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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2014

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 No. 001-35334

 

 

RENTECH NITROGEN PARTNERS, L.P.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   45-2714747

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

10877 Wilshire Boulevard, 10th Floor

Los Angeles, California

  90024
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (310) 571-9800

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Units Representing Limited Partner Interests   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The aggregate market value of the voting and non-voting common equity held by non-affiliates as of June 30, 2014, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $264.2 million (based upon the closing price of the common units on June 30, 2014, as reported by the New York Stock Exchange).

As of February 27, 2015, the registrant had 38,913,396 common units outstanding.

DOCUMENTS INCORPORATED BY REFERENCE: None

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page  
PART I   

ITEM 1. Business

     4   

ITEM 1A. Risk Factors

     18   

ITEM 1B. Unresolved Staff Comments

     43   

ITEM 2. Properties

     43   

ITEM 3. Legal Proceedings

     43   

ITEM 4. Mine Safety Disclosures

     44   
PART II   

ITEM  5. Market for Registrant’s Common Units, Related Unitholder Matters and Issuer Purchases of Common Units

     44   

ITEM 6. Selected Financial Data

     46   

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     49   

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

     70   

ITEM 8. Financial Statements and Supplementary Data

     72   

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     105   

ITEM 9A. Controls and Procedures

     105   

ITEM 9B. Other Information

     106   
PART III   

ITEM 10. Directors, Executive Officers and Corporate Governance

     106   

ITEM 11. Executive Compensation

     112   

ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters

     137   

ITEM 13. Certain Relationships and Related Transactions, and Director Independence

     140   

ITEM 14. Principal Accountant Fees and Services

     143   
PART IV   

ITEM 15. Exhibits and Financial Statement Schedules

     143   

Signatures

     147   

 

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FORWARD-LOOKING STATEMENTS

Certain statements and information included in this Annual Report on Form 10-K, or this Annual Report, and other reports or materials that we have filed or will file with the Securities and Exchange Commission, or the SEC (as well as information included in oral statements or other written statements made or to be made by us or our management), contain or may contain “forward-looking statements.” Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include the words “will,” “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. Our forward-looking statements include statements about our business strategy, our industry, our future profitability, our expected capital expenditures (including for maintenance or expansion projects and environmental expenditures) and the impact of such expenditures on our performance, and our operating costs. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. Factors that could affect our results include the risk factors detailed in Part I—Item 1A “Risk Factors” and from time to time in our periodic reports and registration statements filed with the SEC. You should not place undue reliance on our forward-looking statements. Although forward-looking statements reflect our good faith beliefs, forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise, unless required by law.

References in this report to “the Partnership,” “RNP,” “we,” “our,” “us” and like terms refer to Rentech Nitrogen Partners, L.P. and our subsidiaries, unless the context otherwise requires or where otherwise indicated. References in this report to “Rentech” refer to Rentech, Inc. and its subsidiaries other than us, unless the context otherwise requires or where otherwise indicated. References to “RDC” refer to Rentech Development Corporation, which is a wholly owned subsidiary of Rentech, references to “RNHI” refer to Rentech Nitrogen Holdings, Inc., which is a wholly owned subsidiary of RDC, and references to “Rentech Nitrogen GP” and “our general partner” refer to Rentech Nitrogen GP, LLC, which is our general partner and a wholly owned subsidiary of RNHI. References to “our operating companies” refer to Rentech Nitrogen, LLC, or RNLLC, which was formerly known as Rentech Energy Midwest Corporation, or REMC, and Rentech Nitrogen Pasadena, LLC, or RNPLLC, which was formerly known as Agrifos Fertilizer, LLC.

 

3


Table of Contents

PART I

ITEM 1. BUSINESS

Overview

We are a Delaware master limited partnership formed in July 2011 by Rentech, a company traded on the NASDAQ Stock Market under the symbol “RTK,” to own, operate and expand our fertilizer business. We own and operate two fertilizer facilities: our East Dubuque Facility and our Pasadena Facility. Our East Dubuque Facility produces primarily ammonia and urea ammonium nitrate solution, or UAN, using natural gas as the facility’s primary feedstock. Our Pasadena Facility produces ammonium sulfate, ammonium thiosulfate and sulfuric acid, using ammonia and sulfur as the facility’s primary feedstock.

On February 17, 2015, we announced that our general partner’s board has initiated a process to explore and evaluate potential strategic alternatives for the Partnership, which may include a sale of the Partnership, a merger with another party, a sale of some or all of our assets, or another strategic transaction. There can be no assurance that this strategic review process will result in a transaction.

Our East Dubuque Facility is located in the center of the Mid Corn Belt, the largest market in the United States for direct application of nitrogen fertilizer products. The Mid Corn Belt includes the States of Illinois, Indiana, Iowa, Missouri, Nebraska and Ohio. The States of Illinois and Iowa have been the top two corn producing states in the United States for the last 20 years according to the United States Department of Agriculture, or USDA. We consider the market for our East Dubuque Facility to be comprised of the States of Illinois, Iowa and Wisconsin.

Our East Dubuque Facility’s core market consists of the area located within an estimated 200-mile radius of the facility. In most instances, our customers take delivery of our nitrogen products at our East Dubuque Facility and then arrange and pay to transport them to their final destinations by truck. To the extent our products are picked up at our East Dubuque Facility, we do not incur any shipping costs, in contrast to nitrogen fertilizer producers located outside of the facility’s core market that must incur transportation and storage costs to transport their products to, and sell their products in, our market. In addition, our East Dubuque Facility does not maintain a fleet of trucks and, unlike some of our major competitors, our East Dubuque Facility does not maintain a fleet of rail cars because the facility’s customers generally are located close to the facility and prefer to be responsible for transportation. Having no need to maintain a fleet of trucks or rail cars lowers our East Dubuque Facility’s fixed costs. The combination of our East Dubuque Facility’s proximity to its customers and our storage capacity at the facility also allows for better timing of the pick-up and application of the facility’s products, as nitrogen fertilizer product shipments from more distant locations have a greater risk of missing the short periods of favorable weather conditions during which the application of nitrogen fertilizer may occur.

Our Pasadena Facility is the largest producer of synthetic ammonium sulfate and the third largest producer of ammonium sulfate in North America. We believe that our ammonium sulfate has several characteristics that distinguish it from competing products. In general, the ammonium sulfate that is available for sale in our industry is a byproduct of other processes and does not have certain characteristics valued by customers. Our ammonium sulfate is sized to the specifications preferred by customers and may more easily be blended with other fertilizer products. We also believe that our ammonium sulfate has a longer shelf-life, is more stable and is more easily transported and stored than many competing products.

Our Pasadena Facility is located on the Houston Ship Channel with access to transportation at favorable prices. The facility has two deep-water docks and access to the Mississippi waterway system and key international waterways. The facility is also connected to key domestic railways, which permit the efficient, cost-effective distribution of its products west of the Mississippi River. Our Pasadena Facility’s distributors purchase our products at our facility and then arrange and pay to transport them to their final destinations by truck, rail car or vessel. Our Pasadena Facility’s products are sold primarily through distributors to customers in the United States, and are applied to many types of crops including soybeans, potatoes, cotton, canola, alfalfa, corn and wheat.

Our Pasadena Facility purchases ammonia as a feedstock at contractual prices based on the monthly Tampa Index market, while our East Dubuque Facility sells ammonia at prevailing prices in the Mid Corn Belt region. Ammonia prices are typically significantly higher in the Mid Corn Belt than in Tampa.

Overview of Certain Significant Events that Occurred during 2014

During 2014, we (i) completed the urea expansion project at our East Dubuque Facility; (ii) substantially completed the power generation project and completed the sulfuric acid converter project at our Pasadena Facility; (iii) wrote off the remaining $27.2 million of goodwill relating to the acquisition of Agrifos LLC, or the Agrifos Acquisition; and (iv) reached an agreement with the seller in the Agrifos Acquisition to settle all existing and future indemnity claims relating to the Agrifos Acquisition, which resulted in income to us of $5.6 million.

 

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Several negative factors affected our operating results in 2014. Sales volumes were lower than we had expected due to both unplanned downtime at our East Dubuque Facility and a decision to reduce output and sales from our Pasadena Facility in order to improve the profitability of that facility. As discussed above, we also wrote down all of the remaining goodwill at our Pasadena Facility as a result of the continued outlook for profits to be lower than we had foreseen at the time of the Agrifos Acquisition.

We seek to continue to organically expand capacity at our fertilizer facilities, although any such expansion projects are likely to be smaller than the ongoing or recently-completed capacity expansions at each facility. We expect any expansion project to require new capital as we do not expect to use our operating cash flow to invest in any new growth projects. Expansion projects involve numerous risks and uncertainties, and there can be no assurance that we will be able to complete any expansion projects on a timely basis or at all.

Organizational Structure

The following diagram depicts our organizational structure as of February 27, 2015 (all percentage ownership interests are 100% unless otherwise noted):

 

 

LOGO

Business

Our East Dubuque Facility

Our East Dubuque Facility is located on 210 acres in the northwest corner of Illinois on a 140-foot bluff above the Upper Mississippi River. Our East Dubuque Facility produces ammonia, urea ammonium nitrate solution, or UAN, liquid and granular urea, nitric acid and food-grade carbon dioxide, or CO2, using natural gas as its primary feedstock. We sell such products to customers located in the Mid Corn Belt region of the United States, the largest market in the United States for direct application of nitrogen fertilizer products. Our East Dubuque Facility operates continuously, except for planned shutdowns for maintenance and efficiency improvements, and unplanned shutdowns. Our East Dubuque Facility can optimize its product mix according to changes in demand and pricing for its various products. Some of these products are final products sold to customers, and others, including ammonia, are both final products and feedstocks for other products, such as UAN, nitric acid, liquid urea and granular urea.

 

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The following table sets forth our East Dubuque Facility’s current rated production capacity for the listed products in tons per day and tons per year, and its product storage capacity.

 

Product

   Approximate Production Capacity      Product Storage Capacity
   Tons /Day      Tons /Year(1)     

Ammonia

     1,025         374,125       60,000 tons (3 tanks); 15,000 tons(2)

UAN

     1,100         401,500       80,000 tons (2 tanks)

Urea (liquid)

     484         176,660       Limited capacity is not a factor

Urea (granular)

     140         51,100       12,000 granular ton warehouse

Nitric acid

     380         138,700       Limited capacity is not a factor

CO2

     350         127,750       1,900 tons

 

(1) Production capacity for the year is based on daily rated production capacity times 365 days. The number of actual operating days will vary from year to year.
(2) Represents 15,000 tons of storage capacity at the terminal of Agrium U.S.A., Inc., or Agrium, in Niota, Illinois where we have the right to store ammonia pursuant to our distribution agreement with Agrium. Our right to store ammonia at this terminal expires on June 30, 2016, but automatically renews for successive one year periods, unless we deliver a termination notice to Agrium with respect to such storage rights at least three months prior to an automatic renewal. Notwithstanding the foregoing, our right to use the storage space immediately terminates if the distribution agreement terminates in accordance with its terms. See “—Marketing and Distribution.”

The following table sets forth the amount of products produced by, and shipped from, the East Dubuque Facility for the years ended December 31, 2014, 2013 and 2012:

 

     For the Years Ended
December 31,
 
     2014      2013      2012  
     (in thousands of tons)  

Products Produced

        

Ammonia(1)

     324         244         293   

UAN

     269         262         301   

Urea (liquid)

     150         137         139   

Urea (granular)

     25         22         23   

Nitric acid

     105         106         122   

CO2

     82         69         76   

Products Shipped

        

Ammonia

     153         103         149   

UAN

     267         269         291   

Urea (liquid)

     30         21         13   

Urea (granular)

     25         22         22   

Nitric acid

     11         14         14   

CO2

     81         71         76   

 

(1) Ammonia is used in the production of all other products produced by our East Dubuque Facility, except CO2.

Expansion Projects

In 2014, we completed the urea expansion project at our East Dubuque Facility. As part of the project, we installed an additional CO2 compressor, which increased liquid urea production capacity at our East Dubuque Facility from 460 tons per day to 484 tons per day, or from 167,900 tons annually to 176,660 tons annually. We spent $3.2 million on this project.

We are regularly evaluating or pursuing opportunities to increase our profitability by expanding the East Dubuque Facility’s production capabilities and product offerings, including with the following expansion projects:

 

    Nitric Acid Expansion Project. In 2014, we commenced the replacement of a compressor train in one of our nitric acid plants at our East Dubuque Facility. This project is expected to increase nitric acid production at the facility by 30 tons per day or 11,000 tons annually, and decrease electric power usage. We expect to complete this project during the second quarter of 2015 at a cost of $7.0 million. This project will be funded initially with borrowings under the credit agreement we entered into in July 2014 with General Electric Capital Corporation, or the GE Credit Agreement.

 

    Ammonia Synthesis Converter Project. We plan to replace the ammonia synthesis converter at our East Dubuque Facility, which is expected to increase reliability, production and plant efficiency. The project is expected to cost approximately $30.0 million and to be completed by the end of 2016. This project will be funded initially with borrowings under the GE Credit Agreement.

 

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Products

Our East Dubuque Facility’s product sales are heavily weighted toward sales of ammonia and UAN, which together made up 80% or more of our East Dubuque Facility’s total revenues for the years ended December 31, 2014, 2013 and 2012. A majority of our East Dubuque Facility’s products are sold through our distribution agreement with Agrium as described below under “—Marketing and Distribution,” with the exception of CO2, which we sell directly to customers in the food and beverage market at negotiated contract prices. Ammonia and UAN are each sources of nitrogen, but each has its own characteristics, and customers’ preferences for each product vary according to the crop planted, soil and weather conditions, regional farming practices, relative prices and the cost and availability of storage, transportation, handling and application equipment. During the years ended December 31, 2014, 2013 and 2012, we sold more than 90% of our East Dubuque Facility’s nitrogen products to customers for agricultural application, with the remaining portion sold to customers for industrial uses.

Ammonia. Our East Dubuque Facility produces ammonia, the simplest form of nitrogen fertilizer and the feedstock for the production of other nitrogen fertilizers. The ammonia processing unit at our East Dubuque Facility has a current rated capacity of 1,025 tons per day. Our East Dubuque Facility’s ammonia product storage consists of three 20,000 ton tanks and 15,000 tons of leased storage in Niota, Illinois.

UAN. UAN is a liquid fertilizer that has a slight ammonia odor but, unlike ammonia, it does not need to be refrigerated or pressurized when transported or stored. Our East Dubuque Facility has two UAN storage tanks with a combined capacity of 80,000 tons.

Urea. Our East Dubuque Facility’s urea solution is (i) sold in its liquid state, (ii) processed into granular urea through the facility’s urea granulation plant to create dry granular urea, (iii) upgraded into UAN or (iv) upgraded into diesel exhaust fluid, or DEF. We assess market demand for each of these four end products and allocate our East Dubuque Facility’s urea solution as appropriate. We sell liquid urea, including DEF, primarily to industrial customers in the power, ethanol and diesel emissions markets. DEF is a urea-based chemical reactant that is intended to reduce nitrogen oxide emissions in the exhaust systems of certain diesel engines of trucks and off-road farm and construction equipment. Although we believe that there is high demand for our granular urea in agricultural markets, we sell it primarily to customers in specialty urea markets where the spherical shape and consistent size of the granules produced by our curtain granulation technology generally command a premium price. Our East Dubuque Facility has a 12,000 ton capacity bulk warehouse that can be used for storage of dry bulk granular urea.

Nitric Acid. Our East Dubuque Facility produces nitric acid through two separate nitric acid plants at the facility. Nitric acid is either sold to third parties or used within the facility for the production of ammonium nitrate solution, as an intermediate from which UAN is produced. We believe that our East Dubuque Facility currently has sufficient storage capacity available for the nitric acid produced at the facility.

CO2. CO2 is a gaseous product that is co-manufactured with ammonia, with 1.1 tons of CO2 produced per ton of ammonia produced. Our East Dubuque Facility utilizes CO2 in its urea production and has developed a market for CO2 through purification to a food grade liquid CO2. Our East Dubuque Facility has storage capacity for 1,900 tons of CO2. We have multiple CO2 sales agreements that allow for regular shipment of CO2 throughout the year, and our current storage capacity is sufficient to support our CO2 delivery commitments.

Marketing and Distribution

In 2006, we entered into a distribution agreement with Agrium under which a majority of our East Dubuque Facility’s products, including ammonia and UAN, are sold. Pursuant to the distribution agreement, Agrium is obligated to use commercially reasonable efforts to promote the sale of, and to solicit and secure orders from its customers for, ammonia, liquid and granular urea, UAN and nitric acid. Under the distribution agreement, Agrium bears the credit risk on products sold through Agrium pursuant to the agreement. The distribution agreement has a term that ends in April 2016, but automatically renews for subsequent one-year periods, unless either party delivers a termination notice to the other party at least three months prior to an automatic renewal.

