-----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, BI4WZm8ZIAZRZCWpuA+nEMOJQQ4gAeQV6FttHBHbJEgufeX7Zz3ArKeh+ta6KTBX PK5bedMWArEHwKNQ8gazvA== 0000950131-99-001728.txt : 19990326 0000950131-99-001728.hdr.sgml : 19990326 ACCESSION NUMBER: 0000950131-99-001728 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 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: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-43007 FILM NUMBER: 99572839 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-K 1 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, 1998 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 incorporation or organization) Identification No.) 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. The aggregate market value of the registrant's Common Units held by nonaffiliates as of the close of business on January 31, 1999 was $55,800,000. ================================================================================ 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 8. Financial Statements and Supplementary Data.................................. 13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................................... 14 PART III -------- Item 10. Directors and Executive Officers of the Registrant........................... 15 Item 11. Executive Compensation....................................................... 16 Item 12. Security Ownership of Certain Beneficial Owners and Management............... 20 Item 13. Certain Relationships and Related Transactions............................... 21 PART IV ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............. 23 Signatures..................................................................................... 26 Index to Financial Statement Schedules, Reports and Consents................................... F-1
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"), a Delaware corporation, owns a combined 2.0% general partner interest in, and serves as the general partner (the "General Partner") of, both TNCLP and the Operating Partnership (collectively the "Partnership", unless the context otherwise requires). TNC is an indirect, wholly owned subsidiary of Terra Industries Inc. ("Terra"), a Maryland corporation. Terra, through its various subsidiaries, is a leading marketer and producer of nitrogen fertilizer, crop protection products, seed and services for agricultural, turf, ornamental and other growers. Terra also produces nitrogen products and methanol for industrial customers. 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 12,779,814 Common Units as of December 31, 1998 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, to some extent, the various nitrogen fertilizer products are interchangeable, each has its own distinct characteristics which result in agronomic preferences among end users. Farmers determine which type of nitrogen fertilizer to apply depending on the crop, soil and weather conditions, regional farming practices and relative nitrogen fertilizer prices. The Partnership's sales mix for each of the years 1998, 1997 and 1996 was (based on tons sold):
1998 1997 1996 ---- ---- ---- Ammonia 15% 15% 13% Urea 15% 15% 13% UAN 0% 70% 74% ---- ---- ---- 100% 100% 100%
Ammonia. The Partnership produces ammonia, the simplest form of nitrogen fertilizer and the feedstock for the production of most other nitrogen fertilizers, at its two plants (the "Plants") located in Verdigris, Oklahoma (the "Verdigris Plant") and Blytheville, Arkansas (the "Blytheville Plant"). 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 unit 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. 1 Urea. The Partnership produces urea at the Blytheville Plant, by upgrading a portion of its ammonia production. Solid urea is produced by converting ammonia into liquid urea which is then dehydrated, turned into a solid and either prilled or granulated. Prilled materials are the most common form of solid urea. The granular form made by the Partnership may 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. UAN. The Partnership produces UAN at the Verdigris Plant and at the Blytheville Plant by upgrading a portion 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%. 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 rather than in separate applications, thus reducing energy and labor costs. In addition, UAN, unlike ammonia, may be applied from ordinary tanks and trucks and can be sprayed on, injected into the soil, or applied 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, and the Partnership believes this trend, if continued, should 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 Plants are located on waterways near the major crop producing and consuming areas of the United States, where the Partnership has ready access to barge, truck and rail transportation at both Plants and an ammonia pipeline at the Verdigris Plant to transport product to its primary markets. The Partnership's products are marketed and distributed through an organization that is based out of Sioux City, Iowa and provides combined services to the Partnership and Terra. For further information on the combined organizations of the General Partner and its affiliates, see "Certain Relationships and Related Transactions". 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, who, in turn, sell directly to farmers. Many dealers maintain storage capacity for year-round inventory as well as application equipment. The majority of the Partnership's sales of nitrogen fertilizer is made to dealers. For the year ended December 31, 1998, sales to Terra totaled $26.3 million, or 10.5% of the Partnership's sales. For a description of the Partnership's sales to affiliates of the General Partner, see "Certain Relationships and Related Transactions". No other customer accounted for greater than 10% of the Partnership's 1998 sales. The Partnership occasionally exports UAN through an export marketing association comprised of four domestic UAN producers. Transportation. The Partnership transports product primarily via barge and railcar. Additionally, the Partnership uses trucks to transport smaller quantities of product, and the Verdigris Plant distributes ammonia through a common carrier pipeline. In addition, various supply terminals and transportation equipment are generally available for the use and benefit of the Partnership and affiliates of the General Partner. The Partnership has access to significant storage capacity throughout the Midwestern U.S. through these supply terminals and by its storing product in various retail service centers of Terra. See "Certain Relationships and Related Transactions." 2 PRODUCTION FACILITIES The following table illustrates the Partnership's gross production capacity and percentage of capacity utilized.
Years Ended December 31, ------------------------ 1998 1997 1996 -------- -------- -------- Capacity (000s short tons) Ammonia 1,470 1,470 1,470 Urea 480 480 480 UAN 2,210 2,210 2,210 ----- ----- ----- Total 4,160 4,160 4,160 Capacity Utilization* 104% 105% 105%
* Capacity utilization is determined by dividing the gross tons of product produced by the tons of capacity at expected operating rates and onstream factors. Verdigris Plant. The Verdigris facility is located at the Port of Catoosa, in Rogers County, Oklahoma. On the Verdigris site are the Verdigris Plant and the Port Terminal. The Verdigris Plant is owned in fee by the Partnership, while the Port Terminal is leased from the Tulsa-Rogers County Port Authority. 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. The Verdigris Plant consists of two ammonia plants, two nitric acid plants and two UAN solution plants. The Verdigris Plant produces primarily ammonia and UAN solution. In 1998, approximately 71% of its ammonia production was converted into UAN. In addition, the Verdigris Plant also contains carbon dioxide and argon recovery facilities. The Verdigris Plant's sale of by-product carbon dioxide and argon reduces the cost of production of nitrogen products. The Verdigris Plant transports its products by barge, truck, rail and pipeline. The Partnership's assets at the Verdigris Plant are subject to an encumbrance in favor of lenders. Blytheville Plant. The Blytheville Plant is located in Mississippi County, Arkansas, adjacent to the Mississippi River. The Blytheville Plant consists of an ammonia plant, a granular urea plant and a UAN solution plant. In 1998, approximately 65% of its ammonia was converted into granular urea and UAN. The ammonia facility at the Blytheville Plant is leased from the City of Blytheville at a nominal annual rental. The lease term is scheduled to expire on November 30, 2004, and the Partnership has the option to extend the lease for eleven successive terms of five years each at the same rental rate. The Partnership has the unconditional right to purchase the Plant for a nominal price at the end of the lease term (including any renewal term). The urea facility is also leased from the City of Blytheville. The lease is scheduled to expire on November 1, 2005, and the Partnership has the option to renew the lease for three successive periods of five years each at a nominal annual rental. The Partnership also has an option to purchase the property for a nominal price. The Blytheville Plant has access to a distribution system which includes rail, truck and barge transportation. This distribution network gives the Blytheville Plant the flexibility to serve the Eastern U.S. fertilizer markets. The Partnership's assets at the Blytheville Plant are subject to an encumbrance in favor of lenders. Terminal Facilities. The Partnership owns and operates four terminals used in the storage and distribution of product to customers. The Dublin Terminal, a UAN terminal owned by the Partnership in fee, is located in Henry and Wayne Counties, Indiana. The Blair Terminal, an ammonia and UAN terminal facility in which the Partnership holds a fee interest and a leasehold interest, is located in Washington County, Nebraska. The Pekin Terminal, a UAN terminal in which the Partnership holds a leasehold interest, is located in Tazewell County, Illinois. The Shattuc Terminal, a UAN terminal owned by the Partnership in fee, is located in Clinton County, Illinois. The leasehold portions of both the Blair Terminal and the Pekin Terminal properties are leased from Conoco Inc. under a capital lease. The lease is scheduled to terminate on November 30, 2000. The Partnership has an option to purchase these properties for a nominal price at the end of the lease term. In addition, as of December 31, 1998, the Partnership had access to leased space in 78 terminals located in numerous states. RAW MATERIALS Natural gas is the primary raw material used in the production of ammonia and is also the primary fuel used in the Partnership's ammonia production processes. The Partnership purchases natural gas from unaffiliated sources. The purchase, transportation and forward pricing activities of natural gas account for a large majority of the Partnership's 3 production costs, and represented 54% of total costs and expenses during 1998. A significant increase in the price of natural gas that is not recovered through an increase in nitrogen fertilizer prices would have a material adverse effect on the Partnership's profitability and cash flow. Annual gas usage in the Partnership's Plants is approximately 56 million MMbtus (million British Thermal Units). The Partnership has entered into firm transportation contracts to minimize the risk of interruption or curtailment of natural gas supplies. The Partnership's natural gas procurement policy is to effectively fix or cap the unit cost of 40% to 80% of its natural gas requirements for the upcoming 12 months and up to 50% of its natural gas requirements for the subsequent two-year period using supply contracts, financial derivatives and other forward pricing techniques in an attempt to gain some protection against natural gas price increases on the spot market. Consequently, if natural gas prices were to increase in a future period the Partnership may benefit from these forward pricing techniques; however, if natural gas prices were to fall, the Partnership may incur costs above the spot market price as a result of such policies. The settlement dates for such financial instruments are scheduled to coincide with gas purchases during such future periods. These instruments reference physical natural gas prices or appropriate NYMEX futures contract prices. The contracts' physical prices are frequently based on the Henry Hub Louisiana price, which is the most common and financially liquid location of reference for financial derivatives related to natural gas; however, natural gas supplies for the Partnership's two production facilities are purchased from various suppliers at locations that are different from Henry Hub. This creates a location basis differential between the contract price and the physical price of natural gas. Accordingly, the use of financial derivatives may not exactly offset the change in price of physical gas. Therefore, the Partnership has entered into basis swaps to maintain fixed prices for the location basis differential. As of December 31, 1998, the Partnership had effectively fixed or capped the price of a portion of its natural gas requirements for 1999 and 2000 in line with its gas procurement policy mentioned above. Liquidation of these financial derivatives based on December 31, 1998 market prices would have resulted in a loss of $4.9 million. Verdigris Plant Supply. The Verdigris Plant obtains natural gas under a transportation agreement with Oklahoma Natural Gas Company ("ONG") that will expire in 2004. Under the provisions of the agreements, the Partnership has the option to: (a) purchase all or part of its natural gas requirements from ONG at prices periodically offered by ONG, (b) purchase natural gas from third