-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M00iT9JyohCOTmrFMkIdAUzX0juUga5qpiL5mKPlHX4X1CY2jYWcmMoK+/65OyaX JY142RtYMHFQZttgBoY71w== 0000950131-97-003411.txt : 19970515 0000950131-97-003411.hdr.sgml : 19970515 ACCESSION NUMBER: 0000950131-97-003411 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TERRA NITROGEN CO L P /DE CENTRAL INDEX KEY: 0000879575 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE CHEMICALS [2870] IRS NUMBER: 731389684 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10877 FILM NUMBER: 97604230 BUSINESS ADDRESS: STREET 1: 5100 EAST SKELLY DRIVE STREET 2: PO BOX 6000 CITY: TULSA STATE: OK ZIP: 74135 BUSINESS PHONE: 7122771340 MAIL ADDRESS: STREET 1: 5100 EAST SKELLY DRIVE CITY: TULSA STATE: OK ZIP: 74135 10-Q 1 FORM 10-Q ================================================================================ FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________________________ (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended March 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to __________________ Commission file number 1-10877 TERRA NITROGEN COMPANY, L.P. (Exact name of registrant as specified in its charter) Delaware 73-1389684 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) Terra Centre PO Box 6000, 600 Fourth Street Sioux City, Iowa 51102-6000 (Address of principal executive office) (Zip Code) Registrant's telephone number: (712) 277-1340 5100 East Skelly Drive, Suite 800 Tulsa, Oklahoma 74135 (Former Address, If Changed Since Last Report) At the close of business on May 2, 1997, there were 307,202 Senior Preference Units outstanding and 18,501,576 Common Units outstanding. 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. X Yes No ---- ---- ================================================================================ 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements TERRA NITROGEN COMPANY, L.P. CONSOLIDATED BALANCE SHEETS (In Thousands)
March 31, December 31, March 31, 1997 1996 1996 ----------- ------------ ----------- (Unaudited) (Unaudited) Assets Current assets: Cash and cash equivalents $ 61,371 $ 46,762 $ 72,106 Accounts receivable 581 11,054 23,429 Inventory - finished products 30,849 15,209 18,357 Inventory - materials and supplies 17,511 14,489 10,121 Distribution reserve fund - 18,480 - Prepaid expenses 2,723 2,353 5,458 -------- -------- -------- Total current assets 113,035 108,347 129,471 Net property, plant and equipment 171,378 172,771 175,844 Distribution reserve fund - - 18,480 Other assets 19,387 25,550 13,256 -------- -------- -------- Total assets $303,800 $306,668 $337,051 ======== ======== ======== Liabilities and partners' capital Current liabilities: Accounts payable and accrued liabilities $ 52,378 $ 51,730 $ 19,431 Customer prepayments 11,335 5,936 25,990 Current portion of capital lease obligations 1,036 1,162 1,525 -------- -------- -------- Total current liabilities 64,749 58,828 46,946 Capital lease obligations 2,869 3,036 3,905 Other long-term obligations 1,060 1,060 1,060 Partners' capital 235,122 243,744 285,140 -------- -------- -------- Total liabilities and partners' capital $303,800 $306,668 $337,051 ======== ======== ========
See accompanying notes. 2 TERRA NITROGEN COMPANY, L.P. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In Thousands, Except Per Unit Amounts)
Three Months Ended March 31, ------------------------- 1997 1996 ---------- ---------- Revenues $74,045 $89,304 Other income 134 144 ------- ------- Total revenues 74,179 89,448 Cost of goods sold 42,509 35,242 ------- ------- Gross profit 31,670 54,206 Operating expenses 2,970 3,035 ------- ------- Operating income 28,700 51,171 Interest expense (434) (126) Interest income 1,526 1,953 ------- ------- Net income $29,792 $52,998 ======= ======= Net income allocable to limited partners' interest $27,175 $37,198 ======= ======= Net income per limited partnership unit $ 1.44 $ 1.98 ======= =======
See accompanying notes. 3 TERRA NITROGEN COMPANY, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In Thousands)
Three Months Ended March 31, -------------------- 1997 1996 -------- -------- Operating activities: Net income $ 29,792 $ 52,998 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,948 2,796 Amortization of deferred finance fees - 9 Changes in operating assets and liabilities: Receivables 10,473 4,997 Inventories (18,662) (6,394) Prepaid expenses (370) 542 Accounts payable, accrued liabilities and customer prepayments (20,756) 416 Other 6,237 1,342 -------- -------- Net cash provided by operating activities 9,662 56,706 Net cash used in investing activities: Capital expenditures (1,628) (1,603) Financing activities: Distribution reserve fund 18,480 - Repayment of capital lease obligations (293) (272) Partnership distributions (11,612) (54,215) -------- -------- Net cash provided by (used in) financing activities 6,575 (54,487) -------- -------- Net increase in cash and cash equivalents 14,609 616 Cash and cash equivalents at beginning of period 46,762 71,490 -------- -------- Cash and cash equivalents at end of period $ 61,371 $ 72,106 ======== ========
See accompanying notes. 4 TERRA NITROGEN COMPANY, L.P. Notes to Consolidated Financial Statements (Unaudited) 1. Basis of Presentation The consolidated financial statements contained herein should be read in conjunction with the consolidated financial statements and notes thereto contained in the Terra Nitrogen Company, L.P. ("TNCLP") Annual Report on Form 10-K for the year ended December 31, 1996. TNCLP and its operating partnership subsidiary, Terra Nitrogen, Limited Partnership (the "Operating Partnership"), are referred to herein, collectively, as the "Partnership". The accompanying unaudited consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for the fair statement of the results for the periods presented. All of these adjustments are of a normal and recurring nature. Results for the quarter are not necessarily indicative of future financial results of the Partnership. Net income per limited partnership unit is computed by dividing net income, less a 9% and 30% share allocable to the General Partner for the three months ended March 31, 1997 and 1996, respectively, by 18,808,778 limited partner units. The net income allocated to the General Partner decreased to 9% during the three months ended March 31, 1997 due to the reduction in Available Cash distributed to the General Partner. According to the Agreement of Limited Partnership of TNCLP, net income is allocated to the General Partner and the Limited Partners in each taxable year in the same proportion that Available Cash for such taxable year was distributed to the General Partner and the Limited Partners. Distributions of Available Cash are made 98% to the Limited Partners and 2% to the General Partner, except that the General Partner is entitled, as an incentive, to larger percentage interests (up to 50%) to the extent that distributions of Available Cash exceed specified target levels. Available Cash for the three months ended March 31, 1997 decreased $22.8 million from the three months ended March 31, 1996 due primarily to lower net income in 1997. 2. Distributions to Unitholders The Partnership makes quarterly cash distributions to Unitholders and the General Partner in an amount equal to 100% of its Available Cash (as this and other capitalized terms are defined in the Partnership Agreement). In addition, a Reserve Amount equal to $18.5 million was previously funded to support distributions on the Senior Preference Units ("SPUs"). Since the SPUs are being redeemed (see "Redemption of SPUs" below), the Reserve Amount is no longer required to be maintained. 5 The quarterly cash distributions paid to the Units and to the General Partner applicable to 1997 and 1996 were as follows:
