================================================================================
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarter ended June 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 1-10877
TERRA NITROGEN COMPANY, L.P.
(Exact name of registrant as specified in its charter)
Delaware 73-1389684
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Terra Centre
PO Box 6000, 600 Fourth Street
Sioux City, Iowa 51102-6000
(Address of principal executive office) (Zip Code)
Registrant's telephone number:
(712) 277-1340
At the close of business on July 31, 2001, there were 18,501,576 Common Units
outstanding.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
- --- ---
================================================================================
PART I. FINANCIAL INFORMATION
TERRA NITROGEN COMPANY, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
June 30, December 31, June 30,
2001 2000 2000
-------- ------------ --------
ASSETS
Current assets:
Cash and cash equivalents $ 10 $ 17,941 $ 10,501
Accounts receivable 26,166 24,739 29,955
Inventory - finished products 39,119 9,431 20,214
Inventory - materials and supplies 9,569 9,950 1,123
Prepaid expenses and other current assets 2,364 3,117 2,056
- -------------------------------------------------------------------------------------
Total current assets 77,228 65,178 63,849
Net property, plant and equipment 142,202 147,597 151,308
Other assets 7,857 11,259 11,560
- -------------------------------------------------------------------------------------
Total assets $227,287 $224,034 $226,717
=====================================================================================
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Short-term note payable to affiliates $ 19,800 $ --- $ ---
Accounts payable and accrued liabilities 18,968 19,680 21,319
Customer prepayments --- 3,076 3,059
Current portion of long-term debt and
capital lease obligations 1,000 1,000 1,460
- -------------------------------------------------------------------------------------
Total current liabilities 39,768 23,756 25,838
Long-term debt 7,231 8,250 8,750
Long-term payable to affiliates 5,316 5,316 5,316
Partners' capital 174,972 186,712 186,813
- -------------------------------------------------------------------------------------
Total liabilities and partners' capital $227,287 $224,034 $226,717
=====================================================================================
See Accompanying Notes to the Consolidated Financial Statements.
2
TERRA NITROGEN COMPANY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit amounts)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
-------- ------- -------- --------
Revenues $93,852 $85,378 $153,751 $155,095
Other income 192 131 283 300
- ---------------------------------------------------------------------------
Total revenues 94,044 85,509 154,034 155,395
Cost of goods sold 92,174 69,874 148,407 132,454
- ---------------------------------------------------------------------------
Gross profit 1,870 15,635 5,627 22,941
Operating expenses 2,643 3,492 4,741 5,870
- ---------------------------------------------------------------------------
Operating income (loss) (773) 12,143 886 17,071
Interest expense (190) (278) (412) (915)
Interest income 41 1 203 ---
- ---------------------------------------------------------------------------
Net income (loss) $ (922) $11,866 $ 677 $ 16,156
===========================================================================
Net income (loss) allocable to
limited partners' interest $ (904) $11,629 $ 662 $ 15,833
===========================================================================
Net income (loss) per limited
partnership unit $ (0.05) $ 0.63 $ 0.04 $ 0.86
===========================================================================
See Accompanying notes to the Consolidated Financial Statements.
3
TERRA NITROGEN COMPANY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30,
2001 2000
-------- --------
Operating activities:
Net income from operations $ 677 $ 16,156
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 6,372 6,382
Changes in operating assets and liabilities:
Receivables (1,427) (110)
Inventories (29,307) 17,774
Prepaid expenses (1,952) (473)
Accounts payable, accrued liabilities and
customer prepayments (5,194) (1,625)
Change in other assets 3,401 3,035
- ----------------------------------------------------------------------------
Net cash flows from operating activities (27,430) 41,139
Net cash flows from investing activities:
Capital expenditures (976) (414)
Financing activities:
Net changes in short-term borrowings 19,800 (39,601)
Issuance (repayment) of long-term debt
and capital lease obligations (1,019) 9,364
Partnership distributions paid (8,306) ---
- ----------------------------------------------------------------------------
Net cash flows from financing activities 10,475 (30,237)
============================================================================
Net increase (decrease) in cash and cash equivalents (17,931) 10,488
Cash and cash equivalents at beginning of period 17,941 13
- ----------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 10 $ 10,501
============================================================================
See Accompanying Notes to the Consolidated Financial Statements.
4
TERRA NITROGEN COMPANY, L.P.