parties or (c) use any combination of (a) or (b). Except under certain limited circumstances, all natural gas purchased by the Verdigris Plant must be transported to the Plant on ONG's pipeline system under interruptible transportation agreements. Blytheville Plant Supply. The Partnership has agreements for the transportation of natural gas to the Blytheville Plant. The primary term of the agreements expires on May 1, 2001. SEASONALITY AND VOLATILITY Nitrogen fertilizer is a global commodity and generally has no proprietary distinction. The U.S. nitrogen fertilizer business is both seasonal and volatile due to a number of factors that affect U.S. and world supply and demand. Approximately 60% of all nitrogen fertilizer consumed in the United States is applied on acreage used for growing corn and wheat. Because of its dependence on U.S. agricultural markets, the Partnership's business is seasonal to the extent that the Partnership typically realizes higher prices and accordingly more revenues on its products in the second quarter. The seasonality of the Partnership's business is the result of the U.S. agricultural growing season, which imposes the need to build inventories for the annual peak periods of fertilizer application and generally results in higher fertilizer prices during such peak periods. Prices for fertilizer typically peak in the spring, drop in the summer, increase in the fall (as depleted inventories are restored) through the spring. However in 1997 and 1998, as discussed below, nitrogen fertilizer prices declined during the summer and continued to decline during the fall and winter as a result of increased production capacity in the industry. In recent years, additional UAN storage capacity has been built which allows the Partnership's customers to purchase more product during the fall and winter months. As a result, there may be a shift in Partnership UAN sales from the first and second quarters of the year to the third and fourth quarters. While the third and fourth quarter sales volume may now generally be expected to represent a higher percentage of the annual sales volume, the second quarter continues to be the Partnership's strongest quarter producing the highest sales volume and earnings. The Partnership's revenues are dependent on U.S. agricultural conditions, which can be volatile as a result of a number of factors, the most important of which are weather patterns and conditions (particularly during periods of high 4 fertilizer application), current and projected grain stocks and prices, grain export prices and supports, and the U.S. government's agricultural policy. U.S. governmental policies were designed to regulate or influence the number of acres planted, the level of grain inventories, the mix of crops planted and crop prices in order to mitigate price and grain inventory volatility. The enactment of the Federal Agriculture Improvement and Reform ("FAIR") Act during 1996 ended government acreage reduction and production control measures and allowed farmers more flexibility in planting. As a result, additional acres were brought into production during 1996 and this increase in acreage production, if sustained, could have a positive impact on the fertilizer industry over the next few years. However, during 1997 and 1998, the impact of the increase in acreage production was more than offset by increased nitrogen fertilizer production capacity from new plants and expansion of existing plants by competitors (see "Competition"). Nitrogen fertilizer producers experienced favorable market conditions in 1995 and 1996 which led to increased supply since 1997 through the construction of new plants and expansion of existing facilities. Future nitrogen fertilizer prices will depend on, among other things, to what extent increased worldwide supply will be absorbed by increased demand or to what extent marginal production capacity is shut down. COMPETITION The nitrogen fertilizer industry is highly competitive. Competition takes place largely on the basis of price, reliability and deliverability. The relative cost and availability of natural gas, the efficiency of production facilities and the ability to transport finished goods to end users are important competitive factors. The Partnership's domestic competitors include large farm cooperatives, other independent fertilizer companies and subsidiaries or divisions of larger energy companies. In addition, nitrogen fertilizers imported into the United States compete with domestically produced nitrogen fertilizers, including those of the Partnership. Some of the Partnership's principal competitors may have greater total resources and may be less dependent on earnings from nitrogen fertilizer sales than is the Partnership. Countries with inexpensive sources of natural gas, particularly those in the former Soviet Union and the Middle East, can produce nitrogen fertilizers at a low cost. However, political instability and transportation costs can serve as deterrents to exporting nitrogen fertilizers to the U.S. Favorable market conditions in the mid-1990s have resulted in nitrogen fertilizer production capacity increases, and additional capacity started up in 1998 with more expected in the next few years. If increasing demand is insufficient to absorb new supplies generated by these facilities, profit margins could decline further in future periods. ENVIRONMENTAL MATTERS The Partnership is subject to federal, state and local environmental, health and safety laws and regulations, particularly relating to air and water quality. In the course of its ordinary operations, the Partnership has and will generate wastes, which may fall within the definition of "hazardous substances" under federal or state laws. If such wastes have been disposed of at sites which are targeted for cleanup by federal or state regulatory authorities, the Partnership may be among those responsible under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or analogous state laws for all or part of the costs of such cleanup. The Partnership believes that the procedures currently in effect at all of its facilities for the production, handling and transportation of all materials are consistent with industry standards and in compliance with applicable environmental, health and safety laws in all material respects. In addition, in connection with the Asset Purchase Agreement dated February 7, 1990, between TNC and Freeport-McMoRan Resource Partners, Limited Partnership ("FMRP"), as amended, by which TNC purchased certain nitrogen fertilizer operations from FMRP (the "1990 TNC Acquisition"), FMRP agreed to provide TNC a limited indemnity (the "Freeport Indemnity") for certain environmental liabilities that are the subject of official notice from a court or governmental agency. The Freeport Indemnity encompasses all costs incurred in respect of all such liabilities associated with the off-site disposal of hazardous substances or other solid wastes generated by FMRP prior to the 1990 TNC Acquisition closing date, February 28, 1990. Based on its current knowledge, the Partnership does not expect any capital expenditures relating to environmental matters to have a material adverse effect on its results of operations, financial condition, capital resources, liquidity or cash flow. There can be no assurance, however, that additional environmental matters resulting in material liabilities or expenditures will not be discovered or that, in the future, material expenditures for such matters will not be required by changes in law. 5 EMPLOYEES The Partnership does not have any employees, officers or directors. The General Partner is responsible for the management of the Partnership. As of December 31, 1998, the General Partner had 350 employees. None of the General Partner's employees are subject to collective bargaining agreements. The General Partner considers its labor relations to be good. LIMITED CALL RIGHT If at any time less than 25% of the issued and outstanding units are held by non-affiliates of the General Partner, the Partnership 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 69% of the Common Units at December 31, 1998. If and when the 75% ownership threshold is met, TNCLP shall 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 twenty trading days closing prices as of the date five days before the purchase is announced or (2) the highest price paid by the General Partner or any of its affiliates for any unit within the 90 days preceding the date the purchase is announced. 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 Not Applicable. 6 PART II ITEM 5. Market for Registrant's Units and Related Unitholder Matters Prior to April 1, 1997, the SPUs of TNCLP were listed and traded on the New York Stock Exchange under the symbol, TNH. After March 31, 1997, the Common Units traded under the symbol TNH on the New York Stock Exchange. The high and low sales prices of the Common Units (previously SPUs) for each quarterly period for 1998 and 1997, as reported on the New York Stock Exchange Composite Tape, were as follows:
1998 1997 Quarter High Low High Low ------- ---- --- ---- --- 1st $30.6250 $26.8125 $45.3750 $35.5000 2nd 31.0000 22.3125 43.8750 37.8750 3rd 21.0625 18.1250 42.3750 32.2500 4th 18.6875 9.3750 38.1875 23.2500
Based on information received from TNCLP's transfer and servicing agent, the number of registered unitholders as of February 26, 1999 is 693. TNC owned 11,779,814 Common Units as of December 31, 1998. The quarterly cash distributions paid to the Units and the General Partner in 1998 and 1997 were as follows:
Amount Per Amount Per Amount Distributed Senior Preference Common to General Partner Unit Unit 1998: First Quarter - $1.17 $ 3,431,000 Second Quarter - - 0 Third Quarter - 1.72 9,895,000 Fourth Quarter - - 0 1997: First Quarter $.605* $1.50 $10,476,778 Second Quarter .605* 1.02 1,835,535 Third Quarter - 2.38 26,686,249 Fourth Quarter - .29 109,543
* The distributions paid in the first and second quarters of 1997 to the holders of the SPUs represented an amount equal to the MQD for each quarter. Nonconverting SPU holders were not entitled to participate in cash distributions in excess of the MQD after December 31, 1996. Cash distributions are based on Available Cash for the quarter as defined in TNCLP's limited partnership agreement. 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, 1998. 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, ---------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands, except Income per Unit and Average Realized Prices) INCOME STATEMENT DATA: Revenues $ 249,434 $ 333,959 $ 362,730 $ 373,325 $ 300,269 Other income 1,326 1,353 408 650 2,565 ---------- ---------- ---------- ---------- ---------- Total revenues 250,760 335,312 363,138 373,975 302,834 Cost of goods sold 201,981 219,486 177,502 187,615 193,541 ---------- ---------- ---------- ---------- ---------- Gross profit 48,779 115,826 185,636 186,360 109,293 Operating expenses 9,179 12,147 13,035 16,840 20,000 ---------- ---------- ---------- ---------- ---------- Operating income 39,600 103,679 172,601 169,520 89,293 Interest expense (2,288) (2,201) (1,210) (1,748) (3,575) Interest income 1,463 3,660 6,242 4,696 2,038 ---------- ---------- ---------- ---------- ---------- Income before extraordinary expense $ 38,775 $ 105,138 $ 177,633 $ 172,468 $ 87,756 ========== ========== ========== ========== ========== Income before extraordinary expense per limited partner unit $ 1.60 $ 4.17 $ 6.35 $ 6.55 $ 4.57 ========== ========== ========== ========== ========== BALANCE SHEET DATA (AT PERIOD END): Net property, plant and equipmen $ 164,689 $ 169,533 $ 172,771 $ 177,358 $ 179,028 Total assets 236,077 253,828 306,668 338,123 316,645 Long-term debt and capital lease obligations, including current maturities 8,965 10,036 4,198 5,702 42,450 Partners' capital 178,755 206,775 243,744 286,356 236,879 OPERATING DATA: Production (000's tons): (a) Ammonia-net of upgrades 485 487 397 427 535 UAN 2,270 2,299 2,286 2,158 1,890 Urea 492 496 447 453 424 Total production ---------- ---------- ---------- ---------- ---------- 3,247 3,282 3,130 3,038 2,849 Sales Volume (000's tons): (a) Ammonia 456 475 394 451 541 UAN 2,151 2,249 2,324 2,133 1,884 Urea 453 496 419 455 418 ---------- ---------- ---------- ---------- ---------- Total sales 3,060 3,220 3,137 3,039 2,843 Average realized prices ($/ton) Ammonia $ 129 $ 183 $ 186 $ 199 $ 174 UAN 64 79 92 93 77 Urea 115 139 179 187 147
