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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, 2002
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, 2002, 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)
June 30, December 31, June 30,
2002 2001 2001
-------------- ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 11,125 $ 10 $ 10
Accounts receivable 28,781 32,311 26,166
Inventory - finished products 12,137 18,292 39,119
Inventory - materials and supplies 9,754 10,128 9,569
Prepaid expenses and other current assets 2,744 3,939 2,364
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 64,541 64,680 77,228
- ---------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 130,849 136,335 142,202
Other assets 7,593 9,402 7,857
- ---------------------------------------------------------------------------------------------------------------------
Total assets $ 202,983 $ 210,417 $ 227,287
=====================================================================================================================
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Short-term note payable to affiliates $ --- $ 14,293 $ 19,800
Accounts payable and accrued liabilities 14,131 12,720 18,968
Customer prepayments 741 2,388 ---
Current portion of long-term debt and
capital lease obligations 53 --- 1,000
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 14,925 29,401 39,768
- ---------------------------------------------------------------------------------------------------------------------
Long-term debt 8,362 8,200 7,231
Long-term payable to affiliates 5,316 5,316 5,316
Partners' capital 174,380 167,500 174,972
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and partners' capital $ 202,983 $ 210,417 $ 227,287
=====================================================================================================================
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 Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-------------- ------------- -------------- -------------
Revenues $ 104,529 $ 101,558 $ 161,638 $ 167,099
Other income 364 193 655 283
- -----------------------------------------------------------------------------------------------------------------------
Total revenues 104,893 101,751 162,293 167,382
Cost of goods sold 99,198 99,880 152,264 161,755
- -----------------------------------------------------------------------------------------------------------------------
Gross profit 5,695 1,871 10,029 5,627
Operating expenses 2,649 2,643 4,644 4,741
- -----------------------------------------------------------------------------------------------------------------------
Operating income (loss) 3,046 (772) 5,385 886
Interest expense (22) (190) (125) (412)
Interest income 1 41 1 203
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 3,025 $ (921) $ 5,261 $ 677
=======================================================================================================================
Net income (loss) allocable to
limited partners' interest $ 2,965 $ (904) $ 5,156 $ 662
=======================================================================================================================
Net income (loss) per limited
partnership unit $ 0.16 $ (0.05) $ 0.28 $ 0.04
=======================================================================================================================
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,
2002 2001
------------- -------------
Operating activities:
Net income from operations $ 5,261 $ 677
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 6,547 6,372
Changes in operating assets and liabilities:
Receivables 3,530 (1,427)
Inventories 6,528 (29,307)
Prepaid expenses 2,814 (1,952)
Accounts payable, accrued liabilities and
customer prepayments (235) (5,194)
Change in other assets 1,811 3,401
- -------------------------------------------------------------------------------------------------------------------------
Net cash flows from operating activities 26,256 (27,430)
Net cash flows from investing activities:
Capital expenditures (1,062) (976)
Financing activities:
Net changes in short-term borrowings (14,293) 19,800
Issuance (repayment) of long-term debt
and capital lease obligations 214 (1,019)
Partnership distributions paid --- (8,306)
- -------------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities (14,079) 10,475
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 11,115 (17,931)
Cash and cash equivalents at beginning of period 10 17,941
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 11,125 $ 10
=========================================================================================================================
See Accompanying Notes to the Consolidated Financial Statements.
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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, 2002 $178,808 $ (10,221) $ (1,087) $ 167,500
Net Income 5,156 105 --- 5,261
Change in fair value of derivatives --- --- 1,619 1,619
----------
Comprehensive income --- --- --- 6,880
- --------------------------------------------------------------------------------------------------------------------
Partners' capital at June 30, 2002 $183,964 $ (10,116) $ 532 $ 174,380
====================================================================================================================
Limited partner units issued and
Outstanding at June 30, 2002 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, 2001 $ 196,571 $ (9,859) $ --- $ 186,712
Net Income 663 14 --- 677
Cumulative effect of change in
accounting principle for
derivative financial instruments --- --- 14,200 14,200
Change in fair value of derivatives --- --- (18,311) (18,311)
------------
Comprehensive income --- --- --- (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
==========
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, 2001. 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.