Senior Preference Units Common Units General Partner ------------------------ ------------------------ ------------------------ Total (000s) $ Per Unit Total (000s) $ Per Unit Total (000s) $ Per Unit ------------ ---------- ------------ ---------- ------------ ---------- 1997: First Quarter $ 8,250 $.605 $3,129 $.605 $ 232 - 1996: First Quarter 26,046 1.91 9,880 1.91 18,290 - Second Quarter 22,227 1.63 8,948 1.73 14,904 - Third Quarter 33,000 2.42 7,603 1.47 9,995 - Fourth Quarter 24,136 1.77 9,879 1.91 18,290 -
The distribution paid in the first quarter 1997 represented an amount equal to the minimum quarterly distribution ("MQD") for the quarter. Distributions of $16.6 million ($.895 per Unit) and $10.2 million were paid to the Common Unitholders and the General Partner, respectively, on April 30, 1997, representing the remainder of the Available Cash for the quarter ended December 31, 1996. Nonconverting SPU holders are not entitled to participate in cash distributions in excess of the MQD after December 31, 1996. 3. Cash and cash equivalents The Partnership has a demand deposit with an affiliate that represents excess Partnership cash deposited with Terra Capital, Inc., the parent of the General Partner. The deposit is due on demand and at March 31, 1997 the interest rate was 6.3%. The amount of the demand deposit included in cash and cash equivalents was $42.3 million at March 31, 1997. 4. Conversion of SPUs Pursuant to the provisions of the Agreement of Limited Partnership of TNCLP, the Preference Period for TNCLP ended on December 31, 1996. For a 90-day period commencing on December 31, 1996, the holders of all SPUs had the right to elect to convert their SPUs into Common Units on a one-for-one basis, effective as of the Senior Conversion Date, by delivering to the General Partner a conversion notice. Any SPUs for which a conversion notice was not received during such 90-day period remained SPUs. Those units that remained SPUs and did not convert into Common Units are entitled to the MQD, but do not participate with the Common Units in any additional distributions. As of March 31, 1997 (the end of the Conversion Period) holders of 13,329,162 SPUs elected to convert their units to Common Units and 307,202 units remained SPUs. The Common Units began trading on the New York Stock Exchange on April 1, 1997 under the symbol TNH. 6 5. Redemption of SPUs On March 21, 1997, the Partnership announced that on May 27, 1997, it would redeem, pursuant to the terms of the Partnership Agreement, all SPUs that did not convert to Common Units. The redemption price is $21.50 per unit. On May 27, 1997, the SPUs will receive the MQD of $.605 per unit for the quarter ended March 31, 1997, in addition to the redemption price. The SPUs are trading on the New York Stock Exchange under the symbol TNH PRCL until redeemed. 6. Natural gas costs The Partnership's natural gas procurement policy is to effectively fix or cap the unit cost of approximately 40-80% of its natural gas requirements for the upcoming 12 months and up to 50% of its natural gas requirements for the subsequent two-year period using supply contracts, financial derivatives and other forward pricing techniques in an attempt to gain some protection against natural gas price increases on the spot market. Consequently, if natural gas prices were to increase in a future period, the Partnership may benefit from these forward pricing techniques; however, if natural gas prices were to fall, the Partnership may incur costs above the spot market price as a result of such policies. The settlement dates for such financial instruments are scheduled to coincide with gas purchases during future periods. These instruments are based on a designated price, which is referenced to market natural gas prices or appropriate NYMEX futures contract prices. The Partnership frequently uses prices at the Henry Hub in Louisiana, the most common and financially liquid location of reference for financial derivatives related to natural gas; however, natural gas supplies for the Partnership's two production facilities are purchased from various suppliers at locations that are different from Henry Hub. This 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. As of March 31, 1997, the Partnership had effectively fixed or capped the price of a substantial portion of its natural gas requirements for 1997 and 1998, consistent with its policy mentioned above. Unrealized gains from forward pricing positions totaled $9.7 million and $22.5 million as of March 31, 1997 and 1996, respectively. For the three months ended March 31, 1997, natural gas hedging activities produced cost savings of $9.4 million compared with savings of $12.6 million for the 1996 period. 7. Hedging During the first quarter of 1997, the Partnership recorded hedging gains or losses based on a pooled resources concept with Terra Capital, Inc. During 1997, hedging gains and losses were allocated to each manufacturing plant based on budgeted gas usage for such plant. Prior to 1997, hedging gains and losses were specifically identified with a particular plant based on contractual arrangements for that plant. The impact of this change in accounting for hedging gains and losses did not have a material impact on the consolidated financial position or results of operations for the quarter ended March 31, 1997. 7 8. New accounting standards In June 1996, The Financial Accounting Standards Board issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", which establishes accounting and reporting standards for such transfers. The Partnership adopted SFAS No. 125 effective January 1, 1997 and there was no material impact on the Partnership's consolidated financial position or results of operations. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Three months ended March 31, 1997, compared with the three months ended March 31, 1996 Volumes and prices for the three month periods ended March 31, 1997 and 1996 were as follows:
1997 1996 ---------------------- ---------------------- Sales Average Sales Average Volumes Unit Price Volumes Unit Price (000 tons) ($/ton) (000 tons) ($/ton) ---------------------- ---------------------- Ammonia 85 207 71 194 UAN 407 90 552 97 Urea 114 173 107 208
Revenues for the quarter ended March 31, 1997 declined $15.3 million, or 17%, compared with the quarter ended March 31, 1996 primarily due to lower UAN sales volumes. UAN sales volumes decreased 26% from the 1996 quarter due to carryover stocks at the dealer level and from wet weather in the South and Southwest. In addition, urea and UAN sales prices were down 17% and 6%, respectively, while ammonia sales prices improved 6% from the prior year quarter. Cost of goods sold as a percentage of revenues increased to 57% for the 1997 quarter from 39% in the 1996 period as a result of significantly higher natural gas costs. Cold weather during the 1997 period caused the Partnership's natural gas costs to increase 90% over the prior year quarter. The Partnership's forward pricing activities produced $3.2 million more in cost savings during the 1996 period compared with the 1997 quarter. Interest expense increased $308,000 over the comparable 1996 period primarily due to the discount on accounts receivable sold under the accounts receivable securitization facility entered into during the third quarter of 1996. Interest income decreased $427,000, or 22%, compared with the 1996 period due to lower levels of cash and short term investments. Capital resources and liquidity Net cash provided by operating activities for the first three months of 1997 was $9.7 million, a decrease of $47.0 million compared with the same period in 1996, principally due to lower net income and higher working capital requirements. Working capital requirements increased due to higher inventory levels as a result of lower sales volumes. Working capital was further affected by lower trade accounts payable and customer prepayments during 1997. In addition, 9 the inclusion of the Reserve Amount in cash and cash equivalents