(a) Sales volume differs from production due to the purchase and resale by the Partnership of ammonia, UAN and Urea as well as changes in the quantities of inventory of each of the products of the Partnership. 8 ITEM 7. 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 number of planted acres, the effects general weather patterns have on timing and duration of field work for crop planting and harvesting, the availability and cost of natural gas, the effect of environmental legislation on demand for the Partnership's products, the availability of financing sources to fund seasonal working capital needs, and the potential for interruption due to accident or natural disaster. Although the Partnership's revenues are principally domestic, nitrogen fertilizer is a global commodity thus the worldwide relative balance of supply and demand for nitrogen fertilizer can impact Partnership sales. Worldwide demand is affected by the growing population and improving economies in developing countries. Worldwide capacity and the availability of nitrogen product exports from major producing areas affect supply. Due to several years of favorable economics in the industry, capacity additions in the form of new and expanded production facilities have been undertaken. The new nitrogen fertilizer supplies that have come on-stream have adversely impacted profit margins until increased demand is sufficient to absorb new supplies or marginal production capacity is shut down. Demand for nitrogen fertilizer in the United States comes primarily from the agricultural market. Approximately 60% of all nitrogen fertilizer is applied to acreage for corn and wheat. The enactment of the FAIR Act in 1996 ended government acreage reduction and production control measures and allowed farmers more flexibility in planting. Changes in corn and wheat acreages can have a significant effect on the demand for the Partnership's products. Weather can have a significant effect on demand for the Partnership's products. Weather conditions that delay or intermittently disrupt field work during the planting season may result in fewer nitrogen applications. Similar 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 reduce the amount of fertilizer purchased in the future. The Partnership's margins are also influenced by the cost of natural gas, the primary raw material in the production of nitrogen fertilizers. In 1998, natural gas costs accounted for approximately 54% of the Partnership's total costs and expenses. It is the policy of the Partnership to hedge 40-80% of its natural gas requirements for a one-year period, and up to 50% of its requirements for the subsequent two-year period. The Partnership manages the market price volatility of natural gas prices through the use of derivative commodity instruments. Changes in the market value of these instruments have a high correlation to changes in the spot price of natural gas. The fair value of these instruments is estimated based on quoted market prices from brokers and computations prepared by the Partnership. Annual procurement requirements for natural gas are approximately 56 million MMbtu. The Partnership has hedged 59% of its 1999 requirements and 15% of its 2000 requirements. Market risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse change in price. As of December 31, 1998, the Partnership's market risk exposure related to future natural gas requirements being hedged was $7.4 million based on the sensitivity analysis. This hypothetical adverse impact on natural gas derivative instruments would be more than offset by lower costs for natural gas purchases. The Partnership's business is highly seasonal with the majority of sales occurring during the second quarter in conjunction with spring planting activity. Due to the seasonality of the business and the relatively brief periods during which products can be used by customers, the Partnership builds inventories during the first quarter of the year to ensure timely product availability during the peak sales season. For its current level of sales, the 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 1999. The Partnership is subject to federal, state, and local environmental, health, and safety laws and regulations, particularly relating to air and water quality. In the course of its ordinary operations, the Partnership generates wastes that may fall within the definition of "hazardous substances" under federal or state laws. The Partnership's production facilities and storage locations require ongoing operating expenditures to remain in compliance with environmental regulations. These operating costs consist largely of items related to electrical and chemical usage, waste disposal, laboratory analysis and fees for outside consultants and contractors. 9 The Partnership's operations may be subject to significant interruption if one or more of its facilities were to experience a major accident or other natural disaster. The Partnership currently maintains insurance (including business interruption insurance) and expects that it will continue to do so in an amount that it believes is sufficient to allow the Partnership to withstand 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. It is the general policy of the Partnership 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 Partnership'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. RESULTS OF OPERATIONS: 1998 COMPARED WITH 1997 The Partnership's sales volumes and prices for the twelve months ended December 31, 1998 and 1997 were as follows:
1998 1997 ------------------------------------ ------------------------------------- Sales Volume Avg. Unit Price Sales Volume Avg. Unit Price (000 tons) ($ / ton) (000 tons) ($ / ton) ---------- --------- --------- --------- Ammonia 456 129 475 183 UAN 2,151 64 2,249 79 Urea 453 115 496 139
Revenues for the year ended December 31, 1998 declined $84.5 million, or 25%, primarily due to lower sales prices for all products and to a lesser degree, lower sales volumes. Nitrogen prices fell during 1998 due to lower worldwide demand for urea, increased nitrogen production capacity and erratic weather patterns in the Partnership's markets. Wet weather in some Midwestern areas during the spring and drought conditions in the Southwest led to lower demand for UAN. As a result of increased UAN availability and lower alternate nitrogen prices, the Partnership's UAN average unit sale price declined 19% compared with 1997. In addition, lower grain prices caused some growers to delay post-harvest fertilizer applications, and anticipated continued price weakness caused some fertilizer dealers to delay filling inventories with urea and solutions. Urea average unit sales price declined 17% in 1998 compared with 1997 due to the continuation of a significant reduction in China's purchases in the world markets. China had been a major purchaser of urea for import prior to 1997, but increased production in that country led to elevated inventories and a ban on all urea imports until the inventories are reduced. This created excess supply in the world markets and led to significantly lower prices during 1998. Cost of goods sold as a percentage of revenues increased to 81% for 1998 from 65% in 1997 due to lower sales prices somewhat offset by lower natural gas costs. The Partnership's natural gas costs decreased 5% in 1998 compared with 1997. The Partnership's forward pricing activities produced $5.9 million in cost savings compared with spot market natural gas prices during 1998 compared with $25.6 million in cost savings in 1997. Operating expenses decreased $3.0 million, or 25%, due to lower pension, administrative and overhead expense allocations from TNC and Terra. Interest expense was essentially unchanged in 1998 compared to 1997. 10 Interest income declined $2.2 million during 1998 due to lower levels of cash and short-term investments, the result of decreased profitability. Net income per limited partner unit is computed by dividing net income, less an approximate 24% and 26% share allocable to the General Partner for the years ended December 31, 1998 and 1997, 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. 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 target levels, which were not met. Available Cash for 1998 decreased $103.6 million from 1997 due primarily to lower net income in 1998. 1997 COMPARED WITH 1996 The Partnership's sales volumes and prices for the twelve months ended December 31, 1997 and 1996 were as follows:
1997 1996 ------------------------------------ ------------------------------------- Sales Volume Avg. Unit Price Sales Volume Avg. Unit Price (000 tons) ($ / ton) (000 tons) ($ / ton) ---------- --------- ---------- --------- Ammonia 475 183 394 186 UAN 2,249 79 2,324 92 Urea 496 139 419 179
Revenues for the year ended December 31, 1997 declined $27.8 million, or 8%, due to lower sales prices for all products and primarily for urea and UAN. Also contributing to the lower revenues were lower sales volumes for UAN partially offset by higher ammonia and urea sales volumes. Nitrogen prices fell during 1997 due to lower worldwide demand for urea, increased nitrogen production capacity and erratic weather patterns in the Partnership's markets. Urea sales prices declined 22% in 1997 compared with 1996 due to a significant reduction in China's purchases in the world markets. China has been a major purchaser of urea, but increased production in that country led to elevated inventories and a ban on all urea imports until the inventories are reduced. This created excess supply in the world markets and led to significantly lower prices during 1997. Wet weather in the South and Southwest led to lower demand for UAN. As a result of increased UAN availability and lower alternate nitrogen prices, the Partnership's UAN prices declined 14% compared with 1996. In addition, spring weather conditions in the Midwest favored ammonia application over UAN application. Contributing to favorable ammonia market conditions during 1997 were increased corn acres and greater demand for ammonia in the manufacture of upgraded nitrogen fertilizer and industrial products. Cost of goods sold as a percentage of revenues increased to 65% for 1997 from 49% in 1996 due to lower sales prices and higher natural gas costs. The Partnership's natural gas costs increased 29% in 1997 compared with 1996. The Partnership's forward pricing activities produced $25.6 million in cost savings compared with spot market natural gas prices during 1997 compared with $37.1 million in 1996. Operating expenses in 1997 decreased $.9 million, or 7%, due primarily to $3.4 million lower administrative and overhead expense allocations offset by $2.8 million higher freight and transportation allocations from TNC and Terra. Interest expense increased $1 million in 1997 due to the discount on accounts receivable sold under the accounts receivable securitization facility and to the borrowing under the revolving credit agreement used to fund the redemption of the Senior Preference Units. Interest income declined $2.6 million during 1997 due to lower levels of cash and short-term investments and the elimination of the Reserve Amount. 11 Net income per limited partner unit is computed by dividing net income, less an approximate 26% and 33% share allocable to the General Partner for the years ended December 31, 1997and 1996 respectively, by 18,501,576 limited partner units for the year ended December 31, 1997 and by 18,808,778 limited partner units for the year ended December 31, 1996. The net income allocated to the General Partner decreased to 26% for the year ended December 31, 1997 due to the decrease in Available Cash distributed to the General Partner. According to the Agreement of Limited Partnership of TNCLP, net income is allocated to the General Partner and the Limited Partners in each taxable year in the same proportion that Available Cash for such taxable year was distributed to the General Partner and the Limited Partners. Distributions of Available Cash are made 98% to the Limited Partners and 2% to the General Partner, except that the General Partner is entitled, as an incentive, to larger percentage interests to the extent that distributions of Available Cash exceed specified target levels, which were not met. Available Cash for 1997 decreased $82.3 million from 1996 due primarily to lower net income in 1997 partially offset by the elimination of the $18.5 million Reserve Amount and to an increase in 1996 Available Cash as a result of the impact of TNCLP's participation in an accounts receivable securitization facility. CAPITAL RESOURCES AND LIQUIDITY Net cash provided by operating activities for 1998 was $45.2 million, a decrease of $65.8 million from 1997, principally due to lower net income. Working capital decreased $19.4 million primarily due to an increase of $19.8 million in inventories, the result of substantially lower than anticipated sales, and an increase of $2.7 million in accounts receivable offset by an increase of $15.0 million in the amounts due to affiliates and a decrease of $30.2 million in cash. The Partnership's principal needs for funds are to support its working capital requirements, distributions to partners, if any, and capital expenditures. The Partnership intends to fund such needs from net cash provided by operating activities, and, to the extent permitted thereunder, from funds available under the Operating Partnership's revolving credit facility. At December 31,1998, the Operating Partnership had $18 million of unused borrowing capacity under its revolving credit facility. The Partnership believes that such sources of funds will be adequate to meet the Partnership's working capital needs, make quarterly distributions to partners, if any, and fund the Partnership's capital expenditures during 1999. Quarterly distributions to the partners of TNCLP 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. Distributions paid to all partners were $66.8 million in 1998 and $135.5 million in 1997. Distributions on the Common Units are cumulative to the extent that, for any calendar quarter, if a distribution of at least $0.605 is not paid to the holders of the Common Units, the amount of the shortfall (plus any arrearages from prior quarters) will be paid out of Available Cash in subsequent quarters before any incentive distributions are paid to the General Partner. As of December 31, 1998, the accumulated distribution arrearage for the Common Units was $11.2 million ($.605 per unit). The Partnership's accumulated arrearage will likely increase by $11.2 million ($.605 per unit) as no distributions were declared in early 1999. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities" which will be effective for fiscal years beginning after June 15, 1999. The Partnership will adopt SFAS 133 effective January 1, 2000. At this time, the Partnership has not determined the impact of SFAS 133 on its results of operations, financial position, or cash flows. YEAR 2000 ISSUE The Year 2000 issue concerns computer programs that use only the last two digits to identify the year in date fields. If not corrected, many of these computer applications could fail or create erroneous results near January 1, 2000. This issue affects virtually every company. The Partnership relies upon Terra to provide Management Information Systems services. 