Realized gains and losses from hedging activities and premiums paid for
option contracts are deferred and recognized in the month in which the
hedged transactions closed. Swaps, options and other derivative
instruments that do not qualify for hedge accounting treatment are marked
to market each accounting period. Costs associated with settlement of
natural gas purchase contracts and costs for shipping and handling are
included in cost of sales.
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, 2002 and 2001, 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 2002. On July 22, 2002
the Partnership declared a $3.8 million cash distribution ($0.20 per
common unit) payable August 26, 2002 to record holders as of August 5,
2002. The Partnership paid cash distributions totaling $8.3 million ($0.44
per common unit) in the first half of 2001.
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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, 2002, $11.1 million was 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.
4. Natural gas costs
Natural gas is the principal raw material used in the Partnership's
production of nitrogen products. Natural gas prices are volatile and we
manage this volatility through the use of derivative commodity
instruments. The Partnership's normal policy is to hedge 20-80% of its
natural gas requirements for the upcoming 12 months and up to 50% of the
requirements for the following 24-month period, provided that such
arrangements would not result in costs greater than expected selling
prices for our finished products. The financial derivatives are traded in
months forward and settlement dates are scheduled to coincide with gas
purchases during those future periods. These contracts reference physical
natural gas prices or approximate NYMEX futures contract prices. Contract
prices are frequently based on prices at the most common and financially
liquid location of reference for financial derivatives related to natural
gas. However, natural gas supplies for our facilities are purchased for
each plant at locations other than reference points, which often creates a
location basis differential between the contract price and the physical
price of natural gas. Accordingly, 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 2002 and part of
2003, consistent with its policy. As a result of its policies, the
Partnership has reduced the potential adverse financial impact of natural
gas 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, 2002 to cover 12% of natural gas
requirements for the succeeding twelve months. The Partnership also uses
basis swaps to manage some of the basis risk.
Unrealized gains from forward pricing positions totaled $0.2 million as of
June 30, 2002. In addition, the Partnership had contracts which would
reduce, assuming no decrease in forward natural gas prices at June 30,
2002, the purchase price of about 7 percent of its next 12 months' natural
gas needs by $1.4 million. The amount ultimately recognized by the
Partnership will be dependent on published prices in effect at the time of
settlement. The Partnership also had $0.3 million of realized gains on
closed North America contracts relating to future periods that have been
deferred to the respective period.
On June 30, 2002, the fair value of the derivatives resulted in a $0.2
million increase to current assets and a $0.3 million reduction to current
liabilities. The increase to current assets was to recognize he value of
open natural gas contracts; the reduction to current liabilities was to
reclassify deferred gains on closed contracts relating to future periods.
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5. Idled facilities
On November 30, 2000, the Partnership reported that it would not restart
its Blytheville, Arkansas ammonia and urea production facility as the
result of high natural gas costs. On January 2, 2001 the Partnership idled
one of two sets of ammonia and upgrading plants at its Verdigris, Oklahoma
facility as the result of high natural gas costs. The Verdigris plant
resumed production on January 23, 2001 and the Blytheville plant resumed
production in March 2001. The Blytheville plant was also idled from June
2001 until October 2001 due to its inability to generate cash flow under
existing price and cost conditions.
6. In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting
for Asset Retirement Obligations". This standard requires us to record the
fair value of a liability for an asset retirement obligation in the period
in which it is incurred and is effective for our fiscal year 2003. The
adoption of this standard is not expected to have a material effect on the
Partnerships' financial position or results of operations.
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Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim reporting purposes. The preparation of these financial
statements requires us to make estimates and judgments that affect the amount of
assets, liabilities, revenues and expenses at the date of our financial
statements. Actual results may differ from these estimates under different
assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. Our critical
accounting policies are described below.
