10-Q 1 0001.txt FORM 10-Q ================================================================================ FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________________________ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 2000 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 At the close of business on July 31, 2000, there were 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 TERRA NITROGEN COMPANY, L.P. CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited)
June 30, December 31, June 30, 2000 1999 1999 -------------- ------------- ---------- ASSETS Current assets: Cash and cash equivalents $ 10,501 $ 13 $ 13 Accounts receivable 29,955 29,846 19,322 Inventory - finished products 20,214 25,611 24,887 Inventory - materials and supplies 1,123 13,501 16,928 Prepaid expenses and other current assets 2,056 1,583 2,219 --------------------------------------------------------------------------------------------------------------------- Total current assets 63,849 70,554 63,369 Net property, plant and equipment 151,308 157,275 162,242 Other assets 11,560 14,595 7,814 --------------------------------------------------------------------------------------------------------------------- Total assets $ 226,717 $ 242,424 $ 233,425 ===================================================================================================================== LIABILITIES AND PARTNERS' CAPITAL Current liabilities: Short-term note payable to affiliates $ --- $ 39,601 $ 28,880 Accounts payable and accrued liabilities 21,321 19,614 18,356 Customer prepayments 3,059 6,389 129 Current portion of long-term debt and capital lease obligations 1,460 847 1,145 --------------------------------------------------------------------------------------------------------------------- Total current liabilities 25,840 66,451 48,510 Long-term debt and capital lease obligations 8,750 --- 461 Long-term payable to affiliates 5,316 5,316 5,316 Partners' capital 186,811 170,657 179,138 --------------------------------------------------------------------------------------------------------------------- Total liabilities and partners' capital $ 226,717 $ 242,424 $ 233,425 =====================================================================================================================
See accompanying Notes to the Consolidated Financial Statements. 2 TERRA NITROGEN COMPANY, L.P. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per unit amounts) (unaudited)
Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ------------ ----------- ------------ ------------- Revenues $ 85,378 $ 68,595 $ 155,095 $ 122,379 Other income (expense) 131 (31) 300 258 ----------------------------------------------------------------------------------------------------------------------- Total revenues 85,509 68,564 155,395 122,637 Cost of goods sold 69,874 64,039 132,454 117,802 ----------------------------------------------------------------------------------------------------------------------- Gross profit 15,635 4,525 22,941 4,835 Operating expenses 3,492 1,890 5,870 4,107 ----------------------------------------------------------------------------------------------------------------------- Operating income 12,143 2,635 17,071 728 Interest expense (278) (556) (987) (988) Interest income 1 342 72 642 ----------------------------------------------------------------------------------------------------------------------- Net income $ 11,866 $ 2,421 $ 16,156 $ 382 ======================================================================================================================= Net income allocable to limited partners' interest $ 11,629 $ 2,373 $ 15,833 $ 374 ======================================================================================================================= Net income per limited partnership unit $ 0.63 $ 0.13 $ 0.86 $ 0.02 =======================================================================================================================
See accompanying Notes to the Consolidated Financial Statements. 3 TERRA NITROGEN COMPANY, L.P. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Six Months Ended June 30, 2000 1999 ---------- --------- Operating activities: Net income $ 16,156 $ 382 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,382 6,475 Changes in operating assets and liabilities: Receivables (110) (12,660) Inventories 17,774 8,641 Prepaid expenses (473) 221 Accounts payable, accrued liabilities and customer prepayments (1,625) (969) Change in other assets --- 92 Other 3,035 2,832 -------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 41,139 5,014 Net cash used in investing activities: Capital expenditures (414) (4,028) Financing activities: Net changes in short-term borrowings (39,601) 5,293 Issuance (repayment) of long-term debt and capital lease obligations 9,364 (7,360) -------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (30,237) (2,067) -------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 10,488 (1,081) Cash and cash equivalents at beginning of period 13 1,094 -------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 10,501 $ 13 ==============================================================================================================
