Attached files

file filename
8-K/A - FORM 8-K/A - East Dubuque Nitrogen Partners, L.P.d466924d8ka.htm
EX-99.1 - EX-99.1 - East Dubuque Nitrogen Partners, L.P.d466924dex991.htm
EX-23.1 - EX-23.1 - East Dubuque Nitrogen Partners, L.P.d466924dex231.htm
EX-99.3 - EX-99.3 - East Dubuque Nitrogen Partners, L.P.d466924dex993.htm

Exhibit 99.2

Agrifos Fertilizer L.L.C.

Financial Statements

September 30, 2012 and 2011


Agrifos Fertilizer L.L.C.

Index

September 30, 2012 and 2011

 

 

 

     Page(s)  

Financial Statements, as restated

  

Statements of Financial Position

     1   

Statements of Operations

     2   

Statements of Comprehensive Income (Loss)

     3   

Statements of Changes in Member’s Equity and Accumulated Other Comprehensive Loss

     4   

Statements of Cash Flows

     5   

Notes to Financial Statements

     6-15   


Agrifos Fertilizer L.L.C.

Statements of Financial Position

September 30, 2012 and December 31, 2011

 

    

September 30,

2012

   

December 31,

2011

 
           (Restated)  
     (Unaudited)  

Assets

    

Current assets

    

Cash and cash equivalents

   $ 1,332,957      $ 5,679,742   

Accounts receivable, trade

     8,931,782        891,990   

Other receivables, net

     63,123        197,207   

Inventories and other assets, net

     13,717,265        22,017,477   

Prepaid expenses and other current assets

     259,697        1,442,865   

Deferred income tax asset

     61,535        58,000   
  

 

 

   

 

 

 

Total current assets

     24,366,359        30,287,281   

Property, plant and equipment, net

     51,847,764        49,130,253   

Deferred income tax asset

     —          489,296   

Other assets

     743,899        824,399   
  

 

 

   

 

 

 

Total assets

   $ 76,958,022      $ 80,731,229   
  

 

 

   

 

 

 

Liabilities and Member’s Equity

    

Current liabilities

    

Accounts payable

   $ 11,223,306      $ 10,721,007   

Accrued expenses

     3,414,533        5,532,448   

Deferred revenue

     4,161,008        2,747,722   

Income taxes payable

     63,158        —     

Current portion of long-term debt

     10,026,790        6,500,000   
  

 

 

   

 

 

 

Total current liabilities

     28,888,795        25,501,177   

Long term debt, net of current portion

     20,144,695        22,500,000   

Deferred income tax

     1,854,195        —     

Asset retirement obligation

     1,661,795        1,622,252   

Accrued employee benefits and other liabilities

     1,632,293        1,957,343   
  

 

 

   

 

 

 

Total liabilities

     54,181,773        51,580,772   

Commitments and contingencies

    

Member’s equity

     24,195,123        30,616,770   

Accumulated other comprehensive loss

     (1,418,874     (1,466,313
  

 

 

   

 

 

 

Total member’s equity and accumulated other comprehensive loss

     22,776,249        29,150,457   
  

 

 

   

 

 

 

Total liabilities and member’s equity and accumulated other comprehensive loss

   $ 76,958,022      $ 80,731,229   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

1


Agrifos Fertilizer L.L.C.

Statements of Operations

For the nine months ended September 30, 2012 and 2011

 

    

September 30,

2012

   

September 30,

2011

 
           (Restated)  
     (Unaudited)  

Revenues

   $ 119,915,709      $ 109,604,431   

Operating expenses

    

Costs of products sold

     112,262,898        109,943,995   

Selling, general and administrative

     7,140,469        6,023,152   

Gain on sale of assets, net

     —          240,542   
  

 

 

   

 

 

 

Total operating expenses

     119,403,367        116,207,689   
  

 

 

   

 

 

 

Operating income (loss)

     512,342        (6,603,258

Other income (expense)

    

Interest expense, net

     (863,871     (536,292

Gain on insurance settlements

     1,000,000        —     
  

 

 

   

 

 

 

Total other income (expense), net

     136,129        (536,292
  

 

 

   

 

 

 

Income (loss) before income taxes

     648,471        (7,139,550

Income taxes

     3,047,687        402,601   
  

 

 

   

 

 

 

Net loss

   $ (2,399,216   $ (7,542,151
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

2


Agrifos Fertilizer L.L.C.

