-----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, QJhR1Mal+V65RndjHYUMli9J0HZdM0DvJGuwwlOEMH7BiaKHia4XLX/Bevfhp0vR 7Ft13WC7g8IFORmuvdGaiA== 0000950131-02-000973.txt : 20020415 0000950131-02-000973.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950131-02-000973 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020319 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 033-43007 FILM NUMBER: 02578904 BUSINESS ADDRESS: STREET 1: TERRA CENTRE 600 FOURTH STREET STREET 2: PO BOX 6000 CITY: SIOUX CITY STATE: IA ZIP: 51102-6000 BUSINESS PHONE: 7122771340 MAIL ADDRESS: STREET 1: TERRA CENTER 600 FOURTH STREET STREET 2: PO BOX 6000 CITY: SIOUX CITY STATE: IA ZIP: 51102-6000 10-K405 1 d10k405.txt FORM 10-K ================================================================================ FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------------- (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 Commission file number 1-10877 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from __________ to __________ 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 51102-6000 600 Fourth Street (Zip Code) P.O. Box 6000 Sioux City, Iowa (712) 277-1340 (Address of principal executive offices) (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------- Common Units Representing Limited Partner Interests New York Stock Exchange Evidenced by Depositary Receipts Securities registered pursuant to section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the registrant's common units held by nonaffiliates as of the close of business on January 31, 2002 was $32,057,305,90. ================================================================================ TABLE OF CONTENTS
PART I ------ Page Items 1 and 2. Business and Properties........................................................... 1 Item 3. Legal Proceedings................................................................. 6 Item 4. Submission of Matters to a Vote of Unitholders.................................... 6 PART II ------- Item 5. Market for Registrant's Units and Related Unitholder Matters...................... 7 Item 6. Selected Financial Data........................................................... 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................... 9 Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................ 9 Item 8. Financial Statements and Supplementary Data....................................... 9 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................................................... 9 PART III -------- Item 10. Directors and Executive Officers of the Registrant................................ 10 Item 11. Executive Compensation............................................................ 11 Item 12. Security Ownership of Certain Beneficial Owners and Management.................... 15 Item 13. Certain Relationships and Related Transactions.................................... 16 PART IV ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................... 17 Signatures........................................................................................ 21
TERRA NITROGEN COMPANY, L.P. FORM 10-K PART I Items 1 and 2. Business and Properties General Terra Nitrogen Company, L.P. ("TNCLP") is a Delaware limited partnership that conducts its operations through an operating partnership subsidiary, Terra Nitrogen, Limited Partnership (the "Operating Partnership"). Terra Nitrogen Corporation ("TNC" or "General Partner"), a Delaware corporation, is the general partner of both TNCLP and the Operating Partnership (collectively the "Partnership," unless the context otherwise requires) and owns a consolidated 2.0% interest in the Partnership. TNC is an indirect, wholly-owned subsidiary of Terra Industries Inc. ("Terra" or "the company"), a Maryland corporation. Terra is an industry leader in the production and marketing of both nitrogen products and methanol. Terra is one of the largest North American producers of anhydrous ammonia and nitrogen solutions and is the largest producer of ammonium nitrate in the United Kingdom. In addition, Terra is the largest U.S. producer of methanol. Ownership of TNCLP is comprised of the general partner interest and the limited partner interests. The limited partner interests consist of 18,501,576 common units. Terra and its subsidiaries owned 13,889,014 common units as of December 31, 2001 and the balance are traded on the New York Stock Exchange under the symbol "TNH." The common units are referred to herein individually as a "unit" and collectively as "units." Partnership Products The Partnership is one of the largest U.S. producers and distributors of nitrogen fertilizer products, which are used primarily by farmers to improve the yield and quality of their crops. The Partnership's principal products include ammonia, urea and urea ammonium nitrate solution ("UAN"). The Partnership's product sales are heavily weighted toward UAN, and all of its products are sold on a wholesale basis. Although these different nitrogen products are often interchangeable, each has its own characteristics, and customer product preferences vary according to the crop planted, soil and weather conditions, regional farming practices, relative prices and the cost and availability of appropriate storage, handling and application equipment. The Partnership's principal nitrogen products are described in greater detail below: Anhydrous Ammonia. The Partnership produces anhydrous ammonia (often referred to simply as "ammonia"), the simplest form of nitrogen fertilizer and the feedstock for the production of other nitrogen fertilizers, at its two facilities which are located in Verdigris, Oklahoma and Blytheville, Arkansas. Ammonia is produced by reacting natural gas with steam and air at high temperatures and pressures in the presence of catalysts. Ammonia has a nitrogen content of 82% by weight and is generally the least expensive form of fertilizer per pound of nitrogen. However, because it is a gas that must be kept under pressure and refrigerated, ammonia is more costly to store, ship and apply than other nitrogen fertilizer products and must be applied during a shorter period of the growing season. Ammonia must be injected into the soil by specialized equipment, and soil conditions limit its application. In addition, in certain areas, especially in lesser-developed countries, dealers and farmers lack the equipment necessary to store, ship and apply ammonia and are required to use other forms of nitrogen fertilizer. Ammonia can be upgraded into solid or liquid fertilizers, like urea and UAN, which are easier to transport, store and apply than ammonia. Urea. The Partnership produces granular urea at its Blytheville, Arkansas facility by upgrading portions of its ammonia production. Solid urea is produced by converting ammonia into liquid urea that is then dehydrated, turned into a solid, and either prilled or granulated. Prilled materials are the most common form of solid urea. Granular urea may 1 command a modest price premium in certain markets because the consistency in size of the granules (relative to prills) results in a more controllable spreading pattern and better blending characteristics. Urea has a nitrogen content of 46% by weight, the highest level for any solid nitrogen product. Dry urea is used both as a direct application fertilizer and as an ingredient in the dry bulk blending of mixed fertilizer grades. Urea is transported and stored in bulk or in bags and is often blended by distributors into customized fertilizers containing other nutrients. In addition, urea liquor (liquid) is used as an animal feed supplement and in industrial applications. UAN. The Partnership produces UAN at its Verdigris, Oklahoma facility and at the Blytheville, Arkansas facility by upgrading portions of its ammonia production. UAN is produced by combining liquid urea and ammonium nitrate in water. UAN is a liquid fertilizer and, unlike ammonia, is odorless and does not need to be refrigerated or pressurized for transportation or storage. The nitrogen content of UAN is typically 28% to 32% by weight. As a liquid, UAN has many advantages over solid fertilizers and gaseous ammonia. UAN may be applied more uniformly than non-liquid products and may be mixed with various crop protection products or other nutrients, permitting the farmer to apply several materials simultaneously, thus reducing energy and labor costs. In addition, UAN, unlike ammonia, may be applied from ordinary tanks and trucks and can be applied to the soil either through spraying, injecting or through irrigation systems throughout the growing season. Due to its stable nature, UAN may be used for no-till row crops where fertilizer is spread on the surface of the soil but may be subject to volatilization losses. The use of conservation tilling, which reduces erosion, has increased in the United States over the past decade. This trend, if continued, will likely increase UAN demand. Marketing and Distribution The Partnership sells its products primarily in the Central and Southern Plains and Cornbelt regions of the United States. The Partnership's two facilities are located near the major crop producing and consuming areas of the United States, and the Partnership has ready access to barge, truck and rail transportation at both facilities. In addition, the Verdigris facility has an ammonia pipeline to transport product to primary markets. The Partnership's products are marketed and distributed through an organization based in Sioux City, Iowa that provides combined services to the Partnership and to Terra. For further information on the combined organizations of the General Partner and its affiliates, see "Certain Relationships and Related Transactions." In addition, the Partnership occasionally exports UAN through an export marketing association comprised of four domestic UAN producers. All of the Partnership's sales are at the wholesale level. The Partnership's customers for fertilizer products are dealers, national farm retail chains, distributors and other fertilizer producers and traders. National farm retail chains have both distribution and application capabilities. Distributors operate as wholesalers and sell directly to dealers and national farm retail chains, which, in turn, sell directly to farmers. Many dealers maintain year-round storage capacity for inventory as well as application equipment. The majority of the Partnership's nitrogen fertilizer sales are made to dealers. No single customer accounted for more than 10% of the Partnership's 2001 sales. Production and Terminal Facilities Production Facilities. The Partnership's two facilities produce nitrogen fertilizer products. These facilities are located in or near the following locations and have the following production capacities: =========================== ======================================= Location Annual Capacity in Tons --------------------------- --------------------------------------- Ammonia/1/ Urea UAN-28 --------------------------- ------------ ----------- -------------- Blytheville, Arkansas 420,000 480,000 30,000 --------------------------- ------------ ----------- -------------- Verdigris, Oklahoma 1,050,000 - 2,180,000 --------------------------- ------------ ----------- -------------- Total 1,470,000 480,000 2,210,000 =========================== ============ =========== ============== /1/ Measured in gross tons of ammonia produced; net tons available for sale will vary with upgrading requirements. =================================================================== 2 The Partnership's manufacturing facilities are each designed to operate continuously, except for planned shutdowns (usually biennial) for maintenance and efficiency improvements. Capacity utilization (gross tons produced divided by capacity tons at expected operating rates and on-stream factors) of the Partnership's fertilizer manufacturing facilities was 81% in 2001, 89% in 2000 and 97% in 1999. Terra's capacity utilization was reduced in 2001 as a result of plant shutdowns due to high natural gas prices. The Partnership owns all of its manufacturing facilities in fee, unless otherwise stated below. All Partnership manufacturing facilities are subject to encumbrances in favor of lenders. The Verdigris, Oklahoma facility is made up of two ammonia plants, two nitric acid plants, two UAN plants and a port terminal. The Partnership owns the plants in fee, while the port terminal is leased from the Tulsa-Rogers County Port Authority. The leasehold interest on the port terminal is scheduled to expire in April 2004, and the Partnership has an option to renew that lease for an additional five-year term. The Blytheville, Arkansas facility consists of an anhydrous ammonia plant, a granular urea plant and a UAN plant. The ammonia plant is leased from the City of Blytheville at a nominal annual rate. The ammonia plant lease is scheduled to expire in November 2004, and the Partnership has an option to extend the lease for eleven successive terms of five years each at the same rental rate. The Partnership has an unconditional option to purchase the plant for a nominal price at the end of the lease term (including any renewal term). The urea plant is also leased from the City of Blytheville. The urea plant lease is scheduled to expire in November 2005, and the Partnership has an option to extend the lease for three successive terms of five years each at the same rental rate. The Partnership also has a similar, unconditional option to purchase the urea plant for a nominal price. Terminal Facilities. The Partnership owns and operates three terminals used to store and distribute UAN to customers. The Partnership owns UAN terminals near Dublin, Indiana (Henry and Wayne Counties), Blair, Nebraska (Washington County), and Pekin, Illinois (Tazewell County). In addition, the Blair, Nebraska terminal stores and distributes Anhydrous Ammonia. Prior to November 30, 2000, the Partnership held leasehold interests in portions of the Blair and Pekin terminals under a lease with Conoco, Inc. The Partnership exercised its option to purchase these leasehold interests on November 30, 2000. A Partnership-owned facility in Shattuc, Illinois was closed on November 1, 2000 and is currently for sale. Breakdown of Revenue by Product The approximate revenue contributions of the Partnership's principal products (based upon percentages of the Partnership's consolidated revenues) for each of the last three years are as follows: 2001 2000 1999 ---- ---- ---- Ammonia 20% 21% 25% UAN 66% 66% 58% Urea 14% 13% 17% ---- ---- ---- 100% 100% 100% Credit The Partnership's credit terms are generally 15-30 days from date of shipment, but may be extended for longer periods during certain sales seasons consistent with industry practices. The Partnership's bad debt write-offs have been less than $1 million annually for each of the past three years. Seasonality and Volatility The fertilizer business is seasonal, based upon the planting, growing and harvesting cycles. Inventories must be accumulated to allow for uninterrupted customer deliveries and require significant storage capacity. This seasonality generally results in higher fertilizer prices during peak periods, with prices normally reaching their highest point in the spring, decreasing in the summer, and increasing again in the fall as depleted inventories are restored. 