Impairments of long-lived assets - We record impairment losses on long-lived
assets used in operations when events and circumstances indicate that the assets
might be impaired and the undiscounted cash flows estimated to be generated by
those assets are less than the carrying amount of these items. Our cash flow
estimates are based on historical results adjusted to reflect our best estimate
of future market and operating conditions. The net carrying value of assets not
recoverable is reduced to fair value. Our estimates of fair value represent our
best estimate based on industry trends and reference to market rates and
transactions.
Revenue recognition - Revenue is recognized when title to finished product
passes to the customer. Revenue is recognized as the net amount to be received
after deducting estimated amounts for discounts and trade allowances. Revenue
includes amounts paid by customers for shipping and handling.
Inventory valuation - Inventories are stated at the lower of cost or estimated
net realizable value. The average cost of inventories is determined using the
first-in, first-out method. The nitrogen and methanol industries are
characterized by rapid change in both demand and pricing. Rapid declines in
demand could result in temporary or permanent curtailment of production, while
rapid declines in price could result in a lower of cost or market adjustment.
9
Three months ended June 30, 2002 compared with
three months ended June 30, 2001
Volumes and prices for the three-month periods ended June 30, 2002 and 2001
follow:
2002 2001
Volumes Unit Price Volumes Unit Price
(000 tons) ($/ton) (000 tons) ($/ton)
------------ ------------ ------------ ------------
Ammonia 129 $ 159 91 $ 276
UAN 825 71 458 117
Urea 122 114 107 144
Revenues for the quarter ended June 30, 2002 increased $2.9 million, or 3%,
compared with the same quarter in 2001 as the result of higher volumes for all
Partnership products, partly offset by lower sales prices. Selling prices
reduced revenues by $57 million reflecting increased supplies of nitrogen
products as compared to 2001 when high natural gas costs resulted in industry
wide production curtailments from the middle of 2000. Second quarter 2001 sales
volumes were depressed due to lower production rates, reduced demand in response
to high prices and increased competition from imports.
Second quarter gross profits increased $3.8 million from 2001. Higher 2002 sales
volumes contributed $4 million to gross profits. The effect of lower 2002 sales
prices was offset by lower natural gas costs, which declined from $5.25 MMBtu in
2001 to $3.11/MMBtu in 2002 (net of forward pricing gains or losses.) As a
result of forward price contracts, second quarter 2002 natural gas costs for the
Partnership were $4.1 million lower than spot prices.
Operating expenses were essentially unchanged in 2002 from 2001. Net interest
expense was $128,000 lower than the 2001 second quarter due to lower borrowing
levels.
10
Six months ended June 30, 2002 compared with
six months ended June 30, 2001
Volumes and prices for the six-month periods ended June 30, 2002 and 2001
follow:
2002 2001
Volumes Unit Price Volumes Unit Price
(000 tons) ($/ton) (000 tons) ($/ton)
------------ ------------ ------------ ------------
Ammonia 204 $ 150 109 $ 282
UAN 1,245 68 812 123
Urea 242 109 143 160
Revenues for the six months ended June 30, 2002 declined $5.5 million, or 3%,
compared with the same period in 2001. Sales prices were lower as the result of
increased supplies of nitrogen fertilizer in contrast to 2001 when high natural
gas costs resulted in industry-wide production curtailments. A substantial
portion of the revenue shortfall from lower sales prices was offset by higher
2002 volumes as compared to last year's first half. Sales volumes in 2001 were
depressed due to lower production rates, reduced demand in response to high
prices and increased competition from imports.
Gross profits during the 2002 first six months increased $4.4 million from 2001.
The increase in gross profits was primarily related to lower natural gas costs
and higher sales volumes, offset in part by reduced sales prices. Natural gas
costs decreased almost $84 million over the 2001 first half as unit costs, net
of forward pricing gains and losses decreased to $2.86/MMBtu during the 2002
first half compared to $5.81/MMBtu during the same 2001 period. Natural gas
costs in the 2002 first half were $1.4 million lower than spot prices as the
result of forward price contracts.
Operating expenses were essentially unchanged in 2002 from 2001. Net interest
expense of $124,000 was $85,000 less than the 2001 first half due to lower
borrowing levels.