at March 31, 1997 had a favorable impact on cash provided by financing activities during the 1997 period. The Partnership's principal needs for funds are for support of its working capital, distributions to Partners, redemption of nonconverting SPUs and capital expenditures. The Partnership intends to fund such needs primarily from net cash provided by operating activities. At March 31, 1997, the Operating Partnership also had $25 million of unused borrowing capacity under its revolving credit facility. The Partnership believes that such sources of funds will be adequate to meet the Partnership's working capital needs, make quarterly distributions to Partners, redeem the nonconverting SPUs and fund the Partnership's capital expenditures for at least the next twelve months. Quarterly distributions to the Partners of TNCLP are based on Available Cash for the quarter as defined in the Agreement of Limited Partnership of TNCLP. Available Cash is defined generally as all cash receipts less all cash disbursements, adjusted for changes in certain reserves established as the General Partner determines in its reasonable discretion to be necessary. Available Cash for the three months ended March 31, 1997 decreased $22.8 million compared with the three months ended March 31, 1996 due primarily to lower net income in 1997. On April 22, 1997, the General Partner announced a cash distribution of $18.9 million ($1.02 per Unit) to holders of the Common Units of record as of May 5, 1997, payable on May 27, 1997, based on Available Cash for the quarter ended March 31, 1997. A cash distribution of $1.8 million to the General Partner was also declared. There were no accumulated distribution arrearages for any Units as of March 31, 1997. The last quarterly cash distribution of $.605 per SPU, representing the MQD, will be paid as part of the May 27, 1997 redemption of the SPUs. The Available Cash for the first quarter of 1997 includes $18.5 million from the elimination of the Reserve Amount required to support four quarters of the MQD on the SPUs. The Reserve Amount is no longer required after the redemption of the SPUs. On April 3, 1997, the General Partner announced a cash distribution of $16.6 million ($.895 per Unit) to holders of the Common Units of record as of April 18, 1997, paid on April 30, 1997. A cash distribution of $10.2 million to the General Partner was also declared. This distribution was the remainder of the cash distribution announced in January, representing the balance of Available Cash for the fourth quarter of 1996. SPUs that did not convert to Common Units are not entitled to participate in distributions in excess of the MQD after December 31, 1996. Accounts receivable declined $10.5 million from the December 31, 1996 balance due to accruals at December 31, 1996 for income on gas hedges received in January compared with no such accruals at March 31, 1997. Accounts receivable declined $22.8 million from the March 31, 1996 balance primarily due to the accounts receivable securitization facility entered into in the third quarter of 1996. Finished products inventory increased $15.6 million and $12.5 million from the December 31, 1996 and March 31, 1996 balances, respectively, primarily due to lower than anticipated UAN sales volumes during the first quarter of 1997. 10 Customer prepayments increased $5.4 million from the December 31, 1996 balance due to fewer customers participating in the prepay program at the end of 1996. Certain customers prepay for product during the fall and winter months to take advantage of favorable pricing conditions. The customers then take delivery of the product as needed during the spring planting season. Customer prepayments increased during the first quarter of 1997 in anticipation of spring planting; however, the 1997 balance was $14.7 million lower than the March 31, 1996 balance due to a higher level of carryover stocks at the dealer level at the beginning of 1997 compared with the beginning of 1996. Capital expenditures Capital expenditures totaled $1.6 million for the first three months of 1997. In the remainder of 1997, the Partnership plans to spend approximately $14.1 million. Plans for 1997 include urea storage and loading improvements at the Blytheville plant and environmental control and ammonia efficiency improvements at the Verdigris plant. Environmental matters The Partnership is subject to federal, state and local environmental, health and safety laws and regulations, particularly relating to air and water quality. In the course of its ordinary operations, the Partnership has and will generate wastes which may fall within the definition of "hazardous substances" under federal or state laws. The Partnership's production facilities and storage locations require ongoing operating expenditures in order to remain in compliance with environmental regulations. These operating costs consist largely of such items as electrical and chemical usage, waste disposal, laboratory analysis, fees for outside consultants and contractors, and salaries for environmental employees. Based on its current knowledge, the Partnership does not expect capital expenditures relating to environmental matters to have a material adverse effect on its results of operations, financial condition, capital resources, liquidity or cash flow. Based on information presently available, the Partnership does not expect that any further material capital expenditures will be required to comply with existing environmental regulations. Based on such regulations, the Partnership does not believe that it will be required to make any material environmental remediation expenditures in the foreseeable future. 11 Part II. Other Information Item 2. Changes in Securities Pursuant to the provisions of the Agreement of Limited Partnership of TNCLP and the Conversion Statement dated December 31, 1996, 13,329,162 SPUs recently converted to Common Units on a one-for-one basis. The Common Units were registered under the Securities Exchange Act of 1934 pursuant to a Form 8-A dated March 24, 1997. Depositary receipts evidencing such Common Units were issued subsequent to the March 31, 1997 expiration of the 90 day conversion period. A copy of the Conversion Statement is filed as exhibit 99.1 to this report and the description of, among other things, the rights of holders of SPUs and Common Units after the December 31, 1996 "Senior Conversion Date" and expiration of the "Preference Period" is incorporated herein by reference. Item 5. Other Information Dennis B. Longmire, Chairman and Chief Executive Officer of Darling International, Inc., was named a director of Terra Nitrogen Corporation in April 1997. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.63 Amendment No. 4 dated as of March 13, 1997 to the 1995 Credit Agreement, filed as Exhibit 4.7 to the Terra Industries Inc. Form 10-Q for the quarter ended March 31, 1997 (File No. 1- 8520), is incorporated herein by reference. 27 Financial Data Schedule. (EDGAR only) 99.1 Conversion Statement dated December 31, 1996. (b) Reports on Form 8-K: None. 12 SIGNATURE Pursuant to the requirements 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 NITROGEN COMPANY, L.P. By: TERRA NITROGEN CORPORATION as General Partner By: /s/ Erik L. Slockers ------------------------------ Erik L. Slockers Vice President, Controller (Principal Accounting Officer) Date: May 14, 1997 13 EX-27 2 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated statement of financial position of Terra Nitrogen Company, L.P. as of March 31, 1997 and the related consolidated statement of income for the three months then ended and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 61,371 0 581 0 48,360 113,035 268,930 (97,552) 303,800 64,749 2,869 0 0 0 235,122 303,800 74,045 74,179 42,509 42,509 0 0 434 29,792 0 29,792 0 0 0 29,792 1.44 0 Due to the nature of the partnership, this represents partners capital.
