of process in the State of New York for any purpose except as provided herein and shall not be deemed to confer rights on any Person other than the Parties to this Agreement. The provisions of this Subsection 1.3 shall not affect a Party’s right to bring any Proceedings related to the enforcement of any arbitration award in any other jurisdiction.

1.4 Schedules: The following schedules are attached to this Agreement and are incorporated into and form an integral part of this Agreement:

Schedule		Description
Schedule A	-	Definitions
Schedule B	-	Services
Schedule C	-	Specifications
Schedule D	-	DuPont Wharf Allocation
Schedule E	-	Extracts of the DuPont Agreement
Schedule F	-	Disclosure Schedule

2. PROVISION OF SERVICES

2.1 Undertaking to Provide and to Accept Services: Terra shall perform or cause to be performed, the Services described in Schedule B, in each case on the terms and subject to the conditions set forth in this Agreement (in particular, Schedule B) and, with respect to the Wharf Services and the Slip Services subject to the terms of the DuPont Agreement.

2.2 Service Standards: Terra shall perform the Services with the standard of professional skill, care and diligence customarily applied in respect of services of the same quality and character as the Services in similar industry manufacturing processes. Terra shall undertake all reasonable efforts to require DuPont to provide the service levels required under the DuPont Agreement relating to the Wharf Services and the Slip Services.

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2.3 Service Levels: Terra shall provide the Services at the service levels set forth in the attached Schedule B. Methanex may upon 60 days’ prior written notice to Terra (each such notice, a “Reduction Notice”) reduce the level of any Service provided hereunder. Each Reduction Notice shall identify the Service and specify the level required and the date on which Methanex desires such reduction to become effective (which shall not be earlier than 60 days after the date of such Reduction Notice). From and after the effective date of such reduction, Terra shall use all reasonable efforts to reduce such Service to the level set forth in the applicable Reduction Notice. All costs associated with such Service shall be adjusted to give effect to such reduced service level.

2.4 Coordination of Services: Terra shall, at all times, have sole authority with respect to all personnel matters involving the employees, consultants and third-party contractors at the Beaumont Facility, including salaries, benefits, compensation, indirect personnel costs, training, insurance, labour matters, working hours, job responsibilities, health and safety procedures, bonding and all other employee, personnel-related and contracting matters. Terra shall be responsible for coordinating the provision of Services and, without limiting the generality of the foregoing, all Services shall be provided by employees of Terra or by third parties with whom Terra has contracted to provide such Services. Methanex acknowledges that the Wharf Services will be provided by Terra in accordance with the provisions of the DuPont Agreement, and that the DuPont employees shall be carrying out the Wharf Services. Methanex shall not have any liability for any personnel matters involving employees, consultants and third-party contractors at the DuPont Wharf.

2.5 Terra’s Rights to Provide Services: The Parties acknowledge and agree that the Wharf Services and certain of the Slip Services provided by Terra to Methanex under this Agreement are furnished to Terra by DuPont pursuant to the terms of the DuPont Agreement. Notwithstanding any terms in this Agreement, Terra shall not be obligated to provide the Wharf Services and certain of the Slip Services to Methanex under this Agreement if the provision of such services is beyond Terra’s control as a result of DuPont failing to provide such Wharf Services and Slip Services to Terra under the DuPont Agreement.

3. TERM AND TERMINATION

3.1 Effective Date: This Agreement shall become effective on December 31, 2003.

3.2 Term: The initial term (“Initial Term”) of this Agreement shall be for a period of five Years, expiring on December 31, 2008. At least 190 days prior to the expiration of the Initial Term, Methanex may request an extension of the Initial Term by delivering a written notice to Terra (“Extension Notice”). Within 10 days of the delivery of an Extension Notice by Methanex to Terra, the Parties shall enter into negotiations in good faith, with the intention of reaching an agreement as to the extension of the Initial Term. If the Parties fail to reach an agreement regarding the extension of the Initial Term, then the provisions of Section 6 below shall apply. For the purposes of this Agreement, any extension of the Initial Term of this Agreement shall be referred to as the “Renewal Term”.

3.3 Termination of Services for Breach: The obligation of Terra to provide one or more Services and the obligation of Methanex to accept one or more Services may be terminated at the option of:

(a) Methanex, if Terra fails to provide any Service or to perform its obligations in accordance with the terms of this Agreement, if such failure shall remain unremedied for 30 days after written notice thereof shall have been given by Methanex to Terra or, if the failure is of a type that cannot reasonably be cured within 30 days, failure to initiate within such 30 day period such action as reasonably can be taken toward curing the same

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and/or failure to prosecute such action as promptly as is reasonably possible after such action is initiated; and

(b) Terra, if (i) Methanex shall fail to pay an amount when the same becomes due and payable under this Agreement and any such failure shall remain unremedied for a period of the longer of (x) ten days after notice thereof shall have been given by Terra to Methanex and (y) 40 days after the date such payment is due; provided that Terra shall not have such right of termination in the event Methanex is contesting in good faith the amount of any such overdue amount and has paid to Terra any undisputed amount, or (ii) Methanex fails to perform its obligations in accordance with the terms of this Agreement, and any such failure to perform shall remain unremedied for a period of 30 days after notice thereof shall have been given by Terra to Methanex or, if the failure is of a type that cannot reasonably be cured within 30 days, failure to initiate within such 30 day period such action as reasonably can be taken toward curing the same and/or failure to prosecute such action as promptly as is reasonably possible after such action is initiated.

3.4 Termination of Services for Bankruptcy: This Agreement may be terminated by a Party if the other Party:

(a) is unable to pay its debts as they become due, has made a general assignment for the benefit of creditors, filed a voluntary bankruptcy petition, become the subject of an order for relief or been declared insolvent in any bankruptcy or insolvency Proceedings, instituted a Proceedings or filed an answer in a Proceedings seeking to adjudicate itself insolvent or seeking reorganization, arrangement, composition, readjustment, protection, liquidation, winding-up, dissolution or similar relief of such Party or such Party’s debts or liabilities under any dissolution, liquidation, bankruptcy, moratorium, readjustment of debt, compromise, rearrangement, receivership, insolvency, fraudulent transfer or conveyance, reorganization or similar debtor relief Law from time to time in effect affecting the rights of creditors generally; or

(b) has had any Proceedings of the type referred to in Subsection 3.4(a) above filed or commenced against it or has by any act indicated its approval thereof, consented thereto or acquiesced therein, or has had an order, judgment or decree entered appointing a trustee, receiver, custodian, liquidator or similar official adjudicating such Party insolvent or approving the petition in any such Proceedings, and such order, judgment or decree has remained in effect and unstayed for 90 days.

3.5 Voluntary Termination by Methanex: Methanex may, in its sole discretion, terminate this entire Agreement or any one or more Services provided by Terra to Methanex, upon 190 days prior written notice to Terra, in writing.

3.6 Automatic Termination: This Agreement shall automatically terminate in the event Terra delivers a Terra Restart Notice (defined in the Asset Purchase Agreement) to Methanex, in accordance with the Asset Purchase Agreement, with such termination to be effective as of the Production Commencement Date (defined in the Asset Purchase Agreement).

3.7 Effect of Termination: Upon the expiration or termination of this Agreement, this Agreement shall immediately become void and there shall be no liability on the part of either Party as a result of such termination, and in particular, Methanex shall not be liable to make any further payments to Terra under Section 7 of this Agreement other than for amounts that are payable as at the date of

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termination; provided, however, that Subsections 14.1, 14.2, 14.8, 14.9, Sections 6, 11 and 12, shall survive the expiration or termination of this Agreement. Notwithstanding anything to the contrary contained in this Agreement, a termination of this Agreement for any reason shall not affect any rights or remedies of either Party arising out of any breach of this Agreement prior to such termination or the right of either of the Parties to receive any amount earned or accrued hereunder prior to such termination or otherwise payable with respect to any period prior to such termination.

4. SUSPENSION OF SERVICES

4.1 Temporary Suspension of Services for Repairs/Maintenance: The provision of one or more of the Services by Terra to Methanex may be temporarily suspended for such periods of time as are necessary to carry out scheduled maintenance or necessary repairs or improvements to the Beaumont Facility, the DuPont Wharf or the Facility Pipelines (“Temporary Service Suspension”). In the event of any Temporary Service Suspension, Terra may elect to reduce, interrupt, allocate, alter or change the Services that it is required to provide under this Agreement; provided that:

(a) except in the case of emergencies, Terra shall deliver 30 days written notice to Methanex of any Temporary Service Suspension, including relevant details relating to the proposed reduction, interruption, allocation, alteration or change in the Services as a result of the Temporary Service Suspension;

(b) unless Methanex shall otherwise consent in writing, such Temporary Service Suspension shall not exceed 14 days.

Upon the occurrence and during the continuance of any of the events referred to in this Subsection 4.1, Terra and Methanex shall cooperate to attempt to arrange for Services to be furnished to Methanex in an alternate manner or by a third party acceptable to Methanex, to minimize or reduce the effect of such Temporary Service Suspension on Methanex’s operations.

4.2 Emergency Repairs: Terra shall provide notice to Methanex, as soon as reasonable possible (and in any event within two days) in the event of any emergency repair or unplanned but required maintenance to the Beaumont Facility, the Facility Pipelines or the DuPont Wharf. Terra shall use all reasonable efforts to complete any such emergency repairs in a timely manner and to resume the provision of the Services (and each Service) as soon as possible.

4.3 Maintenance Schedule: Terra shall deliver a copy of its latest annual maintenance schedule on July 1^st in each Year to Methanex, which annual maintenance schedule shall set forth the dates and times when scheduled maintenance by Terra is expected to occur on the Beaumont Facility and any and all relevant details in respect of such scheduled maintenance. Terra shall deliver to Methanex, on January 1, 2004, a copy of its 2003 annual maintenance schedule, as up-dated. Terra shall up-date its annual maintenance schedule on a quarterly basis and shall deliver such up-dated maintenance schedule to Methanex within 20 days after the end of each calendar quarter.

4.4 Suspension or Termination of Operations at Beaumont Facility: For greater certainty, in the event the Beaumont Facility is not Operational, Terra shall continue to provide the Services to Methanex in accordance with Schedule B.

5. FORCE MAJEURE AND TEMPORARY SUSPENSION OF SERVICES

5.1 Occurrence of Event of Force Majeure: Upon an Event of Force Majeure and during the continuance of an Event of Force Majeure, the obligation of Terra to provide one or more Services

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and the corresponding obligation of Methanex to accept one or more Services, as the case may be, shall be temporarily suspended; provided that (i) such suspension shall relate solely to that portion of the Service or Services that the Party seeking to rely on such Event of Force Majeure is unable to perform or accept, as the case may be and (ii) such suspension shall be in effect only for such period during which such Event of Force Majeure shall be continuing. If such Event of Force Majeure results in a partial rather than a total inability on the part of Terra to perform the Services, Methanex shall in its sole discretion be entitled to receive any available portion of the Services.