See accompanying Notes to the Consolidated Financial Statements. 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, 1999. 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 2% share allocable to the General Partner for the six months ended June 30, 2000 and 1999, respectively, by 18,501,576 limited partner units. 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 as Available Cash for such taxable year was distributed to the General Partner and the Limited Partners. If there is no cash distribution, net income is allocated to the Limited Partners and the General Partner generally based on their respective ownership percentages. 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 amounts. 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. No distributions were made in 2000 or 1999. 3. Financing Arrangements The Partnership has an arrangement for demand deposits and notes with an affiliate to allow for excess Partnership cash to be deposited with or funds to be borrowed from Terra Capital, Inc., the parent of the General Partner. At June 30, 2000 and 1999, no amounts were deposited with Terra Capital, Inc. The amount of the demand notes was $13.7 million at June 30, 1999, and bore interest at the rate paid by Terra Capital on its short-term borrowings. At June 30, 2000, no demand notes were outstanding. 4. Natural gas costs Natural gas is the principal raw material used in the Partnership's production of nitrogen products. The Partnership enters into forward pricing arrangements for natural gas provided that such arrangements would not result in costs that would be greater than expected selling prices for nitrogen products. Under those conditions, the Partnership's natural gas procurement policy is to effectively fix or cap the price of between 25% and 80% of its natural gas requirements for a one-year period and up to 50% of its natural gas requirements for the subsequent two-year period through supply contacts, financial derivatives and other forward pricing techniques. The financial derivatives are traded in months forward and settlement dates are 5 scheduled to coincide with gas purchases during that future period. These contracts reference physical natural gas prices or appropriate NYMEX futures contract prices. Contract physical prices are frequently based on the Henry Hub Louisiana price, but natural gas supplies for the Partnership's production facilities are physically purchased from various suppliers 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 Partnership has entered into forward pricing positions for a portion of its natural gas requirements for the remainder of 2000 and part of 2001, consistent with its policy. As a result of its policies, the Partnership has reduced the potential adverse financial impact of natural gas price increases during the forward pricing period, but conversely, if natural gas prices were to fall, the Partnership will incur higher costs. Contracts were in place at June 30, 2000 to cover 21% of natural gas requirements for the succeeding twelve months. Unrealized gains from forward pricing positions totaled $15.3 million as of June 30, 2000. The amount recognized by the Partnership will be dependent on prices in effect at the time of settlement. 5. Idled facilities On June 1, 2000, the Partnership reported that it would not restart ammonia and urea production at its Blytheville, Arkansas plant in response to high natural gas costs. The plant is expected to resume operations on or about August 15, 2000. 6 Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Three months ended June 30, 2000 compared with three months ended June 30, 1999 Volumes and prices for the three-month periods ended June 30, 2000 and 1999 were as follows:
2000 1999 -------------------------- -------------------------- Sales Average Sales Average Volumes Unit Price Volumes Unit Price (000 tons) ($/ton) (000 tons) ($/ton) -------------------------- -------------------------- Ammonia 133 $152 154 $125 UAN 741 77 622 64 Urea 57 140 98 98
Revenues for the quarter ended June 30, 2000 increased $16.9 million, or 25%, compared with the same quarter in 1999 primarily as the result of higher prices for all Partnership products and increased demand for UAN. The higher prices reflected lower industry inventories as a result of permanent plant closures by other producers and production curtailment during the last half of 1999. Second quarter gross profits increased $11.1 million from 1999. The increased sales prices and volumes for UAN increased gross profits by $17 million. These increases were partly offset by higher natural gas costs, which increased from $2.18/MMBtu in 1999 to $3.03/MMBtu in 2000 (net of forward pricing gains or losses). Operating expenses were $1.6 million higher in 2000 than in 1999 primarily as the result of absorbing a higher percentage of the General Partner's operating expenses after its Distribution business was sold. Net interest expense was $278,000 lower than the 1999 second quarter due to decreased levels of short-term debt. 7 SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1999 Volumes and prices for the six-month periods ended June 30, 2000 and 1999 were as follows:
2000 1999 ---------------------------- ---------------------------- Sales Average Sales Average Volumes Unit Price Volumes Unit Price (000 tons) ($/ton) (000 tons) ($/ton) ---------------------------- ---------------------------- Ammonia 261 $142 285 $115 UAN 1,343 70 1,092 63 Urea 185 127 225 94