 

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During the years ended December 31, 2014, 2013 and 2012, 78% or more of our East Dubuque Facility product sales were through Agrium pursuant to the distribution agreement, and the remainder sold directly to other customers. Our management approves price, quantity and other terms for each sale through Agrium, and we pay Agrium a commission for its services. Our rights under the distribution agreement include the right to store specified amounts of our ammonia for a monthly fee at Agrium’s ammonia terminal in Niota, Illinois, which serves as a distribution point where ammonia produced at our East Dubuque Facility is sold. Our right to store ammonia at Agrium’s terminal expires on June 30, 2016, but automatically renews for successive one year periods, unless we deliver a termination notice to Agrium with respect to such storage rights at least three months prior to an automatic renewal. Notwithstanding the foregoing, our right to use the storage space immediately terminates if the distribution agreement terminates in accordance with its terms. Outside of the distribution agreement, we also sell our East Dubuque Facility’s nitrogen products and CO2 directly to our customers.

Under the distribution agreement, we pay commissions to Agrium on applicable gross sales during the first 10 years of the agreement, not to exceed $5 million during each contract year. The commission rate is 5%. The effective commission rate associated with sales under the distribution agreement was 3.4% for the year ended December 31, 2014, 3.6% for the year ended December 31, 2013 and 2.7% for the year ended December 31, 2012.

Customers

We sell a majority of our East Dubuque Facility’s nitrogen products to customers located in the facility’s core market, which is the area located within an estimated 200-mile radius of the facility. Given the nature of our business, and consistent with industry practice, we generally do not have long-term minimum sales contracts for fertilizer products with any of our customers. The following table shows for the periods presented the percentage of our sales of products to our top five customers and sales to certain specific customers:

 

     For the Years Ended
December 31,
 
     2014     2013     2012  

Sales of Products to Top 5 Customers

      

Ammonia, as a % of total ammonia sales

     62     57     54

UAN, as a % of total UAN sales

     58     59     38

Sales to Customers, as a % of total sales

      

Agrium (as a direct customer)

     —          2     2

Crop Production Services, Inc., or CPS

     12     12     9

Seasonality and Volatility

Ammonia, UAN and other nitrogen based fertilizer sales are seasonal, based upon planting, growing and harvesting cycles, and product availability. Inventories are accumulated to allow for shipments to customers during the spring and fall fertilizer application seasons, which require significant storage capacity. The accumulation of inventory to be available for seasonal sales creates significant seasonal working capital requirements. This seasonality generally results in higher fertilizer prices during peak fertilizer application periods, with prices normally reaching their highest point in the spring, decreasing in the summer, and increasing again in the fall. Our East Dubuque Facility’s products are sold both on the spot market for immediate delivery and under prepaid contracts for future delivery of products at fixed prices. The terms of the prepaid contracts, including the percentage of the purchase price paid as a down payment, can vary from season to season. Variations in the proportion of product sold through forward sales contracts and variations in the terms of such contracts can increase the seasonal volatility of our cash flows and cause changes in the patterns of seasonal volatility from year-to-year. The cash from prepaid contracts is included in our operating cash flow in the quarter in which the cash is received, while revenue and cost of sales related to prepaid contracts are recognized when products are picked up or delivered and the customer takes title. As a result, the timing of cash received under prepaid contracts may be very different from the timing of recognition of income and expense under those same contracts; significant amounts of profit may be related to cash collected in earlier periods and recorded profits may not be accompanied by a corresponding collection of cash in a particular reporting period. See “Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Another seasonal factor affecting our industry is the effect of weather-related conditions on the ability to transport products by barge on the Upper Mississippi River. During certain times of the winter, the Upper Mississippi River cannot be used for transport due to lock closures, which could preclude the transportation of nitrogen products by barge during this period and may increase transportation costs. The following table sets forth the percentage of ammonia and UAN tonnage sold that was transported from our East Dubuque Facility by barge:

 

     For the Years Ended
December 31,
 
     2014     2013     2012  

Ammonia

     —          4.8     5.6

UAN

     4.5 %     —         1.7

 

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The following table shows total tons of our East Dubuque Facility’s products shipped for each quarter presented below:

 

     For the Years Ended
December 31,
 
     2014      2013      2012  
     (in thousands of tons)  

Ammonia

        

Quarter ended March 31

     7         11         30   

Quarter ended June 30

     72         41         40   

Quarter ended September 30

     27         24         31   

Quarter ended December 31

     47         27         48   

UAN

        

Quarter ended March 31

     49         61         34   

Quarter ended June 30

     82         59         92   

Quarter ended September 30

     83         117         110   

Quarter ended December 31

     53         32         55   

Other Nitrogen Products

        

Quarter ended March 31

     16         15         13   

Quarter ended June 30

     17         20         13   

Quarter ended September 30

     16         14         14   

Quarter ended December 31

     17         8         9   

CO2

        

Quarter ended March 31

     20         23         15   

Quarter ended June 30

     22         24         15   

Quarter ended September 30

     19         21         25   

Quarter ended December 31

     20         3         21   
  

 

 

    

 

 

    

 

 

 

Total Tons Shipped

  567      500      565   
  

 

 

    

 

 

    

 

 

 

We typically ship the highest volume of tons from our East Dubuque Facility during the spring planting season, which occurs during the quarter ending June 30 of each year. The next highest volume of tons shipped is typically after the fall harvest during the quarter ending December 31 of each year. However, as reflected in the table above, the seasonal patterns may change substantially from year to year due to various circumstances, including timing of or changes in weather. These seasonal increases and decreases in demand also can cause fluctuations in sales prices. In winter seasons with warmer weather, early planting may shift significant ammonia sales into the quarter ending March 31. Wet or cold weather during the normal spring application season can delay deliveries that would normally occur in the spring. Weather conditions can also affect the mix of demand for our products at various times in the year. Certain weather and soil conditions favor the application of ammonia, while other conditions favor the application of UAN solution.

Raw Materials

The principal raw material used to produce nitrogen fertilizer products at our East Dubuque Facility is natural gas. We have historically purchased natural gas in the spot market, through the use of forward purchase contracts, or a combination of both. We use forward purchase contracts to lock in pricing for a portion of our East Dubuque Facility’s natural gas requirements. These forward purchase contracts are generally either fixed-price or index-price, short term in nature and for a fixed supply quantity. Our general policy is to purchase enough natural gas under fixed-price forward contracts to manufacture the products that have been sold under prepaid contracts for future delivery, effectively fixing a substantial portion of the gross margin on pre-sold product. We sometimes also purchase or fix prices on natural gas in excess of those requirements, when we believe that gas prices are attractive enough to lock in even without matching product pre-sales. We are able to purchase natural gas at competitive prices due to our East Dubuque Facility’s connection to the Northern Natural Gas interstate pipeline system, which is within one mile of the facility, and the facility’s connection to the ANR Pipeline Company, or ANR, pipeline. The pipelines are connected to Nicor Inc.’s, or Nicor’s, distribution system at the Chicago Citygate receipt point and at the Hampshire interconnect, respectively, from which natural gas is transported to the facility. Though we do not typically purchase natural gas for the purpose of resale, we occasionally sell natural gas when purchase commitments exceed production requirements and/or storage capacities, or

 

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when the margin from selling natural gas significantly exceeds the margin from producing additional ammonia. The East Dubuque Facility’s receipt point locations and access to the Chicago Citygate receipt point has allowed us to obtain relatively favorable natural gas prices for sales of our excess natural gas due to our proximity to the stable residential demand for the commodity in Chicago, Illinois. The following table shows the natural gas purchased and used in production:

 

     For the Years Ended
December 31,
 
     2014      2013      2012  

Volume (MMBtu, or million British thermal units)

     11,487,000         8,942,000         10,644,000   

We plan to continue to operate our East Dubuque Facility with natural gas as its primary feedstock. Competitors may have access to cheaper natural gas or other feedstocks that could provide them with a cost advantage. Depending on its magnitude, the amount of this cost advantage could offset our savings on transportation and storage costs as a result of our East Dubuque Facility’s location. The following table shows the average prices for natural gas in our cost of sales for the periods presented:

 

     For the Years Ended
December 31,
 
     2014      2013      2012  

Cost of natural gas ($ per MMBtu)

   $ 5.00       $ 4.16       $ 3.59   

Changes in the levels of natural gas prices and market prices of nitrogen-based products can materially affect our financial position and results of operations. Natural gas prices in the United States have experienced significant fluctuations over the last several years, increasing substantially in 2008 and subsequently declining to the current lower levels. Several recent discoveries of large natural gas deposits in North America, combined with advances in technology for natural gas production have caused large increases in the estimates of available natural gas reserves and production in the United States, contributing to significant reductions in the market price of natural gas.

In 2014, we entered into fixed-quantity forward purchase contracts at fixed and indexed prices for various delivery dates through June 30, 2015. As of December 31, 2014, the total MMBtus associated with these forward purchase contracts are 3.7 million and the total amount of the purchase commitments are $15.6 million, resulting in a weighted average rate per MMBtu of $4.18 in these commitments. During January and February 2015, we entered into additional fixed-quantity forward purchase contracts at fixed and indexed prices for various delivery dates through December 31, 2015. The total MMBtus associated with these additional forward purchase contracts are 2.7 million and the total amount of the purchase commitments is $7.7 million, resulting in a weighted average rate per MMBtu of $2.88 in these new commitments.

Transportation

In most instances, our East Dubuque Facility’s customers take delivery of nitrogen products at the facility, and then arrange and pay to transport the products to their final destinations by truck. Similarly, under the distribution agreement, neither we nor Agrium is responsible for transportation, and customers that purchase our East Dubuque Facility’s products through Agrium also take delivery of such products at the facility. When products are purchased for delivery at the facility, the customer is responsible for all costs of, and bears all risks associated with, the transportation of products from the facility.

In certain instances, customers take delivery of products at the final destination. In these circumstances, we are responsible for the associated transportation costs. In order to accommodate barge and rail deliveries, we own and operate a barge dock on the Mississippi River, and a rail spur that connects to the Burlington Northern Santa Fe Railway and the Canadian National Railway Company, or Canadian National. We also ship products by barge to our leased storage facility in Niota, Illinois, which provides another distribution point from which our customers may pick up our East Dubuque Facility’s products by truck.

Competition

Our East Dubuque Facility competes with a number of domestic and foreign producers of nitrogen fertilizer products, many of which are larger than us and have significantly greater financial and other resources than we do.

We believe that customers for nitrogen fertilizer products make purchasing decisions principally on the delivered price and availability of the product at the critical application times. Our East Dubuque Facility’s proximity to its customers provides us with a

 

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competitive advantage over producers located further away from those customers. The nitrogen fertilizer facilities closest to our East Dubuque Facility are located about 190 miles away in Fort Dodge, Iowa; 275 miles away in Creston, Iowa; 300 miles away in Port Neal, Iowa; and 350 miles away in Lima, Ohio. Our East Dubuque Facility’s physical location in the center of the Mid Corn Belt provides the facility with a transportation cost advantage compared to other producers who must ship their products over greater distances to our East Dubuque Facility’s market area. The combination of our East Dubuque Facility’s proximity to its customers and our storage capacity at the facility allows customers to better time the pick-up and application of our products, as deliveries from more distant locations have a greater risk of missing the short periods of favorable weather conditions during which the application of nitrogen fertilizer and planting may occur. However, other producers of nitrogen fertilizer products are constructing or contemplating the construction of new nitrogen fertilizer facilities in North America, including in the Mid Corn Belt. For example, Orascom Construction Industries Company, or OCI, an Egyptian producer of fertilizer products, has announced that a wholly owned subsidiary of OCI is constructing a facility located 165 miles away from our East Dubuque Facility that is designed to produce between 1.5 to 2.0 million metric tons per year of ammonia, urea, UAN and DEF and that it expects the facility to be operational in late 2015. If a new nitrogen fertilizer facility is completed in our East Dubuque Facility’s core market, it could benefit from the same competitive advantage associated with the location of our East Dubuque Facility. The completion of such a facility could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions to our unitholders.

Our Pasadena Facility

On November 1, 2012, we completed our acquisition of 100% of the membership interests of Agrifos LLC, or Agrifos, from Agrifos Holdings Inc., or the Seller, pursuant to a Membership Interest Purchase Agreement, or the Purchase Agreement. Upon the closing of this transaction, or the Agrifos Acquisition, Agrifos became our wholly owned subsidiary and its name changed to Rentech Nitrogen Pasadena Holdings, LLC. Rentech Nitrogen Pasadena Holdings, LLC owns all of the member interests in RNPLLC, which owns and operates the Pasadena Facility.

Our Pasadena Facility is located on an 85 acre site located on the Houston Ship Channel which includes 2,700 linear feet of water frontage and two deep-water docks. The property also includes 415 acres of land, which contains phosphogypsum stacks. In early 2011 prior to our ownership, the Pasadena Facility ceased production of diammonium phosphate and monoammonium phosphate. Agrifos undertook major capital and maintenance projects at the Pasadena Facility, including decommissioning certain phosphate production assets, and converting a portion of the Pasadena Facility’s assets to the production of ammonium sulfate fertilizer. Ammonium sulfate is now the primary product of the Pasadena Facility. Following the conversion, the Pasadena Facility continues to produce sulfuric acid and ammonium thiosulfate.

Our Pasadena Facility is the largest producer of synthetic ammonium sulfate and the third largest producer of ammonium sulfate in North America. We believe that our ammonium sulfate has several characteristics that distinguish it from competing products. In general, the ammonium sulfate that is available for sale in our industry is a byproduct of other processes and does not have certain characteristics valued by customers. Our ammonium sulfate is sized to the specifications preferred by customers and may more easily be blended with other fertilizer products. We also believe that our ammonium sulfate has a longer shelf-life, is more stable and is more easily transported and stored than many other competing products.

In late 2014, we restructured operations at our Pasadena Facility. As part of the restructuring, our Pasadena Facility reduced expected annual production of ammonium sulfate by approximately 25 percent, to 500,000 tons. We intend to sell approximately 70 percent of the 500,000 tons in the domestic market and the remaining tons in New Zealand and Australia, which are the international markets with the highest net prices for ammonium sulfate. Our sales plan eliminates historically low-margin sales to Brazil, other than modest amounts expected during peak seasons when higher margins may be achievable. Our restructuring plan provides us the flexibility to increase ammonium sulfate production above the 500,000 ton rate, if market conditions are favorable.

We are evaluating opportunities to build terminalling assets on the site of our Pasadena Facility. We do not expect to invest significant amounts of our own capital in such assets, but expect to work with a joint venture partner on any such development.

The following table sets forth our Pasadena Facility’s current rated production capacity for the listed products in tons per day and tons per year, and our product storage capacity.

 

     Approximate Production Capacity         

Product

   Tons /Day      Tons /Year(1)      Product Storage Capacity  

Ammonium sulfate

     2,100         693,000         60,000 tons   

Sulfuric acid

     1,750         638,750         27,000 tons   

Ammonium thiosulfate

     220         80,300         14,000 tons   

 

(1) Ammonium sulfate production capacity for the year is based on daily rated production capacity times 330 days given regular required cleanings of the granulator. Actual production, based on the restructuring plan, is expected to be 500,000 tons per year. Sulfuric acid and ammonium thiosulfate production capacities for the year are based on daily rated production capacity times 365 days. The number of actual operating days will vary from year to year.

 

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The following table sets forth the amount of products produced by, and shipped from, our Pasadena Facility for the years ended December 31, 2014 and 2013 and the period beginning November 1, 2012 (the closing date of the Agrifos Acquisition) through December 31, 2012:

 

     For the Years Ended
December 31,
     For the Period
November 1, 2012

Through
December 31,
 
     2014      2013      2012  
     (in thousands of tons)  

Products Produced

  

Ammonium sulfate

     522         465         88   

Sulfuric acid(1)

     447         478         69   

Ammonium thiosulfate

     63         60         9   

Products Shipped

        

Ammonium sulfate

     572         428         115   

Sulfuric acid

     112         148         27   

Ammonium thiosulfate

     67         54         —    

 

(1) Our Pasadena Facility produces sulfuric acid primarily for the production of ammonium sulfate.

Expansion Projects and Other Significant Capital Projects

In 2014, we substantially completed the power generation project and completed the sulfuric acid converter project at our Pasadena Facility. In the power generation project, we installed a steam turbine/generator set that uses excess steam produced from the sulfuric acid plant at the facility to produce electrical power. We expect that a portion of the power will be used in our Pasadena Facility, reducing electricity expenses, and the remaining power will be sold in the deregulated Texas power market, creating an additional revenue stream. We spent $30.8 million on this project through December 31, 2014. We replaced the sulfuric acid converter for a cost of $16.7 million.

Products

Our Pasadena Facility’s products are applied to many types of crops including soybeans, potatoes, cotton, canola, alfalfa, corn and wheat. Our Pasadena Facility’s product sales are heavily weighted toward sales of ammonium sulfate, which made up 80% or more of our Pasadena Facility’s total revenues for the years ended December 31, 2014 and 2013. Our Pasadena Facility’s products are sold primarily through distribution agreements as described below under “—Marketing and Distribution.”

Ammonium Sulfate. Ammonium sulfate is a solid dual-nutrient fertilizer produced by combining ammonia and sulfuric acid. The sulfur derived from ammonium sulfate is the form of sulfur most available as a nutrient for crops. Our Pasadena Facility produces ammonium sulfate that is sized to the specifications of other nitrogen, phosphate and potash fertilizer products which results in less segregation in blended products. The ammonium sulfate plant at our Pasadena Facility has a current rated capacity of 2,100 tons per day. Our Pasadena Facility has storage capacity for 60,000 tons of ammonium sulfate. In addition, we have an arrangement with Interoceanic Corporation, or IOC, that permits us to store approximately 60,000 tons of ammonium sulfate at IOC-controlled terminals, which are located near end customers of our Pasadena Facility’s ammonium sulfate.