5.2 Notice to Other Party: Where a Party is prevented from performing its obligations under this Agreement as a result of an Event of Force Majeure, it shall promptly notify the other Party by telephone (to be confirmed in writing within three days of the Event of Force Majeure) of the occurrence of an Event of Force Majeure and describe, in reasonable detail, the Services that are delayed or prevented and an estimate of the anticipated duration of the Event of Force Majeure. The Party claiming an Event of Force Majeure shall use commercially reasonable efforts to mitigate the impact or consequence of the event on the other Party and to recommence the provision of Services to whatever extent possible without delay.

5.3 Methanex’s Payment Obligations: Upon an Event of Force Majeure continuing for more than 30 consecutive days, effective as of the 31^st day of such Event of Force Majeure and continuing until the Event of Force Majeure is finally resolved, Methanex shall have no obligation to pay the Service Fees or any other amounts set forth under Section 7 of this Agreement.

6. PURCHASE OF CONTRACTS

6.1 Purchase/Sale of Pipeline Customers: The Parties acknowledge and agree that supply and delivery of Methanol to the Pipeline Customers can only occur using the equipment, methanol storage tanks, personnel and other facilities of the Beaumont Facility including, without limitation, the Facility Pipelines connecting the Beaumont Facility to the Pipeline Customers’ facilities. As a result, upon the termination of this Agreement in accordance with Subsections 3.3 and 3.4, Terra shall, effective as of the date of termination (the “Termination Date”) purchase from Methanex and Methanex shall sell, transfer and assign to Terra, all of Methanex’s right, title and interest in and to the Pipeline Customer Contracts and the volume of Methanol inventory located in the Beaumont Storage Tanks as of the Termination Date (“Inventory”).

6.2 Purchase Price for Contracts: The purchase price (“Contract Price”) for the Pipeline Customer Contracts shall be calculated as follows:

Contract Price = [***]

Where:

[***]

[***]

[***]

[***]

6.3 Purchase Price for Inventory: The Inventory shall be determined by measuring the actual quantity of Methanol inventory contained in the Beaumont Storage Tanks as of midnight (Central

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Standard Time) on the day before the Termination Date (“Actual Closing Inventory”), as measured by an independent surveyor selected by the Parties, acting reasonably. The findings of the surveyor shall be final and binding upon the Parties for all purposes. The Parties shall jointly instruct an independent surveyor to measure the quantity of Methanol located in the Beaumont Storage Tanks as of midnight the day before the Termination Date. The independent surveyor shall be instructed to provide the quantity information of the Actual Closing Inventory to Methanex and Terra. The purchase price for the Inventory (“Inventory Price”) shall be [***].

6.4 Payment Terms: Promptly after the Termination Date, Methanex shall calculate the:

(a) Contract Price; and

(b) Inventory Price,

and Methanex shall prepare and deliver to Terra: (i) an invoice setting forth the Inventory Price; and (ii) a notice setting forth the amount of the Contract Price payable by Methanex to Terra, or by Terra to Methanex, as the case may be. Terra shall pay the full amount of the Inventory Price within seven Business Days after receipt by Terra of an invoice from Methanex in respect of such Inventory Price. Either Terra or Methanex, as the case may be, shall pay to the other Party the full amount of the Contract Price within seven Business Days after receipt by Terra of the notice referred to above.

6.5 Consents: Where the consent of a third party is required to permit the transfer or assignment to Terra of Methanex’s interests in a Pipeline Customer Contract, the assignment of such Pipeline Customer Contract and the rights in respect of which the required consent has not been received on or before the Termination Date will not be effective until such consent has been received and such Pipeline Customer Contract or right shall be held by Methanex following the Termination Date, in trust for the benefit and exclusive use of Terra. Methanex shall continue to use all reasonable efforts to obtain the required consents after the Termination Date.

6.6 Right of First Refusal: If Terra acquires the Pipeline Customer Contracts (legally or beneficially), in accordance with Subsection 6.1, and Terra decides to purchase methanol from a third party methanol supplier in order to meet its supply obligations under the Pipeline Customer Contracts or decides to assign the Pipeline Customer Contracts to a third party (“Supply Right”), then neither Terra nor its Affiliates shall offer the Supply Right to a third party methanol supplier, unless Terra first offers the Supply Right to Methanex by notice in writing (the “Offer”) delivered to Methanex. The Offer shall include all material terms and conditions of the Supply Right including, without limitation, the price for methanol supplied, and that the Offer is open for acceptance by Methanex for a period of 14 days (the “Offer Period”) after delivery of the Offer by Terra to Methanex. At the expiration of the Offer Period, Methanex shall advise Terra whether or not the Offer has been accepted.

If Methanex accepts the Offer, then Terra and Methanex shall enter into a supply agreement on the terms and conditions substantially as set out in the Offer. If Methanex rejects the Offer or fails to respond to Terra within the Offer Period, then Terra shall have the right to offer the Supply Right to another third party methanol supplier, provided that Terra shall not offer the Supply Right to another third party methanol supplier on terms more favourable than those specified in the Offer including, without limitation, at a price that is less than the price specified in the Offer. If Terra intends to offer the Supply Right to another third party methanol supplier on terms more favourable than those specified in the Offer, then Terra shall first offer such amended terms to Methanex by notice in writing (“Amended Offer”) delivered to Methanex. In the event of an Amended Offer the right of first refusal procedure set forth in this Subsection 6.6 shall apply to any Amended Offer and any reference to the term “Offer” shall mean “Amended Offer”.

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7. PAYMENT FOR SERVICES AND AUDIT RIGHTS

7.1 Terra Expenses : Methanex shall reimburse Terra, at Terra’s cost, for the following expenses incurred by Terra in its performance of the Services under this Agreement:

(a) the proportional amount of the Wharf Service Charges (defined in the DuPont Agreement) to load and off-load Methanol, the allocation of such charges to Terra for the period 2001-2003 is set forth in Schedule D;

(b) fuel gas for flaring when loading or off-loading Methanol to and/or from vessels or barges as may be necessary; and

(c) all reasonable surveyor and laboratory charges to inspect the quality and quantity of Methanol stored in the Beaumont Storage Tanks.

Terra shall deliver to Methanex, as soon as possible, in each Year a DuPont Wharf Allocation of Wharf Service Charges in the form of Schedule D attached.

7.2 Service Fees : In the event of an Extended Suspension (as defined in the Asset Purchase Agreement) and for so long as the Extended Suspension is continuing, Terra shall dedicate four full-time personnel to carry out the Services for Methanex and Methanex shall pay to Terra an amount of [***] per month for such Services provided by BMC to Methanex under this Agreement (“Service Fees”). During any Extended Suspension, in addition to the Service Fees, Methanex shall also pay up to a maximum of [***] per Year, prorated for any portion of a Year, for contractors fees, materials and equipment relating to the maintenance of those Facility Pipelines that are owned by Terra.

7.3 Taxes : To the extent not otherwise paid by Methanex pursuant to this Agreement, Methanex shall pay to Terra an amount equal to the aggregate amount of all sales and use taxes imposed by any Governmental Authority on each of the Services provided by Terra to Methanex under this Agreement, which taxes shall be included and identified on Terra’s monthly invoice to Methanex in accordance with Subsection 7.4 below. Notwithstanding the foregoing, Terra agrees to use reasonable efforts to provide exemption certificates where available and to calculate any applicable sales and use taxes and to make payment thereof directly to the appropriate taxing authority.

7.4 Payment Terms : On or before the seventh Business Day of each month during the Initial Term or any Renewal Term of this Agreement Terra shall deliver to Methanex an invoice setting forth, in detail sufficient so as to permit the calculation of the amounts payable by Methanex under Subsection 7.1 including taxes, with respect to the immediately preceding month or, in the case of any termination of a Service, with respect to such Service. Payments hereunder shall be made by electronic (EDI or equivalent) transfer. Methanex shall pay the amount of such invoices to BMC on or before the 25^th day of each month. Any payments due on a day other than a Business Day shall be made on the next succeeding Business Day.

7.5 Adjustments for Errors : If at any time during the Term of this Agreement an error is made in the calculation of any amount payable by Methanex under this Agreement, the invoice for the month immediately succeeding the month in which such error was finally determined shall be increased or decreased, as the case may be, by an amount equal to the sum of such overpayment or underpayment, as the case may be, by Methanex.

7.6 Late Payments : If all or any part of the sums shown due on any invoices provided for herein are not paid when due, or if all or any part of the sums shown due are disputed by Methanex and

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such dispute is resolved in favour of Terra, then interest on any unpaid amount shall be paid by Methanex. If all or any part of the sums shown due on any invoices provided for herein are paid but disputed by Methanex and such dispute is resolved in favour of Methanex, then interest shall be paid by Terra on the disputed amount so paid. Such interest shall be paid at a rate of two percent (2%) above the LIBOR rate in force from time to time calculated from the due date of payment up to and including the actual date of payment and interest.

7.7 Audit Rights

(a) During the Term, each of the Parties shall keep and maintain proper, detailed, accurate and complete records and supporting documentation, regardless of the medium by which they are created or stored, in respect of all matters referred to in this Section 7 (collectively, the “Records”). Each Party shall keep and retain all Records for a period of 24 months after the end of any Year to which the Records relate (“Record Retention Period”).

(b) The Parties acknowledge and agree that the Records of each Party contain sensitive and confidential information, the disclosure of which would cause irreparable injury to a Party. At any time prior to the expiry of the Record Retention Period, either Party may, in order to verify and validate the calculation of any formula or the amount of any payment under this Agreement, audit the Records of the other Party provided that; such audit may only be conducted by an independent accounting firm (“Independent Auditor”) selected by the Party requesting the audit and subject to a confidentiality agreement, in a form satisfactory to the Party seeking the audit. The information conveyed by a Parties’ Independent Auditor to such Party requesting the audit shall only relate to the accuracy or correctness of formula calculations or payment amounts and the Independent Auditor shall not provide a copy of the Records or any other information to such Party.

(c) Audits of either Party’s Records shall be carried out by an Independent Auditor at any time prior to the expiry of the Record Retention Period, during normal business hours but upon prior written request to the other Party. The Independent Auditor may enter the business premises of the other Party where the Records are located, and inspect, audit and copy any or all of the Records. Each Party shall co-operate with the other Party and its Independent Auditor in carrying out the inspection, audit and copying of such Records including, without limitation, by providing the Independent Auditor with access to, and assistance with, all computer systems and other electronic means by which any such Records may be kept. The inspection of any or all of the Records by a Party, from time to time, shall be done at such Party’s own cost and expense, including, without limitation, such Party’s costs of its Independent Auditor.

(d) If the Independent Auditor identifies an error in the calculation of any amount payable by Methanex, the applicable invoice in which the error was determined by the Independent Auditor shall be increased or decreased, as the case may be, by an amount equal to such overpayment or such underpayment, as the case may be, by Methanex.

8. REPRESENTATIONS AND WARRANTIES

8.1 Representations and Warranties of Terra : Terra Industries and BMC Holdings hereby jointly and severally represent and warrant to Methanex and acknowledge that Methanex is relying on the

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representations and warranties of Terra Industries and BMC Holdings in entering into this Agreement, that:

(a) Corporate Status. Terra Industries is duly incorporated, organized, validly exists and is in good standing under the Laws of Maryland, and is duly qualified to conduct its business in the State of Texas. BMC Holdings is duly incorporated, organized, validly exists and is in good standing under the Laws of Delaware, and is duly qualified to conduct its business in the State of Texas.