3 The fertilizer business can also be volatile as a result of a number of other factors. The most important of these factors are: . Weather patterns and field conditions (particularly during periods of high fertilizer consumption); . Quantities of fertilizers imported to and exported from North America; . Current and projected grain inventories and prices, which are heavily influenced by U.S. exports and worldwide grain markets; and . Price fluctuations in natural gas, the principal raw material used to produce nitrogen fertilizer. Governmental policies may directly or indirectly influence the number of acres planted, the level of grain inventories, the mix of crops planted and crop prices. Nitrogen fertilizer price levels are influenced by world supply and demand for ammonia and nitrogen-based products. Long-term demand is affected by population growth and rising living standards that determine food consumption. Shorter-term demand is affected by world economic conditions and international trade decisions, such as China's cessation of urea imports in recent years. Supply is affected by increasing worldwide capacity and the availability of nitrogen product exports from major producing regions such as the former Soviet Union, the Middle East and South America. During the mid-to-late 1990's favorable nitrogen prices in the industry spurred capacity additions in the form of new and expanded production facilities. More recently, depressed U.S. prices and margins for nitrogen products have resulted in some curtailments or shutdowns of North American capacity. Some, but not all, of these shutdowns are expected to be permanent. Raw materials The principal raw material used to produce manufactured nitrogen products is natural gas. The Partnership believes there is a sufficient supply of natural gas for the foreseeable future and has entered into firm contracts to minimize the risk of interruption or curtailment of natural gas supplies during the peak-demand winter season. Terra's natural gas procurement policy, which is also applicable to the Partnership's gas procurement, is to fix or cap the price of approximately 25% to 80% of its natural gas requirements for a rolling one-year period and up to 50% of its natural gas requirements for the subsequent two-year period, provided that such arrangements would not result in costs that would be greater than the expected selling prices for Terra's finished products. In response to extremely volatile natural gas costs during the last six months of 2000 and uncertainties regarding the ability of finished goods prices to recover the increases in gas costs, Terra's Board of Directors amended the hedging policy and eliminated the minimum hedge requirement through the end of 2001. Early in 2002, the Board revised the hedging policy to permit hedging of 20% - 80% of our natural gas requirements for the upcoming year and up to 50% of the requirements for the following two-year period. Capping natural gas prices is accomplished through various supply contracts, financial derivatives and other instruments. A significant portion of global nitrogen products production occurs at facilities with access to fixed-priced natural gas supplies. These facilities' natural gas costs have been and could continue to be substantially lower than the Partnership's. If natural gas prices rise, the Partnership may benefit from its use of forward-pricing techniques. Conversely, if natural gas prices fall, the Partnership may incur costs above the then-available spot market price. The settlement dates of forward-pricing contracts coincide with gas purchase dates. Forward-pricing contracts are based on a designated price, which price is referenced to market natural gas prices or appropriate NYMEX futures contract prices. Transportation The Partnership uses several modes of transportation to receive materials and ship product to customers, including railroad cars, common carrier trucks, barges and common carrier pipelines. The Partnership uses approximately 60 liquid, dry and anhydrous ammonia fertilizer terminal storage facilities in numerous states. Railcars are the major source of transportation at the Partnership's manufacturing facilities. Terra currently leases approximately 2,120 railcars. Terra also owns 10 nitric acid railcars. In addition, the Verdigris facility distributes ammonia through a common carrier pipeline. The Partnership transports purchased natural gas to its Verdigris, Oklahoma facility via an intrastate pipeline. This pipeline is not an open-access carrier, but is nonetheless part of a widespread regional system through which Verdigris can receive natural gas from any major Oklahoma source. The Partnership also has limited access to out-of-state natural 4 gas supplies for this facility. The Partnership transports purchased natural gas for its Blytheville, Arkansas facility, which is delivered by a natural gas pipeline company. Research and Development The Partnership does not currently have any significant, ongoing research and development efforts. Competition Nitrogen products are a global commodity, and the Partnership's customers include distributors, industrial end-users, dealers and other fertilizer producers. Customers base purchasing decisions principally on the delivered price and availability of the product. The Partnership competes with a number of domestic and foreign producers, including state-owned and government-subsidized entities. Some of the Partnership's principal competitors may have greater total resources and may be less dependent on earnings from nitrogen fertilizer sales than the Partnership. Some foreign competitors may have access to lower cost or government-subsidized natural gas supplies, particularly those with facilities in warmer climates. Natural gas comprises a significant portion of the raw materials cost of the Partnership's nitrogen products. Competitive natural gas purchasing is essential to maintaining a low-cost product position. The Partnership competes with other manufacturers of nitrogen products on delivery terms and availability of products, as well as on price. Environmental and Other Regulatory Matters The Partnership's operations are subject to various federal, state and local environmental, health and safety laws and regulations, including laws relating to air quality, hazardous and solid wastes and water quality. The Partnership is also involved in the manufacture, handling, transportation, storage and disposal of materials that are or may be classified as hazardous or toxic by federal, state or other regulatory agencies. Precautions are taken to reduce the likelihood of accidents involving these materials. If such materials have been or are disposed of at sites that are targeted for investigation and remediation by federal or state regulatory authorities, the Partnership may be responsible under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or analogous laws for all or part of the costs of such investigation and remediation. Freeport-McMoRan Resource Partners, Limited Partnership (a former owner and operator of the Partnership's production facilities) has retained liability for certain environmental matters originating prior to the acquisition of these facilities by the Partnership. The Partnership may be required to install additional air and water quality control equipment, such as low NOX burners, scrubbers, ammonia sensors and continuous emission monitors, at certain of its facilities in order to maintain compliance with Clean Air Act, Clean Water Act and similar requirements. These equipment requirements are also typically applicable to competitors as well. The Partnership estimates that the cost of additional equipment to comply with these requirements in 2002 and beyond will be less than $5 million. The Partnership endeavors to comply in all material respects with applicable environmental, health and safety regulations and has incurred substantial costs in connection with such compliance. Because these regulations are expected to continue to change and generally to be more restrictive than current requirements, the costs of compliance will likely increase. The Partnership does not expect its compliance with such regulations to have a material adverse effect on its results of operations, financial position or net cash flows. Revenues and Assets Terra's revenues from external customers, measure of profit and loss and total assets for the years 1999-2001 are set forth in the Notes to the Consolidated Financial Statements. Terra's revenues and assets according to geography are also set forth in the Notes to the Consolidated Financial Statements. Employees The Partnership does not have any employees, officers or directors. 5 The General Partner is responsible for the management of the Partnership. As of December 31, 2001, the General Partner had 308 employees. None of the General Partner's employees that work in connection with the Partnership's business are subject to collective bargaining agreements. The General Partner considers its labor relations to be good. Limited Call Right Since less than 25% of the issued and outstanding units are held by non-affiliates of the General Partner, the Partnership, at the General Partner's sole discretion, may call, or assign to the General Partner or its affiliates its right to acquire, all such outstanding units held by non-affiliated persons. The General Partner and its affiliates owned 75.1% of the common units at December 31, 2001. If the General Partner elects to acquire all outstanding units, TNCLP is required to give at least 30 but not more than 60 days notice of its decisions to purchase the outstanding units. The purchase price per unit will be the greater of (1) the average of the previous 20 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. Item 3. Legal Proceedings There is no pending or threatened litigation to the knowledge of the Partnership that would have a material adverse effect on the business or financial condition of the Partnership. Item 4. Submission of Matters to a Vote of Unitholders No items were submitted to a vote of unitholders of TNCLP during the fourth quarter of 2001. 6 PART II Item 5. MARKET FOR REGISTRANT'S UNITS AND RELATED UNITHOLDER MATTERS TNCLP's common units are listed on the New York Stock Exchange. The high and low sales prices of the common units for each quarterly period for 2001 and 2000, as reported on the New York Stock Exchange Composite Price History, were as follows:
2001 2000 ---------------------------- ------------------------------- Quarter High Low High Low 1st $9.5000 $6.8750 $7.8125 $3.8750 2nd 9.5500 6.7000 6.2500 3.6250 3rd 8.8500 5.0000 6.2500 3.5000 4th 6.4500 5.0000 8.8125 5.3125
Based on information received from TNCLP's transfer and servicing agent, the number of registered unitholders as of February 28, 2002 is 374. TNC owned 11,172,414 common units as of December 31, 2001. Terra Capital, Inc. owned 2,716,600 common units as of December 31, 2001. The quarterly cash distributions paid to the holders of common units and the General Partner in 2001 and 2000 were as follows:
Amount Per Amount Common Distributed to Unit General Partner ----------------- ---------------------- 2001 ---- First Quarter $.22 $82,000 Second Quarter $.22 $84,000 Third Quarter - 0 Fourth Quarter - 0 2000 ---- First Quarter - 0 Second Quarter - 0 Third Quarter - 0 Fourth Quarter $.22 $83,000
Under TNCLP's limited partnership agreement, cash distributions to unitholders are based on Available Cash for the quarter as defined therein. 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. There are a number of factors which affect the amount of taxable income reported to unitholders including Partnership earnings, capital spending and cash distributions. Item 6. SELECTED FINANCIAL DATA SELECTED HISTORICAL FINANCIAL AND OPERATING DATA The following table sets forth the Partnership's historical financial and operating data for each of the five years ended December 31, 2001. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and related notes included elsewhere in this report. 7
Selected Historical Financial and Operating Data ----------------------------------------------------------------------------- Year Ended December 31, ----------------------------------------------------------------------------- 2001 2000 1999 1998 1997 --------- --------- --------- ---------- --------- (Dollars in Thousands, except Income per Unit and Average Realized Prices) Income Statement Data: Revenues $ 304,872 $ 320,239 $ 257,166 $ 282,772 $ 375,837 Other income 953 744 787 1,326 1,353 --------- --------- --------- --------- --------- Total revenues 305,825 320,983 257,953 284,098 377,190 Cost of goods sold 304,648 288,468 256,956 235,319 261,364 --------- --------- --------- --------- --------- Gross profit 1,177 32,515 997 48,779 115,826 Operating expenses 10,074 11,493 7,797 9,179 12,147 --------- --------- --------- --------- --------- Operating income (8,897) 21,022 (6,800) 39,600 103,679 Interest expense (924) (1,436) (1,947) (2,288) (2,201) Interest income 2 623 649 1,463 3,660 --------- --------- --------- --------- Net income (loss) $ (9,819) $ 20,209 $ (8,098) $ 38,775 $ 105,138 ========= ========= ========= ========= ========= Net income (loss) per limited partner unit $ (0.52) $ 1.07 $ (0.43) $ 1.60 $ 4.17 ========= ========= ========= ========= ========= Partnership Distributions Paid: Senior preference units $ - $ - $ - $ - $ 372 Common units 8,140 4,071 - 53,469 96,023 General partner 166 83 - 13,326 39,108 --------- --------- --------- --------- --------- Total partnership distributions $ 8,306 $ 4,154 $ - $ 66,795 $ 135,503 ========= ========= ========= ========= ========= Distributions Paid Per Unit: Senior preference units $ - $ - $ - $ - $ 1.21 ========= ========= ========= ========= ========= Common units $ 0.44 $ 0.22 $ - $ 2.89 $ 5.20 ============================================================================= Balance Sheet Data (at period end): Net property, plant and equipment $ 136,335 $ 147,597 $ 157,275 $ 164,689 $ 169,533 Total assets 210,417 224,034 242,424 236,077 253,828 Long-term debt and capital lease obligations, including current maturities 8,200 9,250 847 8,965 10,036 Partners' capital 167,500 186,712 170,657 178,755 206,775 Operating Data: Production (000's tons): Ammonia-net of upgrades 226 332 452 485 487 UAN 1,982 2,184 2,114 2,270 2,299 Urea 140 264 395 492 496 --------- --------- --------- --------- --------- Total production 2,348 2,780 2,961 3,247 3,282 Sales Volume (000's tons): Ammonia 259 373 479 456 475 UAN 1,942 2,409 2,191 2,151 2,249 Urea 290 282 417 453 496 --------- --------- --------- --------- --------- Total sales 2,491 3,064 3,087 3,060 3,220
8 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information with respect to management's discussion and analysis of financial condition and results of operations contained in Exhibit 13 hereto is incorporated herein by reference. Item 7A. QUANTITATIVE AND QUALTITATIVE DISCLOSURES ABOUT MARKET RISK Information with respect to quantitative and qualitative disclosures about market risk contained in Exhibit 13 hereto (primarily under the subheading "Risk Management and Financial Instruments" discussion) is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Partnership together with the report thereon of Deloitte & Touche LLP, independent auditors, contained in Exhibit 13 hereto are incorporated by reference. QUARTERLY FINANCIAL DATA (Unaudited) Summarized quarterly financial data are as follows (in thousands, except per unit amounts):
First Second Third Fourth Quarter Quarter Quarter Quarter ------------------------------------------------ 2001 - --------------------------------------- Revenues $ 65,632 $ 101,750 $ 55,751 $ 82,692 Gross profit 3,757 1,870 (8,858) 4,408 Net income (loss) 1,599 (922) (11,398) 902 Net income per limited partnership unit 0.09 (0.05) (0.61) 0.05 2000 - --------------------------------------- Revenues $ 79,534 $ 94,489 $ 66,896 $ 80,064 Gross profit 7,305 15,635 4,964 4,611 Net income 4,288 11,866 3,637 418 Net income per limited partnership unit 0.23 0.63 0.19 0.02
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There has been no change in accountants, nor has there been any matter of accounting principles or practices or financial disclosure, which in either case is required to be reported pursuant to this Item 9. 9 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT TNC, in its capacity as General Partner, manages and controls the activities of TNCLP and the Operating Partnership. Unitholders do not direct or participate in the management or control of either TNCLP or the Operating Partnership. The General Partner does not intend to establish any advisory board or similar body to which the Unitholders would be entitled to elect representatives. The Partnership has no directors or executive officers. Set forth below is certain information concerning the directors and executive officers of the General Partner. The sole stockholder of the General Partner elects the directors of the General Partner. All directors hold office until their successors are duly elected and qualified or their earlier resignation or removal. All officers of the General Partner serve at the discretion of the directors.