Sulfuric Acid. Sulfuric acid not used for production of ammonium sulfate is sold to third parties. The majority of the sulfuric acid sold by our Pasadena Facility is sold through a distributor to industrial consumers. Our Pasadena Facility has storage capacity for 27,000 tons of sulfuric acid.

Ammonium Thiosulfate. Ammonium thiosulfate is a liquid fertilizer. Ammonium thiosulfate typically is combined with UAN to help increase the efficiency of nitrogen in crops. Our Pasadena Facility has storage capacity for 14,000 tons of ammonium thiosulfate.

 

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Marketing and Distribution

We sell substantially all of our Pasadena Facility’s products through marketing and distribution agreements. Pursuant to an exclusive marketing agreement we have entered into with IOC, IOC has the exclusive right and obligation to market and sell all of our Pasadena Facility’s ammonium sulfate product. Under the marketing agreement, IOC is required to use commercially reasonable efforts to market the product to obtain the most advantageous price. We compensate IOC for transportation and storage costs relating to the ammonium sulfate product it markets through the pricing structure under the marketing agreement. The marketing agreement has a term that ends December 31, 2016, but automatically renews for subsequent one-year periods (unless either party delivers a termination notice to the other party at least 210 days prior to an automatic renewal). The marketing agreement may be terminated prior to its stated term for specified causes. During the years ended December 31, 2014 and 2013, the marketing agreement with IOC accounted for all of our Pasadena Facility’s ammonium sulfate revenues. The ammonium sulfate storage arrangement with IOC currently is not governed by a written contract. We also have marketing and distribution agreements to sell other products that automatically renew for successive one year periods.

Customers

We sell substantially all of the products from our Pasadena Facility to IOC and our other distributors, and we do not have direct contact with our distributors’ customers. Our distributors sell a majority of our Pasadena Facility’s products to customers located west of the Mississippi River. Through our distributors, we sold all of our Pasadena Facility’s nitrogen products to customers for agricultural uses during the years ended December 31, 2014 and 2013 . Given the nature of our business, and consistent with industry practice, we do not have direct sales contracts for fertilizer products with any of our end customers. The majority of the sulfuric acid our Pasadena Facility sells to its distributor is placed with industrial consumers.

Seasonality and Volatility

Significant seasonal weather factors have affected demand for and timing of deliveries for our Pasadena Facility’s domestic agricultural products. Domestic prices for ammonium sulfate and ammonium thiosulfate normally reach their highest point in the spring, decreasing in the summer, and increasing again in the fall. Sales prices of these products are adjusted seasonally in order to facilitate distribution of the products throughout the year. Sales to Australia, Brazil and New Zealand may partially offset this domestic seasonal pattern because they are in the southern hemisphere. We operate the ammonium sulfate plant at our Pasadena Facility throughout the year to the extent that there is available storage capacity for this product. We manage our storage capacity by distributing the product through IOC to customers in both domestic and offshore markets throughout the year. If storage capacity were to be insufficient, we would be forced to cease or reduce production of the product until storage capacity became available. Our Pasadena Facility’s ammonium sulfate product is delivered to IOC and sold at prevailing market prices. See “Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Because we sell sulfuric acid through a distributor to industrial consumers, demand for this product generally is constant during the year. Sales of industrial products, such as sulfuric acid, are generally not impacted by seasons and weather. We typically ship sulfuric acid from our Pasadena Facility each month of the year with the majority of the product sold under annual contracts.

Raw Materials

The principal raw materials used to produce nitrogen fertilizer products at our Pasadena Facility are ammonia and sulfur. We purchase ammonia for use at the facility from OCI Beaumont, LLC, or OCI Beaumont. OCI Beaumont operates an ammonia and methanol production facility on the Neches River in Nederland, Texas just outside of Beaumont, Texas. Ammonia pricing is based on a published Tampa, Florida market index that is set on a quarterly basis through negotiations between large industry producers and consumers, or the Tampa Index. The Tampa Index is commonly used in annual contracts for both the agricultural and industrial sectors, and is based on the most recent major industry transactions in the Tampa market. Pricing considerations for ammonia incorporate international supply-demand, ocean freight and production factors. An 1,800 short ton ammonia barge delivers ammonia from Beaumont, Texas to our Pasadena Facility, pursuant to a long term lease we entered into with Port Arthur Towing Company. Ammonia purchased and used in production at our Pasadena Facility was 155,000 tons in the year ended December 31, 2014 and 128,000 tons in the year ended December 31, 2013.

We obtain sulfur for our Pasadena Facility primarily by truck from local refineries in the Houston area and, to a lesser extent, by rail car. Major suppliers of sulfur to our Pasadena Facility include refiners, such as Phillips 66 Company, Shell Oil Products U.S. and Valero Energy Corporation. Our contracts with these refiners generally have a term of one year. Once pricing for the first quarter of a year is negotiated, the price then fluctuates up or down each subsequent quarter based on changes to the Tampa Index. Sulfur purchased and used in production at our Pasadena Facility was 194,000 tons in the year ended December 31, 2014 and 172,000 tons in the year ended December 31, 2013.

 

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Transportation

Our Pasadena Facility is located on the Houston Ship Channel with access to various modes of transportation at favorable prices. The facility has two deep-water docks and access to the Mississippi waterway system and key international waterways. The docks at the facility are suitable for loading and unloading bulk or liquid barges with payloads of up to 35,000 tons. The facility is also connected to key domestic railways which permit the efficient, cost-effective distribution of its products west of the Mississippi River. We believe this provides a significant cost advantage relative to producers located on the East Coast that are forced to switch railways when shipping product to this region. Our location on the Houston Ship Channel allows our distributors or us to use low cost barge and vessel transport when selling products and purchasing feedstocks.

Competition

Our Pasadena Facility competes with a number of domestic and foreign producers of nitrogen fertilizer products, many of which are larger than we are and have significantly greater financial and other resources than we do. We believe that customers who purchase the product make purchasing decisions based, in part, on the product’s size and shelf life. The majority of ammonium sulfate produced in North America and globally is generated as a byproduct of another process. We believe that our ammonium sulfate (which we refer to as synthetic ammonium sulfate) is made specifically for fertilizer, is sized to the specifications preferred by customers, is more easily blended with other fertilizer products and is better suited for use in agricultural application equipment. We also believe that our ammonium sulfate has a longer shelf-life, is more stable and is more easily transported and stored than many other competing products. Honeywell International Inc., or Honeywell, the largest producer of ammonium sulfate in the United States is located in Hopewell, Virginia, about 1,350 miles away from our Pasadena Facility. BASF AG, the second largest producer of ammonium sulfate, is located in Freeport, Texas, about 60 miles away from our Pasadena Facility. Our Pasadena Facility has access to transportation at favorable prices, such as low cost barge and vessel. We believe that our close proximity to sources of our primary feedstocks and access to low-cost transportation enables the facility to offer competitive pricing to customers adjacent to and west of the Mississippi River.

We also face competition from numerous regional producers of sulfuric acid, including E. I. du Pont de Nemours and Company located in El Paso and La Porte, Texas and Burnside, Louisiana, Eco Services located in Baytown and Houston, Texas and Chemtrade Logistics Inc., located in Beaumont, Texas.

Growth Plans

We seek to continue to organically expand capacity at our Fertilizer Facilities, although any such expansion projects are likely to be smaller than the ongoing or recently-completed capacity expansions at each facility. We expect any expansion project to require new capital as we do not expect to use our operating cash flow to invest in any new growth projects. Expansion projects involve numerous risks and uncertainties, and there can be no assurance that we will be able to complete any expansion projects on a timely basis or at all.

Environmental Matters

Our business is subject to extensive and frequently changing federal, state and local, environmental, health and safety regulations governing a wide range of matters, including the emission of air pollutants, the release of hazardous substances into the environment, the treatment and discharge of waste water and the storage, handling, use and transportation of our fertilizer products, raw materials, and other substances that are part of our operations. These laws include the Clean Air Act, or the CAA, the federal Water Pollution Control Act, or the Clean Water Act, the Resource Conservation and Recovery Act, or RCRA, the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, the Toxic Substances Control Act, or the TSCA, and various other federal, state and local laws and regulations. These laws, their underlying regulatory requirements and the enforcement thereof impact us by imposing:

 

    restrictions on operations or the need to install enhanced or additional controls;

 

    the need to obtain and comply with permits and authorizations;

 

    liability for the investigation and remediation of contaminated soil and groundwater at current and former facilities (if any) and off-site waste disposal locations; and

 

    specifications for the products we market.

 

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These laws significantly affect our operating activities as well as the level of our operating costs and capital expenditures. Failure to comply with environmental laws, including the permits issued to us thereunder, generally could result in substantial fines, penalties or other sanctions, court orders to install pollution-control equipment, permit revocations and facility shutdowns. The following table shows capital expenditures related to environmental, health and safety at the East Dubuque Facility and the Pasadena Facility:

 

     For the Years Ended
December 31,
 
     2014      2013      2012  
     (in millions)  

East Dubuque Facility

   $ 0.2       $ 0.2       $ 0.3   

Pasadena Facility

     0.2         0.3         1.0   

Our operations require numerous permits and authorizations. A decision by a governmental regulator to revoke or substantially modify an existing permit or authorization could have a material adverse effect on our ability to continue operations at the impacted facility. Expansion of our operations is predicated upon obtaining the necessary environmental permits and authorizations. We may experience delays in obtaining or be unable to obtain required permits, which may delay or interrupt our operations and limit our growth and revenue.

In addition, environmental, health and safety laws may impose joint and several liability, without regard to fault, for cleanup of a contaminated site on current owners and operators of the site, former owners and operators of the site at the time of the disposal of the hazardous substances, any person who arranges for the transportation, disposal or treatment of the hazardous substances, and the transporters who select the disposal and treatment facilities, regardless of the care exercised by such persons. Private parties, including the owners of properties adjacent to other facilities where our wastes are taken for disposal, also may have the right to pursue legal actions to enforce compliance as well as to seek damages for non-compliance with environmental laws and regulations or for personal injury or property or natural resource damages. In addition, the risk of accidental spills or releases could expose us to significant liabilities that could have a material adverse effect on our business, financial condition or results of operations.

The laws and regulations to which we are subject are complex, change frequently and have tended to become more stringent over time. The ultimate impact on our business of complying with existing laws and regulations is not always clearly known or determinable due in part to the fact that our operations may change over time and certain implementing regulations for laws, such as the CAA, have not yet been finalized, are under governmental or judicial review or are being revised. These laws and regulations could result in increased capital, operating and compliance costs.

Our facilities have experienced some level of regulatory scrutiny in the past, and we may be subject to further regulatory inspections, future requests for investigation or assertions of liability relating to environmental issues. In the future, we could incur material liabilities or costs related to environmental matters, and these environmental liabilities or costs (including fines or other sanctions) could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.

Certain environmental regulations and risks associated with our business are outlined below. We strive to maintain compliance with these regulations; however, they are complex and varied, and our operations are heavily regulated, and we may, from time to time, fall out of compliance. For example, the Pasadena Facility may not comply with wastewater and stormwater discharge requirements and solid and hazardous waste requirements. As another example, the Illinois Environmental Protection Agency, or the IEPA, alleged that an ammonia release at our East Dubuque Facility violated environmental laws, and we entered into a settlement agreement with the IEPA in August 2013 requiring us to connect a device at the facility to an ammonia safety flare by December 1, 2015.

The Federal Clean Air Act. The CAA and its implementing regulations, as well as the corresponding state laws and regulations that regulate emissions of pollutants into the air, impose permitting and emission control requirements relating to specific air pollutants, as well as the requirement to maintain a risk management program to help prevent accidental releases of certain substances. Standards promulgated pursuant to the CAA may require that we install controls at or make other changes to our facilities. If new controls or changes to operations are needed, the costs could be significant. In addition, failure to comply with the requirements of the CAA and its implementing regulations could result in substantial fines, civil or criminal penalties, or other sanctions.

The regulation of air emissions under the CAA requires that we obtain various construction and operating permits, including Title V air permits and incur capital expenditures for the installation of certain air pollution control devices at our facilities. Measures have been taken to comply with various regulations specific to our operations, such as National Emission Standard for Hazardous Air Pollutants, New Source Performance Standards and New Source Review. We have incurred, and expect to continue to incur, substantial capital expenditures to maintain compliance with these and other air emission regulations that have been promulgated or may be promulgated or revised in the future. As one example, we entered into a consent decree that required us to take action to achieve compliance with the emissions limits and other requirements applicable to our East Dubuque Facility.

 

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In July 2011, we voluntarily began operating what we believe is the first tertiary nitrous oxide, or N2O, catalytic converter in the United States on one of our nitric acid plants at our East Dubuque Facility. This converter is designed to convert approximately 90% of the N2O generated in our production of nitric acid into nitrogen and oxygen at that one plant. During the year ended December 31, 2014, 91%, or 331 metric tonnes, of N2O generated by that plant was converted into nitrogen and oxygen. In late December 2013, we installed a N2O abatement catalyst in the other nitric acid plant at our East Dubuque Facility. This catalyst is also designed to convert approximately 90% of the N2O generated in our production of nitric acid into nitrogen and oxygen. During the year ended December 31, 2014, 93%, or 340 metric tonnes, of N2O generated by that plant was converted into nitrogen and oxygen. We monitor and record the reduction in N2O emissions, which is verified by a third party. We have listed the credits on an active registry, such as the Climate Registry maintained by the Climate Action Reserve, and sell the credits for a profit. We have entered into a five-year agreement to supply emission reduction credits with sales totaling $0.5 million for the year ended December 31, 2014 and $0.1 million during each of the years ended December 31, 2013 and 2012.

Release Reporting. The release of hazardous substances or extremely hazardous substances into the environment is subject to release reporting requirements under federal and state environmental laws, including the Emergency Planning and Community Right-to-Know Act. We occasionally experience releases of hazardous or extremely hazardous substances from our operations or properties. We report such releases to the EPA, the IEPA, the Texas Commission on Environmental Quality, and other relevant federal, state and local agencies as required by applicable laws and regulations. If we fail to properly report a release, or if the release violates the law or our permits, it could cause us to become the subject of a governmental enforcement action or third-party claims. Government enforcement or third-party claims relating to releases of hazardous or extremely hazardous substances could result in significant expenditures and liability.

Clean Water Act. The Clean Water Act and analogous state laws impose restrictions and strict controls with respect to the discharge of pollutants, including spills and leaks of oil and other substances, into waters of the United States. The discharge of pollutants into regulated waters is prohibited, except in accordance with the terms of a permit issued by the EPA or an analogous state agency. The Clean Water Act and regulations implemented thereunder also prohibit the discharge of dredge and fill material into regulated waters, including wetlands, unless authorized by an appropriately issued permit. In addition, the Clean Water Act and analogous state laws require individual permits or coverage under general permits for discharges of storm water runoff from certain types of facilities. Spill prevention, control and countermeasure requirements of federal laws require appropriate containment berms and similar structures to help prevent the contamination of navigable waters by a petroleum hydrocarbon tank spill, rupture or leak. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with discharge permits or other requirements of the Clean Water Act and analogous state laws and regulations.

Greenhouse Gas Emissions. Legislative and regulatory measures to address greenhouse gas, or GHG, emissions (including CO2, methane and N2O) are in various phases of discussion or implementation. At the federal legislative level, Congress has previously considered legislation requiring a mandatory reduction of GHG emissions. Although Congressional passage of such legislation does not appear imminent at this time, it could be adopted at a future date. It is also possible that Congress may pass alternative climate change bills that do not mandate a nationwide cap-and-trade program and instead focus on promoting renewable energy and energy efficiency or impose a carbon fee.

Management of Hazardous Substances and Contamination. Under CERCLA and related state laws, certain persons may be liable at sites where or from release or threatened release of hazardous substances has occurred or is threatened. These persons can include the current owner or operator of property where a release or threatened release occurred, any persons who owned or operated the property when the release occurred, and any persons who disposed of, or arranged for the transportation or disposal of, hazardous substances at a contaminated property. Liability under CERCLA is strict, retroactive and, under certain circumstances, joint and several, so that any responsible party may be held liable for the entire cost of investigating and remediating the release of hazardous substances. RCRA regulates the generation, treatment, storage, handling, transportation and disposal of solid waste and requires states to develop programs to ensure the safe disposal of solid waste. Under RCRA, persons may be liable at sites where the past or present storage, handling, treatment, transportation, or disposal of any solid or hazardous waste may present an imminent and substantial endangerment to health or the environment. These persons can include the current owner or operator of property where disposal occurred, any persons who owned or operated the property when the disposal occurred, and any persons who disposed of, or arranged for the transportation or disposal of, hazardous substances at a contaminated property. Liability under RCRA is strict and, under certain circumstances, joint and several, so that any responsible party may be held liable for the entire cost of investigating and remediating the release of hazardous substances. As is the case with all companies engaged in similar industries, depending on the underlying facts and circumstances we face potential exposure from future claims and lawsuits involving environmental matters, including soil and water contamination, personal injury or property damage allegedly caused by hazardous substances that we manufactured, handled, used, stored, transported, spilled, disposed of or released. We cannot assure you that we will not become involved in future proceedings related to our release of hazardous or extremely hazardous substances or that, if we were held responsible for damages in any existing or future proceedings, such costs would be covered by insurance or would not be material. For a discussion of hazardous substances management at the Pasadena Facility, see the risk factor captioned “There are phosphogypsum

 

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stacks located at the Pasadena Facility that will require closure. In the event we become financially obligated for the costs of closure, this would have a material adverse effect on our business, cash flow and ability to make cash distributions to our unitholders.” For a discussion of releases at the Pasadena Facility, see the risk factor captioned “Soil and groundwater at the Pasadena Facility is pervasively contaminated, and we may incur costs to investigate and remediate known or suspected contamination at the Pasadena Facility. We may also face legal actions or sanctions or incur costs related to contamination or noncompliance with environmental laws at the facility.”

