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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 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 October 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
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PART I. FINANCIAL INFORMATION
TERRA NITROGEN COMPANY, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
September 30, December 31, September 30,
2001 2000 2000
-------------- ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 10 $ 17,941 $ 19,627
Accounts receivable 25,170 24,739 33,964
Inventory - finished products 27,632 9,431 14,330
Inventory - materials and supplies 9,636 9,950 9,287
Prepaid expenses and other current assets 7,902 3,117 1,483
- ----------------------------------------------------------------------------------------------------------
Total current assets 70,350 65,178 78,691
Net property, plant and equipment 139,336 147,597 148,701
Other assets 6,846 11,259 13,978
- ----------------------------------------------------------------------------------------------------------
Total assets $ 216,532 $ 224,034 $ 241,370
==========================================================================================================
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Short-term note payable to affiliates $ 20,709 $ --- $ ---
Accounts payable and accrued liabilities 17,906 19,680 31,880
Customer prepayments --- 3,076 3,804
Current portion of long-term debt and
capital lease obligations 1,000 1,000 1,420
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 39,615 23,756 37,104
Long-term debt 6,985 8,250 8,500
Long-term payable to affiliates 5,316 5,316 5,316
Partners' capital 164,616 186,712 190,450
- ----------------------------------------------------------------------------------------------------------
Total liabilities and partners' capital $ 216,532 $ 224,034 $ 241,370
==========================================================================================================
See Accompanying Notes to the Consolidated Financial Statements.
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TERRA NITROGEN COMPANY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit amounts)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
------------- ------------- -------------- -------------
Revenues $ 47,543 $ 58,997 $ 201,294 $ 214,092
Other income 264 248 547 548
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Total revenues 47,807 59,245 201,841 214,640
Cost of goods sold 56,665 54,281 205,072 186,735
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Gross profit (8,858) 4,964 (3,231) 27,905
Operating expenses 2,135 1,053 6,876 6,923
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Operating income (loss) (10,993) 3,911 (10,107) 20,982
Interest expense (405) (275) (817) (1,262)
Interest income --- 1 203 73
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Net income (loss) $ (11,398) $ 3,637 $ (10,721) $ 19,793
================================================================================================
Net income (loss) allocable to
limited partners' interest $ (11,170) $ 3,564 $ (10,507) $ 19,396
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Net income (loss) per limited
partnership unit $ (0.60) $ 0.19 $ (0.57) $ 1.05
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See Accompanying notes to the Consolidated Financial Statements.
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TERRA NITROGEN COMPANY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
2001 2000
------------- -------------
Operating activities:
Net income from operations $ (10,721) $ 19,793
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 9,609 9,539
Changes in operating assets and liabilities:
Receivables (431) (4,118)
Inventories (17,887) 15,494
Prepaid expenses (4,785) 100
Accounts payable, accrued liabilities and
customer prepayments (4,850) 9,679
Change in other assets 4,413 616
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Net cash flows from operating activities (24,652) 51,103
Net cash flows from investing activities:
Capital expenditures (1,348) (964)
Financing activities:
Net changes in short-term borrowings 20,709 (39,601)
Issuance (repayment) of long-term debt
and capital lease obligations (1,265) 9,076
Partnership distributions paid (8,306) --
Other (3,069) --
- -------------------------------------------------------------------------------------------------
Net cash flows from financing activities 8,069 (30,525)
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Net increase (decrease) in cash and cash equivalents (17,931) 19,614
Cash and cash equivalents at beginning of period 17,941 13
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 10 $ 19,627
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See Accompanying Notes to the Consolidated Financial Statements.
4
TERRA NITROGEN COMPANY, L.P.
CONSOLIDATED STATEMENTS OF PARTNER'S CAPITAL
(unaudited)
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 (10,507) (214) (10,721)
Cumulative effect of change in accounting
for derivative financial investments 14,200 14,200
Change in fair value of derivatives (17,269) (17,269)
--------
Comprehensive income (loss) (13,790)
Distributions (8,140) (166) (8,306)
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Partners' capital at September 30, 2001 $ 177,924 $ (10,239) $ (3,069) $ 164,616
===============================================================================================================
Limited partner units issued and
outstanding at September 30, 2001 18,501,576
==========
Limited General Accumulated Total
Partners' Partners' Other Partners'
Interests Interest Comprehensive Capital
(in thousands, except for Units) Income
- ---------------------------------------------------------------------------------------------------------------
Partners' capital at January 1, 2000 $ 180,837 $ (10,180) $ -- $ 170,657
Net Income 19,396 397 -- 19,793
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Partners' capital at September 30, 2000 $ 200,233 $ (9,783) $ -- $ 190,450
===============================================================================================================
Limited partner units issued and
outstanding at September 30, 2000 18,501,576
==========
See Accompanying Notes to the Consolidated Financial Statements.
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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 nine months ended
September 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 nine months of 2000. The
Partnership paid cash distributions totaling $8.3 million ($0.44 per common
unit) in the first nine months of 2001.
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 September 30, 2001 and 2000, no amounts were deposited with
Terra Capital, Inc. The amount of the demand note was $20.7 million at
September 30, 2001 and bore interest at the rate paid by Terra Capital on
its short-term borrowings. There were no outstanding demand notes at
September 30, 2000.
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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 September 30, 2001 to cover approximately 11% of natural
gas requirements for the succeeding twelve months. Unrealized losses from
forward pricing positions totaled $0.5 million as of September 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
September 30, 2001. The Partnership also had $1.9 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 began on October 1, 2001.
6. 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.