EX-99.1 3 CONVERSION STATEMENT [TERRA LOGO] CONVERSION STATEMENT Until March 31, 1997, holders of Senior Preference Units ("SPUs") of Terra Nitrogen Company, L.P. ("TNCLP") have the right to convert SPUs into Common Units of TNCLP. Conversion decision required - your consideration is very important Holders who fail to take action will, by default, remain SPU holders and be subject to redemption at a price of $21.50 per SPU. The rights and benefits of Common Units are substantially similar to those that have existed for the SPUs, although Common Units do not have any preference rights. After December 31, 1996, SPUs are no longer entitled to participate in quarterly cash distributions in excess of the minimum quarterly distribution ("MQD") of $0.605 per unit. The Common Units will receive cash distributions, if any, only after SPUs have been paid the MQD. Holders must convert to Common Units in order to participate in any cash distributions above the MQD. (Cash distributions in excess of $0.605 per unit have been paid on SPUs and Common Units for twelve consecutive quarters.) The last reported sale of SPUs on the New York Stock Exchange Composite Tape on December 20, 1996 was $45 per SPU. The Common Units are approved for listing on the New York Stock Exchange, provided that a minimum level of elections to convert is satisfied. The General Partner currently anticipates that the thresholds for NYSE trading of the Common Units will be satisfied. If the Common Units cannot be listed on the NYSE, despite TNCLP's good faith attempts, publicly held SPUs may not convert. These are your alternatives: 1. If you wish to remain a holder of SPUs, no action on your part is required. 2. If you want to convert to Common Units, either you or the nominee holding your SPUs must complete and deliver the Conversion Notice/Letter of Transmittal, along with your SPU certificates, as instructed on the form. This Conversion Statement provides you with detailed information about the conversion process and the consequences of the decision you make. We encourage you to read this document carefully. In addition, you may obtain information about TNCLP from documents TNCLP has filed with the Securities and Exchange Commission. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS CONVERSION STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. This Conversion Statement is dated and mailed to SPU holders on December 31, 1996. TABLE OF CONTENTS
Page ---- Conversion Q & A................................................3 Summary.........................................................8 Conversion Background..........................................13 The Conversion.................................................13 Certain Federal Income Tax Consequences........................16 Market Price of Securities; Cash Distributions.................17 Description of Units...........................................19 Exchange Agent.................................................20
AVAILABLE INFORMATION TNCLP is subject to the information requirements of the Securities Exchange Act of 1934, as amended, and is required to file periodic reports and other information with the Securities and Exchange Commission (the "Commission"). Reports and other information filed by TNCLP can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the Commission at 75 Park Place, New York, New York 10007 and at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission also maintains a Web site that contains reports and other information regarding registrants, like TNCLP, that file electronically with the Commission (site address http://www.sec.gov). In addition, reports and other information may be inspected, with respect to TNCLP, at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005, upon which the units of TNCLP are listed. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed with the Commission (File No. 1-10877) are incorporated herein by reference: (i) TNCLP's Annual Report on Form 10-K for the fiscal year ended December 31, 1995; (ii) TNCLP's Quarterly Report on Form 10-Q for the fiscal quarters ended March 31, 1996, June 30, 1996 and September 30, 1996; and (iii) the description of the Units, set forth in the Registration Statement on Form 8-A dated September 27, 1991, as amended by Form 8 dated October 16, 1991. All documents filed by TNCLP pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Conversion Statement and prior to the termination of the conversion period contemplated hereby shall be deemed to be incorporated by reference into this Conversion Statement and to be a part hereof from the date of filing of such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Conversion Statement to the extent that a statement contained herein or in any subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Conversion Statement. 2 TNCLP will provide without charge to each person to whom this Conversion Statement is delivered, upon the written or oral request of such person, a copy of any or all of the documents incorporated herein by reference (other than exhibits, unless such exhibits are specifically incorporated by reference in such documents). Written requests for such copies should be directed to Corporate and Investor Relations, Terra Nitrogen, 600 Fourth Street, P.O. Box 6000, Sioux City, Iowa 51102-6000 (phone (712) 277-5438). _________________ No person is authorized in connection with this conversion to give any information or to make any representations other than as contained or incorporated by reference in this Conversion Statement, and, if given or made, such information or representations must not be relied upon as having been authorized by TNCLP or the General Partner. This Conversion Statement does not constitute an offer to sell or the solicitation or an offer to buy any of the securities offered hereby to any person in any jurisdiction in which it is unlawful to make such offer or solicitation. Neither the delivery of this Conversion Statement nor any conversion effectuated hereunder shall, under any circumstances, create any implication that the information contained herein is correct as of any date subsequent to the date hereof. _________________ CONVERSION Q & A The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information appearing elsewhere in this Conversion Statement or incorporated by reference herein. - ------------------------------------------------------------------ What changed for Senior Preference Unitholders at the end of 1996? - ------------------------------------------------------------------ Starting December 31, 1996, holders of SPUs became limited in the amount of quarterly cash distributions they can receive, as further described below. In addition, after April 1, 1997, SPUs can be redeemed by TNCLP for $21.50 per SPU. These changes are in accordance with TNCLP's Partnership Agreement. Cash distributions to SPU holders will be no more than the minimum quarterly distribution (MQD) of $0.605 per unit ($2.42 annually). The MQD is considerably less than cash distributions to SPU holders of $5.00 per SPU paid in 1995 and $7.73 per SPU paid in 1996. The redemption price of $21.50 per SPU is also considerably less than the closing market price for SPUs of $45 on December 20, 1996. SPU holders who want to retain their rights to participate in distributions greater than the MQD and avoid having SPUs redeemed by TNCLP for $21.50 per SPU, can elect to convert to "Common Units" of TNCLP before March 31, 1997. This conversion is on a one-for-one basis and at no cost to the holder. Although the Common Units are not publicly traded at the current time, the New York Stock Exchange has approved an application to list the Common Units, provided that a minimum level of elections to convert is satisfied. (The General Partner currently anticipates that the NYSE thresholds will be satisfied.) If the 3 Common Units cannot be listed on the NYSE, despite TNCLP's good faith attempts, publicly held SPUs may not convert. - ------------------------------------------------------------- What are the ramifications of converting to the Common Units? - ------------------------------------------------------------- Quarterly distributions on the Common Units will be paid after the nonconverted SPU holders have been paid the MQD. Common Unitholders share on a quarterly basis all the remaining Available Cash with the General Partner, which could be more or less than the MQD on a per unit basis. (Cash distributions in excess of the MQD have been made on SPUs and Common Units for twelve consecutive quarters.) The Common Units will not be subject to the redemption feature, but can be called at a then-current market price by TNCLP, the General Partner or its affiliates under certain circumstances as described on the next page. - ----------------------------------------------------------------------- What are the ramifications of remaining a Senior Preference Unitholder? - ----------------------------------------------------------------------- Again, after December 31, 1996, nonconverting SPU holders will not receive any distributions in excess of the MQD, although they will receive their MQD before the Common Units are paid A Reserve Amount equal to one year's MQD payments will be maintained to support distributions on nonconverted SPUs. If the SPUs no longer meet the NYSE's listing requirements, the SPUs would be subject to delisting. In addition, according to the Partnership Agreement, TNCLP has the right, and currently expects, to redeem nonconverted SPUs at a