12 Terra has assigned dedicated resources to address its year 2000 issues with a Year 2000 Steering Committee providing management oversight and coordination. The Partnership has also published Year 2000 Information and Disclosures on Terra's website (http://www.terraindustries.com). In general, management ------------------------------- believes the "State of Readiness" for the Partnership is such that it will be ready for Year 2000 issues on time. Terra's management information systems (MIS) environment has been assessed for Year 2000 issues and some remedial actions have been identified. The cost of remedial actions for the MIS area is not material to the Partnership. Nearly all of these remedial actions are complete with minimal cost. Testing is substantially complete with minimal cost. Testing is substantially complete with the mainframe hardware systems and the associated software, with the exception of a few software packages originally purchased from third parties that are scheduled to be updated in 1999. Terra recently completed an organization-wide review of all possible computing functions, including the process control systems and instrumentation in the manufacturing facilities. Some remedial actions have been identified in a few areas and the cost of these remedial actions is not expected to be material to the Partnership. Terra is also assessing Year 2000 issues in relation to its customers, suppliers and other constituents because the action or inaction of third parties may materially affect the Partnership. An initial assessment of key third parties, including utility suppliers, has been completed and some follow up is ongoing. Although Terra expects that there will be no significant adverse consequences relating to its Year 2000 issues, the Partnership believes its most reasonably likely worst case Year 2000 scenario involves the interruption of its manufacturing facilities due to failed utility supplies or some other cause. The Partnership has in place contingency plans to deal with such interruptions, although restarting these facilities may be dependent on the resumption of utilities from sole source suppliers. Other general contingency planning efforts continue to be evaluated and refined for precautionary purposes. Terra anticipates that it will complete all assessment, remediation, testing, and contingency planning efforts for Year 2000 issues in the third quarter of 1999. Based on substantial completion of activities to date, the Partnership anticipates that Year 2000 issues, including the historical and estimated costs of remediation, will not have a material effect on its business, results of operations or financial condition. However, the costs or consequences of incomplete or untimely resolution of Year 2000 issues by the Partnership or third parties could have a material adverse affect on the Partnership. FORWARD LOOKING PRECAUTIONS Information contained in this report, other than historical information, may be considered forward looking. Forward looking information reflects Management's current views of future events and financial performance that involve a number of risks and uncertainties. The factors that could cause actual results to differ materially include, but are not limited to, the following: general economic conditions within the agricultural industry, competitive factors and pricing pressures (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. 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, appears on pages F-2 through F-14 of this report. See Index to Financial Statements on page F-1. 13 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 --------- --------- --------- --------- 1998 ---- Revenues $ 48,916 $ 100,831 $ 33,608 $ 67,405 Gross profit 8,321 31,501 6,758 2,199 Net Income 5,801 28,166 4,672 136 Net Income per limited partnership unit 0.31 1.09 0.19* 0.01 1997 ---- Revenues $ 74,179 $ 105,601 $ 77,120 $ 78,412 Gross profit 31,670 45,347 22,127 16,682 Net Income 29,792 42,937 18,719 13,690 Net Income per limited partnership unit 1.44 1.24 0.78 0.71
* The 1998 third quarter net income per unit has been restated to correct for the allocation of income between the general partner and the limited partners to be in accordance with the partnership agreement. ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 14 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......... 45 Director, President and Chief Executive Officer (Executive Vice President and Chief Operating Officer, Terra Industries Inc.) Burton M. Joyce............ 57 Chairman of the Board of Directors (President and Chief Executive Officer, Terra Industries Inc.) Dennis B. Longmire......... 54 Director Francis G. Meyer........... 47 Director (Senior Vice President and Chief Financial Officer, Terra Industries Inc.) Robert W. Todd............. 71 Director PRINCIPAL OPERATING EXECUTIVE OFFICERS OF TERRA NITROGEN CORPORATION: Michael L. Bennett......... 45 Director, President and Chief Executive Officer (Executive Vice President and Chief Operating Officer, Terra Industries Inc.) Burton M. Joyce............ 57 Chairman of the Board of Directors (President and Chief Executive Officer, Terra Industries Inc.) S. Wesley Haun............. 51 Vice President--Energy Charles J. Pero............ 50 Vice President--Human Resources Steven A. Savage........... 54 Senior Vice President--Manufacturing OTHER EXECUTIVE OFFICERS OF TERRA NITROGEN CORPORATION (INCLUDING OFFICES WITH TERRA INDUSTRIES INC.): Francis G. Meyer........... 47 Director (Senior Vice President and Chief Financial Officer, Terra Industries Inc.) Paula C. Norton............ 53 (Vice President--Corporate and Investor Relations, Terra Industries Inc.) George H. Valentine........ 50 Vice President and General Counsel (Senior Vice President, General Counsel and Corporate Secretary, Terra Industries Inc.)
The Audit Committee of the Board of Directors of TNC is comprised of Messrs. Longmire and Todd. 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 and Chief Executive Officer of TNC since June 1998 and a director since March 1995. He has been Executive Vice President and Chief Operating Officer of Terra since February 1997; 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 has been President and Chief Executive Officer of Terra since May 1991. Mr. Longmire has been a director since April 1997. He has been Chairman of the Board and Chief Executive Officer of Darling International, Inc. since 1994. He was Group Vice President of Central Soya Food from 1990 to 1993. 15 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. Todd has been a director since March 1995. He was Vice President, Chemical Industry Services for Citibank, N.A. until retiring in June 1990. Mr. S. Wesley Haun has been Vice President, Energy since June 1998. He served in three positions for KN Energy Inc., Sr. Vice President, Vice President, Strategic Business Development and Vice President, Marketing & Gas Supply, from 1988 to 1998. Mr. Pero has been Vice President, Human Resources since February 1990. He has been a Vice President of Terra since February 1998. 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. Ms. Norton has been Vice President, Corporate and Investor Relations of Terra since February 1995. She was Director, Corporate Relations of Terra from January 1993 to February 1995. Mr. Valentine has been Vice President and General Counsel of TNC since December 1994 and Senior Vice President, General Counsel and Corporate Secretary of Terra since November 1995. He was Vice President, General Counsel and Corporate Secretary of Terra from November 1993 to November 1995. 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). 16 SUMMARY COMPENSATION TABLE
Annual Compensation ------------------------------------------------------------------------------------------------- Name and Other Annual Principal Position Year Salary 1/ Bonus 2/ Compensation 3/ ------------------------------------------------------------------------------------------------- Burton M. Joyce 1998 $686,347 -- $5,863 Chairman of the Board 1997 614,539 $375,000 4,154 of Directors 1996 543,115 450,000 3,764 Michael L. Bennett 1998 339,616 -- 2,320 President and Chief Executive Officer 1997 270,346 120,063 2,120 1996 207,039 108,600 1,943 Francis G. Meyer 1998 255,655 -- 1,830 Sr. Vice President and 1997 239,115 71,224 1,830 Chief Financial Officer 1996 223,769 91,800 1,581 Steven A. Savage 1998 199,513 -- 4,609 Sr. Vice President, 1997 172,605 43,401 -- Manufacturing 1996 167,411 50,800 -- George H. Valentine 1998 231,424 -- 1,348 Vice President and 1997 209,116 82,049 2,120 General Counsel 1996 195,654 99,300 1,943 Lawrence S. Hlobik 1998 108,731 -- 2,800 Former Chairman and 1997 225,346 111,413 -- President 1996 200,385 119,900 -- ================================================================================================ ======================================================================================================= Long-Term-Compensation --------------------------------------------- Awards Payouts ------------------------------------------------------------------------------------------------------- Restricted Securities All Other Stock Underlying LTIP Compen- Award(s) 4/ Options Payouts sion5/ ------------------------------------------------------------------------------------------------------- Burton M. Joyce $ 575,0006/ -- -- $30,169 Chairman of the Board -- 162,000 -- 26,424 of Directors 1,828,1257/ 60,000 -- 24,682 Michael L. Bennett 287,5006/ -- -- 14,922 President and Chief Executive Office -- 56,000 -- 11,602 365,6257/ 30,000 -- 9,022 Francis G. Meyer 287,5006/ -- -- 10,379 Sr. Vice President and -- 36,000 -- 9,478 Chief Financial Officer 365,6257/ 30,000 -- 9,084 Steven A. Savage -- -- -- 7,910 Sr. Vice President, -- 12,500 -- 6,818 Manufacturing 134,5507/ 11,300 -- 6,479 George H. Valentine 201,2506/ -- -- 9,394 Vice President and -- 36,000 -- 8,289 General Counsel 292,5007/ 28,000 -- 7,986 Lawrence S. Hlobik -- -- -- 4,581 Former Chairman and -- 40,000 -- 9,673 President 558,7507/ 30,000 -- 8,807 =======================================================================================================
1/ "Salary" includes for 1998 twenty-seven biweekly payments and 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 amounts deferred at the election of the named executive officer under Terra's Supplemental Deferred Compensation Plan. 3/ "Other Annual Compensation" includes tax reimbursements or "gross-ups" - - provided to the named executive officers. While the named executive officers enjoy certain other perquisites, such perquisites do not exceed the lesser of $50,000 or 10% of such officer's salary and bonus. 4/ The restricted stock awards referenced in the table relate to Common Shares - - of Terra, not any securities of TNC or TNCLP. The number of restricted Common Shares ("Restricted Shares") held, and the value thereof (shown in parenthesis), at December 31, 1998 by each of the named executive officers is: Burton M. Joyce: 100,000 ($618,750); Michael L. Bennett: 62,000 ($383,625); Francis G. Meyer: 62,000 ($383,625); Steven A. Savage: 13,000 ($80,438); George H. Valentine: 45,000 ($278,438) and Lawrence S. Hlobik: 0 ($0). During the restricted period, a holder of Restricted Shares is entitled to all benefits incidental to ownership of the Common Shares, including voting the Common Shares and receiving such dividends as from time to time may be declared by the Board of Directors of the Corporation. 5/ "All Other Compensation" includes amounts contributed, allocated or accrued - -- for the named executive officers under Terra's Employees' Savings and Investment Plan and Supplemental Deferred Compensation Plan. 17 6/ On December 14, 1998, 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: 100,000 to Mr. Joyce; 50,000 to Mr. Bennett; 50,000 to Mr. Meyer; and 35,000 to Mr. Valentine. The closing price per Common Share on the New York Stock Exchange ("NYSE") on the date of award was $5.75. The restrictions lapse upon the earliest of (i) the 30 business day average closing price of the Common Shares on the NYSE is at least $11.50 per share; (ii) a change of control of Terra (as defined in the award); and (iii) the executive remaining employed with Terra until December 15, 2000. 7/ On November 12, 1996, the Personnel Committee of Terra's Board of Directors - -- approved the grant of 125,000, 25,000, 25,000, 9,200, 20,000 and 25,000 Restricted Shares under Terra's 1992 Stock Incentive Plan to each of Messrs. Joyce, Bennett, Meyer, Savage, Valentine and Hlobik, respectively. The closing per share price of the Common Shares on the NYSE on the date of award was $14.625. The restrictions lapsed in December 1998 pursuant to action by Terra's Board of Directors for all except Mr. Hlobik; provided, however, that if the executive's employment terminates with Terra (other than by death or disability) prior to the earlier of (i) a change of control of Terra (as defined in the original award), (ii) the achievement of the stock price targets set forth in such original awards or (iii) two years from the date the restrictions lapsed, then such executive is to reimburse Terra an amount equal to the value of the stock on the date of vesting net of income and employment taxes withheld. Mr. Hlobik also received a grant of 15,000 Restricted Shares as approved by the Personnel Committee on February 19, 1996. The closing per share price of the Common Shares on the NYSE on the first trading day following the date of award was $12.875. All of Mr. Hlobik's outstanding Restricted Shares were cancelled at the time of his termination of employment. OPTION YEAR-END VALUE TABLE The following table provides information concerning the exercise of stock options during 1998 and the number and value of unexercised options to purchase Terra Common Shares granted under the stock incentive plans of Terra.