Statements of Comprehensive Income (Loss)

For the nine months ended September 30, 2012 and 2011

 

    

September 30,

2012

   

September 30,

2011

 
           (Restated)  
     (Unaudited)  

Net loss

   $ (2,399,216   $ (7,542,151

Amortization of actuarial loss

     43,815        (11,271

Amortization of prior service costs

     3,624        (568
  

 

 

   

 

 

 

Comprehensive income (loss)

   $ (2,351,777   $ (7,553,990
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

3


Agrifos Fertilizer L.L.C.

Statements of Changes in Member’s Equity and Accumulated Other

Comprehensive Loss

For the nine months ended September 30, 2012

 

           Accumulated        
           Other        
           Comprehensive        
     Member’s     Loss        
     Equity     (Unaudited)     Total  

Balances at December 31, 2011 (Restated)

   $ 30,616,770      $ (1,466,313   $ 29,150,457   

Distributions

     (3,100,000     —          (3,100,000

Receivable from owner

     (922,431     —          (922,431

Net loss

     (2,399,216     —          (2,399,216

Amortization of actuarial loss

     —          43,815        43,815   

Amortization of prior service costs

     —          3,624        3,624   
  

 

 

   

 

 

   

 

 

 

Balances at September 30, 2012

   $ 24,195,123      $ (1,418,874   $ 22,776,249   
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

4


Agrifos Fertilizer L.L.C.

Statements of Cash Flows

For the nine months ended September 30, 2012 and 2011

 

    

September 30,

2012

   

September 30,

2011

 
           (Restated)  
     (Unaudited)  

Cash flows from operating activities

    

Net loss

   $ (2,399,216   $ (7,542,151

Adjustments to reconcile net loss to net cash provided by operating activities

    

Depreciation

     3,434,381        3,138,831   

Accretion of asset retirement obligations

     39,542        38,298   

Amortization of debt issuance costs

     90,000        75,000   

Loss on fixed asset sale

     —          240,542   

Pension amortization and adjustments

     47,439        434,251   

Change in allowance for inventory obsolesence

     —          1,659,653   

Deferred income tax, net

     2,339,956        381,864   

Changes in working capital assets and liabilities

    

Accounts receivable, trade

     (6,239,792     1,983,081   

Other receivables

     134,084        4,579,716   

Inventories

     6,500,212        3,629,302   

Prepaid expenses and other current assets

     1,183,169        (1,303,098

Other assets

     (9,500     245,400   

Accounts payable

     502,299        (6,248,677

Accrued expenses

     (2,117,915     (626,897

Income tax payable

     63,158        67,825   

Deferred revenue

     1,413,286        387,772   

Other liabilities

     (325,050     601,073   
  

 

 

   

 

 

 

Net cash provided by operating activities

     4,656,053        1,741,785   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchase of property, plant and equipment

     (6,151,892     (8,039,781

Proceeds from disposal of property, plant and equipment

     —          907,636   
  

 

 

   

 

 

 

Net cash used in investing activities

     (6,151,892     (7,132,145
  

 

 

   

 

 

 

Cash flows from financing activities

    

Distributions

     (3,100,000     (8,000,000

Note receivable from related parties

     (922,431     (7,810,000

Payment of deferring financing cost

     —          (525,000

Borrowings on long-term debt

     28,000,000        37,000,000   

Repayments on long-term debt

     (26,828,515     (10,000,000
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (2,850,946     10,665,000   

Net increase (decrease) in cash and cash equivalents

     (4,346,785     5,274,640   

Cash and cash equivalents

    

Beginning of period

     5,679,742        1,557,064   
  

 

 

   

 

 

 

End of period

   $ 1,332,957      $ 6,831,704   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

5


Agrifos Fertilizer L.L.C.

