Terra Industries Inc. East Coast Roadshow Presented by: Michael L. Bennett President and CEO
Forward-Looking Statements This presentation may contain forward-looking statements, which involve inherent risks and uncertainties. Statements that are not historical facts, including statements about Terra Industries Inc. s beliefs, plans or expectations, are forward-looking statements. These statements are based on current plans, estimates and expectations. Actual results may differ materially from those projected in such forward-looking statements and therefore you should not place undue reliance on them. A non-exclusive list of the important factors that could cause actual results to differ materially from those in such forward-looking statements is set forth in Terra Industries Inc. s most recent report on Form 10-K and Terra Industries Inc. s other documents on file with the Securities and Exchange Commission. Terra Industries Inc. undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. 2
Our Value Proposition The nitrogen industry is better positioned than most in the current uncertain economic times because demand for our products remains strong as long as people continue to eat. We ll demonstrate this by answering these questions: How does the global economic crisis affect Terra? What s creating this strong demand, and how long is it likely to last? How is supply matching up to demand? What about natural gas? How is Terra creating shareholder value? 3
How Does the Global Economic Crisis Affect Terra? Potential Concerns Unsure whether our customers (ag dealers) and their customers (farmers) will have adequate access to credit Industrial nitrogen demand may slow New capacity could lead to nitrogen oversupply Previous downturns have led to massive North American nitrogen capacity shutdowns, bankruptcies Why We re Optimistic Farm incomes projected to be at historical highs Ag fundamentals remain strong: Population continues to grow Global grain inventories are low Terra s industrial business focuses on mining for power generation and government-mandated emissions reduction, so are somewhat insulated from effects of an economic slowdown Competitors are now even less likely to build new capacity due to uncertain economic outlook Terra is positioned to weather a down cycle: North American assets have gained competitive advantages in natural gas and freight costs Terra is financially solid 4
What s Creating this Strong Demand? Growing global population Demand for higher-protein food in developing countries Emerging environmental applications Use of grains to produce biofuels 5
Growing World Population Demands More Food World Population Forecast Billions of People 10 9 8 7 6 5 4 3 2 1 0 1950 2007 2015 2025 2050 The global population is increasing by more than 1% per year. Source: World Population Prospects 6
Pounds Per Person 400 360 320 280 Better Diets and a Growing Population Have a Dual Effect on Grain Demand World Per Capita Grain Use Grain use per person levels out over time, indicating a stabilization in consumption patterns. 1996-97 1999-00 2002-03 2005-06 2008-09 2011-12 2014-15 2017-18 150 World Grain Trade Coarse Grains, Wheat, and Rice However, the global population continues to increase, causing total global demand for grain to grow along with the population. Million Tonnes 125 100 75 50 Source: USDA, Doane May 2008 1996-97 1999-00 2002-03 2005-06 2008-09 2011-12 2014-15 2017-18 7
Growing Global Meat Import Demand 20,000 18,000 16,000 (000 Metric Tons) 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: USDA Long-Term Outlook 2008-2017 Beef Poultry Pork 8
Rising Meat Production Requires Additional Feed Meat Global Import Demand Increase: 2006-2016 Pounds of Feed Needed to Produce 1 Pound Meat Typical Feed Sources Poultry 31% 2.6 Corn, DDGs, Soybean Meal Pork 32% 6.5 Corn, DDGs, Soybean Meal Beef 35% 7.0 Corn, Forage, Soybean Meal About 55% of U.S. corn production is used as feed Based on 90 million acres of corn this translates into ~ 3.5 million tons of nitrogen Sources: USDA Long-Term Outlook 2008-2017; Ephraim Leibtag, USDA Amber Waves 2008 9
Growers Expect Continued Strong Commodity Grain Prices 100 U.S. Stocks-to-Use Ratio Forecast 80 Percent 60 40 20 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Corn Soybeans Wheat Current: 10.1% 7.4% 28.1% Source: USDA Agricultural Long-Term Forecast 2008-2017 10
U.S. Demand for Corn Continues to Grow U.S. Corn Long-Term Projections Billions of Bushels 16 14 12 10 8 6 4 2 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Fertilizer Year Ending Ethanol Exports Other Source: USDA 11
US Nitrogen Demand/Supply Outlook Million Tons -Production -Imports -Exports Net Avail 06/ 07 N 8.9 10.1 0.3 18.7 07/ 08 08/ 09 N N 9.3 9.7 12.8 11.4 0.4 0.3 21.7 20.8 Disappearance 19.5 20.3 20.8 Source: Blue Johnson, Terra Estimates 12
SCR Applications are an Emerging Nitrogen Market Shift in U.S. automotive markets to mileage efficiency diesel vehicles will encourage demand growth Diesel sales are anticipated to grow from 3% of total light duty sales (2005) to around 9% (2012) Heavy duty diesel markets will likely be first adopters of SCR technology Total global urea demand for SCR markets could increase to 1.95 million tonnes by 2015, and has the ultimate potential of a 3.1-million-tonne market annually U.S. and EU demand growth hinges largely on the successful construction of new coal fired power plants which may be hindered by future climate change legislation and rulings Source: Fertecon 13
How is Supply Matching Up to Demand? Ammonia Slow global new capacity growth (none planned in North America) Operating rates remain steady through 2015 Upgraded Products Modest global capacity growth Firm operating rates through 2009 Trade restrictions (China, India) will affect global imports/exports 14