=============================================================================================================== 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, December 31, 1998 1/ 1998 1998 ---------------------------------------------------------- Exercisable Unexercisable Exercisable Unexercisable - --------------------------------------------------------------------------------------------------------------- Burton M. Joyce 35,000 $124,688 609,000 253,000 $403,125 $-0- Michael L. Bennett -0- -0- 38,666 47,334 -0- -0- Francis G. Meyer -0- -0- 45,000 36,000 6,563 -0- Steven A. Savage -0- -0- 11,698 12,102 -0- -0- George H. Valentine -0- -0- 30,666 33,334 -0- -0- ===============================================================================================================
1/ Based on the closing price on the New York Stock Exchange-Composite - -- Transaction of Terra Common Shares on December 31, 1998 ($6.1875). PENSION PLAN The following table shows for employees retiring in 1998 the estimated annual retirement benefit payable on a straight life annuity basis under the Employees' Retirement Plan of Terra (the "Retirement Plan") and Terra's Excess Benefit Plan (the "Excess Benefit Plan"), on a non-contributory basis, which covers Burton M. Joyce and a limited number of other employees, at various levels of accrued service and compensation. 18
================================================================================ Years of Credited Service Remuneration --------------------------------------------------------------- 5 10 15 20 25 30 - -------------------------------------------------------------------------------- $ 150,000 $12,191 $ 24,382 $ 36,573 $ 48,765 $ 60,956 $ 73,147 250,000 20,941 41,882 62,823 83,765 104,706 125,647 500,000 42,816 85,632 128,448 171,265 214,081 256,897 750,000 64,691 129,382 194,073 258,765 323,456 388,147 1,000,000 86,566 173,132 259,698 346,265 432,831 519,397 ================================================================================
"Compensation" under the Retirement Plan includes all salaries and wages paid to a participant, including bonuses, overtime, commissions and amounts the participant elects to defer under Terra's Employees' Savings and Investment Plan. Covered earnings are limited by Section 401(a)(17) of the Internal Revenue Code ("Code") to $160,000 in 1998. The above benefits are subject to the limitations of Section 415 of the Code, which provided for a maximum annual payment of approximately $130,000 in 1998. 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. Eligible compensation for Burton M. Joyce as of the end of the last calendar year is $1,061,347 and the estimated years of service for Mr. Joyce is 12. Certain executive officers of TNC and certain other employees are entitled to the estimated annual retirement benefit under the Retirement Plan and Excess Benefit Plan as set forth in the following table:
================================================================================ Years of Credited Service Remuneration --------------------------------------------------------------- 5 10 15 20 25 30 - -------------------------------------------------------------------------------- $ 150,000 $10,691 $ 21,382 $ 32,073 $ 42,765 $ 53,456 $ 64,147 250,000 18,441 36,882 55,323 73,765 92,206 110,647 500,000 37,816 75,632 113,448 151,265 189,081 226,897 750,000 57,191 114,382 171,573 228,765 285,956 343,147 1,000,000 76,566 153,132 229,698 306,265 382,831 459,397 ================================================================================
Eligible compensation for the following named executive officers as of the end of the last calendar year is: Michael L. Bennett: $459,679; Francis G. Meyer: $326,879; Steven A. Savage: $242,914 and George H. Valentine: $313,473. The estimated years of service for each such officer is as follows: Michael L. Bennett: 25; Francis G. Meyer: 16; Steven A. Savage: 12 and George H. Valentine: 5. Eligible compensation for each of the named executive officers includes the salary paid in 1998 to each of the named executive officers plus the bonus paid in 1998 to such executive officers for service in 1997. Amounts reported in the table entitled "Summary Compensation Table" for 1998 include the salary paid to each of the named executive officers in 1998 plus the bonus paid to such executive officers in 1999 for service in 1998. 19 EMPLOYEE CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS The named executive officers (other than Mr. Hlobik) are parties to Executive Retention Agreements with Terra. These agreements provide for benefits in the event such officer's employment is terminated at any time within two years (three years in the case of Mr. Joyce) following a change of control of Terra (as defined in the agreements) without cause, or by such officer for good reason. The change of control benefits include: (a) continuation of base salary and bonus for two years (three years in the case of Mr. Joyce); (b) continuation of medical and dental benefits for two years (three years in the case of Mr. Joyce); (c) payment of accrued but unpaid compensation; (d) automatic vesting in Terra's Excess Benefit Plan with an addition of two years (a maximum of eight years in the case of Mr. Joyce), to the credited service level and the age of the participant for purposes of computing the accrued benefits under the Excess Benefit Plan; (e) certain outplacement services; and (f) office space and secretarial support for one year for Mr. Joyce. 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. Board of Directors Compensation Independent directors of TNC receive an annual retainer fee of $15,000 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 and executive officer compensation decisions with respect to TNC have been made by Terra and, in the case of those TNC executive officers who are key employees of Terra, by the Personnel Committee of the Board of Directors of Terra. None of the members of the Personnel Committee are employees of Terra or its subsidiaries. ITEM 12. Security Ownership of Certain Beneficial Owners and Management The entire general partner interest in both TNCLP and the Operating Partnership is owned by TNC and certain limited partner interests in TNCLP are owned by TNC, 600 Fourth Street, Sioux City, Iowa 51101. All the outstanding capital stock of TNC is owned by Terra Capital, Inc., 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. also owned, as of December 31, 1998, 1,607,400 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, as of December 31, 1998, in part as follows: 51.1% by Taurus International S.A. and 5.3% by Taurus Investments S.A. Each of Taurus International S.A. and Taurus Investments S.A. is a company incorporated under the laws of Luxembourg as a societe anonyme and is wholly owned by Minorco. Minorco is a company incorporated under the laws of Luxembourg as a societe anonyme and is an international natural resources company with operations in gold, base metals, industrial minerals, paper and packaging and agribusiness. Minorco's address is 9 rue Sainte Zithe, L-2763 Luxembourg City, Grand Duchy of Luxembourg. The capital stock of Minorco is owned in part as follows: approximately 45.6%, directly or through subsidiaries, by Anglo American Corporation of South Africa Limited ("Anglo American"), a publicly held mining and finance company, and approximately 22.5%, directly or through subsidiaries, by De Beers Centenary AG ("Centenary"), a publicly held Swiss diamond mining and investment company. Approximately 37.9% of the capital stock of Anglo American is owned, directly or through subsidiaries, by De Beers Consolidated Mines Limited ("De Beers"), a publicly held diamond mining and investment company. Approximately 29.4% of the capital stock of Centenary and approximately 33.5% of the capital stock of De Beers is owned, directly or through subsidiaries, by Anglo American. De Beers owns approximately 10.9% of Centenary. Mr. Nicholas F. Oppenheimer, Deputy Chairman and a director of Anglo American, Chairman and a director of Centenary and De Beers, and a director of Minorco, and Mr. Henry R. Slack, a director of Terra, Chief Executive and a director of Minorco and a director of Anglo American, have indirect partial interests in approximately 6.3% of the outstanding shares of Minorco and approximately 8.7% of the outstanding shares of Anglo American. Mr. Edward G. Beimfohr, Mr. David E. Fisher and Mr. Anthony W. Lea are directors of Terra and Minorco. Mr. Fisher is also a director 20 of Taurus International S.A. and Taurus Investments S.A. Mr. Lea is also a director of Anglo American and Taurus Investments S.A. Set forth below is certain information concerning the beneficial ownership, as of December 31, 1998, of the TNCLP Common Units and the Terra Industries Common Shares, by each person known to TNC to be a beneficial owner of more than 5% of the TNCLP Common Units, by each director of TNC, by each of the Named Executive Officers of TNC, and 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 Owned Class ---- ----- ----- ------------------ ----- Terra Nitrogen Corporation 11,172,414 60% -- -- 600 Fourth Street Sioux City, Iowa 51101 Terra Capital, Inc. 1,607,400 9% -- -- 600 Fourth Street Sioux City, Iowa 51101 Michael L. Bennett -- -- 155,311 * Lawrence S. Hlobik -- -- -- -- Burton M. Joyce -- -- 992,558 * Dennis B. Longmire -- -- -- -- Francis G. Meyer -- -- 176,694 * Steven A. Savage 4,000 * 38,582 * Robert W. Todd -- -- -- -- George H. Valentine -- -- 148,010 * All directors and executive 4,000 * 1,558,878 2% officers as a group (10 persons)
*Represents less than 1% of class. 1/ Each has sole voting and investment power of all the securities indicated. - - The number of Terra CommonShares shown also reflect the ownership of certain restricted Common Shares subject to certain performance related vesting conditions and Common Shares under Terra Employees' Savings and Investment Plan as of December 31, 1998. 2/ Terra Nitrogen Corporation also owns all the general partner interests. - - Each of Terra Nitrogen Corporation and Terra Capital, Inc. is an indirect, wholly owned subsidiary of Terra Industries Inc. 3/ The number of Terra Industries Common Shares shown as beneficially owned by - - Messrs. Bennett, Joyce, Meyer, Savage, Valentine and by all directors and executive officers as a group, include 38,666, 609,000, 45,000, 11,698, 30,666 and 749,695 Common Shares, respectively, as to which such person or group had the right to acquire beneficial ownership pursuant to the exercise, on or before May 4, 1999, of employee stock options. No other individual listed held any employee stock options that are exercisable on or before May 4, 1999. ITEM 13. Certain Relationships and Related Transactions The General Partner does not receive a management fee or similar compensation in connection with its management of the Partnership. Pursuant to TNCLP's limited partnership agreement and the Operating Partnership's limited partnership agreement, the General Partner receives: (i) distributions in respect of its 2% General Partner interest on a combined basis in TNCLP and the Operating Partnership (See "Market for Registrant's Units and Related Unitholders Matters"); (ii) distributions in respect of its ownership of limited partner interests of TNCLP; (iii) incentive distributions payable to the General Partner out of TNCLP's Available Cash (as defined) in the event quarterly distributions exceed specified target levels; and 21 (iv) reimbursement for all direct and indirect costs and expenses incurred on behalf of the Partnership, all general and administrative expenses incurred by the General Partner or its affiliates for or on behalf of the Partnership and all other expenses necessary or appropriate to the conduct of the business of, and reasonably allocable to, the Partnership. Such reimbursement includes the costs of compensation and employee benefit plans properly allocable to the Partnership. Because certain of the plans are incentive based, the maximum amount to be reimbursed by the Partnership under such plans cannot be determined in advance. For the years ended December 31, 1998, 1997 and 1996, the General Partner was entitled to reimbursement in the amount of $40.0 million, $24.7 million and $25.9 million, respectively, for the direct and indirect costs and expenses related to the business activities of the Partnership. TNC and Terra are parties to an agreement whereby TNC provides certain general and administrative services for certain Terra affiliates. Certain costs and expenses incurred by TNC for providing such services are charged (based on cost) to such affiliates, including the Partnership. Such expenses charged to the Partnership were $5.4 million, $7.2 million and $7.9 million for 1998, 1997 and 1996, respectively. Under another agreement between TNC and Terra, certain management and other services, including, advertising, accounting, legal, human resources, insurance and risk management, safety and environmental, and corporate relations are provided by Terra or certain of its affiliates (other than TNC) and charged to Terra affiliates, including the Partnership, as appropriate. Expenses under this agreement charged to the Partnership were $3.7 million, $5.0 million and $5.1 million for 1998, 1997 and 1996, 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 and other Terra affiliates are charged based on usage of such assets and freight costs incurred. Amounts charged to the Partnership for 1998, 1997 and 1996 were $26.1 million, $23.3 million, and $20.5 million, respectively. The Partnership sells product to affiliates of the General Partner at market prices and terms. During 1998, 1997 and 1996 the Partnership sold $26.3 million, $41.0 million and $41.4 million, respectively, of nitrogen fertilizer products to affiliates of the General Partner at market prices and terms. Accounts receivable from Terra were $9.0 million and $314,000 at December 31, 1998 and 1997, respectively. The Partnership has demand deposit and demand note arrangements with a Terra subsidiary to allow for excess Partnership cash to be deposited with or funds to be borrowed from such affiliate. The balance is due on demand and bears interest based on the Cost Rate under the Accounts Receivable Sale Agreement or the Eurodollar rate under the Credit Agreement, whichever is higher (7.3% and 6.5% at December 31, 1998 and 1997, respectively). Interest income recorded by the Partnership on the demand deposit was $1.6 million and $3.5 million for 1998 and 1997, respectively. 