Notes to Financial Statements

September 30, 2012 and 2011

Unaudited

 

1. Description of Business

Agrifos Fertilizer Inc. was incorporated under the laws of the State of Delaware in 2003. In December 2008, Agrifos Fertilizer, Inc. was converted from a Delaware corporation to a Delaware limited liability company named Agrifos Fertilizer L.L.C. (the “Company”). The Company is owned by Agrifos Holdings Inc. (“Holdings”). The Company owns and operates a fertilizer plant located in Pasadena, Texas.

In early 2011, the Company’s operations were restructured. The Company ceased production of phosphate fertilizers, which included DAP (diammonium phosphate) and MAP (monoammonium phosphate), due to the limited remaining capacity of the Company’s primary waste disposal site related to its phosphate operations.

The Company undertook major capital and maintenance projects at the Pasadena plant, including decommissioning certain phosphate productions assets and converting a portion of its assets to the new business model. The Company’s new business model includes the production of ammonium sulfate fertilizer and the continued production of sulfuric acid and ammonium thiosulfate.

 

2. Significant Accounting Policies

Basis of Presentation

The financial statements for the periods presented are unaudited and reflect all adjustments, consisting of normal recurring items, which management considers necessary for a fair statement of the Company’s financial position as of September 30, 2012, and the results of operations and cash flows for the periods presented. Operating results for the nine months ended September 30, 2012 and 2011 are not necessarily indicative of results to be expected for the entire years.

These financial statements should be read in conjunction with the audited annual financial statements and notes thereto for the years ended December 31, 2011, 2010 and 2009. These audited financial statements have been included as exhibit 99.1 of the Form 8-K/A dated October 31, 2012. These financial statements have been prepared in accordance with the rules for interim financial statements and do not include all annual disclosures required by generally accepted accounting principles in the United States.

Revenue Recognition

Revenue from the sale of fertilizers is recognized when persuasive evidence of an arrangement exists, products are shipped, the fee is fixed or determinable, and collectability is reasonably assured. As discussed in Note 3, the financial statements were restated for bill and hold transactions. The Company no longer recognizes revenue for bill and hold transactions.

Cash and Cash Equivalents

Cash on hand and highly liquid investments purchased with an original maturity of three months or less are considered to be cash and cash equivalents.

Allowance for Doubtful Accounts

The Company maintains allowances for potential credit losses which, when realized, have been within the range of management’s expectations.

 

6


Agrifos Fertilizer L.L.C.

Notes to Financial Statements

September 30, 2012 and 2011

Unaudited

 

Inventories, net

Inventories are stated at the lower of cost, as determined by standard costing which approximates the weighted average cost method, or market. Cost includes material, labor and manufacturing overhead. The statements of financial position include reserves to provide for estimated losses arising from writing down inventories to market value in those situations where cost exceeded market value at September 30, 2012 and December 31, 2011 and for slow moving and obsolete inventories (see Note 5).

Property, Plant and Equipment, net

Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation for financial reporting purposes is provided using straight-line methods over the estimated useful lives of the assets. Estimated useful lives of the assets range from 1.5 to 10 years, with the majority relating to plant, machinery and equipment that range from three to 10 years. Buildings have estimated useful lives of 20 years.

Expenditures for major acquisitions and improvements are capitalized; expenditures for maintenance and repairs are charged to expense as incurred, including the cost of major maintenance expenditures. When property and equipment are sold or retired, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in other expense.