CONSOLIDATED STATEMENTS OF PARTNER'S CAPITAL
Limited General Accumulated Total
Partners' Partner Other Partners'
Interests Interests Comprehensive Capital
(in thousands, except for Units) Income
- -----------------------------------------------------------------------------------------------------------
Partners' capital at January 1, 2001 $196,571 $ (9,859) $ --- $ 186,712
Net Income 663 14 677
Cumulative effect of change in accounting
for derivative financial investments 14,200 14,200
Net unrealized loss on hedges, net of taxes (18,311) (18,311)
--------
Comprehensive income (loss) (3,434)
Distributions (8,140) (166) (8,306)
- ----------------------------------------------------------------------------------------------------------
Partners' capital at June 30, 2001 $189,094 $ (10,011) $ (4,111) $ 174,972
- ----------------------------------------------------------------------------------------------------------
Limited partner units issued and
Outstanding at June 30, 2001 18,501,576
==========
Limited General Accumulated Total
Partners' Partner Other Partners'
Interests Interests Comprehensive Capital
(in thousands, except for Units) Income
- -----------------------------------------------------------------------------------------------------------
Partners' capital at January 1, 2000 $180,837 $ (10,180) --- $170,657
Net Income 15,833 323 --- 16,156
- ----------------------------------------------------------------------------------------------------------
Partners' capital at June 30, 2000 $196,670 $ (9,857) --- $186,813
==========================================================================================================
Limited partner units issued and
Outstanding at June 30, 2000 18,501,576
===========
See Accompanying Notes to the Consolidated Financial Statements.
5
TERRA NITROGEN COMPANY, L.P.
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The consolidated financial statements contained herein should be read in
conjunction with the consolidated financial statements and notes thereto
contained in the Terra Nitrogen Company, L.P. ("TNCLP") Annual Report on
Form 10-K for the year ended December 31, 2000. TNCLP and its operating
partnership subsidiary, Terra Nitrogen, Limited Partnership (the "Operating
Partnership"), are referred to herein, collectively, as the "Partnership".
The accompanying unaudited consolidated financial statements reflect all
adjustments, which are, in the opinion of management, necessary for the
fair statement of the results for the periods presented. All of these
adjustments are of a normal and recurring nature. Results for the quarter
are not necessarily indicative of future financial results of the
Partnership.
Net income per limited partnership unit is computed by dividing net income,
less a 2% share allocable to the General Partner for the six months ended
June 30, 2001 and 2000, respectively, by 18,501,576 limited partner units.
According to the Agreement of Limited Partnership of TNCLP, net income is
allocated to the General Partner and the Limited Partners in each taxable
year in the same proportion as Available Cash for such taxable year was
distributed to the General Partner and the Limited Partners. If there is no
cash distribution, net income is allocated to the Limited Partners and the
General Partner generally based on their respective ownership percentages.
Distributions of Available Cash are made 98% to the Limited Partners and 2%
to the General Partner, except that the General Partner is entitled, as an
incentive, to larger percentage interests (up to 50%) to the extent that
distributions of Available Cash exceed specified amounts.
2. Distributions to Unitholders
The Partnership makes quarterly cash distributions to Unitholders and the
General Partner in an amount equal to 100% of its Available Cash. No
distributions were made during the first half of 2000. The Partnership paid
cash distributions totaling $8.4 million ($0.44 per common unit) in the
first half of 2000.
3. Financing Arrangements
The Partnership has an arrangement for demand deposits and notes with an
affiliate to allow for excess Partnership cash to be deposited with or
funds to be borrowed from Terra Capital, Inc., the parent of the General
Partner. At June 30, 2001 and 2000, no amounts were deposited with Terra
Capital, Inc. The amount of the demand note was $19.8 million at June 30,
2001 and bore interest at the rate paid by Terra Capital on its short-term
borrowings. There were no outstanding demand notes at June 30, 2000.
6
4. Natural gas costs
Natural gas is the principal raw material used in the Partnership's
production of nitrogen products. The Partnership enters into forward
pricing arrangements for natural gas provided that such arrangements would
not result in costs greater than expected selling prices for nitrogen
products. The Partnership's normal natural gas procurement policy is to
effectively fix or cap the price of between 25% and 80% of its natural gas
requirements for a one-year period and up to 50% of its natural gas
requirements for the subsequent two-year period through supply contacts,
financial derivatives and other forward pricing techniques. In response to
extremely volatile natural gas costs during the last six months of 2000 and
uncertainties regarding the ability of finished goods to recover the
increases to gas costs, the Partnership amended its policy and eliminated
the minimum hedge requirement through the end of 2001. The financial
derivatives are traded in months forward and settlement dates are scheduled
to coincide with gas purchases during that future period. These contracts
reference physical natural gas prices or appropriate NYMEX futures contract
prices. Contract prices are frequently based on the Henry Hub Louisiana
price, but natural gas supplies for the Partnership's production facilities
are physically purchased from various suppliers which often creates a
location basis differential between the contract price and the physical
price of natural gas. Accordingly, the use of financial derivatives may not
exactly offset the change in the price of physical gas.