(b) Authority to Enter into Agreement. Terra Industries and BMC Holdings each has good and sufficient capacity, power, authority and right to enter into this Agreement and to observe and perform each of their respective obligations contained in this Agreement. The execution, delivery and performance of this Agreement has been duly and effectively authorized by all necessary corporate action of Terra Industries and BMC Holdings and this Agreement has been duly executed and delivered by and constitutes a legal, valid and binding obligation, enforceable in accordance with its terms.

(c) No Conflicts. Neither of the execution and delivery of this Agreement, nor the due observance and performance by Terra Industries and BMC Holdings of their respective obligations contained in this Agreement shall materially conflict with or result in a breach of or a default under any provision, term or condition of:

(i) the incorporating documents of Terra Industries and BMC Holdings or any resolution of their respective directors or shareholders;

(ii) to the knowledge of Terra Industries and BMC Holdings any order, declaration, injunction, decree, writ, judgment or award of any Governmental Authority, court or arbitrator; or

(iii) any contract to which Terra Industries and BMC Holdings is a party or by which it is bound.

(d) No Governmental Consents Required. No consent, approval, authorization, license, order or permit of any Governmental Authority is required for Terra to duly observe and substantially perform the provisions, terms and conditions of this Agreement.

(e) State of Assets. Except as disclosed in Schedule F, all Facility Assets comprising the Beaumont Facility, the DuPont Wharf and the Facility Pipelines are, based upon industry standards, in good operating condition, in a state of good maintenance and repair, have been properly maintained, contain no defects known to Terra and are adequate for the purposes for which they are currently being used.

(f) Provision of Services to other Entities. Except as otherwise permitted by this Agreement, Terra has not entered into any agreements or undertakings (whether or not in writing) that relate to the Services to be provided by Terra to Methanex pursuant to this Agreement with a third party or with one of its Affiliates, nor has it adopted any policies or procedures within the Beaumont Facility, that would entitle such third party or Affiliate or any manufacturing process at the Beaumont Facility to receive such Services in a manner that, solely as a result of the rights afforded to such third party, Affiliate or manufacturing process, would impair the rights or increase the obligations of Methanex with respect to such Services, including, without limitation, any arrangements with

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respect to the loading or off-loading of Methanol or materials at the Beaumont Facility and the DuPont Wharf.

9. COVENANTS

9.1 Covenants of Terra : For so long as this Agreement remains in effect, Terra shall:

(a) Compliance with Law. Comply and perform its obligations and the Services under this Agreement in accordance with, and shall ensure that its contractors comply and perform their obligations in accordance with, all applicable Laws, including, without limitation, all applicable Environmental Laws and Environmental Permits.

(b) Inspection, Access and Testing. At scheduled times and intervals to be agreed upon by the Parties arrange for Methanex, its agents or representatives to access to the Beaumont Facility, the DuPont Wharf and Facility Pipelines in order to (x) consult with those Terra employees designated by Terra regarding Services to be provided hereunder and (y) require that meter calibration and/or providings, tank strappings or other tests be conducted to verify the accuracy of equipment used to determine the quality, quantity or level of Services provided by or on behalf of Terra to Methanex; provided that (A) Methanex shall not be entitled to require meter calibration and/or providings, tank strappings or other tests permitted by clause (y) above any more frequently than every 30 days and (B) Methanex shall cause its employees, agents and representatives to comply with all of Terra’s rules and regulations pertaining to security, safety and property protection and follow the route or routes designated by Terra.

(c) Authorizations and Permits. (i) Maintain in full force and effect all authorizations, waivers, consents, licenses, permits (including all Environmental Permits), orders and approvals and make or cause to be made all registrations, filings, permit transfers (including any Environmental Permit transfers) and notices with or to all third parties and Governmental Authorities necessary or appropriate for Terra to provide Services and (ii) with respect to any such authorizations, waivers, consents, permits, orders and approvals that shall materially affect the manner in which Methanex operates the Beaumont Facility. Without limiting the generality of the foregoing, Terra shall cause any and all required authorizations, waivers, consents, licenses, permits (including Environmental Permits) orders and approvals (and filing all applications in connection therewith) be obtained in order to (i) provide vessel or barge off-loading at the DuPont Wharf at a rate of 1,000 metric tonnes per hour; and (ii) dredge the dock at the DuPont Wharf.

(d) Alterations of Facilities. Not make any alteration to any of the Facility Assets if such alteration would (i) materially adversely affect Terra’s ability to provide Services to Methanex on the terms and conditions of this Agreement or (ii) materially increase the amounts that are payable by Methanex in connection with Services provided to Methanex under this Agreement; provided that clause (ii) shall not apply to any alteration (x) that is required by any Law, rule, regulation or Governmental Order, (y) that in Terra’s reasonable opinion, is required to preserve safety or environmental standards at the Beaumont Facility, the Facility Pipelines or the DuPont Wharf or (z) if the amounts that are payable by Methanex in connection with Services provided to Methanex under this Agreement would not be materially increased as a result of such alteration. Notwithstanding the foregoing, promptly upon the execution of this Agreement, Terra shall use best efforts to cause DuPont to carry out any and all required dock dredging at the DuPont Wharf as may be necessary or reasonably requested by Methanex, in order

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for Terra to provide the Wharf Service, such dredging costs shall be at Methanex’s expense.

(e) Increase in Levels of Services. Discuss and reasonably consider requests by Methanex to provide additional services to Methanex.

(f) Amendment/Termination of Material Contracts. Not cancel or terminate any Material Contract or consent to or accept any cancellation or termination thereof, amend or otherwise modify any material term of any Material Contract or give any consent, waiver or approval thereunder, waive any default under or breach of any material term of any Material Contract, agree in any manner to any other amendment, modification or change of any term or condition of any Material Contract that would materially impair or interfere with the ability of Terra to provide any Service hereunder or that would materially increase any of the amounts payable by Methanex hereunder; provided that the foregoing shall not apply to any act or action that may be undertaken unilaterally by the other party to such Material Contract or that occurs as a matter of Law, rule, regulation or Governmental Order.

(g) Renewal of DuPont Agreement. Deliver to DuPont a written request for an extension of the Service Termination Date (as defined in the DuPont Agreement) in accordance with the provisions of Subsection 3.02(c) or Subsection 3.02(d) of the DuPont Agreement and use its best efforts to negotiate with DuPont an extension of the Services Termination Date or at a minimum the services provided by DuPont to Terra that comprise the Wharf Services. Terra shall keep Methanex apprised at all times of its progress in its negotiations with DuPont in respect of an extension of the Services Termination Date.

(h) Provision of Service to Other Entities. Except as otherwise permitted by this Agreement, not enter into any agreements or undertakings that relate to the Services to be provided by Terra to Methanex pursuant to this Agreement with any third parties or any of Terra’s Affiliates, or adopt any policies or practices within the Beaumont Facility that would entitle such third parties or any of Terra’s Affiliates or any of the manufacturing processes at the Beaumont Facility to receive Services in a manner that, solely as a result of the rights afforded to such third party, Affiliate or manufacturing process, would impair the rights or increase the obligations of Methanex with respect to such Service.

(i) Maintenance of Facilities. Undertake or cause DuPont to carry out, subject to the provisions of the DuPont Agreement, regularly scheduled maintenance of the DuPont Wharf and Beaumont Slip and any assets used in connection with the DuPont Wharf or Beaumont Slip, in accordance with industry standards and the historical practice.

(j) Reporting. Furnish to Methanex:

(i) promptly upon receipt thereof, copies of any statement or report to or notice from any Governmental Authority or third party that relates to any authorization, waiver, consent, permit (including any Environmental Permit), order or approval that relates to any Service (including without limitation the Wharf Services and the Facility Pipeline Services) to be provided by or on behalf of Terra and that shall materially affect the manner in which Terra operates the Beaumont Facility;

(ii) promptly upon becoming aware, notice of any event or occurrence that results in any non-compliance by Terra with any applicable Law, rule, regulation, permit

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or, authorization including, without limitation, any Environmental Law or Environmental Permit insofar as such non-compliance shall adversely affect any Service to be provided by or on behalf of Terra to Methanex or the performance of any of Terra’s other obligations under this Agreement;

(iii) within a reasonable period after becoming aware, notice of any event or contingency that may significantly increase Methanex’s costs under this Agreement and any proposals that Terra may have to avoid or reduce such cost increase; and

(iv) promptly, and in any event not later than three days prior thereto, notice of the date and time of all meter calibrations and/or providings or tank strappings and other tests conducted to verify the accuracy of the equipment used to determine the quality, quantity or level of Services.

10. INSURANCE

At all times during the Term, Terra shall take out and maintain with financially sound and reputable insurers, at its own cost, the insurance coverage listed below:

Coverage	Amount
General Public Liability covering bodily injury and property damage	$25 million per occurrence
Employer’s Liability	$25 million per occurrence
Marine liability insurance covering property damage and bodily injury arising out of ownership, use or operation of the DuPont Wharf or the Beaumont Facility	$25 million per occurrence
All risk on methanol product in tanks and/or pipelines for the full replacement cost of the Methanol	$10 million per occurrence
Workers’ Compensation	Required Statutory Minimum
Sudden and Accidental Pollution	$25 million per occurrence
Environmental Pollution	$25 million per occurrence

Upon request, Terra shall furnish Methanex with certification of such insurance providing for at least 30 days’ prior written notice of cancellation or material modification. To the extent necessary under the indemnity provisions of this Agreement, Terra shall name Methanex and the other Methanex Indemnified Persons as an additional insured under all of such policies. Each insurance policy shall provide a waiver of subrogation in favour of Methanex.

11. LIMITATION ON LIABILITY/INDEMNITY

11.1 Limitation of Liability : NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, EXCEPT AS PROVIDED IN SUBSECTION 13.3(f) BELOW, NO PARTY, NOR ANY RESPECTIVE REPRESENTATIVE, SHALL BE LIABLE TO ANY OTHER PARTY FOR ANY CONSEQUENTIAL, INDIRECT, SPECIAL OR PUNITIVE DAMAGES FROM ANY CAUSE WHATSOEVER, WHETHER BASED IN CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY OR ANY OTHER LEGAL THEORY UNLESS (I) SUCH DAMAGES RESULT FROM THE GROSS NEGLIGENCE OR INTENTIONAL MISCONDUCT OF SUCH PARTY OR

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ANY OF ITS REPRESENTATIVES; OR (II) SUCH DAMAGES ARE PAYABLE BY AN INDEMNIFIED PARTY PURSUANT TO A THIRD PARTY CLAIM MADE BY A NON-AFFILIATE OF THE INDEMNIFIED PARTY AND FOR WHICH INDEMNIFICATION IS OTHERWISE AVAILABLE HEREUNDER.

11.2 Indemnification of Terra : Methanex agrees to indemnify, defend and hold harmless Terra and its directors, officers, employees, contractors, agents and representatives (the “Terra Indemnified Persons”), from and against any and all Claims and Proceedings to the extent arising out of the negligence or intentional misconduct of Methanex or any other Methanex Indemnified Person.