Long-lived assets to be held and used by the Company are reviewed to determine whether any events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. For long-lived assets to be held and used, the Company bases its evaluation on impairment indicators such as the nature of the assets, the future economic benefit of the assets, any historical or future profitability measurements and other external market conditions or factors that may be present. If such impairment indicators are present or other factors exist that indicate that the carrying amount of the asset may not be recoverable, the Company determines whether impairment has occurred through the use of an undiscounted cash flow analysis of the asset at the lowest level for which identifiable cash flows exist. If impairment has occurred, the Company recognizes a loss for the difference between the carrying amount and the fair value of the asset. The fair value of the asset is measured using quoted market prices or, in the absence of quoted market prices, is based on an estimate of discounted cash flows. No impairment was recorded in 2012 or 2011.

Asset Retirement Obligations

The Company’s asset retirement obligations (AROs) relate to future costs associated with the removal of contaminated material upon removal of the phosphorous plant. The fair value of a liability for an ARO is recorded in the period in which it is incurred and the cost of such liability increases the carrying amount of the related long-lived asset by the same amount. The liability is accreted each period through charges to operating expense and the capitalized cost is depreciated over the remaining useful life of the asset.

Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables and debt. Management considers the carrying values of cash and cash equivalents, trade receivables and trade payables to be representative of their respective fair values because of their short-term maturities or expected settlement dates. The carrying values of outstanding amounts under the revolving credit facility and term debt approximate fair value due to the floating interest rate.

 

7


Agrifos Fertilizer L.L.C.

Notes to Financial Statements

September 30, 2012 and 2011

Unaudited

 

Concentration of Risk

The Company sells to its customers on an uncollateralized credit basis unless past experience with the customer requires cash on delivery or other arrangements.

Cash is deposited in demand accounts in federally insured domestic institutions to minimize risk. From time to time the balances may exceed the $250,000 level of coverage provided by the Federal Depository Insurance Corporation. The Company has not incurred losses related to these deposits.

Income Taxes

Effective January 1, 2009, Holdings converted to a Subchapter “S” corporation. A Subchapter S corporation is a pass through entity for income tax purposes to the shareholders of the Company. As a result of the election, Holdings changed from a taxable entity to a nontaxable entity. Deferred tax assets and liabilities were eliminated at the date an enterprise ceased to be a taxable enterprise. The Company is subject to the Texas Margin Tax, therefore the deferred taxes associated with the Texas Margin Tax remain on the Company’s books and records. In addition, even though an S corporation is a flow through entity, there is an entity level tax that is assessed when the corporation sells certain built-in gain assets within the ten years subsequent to the conversion to an S corporation. See Note 9 for recognition of this income tax in 2012. The Company follows generally accepted accounting principles to account for uncertainty in income taxes. These accounting principles provide thresholds and measurements to determine whether tax benefits claimed or expected to be claimed in a tax return should be recorded in the financial statements.

Use of Estimates

The preparation of financial statements in conformity with U.S. 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.

 

3. Restatement

The Company concluded it was required to restate its previously issued financial statements for the following items:

 

   

The Company did not meet revenue recognition criteria for bill and hold transactions as well as sales under a marketing agreement for which the price was not determinable upon shipment;

 

   

The Company determined it had a conditional asset retirement obligation for its phosphorous plant, which should have been recorded in 2005;

 

   

The Company had certain DAP inventory which was damaged during 2011, and cannot be sold; and

 

   

The Company did not appropriately record an adjustment to reduce inventory to the lower of cost or market in 2011.

 

   

The Company incorrectly reflected a cash outflow for financing costs as an operating activity.

The impact of correcting these errors, as well as recording other immaterial corrections are as follows:

 

8


Agrifos Fertilizer L.L.C.