The Partnership has entered into forward pricing positions for a portion of
its natural gas requirements for the remainder of 2001 and part of 2002,
consistent with its policy. As a result of its policies, the Partnership
has reduced the potential adverse financial impact of natural gas price
increases during the forward pricing period, but conversely, if natural gas
prices were to fall, the Partnership will incur higher costs. Contracts
were in place at June 30, 2001 to cover approximately 14% of natural gas
requirements for the succeeding twelve months. Unrealized losses from
forward pricing positions totaled $2.7 million as of June 30, 2001. The
ultimate amount recognized by the Partnership will be dependent on prices
in effect at the time of settlement for unrealized positions at June 30,
2001. The Partnership also had $1.4 million of realized losses on closed
contracts relating to future periods that have been deferred to the
respective period.
5. Idled facilities
On June 7, 2001 the Partnership reported it would suspend production of
ammonia and urea at its Blytheville, Arkansas plant due to its inability to
generate cash flow under existing price and cost conditions. The restart of
production at that facility has not been scheduled.
6. Change in Accounting for Derivative Financial Instruments
Statement of Financial Accounting Standards (SFAS) 133, "Accounting for
Derivative Instruments and Hedging Activities" requires that all derivative
instruments, whether designated in hedging relationships or not, be
recorded in the balance sheet at fair value. The Partnership has designated
its natural gas derivative instruments as cash flow hedges with changes in
fair value recorded in other comprehensive income (OCI) until the natural
gas it relates to is used in production when it is then reclassified from
OCI to earnings.
7
On January 1, 2001, the Partnership adopted SFAS 133 which resulted in a
cumulative $9.9 million increase to current assets, a $4.3 million reduction to
current liabilities and a $14.2 million increase to accumulated OCI which
reflected the effective portion of the derivatives designated as cash flow
hedges. The increase to current assets was to recognize the value of open
natural gas contracts and the reduction to current liabilities was to reclassify
deferred gains on closed contracts relating to future periods. The changes in
the components of accumulated OCI during the six months ended June 30, 2001
follow:
Net Unrealized Realized Gain (Loss) Accumulated
Gain (loss) Deferred to OCI
on Natural Gas Future Periods
(in thousands) Hedging Activity
- ------------------------------------------------------------------------------------------
Balance January 1, 2001 $ 9,900 $ 4,300 $ 14,200
Net unrealized gain (loss)
arising during period (12,358) 1,018 (11,340)
Transfer net (gain) loss realized
to production costs 2,206 (4,300) (2,094)
- ------------------------------------------------------------------------------------------
Balance March 31, 2001 $ (252) $ 1,018 $ 766
- ------------------------------------------------------------------------------------------
Net unrealized gain (loss)
arising during period (5,633) (1,405) (7,038)
Transfer net (gain) loss realized
to production costs 3,179 (1,018) 2,161
- ------------------------------------------------------------------------------------------
Balance June 30, 2001 $ (2,705) $(1,405) $ (4,111)
==========================================================================================
8
Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Three months ended June 30, 2001 compared with
three months ended June 30, 2000
Volumes and prices for the three-month periods ended June 30, 2001 and 2000
follow:
2001 2000
Volumes Unit Price Volumes Unit Price
(000 tons) ($/ton) (000 tons) ($/ton)
---------- ---------- ---------- ----------
Ammonia 91 $276 133 $152
UAN 458 117 741 77
Urea 107 144 57 140
Revenues for the quarter ended June 30, 2001 increased $8.5 million, or 10%,
compared with the same quarter in 2000 as the result of higher prices for all
Partnership products, partly offset by lower sales volumes. Selling prices
increased revenues by $30 million reflecting lower industry inventories as a
result of production curtailments by the Partnership and other producers since
the second half of 2000 in response to substantial year-over-year increases to
natural gas costs. Sales volumes declined from the 2000 second quarter due to
reduced fertilizer demand in response to fewer corn acres, adverse weather
conditions during the planting season and higher fertilizer prices in the face
of low grain values. The Partnership's sales volumes were also affected by
record fertilizer imports to the United States in response to higher fertilizer
prices.
Second quarter gross profits decreased $13.8 million from 2000. Lower 2001 sales
volumes reduced gross profits $21.2 million from the 2000 second quarter. Higher
selling prices contributed $30 million to 2001 gross profit, but most of the
pricing gains were offset by almost $23 million of cost increases. The most
significant cost increases were in the form of higher natural gas costs, which
increased from $2.72/MMBtu in 2000 to $5.25/MMBtu in 2001 (net of forward
pricing gains or losses.) The Partnership realized $2.2 million in hedging
losses during the 2001 second quarter compared to hedging gains of $7.5 million
during the same 2000 period.