11.3 Indemnification of Methanex : Terra agrees to indemnify, defend and hold harmless Methanex and its respective, directors, officers, employees, contractors, agents and representatives (the “Methanex Indemnified Persons”), from and against any and all Claims and Proceedings to the extent arising out of:

(a) any breach of any representation, warranty or covenant under this Agreement;

(b) the failure of Terra to perform any obligation required to be performed by Terra under this Agreement;

(c) the negligence or intentional misconduct of Terra or any other Terra Indemnified Person;

(d) any past, present or future violation of Environmental Laws by Terra or DuPont with respect to the Beaumont Facility, the DuPont Wharf or the Facility Pipelines;

(e) the presence of any Hazardous Substance in, on or under the Beaumont Facility, the DuPont Wharf or the Facility Pipelines or in, on or under adjacent lands or waterbodies where such Hazardous Substance have migrated from or been Released from the Beaumont Facility, the DuPont Wharf or the Facility Pipelines;

(f) any use, handling, production, generation, manufacture, transportation, storage, handling, disposal, spill or Release of any Hazardous Substances by Terra or DuPont at, on, under, about or from the Beaumont Facility, the DuPont Wharf or the Facility Pipelines; or

(g) any spill or Release of methanol or any other substance from any Facility Asset (including, without limitation, Facility Assets located at the Beaumont Facility, the DuPont Wharf and the Facility Pipelines), including, without limitation: (a) all Environmental Costs and Liabilities arising out of such spill or Release of materials; (b) any damage to the Beaumont Facility, the DuPont Wharf, the Facility Pipelines and Facility Assets or to other property; and (c) the cost of the methanol owned by Methanex that has been spilled or Released.

Notwithstanding any of the foregoing, Terra shall not be responsible for and shall not be required to indemnify any Methanex Indemnified Persons from and against Claims and Proceedings (or portion thereof) that arise out of or in connection with any spill or Release of methanol or other substance from the acts and omissions of any Methanex Indemnified Persons.

11.4 Indemnification Procedures : Within a reasonable period of time after a Terra Indemnified Person or a Methanex Indemnified Person (whether one or more, an “Indemnified Party”) establishes a basis for or receives actual notice of any Claim covered by Subsection 11.2 or Subsection 11.3, as the case may be, the Indemnified Person shall notify the Party from whom

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indemnification is sought (the “Indemnifying Party”) in writing of such Claim, provided, however, that the failure to so notify the Indemnifying Party shall not relieve the Indemnifying Party from any liability which it may have to the Indemnified Person pursuant to Subsection 11.2 or Subsection 11.3, as the case may be, except to the extent of material detriment suffered by the Indemnifying Party as a result of such failure. In the event that a Claim arises out of or results from matters with respect to third parties (a “Third Party Claim”), the Indemnifying Party shall undertake the defence thereof by attorneys chosen by it, which are reasonably acceptable to the Indemnified Person. So long as the Indemnifying Party is defending any Third Party Claim actively and in good faith, the Indemnified Person shall not settle such Third Party Claim without the consent of the Indemnifying Party.

11.5 Defence of Third Party Claim : If the Indemnifying Party, within a reasonable time after notice of any Third Party Claim, fails to defend such Third Party Claim actively and in good faith, the Indemnified Party shall (upon further notice) have the right to undertake the defence, compromise or settlement of such Third Party Claim or consent to the entry of a judgment with respect to such Third Party Claim, on behalf of and for the account and risk of the Indemnifying Party, and the Indemnifying Party shall thereafter have no right to challenge the Indemnified Party’s defence, compromise, settlement or consent to judgment. Irrespective of which Party has the right to defend, compromise or settle any Third Party Claim pursuant to this Subsection 11.5, each of the Indemnifying Party and the Indemnified Party shall be entitled to consult with each other, to the extent it reasonably requests, in respect of the defence of such Third Party Claim and shall cooperate in the defence of any such Third Party Claim, including making its partners (if applicable), officers, directors, employees and books and records available for use in such Third Party Claim, and shall take those actions reasonably within its power which are reasonably necessary to preserve any legal defences to such matters, without the necessity of formal subpoena or court action.

11.6 Payment : The Indemnifying Party shall promptly pay each Indemnified Party any amount properly due under this Section 11 upon demand therefor and reimburse each Indemnified Party for all reasonable expenses (including reasonable attorneys’ fees and costs of court) for which the Indemnified Party is entitled to be indemnified hereunder as they are incurred by such Indemnified Party. Upon judgment, determination, settlement or compromise of any Third Party Claim, the Indemnifying Party shall, upon demand therefor, promptly pay on behalf of the Indemnified Party, and/or shall promptly reimburse the Indemnified Party for its payment of, the amount so determined by such judgment, determination, settlement or compromise and all other Claims of the Indemnified Party with respect thereto, unless, in the case of a judgment or determination, an appeal is made therefrom; provided, however, that if the Indemnifying Party desires to appeal from an adverse judgment or determination, then the Indemnifying Party shall post and pay the cost of the security or bond to stay execution of the judgment or determination pending appeal. Upon the payment in full by the Indemnifying Party of all of such amounts, the Indemnifying Party shall succeed to the rights of the Indemnified Party, to the extent such rights are not waived in settlement, against the third party who made such Third Party Claim.

12. CONFIDENTIALITY

12.1 Information : Each Party (“Disclosing Party”) has disclosed, and may from time to time hereafter disclose, certain Confidential Information to another Party (“Recipient”). The Recipient shall treat the Confidential Information as confidential and shall not use any Confidential Information for any purpose other than in connection with the transactions contemplated by this Agreement. The Recipient shall not disclose any Confidential Information to any Person without the prior written consent of the Disclosing Party. The Recipient further agrees to limit dissemination of and access to the Confidential Information to its employees and representatives who have a need to know such Confidential Information for the purposes contemplated by this Agreement provided that such employees and representatives are informed of and agree to comply with the terms of this Subsection 12.1.

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12.2 Exception: Subsection 12.1 shall not apply to the disclosure of Confidential Information by the Recipient which:

(a) at the time of its disclosure or thereafter becomes generally available to the public other than as a result of a breach of this Agreement;

(b) is already known to the Recipient through proper means prior to disclosure as evidenced by written or other tangible records and practices;

(c) is independently and lawfully developed by the Recipient completely without reference to the Confidential Information as evidenced by written or other tangible records and practices; or

(d) is disclosed without restriction by a third party who is in lawful possession of the information and who has the right to make disclosure.

12.3 Disclosure Required by Law: The Recipient shall not be in breach of its obligation to disclose Confidential Information of the Disclosing Party if that disclosure is required by Law, a court order or similar Proceedings, or is formally requested by a Governmental Authority, provided that the Recipient gives the Disclosing Party as much notice as is reasonably possible in the circumstances prior to disclosing any Confidential Information and the Recipient cooperates with the Disclosing Party in any application, Proceedings or other action the Disclosing Party may undertake to obtain a protective order or other means of protecting the confidentiality of the Confidential Information required to be disclosed.

12.4 Return of Information: Upon the termination of this Agreement, the Recipient shall return all Confidential Information, including any copies of that information, to the Disclosing Party.

12.5 Restriction on Disclosure of this Agreement: Except as may be required by applicable Law or a stock exchange upon which a Party is listed, each Party agrees not to disclose any terms or conditions of this Agreement to any Person who is not a representative of such Party, absent consent by the other Party, which shall not be unreasonably withheld.

12.6 Public Announcements: Except as may be required by Law or a stock exchange upon which a Party is listed, no Party shall, without prior written approval of the other Party, issue, or permit any representative of such Party to issue, any press release or otherwise make, or permit any representatives of such Party to make, any public statement or announcement with respect to this Agreement. The Parties hereto shall consult with each other prior to issuing any such press release or public statement, announcement or the filing of any document that is public record that in any way references this Agreement or the transactions contemplated by this Agreement.

12.7 Remedies: The Parties agree that the covenants and obligations contained in this Section 12 relate to special, unique and extraordinary matters and that a violation of any of the terms hereof would cause irreparable injury in an amount which would be impossible to estimate or determine and for which any remedy at law would be inadequate. As such, the Parties agree that if either Party fails or refuses to fulfill any of its obligations under this Section 12, then the other Party shall have the right to seek the remedy of specific performance, which remedy shall be cumulative and nonexclusive and shall be in addition to any other rights and remedies otherwise available under any other contract or at law or in equity and to which such Party might be entitled. Each Party agrees to waive, and to use commercially reasonable efforts to cause each of its representatives to waive, any requirement for the securing or posting of any bond in connection with the exercise of such remedy. Each Party agrees not to oppose any request, motion or petition made or filed by the other Party for such remedy.

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13. DISPUTE RESOLUTION

13.1 Amicable Settlement: All disputes arising out of or in connection with this Agreement or its performance, including without limitation the validity, scope, meaning, construction, interpretation or application of this Agreement or any provision hereof shall be settled, to the extent reasonably practicable, by amicable negotiation, discussion and agreement between the Parties’ respective Chief Executive Officers, or their designates.

13.2 Inadmissibility: The Parties agree that any discussions pursuant to Subsection 13.1 are settlement negotiations and, to the extent allowed by Law, the subject matter of such discussions is not admissible in any future Proceedings. The Parties shall not subpoena or otherwise require any mediator to testify or produce any records, notes or documents in any future Proceedings.

13.3 Arbitration: Any dispute arising out of or in connection with this Agreement that the Parties have not resolved in accordance with Subsection 13.1 shall be, at the election of Terra or Methanex, submitted to arbitration in accordance with the following terms and procedures:

(a) The Party seeking arbitration shall notify the American Arbitration Association (the “AAA”) and the other Party in writing describing in reasonable detail the nature of the dispute (the “Dispute Notice”). The resolution of such dispute shall be determined by a panel of three arbitrators (the “Arbitration Panel”); one to be appointed by Methanex, one to be appointed by Terra and a neutral arbitrator to be appointed by the arbitrators appointed by Methanex and Terra. The neutral arbitrator shall be an attorney and shall act as chairman. If either Party fails to appoint an arbitrator within 15 Business Days after the dispute is submitted to arbitration, or the two arbitrators appointed by or on behalf of each Party fail to appoint a neutral arbitrator within 15 Business Days after the date of the appointment of the last arbitrator appointed by or on behalf of each Party, then, the third arbitrator shall be appointed under the provisions of the Commercial Arbitration Rules of the AAA. Each Party appointed arbitrator shall have knowledge of or experience in the chemical industry. In the event that any arbitrator is unable to serve, his or her replacement shall be selected in the same manner as the arbitrator to be replaced. The vote of two of the three arbitrators shall be required for any decision under this Subsection 13.3. The arbitration shall be conducted in New York City or such other location that the Parties may mutually agree in writing;

(b) The arbitration shall be subject to the Federal Arbitration Act as supplemented by the conditions set forth in this Subsection 13.3. The arbitration shall be administered by the AAA and shall be governed by the AAA Commercial Arbitration Rules, other than as specifically modified herein;

(c) The decision of, and award rendered by, the Arbitration Panel shall be in writing and shall be final and binding on each Party. The award of the Arbitration Panel shall be reasoned and shall include written findings of fact and conclusions of Law. The fees and expenses of the Party appointed arbitrators shall be paid by the Party appointing such arbitrator and the fees and expenses of the neutral arbitrator shall be shared equally by Methanex and Terra, provided, however, the Arbitration Panel may assess such fees and expenses in the manner it deems appropriate in connection with its decision;