price of $21.50 per SPU. - ---------------------------------------------------------------------------- What is the effect of this conversion process on cash distributions normally paid in February? - ---------------------------------------------------------------------------- The Partnership intends to distribute cash to unitholders at the end of February 1997 equal to the MQD ($0.605 per unit). The excess of Available Cash for the quarter ended December 31, 1996 over the amounts distributed in February 1997 will be paid to all partners other than nonconverting SPUs based on a record date shortly after the expiration of the conversion period. An announcement concerning the amount and timing of the distribution is scheduled for late January 1997. Nonconverting SPU holders will not receive any cash distributions in excess of the MQD. - ------------------------------------------------------------------------- Does the General Partner and its affiliates intend to convert their SPUs? - ------------------------------------------------------------------------- The General Partner and its affiliates intend to convert their respective SPUs into Common Units. The General Partner and its affiliates currently own 6,974,900 SPUs and 5,172,414 Common Units. The public owns 6,661,464 SPUs. - --------------------------------------- How long do I have to make my decision? - --------------------------------------- You have 90 days to make your decision (until 5:00 p.m. Eastern (Daylight) Time on March 31, 1997). Failure to return 4 a completed Conversion Notice/Letter of Transmittal, along with your SPU certificates, within the 90 day time frame will cause your units to remain SPUs. Can decisions to convert be withdrawn? Decisions to convert SPUs into Common Units that have been completed by delivering a Conversion Notice/Letter of Transmittal may be withdrawn at any time prior to 5:00 p.m. Eastern Standard (Daylight) Time on March 31, 1997 by contacting the Exchange Agent, First Chicago Trust Company of New York, and delivering a letter to that effect. If I want to convert, what do I do? If you are the holder of record (a person to whom a certificate was issued), you need to complete the Conversion Notice/Letter of Transmittal and forward it along with your SPU certificate to the Exchange Agent. You are not the holder of record if your broker or another nominee holds the SPUs on your behalf. In these cases you need to instruct your broker or other nominee to complete the conversion election on your behalf. Will the SPUs convert to Terra Industries Inc. common stock (exchange symbol: TRA)? No, the SPUs will have the option to convert to Common Units of TNCLP, not common stock of Terra Industries. Can the SPUs be redeemed? TNCLP may redeem any or all of the outstanding SPUs at any time upon at least 30 but not more than 60 days notice. If, after giving effect to an anticipated redemption, fewer than 1.0 million SPUs would be held by non- affiliates of the General Partner, TNCLP must redeem all such SPUs if it redeems any SPUs. The redemption price per SPU is $21.50. TNCLP currently expects that it will seek to redeem all outstanding SPUs sometime after the conversion process is completed. Under what circumstances can the Common Units be called? If at any time not more than 25% of the issued and outstanding Common Units are held by non-affiliates of the General Partner, either TNCLP, the General Partner or its affiliates may call all such outstanding units held by non- affiliated persons. TNCLP shall give at least 30 but not more than 60 days notice of its decision to purchase the outstanding units of the class. The purchase price per unit will be the greater of (1) the average of the previous twenty trading days closing prices as of the date five days before the purchase is announced or (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. In the event all SPUs owned by the General Partner and its affiliates are converted, they will own 12.15 million Common Units. If at least 4.05 million of the 6.66 million publicly held SPUs convert, the non-affiliated persons will own more 5 than 25% of the issued and outstanding Common Units (assuming the General Partner and its affiliates do not acquire any additional Common Units). How will future cash distributions be determined? Cash distributions will continue to be determined using the same methodology as in the past. The terms of the Partnership Agreement require TNCLP to distribute 100% of its Available Cash. Available Cash is largely dependent on TNCLP earnings. The principal change in future cash distributions is that nonconverted SPU holders are only entitled to the MQD. What level of conversions is needed for listing Common Units on the NYSE? The Common Units are approved for listing on the NYSE if after conversion there are at least 1.1 million publicly held Common Units, the aggregate market value of the publicly held Common Units is at least $40 million and there are at least 2,000 holders of "round lots" of Common Units. The General Partner currently anticipates that the thresholds for NYSE trading of Common Units will be satisfied. If NYSE trading of Common Units is initiated, what will be the price of the Common Units and how will it be determined? Currently there is no public trading market for the Common Units. The public market will determine the price. Since this is a one-for-one conversion of substantially similar securities, the Common Units will presumably be valued substantially the same as the SPUs they will replace. This value will depend on, among other things, TNCLP performance, general market conditions and cash distributions. The closing market price of SPUs as of December 20, 1996 was $45. When will the Common Units begin trading on the NYSE? Assuming sufficient conversion elections are made, Common Units are expected to begin trading on the NYSE on April 1, 1997 (the day following the expiration of the conversion period). Beginning April 1, 1997, any trading of Units on the NYSE is anticipated to be made under the symbol "TNH" for Common Units and "TNH PR" for SPUs. What happens if the Common Units cannot be listed on the NYSE? If the Common Units cannot be listed on the NYSE, despite TNCLP's good faith attempts, only SPUs owned by the General Partner and its affiliates may be converted into Common Units. SPUs held by all others will remain SPUs, will no longer participate in distributions in excess of the MQD and will be subject to redemption at a price of $21.50. After the conversion period is over, will there be a public market for the SPUs? After the conversion period, the SPUs will continue to trade on the NYSE 6 under the new symbol "TNH PR" separate from the Common Units only if the SPUs continue to meet the exchange listing requirements and are not otherwise redeemed. If the SPUs do not continue to meet the NYSE listing requirements, the SPUs would be subject to delisting. It is entirely possible that there would be an insufficient number of SPUs to provide a liquid secondary trading market. Will the General Partner continue to be entitled to incentive distributions? The General Partner will continue to be entitled to incentive distributions. Nonconverted SPUs will receive only the MQD, and the balance of Available Cash will be distributed to the Common Unitholders and to the General Partner. The General Partner's percentage interest in distributions increases as distributions to the Common Unitholders exceed specified target levels (e.g., distributions of Available Cash exceeding $1.045 per Common Unit per quarter are paid 50% to Common Unitholders and 50% to the General Partner). If I convert an SPU into a Common Unit, what will be the tax basis of the Common Unit and will the conversion generate a taxable transaction? Upon conversion of an SPU into a Common Unit, the holder of the SPU will not recognize gain or loss and will have a basis and holding period in the Common Unit equal to the basis and holding period of the converted SPU. Will future distributions be supported by cash reserves held by TNCLP? TNCLP has been required to maintain cash reserves equal to one year's MQD payments on outstanding SPUs. This requirement would be ongoing for SPUs that do not convert. No reserves are required for Common Units. It is anticipated that any reduction in the Reserve Amount from its current level of $18.5 million will be available for cash distributions in May 1997. 7 SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Conversion Statement or incorporated by reference herein. The Company Terra Nitrogen Company, L.P. ("TNCLP" or the "Company") is one of the largest U.S. manufacturers and marketers of nitrogen fertilizer products. The Company produces ammonia, urea and urea ammonium nitrate solution ("UAN"), which are used by farmers to provide crops with nitrogen, an essential nutrient for plant growth. The Company sells its products to dealers, distributors, other fertilizer producers and traders for ultimate distribution principally in the Central and Southern Plains, Cornbelt and Western regions of the United States and areas served by the Mississippi, Missouri, Ohio and Illinois River systems. The Company's two nitrogen fertilizer plants are advantageously located with ready access, via barge, rail and pipeline, to major farming areas in the United States. The Company's plant in Verdigris, Oklahoma is the largest domestic UAN production facility, and its plant in Blytheville, Arkansas is one of the largest domestic urea production facilities. Both of the Company's plants manufacture anhydrous ammonia (referred to as ammonia), the majority of which is directly upgraded at the plants into UAN and urea. The U.S. nitrogen fertilizer business is both seasonal and volatile due to a number of factors that affect U.S. and world supply and demand. Although there have historically been wide imbalances between world supply and demand for nitrogen fertilizers, the Company believes that a more favorable balance has developed in recent years, particularly in the U.S. market, which accounts for over 95% of the Company's sales. As a result, the Company and many other U.S. producers have been operating at near-capacity rates. Nitrogen fertilizer is a global commodity, however, and the profitability and cash flow of nitrogen fertilizer producers, including the Company, has been volatile in the past and can be expected to be volatile in the future. The principal executive offices of the Company are located at 5100 East Skelly Drive, Suite 800, Tulsa, Oklahoma 74135, and its telephone number is (918) 660-0050. 