Operating expenses were $0.8 million lower in 2001 than in 2000 primarily as the
result of a reduction in the second quarter expense allocation from the General
Partner. Net interest expense was $128,000 lower than the 2000 second quarter
due to lower borrowing levels.
9
Six months ended June 30, 2001 compared with
six months ended June 30, 2000
Volumes and prices for the six-month periods ended June 30, 2001 and 2000
follow:
2001 2000
Volumes Unit Price Volumes Unit Price
(000 tons) ($/ton) (000 tons) ($/ton)
---------- ---------- ---------- ----------
Ammonia 109 $282 261 $142
UAN 812 123 1,343 70
Urea 143 160 185 127
Revenues for the six months ended June 30, 2001 decreased $1.4 million, or 1%,
compared with the same period in 2000. Lower sales volumes as the result of
fewer planted corn acres, wet field conditions that precluded normal application
of fertilizers and increased competition from record import levels, reduced 2001
revenues by $64 million from the first six months of last year. Significantly
higher prices for all products, however, offset $63 million of the revenue
decline. The higher prices reflected lower industry inventories as a result of
periodic production curtailments by most nitrogen producers in response to the
past winter's very high natural gas costs.
Gross profits during the 2001 first six months decreased $17.3 million from
2000. Higher sales prices increased gross profits by $63 million. These
increases were more than offset, however, by higher natural gas costs, which
increased from $2.61/MMBtu in 2000 to $5.81/MMBtu in 2001 (net of forward
pricing gains or losses) and lower sales volume. The Partnership realized $0.1
million in hedging losses during the 2001 first half compared to hedging gains
of $8.9 million during the same 2000 period.
Operating expenses were $1.1 million lower in 2001 than in 2000 primarily as the
result of a reduction in the expense allocation from the General Partner. Net
interest expense of $209,000 was $706,000 less than the 2000 first half due to
lower borrowing levels.
Capital resources and liquidity
Net cash flows used in operations in the first six months of 2001 totaled $27.4
million with $34.4 million used to increase working capital balances reduced by
$7.0 million of operating income after non-cash charges. Most of the working
capital increases are related to carryover inventory balances as the result of
lower sales volumes during the 2001 first half.
The Partnership's principal needs for funds are for support of its working
capital and capital expenditures. The Partnership intends to fund its needs
primarily through net cash flows from operating activities, and, to the extent
required, from funds borrowed from others, including borrowings from Terra
Capital, Inc., the parent of the General Partner. The Partnership believes
10
that such sources of funds will be adequate to meet the Partnership's working
capital needs and fund the Partnership's capital expenditures for at least the
next 12 months.
Quarterly distributions to the Partners of TNCLP are based on Available Cash for
the quarter as defined in the Agreement of Limited Partnership of TNCLP.
Available Cash is defined generally as all cash receipts less all cash
disbursements, adjusted for changes in certain reserves established as the
General Partner determines in its reasonable discretion to be necessary. In
consideration of the Partnership's working capital and operating cash needs, the
General Partner determined there was no Available Cash available for
distribution at June 30, 2001.
Capital expenditures
Capital expenditures totaled $1.0 million for the first six months of 2001. For
the remainder of 2001, the Partnership plans to spend less than $5 million for
routine equipment replacement.
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, at the General Partner's
sole discretion, may call or assign to the General Partner or its affiliates its
right to acquire, all such outstanding units held by non-affiliated persons. The
General Partner and its affiliates owned 75.1% of the Common Units at July 31,
2001. If the General Partner elects to acquire all outstanding units, TNCLP is
required to give at least 30 but not more that 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 by the
General Partner or any of its affiliates for any unit within 90 days preceding
the date the purchase is announced.
FORWARD LOOKING PRECAUTIONS
- ---------------------------
Information contained in this report, other than historical information, may be
considered forward looking. Forward looking information reflects Management's
current views of future events and financial performance that involve a number
of risks and uncertainties. The factors that could cause actual results to
differ materially include, but are not limited to the following: Changes in the
financial markets, general economic conditions within the agricultural industry,
competitive factors and price changes (principally, sales prices of nitrogen
products and natural gas costs), changes in product mix, changes in the
seasonality of demand patterns, changes in weather conditions, changes in
agricultural regulations, and other risks detailed in the Partnership's
Securities and Exchange Commission filings, in particular the "Factors that
Affect Operating Results" section of its most recent Form 10-K.
11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TERRA NITROGEN COMPANY, L.P.
By: TERRA NITROGEN CORPORATION
as General Partner
By: /s/ Francis G. Meyer
--------------------------------------
Francis G. Meyer
Vice President
(Principal Accounting Officer)
Date: August 14, 2001
12