(d) During the arbitration of the dispute, each Party shall make available to the Arbitration Panel and to the other Party all books, records and other information within its control as reasonably requested by the other Party or requested by the Arbitration Panel subject to

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the confidentiality provisions contained herein, and provided that no such access shall waive or preclude any objection to such production based on any privilege recognized by Law. Recognizing the express desire of each Party for an expeditious means of dispute resolution, the Arbitration Panel may limit the scope of discovery between each Party as may be reasonable under the circumstances;

(e) In deciding the substance of each Party’s claims, the Laws of the State of New York shall govern the construction, interpretation and effect of this Agreement (including this Subsection 13.3) without giving effect to any conflict of law principles;

(f) The arbitration hearing shall be commenced promptly and conducted expeditiously, with each Party involved in the dispute being allocated an equal amount of time for the presentation of its case. Unless otherwise agreed to by each Party or ordered by the Arbitration Panel, the arbitration hearing shall be conducted on consecutive days. Time is of the essence in the arbitration Proceedings, and the Arbitration Panel shall have the right and authority to issue monetary sanctions against any Party if, upon a showing of good cause, that Party is unreasonably delaying the Proceedings. To the fullest extent permitted by Law, the arbitration Proceedings and award shall be maintained in confidence by the Arbitration Panel and each Party; and

(g) The Arbitration Panel shall decide all disputes and all substantive and procedural issues related thereto, and shall enforce this Agreement in accordance with its terms. Without limiting the generality of the previous sentence, the Arbitration Panel shall have the authority to issue injunctive relief; however, the Arbitration Panel shall not have any power or authority to: (i) award consequential, indirect or incidental damages (other than in Subsection 13.3(f) above), or punitive damages; or (ii) amend this Agreement. The Arbitration Panel shall render the arbitration award in writing following the completion of the arbitration hearing, setting forth the reasons for the award. In the event that the Arbitration Panel awards monetary damages in favour of either Party, the Arbitration Panel must certify in the award that no consequential, indirect or incidental damages (except as specifically set forth under the terms of this Agreement), punitive damages are included in such award. If the Arbitration Panel’s decision results in a monetary award, interest to be granted such award, if any, and the rate of such interest shall be determined by the Arbitration Panel in their discretion. The arbitration award shall be final and binding on each Party, and judgment thereon may be entered in any court of competent jurisdiction, and may not be appealed except to the extent permitted by the Federal Arbitration Act.

13.4 Interim Relief: Each Party may, by summary proceedings (e.g., a plea in abatement or motion to stay further proceedings), bring any action in any court of competent jurisdiction to (i) compel arbitration of any dispute; (ii) obtain interim measures of protection pending arbitration of any dispute, to preserve the status quo pending resolution of the dispute, to prevent the destruction of documents and other information or things related to the dispute or to prevent the transfer, dissipation or hiding of assets; or (iii) enforce any decision of the Arbitration Panel, including the final award. The bringing of any such action shall not be deemed incompatible with the provisions of this Section 13 or a waiver of a Party’s right to arbitrate. Either Party who fails or refuses to submit to binding arbitration following a lawful demand by the other Party shall bear all costs and expenses incurred by such other Party in compelling arbitration of such dispute.

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13.5 Continuing Obligations: Each of the Parties shall continue to perform its obligations under this Agreement at all times during which any disputes are the subject of the dispute resolution procedures of this Section 13.

14. MISCELLANEOUS

14.1 Relationship of Parties: Neither this Agreement, nor the performance of the Parties under this Agreement, creates between Methanex and Terra, the relationship of principal and agent, partners, joint ventures or any legal relationship, other than that of supplier of methanol.

14.2 Notices: Any and all notices, requests or other communications hereunder shall be given in writing and delivered by courier, personal delivery or facsimile, to the Parties at the following addresses or numbers:

(i) if to Terra, to:

BMC Holdings Inc.

600 Fourth Street

Sioux City, Iowa

USA

Attn: General Counsel

Facsimile No.: (712) 233-5586

(ii) if to Methanex:

Methanex Methanol Company

15301 Dallas Parkway, Suite 1150

Addison, Texas

USA

Attn: Director, North American Marketing and Logistics

Facsimile No.: (972) 702-0910

(iii) with a copy to:

Methanex Corporation

1800 Waterfront Centre

200 Burrard Street

Vancouver, British Columbia

Attn: General Counsel

Facsimile No.: 604-661-2602

or at such other address or number as shall be designated by a Party in a notice to the other Parties given in accordance with this Subsection 14.2. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given, in the case of a notice delivered by courier or by hand, when personally delivered and in the case of a notice sent by facsimile, upon transmittal and acknowledgement of receipt by the recipients fax machine, subject to telephone confirmation of receipt.

14.3 Counterparts: This Agreement may be executed by the Parties in any number of counterparts, each of which shall be deemed an original instrument, but all of which when delivered, by facsimile or otherwise, shall constitute but one and the same Agreement.

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14.4 Benefit and Burden: This Agreement shall enure to the benefit of, and shall be binding upon, the Parties and their respective successors and permitted assigns.

14.5 Amendments and Waiver: No amendment, modification, restatement or supplement of this Agreement shall be valid unless the same is in writing and signed by the Parties. No waiver of any provision of this Agreement shall be valid unless in writing and signed by the Party against whom that waiver is sought to be enforced. No failure or delay on the part of either Party in exercising any right, power or privilege hereunder, and no course of dealing among the Parties, shall operate as a waiver of any right, power or privilege hereunder. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. No notice to or demand on either Party in any case shall entitle such Party to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of either Party to any other or further action in any circumstances without notice or demand.

14.6 Assignment: Neither this Agreement nor any right, interest or obligation hereunder may be assigned by a Party without the prior written consent of the other Party hereto and any attempt to do so shall be null and void. A change of control of a Party or the sale by a Party of all or substantially all of the assets or undertaking, shall be deemed to be an assignment under this Subsection 14.6. For the purposes of this Agreement, “change of control” shall mean the change in ownership of at least 50% of the outstanding shares in the capital of a Party or the change in the ability to control or direct the management of such entity. In the event of an assignment of this Agreement, the assigning Party shall not be released from any of its liabilities or obligations hereunder. In the event of any permitted assignment of this Agreement by either Party, the designated assignee shall assume, in writing (in form and substance reasonably satisfactory to the other Party), the rights and obligations of the assigning Party under this Agreement.

14.7 Severability: Should any clause, sentence, paragraph, Subsection or Section of this Agreement be judicially declared to be invalid, unenforceable or void, such decision shall not have the effect of invalidating or voiding the remainder of this Agreement, and the Parties agree that the part or parts of this Agreement so held to be invalid, unenforceable or void shall be deemed to have been stricken herefrom as if such stricken part or parts had never been included herein.

14.8 Applicable Law: This Agreement and the rights and obligations of the Parties hereunder shall be governed by and construed in accordance with the Laws of the State of New York, without giving effect to the conflict of law principles thereof.

14.9 Expenses: Except as otherwise expressly provided in this Agreement, each Party shall pay its own expenses incident to this Agreement, including all legal and accounting fees and disbursements.

14.10 Responsible Care®: With respect to the operation of the Beaumont Facility, Terra shall comply with the applicable principles and codes of practice of the Responsible Care® initiatives in existence as of the date of execution of this Agreement as established by the American Chemistry Council or such principles and codes of practice that are the same or substantially similar to such Responsible Care® initiatives. Methanex may conduct assessments of the Beaumont Facility in accordance with principles or codes of practice upon providing 90 days written notice to Terra of its intent to conduct an assessment. After having conducted an assessment of the Beaumont Facility if Methanex is of the opinion, acting reasonably, that the Beaumont Facility is not operating in accordance with the principles and codes of practice of Responsible Care® initiatives or such codes of practice that are the same or substantially similar to such Responsible Care® initiatives then, upon the request of Methanex, the Parties shall meet and Terra shall cooperate with Methanex in using reasonable efforts to implement

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corrective steps to bring the Beaumont Facility into compliance with such principles and codes of practice.

14.11 Entire Agreement: This Agreement sets forth all of the promises, agreements, conditions, understandings, warranties and representations between the Parties with respect to the matters contemplated hereby, and supersedes all prior agreements, arrangements and understandings between the Parties with respect to the matters contemplated hereby, whether written, oral or otherwise, including the Confidentiality Agreement. There are no promises, agreements, conditions, understandings, warranties or representations, oral or written, express or implied, between the Parties concerning the subject matter hereof except as set forth herein.

[Signature page to follow]

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IN WITNESS WHEREOF the Parties have executed this Agreement as of the day and year written below.

TERRA INDUSTRIES INC.
By:	/s/ MICHAEL L. BENNETT
	Authorized Signatory

Michael L. Bennett

Printed Name

President & CEO

Title

December 15, 2003

Date

BMC HOLDINGS INC.
By:	/s/ MARK A. KALAFUT
	Authorized Signatory

Mark A. Kalafut

Printed Name

Vice President

Title

December 15, 2003

Date

METHANEX METHANOL COMPANY, by its Managing Partner, Methanex Gulf Coast, Inc.
By:	/s/ GERRY DUFFY
	Authorized Signatory

Gerry Duffy

Printed Name

Director

Title

December 15, 2003

Date

By:	Randy Milner
	Authorized Signatory

Randy Milner

Printed Name

Director

Title

December 15, 2003

Date

SCHEDULE A

DEFINITIONS

“AAA” has the meaning set forth in Subsection 13.3(a).

“Actual Closing Inventory” has the meaning set forth in Subsection 6.3.

“Affiliate” means, with respect to any Person, any other Person that directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with such Person. The term “control” (including, with correlative meaning, the terms “controlling”, “controlled by” and “under common control with”) means the possession, directly or indirectly, of the power to direct or cause direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise;

“Agreement” has the meaning set forth on page 1.

“Aggregate Contract Volume” has the meaning set forth in Subsection 6.2.

“Amended Offer” has the meaning set forth in Subsection 6.6.

“Arbitration Panel” has the meaning set forth in Subsection 13.3(a).

“Asset Purchase Agreement” has the meaning set forth in Recital B.

“Barge Order” has the meaning set forth in Subsection 2(f) of Schedule B.

“Beaumont Facility” means the methanol manufacturing facility, located in Jefferson County, Texas, including, without limitation, all real property, buildings and fixtures and all other tangible property used in the operation of the Beaumont Facility or otherwise located or on the Beaumont Facility, including without limitation, the Beaumont Storage Tanks and the Beaumont Slip.

“Beaumont Premium” has the meaning set forth in Subsection 6.2.

“Beaumont Slip” means a barge docking facility located at the Beaumont Facility, for loading and unloading methanol, owned wholly by BMC Holdings and all related improvements and equipment, including, without limitation, pumps, hoses, pipelines, and any and all other equipment or assets used to load or unload methanol.

“Beaumont Storage Tanks” means the three methanol storage tanks located at the Beaumont Facility as follows: (i) two methanol storage tanks each with a storage capacity of 22,000 metric tonnes; and (ii) one methanol storage tank with a storage capacity of 4,000 metric tonnes.