Notes to Financial Statements

September 30, 2012 and 2011

Unaudited

 

     September 30, 2011  
     As previously              
     reported     Adjustment     As restated  

Statements of Operations

      

Revenues

   $ 115,608,047      $ (6,003,616   $ 109,604,431   

Costs of products sold

     112,741,465        (2,797,470     109,943,995   

Total operating expenses

     119,005,159        (2,797,470     116,207,689   

Operating income (loss)

     (3,397,112     (3,206,146     (6,603,258

Income (loss) before income taxes

     (3,933,404     (3,206,146     (7,139,550

Net income (loss)

     (4,238,962     (3,303,189     (7,542,151

Statements of Cash Flows

      

Cash flows from operating activities:

      

Net income (loss)

     (4,238,962     (3,303,189     (7,542,151

Depreciation

     3,083,293        55,538        3,138,831   

Accretion of asset retirement obligations

     —          38,298        38,298   

Amortization of debt issuance costs

     —          75,000        75,000   

Deferred income tax, net

     284,821        97,043        381,864   

Pension amortization and adjustments

     273,839        160,412        434,251   

Change in allowance for inventory obsolescence

     46,430        1,613,223        1,659,653   

Changes in working capital assets and liabilities:

      

Accounts receivable, trade

     5,481,425        (3,498,344     1,983,081   

Inventories

     (1,168,908     4,798,210        3,629,302   

Deferred revenue

     —          387,772        387,772   

Net cash provided by operating activities

     1,967,342        423,964        1,741,785   

Cash flows from investing activities

      

Proceeds from disposal of PPE

     757,079        150,557        907,636   

Net cash used in investing activities

     (7,282,702     150,557        (7,132,145

Cash flows from financing activities:

      

Payment of deferred financing costs

     (600,000     75,000        (525,000

Net cash used in financing activities

     10,590,000        75,000        10,665,000   

 

9


Agrifos Fertilizer L.L.C.

Notes to Financial Statements

September 30, 2012 and 2011

Unaudited

 

     2011  
     As previously
reported
    Adjustment     As restated  

Statements of Financial Position

      

Accounts receivable

   $ 6,731,019      $ (5,839,029   $ 891,990   

Other receivables

     197,207        —          197,207   

Inventories, net

     14,689,805        7,327,672        22,017,477   

Total current assets

     28,798,638        1,488,643        30,287,281   

Property, plant and equipment, net

     49,469,889        (339,636     49,130,253   

Total assets

     79,582,222        1,149,007        80,731,229   

Accrued expenses

     5,532,448        —          5,532,448   

Deferred revenue

     —          2,747,722        2,747,722   

Total current liabilities

     22,753,455        2,747,722        25,501,177   

Accrued employee benefits and other

     2,144,732        (187,389     1,957,343   

Asset retirement obligation

     —          1,622,252        1,622,252   

Total liabilities

     47,398,187        4,182,585        51,580,772   

Member’s equity

     33,837,737        (3,220,968     30,616,770   

Accumulated other comprehensive loss

     (1,653,702     187,389        (1,466,313

Total member’s equity and accumulated other comprehensive loss

     32,184,035        (3,033,579     29,150,456   

Total liabilities and member’s equity and AOCL

     79,582,222        1,149,007        80,731,229   

 

4. Other Receivables, net

Other receivables consist of the following at September 30, 2012 and December 31, 2011:

 

    

September 30,

2012

    

December 31,

2011

 

Claim receivable

   $ 63,123       $ —     

Other

     —           362,242   

Allowance for doubtful accounts

     —           (165,035
  

 

 

    

 

 

 

Total other receivables, net

   $ 63,123       $ 197,207   
  

 

 

    

 

 

 

Other receivables at September 30, 2012 and December 31, 2011 relate primarily to amounts owed to the Company by a related party for services provided by the Company to the related party.

 

10


Agrifos Fertilizer L.L.C.