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
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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 nine months ended September 30, 2001 follow:
Net Unrealized Realized Gain (Loss) Accumulated
Gain (loss) Deferred to OCI
on Natural Gas Future Periods
(in thousands) Hedging Activity
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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)
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Balance March 31, 2001 $ (252) $ 1,018 $ 766
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Net unrealized gain (loss)
arising during period (5,631) (1,405) (7,036)
Transfer net (gain) loss realized
to production costs 3,178 (1,018) 2,160
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Balance June 30, 2001 $ (2,705) $ (1,405) $ (4,110)
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Net unrealized gain (loss)
arising during period (1,464) (2,524) (3,988)
Transfer net loss realized
to production costs 3,624 1,405 5,029
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Balance September 30, 2001 $ (545) $ (2,524) $ (3,069)
======================================================================================================
In addition to the $1.9 million of realized losses on closed gas contracts,
the Partnership had $0.6 million of losses related to fertilizer swaps at
September 30, 2001.
7. Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FSAB") approved
the issuance of Statement of Financial Accounting Standards ("SFAS") No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." These standards, issued in July 2001, establish
accounting and reporting for business combinations. SFAS No. 141 requires
all business combinations entered into subsequent to June 30, 2001 to be
accounted for using the purchase method of accounting. SFAS No. 142
provides that goodwill and other intangible assets with indefinite lives
will not be amortized, but will be tested for impairment on an annual
basis. Adoption of these standards will not impact the Partnership.
In June 2001, the FASB approved the issuance of SFAS No. 143,
"Accounting for Asset Retirement Obligations." This standard requires
the Partnership to record the fair value of a
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liability for an asset retirement obligation in the period in which it is
incurred and is effective for the Partnership's fiscal year 2003. The
Partnership has not yet quantified the impact arising from adoption of this
standard.
In August 2001, the FASB approved the issuance of SFAS No. 144, "Accounting
for the Impairment of Long-lived Assets." This standard requires the
Partnership to recognize an impairment loss if the carrying amount of a
long-lived asset or asset group is not recoverable and exceeds its fair
value and is effective for the Partnership's fiscal year 2002. The
Partnership has not yet quantified the impact arising from adoption of this
standard
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Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Three months ended September 30, 2001 compared with
three months ended September 30, 2000
Volumes and prices for the three-month periods ended September 30, 2001 and 2000
follow:
2001 2000
Volumes Unit Price Volumes Unit Price
(000 tons) ($/ton) (000 tons) ($/ton)
------------ ------------ ------------ ------------
Ammonia 36 $ 175 56 $ 181
UAN 510 75 520 86
Urea 28 110 30 145
Revenues for the quarter ended September 30, 2001 decreased $11.4 million, or
19%, compared with the same quarter in 2000 as the result of lower prices and
volumes for all Partnership products. Sales prices and volumes declined from the
2000 third quarter due to significantly higher U.S. fertilizer inventories in
response to lower consumption during last spring's planting season.
Third quarter gross profits decreased $13.8 million from 2000. Lower 2001 sales
prices and volumes reduced gross profits $7.5 million from the 2000 second
quarter. Cost increases in the form of higher natural gas costs, which increased
from $3.47/MMBtu in 2000 to $3.55/MMBtu in 2001 (net of forward pricing gains or
losses) decreased gross margins by $0.6 million. The Partnership realized $5.0
million in hedging losses during the 2001 third quarter compared to hedging
gains of $9.8 million during the same 2000 period.
Operating expenses were $1.1 million higher in 2001 than in 2000 primarily as
the result of an increase in the third quarter expense allocation from the
General Partner. Net interest expense was $131,000 higher than the 2000 third
quarter due to higher borrowing levels.
10
Nine months ended September 30, 2001 compared with
nine months ended September 30, 2000
Volumes and prices for the nine-month periods ended September 30, 2001 and 2000
follow:
2001 2000
Volumes Unit Price Volumes Unit Price
(000 tons) ($/ton) (000 tons) ($/ton)
------------ ------------ ------------ ------------
Ammonia 145 $ 256 317 $ 149
UAN 1,323 104 1,863 75
Urea 171 152 215 130
Revenues for the nine months ended September 30, 2001 decreased $12.8 million,
or 6%, 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 $72 million from the first nine months of last year.
Significantly higher prices for all products, however, offset $58 million of the
revenue decline. The higher prices reflected lower industry supplies through the
2001 first quarter 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 nine months decreased $31.1 million from
2000. Higher sales prices increased gross profits by $58 million. These
increases were more than offset, however, by higher natural gas costs, which
increased from $2.85/MMBtu in 2000 to $5.19/MMBtu in 2001 (net of forward
pricing gains or losses) and lower sales volume. The Partnership realized $5.1
million in hedging losses during the 2001 first nine months compared to hedging
gains of $18.8 million during the same 2000 period.
Operating expenses were essentially the same in 2001 as in 2000. Net interest
expense of $614,000 was $575,000 less than the 2000 first nine months due to
lower borrowing levels.
Capital resources and liquidity
Net cash flows used in operations in the first nine months of 2001 totaled $24.7
million with $23.5 million used to increase working capital balances and $1.2
million of operating loss 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 nine months.
The Partnership's principal needs for funds are for support of its working
capital and capital expenditures. The Partnership intends to fund its needs
primarily through net cash flows from operating activities, and, to the extent
required, from funds borrowed from others, including borrowings from Terra
Capital, Inc., the parent of the General Partner. The Partnership believes that
such sources of funds will be adequate to meet the Partnership's working capital
needs and fund the Partnership's capital expenditures for at least the next 12
months.
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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 September 30, 2001.
Capital expenditures
Capital expenditures totaled $1.3 million for the first nine months of 2001. For
the remainder of 2001, the Partnership plans to spend less than $3 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 October
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.
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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: November 14, 2001
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