22 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following documents are filed as a part of this annual report: (1) Financial Statements (2) Financial Statement Schedules: See Index to Financial Statements on page F- 1 for financial statements and financial statement schedules filed as part of this annual report. (3) The exhibits listed below are filed as part of this annual report. #3.1 Agreement of Limited Partnership of TNCLP. 3.2 Certificate of Limited Partnership of TNCLP. 4.1 Deposit Agreement among TNCLP, the Depositary and Unitholders. #4.3 Form of Depositary Receipt for Common Units (included as Exhibit B to the Deposit Agreement filed as Exhibit 4.1 hereto). #4.4 Form of Transfer Application (included in Exhibit A to the Deposit Agreement filed as Exhibit 4.1 hereto). 4.5 Certificate of Limited Partnership of the Operating Partnership. #10.1 Agreement of Limited Partnership of the Operating Partnership. **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. **10.5 Transportation Service Agreement dated as of September 1, 1988, among ARKLA Energy Resources, Arkansas Louisiana Gas 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. 10.8 Car Service Contract dated as of March 2, 1990, between General American Transportation Corporation and TNC, and Consent to Assignment dated February 22, 1990. 10.9 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. 10.10 Lease and Agreement dated December 1, 1964, between City of Blytheville, Arkansas, and Continental Oil Company, as supplemented. 10.11 Lease dated November 1, 1975, between the City of Blytheville, Arkansas, and The Williams Companies, Inc., as supplemented. 10.12 Lease dated September 6, 1977, between Tulsa-Rogers County Port Authority and Agrico Chemical Company, as supplemented. 10.13 Lease dated February 1, 1972, between Continental Oil Company and Agrico Chemical Company, as supplemented. 10.14 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. 10.15 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. 10.16 Receivables and Purchase Agreement dated as of August 20, 1996 among Terra Funding Corporation, Terra Capital, Inc. Certain Financial Institutions and Bank of America National Trust and Savings Association, filed as Exhibit 10.12 to the Terra Industries Inc. Form 10-Q for the period ended September 30, 1996 (File No. 1-8520), is incorporated herein by reference. 23 10.17 Purchase and Sale Agreement dated as of August 20, 1996 among Terra International, Inc., Terra Nitrogen, Limited Partnership, Beaumont Methanol, Limited Partnership, filed as Exhibit 10.13 to the Terra Industries Inc. Form 10-Q for the period ended September 30, 1996 (File No. 1-8520), is incorporated herein by reference. 10.18 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. 10.19 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. 10.20 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. 10.21 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. 10.22 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. 10.23 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. 10.24 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. 10.25 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. 10.26 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. 10.27 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. 10.28 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. 10.29 Amended Demand Deposit Agreement, dated as of August 20, 1996, among 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. 10.30 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. 10.31 Amended and Restated Credit Agreement dated March 31, 1998 (the "1998 Credit Agreement") among Terra Capital, Inc., Terra Nitrogen, Limited Partnership, Certain Guarantors, Certain Lenders, Certain Issuing Banks and Citibank, N.A. (without exhibits or schedules), filed as Exhibit 4.4 to Terra Industries Inc. Form 10-Q for the quarter ended March 31, 1998 (File No. 1-8520), is incorporated herein by reference. 10.32 Amendment No. 1 dated as of September 30, 1998 to the 1998 Credit Agreement, filed as Exhibit 4.5 to Terra Industries' Form 10-Q for the quarter ended September 30, 1998 (File No. 1-8520), is incorporated herein by reference. 10.33 Form of Incentive 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, 1997 (File No. 1-8520), is incorporated herein by reference. 10.34 Form of Nonqualified Stock Option Agreement 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, 1997 (File No. 1-8520), is incorporated herein by reference. 24 10.35 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 . 10.36 1998 Incentive Award Program for Officers and Key Employees of Terra Industries, filed as Exhibit 10.1.16 to the Terra Industries Inc. Form 10-Q for the quarter ended March 31, 1998 (File No. 1.8520), is incorporated herein by reference. 10.37 Executive Retention Agreement for Burton M. Joyce filed as Exhibit 10.1.18 to the Terra Industries Inc. Form 10-K for the year ended December 31, 1998 (File No. 1.8520), is incorporated herein by reference. 10.38 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. 10.39 1999 Incentive Award Program for Officers and Key Employees of Terra Industries filed as Exhibit 10.1.20 to the Terra Industries Inc. Form 10-K for the year ended December 31, 1998 (File No. 1.8520), is incorporated herein by reference. 27 Financial Data Schedule (EDGAR only). 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. ** Confidential treatment has been granted for portions of the exhibit. # Filed under the identical exhibit numbers in TNCLP's Form 10-K (file No. 1-10877) for the year ended December 31, 1991 and incorporated herein by reference. Except as otherwise noted above, all exhibits listed above were previously filed under the identical exhibit number in TNCLP's Registration Statement No. 33-43007 and are incorporated herein by reference. EXECUTIVE COMPENSATION PLANS AND OTHER ARRANGEMENTS Exhibits 10.18 through 10.28 and 10.33 through 10.39 are incorporated herein by reference. (b) Reports on Form 8-K: None. 25 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 25, 1999 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 18, 1999 and in the capacities indicated. Signature Title /s/ Burton M. Joyce Chairman of the Board of Directors - ------------------------ (Burton M. Joyce) of Terra Nitrogen Corporation /s/ Michael L. Bennett Director, President and Chief Executive Officer - ------------------------ (Michael L. Bennett) of Terra Nitrogen Corporation /s/ Dennis B. Longmire Director of Terra Nitrogen Corporation - ------------------------ (Dennis B. Longmire) /s/ Francis G. Meyer Director of Terra Nitrogen Corporation - ------------------------ (Francis G. Meyer) /s/ Robert W. Todd Director of Terra Nitrogen Corporation - ------------------------ (Robert W. Todd) 26 INDEX TO FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES OF TERRA NITROGEN COMPANY, L.P.
Page Independent Auditors' Report F-2 Consolidated Balance Sheets as of December 31, 1998 and 1997.......................................... F-3 Consolidated Statements of Income for the Years ended December 31, 1998, 1997 and 1996................ F-4 Consolidated Statements of Partners' Capital for the Years ended December 31, 1998, 1997 and 1996..... F-5 Consolidated Statements of Cash Flows for the Years ended December 31, 1998, 1997 and 1996............ F-6 Notes to Consolidated Financial Statements............................................................ F-7
All financial statement schedules are omitted because they are either not required, not applicable or the information is shown in the financial statements or in the notes to financial statements. F-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, 1998 and 1997 and the related consolidated statements of income, partners' capital, and cash flows for each of the three years in the period ended December 31, 1998. 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 generally accepted auditing standards. 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 financial statements present fairly, in all material respects, the financial position of Terra Nitrogen Company, L.P. at December 31, 1998 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Deloitte & Touche LLP Omaha, Nebraska February 5, 1999 F-2 Terra Nitrogen Company, L.P. Consolidated Balance Sheets
At December 31, (in thousands) 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ Assets Current assets: Cash and cash equivalents: Cash and cash equivalents $ 12 $ 60 Demand deposit with affiliate 1,082 31,208 -------- -------- 1,094 31,268 Receivables: Trade 4,695 1,542 Other 1,968 2,465 Inventory: Finished products 32,644 19,241 Materials and supplies 17,811 11,437 Prepaid expenses and other current assets 2,440 2,311 -------- -------- Total current assets 60,652 68,264 Property, plant, and equipment, net 164,689 169,533 Other assets 10,736 16,031 -------- -------- Total assets $236,077 $253,828 ======== ======== Liabilities and partners' capital Current Liabilities: Accounts payable 14,459 14,869 Payable to affiliates 23,587 8,560 Accrued liabilities 4,513 3,095 Customer prepayments 482 4,746 Current portion of capital lease obligations 1,119 1,070 -------- -------- Total current liabilities 44,160 32,340 Long-term debt and capital lease obligations 7,846 8,966 Long-term payable to affiliates 5,316 4,687 Other long-term obligations - 1,060 Partners' capital: Limited partners' interests - common unitholders 188,773 212,665 General partners' interest (10,018) (5,890) -------- -------- Total partners' capital 178,755 206,775 -------- -------- Total liabilities and partners' capital $236,077 $253,828 ======== ========
See notes to consolidated financial statements F-3 Terra Nitrogen Company, L.P. Consolidated Statements of Income
Year ended December 31, (in thousands, except per-unit amounts) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------- Revenues Net sales $249,434 $333,959 $362,730 Other income - net 1,326 1,353 408 -------- -------- -------- 250,760 335,312 363,138 Cost of goods sold 201,981 219,486 177,502 -------- -------- -------- Gross profit 48,779 115,826 185,636 Operating expenses 9,179 12,147 13,035 -------- -------- -------- Income from operations 39,600 103,679 172,601 Interest expense (2,288) (2,201) (1,210) Interest income 1,463 3,660 6,242 -------- -------- -------- Net income $ 38,775 $105,138 $177,633 ======== ======== ======== Net income allocable to limited partners' interest $ 29,577 $ 77,545 $119,458 ======== ======== ======== Net income per limited partnership unit $ 1.60 $ 4.17 $ 6.35 ======== ======== ========
See notes to consolidated financial statements F-4 Terra Nitrogen Company, L.P. Consolidated Statements of Partners' Capital
Limited Partners' Interests --------------------------- Senior General Preference Common Partner's Total Partners' (in thousands, except for Units) Unitholders Unitholders Interest Capital - -------------------------------------------------------------------------------------------------------------------------------- Partners' capital at December 31, 1995 $ 226,285 $ 37,768 $ 22,303 $ 286,356 Net income 86,607 32,851 58,175 177,633 Distributions (105,409) (39,983) (74,853) (220,245) --------- -------- ----------- --------- Partners' capital at December 31, 1996 207,483 30,636 5,625 243,744 Net income 160 77,385 27,593 105,138 Distributions (372) (96,023) (39,108) (135,503) Conversion of Senior Preference Units to Common Units (200,667) 200,667 - - Redemption of Senior Preference Units (6,604) - - (6,604) --------- -------- ----------- --------- Partners' capital at December 31, 1997 - 212,665 (5,890) 206,775 ========= Net income 29,577 9,198 38,775 Distributions (53,469) (13,326) (66,795) -------- ----------- --------- Partners' capital at December 31, 1998 $188,773 $ (10,018) $ 178,755 ======== =========== ========= Limited partner units issued and outstanding at December 31, 1998 18,501,576 ===========