Directors: Age Position with the General Partner (Position with Terra Industries Inc.) Michael L. Bennett ........... 48 Director and President (President and Chief Executive Officer) Burton M. Joyce .............. 60 Chairman of the Board Dennis B. Longmire ........... 57 Director Francis G. Meyer ............. 50 Director and Vice President (Senior Vice President and Chief Financial Officer) Theodore D. Sands ............ 56 Director Robert W. Todd ............... 74 Director Principal Operating Executive Officers: Michael L. Bennett ........... 48 Director and President (President and Chief Executive Officer) Mark A. Kalafut .............. 48 Vice President, General Counsel and Corporate Secretary (Vice President, General Counsel and Corporate Secretary) Francis G. Meyer ............. 50 Director and Vice President (Senior Vice President and Chief Financial Officer) W. Mark Rosenbury ............ 54 Vice President (Senior Vice President and Chief Administrative Officer) Steven A. Savage ............. 57 Senior Vice President-Manufacturing
In 2001, the Audit Committee of the Board of Directors of TNC was composed of Messrs. Longmire, Sands and Todd. Mr. Joyce succeeded Mr. Todd on the Audit Committee after Mr. Todd left the board on December 31, 2001. The Audit Committee has authority to review policies and practices of TNC dealing with various matters relating to the financial condition and auditing procedures of TNC, the Partnership and the Operating Partnership. Mr. Bennett has been President of TNC since June 1998 and a director since March 1995. He has been President and Chief Executive Officer of Terra since April 2001, Executive Vice President and Chief Operating Officer of Terra from February 1997 to April 2001, President of Terra Distribution Division from November 1995 to February 1997 and Senior Vice President of Terra from February 1995 to February 1997. He was Senior Vice President, Distribution of Terra International from October 1994 to February 1997. He was Vice President, Northern Division thereof from January 1992 to October 1994. Mr. Joyce has been Chairman of the Board of Directors of TNC since June 1998. He was President and Chief Executive Officer of Terra from May 1991 through April 2001. Mr. Kalafut has been Vice President and General Counsel of TNC since July 2001 and Corporate Secretary since December 1999. He has been Vice President, General Counsel and Corporate Secretary of Terra since July 2001. He was Vice President and Associate General Counsel from April 1992 to July 2001 and General Counsel of Terra International, Inc. from April 1989 to April 1992. Mr. Longmire has been a director since April 1997. He has been Chairman of the Board and Chief Executive Officer of McCauley Bros., Inc. since September 1999; Chairman of the Board and Chief Executive Officer of Darling International, Inc. from 1994 to 1999; and Group Vice President of Central Soya Feed from 1990 to 1993. 10 Mr. Meyer has been Vice President of TNC since December 1994 and a director since March 1995. He has been Senior Vice President and Chief Financial Officer of Terra since November 1995. He was Vice President and Chief Financial Officer of Terra from November 1993 to November 1995. Mr. Rosenbury has been Vice President of TNC since March 2000 and was a director from November 1994 through April 1998. He has been a Senior Vice President and Chief Administrative Officer of Terra since August 1999; Vice President, European Operations of Terra and Managing Director of Terra Nitrogen U.K. from January 1998 to August 1999; and Vice President, Business Development and Strategic Planning of Terra from November 1995 to January 1998. Mr. Sands has been a director since July 2000. He has been the President of HAAS Capital, LLC since February 1999; and was Managing Director-Investment Banking and Coordinator-Global Metals/Mining Group of Merrill Lynch & Co. from 1978 to 1999. Mr. Savage has been Senior Vice President, Manufacturing since April 1995. He was Vice President, Engineering and Plant Manager, Verdigris facility from February 1990 to April 1995. Mr. Todd has been a director since March 1995. He was Vice President, Chemical Industry Services for Citibank, N.A. until retiring in June 1990. None of the executive officers or directors of TNC is related by blood, marriage or adoption to any other executive officer or director of TNC. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires the Partnership's executive officers, directors and greater than ten percent beneficial owners to file initial reports of ownership and reports of changes in beneficial ownership with the Securities and Exchange Commission ("SEC") and the New York Stock Exchange. Executive officers and directors are required by SEC regulations to furnish the Partnership with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms furnished to the Partnership and written representations from the Partnership's executive officers and directors, all of the Partnership's officers, directors and greater than ten percent beneficial owners made all required filings. Item 11. Executive Compensation TNCLP and the Operating Partnership have no executive officers or employees. The following table sets forth certain summary information concerning the combined compensation of the named executive officers of TNC, including compensation from Terra (a portion of which is allocated to the Partnership). These executive officers are those in office as of December 31, 2001 and are collectively referred to below as the "named executive officers." Compensation information is provided for the years 2001, 2000 and 1999. 11 SUMMARY COMPENSATION TABLE
============================================================================================================================ All Other Annual Compensation Long-Term Compensation Compensation/5/ - ---------------------------------------------------------------------------------------------------------------------------- Other Restricted Securities Name and Annual Stock Underlying Principal Position Year Salary /1/ Bonus/ 2/ Compensation /3/ Award(s)/4/ Options - ---------------------------------------------------------------------------------------------------------------------------- Michael L. Bennett 2001 $368,269 -- $2,372 $408,800/6/ -- $8,160 President 2000 310,577 $55,000 4,284 206,250/7/ -- 8,458 1999 322,346 -- -- -- 160,000 13,715 - ---------------------------------------------------------------------------------------------------------------------------- Burton M. Joyce 2001 162,347 -- 5,505 7,300/6/ -- 282,422 Chairman of the Board 2000 502,501 75,000 10,138 412,500/7/ -- 8,143 1999 612,020 -- -- -- 415,000 8,145 - ---------------------------------------------------------------------------------------------------------------------------- Mark A. Kalafut 2001 153,983 -- 2,372 73,000/7/ -- 7,391 Vice President, General Counsel 2000 137,395 13,000 4,284 13,103 and Corporate Secretary 1999 136,476 -- -- 15,886 - ---------------------------------------------------------------------------------------------------------------------------- Francis G. Meyer 2001 253,007 -- 2,669 116,800/6/ -- 10,669 Vice President 2000 226,539 23,000 4,749 165,000/7/ -- 8,446 1999 235,124 -- -- -- 100,000 9,558 - ---------------------------------------------------------------------------------------------------------------------------- W. Mark Rosenbury 2001 221,946 -- 2,372 116,800/6/ -- 10,137 Vice President 2000 208,827 24,000 20,798/8/ 154,688/7/ -- 9,571 1999 211,296 -- 34,575/9/ -- 90,000 9,610 - ---------------------------------------------------------------------------------------------------------------------------- Steven A. Savage 2001 209,846 -- 3,454 87,600/6/ -- 9,584 Sr. Vice President 2000 193,173 18,000 5,600 82,500/7/ -- 29,748 Manufacturing 1999 197,904 -- -- -- 50,000 37,707 ============================================================================================================================
/1/ For all years includes amounts deferred at the election of the named - executive officer under Terra's Employees' Savings and Investment Plan and Supplemental Deferred Compensation Plan. /2/ "Bonus" includes, for the applicable year of service, amounts awarded under - Terra's Incentive Award Program for Officers and Key Employees and includes portions thereof deferred at the election of the named executive officer under Terra's Supplemental Deferred Compensation Plan. Bonuses earned in one year are paid in the following year. Each year shown therefore indicates the salary earned and paid in that year and any bonus earned in that year and paid in the next year. /3/ "Other Annual Compensation" includes tax reimbursements or "gross-ups" with - respect to certain perquisites provided to the named executive officers. While the named executive officers receive certain other perquisites, such perquisites do not exceed the lesser of $50,000 or 10% of such officer's salary and bonus, except for Mr. Rosenbury as described below. /4/ This item shows the grant date value of restricted stock awards. The number - of such shares still subject to restriction and the value thereof (shown in parenthesis), at December 31, 2001 by each of the named executive officers is: Mr. Joyce: 202,500 ($708,750); Mr. Bennett: 240,000 ($840,000); Mr. Kalafut 25,000 ($87,500); Mr. Meyer: 120,000 ($420,000); Mr. Rosenbury: 115,000 ($402,500 and Mr. Savage: 70,000 ($245,000). During the restricted period, a holder of restricted shares is entitled to all benefits incidental to ownership of Terra common stock, including voting such shares and receiving such dividends as from time to time may be declared by the Board of Directors. /5/ "All Other Compensation" comprises amounts contributed, allocated or - accrued for the named executive officers under both Terra's Employees' Savings and Investment Plan and Supplemental Deferred Compensation Plan. The value accrued under Terra's Employees' Savings and Investment Plan and the value accrued under the Supplemental Deferred Compensation Plan (shown in parenthesis) in 2001 was: Mr. Bennett $8,160 and ($0); Mr. Joyce $7,422 and ($0); Mr. Kalafut $7,391 and ($0); Mr. Meyer $8,160 and ($2,509); Mr. Rosenbury $8,160 and ($1,977); Mr. Savage $8,160 and ($1424). In 2000, Mr. Bennett $8,458 and ($0); Mr. Joyce $8,143 and ($0); Mr. Kalafut $7,749 and ($5,354); Mr. Meyer $8,446 and ($0); Mr. Rosenbury $8,429 and ($1,142); Mr. Savage $10,431 and ($19,317). In 1999, Mr. Bennett $8,023 and ($5,692); Mr. Joyce $8,145 and ($0); Mr. Kalafut $7,697 and ($8,189); Mr. Meyer $8,008 and ($1,550); Mr. Rosenbury $8,020 and ($1,590); Mr. Savage $10,000 and ($27,707). In addition, "All Other Compensation" includes consulting service payments to Mr. Joyce in 2001 totaling $275,000 under Mr. Joyce's April 26, 2001 Retirement and Consulting Agreement. /6/ On August 2, 2001, Terra's Board of Directors approved, as recommended by - its Personnel Committee, the grant of the following restricted shares under Terra's 1997 Stock Incentive Plan: 140,000 to Mr. Bennett; 2,500 to Mr. Joyce; 25,000 to Mr. Kalafut; 40,000 to Mr. Meyer; 40,000 to Mr. Rosenbury; and 30,000 to Mr. Savage. The closing price per common share on the New York Stock Exchange ("NYSE") on the date of the award was $2.92. Except for Mr. 12 Joyce, the restrictions lapse on the earlier of (i) the business day following the third anniversary of the date of the award (i.e., August 3, 2004) or (ii) specified changes in control or ownership of Terra (as defined in the award). In regard to Mr. Joyce's stock grants, the restrictions lapse on the earlier of (i) the business day following the second anniversary of the date of the award (i.e., August 3, 2003) or (ii) specified changes in control or ownership of Terra (as defined in the award). /7/ On February 16, 2000, Terra's Board of Directors approved, as recommended - -- by its Personnel Committee, the grant of the following restricted shares under Terra's 1997 Stock Incentive Plan: 200,000 to Mr. Joyce; 100,000 to Mr. Bennett; 80,000 to Mr. Meyer; 75,000 to Mr. Rosenbury, and 40,000 to Mr. Savage. The closing price per common share on the New York Stock Exchange ("NYSE") on the date of the award was $2.0625. The restrictions lapse on the earlier of (i) the business day following the third anniversary of the date of award (i.e., February 17, 2003) or (ii) specified changes in control or ownership of Terra (as defined in the award). /8/ "Other Annual Compensation" for Mr. Rosenbury in 2000 consists of: (i) a - -- tax gross-up for excess U.K. taxes over hypothetical U.S. federal and state taxes - $20,029; and (ii) taxable reimbursement of expatriate living expenses while on assignment in the U.K. - $769. /9/ "Other Annual Compensation" for Mr. Rosenbury in 1999 consists of: (i) a - -- tax gross-up for excess U.K. taxes over hypothetical U.S. federal and state taxes - $15,325; and (ii) taxable reimbursement of expatriate living expenses while on assignment in the U.K. - $19,250. Option Exercises and Year-End Value Table The following table provides information concerning the exercise of stock options during 2001 and the number and value of unexercised options to purchase Terra common stock granted under Terra's stock incentive plans.