Revenues for the six months ended June 30, 2000 increased $32.8 million, or 27% compared with the 1999 period as a result of increased sales prices of all of the Partnership products, caused primarily by lower industry wide inventory levels. In addition, UAN volumes increased 23%, while volumes of ammonia and urea decreased 8% and 18%, respectively. UAN volumes increased due to plant closures by other domestic producers as well as mild winter weather, which promoted early planting and top dressing in the Southeast. Gross profit during the 2000 first six months totaled $22.9 million or $18.1 million more than the prior year period. Approximately $23 million of the gross profit increase is attributable to higher prices. Lower freight and storage costs contributed an additional $5 million to 2000 gross profits, but was more than offset by higher natural gas costs, which increased approximately $13 million over the same 1999 period. Natural gas costs, net of forward pricing gains and losses, averaged $2.73/MMBtu during the 2000 first half compared to $2.22/MMBtu in 1999. Operating expenses were $1.8 million higher in 2000 than in 1999, primarily as the result of absorbing a higher percentage of the General Partner's operating expenses after its Distribution business was sold. Net interest expense of $987,000 was comparable to the first six months of 1999. Interest income decreased $570,000 compared with the 1999 period due to lower levels of cash and short-term investments. Capital resources and liquidity Net cash flows from operations in the first six months of 2000 totaled $41.1 million with $18.6 million generated from reductions to working capital balances and $22.5 million of operating income after non-cash charges. Most of the working capital reductions result from lower inventory balances which reflect, in part, the Partnership's decision in late-May to idle the Blytheville plant in response to high natural gas costs. The plant is expected to resume operations on or about August 15, 2000. The Partnership's principal needs for funds are for support of its working capital and capital expenditures. The Partnership intends to fund its needs primarily through net cash flows from operating activities, and, to the extent required, from funds borrowed from others, including borrowings from Terra Capital, Inc., the parent of the General Partner. The Partnership believes that such sources of funds will be adequate to meet the Partnership's working capital needs and fund the Partnership's capital expenditures for at least the next 12 months. 8 On April 7, 2000, the Partnership with Terra Industries Inc., Terra Capital and other affiliates entered into an asset based financing agreement that provides for the Partnership to borrow amounts generally up to 85% of eligible receivables plus 65% of eligible inventory plus $10 million. The new financing agreement, which expires January 2003, bears interest at floating rates and is secured by substantially all of the Partnerships assets. The new agreement also requires the Partnership and its affiliates to 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, Terra Industries is required to maintain minimum levels of earnings before interest, income taxes, depreciation and amortization (as defined in the financing agreement) computed on a quarterly basis. Failure to meet these covenants would require Terra to incur additional costs to amend the bank facilities or could result in termination of the facilities. 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. In consideration of the Partnership's need to replenish inventories at June 30, 2000, the General Partner established reserves that resulted in no Available Cash generated during the 2000 second quarter. Capital expenditures Capital expenditures totaled $0.4 million for the first six months of 2000. For the remainder of 2000, the Partnership plans to spend less than $2 million for routine equipment replacement. Limited Call Right If at any time not more than 25% of the 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 in accordance with the terms of the TNCLP partnership agreement. TNCLP is required to give at least 30 but not more than 60 days notice of its decision to purchase the outstanding Common Units. The purchase price per unit is required to 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 90 days preceding the date the purchase is announced. The General Partner and its affiliates own 72.4% of the Common Units as of July 31, 2000. Under existing authorization of the board of directors of Terra Industries, Inc., the indirect parent of the General Partner, additional Common Units may be purchased from time to time on the open market and through privately negotiated transactions by affiliates of the General Partner and such purchases may bring this ownership level above 75%. Although TNCLP and its affiliates reserve the right to consider in the future whether to acquire all of the Common Units, they do not have any present plan or intention to do so. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging 9 Activities". SFAS 133 is effective for fiscal years beginning after June 15, 2000, as amended by SFAS 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 33". The Partnership has reviewed SFAS 133 and intends to implement the standard on January 1, 2001. At this time, the Partnership has not determined the impact SFAS 133 will have on its financial position, results of operations or cash flows. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements". SAB 101 summarizes the SEC's view in applying generally accepted accounting principles to selected revenue recognition issues. The application of the guidance in SAB 101 will be required in the Company's fourth quarter of 2000. The Partnership does not expect the adoption of SAB 101 to have material effect on its financial statements. 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: general economic conditions within the agricultural industry, competitive factors and price changes (principally, sales prices of 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 Partnership's Securities and Exchange Commission filings, in particular the "Factors that Affect Operating Results" section of its most recent Form 10-K. 10 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 27 Financial Data Schedule. (EDGAR only) (b) Reports on Form 8-K: None 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/ Francis G. Meyer ------------------------------ Francis G. Meyer Vice President (Principal Accounting Officer) Date: July 28, 2000 11