Underground Injection Operations. Underground injection operations are subject to the Safe Drinking Water Act, or SWDA, as well as analogous state laws and regulations. Under the SWDA, the EPA established the underground injection control, or UIC program, which includes requirements for permitting, testing, monitoring, record keeping, and reporting of injection well activities, as well as a prohibition against the migration of fluid containing any contaminant into underground sources of drinking water. ExxonMobil Corporation (a former owner of the Pasadena Facility), or ExxonMobil, operates injection wells located at or surrounded by our Pasadena Facility for the disposal of wastewater related to the phosphogypsum stacks. State regulations require that a permit be obtained from the applicable regulatory agencies to operate underground injection wells. Any leakage from the subsurface portions of the injection wells could cause degradation of fresh groundwater resources, potentially resulting in suspension of ExxonMobil’s UIC permit, which could adversely impact the closure of the phosphogypsum stacks.

Environmental Insurance. We have a premises pollution liability insurance policy which covers third party bodily injury and property damages claims, remediation costs and associated legal defense expenses for pollution conditions at or migrating from our facilities and the transportation risks associated with moving waste from our facilities to offsite locations for unloading or depositing waste. The policy also covers business interruptions and non-owned disposal sites. Our policy is subject to a limit and self-insured retention and contains other terms, exclusions, conditions and limitations that could apply to a particular pollution condition claim, including the closure post closure of the gypsum stacks (the responsibility of ExxonMobil) and we cannot guarantee that a claim will be adequately insured for all potential damages.

Safety, Health and Security Matters

We are subject to a number of federal and state laws and regulations related to safety, including the federal Occupational Safety and Health Act, or OSHA, and comparable state statutes, the purpose of which are to protect the health and safety of workers. Various OSHA standards may apply to our operations, including standards concerning notices of hazards, safety in excavation and demolition work, the handling of asbestos and asbestos-containing materials and worker training and emergency response programs. We also are subject to OSHA Process Safety Management regulations, which are designed to prevent or minimize the consequences of catastrophic releases of toxic, reactive, flammable or explosive chemicals. These regulations apply to any process that involves a chemical at or above the specified thresholds or any process that involves flammable liquid or gas, pressurized tanks, caverns and wells in excess of 10,000 pounds at various locations. We have an internal safety, health and security program designed to monitor and enforce compliance with worker safety requirements. We also are subject to EPA Chemical Accident Prevention Provisions, known as the Risk Management Plan requirements, which are designed to prevent the accidental release of toxic, reactive, flammable or explosive materials, and the United States Coast Guard’s Maritime Security Standards for Facilities, which are designed to regulate the security of high-risk maritime facilities.

Employees

As of December 31, 2014, we had 101 non-unionized and salaried employees, and 166 unionized employees. We believe that we have good relations with our employees. We have collective bargaining agreements in place covering unionized employees at our East Dubuque Facility and our Pasadena Facility. The agreement for the East Dubuque Facility expires on October 17, 2016. There are two agreements for the Pasadena Facility. One agreement expires on March 28, 2016 and the other expires on April 30, 2016. We have not experienced work stoppages in the recent past.

Financial Information

We operate in two business segments. All of our properties are located in the United States and all of the related revenues are derived from purchasers located in the United States. Our financial information is included in “Part II—Item 8. Financial Statements and Supplementary Data.”

Properties

We operate our East Dubuque Facility on a 210 acre site in East Dubuque, Illinois adjacent to the Mississippi River. We own the land, buildings, several special purpose structures, equipment, storage tanks and specialized truck, rail and river barge loading facilities, and hold easements for the roadways, wells, the rail track and the barge dock. We also have the right to store 15,000 tons of ammonia at Agrium’s terminal in Niota, Illinois. See “—Our East Dubuque Facility—Marketing and Distribution.”

 

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We operate our Pasadena Facility on an 85 acre site in Pasadena, Texas located on the Houston Ship Channel which includes 2,700 linear feet of water frontage and two deep-water docks. The property also includes 415 acres of unused land which contains phosphogypsum stacks. In addition, we have an arrangement with IOC that permits us to store approximately 60,000 tons of ammonium sulfate at IOC-controlled terminals, which are located near end customers of our Pasadena Facility’s ammonium sulfate. This arrangement currently is not governed by a written contract. See “—Our Pasadena Facility—Marketing and Distribution.”

Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports are available free of charge as soon as reasonably practical after they are filed or furnished to the SEC, at the “Investor Relations” portion of our website, www.rentechnitrogen.com. Materials we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website at www.sec.gov that contains reports and other information regarding us that we file electronically with the SEC. The information contained on our website does not constitute part of this report.

ITEM 1A. RISK FACTORS

Set forth below are certain risk factors related to our business. Actual results could differ materially from those anticipated as a result of these and various other factors, including those set forth in our other periodic and current reports filed with the SEC, from time to time. If any risks or uncertainties develop into an actual event, our business, financial condition, cash flow or results of operations could be materially adversely affected. In that case, we might not be able to pay distributions on our common units, the trading price of our common units could decline and you could lose all or part of your investment. Although many of our business risks are comparable to those faced by a corporation engaged in a similar business, limited partner interests are inherently different from the capital stock of a corporation and involve additional risks described below.

Risks Related to Our Business

We may not have sufficient cash available for distribution to pay any quarterly distributions on our common units.

We may not have sufficient cash available for distribution each quarter to enable us to pay any distributions to our common unitholders. Furthermore, our partnership agreement does not require us to pay distributions on a quarterly basis or otherwise. The amount of cash we will be able to distribute on our common units principally depends on the amount of cash flow we generate from our operations, which is directly dependent upon the operating margins we generate, which have been volatile historically, and cash collections under prepaid contracts for our products. Our operating margins are significantly affected by the price and availability of natural gas, ammonia and sulfur, market-driven product prices we are able to charge our customers and our production costs, as well as seasonality, weather conditions, governmental regulation, unplanned maintenance or shutdowns at our facilities and global and domestic demand for nitrogen fertilizer products, among other factors. In addition:

 

    Our partnership agreement does not provide for any minimum quarterly distribution and our quarterly distributions, if any, will be subject to significant fluctuations directly related to the cash flow we generate after payment of our expenses due to the nature of our business.

 

    The amount of distributions we make, if any, and the decision to make any distribution at all is determined by the board of directors of our general partner, whose interests may differ from those of our common unitholders. Our general partner has limited fiduciary and contractual duties, which may permit it to favor its own interests or the interests of Rentech to the detriment of our common unitholders.

 

    The $320.0 million aggregate principal amount of 6.5% second lien senior secured notes due 2021, or the Notes, and the GE Credit Agreement limit, and any credit facility or other debt instruments we enter into in the future may limit, the distributions that we can make. Our Notes and GE Credit Agreement contain, and any future credit facility or debt instruments we enter into may contain, financial tests and covenants that we must satisfy prior to making distributions. Any failure to comply with these tests and covenants could result in the applicable lenders prohibiting distributions by us.

 

    The amount of cash available to pay any quarterly distribution to our unitholders depends primarily on our cash flow, and not solely on our profitability, which is affected by non-cash items that may be large relative to our reported net income. As a result, we may make distributions during periods when we record losses and may not make distributions during periods when we record net income.

 

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    The actual amount of cash available for distribution will depend on numerous factors, some of which are beyond our control, including the availability and price of natural gas, ammonia and sulfur, our operating costs, global and domestic demand for nitrogen fertilizer products, fluctuations in our capital expenditures and working capital needs, our product pre-sale and cash collection cycle and the amount of fees and expenses we incur.

 

    Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, or Delaware Act, we are prohibited from making a distribution to our limited partners if the distribution would cause our liabilities to exceed the fair value of our assets.

The amount of our quarterly cash distributions, if any, will vary significantly both quarterly and annually and will be directly dependent on the performance of our business. Unlike most publicly traded limited partnerships, we do not have a minimum quarterly distribution or employ structures intended to consistently maintain or increase distributions over time.

Investors who are looking for an investment that will pay regular and predictable quarterly distributions should not invest in our common units. We expect our business performance will be more seasonal and volatile, and our cash flow will be less stable, than the business performance and cash flow of most publicly traded limited partnerships. Our quarterly distributions per common unit have been as high as $1.17 and as low as $0.05. Our cash available for distribution was negative in the fourth quarter of 2013. Accordingly, our quarterly cash distributions have been and will be volatile and are expected to vary quarterly and annually. Unlike most publicly traded limited partnerships, we do not have a minimum quarterly distribution or employ structures intended to consistently maintain or increase distributions over time. The amount of our quarterly cash distributions will be directly dependent on the performance of our business, which has been volatile historically for reasons including volatile nitrogen fertilizer and natural gas prices, unplanned outages, seasonal and global fluctuations in demand for nitrogen fertilizer products and the timing of our product pre-sale and cash collections. Because our quarterly distributions will be subject to significant fluctuations directly related to the cash flow we generate after payment of our fixed and variable expenses, future quarterly distributions paid to our unitholders will vary significantly from quarter to quarter and may be zero. Given the seasonal nature of our business, we expect that our unitholders will have direct exposure to fluctuations in the margins we realize on sales of nitrogen fertilizers and other products that we produce. In addition, we frequently make product sales pursuant to prepaid contracts, whereby we receive cash in respect of product to be picked up by or delivered to a customer at a later date, but do not record revenue in respect of such sales until product is picked up or delivered. The cash received from product prepayments increases our operating cash flow in the quarter in which the cash is received, but may effectively reduce our operating cash flow in a subsequent quarter if the cash was received in a quarter prior to the one in which the revenue is recorded.

We may modify or revoke our cash distribution policy at any time at our discretion. Our partnership agreement does not require us to make any distributions at all.

Our current cash distribution policy is to distribute all of the cash available for distribution we generate each quarter to unitholders of record on a pro rata basis. However, we may change such policy at any time at our discretion and could elect not to make distributions for one or more quarters. Our partnership agreement does not require us to make any distributions at all. Accordingly, investors are cautioned not to place undue reliance on the permanence of such a policy in making an investment decision. Any modification or revocation of our cash distribution policy could substantially reduce or eliminate the amounts of distributions to our unitholders.

Our operations may become unprofitable and may require substantial working capital financing.

In recent years, we have generated positive income from operations and positive cash flow from operations. However, in the past, we sustained losses and negative cash flow from operations. Our profits and cash flow are subject to changes in the prices for our products and our main inputs, natural gas, ammonia and sulfur, which are commodities, and, as such, the prices can be volatile in response to numerous factors outside of our control. For example, during the year ended December 31, 2014, the market prices for ammonia and sulfur increased at a faster rate than the increase in prices for our ammonium sulfate and sulfur acid products. As a result, our Pasadena Facility had to write-down $6.0 million of ammonium sulfate inventory to market value, which contributed to a gross loss at the Pasadena Facility for the year. Further, our profits depend on maintaining high rates of production of our products, and interruptions in operations at our facilities could materially adversely affect our profitability. In the fourth quarter of 2013, we experienced disruptions at both of our facilities. The Pasadena Facility underwent a turnaround in December 2013, which lasted longer than anticipated due to issues with a contractor and weather delays, and experienced several relatively small disruptions in production that, in the aggregate, negatively impacted production in 2013. The East Dubuque Facility also experienced a turnaround and a fire, which halted the production of all products in late November and for most of December 2013. These events significantly contributed to a substantial decrease in sales volume in ammonia and UAN sales between the years ended 31, 2013 and 2012. If we are not able to operate our facilities at a profit or if we are not able to retain cash or access a sufficient amount of financing for our working capital needs, our business, financial condition, cash flow, results of operations and ability to pay cash distributions could be materially adversely affected, which could adversely affect the trading price of our common units.

 

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The nitrogen fertilizer business and nitrogen fertilizer prices are seasonal, cyclical and highly volatile and have experienced substantial and sudden downturns in the past. Currently, nitrogen fertilizer demand is at a relative high point and could decrease significantly in the future. Cycles in demand and pricing could potentially expose us to significant fluctuations in our operating and financial results, and expose you to substantial volatility in our quarterly distributions and material reductions in the trading price of our common units.

We are exposed to fluctuations in nitrogen fertilizer demand and prices in the agricultural industry. These fluctuations historically have had, and could in the future have, significant effects on prices across all nitrogen fertilizer products and, in turn, our financial condition, cash flow and results of operations, which could result in significant volatility or material reductions in the price of our common units or an inability to pay cash distributions to our unitholders.

Nitrogen fertilizer products are commodities, the prices of which can be highly volatile. The price of nitrogen fertilizer products depends on a number of factors, including general economic conditions, cyclical trends in end-user markets, supply and demand imbalances, the prices of natural gas, ammonia, sulfur and other raw materials, the prices of other commodities such as corn, soybeans, potatoes, cotton, canola, alfalfa and wheat, and weather conditions, all of which have a greater relevance because of the seasonal nature of fertilizer application. If seasonal demand exceeds the projections on which we base production, our customers may acquire nitrogen fertilizer products from our competitors, and our profitability will be negatively impacted. If seasonal demand is less than we expect, we will be left with excess inventory for which we have limited storage capacity and that will have to be stored or liquidated, which could adversely affect our operating margins and our ability to pay cash distributions.

Demand for nitrogen fertilizer products is dependent on demand for crop nutrients by the global agricultural industry. In recent years, nitrogen fertilizer products have been in high demand, driven by a growing world population, changes in dietary habits and an expanded production of corn. Supply is affected by available capacity and operating rates of nitrogen producers, raw material costs, government policies and global trade. Our results of operations in any year could be negatively impacted by these factors. For example, our results for the year ended December 31, 2014 were heavily affected by significant unanticipated declines in nitrogen prices. During the year ended December 31, 2014, fertilizer prices fell due to weather factors, reduced expectations for corn acreage in 2015 and increased volumes of urea exported from China. A significant or prolonged decrease in nitrogen fertilizer prices would have a material adverse effect on our business, cash flow and ability to make cash distributions to our unitholders. Further, the margins on the sale of ammonium sulfate fertilizer products are currently lower than the margins on our other main nitrogen fertilizer products. If our costs to produce ammonium sulfate fertilizer products increase and the prices at which we sell these products do not correspondingly increase, our profits from the sale of these products may decrease or we may suffer losses on these sales. For example, during the year ended December 31, 2014, our Pasadena Facility suffered a gross loss due to lower ammonium sulfate sales prices, a write-down of inventory and other factors. A significant or prolonged decrease in profits (or increase in losses) on the sale of our ammonium sulfate fertilizer products would have a material adverse effect on our business, cash flow and ability to make cash distributions to our unitholders.

Any decline in United States agricultural production or crop prices or limitations on the use of nitrogen fertilizer for agricultural purposes could have a material adverse effect on the market for nitrogen fertilizer, and on our results of operations, financial condition and ability to make cash distributions to our unitholders.

Conditions in the United States agricultural industry significantly impact our operating results. This is particularly the case in the production of corn, which is a major driver of the demand for nitrogen fertilizer products in the United States. The United States agricultural industry in general, and the production and prices of corn in particular, can be affected by a number of factors, including weather patterns and soil conditions, current and projected grain inventories and prices, domestic and international supply of and demand for United States agricultural products and United States and foreign policies regarding trade in agricultural products. Prices for these agricultural products can decrease suddenly and significantly.

State and federal governmental regulations and policies, including farm and biofuel subsidies and commodity support programs, as well as the prices of fertilizer products, may also directly or indirectly influence the number of acres planted, the mix of crops planted and the use of fertilizers for particular agricultural applications. Developments in crop technology, such as nitrogen fixation, the conversion of atmospheric nitrogen into compounds that plants can assimilate, could also reduce the use of chemical fertilizers and adversely affect the demand for nitrogen fertilizer. In addition, from time to time various state legislatures have considered limitations on the use and application of chemical fertilizers due to concerns about the impact of these products on the environment. The adoption or enforcement of such regulations could adversely affect the demand for and prices of nitrogen fertilizers, which could adversely affect our results of operations, cash flows and ability to make cash distributions to our unitholders.

 

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A major factor underlying the current high level of demand for our nitrogen-based fertilizer products is the expanding production of ethanol. A decrease in ethanol production, an increase in ethanol imports or a shift away from corn as a principal raw material used to produce ethanol could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions to our unitholders.