See notes to consolidated financial statements F-5 Terra Nitrogen Company, L.P. Consolidated Statements of Cash Flows
Year ended December 31, (in thousands ) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- Operating activities Net income $ 38,775 $ 105,138 $ 177,633 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 12,387 11,916 11,472 Changes in operating assets and liabilities: Receivables (2,656) 7,047 17,372 Inventory (19,777) (980) (10,462) Prepaid expenses and other current assets (129) 42 3,648 Accounts payable (410) (10,290) 3,079 Payable to affiliates 15,027 (5,038) 9,029 Accrued liabilities and customer prepayments (2,846) (7,522) (2,993) Changes in other assets 5,295 9,519 (8,418) Other (431) 1,170 5,751 -------- --------- --------- Net cash provided by operating activities 45,235 111,002 206,111 Investing activities: Capital expenditures (7,543) (8,928) (9,090) Proceeds from sale of property, plant and equipment - 221 - -------- --------- --------- Net cash used in investing activities (7,543) (8,707) (9,090) Financing activities: Redemption of Senior Preference Units - (6,604) - Borrowings under revolving line of credit - 7,000 - Repayment of long-term debt (1,071) (1,162) (1,504) Proceeds from elimination of distribution reserve fund - 18,480 - Partnership distributions paid (66,795) (135,503) (220,245) -------- --------- --------- Net cash used in investing activities (67,866) (117,789) (221,749) -------- --------- --------- Net decrease in cash and cash equivalents (30,174) (15,494) (24,728) Cash and cash equivalents at beginning of year 31,268 46,762 71,490 -------- --------- --------- Cash and cash equivalents at end of year $ 1,094 $ 31,268 $ 46,762 ======== ========= =========
See notes to consolidated financial statements F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION Terra Nitrogen Company, L.P. ("TNCLP" or the "Partnership") 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"). Terra Nitrogen Corporation ("TNC"), the General Partner, exercises full control over all business affairs of the Partnership. TNC owns a 2% combined general partner interest in both the Partnership and Operating Partnership. TNC has agreed not to voluntarily withdraw as the General Partner of the Partnership, subject to certain limited exceptions, prior to January 1, 2002. TNC is an indirect wholly owned subsidiary of Terra Industries Inc. ("Terra"), a Maryland corporation, a leading producer and marketer of nitrogen fertilizer, crop protection products, seed and services for growers and dealers. Terra also produces nitrogen products and methanol for industrial customers. 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 12,779,814 Common Units as of December 31, 1998 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 GENERAL - 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 generally collateral 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. RECLASSIFICATIONS - Certain reclassifications have been made to prior years financial statements to conform with current year presentation. ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles 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. CASH AND CASH EQUIVALENTS - TNCLP considers liquid debt instruments with an original maturity of three months or less to be cash equivalents. The Partnership has a demand deposit with an affiliate that represents excess Partnership cash deposited with Terra Capital, Inc. The deposit is due on demand and bears interest based on the Cost Rate under the Accounts Receivable Sale Agreement or the Eurodollar rate under the credit agreement, whichever is higher (7.3%, 6.5% and 6.3% at December 31, 1998, 1997 and 1996, respectively). Interest income recorded by TNCLP on this deposit was $1.5 million, $3.5 million and $5.1 million for 1998, 1997 and 1996, respectively. INVENTORY - 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. F-7 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 9 Derivative Financial Instruments) PLANT TURNAROUND AND CATALYST REPLACEMENT 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, generally over one or two years, until the next scheduled turnaround. Included in other non-current assets at December 31, 1998 and 1997 is $8.8 million and $11.8 million, respectively, of unamortized plant turnaround and catalyst replacement costs. 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 assets and liabilities of the Partnership exceeded the tax basis of the assets and liabilities by approximately $143 million and $150 million at December 31, 1998 and 1997, respectively. PER-UNIT RESULTS AND ALLOCATIONS - Net income per limited partner unit is computed by dividing net income, less an approximate 24%, 26% and 33% share allocable to the General Partner for the years ended December 31, 1998, 1997and 1996 respectively, by 18,501,576 limited partner units for the year ended December 31, 1998 and 1997 and by 18,808,778 limited partner units for the year ended December 31, 1996. 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. NEW ACCOUNTING STANDARDS - In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities" which will be effective for fiscal years beginning after June 15, 1999. The Partnership will adopt SFAS 133 effective January 1, 2000. At this time, the Partnership has not determined the impact of SFAS 133 on its results of operations, financial position, or cash flows. 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 cash distributions exceed specified target levels. During the period December 4, 1991 through December 31, 1996 (the "Preference Period"), distributions of Available Cash were subject to the rights of Senior Preference Units (SPUs) to receive $.605 per unit per quarter, plus any arrearages for minimum payments for prior quarters before any distributions to Common Unitholders. During the Preference Period, SPUs and Common Units participated equally in distributions after each class of Units received the Minimum Quarterly Distribution ("MQD"), subject to the General Partner's right to receive cash distributions. F-8 The quarterly cash distributions paid to the Units and the General Partner in 1998, 1997, and 1996 were as follows:
SENIOR PREFERENCE COMMON GENERAL UNITS UNITS PARTNER ----- ----- ------- TOTAL $ PER TOTAL $ PER TOTAL $ PER ($000S) UNIT ($000S) UNIT ($000S) UNIT ------- ---- ------- ---- ------- ---- 1998: First Quarter - - 21,647 1.17 3,431 - Second Quarter - - - - - - Third Quarter - - 31,822 1.72 9,895 - Fourth Quarter - - - - - - 1997 First Quarter 186 .605 * 27,752 1.50 10,477 - Second Quarter 186 .605 * 18,871 1.02 1,836 - Third Quarter - - 44,034 2.38 26,686 - Fourth Quarter - - 5,366 .29 109 - 1996 First Quarter 26,046 1.91 9,880 1.91 18,290 - Second Quarter 22,227 1.63 8,431 1.63 13,022 - Third Quarter 33,000 2.42 12,517 2.42 27,883 - Fourth Quarter 24,136 1.77 9,155 1.77 15,658 -
* The distributions paid in 1997 to the holders of the SPUs represented an amount equal to the MQD for each quarter. Non-converting SPU holders were not entitled to participate in cash distributions in excess of the MQD after December 31, 1996. Pursuant to the provisions of the TNCLP Agreement of Limited Partnership, the Preference Period for TNCLP ended on December 31, 1996. For a 90-day period that commenced on December 31, 1996, the holders of all SPUs had the right to elect to convert their SPUs into Common Units on a one-for-one basis, effective December 31, 1996, by delivering to the General Partner a conversion notice. Any SPUs for which a conversion notice was not received during the 90-day period remained SPUs. Those units that remained SPUs were entitled to the MQD until redeemed but did not participate with the Common Units in additional distributions after December 31, 1996. Holders of 13,329,162 SPUs converted their units to Common Units and 307,202 units remained SPUs. The Common Units began trading on the New York Stock Exchange on April 1, 1997 under the symbol TNH. Pursuant to the provisions of the Agreement of Limited Partnership, on May 27, 1997, the Partnership redeemed all SPUs that did not convert to Common Units at a redemption price of $21.50 per unit. The SPUs received the MQD of $.605 per unit for the quarter ended March 31, 1997 in addition to the redemption price. As a result of the redemption the Reserve Amount totaling $18.5 million was no longer required and was distributed from Available Cash to holders of the Common Units and to the General Partner. If at any time less than 25% of the issued and outstanding units are held by non-affiliates of the General Partner, the Partnership 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 69% of the Common Units at December 31, 1998. If and when the 75% ownership threshold is met, TNCLP shall 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 twenty trading days' closing prices as of the date five days before the purchase is announced or (2) the highest price paid by the General Partner or any of its affiliates for any Unit within the 90 days preceding the date the purchase is announced. Distributions on the Common Units are cumulative to the extent that, for any calendar quarter, if a distribution of at least $0.605 is not paid to the holders of the Common Units, the amount of the shortfall (plus any arrearages from prior quarters) will be paid out of Available Cash in subsequent quarters before any incentive distributions are paid to the General Partner. As of December 31, 1998, the accumulated distribution arrearage for the Common Units was $11.2 F-9 million ($.605 per unit). The Partnership's accumulated arrearage will likely increase by $11.2 million ($.605 per unit) as no distributions were declared in early 1999. 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 reimbursed 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. Costs and expenses incurred by TNC for providing such services are charged to the Partnership. For the years ended December 31, 1998, 1997 and 1996, expenses charged to the Partnership by TNC amounted to $40.0 million, $24.7 million and $25.9 million, respectively, including $17.9 million, $21.5 million and $21.1 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. Expenses under this agreement charged to the Partnership were $3.7 million, $5.0 million and $5.1 million for the years ended December 31, 1998, 1997 and 1996, 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 usage of such assets and freight costs incurred. Amounts charged to the Partnership for the years ended December 31, 1998, 1997 and 1996 were $26.1 million, $23.3 million and $20.5 million, respectively. 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 $.8 million, $1.2 million and $1.2 million ($.6 million, $1.0 million and $1.1 million of which was charged to the Partnership) in 1998, 1997 and 1996, 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. Pension costs are funded to satisfy minimum requirements prescribed by the Employee Retirement Income Security Act of 1974. 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, 1998, 1997 and 1996 were $627,000, $706,000 and $759,000, respectively. TNC has an incentive compensation plan covering certain key employees which is based on Terra Nitrogen Division (which consists of the Partnership and the Nitrogen Manufacturing business represented by Terra's plants located in Woodward, Oklahoma; Port Neal, Iowa; and Courtright, Ontario) annual earnings before interest, taxes and minority interest. Expenses for the incentive compensation plan charged to the Partnership for the years ended December 31, 1998, 1997 and 1996 were $0, $1.5 million and $1.3 million, respectively. The Partnership sold $26.3 million, $41.0 million and $41.4 million of nitrogen fertilizer products to Terra at market prices and terms during the years ended December 31, 1998, 1997 and 1996, respectively. Accounts receivable from Terra were $9.0 million and $314,000 at December 31, 1998 and 1997, respectively. Under certain circumstances an affiliate of the Partnership may advance funds to the Partnership under a demand note. F-10 5. ACCOUNTS RECEIVABLE SECURITIZATION On August 20, 1996, TNCLP and certain affiliates of the General Partner, through Terra Funding Corporation ("TFC"), an affiliate of the General Partner and a limited purpose corporation, entered into an agreement with a financial institution to sell an undivided interest in their accounts receivable. Under the agreement, which expires on August 20, 1999, undivided interests in new receivables may be sold as amounts are collected on previously sold amounts. The discount on TNCLP's portion of accounts receivable sold in 1998, 1997 and 1996 was $1.5 million, $1.6 million and $.7 million, respectively, and is included in interest expense in the Consolidated Statements of Income. TNCLP's receivables sold to TFC under this agreement are sold without recourse, however, the amount of discount charged on accounts receivable sold is subject to adjustment, on a prospective basis, based on collection experience. 6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, net consisted of the following at December 31,