=================================================================================================================== Number of Number of Securities Value of Unexercised shares acquired Value Underlying Unexercised in-the-Money Options at Name on exercise in Realized Options at December 31, 2001 December 31, 2001 /1/ 2001 ------------------------------------------------------------ Exercisable Unexercisable Exercisable Unexercisable - ------------------------------------------------------------------------------------------------------------------- Michael L. Bennett -0- -0- $106,666 $53,334 -0- -0- Burton M. Joyce -0- -0- 826,666 138,334 -0- -0- Mark A. Kalafut -0- -0- 26,700 4,000 $28,000 $14,000 Francis G. Meyer -0- -0- 33,333 66,667 -0- -0- W. Mark Rosenbury -0- -0- 60,000 30,000 -0- -0- Steven A. Savage -0- -0- 33,333 16,667 -0- -0- ===================================================================================================================
/1/ Based on the closing price on the New York Stock Exchange Composite Price - -- History of Terra common stock on December 31, 2001 ($3.50). 13 PENSION PLAN TABLES The following table shows for Mr. Rosenbury and certain employees retiring in 2001 the estimated annual retirement benefit payable on a straight life annuity basis under the Employees' Retirement Plan (the "Retirement Plan") and Terra's Excess Benefit Plan (the "Excess Benefit Plan"), on a non-contributory basis, at various levels of accrued service and compensation. - -------------------------------------------------------------------------------- Remuneration Years of Credited Service 5 10 15 20 25 30 - -------------------------------------------------------------------------------- $150,000 $12,009 $24,017 $36,026 $48,035 $60,043 $72,052 250,000 20,759 41,517 62,276 83,035 103,793 124,552 500,000 42,634 85,267 127,901 170,535 213,168 255,802 750,000 64,509 129,017 193,526 258,035 322,543 387,052 1,000,000 86,384 172,767 259,151 345,535 431,918 518,302 - -------------------------------------------------------------------------------- Average compensation (as defined under the Retirement Plan) as of December 31, 2001 for Mr. Rosenbury was $370,936. The estimated credited years of service under the retirement plan for Mr. Rosenbury was 14. Certain other Terra executive officers and employees, including Messrs. Bennett, Kalafut, Meyer and Savage, are entitled to the estimated annual retirement benefit (payable on a straight life annuity basis) under the Retirement Plan and Excess Benefit Plan as set forth in the following table: - -------------------------------------------------------------------------------- Remuneration Years of Credited Service 5 10 15 20 25 30 - -------------------------------------------------------------------------------- $150,000 $10,509 $21,017 $31,526 $42,035 $52,543 $63,052 250,000 18,259 36,517 54,776 73,035 91,293 109,552 500,000 37,634 75,267 112,901 150,535 188,168 225,802 750,000 57,009 114,017 171,026 228,035 285,043 342,052 1,000,000 76,384 152,767 229,151 305,535 381,918 458,302 - -------------------------------------------------------------------------------- Average compensation (as defined under the Retirement Plan) as of December 31, 2001 for Mr. Bennett was $378,964; for Mr. Kalafut $163,394; for Mr. Meyer $311,029; and for Mr. Savage $235,061. The estimated credited years of service under the Retirement Plan for each such officer was as follows: Mr. Bennett - 28; Mr. Kalafut - 12; Mr. Meyer - 19; and Mr. Savage - 14. "Compensation" under the Retirement Plan includes the total salary and wages paid to a participant, including bonuses, overtime, commissions and elective contributions made by Terra on behalf of the participant pursuant to Internal Revenue Code (the "Code") sections 401(k) or 125. Covered earnings are limited by Section 401(a)(17) of the Code to $170,000 in 2001. The above benefits are subject to the limitations of Section 415 of the Code, which provides for a maximum annual payment of approximately $140,000 in 2001. Under the Excess Benefit Plan, however, Terra will supplement those benefits so that the amount the participant will receive will be equal to the amount that would have been received under the Retirement Plan but for such limitations. "Compensation" under the Excess Benefit Plan also includes amounts deferred under the Supplemental Deferred Compensation Plan. Employee Contracts, Termination of Employment and Change in Control Arrangements Terra's chief executive officer and each of the other named executive officers are party with Terra to an executive retention agreement. Each such agreement provides the executive with certain benefits if his employment is terminated under specified conditions. To receive benefits, the executive must be terminated within two years of a change of control 14 (as defined in the agreement) of Terra. In addition, such termination must be made either by Terra or a successor entity without cause, or by the executive for good reason. Benefits under the executive retention agreements include (a) continuation of base salary and bonus for two years; (b) continuation of medical and dental benefits for two years; (c) payment of accrued but unpaid compensation; (d) automatic vesting in Terra's Excess Benefit Plan with an addition of two years to the credited service level and the age of the participant for purposes of computing the accrued benefits under the Excess Benefit Plan; and (e) certain outplacement services. Such benefits are in lieu of any other severance benefits that may otherwise be payable. Compensation earned from other employment shall not reduce the amounts otherwise payable by Terra. Terra also agreed to reimburse each such officer on an after-tax basis for any excise tax incurred as a result of the "excess parachute payment" provisions of the Internal Revenue Code. Mr. Joyce retired effective April 26, 2001 and resigned as Terra's President and Chief Executive Officer on that date. In connection with Mr. Joyce's retirement, Terra entered into a retirement and consulting agreement providing Mr. Joyce certain benefits. Under this agreement, Mr. Joyce agreed to provide consulting services to the company for the five-year period commencing April 26, 2001 at a rate of $550,000 annually. Either party may terminate the consulting period effective May 1, 2004 and in the event of such termination, the company shall pay Mr. Joyce $1,100,000 in a lump sum on June 1, 2004. The company also agreed to reimburse Mr. Joyce up to $65,000 for the cost of secretarial services and office space through May 1, 2004. In addition to providing consulting services as described above, Mr. Joyce forgoes all rights to all benefits under the Executive Retention Agreement dated December 31, 1998 and provided the company a general release of all claims. Board of Directors Compensation Independent directors of TNC receive an annual retainer fee of $20,000 for their directorship, plus a fee of $1,000 for each TNC Board meeting attended and each Audit Committee meeting attended. No other director of TNC receives any compensation for serving as a director. Compensation Committee Interlocks and Insider Participation TNC does not have a compensation committee. The Personnel Committee of the Board of Directors of Terra has made executive officer compensation decisions with respect to those TNC executive officers who are also key employees of Terra. The Personnel Committee of TNC is composed of the directors named as signatories to the "Report on Executive Compensation" below. No director has any direct or indirect material interest in or relationship with TNC other than stockholdings as discussed above and as related to his or her position as a director, except as described under the caption "Certain Relationships and Related Transactions." During 2001, no officer or other employee of TNC served on the board of directors of any other entity, where any officer or director of such entity also served on TNC's Board. None of the members of such Personnel Committee are employees of Terra or its subsidiaries. Item 12. Security Ownership of Certain Beneficial Owners and Management TNC owns the entire general partner interest in both TNCLP and the Operating Partnership. TNC's principal executive offices are located at 600 Fourth Street, Sioux City, Iowa 51101. Terra Capital, Inc. owns all the outstanding capital stock of TNC, and is an indirect, wholly-owned subsidiary of Terra. The stock of TNC is pledged as security under the Credit Agreement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 7 to the Financial Statements. Terra Capital, Inc. owned, as of December 31, 2001, 2,716,600 common units of TNCLP. Terra and its subsidiaries are engaged in certain transactions with the Partnership described under the caption "Certain Relationships and Related Transactions" below. The capital stock of Terra is owned 49.1% by Taurus International S.A ("Taurus") as of December 31, 2001. Taurus is a company incorporated under the laws of Luxembourg as a societe anonyme and is wholly-owned by Anglo American plc ("Anglo American"), a company incorporated under the laws of England and Wales as a public limited company. Anglo American, with its subsidiaries, joint ventures and associates, is a global leader in the mining and natural resource sectors. It has significant and focused interests in gold, platinum, diamonds, coal, base and ferrous metals, industrial minerals and forest products. 15 The following table shows the ownership of TNCLP common units and Terra common stock as of December 31, 2001 by (a) each person known to TNC to be a beneficial owner of more than 5% of the TNCLP common units (based on information reported to the SEC by or on behalf of such persons); (b) each director of TNC; (c) each of the named executive officers of TNC; and (d) by all directors and executive officers of TNC as a group.
Number of Terra Number of Percent of Common Shares Percent of Name Units Class Beneficially Owned1/ Class ---- ----- ----- ------------------- ----- Terra Nitrogen Corporation/2/ 11,172,414 60.4% -- -- 600 Fourth Street Sioux City, Iowa 51101 Terra Capital, Inc. 2,716,600 14.7% -- -- 600 Fourth Street Sioux City, Iowa 51101 Michael L. Bennett -- -- 439,438/3/ * - Burton M. Joyce -- -- 1,211,338/3/ 1.6% - Mark A. Kalafut -- -- 88,973/3/ * -- Dennis B. Longmire -- -- -- -- Francis G. Meyer -- -- 314,729/3/ * - W. Mark Rosenbury 2,500 * * 342,537/3/ Theodore D. Sands 13,500 * * -- Steven A. Savage 4,000 * 125,457/3/ * - Robert W. Todd -- -- -- -- All directors and executive 20,000 * 2,591,856/3/ 3.4% - officers as a group (10 persons) * Represents less than 1% of class.
/1/ Each person has sole voting and investment power of all the securities - indicated. The shares of Terra common stock shown include ownership of restricted common stock, which is subject to certain performance-related vesting conditions, and shares held under Terra's Employees' Savings and Investment Plan, in each case as of December 31, 2001. /2/ Terra Nitrogen Corporation also owns the entire general partner interests - in the Partnership. Each of Terra Nitrogen Corporation and Terra Capital, Inc. is an indirect, wholly-owned subsidiary of Terra Industries Inc. /3/ The shares of Terra common stock shown include shares subject to - employee stock options that can be exercised on or before April 30, 2002. Upon such exercise, the option holder(s) would acquire beneficial ownership of shares as follows: Mr. Bennett (106,666); Mr. Joyce (826,666); Mr. Kalafut (18,700); Mr. Meyer (66,666); Mr. Rosenbury (60,000); and Mr. Savage (33,333); and one unnamed executive officer (30,834); and all directors and executive officers as a group (1,142,865). Item 13. Certain Relationships and Related Transactions Information with respect to certain relationships and related transactions contained in Footnote 4 to Exhibit 13 hereto is incorporated herein by reference. 16 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Financial Statements and Financial Statement Schedules 1. Consolidated Financial Statements of Terra Nitrogen Company, L.P. (incorporated herein by reference to Exhibit 13 hereof.) Consolidated Balance Sheets at December 31, 2001 and 2000. Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999. Consolidated Statements of Partners' Capital for the years ended December 31, 2001, 2000 and 1999. Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999. Notes to the Consolidated Financial Statements. Independent Auditors' Report (b) Executive Compensation Plans and Other Arrangements Exhibits 10.14 through 10.26 and 10.29 through 10.36 are incorporated herein by reference. (c) Reports on Form 8-K None. (d) Exhibit 3.1 Agreement of Limited Partnership of TNCLP, filed as Exhibit 3.1 to the TNCLP Form 10-K (file No. 1-10877) for the year ended December 31, 1991, is incorporated herein by reference. 3.2 Certificate of Limited Partnership of TNCLP, filed as Exhibit 3.2 to the TNCLP Registration Statement No. 33-43007, dated September 27, 1991, is incorporated herein by reference. 4.1 Deposit Agreement among TNCLP, the Depositary and Unitholders, filed as Exhibit 4.1 to the TNCLP Form 10-K (file No. 1-10877) for the year ended December 31, 1991, is incorporated herein by reference. 4.2 Form of Depositary Receipt for Common Units (included as Exhibit B to the Deposit Agreement filed as Exhibit 4.1 hereto), filed as Exhibit 4.3 to the TNCLP Form 10-K (file No. 1-10877) for the year ended December 31, 1991, is incorporated herein by reference. 4.3 Form of Transfer Application (included in Exhibit A to the Deposit Agreement filed as Exhibit 4.1 hereto), filed as Exhibit 4.4 to the TNCLP Form 10-K (file No. 1-10877) for the year ended December 31, 1991, is incorporated herein by reference. 4.4 Certificate of Limited Partnership of the Operating Partnership, filed as Exhibit 4.5 to the TNCLP Registration Statement No. 33-43007, dated September 27, 1991, is incorporated herein by reference. 4.5 * Intercompany Promissory Note dated October 10, 2001, between Terra Nitrogen, Limited Partnership and Terra Capital, Inc. 4.6 Amended and Restated Credit Agreement dated as of October 10, 2001 among Terra Capital, Inc., Terra Nitrogen (U.K.) Limited, and Terra Nitrogen, Limited Partnership, certain guarantors, certain lenders, certain issuing banks and Citicorp USA, Inc., filed as Exhibit 4.2 to Terra Industries' Form 8-K dated October 10, 2001, is incorporated herein by reference. 17 10.1 Agreement of Limited Partnership of the Operating Partnership, filed as Exhibit 10.1 to the TNCLP Form 10-K (file No. 1-10877) for the year ended December 31, 1991, is incorporated herein by reference. 10.2** Master Agreement dated October 11, 1989, among ONEOK Inc., Oklahoma Natural Gas Company, ONG Western Inc., ONG Red Oak Transmission Company, ONG Transmission Company, Agrico Chemical Company and Freeport-McMoRan Resource Partners, Limited Partnership. 10.3** Lease Agreement dated October 11, 1989, among ONEOK Inc., Oklahoma Natural Gas Company, ONG Western Inc., ONG Red Oak Transmission Company, ONG Transmission Company, Agrico Chemical Company and Freeport-McMoRan Resource Partners, Limited Partnership. 10.4 Gas Service Agreement dated October 11, 1989, between Oklahoma Natural Gas Company and Agrico Chemical Company, filed as Exhibit 10.4 to the TNCLP Registration Statement No. 33-43007, dated September 27, 1991, is incorporated herein by reference. 10.5** Transportation Service Agreement dated as of September 1, 1988, among Reliant Energy Gas Transmission Company and Agrico Chemical Company, as supplemented by Letter Agreements dated September 2, 1988, and November 1, 1990, and Consent to Assignment dated March 9, 1990. 10.6 Transportation Service Agreement effective January 1, 1990, between MAPCO Ammonia Pipeline, Inc. and Agrico Chemical Company, and Consent to Assignment dated January 22, 1991, filed as Exhibit 10.6 to the TNCLP Registration Statement No. 33-43007, dated September 27, 1991, is incorporated herein by reference. 10.7 Car Service Contract dated as of March 2, 1990, between General American Transportation Corporation and TNC, and Consent to Assignment dated February 22, 1990, filed as Exhibit 10.8 to the TNCLP Registration Statement No. 33-43007, dated September 27, 1991, is incorporated herein by reference. 10.8 Lease Agreement dated as of December 22, 1988, between PLM Investment Management, Inc. and Agrico Chemical Company, and Consent to Assignment dated February 23, 1990, and Assignment and Assumption effective as of March 1, 1990, filed as Exhibit 10.9 to the TNCLP Registration Statement No. 33-43007, dated September 27, 1991, is incorporated herein by reference. 10.9 Lease and Agreement dated December 1, 1964, between City of Blytheville, Arkansas, and Continental Oil Company, as supplemented, filed as Exhibit 10.10 to the TNCLP Registration Statement No. 33-43007, dated September 27, 1991, is incorporated herein by reference. 10.10 Lease dated November 1, 1975, between the City of Blytheville, Arkansas, and The Williams Companies, Inc., as supplemented, filed as Exhibit 10.11 to the TNCLP Form 10-K (file No. 1-10877) for the year ended December 31, 1991, is incorporated herein by reference. 10.11 Lease dated September 6, 1977, between Tulsa-Rogers County Port Authority and Agrico Chemical Company, as supplemented, filed as Exhibit 10.12 to the TNCLP Registration Statement No. 33-43007, dated September 27, 1991, is incorporated herein by reference. 10.12 General and Administrative Services Agreement Regarding Services by Terra Industries Inc. filed as Exhibit 10.11 to Terra Industries Inc. Form 10-Q for the quarter ended March 31, 1995 (file no. 1-8520), is incorporated herein by reference. 10.13 General and Administrative Services Agreement Regarding Services by Terra Nitrogen Corporation filed as Exhibit 10.12 to Terra Industries Inc. Form 10-Q for the quarter ended March 31, 1995 (file no. 1-8520), is incorporated herein by reference. 10.14 1992 Stock Incentive Plan of Terra Industries filed as Exhibit 10.1.6 to Terra Industries' Form 10-K for the year ended December 31, 1992 (file no. 1-8520), is incorporated herein by reference. 