“BMC Holdings” means BMC Holdings Inc.

“Business Day” means any day other than Saturday, Sunday or a legal holiday in the State of Texas.

“Claims” means any and all rights, claims, counterclaims, complaints, disputes, demands, causes of action, liabilities, obligations, damages, losses, legal fees, costs, expenses, and disbursements of any nature or kind, whatsoever and howsoever arising, whether known or unknown, whether in law or in

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equity or pursuant to statute, and whether in any court of law or equity or before any arbitrator or other body, board or tribunal.

“Confidential Information” means information that either Party hereto furnishes to the other Party or to an agent or representative of such other Party in connection with this Agreement on a confidential basis or which relates to its manufacturing processes, its sales and marketing activity or environmental or safety matters, but does not include any such information that is or becomes generally available to the public other than as a result of a breach by such other Party or its agent or representative or that is or that becomes available to such other Party or its agent or representative from a source that is not, to the best of such other Party’s or such other Party’s agent’s or representative’s knowledge, acting in violation of a confidentiality agreement with the Party originally furnishing such information or that such other Party can demonstrate on the basis of written records was already known by it on a non-confidential basis prior to receipt from the Party furnishing such information.

“Contract Price” has the meaning set forth in Subsection 6.2.

“Disclosing Party” has the meaning set forth in Subsection 12.1.

“Dispute Notice” has the meaning set forth in Subsection 13.3(a).

“DuPont” means E.I. DuPont De Nemours and Company.

“DuPont Agreement” means the agreement between DuPont and Beaumont Methanol Corporation dated as of December 12, 1991, extracts of which are attached at Schedule E to this Agreement, and shall only include amendments to the DuPont Agreement that have been provided by Terra to Methanex prior to the Parties entering into this Agreement.

“DuPont Wharf” means the existing wharf facility located adjacent to the Beaumont Facility, and owned and operated by DuPont and all related improvements and equipment, including, without limitation, pumps, hoses, pipelines, and any and all other equipment or assets used to load or unload methanol.

“Environmental Claims” means any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigations, Proceedings, consent orders or consent agreements relating in any way to any Environmental Law or any Environmental Permit, including, without limitation, (a) any and all claims by Governmental Authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law or Environmental Permit and (b) any and all claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief to the extent resulting from the presence of or exposure to Hazardous Substances or arising from alleged injury or threat of injury to the environment.

“Environmental Costs and Liabilities” means all costs, expenses, losses and liabilities of any nature (including, but not limited to, liabilities arising out of Environmental Claims) associated with contamination of the air, surface water, soil or ground water by Hazardous Substances or human exposure to Hazardous Substances or arising under any Environmental Law or Environmental Permit.

“Environmental Laws” includes any federal, state, municipal, county, district or local Laws, regulations, orders, bylaws, rules, codes, standards, guidelines, protocols, Environmental Permits and other lawful requirements of any Governmental Authority, principles of common law and equity and all judicial and administrative decisions, orders and decrees that relate in any way to the environment,

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environmental assessment, health, occupational health and safety, Hazardous Substances (including, without limitation, the storage, manufacture, processing, labelling, disposal, treatment, generation, use, transport, handling, remediation or Release of Hazardous Substances), product liability or the environmental conditions on, under or about the Beaumont Facility, the DuPont Wharf and the Facility Pipelines (including, without limitation, soil, sediments, surface water, groundwater and indoor and ambient air conditions) in effect at any time prior to the date of this Agreement or at the date of this Agreement or at any time after the date of this Agreement.

“Environmental Permits” includes all permits, licences, approvals, consents, authorizations, registrations, privileges, exemptions, waivers, variations, clearances, orders, certificates, rulings and other concessions under any Environmental Laws.

“Event of Force Majeure” means, for any Person, any event, circumstance or condition that is beyond the control of such Person and that prevents such Person from performing, in whole or in part, its obligations under this Agreement. Without limiting the generality of the foregoing, the following occurrences shall be deemed to be Events of Force Majeure: (a) Acts of God, fire, explosion, accident, flood, storm or other natural phenomenon; (b) war (whether declared or undeclared), riot, blockade, sabotage or acts of public enemies; (c) national defense requirements; (d) compliance with any Law, rule, regulation or Governmental Order that (x) becomes effective after the date hereof and (y) is binding on the Person seeking to rely on such Law, rule, regulation or Governmental Order to excuse performance and such Person’s compliance therewith is not voluntary or optional; (e) strikes, lockouts or injunctions (it being understood that nothing herein shall require a Person to settle such or any other kind of labor dispute except on such terms as shall be satisfactory to such Person); (f) unavailability (for reasons other than the cost thereof) of adequate fuel, power, raw materials, labor, containers or transportation facilities; and (g) breakage or failure of machinery or equipment.

“Extension Notice” has the meaning set forth in Subsection 3.2.

“Facility Assets” means any and all assets relating to the production, handling, loading, or unloading of methanol or otherwise relating to methanol located at the Beaumont Facility or the DuPont Wharf including, without limitation, buildings and fixtures, leasehold improvements, Beaumont Storage Tanks, Beaumont Slip, and all related improvements and equipment, including, without limitation, pumps, hoses, pipelines, and any and all other equipment or assets used in connection with methanol or otherwise to operate the Beaumont Facility, the DuPont Wharf or the Facility Pipelines.

“Facility Pipelines” means the entire pipeline system that connects the DuPont Wharf to the Beaumont Facility including, without limitation, all equipment used by DuPont, Terra or any other Person, in the operation of such pipeline system, in the ordinary course.

“FOB” has the meaning given to such term in the standardized definitions relating to the import and export of goods published by the International Chamber of Commerce, as revised in 2000.

“Gallons” means the United States unit of liquid volume.

“Governmental Authority” means: (i) any government; (ii) any federal, state, county, province, city, town, municipality, local or other political subdivision thereof or thereto; (iii) any court, tribunal, department, commission, board, bureau, instrumentality, agency, council, arbitrator or other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government; and (iv) any other governmental entity, agency or authority having or exercising jurisdiction over any relevant Person, item or matter.

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“Governmental Order” means any order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Authority.

“Hazardous Substances” includes radioactive materials; asbestos and asbestos-containing materials; urea formaldehyde; hydrocarbons; underground and aboveground tanks; lead; pollutants; polychlorinated biphenyls (“PCBs”) and PCB-containing equipment; flammable substances; contaminants; deleterious substances; dangerous substances and goods; hazardous, corrosive and toxic substances, materials, constituents, compounds, recyclables, chemicals (including, without limitation, petroleum, gasoline or associated products or any by-products or fractions thereof); radon gas; waste; special waste; pesticides; defoliants; explosives; any solid, liquid, gas, vapor, odour, heat, sound, vibration, radiation or combination of any of them the storage, manufacture, processing, labelling, disposal, treatment, generation, use, transport, handling, remediation or Release into the environment of which is prohibited, controlled or regulated under Environmental Laws or Environmental Permits or which may or could pose a hazard to the environment.

“Hours of Operation” means, for any Service, the days and times during which Terra is required to provide such Service to Methanex, which shall be 24 hours a day, seven days a week, unless otherwise specified in writing by the Parties.

“Indemnified Party” has the meaning set forth in Subsection 11.4.

“Indemnifing Party” has the meaning set forth in Subsection 11.4.

“Independent Auditor” has the meaning set forth in Subsection 7.7(b).

“Initial Term” has the meaning set forth in Subsection 3.2.

“Inventory” has the meaning set forth in Subsection 6.1.

“Inventory Price” has the meaning set forth in Subsection 6.3.

“Law” means all laws, statutes, rules, regulations, ordinances, orders, writs, injunctions or decrees and other pronouncements having the effect of law of any Governmental Authority.

“LIBOR” means London InterBank Offered Rate.

“MNDRP” means the Methanex Non-Discounted Reference Price, which is the market index price per Gallon of methanol determined and published by Methanex Corporation on a monthly basis.

“Material Contracts” means the DuPont Agreement and any other contract (in writing or oral) between Terra and a third party or Affiliate, the performance of which is necessary for Terra to provide the Services (and each Service under this Agreement).

“Methanex” means Methanex Methanol Company.

“Methanex Entity” has the meaning set forth in Subsection 8.1(b).

“Methanol” means the chemical grade methanol meeting the Specifications.

“Methanex Indemnified Persons” has the meaning set forth in Subsection 11.3.

“Monthly MMC Price” has the meaning set forth in Subsection 6.2.

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“Offer” has the meaning set forth in Subsection 6.6.

“Offer Period” has the meaning set forth in Subsection 6.6.

“Operational” means the Beaumont Facility shall be deemed operational unless and until Methanex exercises its Extended Suspension right as set forth in Subsection 5.3.3 of the Asset Purchase Agreement.

“Parties” means Terra Industries, BMC Holdings and Methanex, and “Party” means any of Terra Industries, BMC Holdings and Methanex.

“Person” means any individual, sole proprietorship, general partner of a general or limited partnership, partnership, joint venture, trust, incorporated organization, association, corporation, institution, party, entity or Governmental Authority, including any instrumentality, division, body, agency or department thereof.

“Pipeline Customers” means those customers of Methanex, or its Affiliate to whom Methanex supplies methanol using the Facility Pipelines.

“Pipeline Customer Contracts” means the contractual arrangement (in writing or oral) between Methanex and each Pipeline Customer, as may be amended.

“Pipeline Services” has the meaning set forth in Section 4 of Schedule B.

“Pipeline Order” has the meaning set forth in Subsection 4(i) of Schedule B.

“Proceedings” means any and all actions, suits, proceedings, and hearings of any nature and kind in any court of law or equity or before any arbitrator or other body, board or tribunal.

“Recipient” has the meaning set forth in Subsection 12.1.

“Records” has the meaning set forth in Subsection 7.7(a).

“Record Retention Period” has the meaning set forth in Subsection 7.7(a).

“Reduction Notice” has the meaning set forth in Subsection 2.3.

“Release” has the meaning prescribed in any Environmental Law and includes, without limitation, any release, spill, leak, pumping, pouring, emission, emptying, discharge, injection, escape, leaching, disposal, dumping, deposit, spraying, burial, abandonment, incineration, seepage and placement.

“Renewal Terms” has the meaning set forth in Subsection 3.2.

“Service” means the furnishing, supply, distribution and delivery of each service set forth in Schedule B hereto to be provided by or on behalf of Terra to Methanex pursuant to the terms and conditions of this Agreement.

“Service Fees” has the meaning set forth in Subsection 7.2.

“Slip Services” has the meaning set forth in Section 2 of Schedule B.

“Specifications” are as set forth in Schedule C.

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“Storage Services “has the meaning set forth in Section 3 of Schedule B.

“Supply Right” has the meaning set forth in Subsection 6.6.

“Temporary Service Suspension” has the meaning set forth in Subsection 4.1.

“Term” means the Initial Term and any Renewal Term, as the case may be.

“Termination Date” has the meaning set forth in Subsection 6.1;

“Terra” means Terra Industries Inc. and BMC Holdings Inc., together.

“Terra Indemnified Persons” has the meaning set forth in Subsection 11.2.