(in thousands) 1998 1997 - ------------------------------------------------------------------------------------ Assets owned: Land and improvements $ 5,091 $ 5,592 Plant and equipment 261,186 253,636 Terminals and transportation equipment 7,863 7,411 --------- --------- 274,140 266,639 Assets under capital lease: Plant and equipment 9,262 9,262 --------- --------- 283,402 274,050 Less accumulated depreciation and amortization (118,713) (106,368) --------- --------- Total $ 164.689 $ 169,533 ========= =========
7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt and capital lease obligations consist ed of the following at December 31,
(in thousands) 1998 1997 - --------------------------------------------------------------------------------------- Revolver borrowings $ 7,000 $ 7,000 Capitalized lease obligations 1,965 3,036 ------- ------- 8,965 10,036 Less current maturities (1,119) (1,070) ------- ------- Total $ 7,846 $ 8,966 ======= =======
Terra and its subsidiaries maintain a credit agreement (the "Credit Agreement") with certain lenders and with Citibank, N.A., as agent. The Operating Partnership has a $25 million revolving credit facility under the Credit Agreement. The revolving credit facility expires December 31, 2000. At December 31, 1998, the Operating Partnership had $18.0 million of unused borrowing capacity under its revolving credit facility. The Partnership has classified the revolver borrowing as long-term debt since the Partnership has the ability under its Credit Agreement, and the intent, to maintain this obligation for longer than one year. Interest on the revolving credit facility is based on the prime commercial lending rate plus 1.0% or the Eurodollar rate plus 2.0% at the General Partner's option. At December 31, 1998, the interest rate on the revolving credit facility was 7.3125%. The Operating Partnership incurs certain fees in connection with the borrowings discussed above, including a commitment fee equal to .50% of the unused amount of the revolving credit facility. Loans under the Credit Agreement are guaranteed by Terra and certain subsidiaries, including the General Partner, and are secured by pledges of the stock of significant Terra subsidiaries, including the General Partner, and by substantially all of the Operating Partnership's assets. The security interest granted in the Operating Partnership's assets secures only its $25 million revolving credit facility. The Credit Agreement contains customary events of default, including those relating to failure to pay amounts due, misrepresentation, failure to perform covenants, bankruptcy or insolvency, litigation and unsatisfied judgments, F-11 violations of the Employee Retirement Income Security Act of 1974, as amended, and environmental laws and changes in control or ownership. The Credit Agreement contains covenants customary for financing of this type including limitations on capital expenditures, additional debt, liens, receivables sales, investments, changes in lines of business, transactions with affiliates and limitations on acquisitions. The Credit Agreement also includes covenants requiring Terra to meet certain financial tests. The Partnership is not required to meet such financial tests under the Credit Agreement. Interest paid on long-term debt by the Partnership was $578,000, $605,000 and $471,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 8. COMMITMENTS AND CONTINGENCIES The Operating Partnership is committed to various non-cancelable capital and operating leases for land, buildings and equipment. Total minimum rental payments are as follows:
Capital Operating (in thousands) Leases Leases Total - ------------------------------------------------------------------------------------------ 1999 $1,246 $16,503 $17,749 2000 890 15,170 16,060 2001 - 8,463 8,463 2002 - 6,555 6,555 2003 - 5,707 5,707 2004 and thereafter - 10,657 10,657 ------ ------- ------- Total minimum lease payments 2,136 63,055 65,191 Less amount representing interest (171) - (171) ------ ------- ------- Net minimum lease payments $1,965 $63,055 $65,020 ====== ======= =======
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. The above amounts include the leases for the ammonia and urea facilities at the Blytheville Plant. The lease term for the ammonia facility is scheduled to expire on November 30, 2004 and the Partnership has the option to extend the lease for eleven successive terms of five years each at the same rental rate. The urea facility lease is scheduled to expire November 1, 2005, and the Partnership has the option to renew the lease for three successive periods of five years each at a nominal annual rental. Rent expense under non-cancelable operating leases amounted to approximately $9.0 million, $9.1 million and $6.5 million, including contingent rentals of $1.6 million, $1.9 million and $1.8 million, based primarily on terminal throughput, for the years ended December 31, 1998, 1997 and 1996, respectively. The Partnership has certain commitments with respect to the transportation of minimum quantities of ammonia, urea and UAN. The transportation of such minimum quantities is expected to be attained in the normal course of the Partnership's business. The aggregate amount of required payments under these commitments are: 1999 - $8.2 million; 2000 - $8.4 million; 2001 - $2.5 million; 2002 - $2.5 million; 2003 - $2.5 million: 2004 and after - $3.7 million. 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. F-12 9. DERIVATIVE FINANCIAL INSTRUMENTS Since 1997, the Partnership has recorded hedging gains and losses related to natural gas supply requirements based on a pooled resources concept with Terra. Under the pooled resources concept, hedging gains and losses are allocated to each manufacturing plant based on gas usage for such plant. Prior to 1997, hedging gains and losses were specifically identified with a particular plant based on contractual arrangements for that plant. The change in the allocation of hedging gains and losses did not have a material impact on the Partnership's consolidated financial position or results of operations for the years ended December 31, 1998 and 1997. 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 transactions with counter- parties 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. A change in the market value of a derivative financial instrument is recognized as a gain or loss in the period of the change unless the instrument meets the criteria to qualify as a hedge. If the hedge criteria are met, the accounting for the derivative financial instrument is related to the accounting for the hedged item so that changes in the market value of the derivative financial instrument are recognized in income when the effects of related changes in the price of the hedged item are recognized. A change in the market value of a derivative financial instrument that is a hedge of a firm commitment is included in the measurement of the transaction that satisfies the commitment. The Partnership accounts for a change in the market value of a derivative financial instrument that hedges an anticipated transaction in the measurement of the subsequent transaction. If a derivative financial instrument that has been accounted for as a hedge is closed before the date of the anticipated transaction, the Partnership carries forward the accumulated change in value of the contract and includes it in the measurement of the related transaction. Natural gas supplies to meet production requirements at the Operating Partnership's production facilities are purchased at market prices. Natural gas market prices, as with other commodities, are volatile and futures contracts, swap agreements and purchased options are used to effectively maintain fixed prices for a portion of the Operating Partnership's natural gas production requirements and inventory. The settlement dates for such financial instruments are scheduled to coincide with gas purchases during such future periods. These contracts reference physical natural gas prices or appropriate NYMEX futures contract prices. The contracts physical prices are frequently based on the Henry Hub, Louisiana price. Natural gas supplies for the Partnership's two production facilities are purchased from various suppliers at locations that are different from the Henry Hub. This creates a location basis differential between the contract price and the physical price of natural gas. Accordingly, the use of financial derivatives may not exactly offset the change in the price of physical gas. Therefore, Terra has also entered into basis swaps to maintain fixed prices for the location basis differential. There are no initial cash requirements related to the basis swap agreements. Gains and losses on settlement of these contracts are credited or charged to cost of sales in the month in which the hedged transaction occurs. Cash flows related to natural gas basis swaps are reported as cash flows from operating activities. As of December 31, 1998 and 1997, MMbtu's under such contracts totaled 9.0 million and 39.8 million, respectively. The unrealized gain on basis swaps at December 31, 1998 and 1997 was $700,000 and $30,000 respectively. Swap agreements are used to hedge natural gas prices, which are agreements with third parties to exchange cash based on a designated price, which price is referenced to natural gas market prices or appropriate NYMEX futures contract F-13 prices. Option contracts are also used and represent agreements giving the holder of the contract the right to either own or sell a futures or swap contract at a designated price. Option contracts require initial premium payments ranging from 2% to 5% of contract value and the futures contracts require maintenance of cash balances generally 10% to 20% of the contract value. The following summarizes open natural gas contracts allocated to the Partnership at December 31, 1998 and 1997:
1998 1997 --------------------------- ---------------------------- CONTRACT UNREALIZED CONTRACT UNREALIZED (in thousands) MMBTU GAIN (LOSS) MMBTU GAIN (LOSS) - --------------------------------------------------------- ---------------------------- Futures 502 $ (19) (223) $ - Swaps 36,184 (4,890) 55,131 12,060 Options 6,889 (23) - - ------ ------- ------ ------- 43,575 $(4,932) 54,908 $12,060 ====== ======= ====== =======
The Partnership's annual production requirements are approximately 56 million MMbtu's of natural gas. Contracts were in place at December 31, 1998 to cover 59% of 1999 natural gas requirements and 15% for 2000. Gains and losses on settlement of these contracts and premium payments on option contracts are credited or charged to cost of sales in the month in which the hedged transaction occurs. 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 of $1.6 million on closed contracts relating to January 1999 were deferred by the Partnership at December 31, 1998. Realized gains of $600,000 on closed contracts relating to January 1998 were deferred by the Partnership at December 31, 1997. Cash flows related to natural gas hedging are reported as cash flows from operating activities. During 1998, 1997 and 1996, natural gas forward pricing activities reduced the Partnership's natural gas costs by $5.9 million, $25.6 million and $37.1 million, respectively, compared with spot market natural gas prices. 10. OTHER FINANCIAL INFORMATION 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 and capital lease obligations - The carrying amounts of the Partnership's borrowings under long-term debt agreements and capital lease obligations 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, 1998 and December 31, 1997. The unrealized gain (loss) on these contracts is disclosed in Note 9. 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. Credit risk related to trade receivables has also been minimized as a result of the accounts receivable securitization agreement entered into during 1996. 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 years ended December 31, 1998, 1997 and 1996, sales to Terra totaled $26.3 million, $41.0 million and $41.4 million, or 10.5%, 12.3% and 11.4%, respectively, of the Partnership's sales. F-14 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TERRA NITROGEN COMPANY, L.P. 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1,094 0 6,663 0 50,455 60,652 283,402 118,713 236,077 44,160 7,846 0 0 0 178,755 236,077 249,434 250,760 201,981 201,981 9,179 0 825 38,775 0 0 0 0 0 38,775 0 0 DUE TO THE NATURE OF THE PARTNERSHIP, THIS REPRESENTS PARTNERS' CAPITAL.
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