10.15 Form of Restricted Stock Agreement of Terra Industries under its 1992 Stock Incentive Plan filed as Exhibit 10.1.7 to Terra Industries' Form 10-K for the year ended December 31, 1992 (file no. 1-8520), is incorporated herein by reference. 18 10.16 Form of Incentive Stock Option Agreement of Terra Industries under its 1992 Stock Incentive Plan, filed as Exhibit 10.1.8 to Terra Industries' Form 10-K for the year ended December 31, 1992 (file no. 1-8520), is incorporated herein by reference. 10.17 Form of Nonqualified Stock Incentive Agreement of Terra Industries under its 1992 Stock Incentive Plan, filed as Exhibit 10.1.9 to Terra Industries' Form 10-K for the year ended December 31, 1992 (file no. 1-8520), is incorporated herein by reference. 10.18 Terra Industries Inc. Supplemental Deferred Compensation Plan effective as of December 20, 1993, filed as Exhibit 10.1.9 to Terra Industries' Form 10-K for the year ended December 31, 1993 (file no. 1-8520), is incorporated herein by reference. 10.19 Amendment No. 1 to the Terra Industries Inc. Supplemental Deferred Compensation Plan, filed as Exhibit 10.1.15 to Terra Industries' Form 10-Q for the quarter ended September 30, 1995 (file no. 1-8520), is incorporated herein by reference. 10.20 Amendment No. 2 to the Terra Industries Inc. Supplemental Deferred Compensation Plan, filed as Exhibit 10.1.8.a to the Terra Industries Inc. Form 10-K for the year ended December 31, 2000 (File No. 1-8520), is incorporated herein by reference. 10.21 Excess Benefit Plan of Terra Industries, as amended effective as of January 1, 1992, filed as Exhibit 10.1.13 to Terra Industries' Form 10-K for the year ended December 31, 1992 (file no. 1-8520), is incorporated herein by reference. 10.22 Amendment to the Terra Industries Excess Benefit Plan, dated July 26, 2000, filed as Exhibit 10.1.6.a to the Terra Industries Inc. Form 10-K for the year ended December 31, 2000 (File No. 1-8520), is incorporated herein by reference. 10.23 Revised Form of Performance Share Award of Terra Industries under its 1992 Stock Incentive Plan, filed as Exhibit 10.1.11 to the Terra Industries Inc. Form 10-K for the year ended December 31, 1996 (File No. 1-8520), is incorporated herein by reference. 10.24 Revised Form of Incentive Stock Option Agreement of Terra Industries under its 1992 Stock Incentive Plan, filed as Exhibit 10.1.12 to the Terra Industries Inc. Form 10-K for the year ended December 31, 1996 (File No. 1-8520), is incorporated herein by reference. 10.25 Revised Form of Nonqualified Stock Option Agreement of Terra Industries under its 1992 Stock Incentive Plan, filed as Exhibit 10.1.13 to the Terra Industries Inc. Form 10-K for the year ended December 31, 1996 (File No. 1-8520), is incorporated herein by reference. 10.26 1997 Stock Incentive Plan of Terra Industries, filed as Exhibit 10.1.14 to the Terra Industries Inc. Form 10-K for the year ended December 31, 1996 (File No. 1-8520), is incorporated herein by reference. 10.27 Amended Demand Deposit Agreement, dated as of August 20, 1996, between Terra Nitrogen Limited Partnership and Terra Capital, Inc. filed as Exhibit 10.62 to TNCLP's Form 10-K for the year ended December 31, 1996, is incorporated herein by reference. 10.28 Demand Promissory Note dated August 26, 1998 from Terra Nitrogen L.P., as Payor, to Terra Capital Inc. filed as Exhibit 10.69 to TNCLP's Form 10-Q for the quarter ended September 30, 1998, is incorporated herein by reference. 10.29 Form of Incentive Stock Option Agreement of Terra Industries under its 1997 Stock Incentive Plan, filed as Exhibit 10.1.13 to the Terra Industries Inc. Form 10-K for the year ended December 31, 1999 (File No. 1-8520), is incorporated herein by reference. 10.30 Form of Nonqualified Stock Option Agreement of Terra Industries under its 1997 Stock Incentive Plan, filed as Exhibit 10.1.14 to the Terra Industries Inc. Form 10-K for the year ended December 31, 1999 (File No. 1-8520), is incorporated herein by reference. 10.31 Form of Performance Share Award of Terra Industries under its 1997 Stock Incentive Plan filed as Exhibit 10.1.15 to the Terra Industries Inc. Form 10-K for the year ended December 31, 1998 (File No. 1.8520), is incorporated herein by reference. 19 10.32 Retirement and Consulting Agreement for Burton M. Joyce dated April 26, 2001 filed as Exhibit 10.1.16 of Terra Industries Inc. Form 10-K for the year ended December 31, 2001, is incorporated herein by reference. 10.33 Form of Executive Retention Agreement for Other Executive Officers filed as Exhibit 10.1.19 to the Terra Industries Inc. Form 10-K for the year ended December 31, 1998 (File No. 1.8520), is incorporated herein by reference. 10.34 2002 Incentive Award Program for Officers and Key Employees of Terra Industries filed as Exhibit 10.1.18 to the Terra Industries Inc. Form 10-K for the year ended December 31, 2001, is incorporated herein by reference. 10.35 Form of Performance Share Award of Terra Industries under its 1997 Stock Incentive Plan, dated February 16, 2000, filed as Exhibit 10.1.22 to the Terra Industries Inc. Form 10-K for the year ended December 31, 2000 (File No. 1-8520), is incorporated herein by reference. 10.36 Form of Non-Employee Director Performance Share Award of Terra Industries under its 1997 Stock Incentive Plan, dated May 2, 2000, filed as Exhibit 10.1.23 to the Terra Industries Inc. Form 10-K for the year ended December 31, 2000 (File No. 1-8520), is incorporated herein by reference. 13* Financial Review and Consolidated Financial Statements as contained in the Annual Report to Stockholders of Terra Nitrogen for the fiscal year ended December 31, 2001. 99.1 Conversion Statement dated December 31, 1996, filed as Exhibit 99.1 to the TNCLP Form 10-Q for the quarter ended March 31, 1997, is incorporated herein by reference. * Filed herewith. ** Confidential treatment has been granted for portions of the exhibit. 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Terra Nitrogen Company, L.P. By: Terra Nitrogen Corporation, as General Partner By: /s/ Francis G. Meyer ----------------------------------- Francis G. Meyer Vice President (Principal Financial Officer) Dated: March 19, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant as of March 19, 2002 and in the capacities indicated. Signature Title /s/ Burton M. Joyce Chairman of the Board - ------------------------------- of Terra Nitrogen Corporation (Burton M. Joyce) /s/ Michael L. Bennett Director and President - ------------------------------- of Terra Nitrogen Corporation (Michael L. Bennett) /s/ Dennis B. Longmire Director of Terra Nitrogen Corporation - ------------------------------- (Dennis B. Longmire) /s/ Francis G. Meyer Director and Vice President of Terra - ------------------------------- Nitrogen Corporation (Francis G. Meyer) /s/ Theodore D. Sands Director of Terra Nitrogen Corporation - ------------------------------- (Theodore D. Sands) /s/ Robert W. Todd Director of Terra Nitrogen Corporation - ------------------------------- (Robert W.Todd) 21 EX-4.5 3 dex45.txt INTERCOMPANY PROMISSORY NOTE DTD OCTOBER 10, 2001 PROMISSORY NOTE --------------- U.S. $8,200,000.00 Dated: October 10, 2001 FOR VALUE RECEIVED, the undersigned, Terra Nitrogen, Limited Partnership, a Delaware limited partnership ("Borrower"), HEREBY PROMISES TO -------- PAY to the order of Terra Capital, Inc. ("Lender") on October 15, 2008 (the ------ "Maturity Date") the principal sum of U.S. $8,200,000 (EIGHT MILLION TWO ------------- HUNDRED THOUSAND U.S. DOLLARS AND NO CENTS). Capitalized terms used but not defined herein shall have the meanings assigned to them in the Indenture (as defined below). 1. Subject to the terms and conditions hereof, Lender agrees to advance to Borrower on the date hereof such sums as Borrower may request (the "Advances"). Advances shall be made in lawful money of the United States -------- of America ("U.S. Dollars" or "U.S.$") and shall be made in same day or ------------ immediately available funds. Subject to the terms and conditions hereof, Borrower may prepay the Advances. Notwithstanding anything to the contrary contained herein, (i) the Advances shall be made to Borrower on the date hereof in the amount of U.S. $8,200,000 and (ii) the maximum amount of Advances that may be outstanding hereunder is U.S. $8,200,000. 2. The Advances will bear interest at a rate per annum from the date hereof equal to the weighted average interest rate of all borrowings then outstanding under the Credit Facility, to be computed on the basis of a 360 day year of twelve 30 day months. Borrower promises to pay interest on the unpaid principal amount of Advances from the date hereof until such principal amount is paid in full on each April 15 and October 15. 3. Both principal and interest are payable in lawful money of the United States of America to Lender in same day funds. The Advances made by Lender to Borrower pursuant to the terms hereof, and all payments made on account of principal thereof, shall be recorded by Lender and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Promissory Note; provided that the failure of Lender to make any such -------- recordation or endorsement shall not affect the obligations of Borrower hereunder. 4. This Promissory Note is secured by (i) a security agreement (as amended, amended and restated, supplemented or otherwise modified in accordance with the terms thereof, the "Security Agreement"), in the form ------------------ annexed hereto as Exhibit A, among Borrower, TNCLP, Lender, Terra Capital and --------- the Trustee and dated as of the date hereof and (ii) those certain mortgages (as amended, amended and restated, supplemented or otherwise modified in accordance with the terms thereof, the "Mortgages"; together with the Security Agreement --------- and each other security agreement, mortgage, deed of trust, pledge, collateral as- -2- signment, charge, debenture or other agreement or instrument from time to time evidencing or creating any security interest or lien in favor of Lender encumbering any assets of the type described in the definition of Pledged Collateral (as defined in the Security Agreement), Mort-gaged Property (as defined in the Mortgages) or Second Lien Collateral (as defined in the Security Agreement), in each case as amended, amended and restated, supplemented or otherwise modified in accordance with the terms thereof, the "Security -------- Documents") in the form annexed hereto as Exhibit B between Borrower and Terra - --------- --------- Capital and dated as of the date hereof. Reference is made to the Security Documents as to the nature and extent of the security (the "Collateral") for ---------- this Promissory Note, the rights of Lender and Borrower and Terra Capital with respect to the Collateral and the acceleration of the maturity of this Promissory Note, all of the terms of which are hereby incorporated herein by reference. 5. This Promissory Note is unconditionally guaranteed by a guaranty in the form annexed hereto as Exhibit C. --------- 6. Borrower hereby waives presentment, demand, protest and notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. 7. [Intentionally Omitted.] 8. In the event (each, an "Event of Default") that (a) an event ---------------- set forth in Section 6.1 of the Indenture or Section 9.1 of the Credit Facility shall occur, (b) Borrower shall fail to pay any principal of any Advance pursuant to this Promissory Note when the same becomes due and payable, (c) Borrower or any of its Material Subsidiaries (as defined in the Credit Facility) shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors, or any proceeding shall be instituted by or against Borrower or any of its Material Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up or reorganization, under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a custodian, receiver, trustee, administrative receiver, liquidator, provisional liquidator, administrator, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceedings instituted against Borrower or any of its Material Subsidiaries (but not instituted by it), either such proceedings shall remain undismissed or unstayed for a period of 30 days or any of the actions sought in such proceedings shall occur, or (d) Borrower or any of its Material Subsidiaries shall take any corporate action to authorize any of the actions set forth in the immediately preceding clause (c) then, and in any such event, Lender may, by notice to Borrower, declare the Advances and this Promissory Note, all interest thereon and all other amounts payable under this Agreement and the Security Documents to be forthwith due and payable, whereupon the Advances and this Promissory Note, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by Borrower; provided that in the case -------- of the occurrence of an Event of Default referred to in Section 6.1 (vii) or (viii) of the Indenture or Section 9.1(g) of the Credit Facility,(x)the obligation of Lender to make Advances shall automatically be terminated and (y) the Advances and this Promissory Note, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by Borrower. 9. [Intentionally Omitted.] 10. Pursuant to the applicable Security Document (as defined in the Indenture), the Lender has assigned all of its rights and remedies under and in respect of this Promissory Note to U.S. Bank National Association, as Trustee under the Indenture (and its successors and assigns in such capacity) for the benefit of the Noteholders (as defined therein), and the Borrower hereby acknowledges and consent to such assignment. 11. This Promissory Note shall be governed by, and construed in accordance with, the laws of the State of New York, United States, without giving effect to principles of conflict of laws thereof. 12. This Promissory Note cannot be amended without the consent of holders of a majority of the Notes in the manner provided for in the Indenture. 13. Borrower shall have the right at its option from time to time to prepay this Promissory Note in whole or in part without premium or penalty; provided that in no event may Borrower prior to the Maturity Date -------- prepay this Promissory Note below the aggregate principal amount of all Advances outstanding on the date hereof except to the extent that, after giving effect to such prepayment, the aggregate principal amount of all Fixed Asset Intercompany Notes then outstanding exceeds the aggregate principal amount of Notes outstanding; provided,further, that in the event TNCLP becomes a Wholly Owned -------- ------- Subsidiary, Borrower shall have the right at its option to prepay this Promissory Note in whole without premium of penalty without reference to the preceding proviso. -4- TERRA NITROGEN, LIMITED PARTNERSHIP By: TERRA NITROGEN COMPANY, L.P., its general partner By: /s/ Mark A. Kalafut ----------------------------- Name: Mark A. Kalafut Title: Vice President Acknowledged and Agreed: TERRA CAPITAL, INC. By: /s/ Wynn S. Stevenson ------------------------- Name: Wynn S. Stevenson Title: Vice President This Promissory Note is payable to the order of U.S. Bank National Association, as Trustee. TERRA CAPITAL, INC. By: /s/ Wynn S. Stevenson ------------------------ Name: Wynn S. Stevenson Title: Vice President -5- ADVANCES AND PAYMENTS OF PRINCIPAL ---------------------------------- Amount of Unpaid Amount of Principal Paid Principal Notation Date Advance or Prepaid Balance Made By ------------ ------------- ----------------- ------------ ------------ EX-13 4 dex13.txt FINANCIAL REVIEW AND CONSOLIDATED FINANCIAL STMNTS Exhibit 13 CONFIDENTIAL 1 Independent Auditors' Report - ---------------------------- To the Partners Terra Nitrogen Company, L.P. We have audited the accompanying consolidated balance sheets of Terra Nitrogen Company, L.P. (a limited partnership) as of December 31, 2001 and 2000 and the related consolidated statements of operations, partners' capital, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Terra Nitrogen Company, L.P. at December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Omaha, Nebraska January 31, 2002 2 Terra Nitrogen Company, L.P. Consolidated Balance Sheets - -------------------------------------------------------------------------------- At December 31, - -------------------------------------------------------------------------------- (in thousands) 2001 2000 - -------------------------------------------------------------------------------- Assets Current assets: Cash $ 10 $ 10 Demand deposit with affiliate --- 17,931 - -------------------------------------------------------------------------------- Cash and cash equivalents 10 17,941 - -------------------------------------------------------------------------------- Receivables: Trade 31,358 19,381 Other 953 5,358 Inventory: Finished products 18,292 9,431 Materials and supplies 10,128 9,950 Prepaid insurance and other current assets 3,939 3,117 - -------------------------------------------------------------------------------- Total current assets 64,680 65,178 - -------------------------------------------------------------------------------- Property, plant, and equipment, net 136,335 147,597 Other assets 9,402 11,259 - -------------------------------------------------------------------------------- Total assets $ 210,417 $ 224,034 ================================================================================ Liabilities and partners' capital Current liabilities: Note payable to affiliate $ 14,293 $ --- Accounts payable 9,662 12,900 Accrued liabilities 3,058 6,780 Customer prepayments 2,388 3,076 Current portion of long-term debt --- 1,000 - -------------------------------------------------------------------------------- Total current liabilities 29,401 23,756 - -------------------------------------------------------------------------------- Long-term debt 8,200 8,250 Long-term payable to affiliates 5,316 5,316 Partners' capital: Limited partners' interests - common unitholders 178,808 196,571 General partners' interest (10,221) (9,859) Accumulated other comprehensive loss (1,087) --- - -------------------------------------------------------------------------------- Total partners' capital 167,500 186,712 - -------------------------------------------------------------------------------- Total liabilities and partners' capital $ 210,417 $ 224,034 ================================================================================ See accompanying Notes to the Consolidated Financial Statements 3 Terra Nitrogen Company, L.P. Consolidated Statements of Operations