Notes to Financial Statements

September 30, 2012 and 2011

Unaudited

 

5. Inventories, net

Inventories, which include materials, labor and manufacturing, overhead costs, consist of the following at September 30, 2012 and December 31, 2011:

 

    

September 30,

2012

   

December 31,

2011

 
           (Restated)  

Raw materials

   $ 4,155,663      $ 6,841,129   

Finished products

     7,259,258        12,751,761   

Replacement parts and supplies

     6,272,917        6,395,160   
  

 

 

   

 

 

 
     17,687,838        25,988,050   

Allowance for obsolescence

     (3,970,573     (3,970,573
  

 

 

   

 

 

 

Inventories, net

   $ 13,717,265      $ 22,017,477   
  

 

 

   

 

 

 

As discussed in Note 1, the Company ceased production of phosphate fertilizers in early 2011. During the nine months ended September 30, 2011, the Company recorded an allowance for obsolescence of $1,654,653 related to the remaining phosphate fertilizer which was damaged in 2011 and cannot be sold.

 

6. Property, Plant and Equipment, net

Property, plant and equipment consist of the following at September 30, 2012 and December 31, 2011:

 

    

September 30,

2012

   

December 31,

2011

 
       (Restated)  

Land

   $ 10,515,749      $ 10,515,749   

Plant improvements

     7,752,807        7,752,807   

Buildings

     13,194,096        13,174,645   

Machinery and equipment

     58,176,059        56,777,308   

Computer equipment

     2,875,554        2,832,323   

Construction in progress

     8,085,160        3,221,427   
  

 

 

   

 

 

 
     100,599,425        94,274,259   

Less: Accumulated depreciation

     (48,751,661     (45,144,006
  

 

 

   

 

 

 

Property, plant and equipment, net

   $ 51,847,764      $ 49,130,253   
  

 

 

   

 

 

 

Depreciation expense totaled $3,434,381 and $3,138,831 for the nine months ended September 30, 2012 and 2011, respectively.

 

7. Accrued Expenses

Accrued expenses consist of the following at September 30, 2012 and December 31, 2011:

 

11


Agrifos Fertilizer L.L.C.

Notes to Financial Statements

September 30, 2012 and 2011

Unaudited

 

    

September 30,

2012

    

December 31,

2011

 

Accrued payroll and related expenses

   $ 1,529,853       $ 1,009,082   

Legal reserves

     385,041         1,080,000   

Sales and use taxes

     532,294         1,800,000   

Property taxes

     733,000         102,458   

Accrued property, plant and equipment

     —           1,353,564   

Other

     234,345         187,344   
  

 

 

    

 

 

 

Accrued expenses

   $ 3,414,533       $ 5,532,448   
  

 

 

    

 

 

 

 

8. Debt

Debt consists of the following at September 30, 2012 and December 31, 2011:

 

     September 30, 2012     December 31, 2011  
     Balance      Interest Rate     Balance      Interest Rate  

Term Loan, maturing March 31, 2016

   $ 23,171,485         3.23   $ 25,000,000         3.28

Revolving Note, maturing March 31, 2014

     7,000,000         3.25     4,000,000         3.30
  

 

 

      

 

 

    

Total Debt

     30,171,485           29,000,000      

Less current portion

     10,026,790           6,500,000      
  

 

 

      

 

 

    

Long term debt, net of current portion

   $ 20,144,695         $ 22,500,000      
  

 

 

      

 

 

    

On March 9, 2011, the Company entered into a five year credit agreement (“Credit Agreement”) with a financial institution. The Credit Agreement is comprised of a revolving note of $15 million, with a maturity date of March 31, 2014, and a term loan of $25 million, with a maturity date of March 31, 2016. The interest rate per year is the Adjusted One Month LIBOR plus 3.00%. Payments for the term loan are to be repaid in quarterly installments beginning in February 2012 in an amount equal to 2.50%, 3.75% and 5.00% of the unpaid principal balance for years ending 2012, 2013 and thereafter.

The Credit Agreement requires that the Company maintain certain financial covenants. These covenants include a fixed charge coverage ratio, a leverage ratio and a balance sheet ratio. The Company used a portion of the borrowings to repay borrowings under the revolving credit facility.