A major factor underlying the current level of demand for corn and the use of nitrogen fertilizer products is the current production level of ethanol in the United States. Ethanol production in the United States is dependent in part upon a myriad of federal and state incentives. Such incentive programs may not be renewed, or if renewed, they may be renewed on terms significantly less favorable to ethanol producers than current incentive programs. Studies showing that expanded ethanol production may increase the level of GHGs in the environment, or other factors, may reduce political support for ethanol production. Furthermore, the EPA has proposed reducing 2014 renewable blending mandates, which could reduce the level of corn-based ethanol to be blended into the nation’s gasoline supply. If the target for use of renewable fuels such as ethanol is reduced, the demand for corn may fall significantly. Moreover, the current trend in ethanol production research is to develop an efficient method of producing ethanol from cellulose-based biomass. If another ethanol-related subsidy is not implemented, or if an efficient method of producing ethanol from cellulose-based biomass is developed and commercially deployed at scale, the demand for corn may decrease significantly. Any reduction in the demand for corn and, in turn, for nitrogen fertilizer products could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions to our unitholders.

We face competition from other nitrogen fertilizer producers.

We have a number of competitors in the nitrogen fertilizer business in the United States and in other countries, including state-owned and government-subsidized entities. Our East Dubuque Facility’s principal competitors include domestic and foreign fertilizer producers, major grain companies and independent distributors and brokers, including Koch, CF Industries, Agrium, Gavilon, LLC, CHS Inc., Transammonia, Inc., OCI and Helm Fertilizer Corp. Our Pasadena Facility’s principal competitors include domestic and foreign fertilizer producers and independent distributors and brokers, including BASF AG, Honeywell, Agrium, Royal DSM N.V., Dakota Gasification Company and Martin Midstream Partners L.P. and producers of nitrogen fertilizer in China.

Some competitors have greater total resources, or better name recognition, and are less dependent on earnings from fertilizer sales, which make them less vulnerable to industry downturns and better positioned to pursue new expansion and development opportunities. For example, certain of our East Dubuque Facility’s nitrogen fertilizer competitors have recently expanded production capacity for their nitrogen fertilizer products. Furthermore, a few dormant nitrogen production facilities located outside of the East Dubuque Facility’s core market have recently resumed operations. The additional capacity has placed downward pressure on average sales prices for ammonia and UAN. Moreover, we may face additional competition due to further expansion of facilities that are currently operating and the reopening of currently dormant facilities. Also, other producers of nitrogen fertilizer products are contemplating the construction of new nitrogen fertilizer facilities in North America, including in the Mid Corn Belt. For example, OCI has announced that it is constructing a facility located 165 miles away from our East Dubuque Facility that is designed to produce between 1.5 to 2.0 million metric tons per year of ammonia, urea, UAN and diesel exhaust fluid. The facility is expected to begin production in late 2015. If a new nitrogen fertilizer facility is completed in the East Dubuque Facility’s core market, it could benefit from the same competitive advantage associated with the location of the facility. As a result, the completion of such a facility could have a material adverse effect on our business and cash flow.

Many of our competitors in the nitrogen fertilizer business incur greater costs than we and our customers do in transporting their products over longer distances via rail, ships, barges and pipelines. There can be no assurance that our competitors’ transportation costs will not decline or that additional pipelines will not be built in the future, lowering the price at which our competitors can sell their products, which could have a material adverse effect on our results of operations and financial condition.

Our competitive position could also suffer to the extent that we are not able to adapt our nitrogen fertilizer product mix to meet the needs of our customers or expand our own resources either through investments in new or existing operations or through joint ventures or partnerships. An inability to compete successfully in the nitrogen fertilizer business could result in the loss of customers, which could adversely affect our sales and profitability. In addition, as a result of increased pricing pressures in the nitrogen fertilizer business caused by competition, we may in the future experience reductions in our profit margins on sales, or may be unable to pass future input price increases on to our customers, which would reduce our cash flows. For example, higher exports of ammonium sulfate from China during 2014 put downward pressure on ammonium sulfate prices, and prices for ammonia and sulfur, key inputs for ammonium sulfate, increased significantly. The factors together negatively impacted product margins for ammonium sulfate.

 

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Our business is seasonal, which may result in our carrying significant amounts of inventory and seasonal variations in working capital. Our inability to predict future seasonal nitrogen fertilizer demand accurately may result in excess inventory or product shortages.

Our business is highly seasonal. Historically, most of the annual deliveries of the products from our East Dubuque Facility have occurred during the quarters ending June 30 and December 31 of each year due to the condensed nature of the spring planting season and the fall harvest in the East Dubuque Facility’s market. Farmers in that market tend to apply nitrogen fertilizer during two short application periods, one in the spring and the other in the fall. Since interim period operating results reflect the seasonal nature of our business, they are not indicative of results expected for the full fiscal year. In addition, results for comparable quarters can vary significantly from one year to the next due primarily to weather-related shifts in planting schedules and purchase patterns of our customers. We expect to incur substantial expenditures for fixed costs throughout the year and substantial expenditures for inventory in advance of the spring planting season and fall harvest season in our East Dubuque Facility’s market as we build inventories during these low demand periods. Seasonality also relates to the limited windows of opportunity that nitrogen fertilizer customers have to complete required tasks at each stage of crop cultivation. Should events such as adverse weather or production or transportation interruptions occur during these seasonal windows, we would face the possibility of reduced revenue without the opportunity to recover until the following season. In addition, an adverse weather pattern affecting one of our markets could have a material adverse effect on the demand for our products and our revenues, and we may not have sufficient geographic diversity in our customer base to mitigate such effects. Because of the seasonality of agriculture, we also expect to face the risk of significant inventory carrying costs should our customers’ activities be curtailed during their normal seasons. The seasonality can negatively impact accounts receivable collections and increase bad debts. In addition, variations in the proportion of product sold through forward sales and variances in the terms and timing of prepaid contracts can affect working capital requirements and increase the seasonal and year-to-year volatility of our cash flow and cash available for distribution to our unitholders.

If seasonal demand for nitrogen fertilizer exceeds our projections, we will not have enough product and our customers may acquire products from our competitors. If seasonal demand is less than we expect, we will be left with excess inventory and higher working capital and liquidity requirements.

The degree of seasonality of our business can change significantly from year to year due to conditions in the agricultural industry and other factors. As a consequence of our seasonality, we expect that our distributions will be volatile and will vary quarterly and annually.

Any operational disruption at our facilities as a result of equipment failure, an accident, adverse weather, a natural disaster or another interruption could result in a reduction of sales volumes and could cause us to incur substantial expenditures. A prolonged disruption could materially affect the cash flow we expect from our facilities, or lead to a default under our GE Credit Agreement or our Notes.

The equipment at our facilities could fail and could be difficult to replace. Our facilities may be subject to significant interruption if they were to experience a major accident or equipment failure, including accidents or equipment failures caused during expansion projects, or if they were damaged by severe weather or natural disaster. Significant shutdowns at our facilities could significantly reduce the amount of product available for sale, which could reduce or eliminate profits and cash flow from our operations. In the fourth quarter of 2013, for example, we experienced operational disruptions at both of our facilities, which negatively affected our results of operations. Our East Dubuque Facility halted production due to a fire and operated at reduced rates following its turnaround after the discovery of the need for repairs to the foundation of one of its syngas compressors. Our Pasadena Facility also underwent a turnaround in December 2013, which lasted longer than anticipated due to issues with a contractor and weather delays. In addition, we are preparing to replace the ammonia synthesis converter at our East Dubuque Facility, which we expect to be completed by the end of 2016. However, if the existing ammonia synthesis converter were to fail or suffer damage prior to completion of its replacement, this could cause a shutdown of our East Dubuque Facility. Repairs to our facilities could be expensive, and could be so extensive that our facilities could not economically be placed back into service. It has become increasingly difficult to obtain replacement parts for equipment and the unavailability of replacement parts could impede our ability to make repairs to our facilities when needed. We currently maintain property insurance, including business interruption insurance, but we may not have sufficient coverage, or may be unable in the future to obtain sufficient coverage at reasonable costs. A prolonged disruption at our facilities could materially affect the cash flow we expect from our facilities, or lead to a default under our GE Credit Agreement or our Notes. In addition, operations at our facilities are subject to hazards inherent in chemical processing. Some of those hazards may cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. As a result, operational disruptions at our facilities could materially adversely impact our business, financial condition, results of operations and cash flow.

 

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The market for natural gas has been volatile. Natural gas prices are currently at a relative low point. An increase in natural gas prices could impact our relative competitive position when compared to other foreign and domestic nitrogen fertilizer producers, and if prices for natural gas increase significantly, we may not be able to economically operate our East Dubuque Facility.

The operation of our East Dubuque Facility with natural gas as the primary feedstock exposes us to market risk due to increases in natural gas prices, particularly if the price of natural gas in the United States were to become higher than the price of natural gas outside the United States. An increase in natural gas prices would impact our East Dubuque Facility’s operations by making us less competitive with competitors who do not use natural gas as their primary feedstock, and would therefore have a material adverse impact on the trading price of our common units. In addition, if natural gas prices in the United States were to increase relative to prices of natural gas paid by foreign nitrogen fertilizer producers, this may negatively affect our competitive position in the Mid Corn Belt region and thus have a material adverse effect on our results of operations, financial condition and cash flows.

The profitability of operating our East Dubuque Facility is significantly dependent on the cost of natural gas, and our East Dubuque Facility has operated in the past, and may operate in the future, at a net loss. Local factors may affect the price of natural gas available to us, in addition to factors that determine the benchmark prices of natural gas. Since we expect to purchase a substantial portion of our natural gas for use in our East Dubuque Facility on the spot market we remain susceptible to fluctuations in the price of natural gas in general and in local markets in particular. We also expect to use short-term, fixed supply, fixed price forward purchase contracts to lock in pricing for a portion of our natural gas requirements. Our ability to enter into forward purchase contracts is dependent upon our creditworthiness and, in the event of a deterioration in our credit, counterparties could refuse to enter into forward purchase contracts on acceptable terms. If we are unable to enter into forward purchase contracts for the supply of natural gas, we would need to purchase natural gas on the spot market, which would impair our ability to hedge our exposure to risk from fluctuations in natural gas prices. If we fix the price of natural gas with forward purchase contracts, and natural gas prices decrease, then our cost of sales could be higher than it would have been in the absence of the forward purchase contracts. However, forward purchase contracts may not protect us from all of the increases in natural gas prices. A hypothetical increase of $0.10 per MMBtu of natural gas would increase our cost to produce one ton of ammonia by $3.30. Higher than anticipated costs for the catalyst and other materials used at our East Dubuque Facility could also adversely affect operating results. These increased costs could materially and adversely affect our results of operations, financial condition and ability to make cash distributions to our unitholders.

Any interruption in the supply of natural gas to our East Dubuque Facility through Nicor could have a material adverse effect on our results of operations, financial condition and our ability to make cash distributions.

Our East Dubuque operations depend on the availability of natural gas. We have an agreement with Nicor pursuant to which we access natural gas from the ANR and Northern Natural Gas pipelines. Our access to satisfactory supplies of natural gas through Nicor could be disrupted due to a number of causes, including volume limitations under the agreement, pipeline malfunctions, service interruptions, mechanical failures or other reasons. The agreement extends for five consecutive periods of 12 months each, with the first period having commenced on November 1, 2010 and the last period ending October 31, 2015. For each period, Nicor may establish a bidding period during which we may match the best bid received by Nicor for the natural gas capacity provided under the agreement. We could be out-bid for any of the remaining periods under the agreement. In addition, upon expiration of the last period, we may be unable to renew the agreement on satisfactory terms, or at all. Any disruption in the supply of natural gas to our East Dubuque Facility could restrict our ability to continue to make products at the facility. In the event we needed to obtain natural gas from another source, we would need to build a new connection from that source to our East Dubuque Facility and negotiate related easement rights, which would be costly, disruptive and/or unfeasible. As a result, any interruption in the supply of natural gas through Nicor could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.

The markets for ammonia and sulfur have been volatile. If prices for either ammonia or sulfur increase or decrease significantly, we may not be able to economically operate our Pasadena Facility.

The operation of our Pasadena Facility with ammonia and sulfur as its primary feedstocks also exposes us to market risk due to increases in ammonia or sulfur prices. Since we expect to purchase a substantial portion of our ammonia and sulfur for use in our Pasadena Facility on the spot market we remain susceptible to fluctuations in the respective prices of ammonia and sulfur. The margins on the sale of ammonium sulfate fertilizer products are relatively low. If our costs to produce ammonium sulfate fertilizer products increase and the prices at which we sell these products do not correspondingly increase, our profits from the sale of these products may decrease or we may suffer losses on these sales. A hypothetical increase of $10.00 per ton of ammonia would increase the cost to produce one ton of ammonium sulfate by $2.50. A hypothetical increase of $10.00 per ton of sulfur would also increase the cost to produce one ton of ammonium sulfate by $2.50. We do not believe that there is any significant opportunity to reduce the costs of these inputs through hedging.

During the year ended December 31, 2014, the prices paid by our Pasadena Facility for ammonia and sulfur increased substantially, which increased our costs of inputs, but the prices of our products did not rise at the same rate. As a result, during the year ended December 31, 2014, we had significant amounts of inventory at costs representing input costs higher than the current

 

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market price for our products, and we incurred an approximate $6.0 million write-down of ammonium sulfate inventory. Market prices for ammonia and sulfur products may continue to remain low, which could have a materially adverse effect on our results of operations and financial condition.

The success of our ammonium sulfate fertilizer business depends on our ability to improve product sales and margins and to reduce cost at the Pasadena Facility.

Our ammonium sulfate fertilizer business has a limited operating history upon which its business and products can be evaluated. The Pasadena Facility produced phosphate fertilizer until early 2011 when it underwent a conversion to produce ammonium sulfate fertilizer products. In late 2014, we restructured operations at our Pasadena Facility, including to reduce expected annual production of ammonium sulfate by approximately 25 percent, to 500,000 tons. Because our ammonium sulfate fertilizer business has a limited operating history, we may not be able to effectively:

 

    maintain product quality, product sales prices, margins and operating costs at levels that we currently expect;

 

    achieve production rates and on-stream factors that we currently expect;

 

    implement potential capital improvements to lower costs and increase revenues at the Pasadena Facility;

 

    attract and retain customers for our products from our existing production capacity;

 

    comply with evolving regulatory requirements, including environmental regulations;

 

    anticipate and adapt to changes in the ammonium sulfate fertilizer market;

 

    maintain and develop strategic relationships with distributors and suppliers to facilitate the distribution and acquire necessary materials for our products; and

 

    attract, retain and motivate qualified personnel.

The operations at the Pasadena Facility are subject to many of the risks inherent in the growth of a new business. The likelihood of the facility’s success must be evaluated in light of the challenges, expenses, difficulties, complications and delays frequently encountered in the operation of a new business. Moreover, the sales prices for ammonium sulfate have significantly worsened and remain low. We cannot assure you that we will achieve the goals set forth above or any goals we may set in the future. Our failure to meet any of these goals could have a material adverse effect on our business, cash flow and ability to make cash distributions to our unitholders.

We have recorded goodwill impairment charges and recorded write-downs of finished goods and raw material inventories with respect to our Pasadena Facility, and we could be required to record additional material impairment charges and write-downs in the future.

During 2014, we lowered our profitability expectations for the Pasadena Facility primarily due to lower projected market prices for ammonium sulfate. As a result, during the year ended December 31, 2014, we recorded a goodwill impairment charge of $27.2 million relating to the Agrifos Acquisition, and we incurred an approximate $6.0 million write-down of ammonium sulfate inventory. The future profitability of our Pasadena Facility will be significantly affected by, among other things, nitrogen fertilizer product prices and the prices of the inputs to its production processes. It is possible that adverse changes to supply and demand factors relating to the Pasadena Facility’s nitrogen fertilizer products could require us to lower further our expectations for the profitability of the facility in the future. If this were to occur, we could be required to record additional material impairment charges, including with respect to impairment of long-lived assets, and additional write-downs, which could have a material adverse effect on our results of operations, the trading price of our common unit and our reputation.

There are phosphogypsum stacks located at the Pasadena Facility that will require closure. In the event we become financially obligated for the costs of closure, this would have a material adverse effect on our business, cash flow and ability to make cash distributions to our unitholders.

The Pasadena Facility was used for phosphoric acid production until 2011, which resulted in the creation of a number of phosphogypsum stacks at the Pasadena Facility. Phosphogypsum stacks are composed of the mineral processing waste that is the byproduct of the extraction of phosphorous from mineral ores. Certain of the stacks also have been or are used for other waste materials and wastewater. Applicable environmental laws extensively regulate phosphogypsum stacks.

The EPA reached a CAFO with ExxonMobil in September 2010 making ExxonMobil responsible for closure of the stacks, proper disposal of process wastewater related to the stacks and other expenses. In addition, the asset purchase agreement between a subsidiary of Agrifos and ExxonMobil, or the 1998 APA, pursuant to which the subsidiary purchased the Pasadena Facility in 1998 also makes ExxonMobil liable for closure and post-closure care of the stacks, with certain limitations relating to use of the stacks after the date of the agreement. ExxonMobil is in the process of closing the “south stack” (a large phosphogypsum stack that combines “stacks 2, 3 and 5”) and “stack 4” at the facility. ExxonMobil has not yet started closure of “stack 1” at the facility, which is the only

 

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remaining stack that is currently in use for disposal of waste streams. Although ExxonMobil has expended significant funds and resources relating to the closures, we cannot assure you that ExxonMobil will remain able and willing to complete closure and post-closure care of the stacks in the future, including as a result of actions taken by Agrifos prior to the closing of the Agrifos Acquisition. As of January 2012, ExxonMobil estimated that its total outstanding costs associated with the closures and long-term maintenance, monitoring and care of the stacks will be $102.0 million over the next 50 years. However, the actual amount of such costs could be in excess of this amount.