- ------------------------------------------------------------------------------------------------------------------- Year ended December 31, - ------------------------------------------------------------------------------------------------------------------- (in thousands, except per-unit amounts) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------- Revenues Net sales $ 304,872 $ 320,239 $ 257,166 Other income, net 953 744 787 - ------------------------------------------------------------------------------------------------------------------- 305,825 320,983 257,953 - ------------------------------------------------------------------------------------------------------------------- Cost of goods sold 304,648 288,468 256,956 - ------------------------------------------------------------------------------------------------------------------- Gross profit 1,177 32,515 997 - ------------------------------------------------------------------------------------------------------------------- Operating expenses 10,074 11,493 7,797 - ------------------------------------------------------------------------------------------------------------------- Income (loss) from operations (8,897) 21,022 (6,800) Interest expense (924) (1,436) (1,947) Interest income 2 623 649 - ------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (9,819) $ 20,209 $ (8,098) =================================================================================================================== Net income (loss) allocable to limited partners' interest $ (9,623) $ 19,805 $ (7,936) =================================================================================================================== Net income (loss) per limited partnership unit $ (0.52) $ 1.07 $ (0.43) ===================================================================================================================
See accompanying Notes to the Consolidated Financial Statements 4 Terra Nitrogen Company, L.P. Consolidated Statements of Partners' Capital
Accumulated Limited General Other Total Partners' Partners' Comprehensive Partners' (in thousands, except for Units) Interests Interests Income (Loss) Capital - -------------------------------------------------------------------------------------------------------------------------- Partners' capital at January 1, 1999 $ 188,773 $ (10,018) $ --- $ 178,755 Net loss (7,936) (162) --- (8,098) - -------------------------------------------------------------------------------------------------------------------------- Partners' capital at December 31, 1999 180,837 (10,180) --- 170,657 Net income 19,805 404 --- 20,209 Distributions (4,071) (83) (4,154) - -------------------------------------------------------------------------------------------------------------------------- Partners' capital at December 31, 2000 196,571 (9,859) --- 186,712 Net loss (9,623) (196) --- (9,819) Cumulative effect of change in accounting for derivative financial instruments (Note 8) --- --- 14,200 --- Change in fair value of derivatives --- --- (15,287) (1,087) -------- Comprehensive loss --- --- (10,906) Distributions (8,140) (166) --- (8,306) - -------------------------------------------------------------------------------------------------------------------------- Partners' capital at December 31, 2001 $ 178,808 $ (10,221) $ (1,087) $ 167,500 ========================================================================================================================== Limited partner units issued and outstanding at December 31, 2001 18,501,576 ==========
See accompanying Notes to the Consolidated Financial Statements 5 Terra Nitrogen Company, L.P. Consolidated Statements of Cash Flows
================================================================================================================= Year ended December 31, - ----------------------------------------------------------------------------------------------------------------- (in thousands) 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------------- Operating Activities Net income (loss) $ (9,819) $ 20,209 $ (8,098) Adjustments to reconcile net income (loss) to net cash flows from operating activities: Depreciation 12,867 12,706 12,974 Changes in operating assets and liabilities: Receivables (7,572) 5,107 (23,183) Inventory (9,039) 19,731 11,343 Prepaid insurance and other current assets (1,876) (1,534) 857 Accounts payable (3,238) (3,196) 1,637 Payable to affiliates --- --- (23,587) Accrued liabilities and customer prepayments (4,443) (51) 4,912 Change in other assets 1,857 3,336 (3,859) - ----------------------------------------------------------------------------------------------------------------- Net cash flows from operating activities (21,263) 56,308 (27,004) - ----------------------------------------------------------------------------------------------------------------- Investing Activities Capital expenditures (1,985) (3,028) (5,560) Other 380 --- --- - ----------------------------------------------------------------------------------------------------------------- Net cash flows from investing activities (1,605) (3,028) (5,560) - ----------------------------------------------------------------------------------------------------------------- Financing Activities Net changes in short-term borrowings 14,293 (39,601) 39,601 Proceeds from issuance of long-term debt --- 10,000 --- Repayment of long-term debt (1,050) (1,597) (8,118) Partnership distributions paid (8,306) (4,154) --- - ----------------------------------------------------------------------------------------------------------------- Net cash flows from financing activities 4,937 (35,352) 31,483 - ----------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (17,931) 17,928 (1,081) Cash and Cash Equivalents at Beginning of Year 17,941 13 1,094 - ----------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 10 $ 17,941 $ 13 =================================================================================================================
See accompanying Notes to the Consolidated Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations Factors That Affect Operating Performance Factors that may affect the Partnership's future operating results include: the relative balance of supply and demand for nitrogen fertilizers, the availability and cost of natural gas, the number of planted acres - which is affected by both worldwide demand and government policies - the types of crops planted, the effects general weather patterns have on the timing and duration of fieldwork for crop planting and harvesting, the effect of environmental legislation on supply and demand for the Partnership's products, the availability of financing sources to fund seasonal working capital needs and the potential for interruption to operations due to accident or natural disaster. The principal raw material used to produce manufactured nitrogen products is natural gas. Natural gas costs in 2001 accounted for about 55% of total costs and expenses for the Partnership. A significant increase in the price of natural gas that is not hedged or recovered through an increase in the price of related nitrogen products would have an adverse effect on the Partnership's business, financial condition and results. During parts of 2000 and 2001, price volatility in North American natural gas markets prompted industry-wide curtailments of nitrogen production. We produced only 89% and 81% of our total nitrogen capacity in 2000 and 2001, respectively, because of plant shutdowns and production curtailments related to high natural gas costs and to balance inventory levels to demand. A portion of global nitrogen products production is at facilities with access to fixed-price natural gas supplies that have been, and could continue to be, substantially lower than the Partnership's natural gas cost. The Partnership enters into forward pricing arrangements for natural gas so long as such arrangements would not result in costs that would be greater than expected selling prices for finished products manufactured by the Partnership. Terra Industries' normal natural gas procurement policy (which is applicable to TNCLP) has been 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 contracts, financial derivatives and other instruments. In response to extremely unpredictable natural gas costs during 2001 and uncertainties regarding the ability of finished goods prices to recover the increases to natural gas costs, Terra amended our normal policy and eliminated the minimum hedge requirement through the end of 2001. The Partnership's December 31, 2001 forward positions covered 20% of our expected 2002 natural gas requirements. Early in 2002, Terra's hedging policy was revised to permit hedging of 20 - 80% of natural gas requirements for the following 12-month period, and up to 50% of its requirements for the following 24-month period. Prices for nitrogen products are influenced by the world supply and demand balance for ammonia and nitrogen-based products. Long-term demand is affected by population growth and rising living standards that determine food consumption. Short-term demand is affected by world economic conditions and international trade decisions. In addition, 2001 demand was reduced, in part, due to relatively high nitrogen prices and low grain prices. Supply is affected by increasing worldwide capacity and the increasing availability of nitrogen product exports from major producing regions such as the former Soviet Union, the Middle East and South America. Weather can have a significant effect on demand for the Partnership's products. Weather conditions that delay or intermittently disrupt fieldwork during the planting season may cause agricultural customers to use forms of nitrogen fertilizer that are more or less favorable to our products. Weather conditions following harvest may delay or eliminate opportunities to apply fertilizer in the fall. Weather can also have an adverse effect on crop yields, which lowers the income of growers and could impair their ability to pay for crop inputs purchased from Terra's dealer customers. Conversely, low crop yields often increase the planted areas in the subsequent growing season, which, in turn, increases the demand for nitrogen fertilizer. The Partnership's business is highly seasonal, with the majority of its products used during the second quarter in conjunction with spring planting. Due to the business' seasonality and the relatively brief periods during which products can be used by customers, the Partnership and its customers generally build inventories during the second half of the year to ensure product availability during the peak sales season. For its current level of sales, the 7 Partnership requires lines of credit to fund inventory increases and to support customer credit terms. The Partnership believes that its credit facilities are adequate for expected sales levels in 2002. The Partnership's operations may be subject to significant interruption if one or more of its facilities were to experience a major accident or natural disaster. The Partnership currently maintains insurance, including business interruption insurance, which it believes is sufficient to allow the Partnership to cover major damage to any of its facilities. Risk Management and Financial Instruments Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows of the Partnership due to adverse changes in financial and commodity market prices and rates. The Partnership uses derivative financial instruments to manage risk in the area of changes in natural gas prices. The Partnership has no foreign currency exchange rate risk and all debt carries variable interest rates and approximates fair value. The Partnership's general policy is to avoid unnecessary risk and to limit, to the extent practical, risks associated with operating activities. Management of the Partnership may not engage in activities that expose the Partnership to speculative or non-operating risks. Management is expected to limit risks to acceptable levels. The use of derivative financial instruments is consistent with the overall business objectives of the Partnership. Derivatives are used to manage operating risk within the limits established by the General Partner's Board of Directors, and in response to identified exposures, provided they qualify as hedge activities. As such, derivative financial instruments are used to hedge firm commitments and forecasted commodity purchase transactions. Natural gas is the principal raw material used to manufacture nitrogen. Natural gas prices are volatile and the Partnership manages this volatility through the use of derivative commodity instruments. Terra Industries' hedging policy (which is applicable to TNCLP) is described under the previous heading, "Factors that Affect Operating Performance". The Partnership has hedged 20% of expected 2002 requirements and none of its requirements beyond December 31, 2002. The fair value of these instruments is estimated based on published referenced prices and quoted market prices from brokers. These instruments fixed natural gas prices $1.1 million higher than published prices for December 31, 2001 forward markets. Market risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse price change. As of December 31, 2001, the Partnership's market risk exposure related to future hedged natural gas requirement was $1.8 million based on a sensitivity analysis. Changes in the market value of these derivative instruments have a high correlation to changes in the spot price of natural gas. This hypothetical adverse impact on natural gas derivative instruments would be more than offset by lower costs for natural gas purchases. Results of operations: 2001 compared with 2000 The Partnership's sales volumes and prices for 2001 and 2000 follow (quantities in thousands of tons):
2001 2000 --------------------------------- ------------------------------- Sales Volume Avg. Unit Price Sales Volume Avg. Unit Price ------------ --------------- ------------ --------------- Ammonia 259 $ 210 373 $ 156 UAN 1,942 93 2,409 78 Urea 290 134 282 134
Revenues for 2001 decreased $15.2 million, or 5%, as higher selling prices were offset by substantially lower sales volumes. Selling price increases were realized primarily during the first half of 2001 as the result of lower nitrogen supplies caused by industry-wide production curtailments in response to unprecedented increases to natural gas costs. Sales volumes declined primarily as the result of lower production rates in response to higher gas costs, fewer planted acres of corn, wheat and other crops and reduced application rates because of low grain prices and high fertilizer costs. 8 Gross profits during 2001 totaled $1.2 million compared to $32.5 million for 2000. Higher sales prices were more than offset by $46.4 million of natural gas cost increases. Natural gas costs, including $7.5 million of losses on forward pricing contracts, averaged $4.29/MMBtu during 2001 compared to $3.13/MMBtu in 2000. In addition to higher gas costs, lower sales volumes reduced 2001 gross profits $26.5 million from the prior year. Operating expenses of $10.1 million declined $1.4 million, or 12%, as the result of reduced headcount and lower spending for administrative activities. Net interest expense of $0.9 million was comparable to 2000 levels. Results of operations: 2000 compared with 1999 The Partnership's sales volumes and prices for 2000 and 1999 follow (quantities in thousands of tons):
2000 1999 -------------------------------- ------------------------------- Sales Volume Avg. Unit Price Sales Volume Avg. Unit Price ------------ --------------- ------------ --------------- Ammonia 373 $ 156 479 $ 117 UAN 2,409 78 2,191 60 Urea 282 134 417 93