8 Risk Factors Limited partner interests are inherently different from capital stock of a corporation. Current and prospective holders of SPUs or Common Units (collectively, the "Units") should consider the following factors in evaluating the Units: . The markets for TNCLP's products are seasonal and volatile. . TNCLP's business is highly competitive. . TNCLP's profitability and cash flow are affected by the price and availability of natural gas, as well as the price of its nitrogen products. . Voting rights of holders of Units are limited; pursuant to the terms of the Partnership Agreement, the General Partner manages and controls TNCLP. . The General Partner and its affiliates may potentially have conflicts of interest with TNCLP and the holders of Units, although the General Partner has undertaken by written agreement to act fairly and reasonably in connection with TNCLP and the holders of Units. (The General Partner has also elected two independent directors to its board of directors who review potential conflict of interest situations in furtherance of such obligations.) . The General Partner's liability to TNCLP and the holders of Units is limited by the Partnership Agreement. . There is no established trading market for the Common Units and the trading market for the SPUs may be adversely affected as a result of the conversion. The Conversion Terms Until March 31, 1997, SPU holders are being offered the opportunity to elect to convert SPUs into Common Units of TNCLP on a one-for-one basis at no conversion cost to the holder. In the event that the Common Units cannot be listed on the NYSE, despite TNCLP's good faith attempts, only SPUs owned by the General Partner and its affiliates may be converted into Common Units. Distributions of After December 31, 1996, SPUs are no longer entitled to Available Cash participate in quarterly cash distributions from (General) "Available Cash" in excess of $0.605 per SPU ($2.42 per SPU annually). Common Units will participate in quarterly cash distributions from Available Cash, if any, only after SPUs have been paid $0.605 9 per SPU. (Cash distributions from Available Cash in excess of $0.605 per unit have been paid on SPUs and Common Units for twelve consecutive quarters.) The ability of TNCLP to make cash distributions will be largely dependent on TNCLP earnings. February 1997 TNCLP intends to distribute cash to unitholders at the end Cash Distribution of February 1997 equal to the minimum quarterly distribution ("MQD") of $0.605 per unit. The excess of Available Cash for the quarter ended December 31, 1996 over the amounts distributed in February 1997 will be paid to all partners other than nonconverting SPUs based on a record date shortly after the expiration of the conversion period. An announcement concerning the amount and timing of the distribution is scheduled for late January 1997. Nonconverting SPU holders will not receive any cash distributions in excess of the MQD. Redemption TNCLP has the right to redeem the nonconverted SPUs at a price of $21.50 per SPU. Procedure for Depository receipts evidencing SPUs being converted, Conversion together with a properly completed and duly executed Conversion Notice/Letter of Transmittal, must be received on or before 5:00 p.m. Eastern Standard (Daylight) Time on March 31, 1997 by the Exchange Agent, First Chicago Trust Company of New York. Withdrawal Elections to convert SPUs may be withdrawn by the Rights unitholder at any time prior to 5:00 p.m. Eastern Standard (Daylight) Time on March 31, 1997 by contacting the Exchange Agent, First Chicago Trust Company of New York, and delivering a written notice of withdrawal. Certain Federal For a summary of certain federal income tax consequences Income Tax relating to the conversion, see "Certain Federal Income Consequences Tax Consequences" in this document, page 16. Limited Call Right If at any time not more than 25% of the issued and outstanding Common Units are held by non-affiliates of the General Partner, either TNCLP, the General Partner or its affiliates may call all such outstanding units held by non-affiliated persons. TNCLP shall give at least 30 but not more than 60 days notice of its decision to purchase the outstanding units of the class. The 10 purchase price per unit will be the greater of (1) the average of the previous twenty trading days closing prices as of the date five days before the purchase is announced or (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. In the event all SPUs owned by the General Partner and its affiliates are converted, they will own 12.15 million Common Units. If at least 4.05 million of the 6.66 million publicly held SPUs convert, the non-affiliated persons will own more than 25% of the issued and outstanding Common Units (assuming the General Partner and its affiliates do not acquire any additional Common Units). Difference For a summary of certain differences between SPUs and between SPUs and Common Units, see "Description of Units" in this document, Common Units page 19. 11 SUMMARY FINANCIAL DATA The following table presents (i) summary consolidated financial data for the years ended December 31, 1993, 1994 and 1995 derived from TNCLP's audited consolidated financial statements, (ii) summary consolidated financial data for the nine months ended September 30, 1995 and 1996 derived from TNCLP's unaudited consolidated financial statements for such period and (iii) certain operational information for the periods covered. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Selected Financial and Operating Data" and the consolidated financial statements of TNCLP and related notes thereto incorporated by reference herein.
(dollars in thousands, except Year Ended December 31, Nine Months Ended September 30, per unit amounts) -------------------------------- ------------------------------- 1993 1994 1995 1995 1996 -------- -------- -------- -------- -------- Income and Cash Flow Statement Data: Total revenues........................ $259,782 $300,269 $373,325 $279,722 $277,943 Cost of goods sold.................... 190,192 193,541 187,615 137,526 129,495 Operating expenses.................... 17,645 20,000 16,840 13,604 9,156 Operating income...................... 53,004 87,638 169,724 128,592 139,292 Net income............................ 49,729 86,545 172,468 130,662 143,563 Net income allocable to limited partners' interest.................... 48,741 84,822 123,220 96,678 94,654 Net income per limited partnership unit.................................. 2.59 4.51 6.55 5.14 5.03 Cash distributed per limited partnership unit...................... 2.48 2.64 6.25 4.34 5.82 Summary Operating Data: Sales volumes (thousands of tons) Ammonia............................... 453 541 451 327 311 Urea.................................. 460 418 455 358 312 UAN................................... 1,985 1,884 2,133 1,522 1,731 Balance Sheet Data (at end of period): Net property, plant and equipment..... $184,629 $179,028 $177,358 $174,196 $172,827 Total assets.......................... 286,355 316,645 338,123 317,090 301,412 Long term debt and capital lease obligations including current maturities............................ 38,418 42,450 5,702 6,263 4,870 Partners' capital..................... 201,003 236,879 286,354 282,194 258,624