The Company recorded $600,000 in debt issuance costs incurred to obtain the Credit Agreement, which are accounted for as deferred charges and amortized using the straight line method which approximates the interest method over the term of the Credit Agreement. Amortization of debt issuance costs of $90,000 and $75,000 is included in interest expense in the statements of operations for the periods ended September 30, 2012 and 2011.

 

9. Income Taxes

The provision for income tax expense consists of the following for the periods ended September 30:

 

12


Agrifos Fertilizer L.L.C.

Notes to Financial Statements

September 30, 2012 and 2011

Unaudited

 

    

September 30,

2012

    

September 30,

2011

 

Current income tax expense

   $ 704,196       $ 67,825   

Deferred income tax expense

     2,343,491         334,776   
  

 

 

    

 

 

 

Income tax expense

   $ 3,047,687       $ 402,601   
  

 

 

    

 

 

 

As discussed in Note 1, effective January 1, 2009 the Company converted to a sub chapter S corporation for federal income tax reporting and is subject to a tax on assets sold within ten years of the Company’s conversion to a sub chapter S corporation. Prior to 2012, management did not intend to sell assets subject to a built in gains tax, and therefore did not record a deferred tax liability for this tax. During the nine months ended September 30, 2012, management considered selling these assets and therefore recorded $2,423,702 of deferred tax liability for the built in gains tax. As discussed in Note 14, the Company was sold in November 2012.

As of January 1, 2008, the former Texas franchise tax on taxable capital and earned surplus was replaced by the Texas Margin Tax, a revised tax on modified gross revenue. At the time of the change, taxpayers were permitted to take a temporary credit for business loss carryforwards that were available as of December 31, 2007 (“Texas Preservation Credit”). For franchise tax reports due after January 1, 2008, the taxpayer may utilize the Texas Preservation Credit against the tax liability reflected on the Texas Margin Tax return.

The Company is subject to tax examinations in various jurisdictions and accordingly records incremental tax expense based upon the more-likely-than-not outcomes of any uncertain tax positions. In addition, when applicable, the Company adjusts the previously recorded tax expense to reflect examination results when the position is effectively settled. The Company’s ongoing assessments of the more-likely-than-not outcomes of the examinations and related tax positions require judgment and can increase or decrease the Company’s effective tax rate, as well as impact operating results. The specific timing of when the resolution of each tax position will be reached is uncertain.

 

10. Equity

Member’s Equity

All member’s equity is owned by Holdings. All of the Company’s profits and losses are allocated to Holdings.

Receivables from owners

All receivables from owners of the Company parent (Holdings) have been recorded as a reduction in member’s equity.

 

11. Commitments and Contingencies

Operating Leases

The Company leases certain equipment under noncancelable operating leases having terms in excess of one year. Operating lease expense for the periods ended September 30, 2012 and 2011 was $294,061 and $568,768, respectively.

Litigation

The Company, in the normal course of business, is subject to claims and litigation with respect to operations. The Company records a provision with respect to a claim, suit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

 

13


Agrifos Fertilizer L.L.C.

Notes to Financial Statements

September 30, 2012 and 2011

Unaudited

 

Claims and proceedings are reviewed at least annually and provisions are taken or adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information pertinent to a particular matter. Claims, suits, investigations and proceedings are inherently uncertain and it is not possible to predict the ultimate outcome of such matters. While the Company will continue to defend itself vigorously, it is possible that the Company’s business, financial condition, results of operations or cash flows could be affected in any particular period by the resolution of one or more of these matters.

EPA Order of Consent

During 2007, heavy rainfall caused a release of process water into the Houston Ship Channel. As a result, on September 17, 2007, the United States Environmental Protection Agency (“EPA”) issued a First Amended Unilateral Administrative Order to the Company and ExxonMobil Corporation (the “UAO”). Subsequently, an Administrative Order on Consent (the “AOC”) was issued by the EPA which superseded and replaced the UAO in its entirety regarding the 2007 release of process water. As of December 31, 2010, substantially all of the costs necessary to comply with provisions of the AOC have been incurred and expensed in the financial statements.