Revenues for 2000 increased $63.0 million, or 24%, due to higher sales prices for all products. The selling price increases were caused by lower industry-wide inventory levels as the result of the closure of marginal production facilities by other producers since mid-1999 and additional production curtailments in response to significant increases in the cost of natural gas, the primary raw material in the nitrogen production process. In response to high natural gas costs, the Partnership curtailed ammonia production and shut down its Blytheville facility for approximately three months during the second half of 2000, which resulted in lower ammonia and urea sales volumes than in 1999. Sales volumes of UAN increased during 2000 partly as the result of the permanent closure of high-cost UAN production capacity by other producers. Gross profits during 2000 totaled $32.5 million compared with $1.0 million for 1999. Higher sales prices were partially offset by $38.3 million of natural gas cost increases. Natural gas costs, net of $31.4 million in forward pricing gains, averaged $3.13/MMBtu during 2000 compared with $2.31/MMBtu in 1999. The gross profits effect of higher UAN sales volumes was mostly offset by lower ammonia and urea sales volumes. Operating expenses of $11.5 million increased $3.7 million, or 47%, as the result of computer system upgrades that caused higher administrative and overhead expense allocations from the General Partner. A portion of the increase reflects the Partnership's absorption of a higher percentage of the General Partner's operating expense after Terra Industries' distribution business was sold in June 1999. Net interest expense of $0.8 million was similar to 1999 levels. Liquidity and capital resources Net cash used in operating activities for 2001 was $21.3 million compared to 2000 cash provided by operating activities of $56.3 million, a decline of $77.6 million principally due to lower net income and increases to working capital balances. Cash used to fund working capital totaled $24.3 million in 2001 principally as the result of more typical fourth quarter operating activity in contrast to lower inventories and receivable balances at the end of 2000, when plant operating rates were reduced in response to high natural gas costs. Capital expenditures of $2.0 million during 2001 were primarily to fund replacement and stay-in-business additions to plant and equipment. The Partnership expects 2002 capital expenditures to approximate $6.0 million to fund replacement and stay-in-business additions to plant and equipment. 9 On October 10, 2001, the Partnership, along with Terra Industries Inc. ("Terra"), Terra Capital, Inc. and other affiliates, amended its asset-based financing agreement. The amended financing agreement provides for the Partnership to borrow amounts generally up to 85% of eligible receivables plus 60% of eligible inventory. At December 31, 2001, the Partnership had unused borrowing availability of approximately $23 million after deducting notes payable to affiliates of $14.3 million. The amended financing agreement, which expires June 2005, bears interest at floating rates and is secured by substantially all of the Partnerships' working capital. The 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 is required to maintain minimum levels of earnings before interest, income taxes, depreciation, amortization and other non-cash items (as defined in the financing agreement) for the preceding 12 months (LTM) computed on a quarterly basis. The minimum LTM requirement under the facility is $40 million at March 31, 2002, $60 million at June 30, 2002, $75 million at September 30, 2002 and $90 million at December 31, 2002 and each quarter thereafter. During 2001, Terra realized $66 million of earnings before interest, income taxes, depreciation, amortization and other non-cash items (as defined in the financing agreement); consequently, 2002 amounts will have to be $24 million higher than in 2001 to meet the minimum covenants under the facility. 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. If necessary, the Partnership believes that it could replace its existing credit lines on terms and conditions not materially different than its current arrangement through Terra. 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 from net cash provided by 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. Expenditures related to environmental, health and safety regulation compliance are primarily composed of operating costs that totaled $3.0 million, $3.8 million and $3.6 million in 2001, 2000 and 1999, respectively. Because environmental, health and safety regulations are expected to continue to change and generally to be more restrictive than current requirements, the costs of compliance will likely increase. The Partnership does not expect its compliance with such regulations will have a material adverse effect on its results of operations, financial position or net cash flows. In addition, the Partnership incurred $91,000, $290,000 and $895,000 of capital expenditures in 2001, 2000 and 1999, respectively, related to capital improvements to ensure compliance with environmental, health and safety regulations. The Partnership may be required to install additional air and water quality control equipment, such as low nitrous oxide burners, scrubbers, ammonia sensors and continuous emission monitors to maintain compliance with Clean Air Act and similar requirements. These equipment requirements typically apply to competitors as well. The Partnership estimates that the cost of complying with these existing requirements in 2002 and beyond will be less than $10 million. At December 31, 2001, the Partnership had $14.3 million of demand note borrowings payable to Terra Capital, Inc. and bearing interest at 5.4%, the rate paid by Terra Capital on its short-term borrowings. Quarterly distributions to TNCLP's partners are based on Available Cash for the quarter as defined in the TNCLP Agreement of Limited Partnership. 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. There were $8.3 million of distributions paid to the partners in 2001, $4.2 million in 2000 and none in 1999. 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 to the extent that distributions of Available Cash exceed specified levels. The specified levels are increased by the amount quarterly distributions to holders of Common Units are less than $0.605 per unit. As of December 31, 2001, the cumulative shortfall on quarterly distributions to holders of Common Units that must be paid before the General Partner receives an incentive payment was $132.1 million, or $7.13 per unit. 10 Recently Issued Accounting Standards In June 2001, the Financial Accounting Standards Board ("FASB") approved the issuance of Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations entered into subsequent to June 30, 2001, to be accounted for using the purchase method of accounting. SFAS No. 142 provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested annually for impairment. The Partnership does not expect the effect, if any, arising from adoption of these standards to be material to the Partnership's financial position. In July 2001, the FASB voted to issue SFAS No. 143, "Accounting for Asset Retirement Obligations". This standard requires us to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and is effective for our fiscal year 2003. The Partnership has not yet quantified the impact, if any, arising from adoption of this standard. In August 2001, the FASB voted to issue SFAS No. 144, "Accounting for the Impairment of Long-lived Assets". This standard requires that the Partnership recognize an impairment loss if the carrying amount of a long-lived asset or asset group is not recoverable and exceeds its fair value. It is effective our fiscal year 2002. The Partnership does not expect the effect, if any, arising from adoption of this standard to be material to the Partnership's financial position. General Partner Option to Effect Mandatory Redemption of Partnership Units At December 31, 2001, the General Partner and its affiliates owned 75.1% of the Partnership's outstanding units. When less than 25% of the issued and outstanding units are held by non-affiliates of the General Partner, the Partnership, at the General Partner's sole discretion, may call, or assign to the General Partner or its affiliates its right to acquire, all such outstanding units held by non-affiliated persons. If the General Partner elects to acquire all outstanding units, the Partnership is required to give at least 30 but not more than 60 days' notice of its decision to purchase the outstanding units. The purchase price per unit will be the greater of (1) the average of the previous 20 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. Forward-Looking Precautions Information contained in this report, other than historical information, may be considered forward-looking. Forward-looking information reflects management's current views of future events and financial performance that involve a number of risks and uncertainties. The factors that could cause actual results to differ materially include, but are not limited to, the following: changes in the financial markets, general economic conditions within the agricultural industry, competitive factors and price changes (principally, sales prices of nitrogen products and natural gas costs), changes in product mix, changes in the seasonality of demand patterns, changes in weather conditions, changes in agricultural regulations, and other risks detailed in the "Factors that Affect Operating Results" section of this discussion. Notes to Consolidated Financial Statements 1. Organization Terra Nitrogen Company, L.P. ("TNCLP") is a Delaware limited partnership that owns a 99% limited partner interest as the sole limited partner in Terra Nitrogen, Limited Partnership (the "Operating Partnership"; collectively with TNCLP, the "Partnership," unless the context otherwise requires). Terra Nitrogen Corporation ("TNC"), the General Partner, exercises full control over all business affairs of the Partnership. TNC owns, as general partner, a consolidated 2.0% interest in both the Partnership and Operating Partnership. 11 TNC is an indirect wholly-owned subsidiary of Terra Industries Inc. ("Terra"), a Maryland corporation. Terra is an industry leader in the production and marketing of nitrogen products and methanol. Terra is one of the largest producers of anhydrous ammonia and nitrogen solutions in the United States and Canada, as well as is the largest producer of ammonium nitrate in the United Kingdom. In addition, Terra is one of the largest U.S. producers and marketers of methanol. Ownership of TNCLP is represented by the general partner interest and the limited partner interests. The limited partner interests consist of 18,501,576 Common Units. Terra and its subsidiaries owned 13,889,014 Common Units as of December 31, 2001, and the balance are traded on the New York Stock Exchange under the symbol "TNH". The Partnership primarily evaluates performance and determines the allocation of resources on an entity-wide basis. 2. Significant Accounting Policies Description of Business - The Partnership manufactures and sells fertilizer products, including ammonia, urea and urea ammonium nitrate solution ("UAN"), which are principally used by farmers to improve the yield and quality of their crops. The Partnership sells products primarily throughout the United States on a wholesale basis. The Partnership's customers vary in size and are primarily related to the agriculture industry and to a lesser extent to the chemical industry. Credit is extended based on an evaluation of the customer's financial condition, and collateral generally is not required. Basis of Presentation - The consolidated financial statements reflect the combined assets, liabilities and operations of the Partnership and the Operating Partnership. All significant intercompany accounts and transactions have been eliminated. Income is allocated to the General Partner and the Limited Partners in accordance with the provisions of the TNCLP Agreement of Limited Partnership that provides for allocations of income between the Limited Partners and the General Partner in the same proportion as cash distributions declared during the year. Cash and Cash Equivalents - The Partnership considers cash, short-term investments and demand deposits with affiliates with an original maturity of three months or less to be cash and cash equivalents. 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 December 31, 2001, the amount of the demand notes were $14.3 million, and bore interest at 5.4%, the rate paid by Terra Capital on its short-term borrowings. At December 31, 2000, $17.9 million was deposited with Terra Capital, Inc. and earned interest at 6.5%, the rate received by Terra Capital on its commingled cash investments. Inventories - Inventories are stated at the lower of average cost or estimated net realizable value. The cost of inventories is determined using the first-in, first-out method. Property, Plant and Equipment - Expenditures for plant and equipment additions, replacements, and major improvements are capitalized. Related depreciation is charged to expense on a straight-line basis over estimated useful lives ranging from 3 to 20 years. Maintenance, other than plant turnaround and catalyst replacement, and repair costs are expensed as incurred. Plant Turnaround Costs - Costs related to the periodic scheduled major maintenance of continuous process production facilities (plant turnarounds) are deferred and charged to product costs on a straight-line basis during the period until the next scheduled turnaround, generally over two years. Included in other non-current assets at December 31, 2001 and 2000 is $7.2 million and $9.4 million, respectively, of unamortized plant turnaround costs. Impairment of Long-Lived Assets - In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed of", the Partnership reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows expected to result from the use of the asset (undiscounted and without interest charges) is less than the carrying amount of the 12 asset, an impairment loss is recognized based on the difference between the carrying amount and the fair value of the asset. To date, no such impairment has occurred. Accrued Liabilities - Accrued liabilities at December 31, 2000 included $4.3 million of deferred gains on closed natural gas contracts relating to future periods. At December 31, 2001 deferred gains on closed natural gas contracts were $0.3 million. Revenue Recognition - Revenue is recognized when title to finished product passes to the customer. Revenue is recognized as the net amount to be received after deducting estimated amounts for discounts and trade allowances. Amounts paid by customers for shipping and handling are included in revenues. Cost of Sales and Hedging Transactions - Realized gains and losses from hedging activities and premiums paid for option contracts are deferred and recognized in the month to which the hedged transactions relate (see Note 8 - Derivative Financial Instruments). Costs associated with settlement of natural gas purchase contracts and costs for shipping and handling are included in cost of sales. Income Taxes - The Partnership is not subject to income taxes and the income tax liability of the individual partners is not reflected in the consolidated financial statements of the Partnership. The reported amount of net assets of the Partnership exceeded the tax basis of the net assets by approximately $127 million and $136 million at December 31, 2001 and 2000, respectively. Reclassifications - The Partnership reclassified freight costs previously reported as a reduction of revenues to cost of sales in accordance with the Financial Accounting Standards Board's Emerging Issues Task Force No. 00-10, "Accounting for Shipping and Handling Fees and Costs". As a result, revenues and cost of sales increased by $34.6 million in 2000 and $30.2 million in 1999. Certain other reclassifications have been made to prior year's financial statements to conform with current year presentation. Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Per-unit Results and Allocations - Net income per limited partner unit is computed by dividing net income, less an approximate 2% share allocable to the General Partner for the years ended December 31, 2001, 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 that Available Cash for such taxable year was distributed to the General Partner and the Limited Partners. Recently Issued Accounting Standards - On January 1, 2001, the Partnership adopted Statement of Financial Accounting Standards ("SFAS") Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (see Note 8 - Derivative Financial Instruments). In June 2001, the Financial Accounting Standards Board ("FASB") approved the issuance of SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires all business combinations entered into subsequent to June 30, 2001 to be accounted for using the purchase method of accounting. SFAS No. 142 provides that goodwill and other intangible assets with indefinite lives will not be amortized, but will be tested for impairment on an annual basis. The Partnership does not expect the effect, if any, arising from adoption of these standards to be material to the Partnership's financial position. In July 2001, the FSAB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This standard requires us to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and is effective for our fiscal year 2003. The Partnership has not yet quantified the impact, if any, arising from adoption of this standard. 13 In August 2001, the FSAB issued SFAS No. 144, "Accounting for the Impairment of Long-lived Assets". This standard requires that the Partnership recognize an impairment loss if the carrying amount of a long-lived asset or asset group is not recoverable and exceeds its fair value and is effective for fiscal year 2002. The Partnership does not expect the effect, if any, arising from adoption of this standard to be material to the Partnership's financial position. 3. Agreement of Limited Partnership The Partnership makes quarterly cash distributions to Unitholders and the General Partner in an amount equal to 100% of Available Cash, as defined. The General Partner receives a combined minimum 2% of total cash distributions and, as an incentive, the General Partner's participation increases if cumulative cash distributions exceed specified target levels. No quarterly distributions were paid in 1999. The quarterly cash distributions paid to the Units and the General Partner in 2001 and 2000 follow: Common General Units Partner ----- ------- Total $ Per Total ($000s) Unit ($000s) ------ --- ------- 2001 First Quarter 4,070 .22 82 Second Quarter 4,070 .22 84 Third Quarter --- --- --- Fourth Quarter --- --- --- 2000 First Quarter --- --- --- Second Quarter --- --- --- Third Quarter --- --- --- Fourth Quarter 4,071 .22 83 If at any time less than 25% of the issued and outstanding units are held by non-affiliates of the General Partner, the Partnership, at the General Partner's sole discretion, may call, or assign to the General Partner or its affiliates its right to acquire, all such outstanding units held by non-affiliated persons. The General Partner and its affiliates owned 75.1% of the Common Units at December 31, 2001. If the General Partner elects to acquire all outstanding units, TNCLP is required to give at least 30 but not more than 60 days notice of its decision to purchase the outstanding units. The purchase price per unit will be the greater of (1) the average of the previous 20 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. 