12 CONVERSION BACKGROUND The conversion process described herein is expressly provided for in the Partnership Agreement and was disclosed in the initial public offering of SPUs in 1991. Section 5.5(c) of the Partnership Agreement provides as follows: "For a 90-day period commencing on the date the General Partner mails notice to the Unitholders that the Senior Conversion Date has occurred, Unitholders will have the right to elect to convert their Senior Preference Units into Common Units, effective as of the Senior Conversion Date, on a one-for-one basis, subject to adjustment, by delivering a Conversion Notice to the General Partner; provided, however, that any Units as to which a Conversion Notice is not received during such 90-day period shall remain Senior Preference Units; and provided further that in the event that the Common Units are not approved for listing on the New York Stock Exchange or the American Stock Exchange at such time, only those Senior Preference Units as to which a Conversion Notice has been delivered by the General Partner and its Affiliates shall be converted into Common Units and Senior Preference Units held by all other holders shall not be converted into Common Units, but shall remain Senior Preference Units. On or before the Senior Conversion Date, the Partnership shall file an application to list the Common Units on the New York Stock Exchange or the American Stock Exchange and shall pursue such application in good faith; provided that upon termination of the 90-day conversion period the Partnership and its Common Units meet the applicable listing requirements." Consistent with the terms of the Partnership Agreement, the General Partner has determined that the "Senior Conversion Date" occurred on December 31, 1996. THE CONVERSION General SPU holders have, for a limited time, the right to elect to convert SPUs into Common Units of TNCLP on a one-for-one basis and at no conversion cost to the holder. TNCLP's obligation to issue Common Units to holders properly completing and delivering the Conversion Notice/Letter of Transmittal is conditioned on the Common Units being approved for listing on the New York Stock Exchange. The Common Units are approved for listing on the NYSE, provided that a minimum level of elections to convert is satisfied. See "--Post Conversion Trading." 13 Conversion Period; Procedure for Electing to Convert The conversion period commenced on December 31, 1996 and expires at 5:00 p.m. Eastern Standard (Daylight) Time on March 31, 1997. All appropriate documentation must be received on or before 5:00 p.m. Eastern Standard (Daylight) Time on March 31, 1997 by First Chicago Trust Company of New York (the "Exchange Agent"). Failure to comply with the instructions set forth in the Conversion Notice/Letter of Transmittal could result in rejection of the conversion election. Holders of record seeking to convert must deliver their depository receipts evidencing SPUs being converted, together with a properly completed and duly executed Conversion Notice/Letter of Transmittal, and any other documents required by the Conversion Notice/Letter of Transmittal, to the Exchange Agent at the address set forth below under "Exchange Agent" prior to the expiration of the conversion period. All beneficial owners of SPUs who wish to convert (but do not constitute holders of record) should instruct the holder of record to complete and forward the Conversion Notice/Letter of Transmittal on their behalf. Nominees or other record holders who hold SPUs for more than one beneficial owner are entitled to make multiple elections pursuant to the Conversion Notice/Letter of Transmittal. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of any Conversion Notice/Letter of Transmittal will be determined by TNCLP, in its sole discretion, whose determination will be final and binding on all parties. TNCLP reserves the absolute right, in its sole discretion, to reject any and all conversion elections determined not to be in proper form or not to be available for lawful acceptance. TNCLP also reserves the absolute right, in its sole discretion, to waive any of the conditions of the Conversion Notice/Letter of Transmittal or any defect or irregularity in the conversion elections of any SPUs. No submission of a Conversion Notice/Letter of Transmittal will be deemed to be properly made until all irregularities have been cured or waived. TNCLP's interpretation of the terms and conditions of the Conversion Notice/Letter of Transmittal relating to the conversion will be final and binding. None of TNCLP, the General Partner, the Exchange Agent or any other person will be under any duty to give notification of any defects or irregularities in conversion elections or incur any liability for failure to give any such notification. Withdrawal Rights Conversion Notices/Letters of Transmittal submitted for conversion may be withdrawn by the unitholder, upon written notice to the Exchange Agent, at any time prior to 5:00 p.m. Eastern Standard (Daylight) Time on March 31, 1997. Conversion Notices/Letters of Transmittal not timely withdrawn will become irrevocable. 14 To be effective, a written or facsimile transmission of a withdrawal letter must (i) be timely received by the Exchange Agent at one of its addresses specified herein, (ii) specify the name of the person who submitted the Conversion Notice/Letter of Transmittal to be withdrawn, (iii) if depositary receipts evidencing SPUs have been deposited with or otherwise identified to the Exchange Agent, contain the description of the depositary receipts to be withdrawn, indicate the certificate number shown on the certificates evidencing such depositary receipts and the number of SPUs represented by such depositary receipts and (iv) be signed by the holder of the depositary receipts in the same manner as the original signature on the Conversion Notice/Letter of Transmittal. Post Conversion Trading Nonconverted SPUs will continue to trade on the NYSE under the new symbol "TNH PR" only if the SPUs continue to meet the exchange listing requirements and are not otherwise redeemed. It is entirely possible that there would be an insufficient number of SPUs to provide a liquid secondary trading market. TNCLP currently expects that it will redeem all nonconverted SPUs sometime after the conversion process is completed. The issuance of the Common Units upon conversion of the SPUs is exempt from the registration requirements of the Securities Act of 1933 (the "Securities Act"), pursuant to Section 3(a)(9) of the Securities Act. As the issuance of the SPUs was registered under the Securities Act, the Common Units issued upon exchange of the SPUs will be freely tradable under federal law, without compliance with prospectus delivery requirements; provided, however, that the person holding the SPUs, or the Common Units issued upon exchange of the SPUs, is not an affiliate of the Company. If the person holding the SPUs is an affiliate of the Company, the Common Units issuable upon exchange of the SPUs may be sold only pursuant to an effective registration statement under the Securities Act with respect to such Common Units or an exemption from registration thereunder. Assuming that sufficient conversion elections are made to satisfy thresholds for the listing of Common Units on the New York Stock Exchange, the Common Units are expected to commence trading on the NYSE on April 1, 1997 (the day following the expiration of the conversion period). The Common Units are approved for listing on the NYSE under the symbol "TNH" if after conversion there are at least 1.1 million publicly held Common Units, the aggregate market value of the publicly held Common Units is at least $40 million and there are at least 2,000 holders of "round lots" of Common Units. 15 CERTAIN FEDERAL INCOME TAX CONSEQUENCES Upon the conversion of an SPU into a Common Unit, the holder of an SPU will not recognize gain or loss and will have a tax basis and holding period in the Common Unit received equal to the tax basis and holding period of the SPU so converted. If the holder of SPUs converts all SPUs, the holder's tax basis in the Common Units will be equal to the tax basis in the SPUs converted and such tax basis should be equally apportioned among the Common Units received. If a holder of SPUs decides to convert some, but not all, of the holder's SPUs, it is unclear how the tax basis would be apportioned between the SPUs retained and the Common Units received upon the conversion. The Internal Revenue Service has ruled that a partner who acquires interests in a partnership in separate transactions must combine such interests and maintain a single adjusted tax basis in a single partnership interest. Upon a sale or other disposition of less than all of such interest, a portion of such tax basis must be allocated to the interests sold using an "equitable apportionment" method. The ruling is unclear as to how the holding period of these interests is determined once they are combined. If this ruling is applicable to the holders of SPUs, a holder of SPUs who owns SPUs with differing tax bases (generally as a result of acquiring them at different times) will be unable to select high or low basis SPUs to convert as would be the case with corporate stock. It is not clear whether the ruling applies to TNCLP, because, similar to corporate stock, limited partner interests in TNCLP are evidenced by separate certificates. Accordingly, the effect of such ruling on the holders of SPUs is unclear. In addition, on March 19, 1996, certain tax legislation, known as the Revenue Reconciliation Act of 1996, was presented to Congress that would impact the taxation of certain financial products including partnership interests. Under one proposal contained in the Revenue Reconciliation Act of 1996, in the case of partnership interests in publicly traded partnerships which are substantially identical, the basis of such interests and any adjustments to tax basis, would be determined on an average basis and, for holding period purposes, a taxpayer would be treated as selling such interests on a first-in, first-out basis. It is unclear how such proposed legislation, if enacted, would impact (if at all) a holder of SPUs who converts some, but not all, of the holder's SPUs. A holder of SPUs seeking to convert less than all of such holder's SPUs should consult a tax advisor as to the possible consequences of such ruling and subsequent legislation. 16 MARKET PRICE OF SECURITIES; CASH DISTRIBUTIONS SPUs (NYSE symbol: TNH) are traded on the NYSE. The following table sets forth the high and low closing sale prices for the SPUs and the amount of cash distributed to each SPU and Common Unit in each calendar quarter since January 1, 1994.