“Terra Industries” means Terra Industries Inc.

“Third Party Claim” has the meaning set forth in Subsection 11.4.

“Vessel Order” has the meaning set forth in Subsection 1(f) of Schedule B.

“Wharf Services” has the meaning set forth in Section 1 of Schedule B.

“Year” means a calendar year.

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SCHEDULE B

SERVICES

1. WHARF SERVICES

Subject to the provisions of the Agreement, during the Initial Term and any Renewal Term, if applicable, Terra shall provide the following wharf services (the “Wharf Services”) to Methanex:

(a) Access to DuPont Wharf: Methanex, and its agents, shall have access to the DuPont Wharf and related facilities for the purpose of loading, off-loading Methanol and for shipping Methanol to and from the Beaumont Storage Tanks.

(b) Loading/Unloading Rates: Terra shall load and unload vessels and/or barges that are dispatched to the DuPont Wharf by Methanex, or its agents, subject to the Beaumont Vessel Docking Rules set forth in Attachment A of the DuPont Agreement. The Methanol loading and unloading rates at the DuPont Wharf shall be as follows:

Vessel Loading and Discharge Rates: Minimum capability of 1,000 metric tonnes per hour

Barge Loading and Discharge Rates: Minimum capability of 300 metric tonnes per hour

Methanex shall not have any responsibility or liability whatsoever, for any costs or expenses incurred by Terra or DuPont in order for DuPont and Terra to achieve the Vessel Loading and Discharge Rates and Barge Loading and Discharge Rates set forth above.

(c) Maintenance of Wharf Equipment: Terra shall, subject to the terms of the DuPont Agreement, ensure that regular maintenance and extraordinary maintenance, as may be required from time to time, is carried out on all Methanol specific wharf equipment such that the Methanol specific wharf equipment is, at all times, in good repair.

(d) Quantity: The maximum annual volume of Methanol shipped through the DuPont Wharf shall be 175,000,000 Gallons. The maximum monthly volume of Methanol shipped through the DuPont Wharf shall be 25,000,000 Gallons. Notwithstanding the foregoing, upon the request of Methanex, Terra shall use all commercially reasonable efforts to load and off-load greater quantities of Methanol than described above, having due consideration to DuPont Wharf conditions and other DuPont Wharf usage.

(e) Quality: Methanex, or its agents, shall deliver Methanol to the DuPont Wharf that meets the Specifications. Terra shall ensure that from and after the time of delivery of the Methanol at the Dupont Wharf, the Methanol shall meet the Specifications. The quality of the Methanol may be verified by an independent surveyor of Chemical and Petrochemical Inspections Inc. or such other independent surveyors as agreed upon by Methanex, DuPont and Terra. Terra shall use its best efforts to assist Methanex in obtaining DuPont’s approval to have other independent surveyors perform survey services at the DuPont Wharf and/or Beaumont Slip.

(f) Scheduling: Terra shall load or unload Methanol shipped to the DuPont Wharf via vessel or barge as instructed by Methanex in writing (“Vessel Order”). Vessel Orders shall include the vessel name, quantity of Methanol, estimated time of arrival, agent’s name, surveyor, order

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numbers and other pertinent information. Terra and Methanex shall coordinate the Vessel Orders to ensure efficient operations of the Beaumont Facility and the DuPont Wharf. Vessel Orders and any and all communications between the Parties concerning any Vessel Order shall be provided via express.methanex.com or using such other methods as determined by Methanex.

(g) Hours of Operation: 24 hours per day; 7 days per week.

(h) Title and Risk of Loss: The title to the Methanol shall at all times remain with Methanex. The risk of loss in the Methanol shall transfer from Methanex to Terra at the point when the Methanol passes the outlet or inlet flange, as applicable, of the vessel or barge, as the case may be.

(i) Demurrage Costs: Terra shall reimburse Methanex for any and all demurrage costs incurred due to Terra’s inability to provide the Wharf Services in particular, the loading and discharge rates set forth in Subsection 1(b) above. Such demurrage costs will be determined as per the applicable charter party agreement in respect of any vessel or barge subject to demurrage costs. Methanex shall provide to Terra, any and all relevant documentation in respect of any claim by Methanex for reimbursement of demurrage costs under this Section.

(j) Reporting Requirements: Terra will provide to Methanex on a daily basis via express.methanex.com or other means agreeable to Methanex an activity report indicating the volume loaded and discharged via vessels, barges and pipeline on an individual transaction basis. Terra will also report any Methanol lost due to contamination or improper handling by Terra and include in these reports as Methanol lost.

2. BEAUMONT SLIP SERVICES

Subject to the provisions of the Agreement, during the Initial Term and any Renewal Term, if applicable, Terra shall provide the following Beaumont Slip services (the “Slip Services”) to Methanex:

(a) Access to Beaumont Slip: Methanex, and its agents, shall have access to the Beaumont Slip and related facilities for the purpose of loading, off-loading Methanol and for shipping Methanol to and from the Beaumont Storage Tanks.

(b) Loading/Unloading Rates: Terra shall load and unload barges that are dispatched to the Beaumont Slip by Methanex, or its agents. The Methanol loading and unloading rates at the Beaumont Slip shall be as follows:

Barge Loading and Discharge Rates: Minimum capability of 300 metric tonnes per hour

Methanex shall not have any responsibility or liability whatsoever, for any costs or expenses incurred by Terra or DuPont in order for DuPont and Terra to achieve the Barge Loading and Discharge Rates set forth above.

(c) Maintenance of Beaumont Slip Equipment: Terra shall ensure that regular maintenance and extraordinary maintenance, as may be required from time to time, is carried out on all Beaumont Slip equipment such that the Beaumont slip equipment is, at all times, in good repair.

(d) Quantity: The maximum annual throughput volume of Methanol through the Beaumont Slip shall be 175,000,000 Gallons. The maximum monthly throughput volume of Methanol through the Beaumont Slip shall be 25,000,000 Gallons. Notwithstanding the foregoing, upon the request

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of Methanex, Terra shall use all commercially reasonable efforts to load and off-load greater quantities of Methanol than described above, having due consideration to Beaumont Slip conditions and other Beaumont Slip usage.

(e) Quality: Methanex, or its agents, shall deliver Methanol to the Beaumont Slip that meets the Specifications. Terra shall ensure that from and after the time of delivery of the Methanol at the Beaumont Slip, the Methanol shall meet the Specifications. The quality of the Methanol may be verified by an independent surveyor of Chemical and Petrochemical Inspections Inc. or such other independent surveyors as agreed upon by Methanex, DuPont and Terra. Terra shall use its best efforts to assist Methanex in obtaining DuPont’s approval to have other independent surveyors perform survey services at the Beaumont Slip.

(f) Scheduling: Terra shall load or unload Methanol shipped to the Beaumont Slip via barge as instructed by Methanex in writing (“Barge Order”). Barge Orders shall include the name of the barge company, quantity of Methanol, estimated time of arrival, agent’s name, surveyor, order numbers and other pertinent information. Terra and Methanex shall coordinate the Barge Orders to ensure efficient operations of the Beaumont Facility and the Beaumont Slip. Barge Orders and any and all communications between the Parties concerning any Barge Order shall be provided via express.methanex.com or using such other methods as determined by Methanex.

(g) Hours of Operation: 24 hours per day; 7 days per week.

(h) Title and Risk of Loss: The title to the Methanol shall at all times remain with Methanex. The risk of loss in the Methanol shall transfer from Methanex to Terra at the point when the Methanol passes the outlet or inlet flange, as applicable, of the barge.

(i) Demurrage Costs: Terra shall reimburse Methanex for any and all demurrage costs incurred due to Terra’s inability to provide the Slip Services in particular, the loading and discharge rates set forth in Subsection 2(b) above. Such demurrage costs will be determined as per the applicable charter party agreement in respect of any barge subject to demurrage costs. Methanex shall provide to Terra, any and all relevant documentation in respect of any claim by Methanex for reimbursement of demurrage costs under this Section.

(j) Reporting Requirements: Terra will provide to Methanex on a daily basis via express.methanex.com or other means agreeable to Methanex an activity report indicating the volume loaded and discharged via barges on an individual transaction basis. Terra will also report any Methanol lost due to contamination or improper handling by Terra and include in these reports as Methanol lost.

3. STORAGE SERVICES

Subject to the provisions of the Agreement, during the Initial Term and any Renewal Term, if applicable, Terra shall provide the following storage services (the “Storage Services”) to Methanex:

(a) Beaumont Storage Tanks: Terra shall provide Beaumont Storage Tanks, which shall be dedicated to sole use by Methanex. The Methanol stored in the Beaumont Storage Tanks shall not be commingled with any other methanol or materials other than the Methanol stored by Methanex or produced by Terra for Methanex, pursuant to the Asset Purchase Agreement.

Tanks	Capacity	Est. Safe Fill	Est. Heel
Shore Tank #1	7.5 million Gallons	7 million Gallons	300,000 Gallons
Shore Tank #2	7.5 million Gallons	7 million Gallons	300,000 Gallons
Shore Tank #3	1.2 million Gallons	1.1 million Gallons	75,000 Gallons

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(b) Inventory Measurements: For inventory purposes, the amount of Methanol placed in the Beaumont Storage Tanks from vessels or barges shall be determined by an independent surveyor selected by Methanex, in its sole discretion, from among the surveyors listed in Subsection 3(d) below, at time of unloading. The amount of Methanol delivered out of the Beaumont Storage Tanks shall be determined from certified meter readings when delivered via pipeline and by independent surveyor shore tank surveys when loaded into barges or vessels.

(c) Maintenance of Beaumont Storage Tanks: Terra shall ensure that regular maintenance and extraordinary maintenance, as may be required from time to time, is carried out on the Beaumont Storage Tanks and all related equipment such that, at all times, the Beaumont Storage Tanks and related equipment shall be in good repair.

(d) Quality: The quality of the Methanol delivered to Terra and discharged into the Beaumont Storage Tanks shall be verified by an independent surveyor of Chemical and Petrochemical Inspections Inc. or such other independent surveyors as agreed by Methanex, DuPont and Terra. Terra shall use its best efforts to assist Methanex in obtaining DuPont’s approval to have other independent surveyors perform survey services at the Beaumont Facility.

(e) Scheduling: Terra shall manage the loading and off-loading of barges at the Beaumont Slip. Terra and Methanex shall cooperate in scheduling barge shipments in and out of the Beaumont Slip.

(f) Hours of Operation: 24 hours per day; 7 days per week.

(g) Title and Risk of Loss: The title to the Methanol shall at all times remain with Methanex. The risk of loss in the Methanol shall remain with Terra at all times while Terra has control of the Methanol including, without limitation, when the Methanol is being transferred from the Dupont Wharf or the Beaumont Slip into the Beaumont Storage Tanks, while stored in the Beaumont Storage Tanks, during production and while being transferred from the production facility to and storage tank including the Beaumont Storage Tanks, and while being delivered by Terra to the Pipeline Customers via the Facility Pipelines or other pipelines. For greater certainty, the risk of loss shall transfer from Terra to the Pipeline Customers (on a Pipeline Customer by Pipeline Customer basis) as provided for in each Pipeline Customer Contracts.