As discussed above, the costs of closure and post-closure care of the stacks will be substantial. If we become financially responsible for the costs of closure of the stacks, this would have a material adverse effect on our business, cash flow and ability to make cash distributions to our unitholders.

Soil and groundwater at the Pasadena Facility is pervasively contaminated, and we may incur costs to investigate and remediate known or suspected contamination at the Pasadena Facility. We may also face legal actions or sanctions or incur costs related to contamination or noncompliance with environmental laws at the facility.

The soil and groundwater at the Pasadena Facility is pervasively contaminated. The facility has produced fertilizer since as early as the 1940s, and a large number of spills and releases have occurred at the facility, many of which involved hazardous substances. Furthermore, naturally occurring and other radioactive contaminants have been discovered at the facility in the past, and asbestos-containing materials currently exist at the facility. In the past there have been numerous instances of weather events which have resulted in flooding and releases of hazardous substances from the facility. We cannot assure you that past environmental investigations at the facility were complete, and there may be other contaminants at the facility that have not been detected. Contamination at the Pasadena Facility has the potential to result in toxic tort, property damage, personal injury and natural resources damages claims or other lawsuits. Further, regulators may require investigation and remediation at the facility in the future at significant expense.

ExxonMobil submitted Affected Property Assessment Reports, or APARs, under the Texas Risk Reduction Program to the Texas Commission on Environmental Quality, or the TCEQ, beginning in 2011 for the plant site and phosphogypsum stacks at the Pasadena Facility. The APARs identify instances in which various regulatory limits for numerous hazardous materials in both the soil and groundwater at the plant site and in the vicinity of the stacks have been exceeded. TCEQ is requiring ExxonMobil to perform significant additional investigative work as part of the APAR process. The TCEQ may also require further remediation of the contamination at the Pasadena Facility. The TCEQ or other regulatory agencies may hold Agrifos or its subsidiaries responsible for certain of the contamination at the Pasadena Facility.

In the past, governmental authorities have alleged or determined that the Pasadena Facility has been in substantial noncompliance with environmental laws and the Pasadena Facility has been the subject of numerous regulatory enforcement actions. The facility has also been subject to a number of past or current governmental enforcement actions, consent agreements, orders, and lawsuits, including, as examples, actions concerning the closure of the phosphogypsum stacks at the facility, the release of process water and wastewater, hydrogen fluoride emissions, emissions of oxides of sulfur, releases of ammonia and other hazardous substances, various alleged Clean Water Act violations, the potential for off-site contamination, and other matters. In the future, we may be required to expend significant funds to attain or maintain compliance with environmental laws. For example, the facility may not comply with wastewater and stormwater discharge requirements and solid and hazardous waste requirements. Following closure of phosphogypsum stack 1 at the facility, we may need to upgrade the facility’s wastewater system and arrange for offsite disposal of wastes that are currently disposed of onsite in order to maintain compliance with environmental laws, and the costs to design, construct, and operate such a system could be material. Regulatory findings of noncompliance could trigger sanctions, including monetary penalties, require installation of control or other equipment or other modifications, adverse permit modifications, the forced curtailment or termination of operations or other adverse impacts.

The costs we may incur in connection with the matters described above could be material. Subject to the terms and conditions of the 1998 APA, we are entitled to indemnification from ExxonMobil for certain losses relating to environmental matters relating to the facility and arising out of conditions present prior to our acquisition of the facility. However, our rights to indemnification under this agreement is subject to important limitations, and we cannot assure you we will be able to obtain payment from ExxonMobil on a timely basis, or at all. Depending on the amount of the costs we may incur for such matters in a given period, this could have a material adverse effect on the results of our business, cash flow and ability to make cash distributions to our unitholders.

Due to our lack of diversification, adverse developments in the nitrogen fertilizer industry or at either of our facilities could adversely affect our results of operations and our ability to make distributions to our unitholders.

We rely primarily on the revenues generated from our two facilities. An adverse development in the market for nitrogen fertilizer products in our regions generally or at either of our facilities in particular would have a significantly greater impact on our

 

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operations and cash available for distribution to our unitholders than it would on other companies that are more diversified geographically or that have a more diverse asset and product base. The largest publicly traded companies with which we compete sell a more diverse range of fertilizer products to broader markets.

Our facilities face operating hazards and interruptions, including unplanned maintenance or shutdowns. We could face potentially significant costs to the extent these hazards or interruptions cause a material decline in production and are not fully covered by our existing insurance coverage. Insurance companies that currently insure companies in our industry may cease to do so, may change the coverage provided or may substantially increase premiums in the future.

Our operations are subject to significant operating hazards and interruptions. Any significant curtailing of production at one of our facilities or individual units within one of our facilities could result in materially lower levels of revenues and cash flow for the duration of any shutdown and materially adversely impact our ability to make cash distributions to our unitholders. Operations at our facilities could be curtailed or partially or completely shut down, temporarily or permanently, as the result of a number of circumstances, most of which are not within our control, such as:

 

    unplanned maintenance or catastrophic events such as a major accident or fire, damage by severe weather, flooding or other natural disaster;

 

    labor difficulties that result in a work stoppage or slowdown;

 

    environmental proceedings or other litigation that compel the cessation of all or a portion of the operations at one of our facilities;

 

    increasingly stringent environmental and emission regulations;

 

    a disruption in the supply of natural gas to our East Dubuque Facility or ammonia or sulfur to our Pasadena Facility; and

 

    a governmental ban or other limitation on the use of nitrogen fertilizer products, either generally or specifically those manufactured at our facilities.

The magnitude of the effect on us of any unplanned shutdown will depend on the length of the shutdown and the extent of the operations affected by the shutdown.

Our East Dubuque Facility has been in operation since 1965. Our Pasadena Facility has been in operation producing various products since the 1940s. In 2011, the Pasadena Facility was converted to the production of high-quality granulated synthetic ammonium sulfate, and began selling ammonium sulfate and ammonium thiosulfate as its primary products. Historically, our East Dubuque Facility and Pasadena Facility have required a planned maintenance turnaround every two years. Starting with our planned maintenance turnaround in 2016, our East Dubuque Facility will have a planned maintenance turnaround every three years. Turnarounds at our East Dubuque Facility generally last between 18 and 25 days, and turnarounds at our Pasadena Facility generally last between 14 and 25 days. We intend to alternate the year in which a turnaround occurs at each facility, so that both facilities do not experience a turnaround in the same year. Upon completion of a facility turnaround, we may face delays and difficulties restarting production at our facilities. During the fourth quarter of 2013, our East Dubuque Facility halted production due to a turnaround and a fire. Our Pasadena Facility also underwent a turnaround in December of 2013, which lasted longer than anticipated due to issues with a contractor and weather delays. The duration of our turnarounds or other shutdowns, and the impact they have on our operations, have in the past and could in the future materially adversely affect our cash flow and ability to make cash distributions in the quarter or quarters in which such turnarounds or shutdowns occur.

A major accident, fire, explosion, flood, severe weather event, terrorist attack or other event also could damage our facilities or the environment and the surrounding communities or result in injuries or loss of life. Scheduled and unplanned maintenance could reduce our cash flow and ability to make cash distributions to our unitholders during or for the period of time that any portion of our facilities are not operating. Any unplanned future shutdowns could have a material adverse effect on our ability to make cash distributions to our unitholders.

If we experience significant property damage, business interruption, environmental claims, fines, penalties or other liabilities, our business could be materially adversely affected to the extent the damages or claims exceed the amount of valid and collectible insurance available to us. We are currently insured under Rentech’s casualty, environmental, property and business interruption insurance policies. The policies are subject to limits, deductibles, and waiting periods and also contain exclusions and conditions that could have a material adverse impact on our ability to receive indemnification thereunder, as well as customary sub-limits for particular types of losses. For example, the current property policies contain specific sub-limits for losses resulting from business interruptions and for damage caused by covered flooding or named windstorms and resulting flooding or storm surge. We are fully exposed to all losses in excess of the applicable limits and sub-limits and for certain losses due to business interruptions.

Under the insurance policies that cover our Pasadena Facility, property exposures are subject to limits, deductibles and waiting periods with respect to insured physical damage and time element occurrences. Catastrophic perils such as named windstorms, floods and storm surges are subject to additional limitations that apply to each occurrence. The policies also contain exclusions and conditions that could have a material adverse impact on our ability to receive indemnification thereunder, as well as customary sub-limits for particular types of losses. For example the current property policy contains specific sub-limits for losses resulting from business interruption.

 

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Market factors, including but not limited to catastrophic perils that impact our industry, significant changes in the investment returns of insurance companies, insurance company solvency trends and industry loss ratios and loss trends, can negatively impact the future cost and availability of insurance. There can be no assurance that we will be able to buy and maintain insurance with adequate limits, reasonable pricing terms and conditions or collect from insurance claims that we make.

Our results of operations are highly dependent upon and fluctuate based upon business and economic conditions and governmental policies affecting the agricultural industry. These factors are outside of our control and may significantly affect our profitability.

Our results of operations are highly dependent upon business and economic conditions and governmental policies affecting the agricultural industry, which we cannot control. The agricultural products business can be affected by a number of factors. The most important of these factors, for United States markets, are:

 

    weather patterns and field conditions (particularly during periods of traditionally high nitrogen fertilizer consumption);

 

    quantities of nitrogen fertilizers imported to and exported from North America;

 

    current and projected grain inventories and prices, which are heavily influenced by United States exports and world-wide grain markets; and

 

    United States governmental policies, including farm and biofuel policies, which may directly or indirectly influence the number of acres planted, the level of grain inventories, the mix of crops planted or crop prices.

International market conditions, which are also outside of our control, may also significantly influence our operating results. The international market for nitrogen fertilizers is influenced by such factors as the relative value of the United States dollar and its impact upon the cost of importing nitrogen fertilizers, foreign agricultural policies, the existence of, or changes in, import or foreign currency exchange barriers in certain foreign markets, changes in the hard currency demands of certain countries and other regulatory policies of foreign governments, as well as the laws and policies of the United States affecting foreign trade and investment.

Ammonia can be very volatile and extremely hazardous. Any liability for accidents involving ammonia that cause severe damage to property or injury to the environment and human health could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions. In addition, the costs of transporting ammonia could increase significantly in the future.

We produce, process, store, handle, distribute and transport ammonia, which can be very volatile and extremely hazardous. Major accidents or releases involving ammonia could cause severe damage or injury to property, the environment and human health, as well as a possible disruption of supplies and markets. Such an event could result in civil lawsuits, fines, penalties and regulatory enforcement proceedings, all of which could lead to significant liabilities. Any damage to persons, equipment or property or other disruption of our ability to produce or distribute our products could result in a significant decrease in operating revenues and significant additional cost to replace or repair and insure our assets, which could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions. We periodically experience releases of ammonia related to leaks from our equipment or error in operation and use of equipment at our facilities. Similar events may occur in the future.

These circumstances may result in sudden, severe damage or injury to property, the environment and human health. In the event of pollution, we may be held responsible even if we are not at fault and even if we complied with the laws and regulations in effect at the time of the accident. Litigation arising from accidents involving ammonia may result in our being named as a defendant in lawsuits asserting claims for large amounts of damages, which could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions. Given the risks inherent in transporting ammonia, the costs of transporting ammonia could increase significantly in the future.

We are subject to risks and uncertainties related to transportation and equipment that are beyond our control and that may have a material adverse effect on our results of operations, financial condition and ability to make distributions.

Although our customers and distributors generally pick up our products at our facilities, we occasionally rely on barge and railroad companies to ship products to our customers and distributors. The availability of these transportation services and related equipment is subject to various hazards, including extreme weather conditions, work stoppages, delays, spills, derailments and other

 

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accidents and other operating hazards. For example, barge transport can be impacted by lock closures resulting from inclement weather or surface conditions, including fog, rain, snow, wind, ice, strong currents, floods, droughts and other unplanned natural phenomena, lock malfunction, tow conditions and other conditions. Further, the limited number of towing companies and of barges available for ammonia transport may also impact the availability of transportation for our products. These transportation services and equipment are also subject to environmental, safety and other regulatory oversight. Due to concerns related to terrorism or accidents, local, state and federal governments could implement new regulations affecting the transportation of our products. In addition, new regulations could be implemented affecting the equipment used to ship products from our facilities. Any delay in our ability to ship our products as a result of transportation companies’ failure to operate properly, the implementation of new and more stringent regulatory requirements affecting transportation operations or equipment, or significant increases in the cost of these services or equipment could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.

Our business is subject to extensive and frequently changing environmental laws and regulations. We expect that the cost of compliance with these laws and regulations will increase over time, and we could become subject to material environmental liabilities.

Our business is subject to extensive and frequently changing federal, state and local environmental, health and safety regulations governing the emission and release of hazardous substances into the environment, the treatment and discharge of waste water and the storage, handling, use and transportation of our nitrogen fertilizer products. These laws include the CAA, the federal Clean Water Act, the RCRA, CERCLA, the TSCA, and various other federal, state and local laws and regulations. Violations of these laws and regulations could result in substantial penalties, injunctive orders compelling installation of additional controls, civil and criminal sanctions, permit revocations or facility shutdowns. In addition, new environmental laws and regulations, new interpretations of existing laws and regulations, increased governmental enforcement of laws and regulations or other developments could require us to make additional expenditures. Many of these laws and regulations are becoming increasingly stringent, and we expect the cost of compliance with these requirements to increase over time. The ultimate impact on our business of complying with existing laws and regulations is not always clearly known or determinable due in part to the fact that our operations may change over time and certain implementing regulations for laws, such as the CAA, have not yet been finalized, are under governmental or judicial review or are being revised. These expenditures or costs for environmental compliance could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.

Our operations, as well as expansion of such operations, require numerous permits and authorizations. Failure to obtain, renew or comply with these permits or environmental laws generally could result in substantial fines, penalties or other sanctions, court orders to install pollution-control equipment, permit revocations and facility shutdowns. We may experience delays in obtaining or be unable to obtain required permits, which may delay or interrupt our operations and limit our growth and revenue. A decision by a government agency to revoke or substantially modify an existing permit or approval could have a material adverse effect on our ability to continue operations and on our business, financial condition and results of operations.

Our business is subject to accidental spills, discharges or other releases of hazardous substances into the environment. Past or future spills related to our facilities or transportation of products or hazardous substances from our facilities may give rise to liability (including strict liability, or liability without fault, and potential cleanup responsibility) to governmental entities or private parties under federal, state or local environmental laws, as well as under common law. For example, we could be held strictly liable under CERCLA, for past or future spills without regard to fault or whether our actions were in compliance with the law at the time of the spills. Pursuant to CERCLA and similar state statutes, we could be held liable for contamination associated with our facilities, facilities we formerly owned or operated (if any) and facilities to which we transported or arranged for the transportation of wastes or byproducts containing hazardous substances for treatment, storage or disposal. The potential penalties and cleanup costs for past or future releases or spills, liability to third parties for damage to their property or exposure to hazardous substances, or the need to address newly discovered information or conditions that may require response actions could be significant and could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions. For a discussion of releases at the Pasadena Facility, see the risk factor captioned “Soil and groundwater at the Pasadena Facility is pervasively contaminated, and we may incur costs to investigate and remediate known or suspected contamination at the Pasadena Facility. We may also face legal actions or sanctions or incur costs related to contamination or noncompliance with environmental laws at the facility.” In addition, limited subsurface investigation indicates the presence of certain contamination at the East Dubuque facility. In the future, we may determine that there are conditions at the East Dubuque Facility that require remediation or other response.

We may incur future costs relating to the off-site disposal of hazardous wastes. Companies that dispose of, or arrange for the transportation or disposal of, hazardous substances at off-site locations may be held jointly and severally liable for the costs of investigation and remediation of contamination at those off-site locations, regardless of fault. We could become involved in litigation or other proceedings involving off-site waste disposal and the damages or costs in any such proceedings could be material.

 

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Environmental laws and regulations on fertilizer end-use and application and numeric nutrient water quality criteria could have a material adverse impact on fertilizer demand in the future.

Future environmental laws and regulations on the end-use and application of fertilizers could cause changes in demand for our products. In addition, future environmental laws and regulations, or new interpretations of existing laws or regulations, could limit our ability to market and sell our products to end users. From time to time, various state legislatures have proposed bans or other limitations on fertilizer products. In addition, a number of states have adopted or proposed numeric nutrient water quality criteria that could result in decreased demand for our fertilizer products in those states. Any such laws, regulations or interpretations could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.

Climate change laws, regulations, and impacts could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.

Legislative and regulatory measures to address GHG emissions (including CO2, methane and N2O) are in various phases of discussion or implementation. At the federal legislative level, Congress has previously considered legislation requiring a mandatory reduction of GHG emissions. Although Congressional passage of such legislation does not appear imminent at this time, it could be adopted at a future date. It is also possible that Congress may pass alternative climate change bills that do not mandate a nationwide cap-and-trade program and instead focus on promoting renewable energy and energy efficiency or impose a carbon fee.