SPU Closing Price Cash Distributed to each Period High Low SPU and Common Unit - ------ ---- --- ------------------- 1996 - ---- Fourth quarter (through December 20, 1996) $ 45.75 $ 41.50 $1.77 Third quarter 46.25 37.50 2.42 Second quarter 49.25 37.00 1.63 First quarter 47.25 35.75 1.91 1995 - ---- Fourth quarter $38.875 $31.625 $1.47 Third quarter 32.50 29.50 1.73 Second quarter 32.25 28.50 1.14 First quarter 30.50 24.125 0.66 1994 - ---- Fourth quarter $28.625 $22.125 $0.66 Third quarter 29.50 24.50 0.66 Second quarter 30.25 26.125 0.66 First quarter 31.00 25.00 0.66
Currently there is no trading market for the Common Units. The Common Units will presumably be valued substantially consistent with the past valuation of SPUs and will depend on, among other things, TNCLP performance, general market conditions and cash distributions. Quarterly Cash Distributions After December 31, 1996, SPUs are no longer entitled to participate in quarterly cash distributions in excess of $0.605 per unit (the "minimum quarterly distribution" or "MQD"). Holders must convert to Common Units in order to participate in any cash distributions above this level, although the Common Units will receive cash distributions, if any, only after SPUs have been paid the MQD. TNCLP intends to distribute cash to unitholders at the end of February 1997 equal to only the MQD ($0.605 per unit). The excess of the Available Cash for the quarter ended December 31, 1996 over the amounts distributed in February 1997 will be paid to all partners other than 17 nonconverting SPUs based on a record date shortly after the expiration of the conversion period. An announcement concerning the amount and timing of the distribution is scheduled for late January 1997. Nonconverting SPU holders are not entitled to participate in cash distributions in excess of the MQD. Future cash distributions will continue to be based on Available Cash, which will be determined using the same methodology as in the past. Pursuant to the terms of the Partnership Agreement, TNCLP is required to pay out 100% of Available Cash. Available Cash is largely dependent on TNCLP earnings and is dependent on other factors, including working capital requirements and capital expenditures. The General Partner will continue to be entitled to incentive distributions. The General Partner's percentage interest in distributions increases as distributions to the Common Unitholders exceed specified target levels (e.g., distributions of Available Cash from Operations exceeding $1.045 per Common Unit per quarter are paid 50% to Common Unitholders and 50% to the General Partner). Reserve Amount Cash reserves (or the "Reserve Amount") will be maintained in the amount equal to four quarters of MQDs on all nonconverted SPUs. No cash reserves are required for Common Units. In connection with the conversion process, reductions in the Reserve Amount from its current level of $18.5 million will be available for potential cash distributions in May 1997. Distributions of Cash Upon Liquidation TNCLP will dissolve on December 31, 2041, unless sooner dissolved pursuant to the terms of the Partnership Agreement. In connection with the dissolution and liquidation of TNCLP, the proceeds of such liquidation shall be applied, first, in accordance with the provisions of the Partnership Agreement and applicable law to the payment of creditors in the order of priority provided by law and to the creation of a reserve of cash or other assets for contingent liabilities in an amount, if any, determined by the liquidator to be appropriate for such purposes. Any remaining proceeds (or assets in kind) will be distributed to Unitholders and the General Partner as set forth below. If cash (or other assets) to be distributed upon liquidation equals the aggregate balances of the partners' capital accounts (before adjustment for income and loss upon liquidation), such cash (or other assets) will be distributed in proportion to such capital accounts. If cash (or other assets) to be distributed upon liquidation exceeds such aggregate balance of the Partners' capital accounts, cash (or other assets) equal to such aggregate balance will be distributed in proportion to capital accounts and the excess will be distributed, first, 2% to the General partner and 98% to the holders of the Senior Preference Units to the extent of 18 Unrecovered Capital plus accrued arrearages, if any, next, 2% to the General Partner and 98% to the holders of the Common Units to the extent of Unrecovered Capital plus accrued arrearages, if any, and thereafter to the General Partner and to all holders of the Common Units, with the General Partner's percentage interest increasing as distributions to the Common Unitholders exceed specified targets. Any loss or unrealized loss will be allocated to the General Partner and the Unitholders, first, in proportion to the positive balances in such partners' capital accounts until all such balances are reduced to zero, and second, to the General Partner. DESCRIPTION OF UNITS General The Units are equity securities entitled to participate in such distributions of Available Cash as may properly be made from time to time (although the SPUs are only entitled to the MQD after December 31, 1996) and, in the event of any liquidation on winding up of TNCLP, to share in any assets of TNCLP remaining after satisfaction of TNCLP liabilities as provided in the Partnership Agreement. Holders of Units do not have preemptive rights. Holders of Units are entitled to one vote per Unit at meetings of Limited Partners with respect to matters as to which approvals may be solicited. The General Partner does not anticipate that any meeting of Limited Partners will be called in the foreseeable future since the General Partner is authorized in general to perform all acts deemed necessary to carry out the purposes of the Partnership and to conduct the business of the Partnership. Senior Preference Units The Senior Preference Units ("SPUs") are entitled to receive from Available Cash a minimum quarterly distribution of $0.605 per SPU, aggregating $2.42 per SPU on an annualized basis, plus any arrearages in the payment of the MQD for prior quarters, before any distribution of Available Cash is made to holders of Common Units for such quarter. After payment of the MQD with respect to the SPUs and Common Units, only the Common Units will participate in additional quarterly distributions of Available Cash to the limited partners. For a 90-day period commencing on the mailing by the General Partner of this Conversion Statement, the holders of SPUs will have the right to convert their SPUs into Common Units on a one-for-one basis, if the Common Units are approved for listing on the NYSE, subject to official notice of issuance. In the event that the Common Units cannot be listed on the NYSE, only SPUs owned by the General Partner and its affiliates may be converted into Common Units, and SPUs held by all other Unitholders will remain SPUs. 19 Any or all of the SPUs may be redeemed at the option of TNCLP upon at least 30 but not more than 60 days notice at a price equal to Unrecovered Capital plus accrued arrearages, if any. Unrecovered Capital, as further defined in the Partnership Agreement, means an amount equal to the excess of (i) the initial public offering price per SPU ($21.50) over (ii) the sum of all distributions made in respect of an SPU out of Available Cash constituting Cash from Interim Capital Transactions. If after giving effect to an anticipated redemption, fewer than 1.0 million SPUs would be held by non-affiliates of the General Partner, TNCLP must redeem all such SPUs if it redeems any SPUs. The SPUs are entitled to a liquidation preference over the Common Units. Common Units The holders of Common Units are entitled to receive distributions from Available Cash only after TNCLP has distributed the MQD to holders of SPUs. After the holders of SPUs have received the MQD for any quarter plus any arrearages, only the Common Units will participate in distributions of Available Cash to the limited partners. If at any time not more than 25% of the issued and outstanding Common Units are held by non-affiliates of the General Partner, then TNCLP may call, or assign to the General Partner or its affiliates its right to acquire, the remaining publicly-held Units of such class at a purchase price equal to the greater of (i) the highest cash price paid by the General Partner or its affiliates for any Unit of such class purchased within the 90 days preceding the date the General Partner mails notice of the election to call or acquire such Units or (ii) the average of the last reported sales price per Unit on the principal securities exchange on which the Units trade over the 20 trading days preceding the date five days before the General Partner mails such notice. EXCHANGE AGENT First Chicago Trust Company of New York will act as Exchange Agent for the conversion. All correspondence in connection with the conversion and the Conversion Notice/Letter of Transmittal should be addressed to the Exchange Agent as follows:
By Overnight Courier: By Hand: By Mail: --------------------- -------- -------- First Chicago Trust Company First Chicago Trust First Chicago Trust of New York Company of New York Company of New York Tenders and Exchanges Tenders and Exchanges Tenders and Exchanges Suite 4680 c/o Depository Trust Suite 4660 14 Wall Street, 55 Water Street, DTC TAD P.O. Box 2565 Eighth Floor Vietnam Veterans Jersey City, NJ New York, NY 10005 Memorial Plaza 07303-2565 New York, NY 10041 For Information: Call: (201) 324-0137 Fax: (201) 222-4720
20 -----END PRIVACY-ENHANCED MESSAGE-----