4. Related Party Transactions The Partnership has no employees. Pursuant to the provisions of the TNCLP Agreement of Limited Partnership, TNC, as General Partner, is paid for all direct and indirect expenses or payments it makes on behalf of the Partnership and for that portion of TNC's or its affiliates' administrative and overhead expenses and all other expenses necessary or appropriate to the conduct of the Partnership's business and reasonably allocable to the Partnership. TNC will charge TNCLP for all costs and expenses that are directly related to TNCLP operations, such as direct labor and raw materials. Some employee benefits, such as health insurance and pension, are covered under plans that include TNC and its affiliates. Employee benefit costs are allocated between TNCLP and other affiliates on the basis of direct payroll. Management believes such costs would not be materially different if the partnership were obtaining these benefits on a stand-alone basis. For the years ended December 31, 2001, 2000 and 1999, expenses charged to the Partnership by TNC amounted to $34.0 million, $33.3 million and $36.6 million, 14 respectively, including $17.2 million, $17.8 million and $18.2 million, respectively, for payroll and payroll-related expenses including pension costs. Effective January 1, 1995, under a general and administrative service agreement between TNC and Terra, certain services including accounting, legal, risk management, investor relations and certain employee benefit and other employee-related expenses are provided by Terra to TNC. The portion of these expenses allocated to TNC that relate to TNC's activities as General Partner are charged to the Partnership. Allocations are based on individual cost causative factors (such as headcount or sales volume) or on a general allocation formula based equally on sales volumes, headcount and asset values. Since it is not practicable to estimate the cost to duplicate the general and administrative support functions on a stand-alone basis, management has not attempted to estimate the amount of such expenses if the Partnership were obtaining these services on a stand-alone basis. Expenses under this agreement charged to the Partnership were $6.7 million, $8.4 million and $3.4 million for the years ended December 31, 2001, 2000 and 1999, respectively. Certain supply terminals and transportation equipment are generally available for use by the Partnership and other Terra affiliates. The costs associated with the operation of such terminals and transportation equipment and related freight costs incurred to ship product to the various sales points in the distribution system are centralized. The Partnership or Terra is charged based on the actual usage of such assets and freight costs incurred. TNC's employees are members of the Terra Industries Inc. Employees' Retirement Plan (the Terra Retirement Plan), a noncontributory defined benefit pension plan. The accumulated benefits and plan assets of the Terra Retirement Plan are not determined separately for TNC employees. TNC recorded pension costs of $0.4 million, $0.4 million and $0.7 million ($0.3 million, $0.3 million and $0.5 million of which was charged to the Partnership) in 2001, 2000 and 1999, respectively, as its allocated share of the total periodic pension cost for the Terra Retirement Plan. Benefits are based on years of service and average final compensation. Long-term payable to affiliates of $5.3 million at December 31, 2001, represents amounts due from the Partnership to Terra for a historic share of Terra's long-term pension liabilities. The payable is non-interest bearing and will be repaid when Terra is required to fund its related liabilities. No repayments are expected for 2002. Subsequent repayments will be subject to the investment performance of pension funds, changes in actuarial experience and Federal funding requirements. Terra maintains a qualified savings plan that allows employees who meet specified service requirements to contribute a percentage of their total compensation, up to a maximum defined by the plan. Each employee's contribution, up to a specified maximum, may be matched by TNC based on a specified percentage of employee contributions. Employee contributions vest immediately, while Terra's contributions vest over five years. Expenses associated with TNC's contribution to the Terra qualified savings plan charged to the Partnership for the years ended December 31, 2001, 2000 and 1999 were $532,000, $567,000 and $620,000, respectively. The Partnership sold $16.1 million of nitrogen fertilizer products to Terra at market prices and terms during the year ended December 31, 1999. In June 1999, Terra sold its Distribution business and no longer purchases product from the Partnership. 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 December 31, 2001, the amount of the demand notes were $14.3 million, and bore interest at 5.4%, the rate paid by Terra Capital on its short-term borrowings. At December 31, 2000, $17.9 million was deposited with Terra Capital, Inc. and earned interest at 6.5%, the rate received by Terra Capital on its commingled cash investments. Interest expense paid to the affiliate was $924,000, $1.4 million and $1.9 million for the years ended December 31, 2001, 2000 and 1999, respectively. Interest income received from the affiliate was $2,000, $623,000 and $649,000 for the years ended December 31, 2001, 2000 and 1999, respectively. 15 5. Property, Plant and Equipment Property, plant and equipment, net consisted of the following at December 31, (in thousands) 2001 2000 - ------------------------------------------------------------------------------- Assets owned: Land and improvements $ 5,836 $ 5,766 Plant and equipment 280,668 278,157 Terminal and transportation equipment 6,865 7,841 ---------- --------- 293,369 291,764 Less accumulated depreciation and amortization (157,034) (144,167) ---------- ----------- Total $ 136,335 $ 147,597 =========== =========== 6. Long-Term Debt Long-term debt consisted of the following at December 31, (in thousands) 2001 2000 - -------------------------------------------------------------------------------- Fixed asset term facility, Paid in 2001 $ --- $ 9,250 Long-term debt due to affiliate 8,200 --- --------- ----------- 8,200 9,250 Less current maturities --- (1,000) --------- ----------- Total $ 8,200 $ 8,250 ========== =========== On October 10, 2001, the Partnership, along with Terra Industries Inc. ("Terra"), Terra Capital and other affiliates, amended its asset-based financing agreement. The amended financing agreement provides for the Partnership to borrow amounts generally up to 85% of eligible receivables plus 60% of eligible inventory less outstanding letters of credit issued under the facility. At December 31, 2001, the Partnership had no amounts outstanding under the amended financing agreement. The amended financing agreement, which expires June 2005, bears interest at floating rates and is secured by substantially all of the Partnerships' working capital. The 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 is required to maintain minimum levels of earnings before interest, income taxes, depreciation, amortization and other non-cash items (as defined in the financing agreement) for the preceding 12 months (LTM) computed on a quarterly basis. The minimum LTM requirement under the facility is $40 million at March 31, 2002, $60 million at June 30, 2002, $75 million at September 30, 2002 and $90 million at December 31, 2002 and each quarter thereafter. During 2001, Terra Industries Inc. realized $66 million of earning before interest, income taxes, depreciation, amortization and other non-cash items (as defined in the financing agreement); consequently, 2002 amounts will have to be $24 million higher than in 2001 to meet the minimum covenants under the facility. Failure to meet these covenants would require Terra to incur additional costs to amend the bank facilities or could result in termination the facilities. The long-term debt due to affiliates is secured by the fixed and intangible assets of the Partnership and requires no periodic or scheduled repayments. 7. Commitments and Contingencies The Operating Partnership is committed to various non-cancelable operating leases for land, buildings and equipment. Total minimum rental payments follow: 16 (in thousands) - -------------------------------------------------------------------------------- 2002 $ 7,919 2003 7,205 2004 5,010 2005 4,266 2006 2,427 2007 and thereafter 3,458 -------- Net minimum lease payments $ 30,285 ======== Included above is the lease of the Port Terminal at the Verdigris facility. The leasehold interest is scheduled to expire on April 30, 2004, and the Partnership has the option to renew the lease for an additional term of five years. Rent expense under non-cancelable operating leases amounted to approximately $7.1 million, $8.2 million and $8.5 million for the years ended December 31, 2001, 2000 and 1999, respectively. The Partnership is involved in various legal actions and claims, including environmental matters, arising from the normal course of business. It is the opinion of management that the ultimate resolution of these matters will not have a material adverse effect on the results of operations, financial position or net cash flows of the Partnership. 8. Derivative Financial Instruments The Partnership records hedging gains and losses related to natural gas supply requirements based on a pooled resources concept with Terra. Under the pool concept, hedging gains and losses are allocated to each manufacturing plant based on gas usage for such plant. The Partnership is subject to risks undertaken by Terra in its policy of using derivative financial instruments to manage the risk associated with changes in natural gas supply prices. Derivative financial instruments have credit risk and market risk. To manage credit risk, Terra enters into derivative transactions only with counter-parties who are currently rated BBB or better as recognized by a national rating agency. Terra will not enter into a transaction with a counter-party if the additional transaction will result in credit exposure exceeding $20 million. The credit rating of counter-parties may be modified through guarantees, letters of credit or other credit enhancement vehicles. Market risk related to derivative financial instruments should be substantially offset by changes in the valuation of the underlying item being hedged. The Partnership classifies a derivative financial instrument as a hedge if all of the following conditions are met: 1. The item to be hedged must expose the enterprise to price risk. 2. It must be probable that the results of the hedge position substantially offset the effects of price changes on the hedged item (e.g., there is a high correlation between the hedge position and changes in market value of the hedged item). 3. The derivative financial instrument must be designated as a hedge of the item at the inception of the hedge. Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities" requires that all derivative instruments, whether designated in hedging relationships or not, be recorded in the balance sheet at fair value. If the derivative is designated as a fair value hedge, the change in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of the changes in fair value of the derivative are recorded in other comprehensive income (OCI) and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. The Partnership has designated its natural gas derivative instruments as cash flow hedges. The effective portion of the cash flow hedge is deferred in OCI until the natural gas it relates to is purchased and used in production which is then reclassified from OCI to earnings. 17 Natural gas supplies to meet production requirements at the Operating Partnership's production facilities are purchased at market prices. Natural gas market prices are volatile and the Partnership effectively fixes prices for a portion of its natural gas production requirements and inventory through the use of futures contracts, swap agreements and purchased options. These contracts reference physical natural gas prices or appropriate NYMEX futures contract prices. Contract physical prices are frequently based on prices at the Henry Hub in Louisiana, the most common and financially liquid location of reference for financial derivatives related to natural gas. However, natural gas supplies for the Partnership's two production facilities are purchased for each plant at locations other than Henry Hub, which often creates a location basis differential between the contract price and the physical price of natural gas. Accordingly, the use of financial derivatives may not exactly offset the change in the price of physical gas. The contracts are traded in months forward and settlement dates are scheduled to coincide with gas purchases during that future period. A swap is a contract with a third party to exchange cash based on a designated price. Option contracts give the holder the right to either own or sell a futures or swap contract. The futures contracts require maintenance of cash balances generally 10% to 20% of the contract value and option contracts require initial premium payments ranging from 2% to 5% of contract value. Basis swap contracts require payments to or from the Partnership for the amount, if any, that monthly published gas prices from the source specified in the contract differ from prices of NYMEX natural gas futures during a specified period. There is no initial cash requirements related to the swap and basis swap agreement. The following summarizes open natural gas contracts allocated to the Partnership at December 31, 2001 and 2000:
2001 2000 -------------------------- -------------------------- Contract Unrealized Contract Unrealized (in thousands) MMBtu Gain (Loss) MMBtu Gain (Loss) - ---------------------------------------------------------------------------------------------- Swaps 6,044 $ (1,054) 4,411 $ 10,573 Options --- --- 3,930 (988) ------ ---------- ----- ---------- 6,044 $ (1,054) 8,341 $ 9,585 ====== ========== ===== ========== Basis Swaps --- $ --- 4,200 $ 282 ------ ========== ===== ==========
The Partnership's annual procurement requirements are approximately 56 million MMBtu's of natural gas. The Partnership had in place at December 31, 2001, hedge contracts and firm purchase commitments to cover 20% of 2002 natural gas requirements. Gains and losses on settlement of these contracts and premium payments on option contracts are credited or charged to cost of sales in the month to which the hedged transaction relates. The risk and reward of outstanding natural gas positions are directly related to increases or decreases in natural gas prices in relation to the underlying NYMEX natural gas contract prices. Realized losses were $0.3 million on closed contracts relating to future periods as of December 31, 2001. Cash flows related to natural gas hedging are reported as cash flows from operating activities. Compared with spot prices, natural gas hedging activities increased the Partnership's 2001 natural gas costs by $7.5 million and reduced 2000 and 1999 natural gas costs by $31.4 million and $2.5 million, respectively. The estimated fair value of the natural gas futures, swaps, options and basis swaps were based on published referenced prices and quoted market prices from brokers. On January 1, 2001, the Partnership adopted SFAS 133 which resulted in a cumulative $9.9 million increase to current assets, a $4.3 million reduction to current liabilities, and a $14.2 million increase to accumulated OCI, which reflected the effective portion of the derivatives designated as cash flow hedges. The increase to current assets was to recognize the value of open natural gas contracts, the reduction to current liabilities was to reclassify deferred gains on closed contracts relating to future periods and the increase to long-term debt related to interest rate hedges. 18 The changes in the components of accumulated OCI during the year follows:
Net Unrealized Gain (Loss) Accumulated on Natural Gas Realized Gain Other and Fertilizer (Loss) Deferred Comprehensive (in thousands) Hedging Activity to Future Periods Income - ------------------------------------------------------------------------------------------------------------------- Balance January 1, 2001 $ 9,900 $ 4,300 $ 14,200 Net unrealized loss arising during period (1,054) (33) (1,087) Transfer net loss realized to production costs and interest expense (9,900) (4,300) (14,200) - ------------------------------------------------------------------------------------------------------------------ Balance December 31, 2001 $ (1,054) $ (33) $ (1,087) ===================================================================================================================
9. Other Financial Information and Concentrations of Credit Risk Fair values of financial instruments - The following methods and assumptions were used by the Partnership in estimating its fair value disclosures for financial instruments: Cash and cash equivalents - The carrying amounts reported in the balance sheet for cash and cash equivalents approximate their fair values. Long-term debt -The carrying amounts of the Partnership's borrowings under long-term debt agreements approximate fair value. Off-balance-sheet instruments - Fair values for the Partnership's natural gas swaps and options are based on contract prices in effect at December 31, 2001 and December 31, 2000. The unrealized gain (loss) on these contracts is disclosed in Note 8. Concentration of credit risk - The Partnership is subject to credit risk through trade receivables and short-term investments. Although a substantial portion of its debtors ability to pay is dependent upon the agribusiness economic sector, credit risk with respect to trade receivables is minimized due to a large customer base and its geographic dispersion. Short-term cash investments, held as a demand deposit with an affiliate, may be placed with well-capitalized, high quality financial institutions and in short duration corporate and government debt securities funds or utilized for other corporate purposes. Major customers - For the year ended December 31, 1999, sales to Terra totaled $16.1 million, or 7.1% of the Partnership's sales. In June 1999, Terra sold its distribution business and no longer purchases product from the Partnership. -----END PRIVACY-ENHANCED MESSAGE-----