In the absence of congressional legislation curbing GHG emissions, the EPA is moving ahead administratively under its CAA authority. In October 2009, the EPA finalized a rule requiring certain large emitters of GHGs to inventory and report their GHG emissions to the EPA. In accordance with the rule, we monitor our GHG emissions from our facilities and began reporting the emissions to the EPA annually beginning in September 2011. In December 2009, the EPA finalized its “endangerment finding” that GHG emissions, including CO2, pose a threat to human health and welfare. The finding allows the EPA to regulate GHG emissions as air pollutants under the CAA. The EPA adopted regulations that limit emissions of greenhouse gases from motor vehicles, which then triggered the imposition of CAA construction and operating permit requirements under the Prevention of Significant Deterioration, or PSD, and Title V permitting programs for certain large stationary sources that are already subject to these requirements due to emissions of conventional, or criteria, pollutants. Facilities that are required to obtain permits for their GHG emissions are required to reduce those emissions using “best available control technology,” or BACT, standards, which are currently being developed on a case-by-case basis. Future modification to one of our facilities may require us to satisfy BACT requirements and potentially require us to meet other CAA requirements applicable to GHG emissions. A number of states also have adopted reporting and mitigation requirements.

The implementation of additional EPA regulations and/or the passage of federal or state climate change legislation would likely increase the costs we incur to (i) operate and maintain our facilities, (ii) install new emission controls on our facilities and (iii) administer and manage any GHG emissions program. Increased costs associated with compliance with any future legislation or regulation of GHG emissions, if it occurs, may have a material adverse effect on our results of operations, financial condition and ability to make cash distributions. In addition, climate change legislation and regulations may result in increased costs not only for our business but also for agricultural producers that utilize our fertilizer products, thereby potentially decreasing demand for our nitrogen fertilizer products. Decreased demand for our fertilizer products may have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.

Similarly, the impact of potential climate change on our operations and those of our customers is uncertain and could adversely affect us.

Agrium is a distributor and customer of a significant portion of our nitrogen fertilizer products, and we have the right to store products at Agrium’s terminal in Niota, Illinois. Any loss of Agrium as our distributor or customer, loss of our storage rights or decline in sales of products through or to Agrium could materially adversely affect our results of operations, financial condition and ability to make cash distributions.

We use Agrium as a distributor of a significant portion of our nitrogen fertilizer products of our East Dubuque Facility pursuant to a distribution agreement between Agrium and us. For the years ended December 31, 2014, 2013 and 2012, 78% or more of our East Dubuque Facility’s total product sales were made through Agrium. Under the distribution agreement, if we are unable to reach an agreement with Agrium for the purchase and sale of our products, Agrium is under no obligation to make such purchase and sale. Agrium sells products that compete with ours, and may be incentivized to prioritize the sale of its products over ours. In the event of any decline in sales of our products through Agrium as distributor, we may not be able to find buyers for our products.

 

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The distribution agreement has a term that ends in April 2016, but automatically renews for subsequent one-year periods (unless either party delivers a termination notice to the other party at least three months prior to an automatic renewal). The distribution agreement may be terminated prior to its stated term for specified causes. Under the distribution agreement, Agrium bears the credit risk on products sold through Agrium pursuant to the agreement. Agrium also is largely responsible for marketing our products to customers and the associated expense. As a result, if our distribution agreement with Agrium terminates for any reason, Agrium would no longer bear the credit risk on the sale of any of our products and we would become responsible for all of the marketing costs for our products.

Under the distribution agreement, we have the right to store up to 15,000 tons of ammonia at Agrium’s terminal in Niota, Illinois, and we sell a portion of our ammonia at that terminal. Our right to store ammonia at the terminal expires on June 30, 2016, but automatically renews for successive one year periods, unless we deliver a termination notice to Agrium with respect to such storage rights at least three months prior to an automatic renewal. Our right to use the storage space immediately terminates if the distribution agreement terminates in accordance with its terms. Ammonia storage sites and terminals served by barge on the Mississippi River are controlled primarily by CF Industries, Koch and Agrium, each of which is one of our competitors. If we lose the right to store ammonia at the Niota, Illinois terminal, we may not be able to find suitable replacement storage on acceptable terms, or at all, and we may be forced to reduce production. We also may lose sales to customers that purchase products at the terminal.

In addition to distributing our products, Agrium is also one of our significant customers. For the years ended December 31, 2014, 2013 and 2012, 0%, 2% and 2%, respectively, of our total product sales were to Agrium as a direct customer (rather than a distributor) and 12%, 12% and 9%, respectively, of our total product sales were to CPS, a controlled affiliate of Agrium. Agrium or CPS could elect to reduce or cease purchasing our products for a number of reasons, especially if our relationship with Agrium as a distributor were to end. If our sales to Agrium as a direct customer or CPS decline, we may not be able to find other customers to purchase the excess supply of our products.

Sales of our products through or to Agrium could decline or the distribution agreement or our rights to storage could terminate as a result of a number of causes which are outside of our control. Any loss of Agrium as our distributor or customer, loss of our storage rights or decline in sales of products through Agrium could materially adversely affect our results of operations, financial condition and ability to make cash distributions.

IOC is the exclusive distributor of our ammonium sulfate fertilizer. Any loss of IOC as our distributor could materially adversely affect our results of operations, financial condition and ability to make cash distributions.

We have a marketing agreement that grants IOC the exclusive right and obligation to market and sell all of our Pasadena Facility’s granular ammonium sulfate. The marketing agreement has a term that ends December 31, 2016, but automatically renews for subsequent one-year periods (unless either party delivers a termination notice to the other party at least 210 days prior to an automatic renewal). The marketing agreement may be terminated prior to its stated term for specified causes. If we are unable to renew our contract with IOC, we may be unable to find buyers for our granular ammonium sulfate. In addition, we have an arrangement with IOC that permits us to store approximately 60,000 tons of ammonium sulfate at IOC-controlled terminals, which are located near end customers of our Pasadena Facility’s ammonium sulfate. This arrangement currently is not governed by a written contract. If we lose the right to store ammonium sulfate at these IOC-controlled terminals, we may not be able to find suitable replacement storage on acceptable terms, or at all, and we may be forced to reduce production. Any loss of IOC as our distributor, loss of our storage rights or decline in sales of products through IOC could materially adversely affect our results of operations, financial condition and ability to make cash distributions.

Due to our dependence on significant customers, the loss of one or more of our significant customers could adversely affect our results of operations and our ability to make distributions to our unitholders.

Our business depends on significant customers, and the loss of one or several significant customers may have a material adverse effect on our results of operations, financial condition and ability to make cash distributions to our unitholders. In the aggregate, our top five ammonia customers represented 62%, 57% and 54%, respectively, of our ammonia sales for the years ended December 31, 2014, 2013 and 2012, and our top five UAN customers represented 58%, 59% and 38%, respectively, of our UAN sales for the same periods. For the years ended December 31, 2014, 2013 and 2012, 0%, 2% and 2%, respectively, of our East Dubuque Facility’s total product sales were to Agrium as a direct customer (rather than a distributor) and 12%, 12% and 9%, respectively, of our East Dubuque Facility’s total product sales were to CPS, a controlled affiliate of Agrium. During the period beginning November 1, 2012 through December 31, 2014, the marketing agreement with IOC accounted for 100% of our Pasadena Facility’s revenues from the sale of ammonium sulfate. Given the nature of our business, and consistent with industry practice, we generally do not have long-term minimum sales contracts with any of our customers. If our sales to any of our significant customers were to decline, we may not be able to find other customers to purchase the excess supply of our products. The loss of one or several of our significant customers, or a significant reduction in purchase volume by any of them, could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.

 

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The sale of our products to customers in international markets exposes us to additional risks that could harm our business, operating results, and financial condition.

Our Pasadena Facility’s products are sold through distributors to customers in North America, New Zealand, Australia, Brazil and Thailand, and our distributors could expand sales to additional international markets in the future. In addition to risks described elsewhere in this section, the sale of our products in international markets expose us to other risks, including the following:

 

    changes in local political, economic, social and labor conditions, which may adversely harm our business;

 

    import and export requirements, tariffs, trade disputes and barriers, and customs classifications that may prevent our distributors from offering our products to a particular market;

 

    longer payment cycles in some countries, increased credit risk, and higher levels of payment fraud;

 

    still developing foreign laws and legal systems;

 

    uncertainty regarding liability for products, including uncertainty as a result of local laws and lack of legal precedent;

 

    different employee/employer relationships, existence of workers’ councils and labor unions and other challenges caused by distance, language, and cultural differences, making it harder to do business in certain jurisdictions; and

 

    natural disasters, military or political conflicts, including war and other hostilities and public health issues and outbreaks.

In addition, our distributors must comply with complex foreign and United States laws and regulations that apply to international sales and operations. These numerous and sometimes conflicting laws and regulations include internal control and disclosure rules, anti-corruption laws, such as the Foreign Corrupt Practices Act, and other local laws prohibiting corrupt payments to governmental officials, and antitrust and competition regulations, among others. Violations of these laws and regulations could result in fines and penalties, criminal sanctions against our distributors, prohibitions on the conduct of their business and on our ability to offer our products in one or more countries, and could also materially affect our brand, our ability to attract and retain employees, our business and our operating results. Although we have implemented policies and procedures designed to ensure our distributors’ compliance with these laws and regulations, there can be no assurance that our distributors will not violate our policies.

We are largely dependent on our customers and distributors to transport purchased goods from our facilities because we do not maintain a fleet of trucks or rail cars.

We do not maintain a fleet of trucks and, unlike some of our major competitors, we do not maintain a fleet of rail cars. Our customers and distributors generally are located close to our facilities and have been willing and able to transport purchased goods from each facility. In most instances, our customers and distributors purchase products for delivery at the facility and then arrange and pay to transport them to their final destinations by truck. However, in the future, the transportation needs of our customers and distributors as well as their preferences may change, and those customers and distributors may no longer be willing or able to transport purchased goods from our facilities. In the event that our competitors are able to transport their products more efficiently or cost effectively than our customers and distributors, those customers and distributors may reduce or cease purchases of our products. If this were to occur, we could be forced to make a substantial investment in a fleet of trucks and/or rail cars to meet the delivery needs of customers and distributors, and this would be expensive and time consuming. We may not be able to obtain transportation capabilities on a timely basis or at all, and our inability to provide transportation for products could have a material adverse effect on our business, cash flow and ability to make distributions.

We are subject to strict laws and regulations regarding employee and process safety, and failure to comply with these laws and regulations could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.

We are subject to a number of federal and state laws and regulations related to safety, including OSHA and comparable state statutes, the purpose of which are to protect the health and safety of workers. In addition, OSHA requires that we maintain information about hazardous materials used or produced in our operations and that we provide this information to employees, state and local governmental authorities, and local residents. Failure to comply with OSHA requirements and other related state regulations, including general industry standards, record keeping requirements and monitoring and control of occupational exposure to regulated substances, could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions if we are subjected to significant penalties, fines or compliance costs.

 

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There are significant risks associated with expansion and other projects that may prevent completion of those projects on budget, on schedule or at all.

We may undertake additional expansion projects at our East Dubuque Facility and our Pasadena Facility. Projects of the scope and scale we are undertaking or may undertake in the future entail significant risks, including:

 

    unanticipated cost increases;

 

    unforeseen engineering or environmental problems;

 

    work stoppages;

 

    weather interference;

 

    unavailability of necessary equipment; and

 

    unavailability of financing on acceptable terms.

Construction, equipment or staffing problems or difficulties in obtaining any of the requisite licenses, permits and authorizations from regulatory authorities could increase the total cost, delay or prevent the construction or completion of a project.

In addition, we cannot assure you that we will have adequate sources of funding to undertake or complete major projects. As a result, we may need to obtain additional debt and/or equity financing to complete such projects. There is no guarantee that we will be able to obtain other debt or equity financing on acceptable terms or at all. Moreover, if we are able to complete these projects, production levels at our facilities may not meet expectations that we have set.

 

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As a result of these factors, we cannot assure you that our projects will commence operations on schedule or at all, that the costs for the projects will not exceed budgeted amounts or that production levels will achieve the expectations that we have set. Failure to complete a project on budget, on schedule or at all or to achieve expected production levels may adversely impact our ability to grow our business.

Expansion of our production capacity may change the balance of supply and demand in our markets, and our new products may not achieve market acceptance.

We increased our capacity to produce ammonia and urea and started to produce and sell DEF. Increased production of our existing products may reduce the selling price for those products as a result of market saturation. We may be required to sell these products at lower prices, or may not be able to sell all of the products we produce. In addition, there can be no assurance that our new products will be well-received or that we will achieve revenues or profitability levels we expect. If we cannot sell our products or are forced to reduce the prices at which we sell them, this could have a material adverse effect on our results of operations, financial condition and the ability to make cash distributions to our unitholders.

A shortage of skilled labor, together with rising labor costs, could adversely affect our results of operations and cash available for distribution to our unitholders.

Efficient production of nitrogen fertilizer using modern techniques and equipment requires skilled employees. To the extent that the services of skilled labor becomes unavailable to us for any reason, including as a result of the expiration and non-renewal of our collective bargaining agreement or the retirement of experienced employees from our aging work force, we would be required to hire other personnel. We have a collective bargaining agreement in place covering unionized employees at our East Dubuque Facility which will expire in October 2016. In addition, we have two collective bargaining agreements for our Pasadena Facility. One of these agreements expires on March 28, 2016, and the other will expire on April 30, 2016. Upon expiration, we may be unable to renew the collective bargaining agreements on satisfactory terms or at all. We face hiring competition from our competitors, our customers and other companies operating in our industry, and we may not be able to locate or employ qualified replacements on acceptable terms or at all. If our current skilled employees quit, retire or otherwise cease to be employed by us and we are unable to locate or hire qualified replacements, or if the cost to locate and hire qualified replacements for these employees increases materially, our results of operations and cash available for distribution to our unitholders could be adversely affected.

Any reduction in our credit rating could adversely affect our fertilizer business.

Rating agencies regularly evaluate the Notes, and their ratings are based on a number of factors, including our financial strength as well as factors not entirely within its control, including conditions affecting the fertilizer industry generally. There can be no assurance that the Notes will maintain their current ratings. In September 2014, Standard & Poor’s downgraded the Notes one notch to B-. While this action had little to no detrimental impact on our profitability, borrowing costs, or ability to access the capital markets, future downgrades to the Notes or our credit rating could adversely affect our profitability, borrowing costs, or ability to access the capital markets or otherwise have a negative effect on our results of operations or financial condition. Additionally, a downgrade of the credit rating of any particular security issued by us could negatively affect the ability of the holders of that security to sell the securities and the prices at which any such securities may be sold.

Our GE Credit Agreement and the Indenture governing our Notes contain significant limitations on our business operations, including our ability to make distributions to our common unitholders and other payments.

In July 2014, we entered into the GE Credit Agreement, comprised of a $50.0 million senior secured revolving credit facility, or the GE Credit Facility. In April 2013, we entered into an indenture, or the Indenture, governing our Notes.

The Indenture prohibits us from making distributions to our common unitholders if any Default (except a Reporting Default) or Event of Default (each as defined in the Indenture) exists. In addition, the Indenture contains covenants limiting our ability to pay distributions to our common unitholders. The covenants apply differently depending on our Fixed Charge Coverage Ratio (as defined in the Indenture). If the Fixed Charge Coverage Ratio is not less than 1.75 to 1.0, we will generally be permitted to make restricted payments, including distributions to our common unitholders, without substantive restriction. If the Fixed Charge Coverage ratio is less than 1.75 to 1.0, we will generally be permitted to make restricted payments, including distributions to our common unitholders, up to an aggregate $60.0 million basket plus certain other amounts referred to as “incremental funds” under the Indenture. For the year ended December 31, 2014, our Fixed Charge Coverage ratio was 3.60 to 1.00.

Under the GE Credit Agreement, in the event that, on a pro forma basis, less than 30% of the commitment amount is available for borrowing on any distribution date, then in order to make a distribution on such date (a) the Partnership must maintain a first lien leverage ratio no greater than 1.0 to 1 on a pro forma basis and (b) the sum of (i) the undrawn amount under the GE Credit Facility and (ii) cash maintained by the Partnership and its subsidiaries in collateral deposit accounts must be at least $5 million (after giving effect

 

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to the distribution). In addition, before the Partnership can make distributions, there cannot be any default under the GE Credit Agreement. The GE Credit Agreement also contains a requirement that the Partnership maintain a first lien leverage ratio not to exceed 1.0 to 1 at the end of each fiscal quarter where less than 30% of the commitment amount is available for drawing under the GE Credit Facility or a default has occurred and is continuing. As of December 31, 2014, the first lien leverage ratio was 0.20 to 1.

We are subject to covenants contained in the agreements governing our indebtedness and may be subject to additional agreements governing other future indebtedness. These covenants restrict our ability to, among other things, incur, assume or permit to exist additional indebtedness, guarantees and other contingent obligations, incur liens, make negative pledges, pay dividends or make other distributions, make payments to our subsidiaries, make certain loans and investments, consolidate, merge or sell all or substantially all of our assets, enter into sale-leaseback transactions and enter into transactions with our affiliates. Any failure to comply with these covenants could result in a default under our GE Credit Agreement or the Notes. Upon a default, unless waived, the lenders under our GE Credit Agreement and holders of our Notes would have all remedies available to a secured lender, including the ability to cause the outstanding amounts of such indebtedness to become due and payable in full, institute foreclosure proceedings against our assets, and force us into bankruptcy or liquidation.