Capital resources and liquidity
Net cash generated from operating activities for the first half of 2002 was
$26.3 million composed of $11.8 million of cash provided from operating
activities and $14.5 million of decreases to working capital balances. The
decrease in working capital consisted of a seasonal decrease in inventory,
accounts receivable and prepaid expenses.
Capital expenditures of $1.1 million during the first half of 2002 were
primarily to fund replacement and stay-in-business additions to plant and
equipment. The Partnership expects 2002 capital expenditures to approximate $6.0
million to fund replacement and stay-in-business additions to plant and
equipment.
On July 22, 2002, the Partnership declared a $3.8 million distribution ($0.20
per common unit) payable August 26 to record holders as of August 5, 2002.
The Partnership, along with Terra Industries Inc. ("Terra"), Terra Capital, Inc.
and other affiliates, has an asset-based financing agreement that expires in
June 2005. The financing agreement provides for the
11
Partnership to borrow amounts generally up to 85% of eligible receivables plus
60% of eligible inventory. At June 30, 2002, the Partnership had unused
borrowing availability of approximately $29 million. The financing agreement,
which expires June 2005, bears interest at floating rates and is secured by
substantially all of the Partnerships' working capital. The agreement also
requires the Partnership and its affiliates to adhere to certain limitations on
additional debt, capital expenditures, acquisitions, liens, asset sales,
investments, prepayments of subordinated indebtedness, changes in lines of
business and transactions with affiliates. In June, 2002 the credit facility was
amended to remove the required minimum level of earnings before interest, income
taxes, depreciation, amortization and other non-cash items ("EBITDA") as long as
borrowing availability is $60 million or more. If Terra's borrowing availability
falls below $60 million after December 31, 2002, Terra will be required to have
achieved minimum EBITDA of $60 million during the most recent four quarters.
Prior to December 31, 2002, a reduced EBITDA requirement is in effect, which is
$45 million for the four quarters ending June 30, 2002 and $50 million for the
four quarters ending September 30, 2002. If necessary, the Partnership believes
that it could replace its existing credit lines on terms and conditions not
materially different than its current arrangement through Terra.
The Partnership's principal needs for funds are for support of its working
capital and capital expenditures. The Partnership intends to fund its needs
primarily from net cash provided by operating activities, and, to the extent
required, from funds borrowed from others, including borrowings from Terra
Capital, Inc., the parent of the General Partner. The Partnership believes that
such sources of funds will be adequate to meet the Partnership's working capital
needs and fund the Partnership's capital expenditures for at least the next 12
months.
Limited Call Right
At December 31, 2001, the General Partner and its affiliates owned 75.1% of the
Partnership's outstanding units. When less than 25% of the issued and
outstanding units are held by non-affiliates of the General Partner, the
Partnership, at the General Partner's sole discretion, may call, or assign to
the General Partner or its affiliates, its right to acquire all such outstanding
units held by non-affiliated persons. If the General Partner elects to acquire
all outstanding units, the Partnership is required to give at least 30 but not
more than 60 days' notice of its decision to purchase the outstanding units. The
purchase price per unit will be the greater of 1) the average of the previous 20
trading days' closing prices as of the date five days before the purchase is
announced and 2) the highest price paid by the General Partner of any of its
affiliates for any unit within the 90 days preceding the date the purchase is
announced.
FORWARD LOOKING PRECAUTIONS
Information contained in this report, other than historical information, may be
considered forward looking. Forward looking information reflects Management's
current views of future events and financial performance that involve a number
of risks and uncertainties. The factors that could cause actual results to
differ materially include, but are not limited to the following: Changes in the
financial markets, general economic conditions within the agricultural industry,
competitive factors and price changes (principally, sales prices of nitrogen
products and natural gas costs), changes in product mix, changes in the
seasonality of demand patterns, changes in weather conditions, changes in
agricultural regulations, and other risks detailed in the Partnership's
Securities and Exchange Commission filings, in particular the "Factors that
Affect Operating Results" section of its most recent Form 10-K.
12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 99.1 Certification pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(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 9, 2002
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