In 2005, the EPA initiated an enforcement action against the entire United States phosphoric acid industry to enforce compliance with (i) RCRA and the applicable Bevill Amendment exclusion from RCRA and (ii) the HF MACT regulations set forth in the Clean Air Act. On December 7, 2011, the Company settled the enforcement action pursuant to a Consent Agreement and Final Order with the EPA, agreeing to pay $1,800,000 in installments over a two-year period and to complete a supplemental environmental project involving the construction of a containing wall around the granulation unit by June 2012. A payment of $720,000 was remitted to the EPA as of September 30, 2012 resulting in a remaining liability balance of $1,080,000 as of September 30, 2012. The $1,080,000 liability balance is recorded as $360,000 in accrued expense and $720,000 in other long-term liabilities respectively, as of September 30, 2012.

State of Texas Sales and Use Tax Audit

During 2007, the State of Texas completed a sales and use tax audit of the Company for years 2003 to 2005 and, as a result, the Company received a Texas Notification of Audit Results which assessed the Company additional taxes of $1,300,000 and corresponding penalties and interest of $500,000. In February 2012, the Company reached a settlement with the State of Texas on a sales and use tax audit for years 2003 to 2005. The Company agreed to pay $1,300,000 in full settlement of this matter and that payment was made February 29, 2012.

During 2011, the State of Texas completed a sales and use tax audit of the Company for years 2005 to 2008 and, as a result, the Company received a Texas Notification of Audit Results which assessed the Company additional taxes of $1,400,000 and corresponding penalties and interest of $400,000. Although the Company is disputing the tax assessment, based on management’s estimates of the ultimate liability, the Company has recorded a $500,000 liability as of September 30, 2012 and December 31, 2011, which is included in accrued expenses on the statements of financial position.

 

12. Significant Customers and Suppliers

Significant Customers

The Company sells its fertilizers and sulfuric acid under short-term marketing agreements to a select number of customers. For the period ended September 30, 2012, two customers accounted for approximately 99% of the Company’s trade accounts receivable. For the period ended September 30, 2011, three customers accounted for approximately 99% of the Company’s trade accounts receivable. The loss of a significant customer would have a material adverse effect on the Company’s operations.

 

14


Agrifos Fertilizer L.L.C.

Notes to Financial Statements

September 30, 2012 and 2011

Unaudited

 

Significant Suppliers

Ammonia purchased from a certain supplier accounted for approximately 66% and 39% of the Company’s inventory purchases in 2012 and 2011, respectively. Sulfur purchased from a certain supplier accounted for approximately 28% and 40% of the Company’s inventory purchases in the periods ended September 30, 2012 and 2011, respectively.

Management believes there are alternative vendors in the industry that would be able to supply sufficient quantities of a majority of its raw material needs but there is no certainty that such supply can be provided under favorable terms.

 

13. Risks and Uncertainties

The Company relies on its current credit facilities to fund short-term liquidity needs if internal funds are not available from the Company’s operations. Disruptions in the capital and credit markets could adversely affect the Company’s ability to draw on its bank revolving credit facilities. The Company received a $1,000,000 settlement from its insurance company for claims related to a contractor that had inappropriately charged us for services that had been paid but not rendered.

 

14. Subsequent Events

On November 1, 2012, Agrifos Holdings Inc. sold its subsidiary, Agrifos L.L.C., which includes Agrifos Fertilizer L.L.C., to Rentech Nitrogen Partners, L.P., a majority owned subsidiary of Rentech, Inc. In conjunction with the sale, the Company changed its name to Rentech Nitrogen Pasadena, LLC.

Events occurring after September 30, 2012 were evaluated through January 14, 2013 to ensure any subsequent events that meet the criteria for recognition and/or disclosure have been included in these financial statements.

 

15