A Quick Ramp-Up in New Supply is Unlikely The decision to build new ammonia and upgrading capacity has become more difficult to make. Over the past few years: Stranded gas has become a thing of the past Construction costs have increased from $600 - $700 million to $1.2 - $1.5 billion Project timeline has increased from 30 months to 4 years Current global economic conditions make this investment even more unlikely * Figures based on 1.2 million tons/year ammonia/urea facility 15
Sources of Planned Capacity Additions China will account for almost 50% of all new ammonia capacity between 2008 and 2015, adding 13.5 million tonnes. Source: Fertecon 16
Total What About Natural Gas? Recent changes in global natural gas economics have benefited North American nitrogen producers Cash Costs Freight/Handling Product Delivered to the U.S. Gulf Coast Ammonia.80 1.85 8.65 Western Europe 1.90 2.50 17.40 1.00 1.40 8.40 1.10 3.00 18.10 FSU (excluding Russia) 2 Ammonia ($/MMBtu/metric ton) 2005 2008 2005 2008 2005 2008 2005 2008 Gas Costs 3 6.00 14.00 6.00 14.00 1.70 8.30 1.70 8.30.85 1.85 4.15.90 3.00 12.20 1. Western Europe exported 4.0 million mt of nitrogen in 2007. 2. FSU (excluding Russia) exported 3.5 million mt of nitrogen in 2007. 3. European and FSU prices should decrease at the end of Q1/09 and into Q2/09, but will still be higher than North American prices. Sources: Fertecon/Terra Urea.85 2.00 4.55 Urea 1.00 4.00 13.30 17
Global Natural Gas Costs Are Merging $14 Gas Costs to Ammonia Producers $12 $10 $/MMBTU $8 $6 $4 $2 $0 2006 2008 2010 2012 2014 2020 N. Africa M. East Russia Ukraine U.S. W. Europe Source: Fertecon Ammonia Outlook 2-2008 18
Domestic Outlook Q4 2008: Onshore production up 9% YOY Storage levels nearing historical highs Electrical generation significantly down for Q4 YOY Entire energy sector trading lower Supply: Onshore production steadily increasing 4 bcfd YOY Offshore production up.8 bcfd YOY LNG imports to remain dismal due to Asia outbidding the U.S. Canadian imports flat to down as much as.5 bcfd YOY Effect of greenhouse gas reduction efforts: Could significantly increase demand as users switch from coal to gas Some effects are being felt as new coal facilities are being canceled or placed on hold Experts forecast moderating prices, less volatility in 2009 vs. 2008 If prices continue to fall, marginal producers may start limiting supply 19
Financial Objectives Pursue a disciplined capital program, focused on: Improving efficiency Reducing costs Continuously focus on low-cost production Generate significant cash flow over the cycle Ensure adequate liquidity throughout the cycle 20
Excellent Third Quarter Performance Revenues: $790 million (up $318 million) Operating income: $171 million (up $101 million) Income available to common shareholders: $165 million (up $1.13 per share) Equity earnings: $16 million Cash from operations: $95 million Realized $42 million in equity earnings from UK joint venture 21
Using Our Cash to Add Value Increasing UAN capacity by 500,000 tons per year at Woodward, Oklahoma facility Estimated cost: $180 million Enhances market position Improves long-term earnings capability Expanded/Extended share buyback Added 10 million shares to program Extended two years through June 30, 2010 In Q3/08, Terra repurchased 2.4 million shares at $41/share, illustrating how we value the company 22
Using Our Cash to Add Value Restarted idle Donaldsonville, La. ammonia plant in Q3/08 Replacing 500,000 tons of purchased ammonia with our own ammonia for better margins Instituted a 10 /share quarterly dividend Signals management s view that Terra is a new kind of company Under consideration: Continue to evaluate projects to increase upgrading capacity at additional Terra facilities Always open to acquisition opportunities that would create synergies with our existing business 23
Why Add Upgrading Capacity? Ammonia production 3,340 Used in UAN (32% basis) (1,771) 4,333 Used in Ammonium Nitrate (346) 775 Used in Urea (165) 280 Used in Acids (90) 350 Net Ammonia for sale 968 968 Total tons available 6,706 NOTES: At 100% capacity Includes additional Woodward UAN capacity (planned by end of 2010) Excludes Trinidad and UK joint ventures Ammonia Saleable Production Product (thousands of short tons) 24
U.S. Agricultural Ammonia Use is Declining U.S. rail carriers continue to raise shipping rates for ammonia due to increasing risk and insurance carrier concerns Environmental backlash against nitrate levels in watershed areas is leading to pressure to restrict ammonia use 25
Why UAN is Gaining Market Share from Ammonia Fewer growers are planting more corn Old: 75 million acres New: 90 million acres Growers like to have their crop in the ground before mid-may to achieve optimal yields Application window is compressed, favoring UAN over ammonia Weather and soil conditions must be just right for ammonia Grower can fertilize about 200 acres/day UAN is faster and more flexible Custom applicator can cover as much as 1,500 acres/day Can also be applied with other crop inputs 26
UAN Commands a Premium over Ammonia Nitrogen Price Spread - 2006 to Present $0.24 $0.22 $0.20 $0.18 $0.16 $0.14 $0.12 $0.10 $0.08 $0.06 27 Sep-08 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Oct-08 Green Markets' published mid-cornbelt prices Price difference per pound of N
How We re Creating Shareholder Value Increase upgrading capacity at existing facilities: Woodward Others? Expand business lines that generate predictable margins/decrease volatility in business model: Terra Environmental Technologies Yazoo City modifications/orica agreement Deepwater terminals Continue to diversify manufacturing base through opportunistic acquisitions/jvs Maintain comfortable debt level Judiciously investing our cash for long-term growth 28
Terra Industries Inc. East Coast Roadshow Presented by: Michael L. Bennett President and CEO