(h) Contamination/Disposal Costs: Terra shall be responsible, at its own cost and expense, for the safe and lawful removal and disposal of any and all Methanol, located at the Beaumont Facility including, without limitation, in the Facility Pipelines, the tank lines and the Beaumont Storage Tanks, that is or becomes contaminated. Terra shall also be responsible for all costs of cleaning the Beaumont Storage Tanks, the Facility Pipelines and any and all related equipment, as may be necessary, upon an occurrence of contamination. Terra shall reimburse Methanex for the cost of such contaminated Methanol.

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(i) Reporting Requirements: Terra shall report any Methanol lost due to contamination or improper handling by Terra and include in these reports as Methanol lost. By the third working day of the month following the month of activity, Terra will provide Methanex a monthly report indicating the beginning and ending month tank gauges and the corresponding volume and complete list of all transaction activity in and out of the Beaumont Storage Tanks. This monthly report will determine the quantity of Methanol gained or lost by the following formula: (beginning month tank gauge quantity) plus (total all monthly receipts) minus (total all monthly deliveries) minus (ending month tank gauge quantity) equals [(+) gain or (-) loss]. The sum of all the gains and losses will not exceed 0.50% during any 12 month period. For the volume lost in excess of 0.50% metric tonnes Terra will compensate Methanex for the Methanol lost based on the weighted average sale purchase price earned by Methanex FOB the facilities during the specific 12 month period. At no time during the term of this Agreement will the price claimed by Methanex exceed $400 per metric tonne. Methanex will invoice Terra for such losses and Terra shall reimburse Methanex for the full amount of such losses within 15 days of Terra’s receipt of such invoice.

4. FACILITY PIPELINE SERVICES

Subject to the provisions of this Agreement, during the Initial Term and any Renewal Term, if applicable, Terra shall provide the following Facility Pipelines services (the “Pipeline Services”) to Methanex:

(a) Operation: Any and all operational services as may be required to operate the Facility Pipelines, including the pipelines owned and operated by DuPont, as may be required to deliver Methanol to any of the Pipeline Customers.

(b) Maintenance: Any and all maintenance services as may be required to operate the Facility Pipelines, including the pipelines owned and operated by DuPont, as may be required to deliver Methanol to any of the Pipeline Customers.

(c) Permitting: Any and all permitting and filing services as may be required to operate the Facility Pipelines, including the pipelines owned and operated by DuPont, as may be required to deliver Methanol to any of the Pipeline Customers or to Methanex, or its designees, at the DuPont Wharf and/or the Beaumont Slip, and for complying with any and all current requirements of the Department of Transportation and Texas Railroad Commission.

(d) Licensing: Any and all licensing services as may be required to operate the Facility Pipelines, including the pipelines owned and operated by DuPont, as may be required to deliver Methanol to any of the Pipeline Customers.

(e) Meter Proving: Any and all meter proving services as may be required in connection with the Facility Pipelines, including the pipelines owned and operated by DuPont, as may be required to deliver Methanol to any of the Pipeline Customers.

(f) Level of Pipeline Services: Prior to the execution of this Agreement, Terra delivered methanol via various pipelines from the Beaumont Storage Tanks within the Beaumont Facility to the Pipeline Customers. As part of the Pipeline Services provided by Terra to Methanex under the Agreement, Terra shall continue to provide pipeline delivery services to the Pipeline Customers in accordance with any and all instructions provided by Methanex to Terra. Terra shall deliver the Methanol to any new customers of Methanex which customers may be accessed via the Facility Pipelines. Any costs or expenses incurred by Terra to deliver Methanol to customers other than the Pipeline Customers shall be for the account of Methanex.

B-5

(g) Pipeline Deliveries: Terra shall deliver Methanol to the Pipeline Customers as instructed by Methanex in writing (“Pipeline Order”). Pipeline Orders shall include pumping time, quantity of Methanol to be delivered, the Pipeline Customer receiving party and other pertinent information. Terra and Methanex shall coordinate the Pipeline Orders to ensure efficient operations of the Beaumont Facility. Pipeline Orders and any and all communications between the Parties after the delivery of a Pipeline Order shall be provided via express.methanex.com or such other methods as determined by Methanex.

(h) Hours of Operation: 24 hours per day; 7 days per week.

(i) Title and Risk of Loss: The title to the Methanol shall at all times remain with Methanex. The risk of loss in the Methanol while the Methanol is passing through the Facility Pipelines shall remain with Terra at all times. For greater certainty, the risk of loss shall transfer from Terra to the Pipeline Customers (on a Pipeline Customer by Pipeline Customer basis) as provided for in each Pipeline Customer Contracts.

(j) Reporting Requirements: Terra shall report any Methanol lost due to contamination or improper handling by Terra and include in these reports as Methanol lost.

B-6

SCHEDULE C

SPECIFICATIONS

TEST	LIMIT	TEST METHODS
Appearance	Clear & Free	IMPCA 003-98
Color Pt-Co	Max 5	ASTM D 1209-00
Purity % wt on dry basis	Min 99.85	IMPCA 001-02
Water % w/w	Max 0.1	ASTM E 1064-00
Distillation Range At 760 mm Hg	Max 1.0 C to include 64.6 +-  0.1	ASTM D 1078-01
Specific Gravity 20/20°C	0.791 – 0.793	ASTM D 891-00 or ASTM D 4052-02
Potassium Permanganate Time test at 15C, minutes	Min 60	ASTM D 1363-97
Carbonizable Substances (Sulfuric Acid Wash Test) Pt-Co scale	Max 30	ASTM E 346-99
Acidity as acetic acid	Max 30 mg/kg	ASTM D 1613-02
Acetone	Max 30 mg/kg	IMPCA 001-02
Hydrocarbons	Pass	ASTM D 1722-98
Non Volatile Matter	Max 8 mg/1000 mL	ASTM D 1353-00
Ethanol	Max 50 mg/kg	IMPCA 001-02
Chloride as Cl-	Max 0.5 mg/kg	IMPCA 002-98
Sulphur	Max 0.5 mg/kg	ASTM D 3961-98
Total Iron	Max 0.1 mg/kg	ASTM E 394-00

C-1

SCHEDULE D

DUPONT WHARF ALLOCATION

	2000			2001			2002		2003 Aug YTD
	Tons		Barges	Tons		Barges	Tons		Tons		Barges
MeOH	660769		274	606370		240	672342		394260		140
Site Total	1688723		815	1337405		654	1411567		999070		481
Next year fixed %	39.13	%		45.34	%		47.63	%	39.46	%

D-1

SCHEDULE E

EXTRACTS OF DUPONT AGREEMENT

(See attached)

E-1

SCHEDULE F

DISCLOSURE SCHEDULE

NIL

F-1

EX-10.10

Exhibit 10.10

FIRST AMENDMENT TO ASSET PURCHASE AND METHANOL

EXCLUSIVITY AGREEMENT

THIS FIRST AMENDMENT TO THE ASSET PURCHASE AND METHANOL EXCLUSIVITY AGREEMENT (the “Amendment”) is made this 25 day of February, 2004 between TERRA INDUSTRIES INC. (“Terra Industries”), a Maryland corporation and BMC HOLDINGS INC. (“BMC”), a Delaware corporation, each having its head offices at 600 Fourth Street, Sioux City, Iowa (Terra Industries and BMC are together “Terra”) and METHANEX METHANOL COMPANY (“Methanex”), a Texas partnership having an office at 15301 Dallas Parkway, Suite 1150, Addison, Texas 75001.

BACKGROUND:

A. The parties hereto wish to amend their Asset Purchase and Methanol Exclusivity Agreement dated December 15, 2003 (the “Agreement”) to shorten the notification period for Methanex to provide a suspension of supply notice to Terra from 60 days to 30 days.

B. The parties also wish to amend the Agreement to provide that Methanex shall not provide a suspension of supply notice to Terra prior to March 15, 2004.

AGREEMENT:

NOW THEREFORE, the parties agree as follows:

1. AMENDMENT OF SECTION 5.3.3 OF THE AGREEMENT

1.1 The first paragraph of Section 5.3.3 of the Agreement is hereby amended to read as follows:

Methanex Suspension of Supply Notice: At any time during the Effective Period, Methanex may, in its sole discretion, elect to have Terra suspend the supply of methanol from the Beaumont Facility to Methanex (“Extended Suspension”), by providing Terra with written notice of such election as least 30 days prior to the requested date for such suspension of supply (“Methanex Suspension Notice”); provided, however, that under no circumstances shall Methanex issue Terra a Methanex Suspension Notice prior to March 15, 2004. Following receipt of a Methanex Suspension Notice, Terra shall use commercially reasonable efforts to suspend methanol supply from the Beaumont Facility to Methanex on the date requested in the Methanex Suspension Notice. Methanex may elect to suspend the supply of methanol from the Beaumont Facility to Methanex under this Section on more than one occasion during the Effective Period.

1.2 This Amendment shall be effective as of February 1, 2004. This Amendment is supplemental to the Agreement and nothing herein contained shall be construed as

Exhibit 10.10

amending or modifying the same except as herein specifically provided. All remaining portions of Section 5.3.3, and of the Agreement, shall remain unchanged.

IN WITHNESS WHEREOF the parties have executed this Agreement as of the day and year written below.

TERRA INDUSTRIES INC.
By:	/s/ JOSEPH D. GIESLER
	Authorized Signatory
	Joseph D. Giesler
	Printed Name
	Vice President of Industrial Sales and Operations
	Title
	February 16, 2004
	Date
BMC HOLDINGS INC.
By:	/s/ MARK A. KALAFUT
	Authorized Signatory
	Mark A. Kalafut
	Printed Name
	Vice President
	Title
	February 16, 2004
	Date
METHANEX METHANOL COMPANY, by its Managing Partner Methanex Gulf Coast, Inc.
By:	/s/ RANDY MILNER	By:	/s/ MICHAEL MACDONALD
	Authorized Signatory		Authorized Signatory
	Randy Milner		Michael Macdonald
	Printed Name		Printed Name
	Vice President and Corporate Secretary		Vice President
	Title		Title
	February 25, 2004		February 25, 2004
	Date		Date

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Michael L. Bennett, certify that:

1. I have reviewed this annual report on Form 10-K of Terra Industries Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting; and

Date: March 5, 2004

/s/ MICHAEL L. BENNETT

Michael L. Bennett

President and Chief Executive Officer

and Director (Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Francis G. Meyer, certify that:

1. I have reviewed this annual report on Form 10-K of Terra Industries Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting; and

Date: March 5, 2004

/s/ FRANCIS G. MEYER

Francis G. Meyer

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT

TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Terra Industries Inc. (the “Company”) on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned chief Executive Officer and Chief Financial Officer of the Company hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 that based on their best knowledge:

1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report.

/s/ MICHAEL L. BENNETT	/s/ FRANCIS G. MEYER
Michael L. Bennett	Francis G. Meyer
President and Chief Executive Officer	Sr. Vice President and Chief Financial Officer
and Director (Principal Executive Officer)	(Principal Financial Officer)
Dated: March 5, 2004	Dated: March 5, 2004

The certification set forth above is being furnished as an exhibit solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as part of the Form 10-K or as a separate disclosure document of the company or the certifying officers.