We may not have sufficient funds to repay the loans under the GE Credit Agreement or to repurchase the Notes upon the occurrence of certain “change of control” events.

Upon the occurrence of a certain events defined as a “change of control” (as defined in the Indenture) each holder of the Notes may require us to repurchase some or all of the Notes at a repurchase price equal to 101% of their face amount, plus any accrued and unpaid interest. Further, the occurrence of such a change of control would constitute an event of default under the GE Credit Agreement, allowing the lenders thereunder to accelerate the loans under the agreement.

If a change of control event occurs, we may not have sufficient funds to satisfy our obligations under the Indenture and/or the GE Credit Agreement. Our failure to satisfy these obligations would be a default under the applicable agreement giving rise to the applicable counterparties’ right to pursue remedies against us. As a result, any failure to meet these obligations would have a material adverse effect on us.

We are a holding company and depend upon our subsidiaries for our cash flow.

We are a holding company. All of our operations are conducted and most of our assets are owned by our operating companies, which are our wholly owned subsidiaries, and we intend to continue to conduct our operations at the operating companies and any of our future subsidiaries. Consequently, our cash flow and our ability to meet our obligations or to make cash distributions depend upon the cash flow of our operating companies and any of our future subsidiaries and the payment of funds by our operating companies and any of our future subsidiaries to us in the form of dividends or otherwise. The ability of our operating companies and any of our future subsidiaries to make any payments to us depend on their earnings, the terms of their indebtedness, including the terms of any credit facilities and legal restrictions. In particular, our Notes and GE Credit Agreement impose, and future credit facilities entered into by our operating companies or any of our future subsidiaries may impose, significant limitations on the ability of our subsidiaries to make distributions to us and consequently our ability to make distributions to our unitholders.

Our relationship with Rentech and its business, results of operations, financial condition and prospects subjects us to potential risks that are beyond our control.

Due to our relationship with Rentech, adverse developments or announcements concerning Rentech, its business, results of operations, financial condition or prospects could materially adversely affect our financial condition, even if we have not suffered any similar development. In addition, the credit and business risk profiles of Rentech may be factors considered in credit evaluations of us. Another factor that may be considered is the financial condition of Rentech, including the degree of its dependence on cash flow from us to further its business strategy and continue its operations. In 2013, Rentech ceased operations at, reduced staffing at, and mothballed its product demonstration unit, and eliminated all related research and development activities related to its technologies. Rentech has a history of operating losses and has never operated at a profit. If Rentech does not achieve significant amounts of revenues and operate at a profit on an ongoing basis in the future, Rentech may be unable to continue its operations at its current level. Ultimately, Rentech’s ability to remain in business will depend upon earning a profit from our nitrogen fertilizer business and/or its wood fibre processing business. The credit and risk profile of Rentech could adversely affect our credit ratings and risk profile, which could increase our borrowing costs or hinder our ability to raise capital. Furthermore, financial constraints at Rentech may cause Rentech to make business decisions, including decisions to liquidate the common units that it holds in us or its interest in our general partner, which may adversely affect our business and the market price of our common units.

 

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An event of default under the A&R Credit Agreement or Rentech’s default of certain obligations under Rentech’s guaranty for such credit facility could trigger an acceleration under the A&R Credit Agreement and a sale of our common units owned by RNHI, or the Underlying Equity, thus reducing Rentech’s ownership of our common units.

In February 2015, RNHI, an indirect wholly owned subsidiary of Rentech, obtained financing by entering into an amended and restated credit agreement (the “A&R Credit Agreement”) and Rentech borrowed $75.0 million under such facility. As a result of the A&R Credit Agreement, we are subject to risks relating to the A&R Credit Agreement.

The A&R Credit Agreement contains customary mandatory prepayment events and events of default, including defaults by Rentech and RNHI. An event of default under the A&R Credit Agreement or Rentech’s default of certain obligations under Rentech’s guaranty for such credit facility could trigger an acceleration under the A&R Credit Agreement and a foreclosure and sale of the Underlying Equity. Such foreclosure and sale would likely result in the change of ownership of our common units.

We are exploring and evaluating potential strategic alternatives and there can be no assurance that we will be successful in identifying, or completing any strategic alternative, that any such strategic alternative will yield additional value for us or that the process will not have an adverse impact on our business.

On February 17, 2015, we announced that our general partner’s board of directors of our general partner had initiated a process to explore and evaluate potential strategic alternatives for the Partnership, which may include a sale of the Partnership, a merger with another party, a sale of some or all of its assets, or another strategic transaction. However, there can be no assurance that the exploration of strategic alternatives will result in the identification or consummation of any transaction. In addition, we expect to incur substantial expenses associated with identifying and evaluating potential strategic alternatives. The process of exploring strategic alternatives may be time consuming and disruptive to our business operations and, if we and the general partner are unable to effectively manage the process, our business, financial condition, and results of operations could be adversely affected. No decision has been made with respect to any transaction and we cannot assure you that the general partner will be able to identify and undertake any transaction that allows our unitholders to realize an increase in the value of their common units or provide any guidance on the timing of such action, if any. We also cannot assure you that any potential transaction or other strategic alternative, if identified, evaluated and consummated, will provide greater value to our unitholders than that reflected in the current price of our common units. Any potential transaction would be dependent upon a number of factors that may be beyond our control, including, among other factors, market conditions, industry trends, the interest of third parties in our business and the availability of financing to potential buyers on reasonable terms. A transaction to sell all or substantially all of our assets, including by way of a merger, generally requires the approval of the holders of a majority of our outstanding common units. We do not intend to comment regarding the evaluation of strategic alternatives until such time as the board of directors of our general partner has determined the outcome of the process or otherwise has deemed that disclosure is appropriate. As a consequence, perceived uncertainties related to our future may result in the loss of potential business opportunities and volatility in the market price of our common units and may make it more difficult for us to attract and retain qualified personnel and business partners.

Our Chief Executive Officer transition involves significant risks and our ability to successfully manage this transition and other organizational change could impact our business results.

Mr. Forman was elected as our Chief Executive Officer, and as Chief Executive Officer and President of Rentech, on December 9, 2014. He is in the process of assessing our business and refining our strategy and operations. Leadership transitions can be inherently difficult to manage, and an inadequate transition of our CEO may cause disruption to our business, including our relationships with customers. In addition, we continue to execute a number of significant business and organizational changes. Successfully managing these changes, including retention of particularly key employees, is critical to our business success.

Risks Related to an Investment in Us

We intend to distribute all of the cash available for distribution we generate each quarter, which could limit our ability to grow.

Our policy is to distribute all of the cash available for distribution we generate each quarter to our unitholders. Cash available for distribution for each quarter will be determined by the board of directors of our general partner following the end of such quarter. As a result, our general partner will rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities by us, to fund our expansion capital expenditures, and accordingly, to the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow.

In addition, because we intend to distribute all of the cash available for distribution that we generate each quarter, our growth may not be as fast as that of businesses that reinvest their cash available for distribution to expand ongoing operations. To the extent

 

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we issue additional units in connection with any expansion capital expenditures, the payment of distributions on those additional units will decrease the amount we distribute on each outstanding unit. There are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which, in turn, would reduce the cash available for distribution that we have to distribute to our unitholders.

The board of directors and officers of our general partner have fiduciary duties to Rentech, and the interests of Rentech may differ significantly from, or conflict with, the interests of our public common unitholders.

Our general partner is responsible for managing us. Although our general partner has fiduciary duties to manage us in a manner that is in, or not opposed to, our best interests, the fiduciary duties are specifically limited by the express terms of our partnership agreement, and the directors and officers of our general partner also have fiduciary duties to manage our general partner in a manner beneficial to Rentech and its shareholders. The interests of Rentech and its shareholders may differ from, or conflict with, the interests of our common unitholders. In resolving these conflicts, our general partner may favor its own interests or the interests of holders of Rentech’s common stock over our interests and those of our common unitholders.

The potential conflicts of interest include, among others, the following:

 

    Neither our partnership agreement nor any other agreement requires the owners of our general partner to pursue a business strategy that favors us. The affiliates of our general partner have fiduciary duties to make decisions in their own best interests and in the best interest of holders of Rentech’s common stock, which may be contrary to our interests. In addition, our general partner is allowed to take into account the interests of parties other than us or our unitholders in resolving conflicts of interest, which has the effect of limiting its fiduciary duty to our unitholders.

 

    Our general partner has limited its liability and reduced its fiduciary duties under our partnership agreement and has also restricted the remedies available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty. As a result of purchasing common units, unitholders consent to some actions and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under applicable state law.

 

    The board of directors of our general partner will determine the amount and timing of asset purchases and sales, capital expenditures, borrowings, repayment of indebtedness and issuances of additional partner interests, each of which can affect the amount of cash that is available for distribution to our common unitholders.

 

    Our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf. There is no limitation on the amounts our general partner can cause us to pay it or its affiliates.

 

    Our general partner may exercise its rights to call and purchase all of our common units if at any time it and its affiliates own more than 80% of our common units.

 

    Our general partner controls the enforcement of obligations owed to us by it and its affiliates. In addition, our general partner determines whether to retain separate counsel or others to perform services for us.

 

    Our general partner determines which costs incurred by it and its affiliates are reimbursable by us.

 

    Certain of the executive officers of our general partner, and certain directors of our general partner, also serve as directors and/or executive officers of Rentech. The executive officers who work for both Rentech and our general partner, including our chief executive officer, chief financial officer and general counsel, divide their time between our business and the business of Rentech. These executive officers will face conflicts of interest from time to time in making decisions which may benefit either us or Rentech.

 

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Our partnership agreement limits the liability and reduces the fiduciary duties of our general partner and restricts the remedies available to us and our common unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

Our partnership agreement limits the liability and reduces the fiduciary duties of our general partner, while also restricting the remedies available to our common unitholders for actions that, without these limitations and reductions, might constitute breaches of fiduciary duty. Delaware partnership law permits such contractual reductions of fiduciary duty. By purchasing common units, common unitholders consent to some actions that might otherwise constitute a breach of fiduciary or other duties applicable under state law. Our partnership agreement contains provisions that reduce the standards to which our general partner would otherwise be held by state fiduciary duty law. For example:

 

    Our partnership agreement provides that our general partner will not have any liability to us or our unitholders for decisions made in its capacity as general partner so long as it acted in good faith, meaning it subjectively believed that the decisions were in, or not opposed to, our best interests.

 

    Our partnership agreement provides that the doctrine of corporate opportunity, or any analogous doctrine, shall not apply to our general partner. The owners of our general partner are permitted to engage in separate businesses which directly compete with us and are not required to share or communicate or offer any potential business opportunities to us even if the opportunity is one that we might reasonably have pursued. The partnership agreement provides that the owners of our general partner will not be liable to us or any unitholder for breach of any duty or obligation by reason of the fact that such person pursued or acquired for itself any business opportunity.

 

    Our partnership agreement provides that our general partner and the officers and directors of our general partner will not be liable for monetary damages to us for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or those persons acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that such person’s conduct was criminal.

 

    Our partnership agreement generally provides that affiliate transactions and resolutions of conflicts of interest not approved by the conflicts committee of the board of directors of our general partner and not involving a vote of unitholders must be on terms no less favorable to us than those generally provided to or available from unrelated third parties or be “fair and reasonable.” In determining whether a transaction or resolution is “fair and reasonable,” our general partner may consider the totality of the relationship between the parties involved, including other transactions that may be particularly advantageous or beneficial to us.

 

    Our partnership agreement provides that in resolving conflicts of interest, it will be conclusively deemed that in making its decision, the conflicts committee acted in good faith.

By purchasing a common unit, a unitholder will become bound by the provisions of our partnership agreement, including the provisions described above.

Our partnership agreement permits our general partner to make a number of decisions in its individual capacity or in its sole discretion and, as such, our general partner has no duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our common unitholders in making these decisions.

Our partnership agreement contains provisions that permit our general partner to make a number of decisions in its individual capacity, as opposed to its capacity as our general partner, or in its sole discretion. This entitles our general partner to consider only the interests and factors that it desires, and it has no duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our common unitholders. Decisions made by our general partner in its individual capacity or in its sole discretion will be made by RNHI as the sole member of our general partner, and not by the board of directors of our general partner. Examples include the exercise of the general partner’s call right, its voting rights with respect to any common units it may own, its registration rights and its determination whether or not to consent to any merger or consolidation or amendment to our partnership agreement. In effect, the standards to which our general partner would otherwise be held by state fiduciary duty law are reduced. By purchasing a common unit, a unitholder will become bound by the provisions of our partnership agreement, including the provisions described above.

RNHI has the power to appoint and remove our general partner’s directors.

RNHI has the power to appoint and remove all of the members of the board of directors of our general partner. Our general partner has control over all decisions related to our operations. Our public unitholders do not have an ability to influence any operating decisions and will not be able to prevent us from entering into any transactions. Furthermore, the goals and objectives of Rentech, as the indirect owner of our general partner, may not be consistent with those of our public unitholders.

 

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Common units are subject to our general partner’s call right.

If at any time our general partner and its affiliates own more than 80% of our common units, our general partner will have the right, which it may assign to any of its affiliates or to us, but not the obligation, to purchase all, but not less than all, of the common units held by public unitholders at a price not less than their then-current market price, as calculated pursuant to the terms of our partnership agreement. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your common units. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon exercise of the call right. There is no restriction in our partnership agreement that prevents our general partner from issuing additional common units and then exercising its call right. Our general partner may use its own discretion, free of fiduciary duty restrictions, in determining whether to exercise this right.

Our unitholders have limited voting rights and are not entitled to elect our general partner or our general partner’s directors.

Unlike the holders of common stock in a corporation, our unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Unitholders will have no right to elect our general partner or our general partner’s board of directors on an annual or other continuing basis. The board of directors of our general partner, including the independent directors, will be chosen entirely by Rentech as the indirect owner of the general partner and not by our common unitholders. Unlike publicly traded corporations, we will not hold annual meetings of our unitholders to elect directors or conduct other matters routinely conducted at annual meetings of shareholders. Furthermore, even if our unitholders are dissatisfied with the performance of our general partner, they will have no practical ability to remove our general partner. As a result of these limitations, the price at which the common units will trade could be diminished.

Our public unitholders will not have sufficient voting power to remove our general partner without Rentech’s consent.

Rentech indirectly owns 59.7% of our common units. Our general partner may be removed by a vote of the holders of at least 66 2/3% of our outstanding common units, including any common units held by our general partner and its affiliates (including Rentech), voting together as a single class. As a result, public holders of our common units are not able to remove the general partner, under any circumstances, unless Rentech sells some of the common units that it owns or we sell additional units to the public.

Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units (other than our general partner and its affiliates and permitted transferees).

Our partnership agreement restricts unitholders’ voting rights by providing that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, may not vote on any matter. Our partnership agreement also contains provisions limiting the ability of common unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the ability of our common unitholders to influence the manner or direction of management.

Cost reimbursements due to our general partner and its affiliates will reduce cash available for distribution to you.

Prior to making any distribution on our outstanding units, we will reimburse our general partner for all expenses it incurs on our behalf including, without limitation, our pro rata portion of management compensation and overhead charged by Rentech in accordance with our services agreement. The services agreement does not contain any cap on the amount we may be required to pay pursuant to this agreement. The payment of these amounts, including allocated overhead, to our general partner and its affiliates could adversely affect our ability to make distributions to you.

Limited partners may not have limited liability if a court finds that unitholder action constitutes control of our business.

A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to the general partner. Our partnership is organized under Delaware law and our operating companies conduct business in Illinois and Texas. Limited partners could be liable for our obligations as if such limited partners were general partners if a court or government agency determined that:

 

    we were conducting business in a state but had not complied with that particular state’s partnership statute; or

 

    limited partners’ right to act with other unitholders to remove or replace our general partner, to approve some amendments to our partnership agreement or to take other actions under our partnership agreement constituted “control” of our business.

 

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Unitholders may have liability to repay distributions.

In the event that: (i) we make distributions to our unitholders when our nonrecourse liabilities exceed the sum of (a) the fair market value of our assets not subject to recourse liability and (b) the excess of the fair market value of our assets subject to recourse liability over such liability, or a distribution causes such a result, and (ii) a unitholder knows at the time of the distribution of such circumstances, such unitholder will be liable for a period of three years from the time of the impermissible distribution to repay the distribution under Section 17-607 of the Delaware Act.

Likewise, upon the winding up of the Partnership, in the event that (a) we do not distribute assets in the following order: (i) to creditors in satisfaction of their liabilities; (ii) to partners and former partners in satisfaction of liabilities for distributions owed under our partnership agreement; (iii) to partners for the return of their contribution; and (iv) to the partners in the proportions in which the partners share in distributions, and (b) a unitholder knows at the time of the distribution of such circumstances, then such unitholder will be liable for a period of three years from the impermissible distribution to repay the distribution under Section 17-804 of the Delaware Act.

A purchaser of common units who becomes a limited partner is liable for the obligations of the transferring limited partner to make contributions to the Partnership that are known by the purchaser at the time it became a limited partner, and for unknown obligations if the liabilities could be determined from our partnership agreement.

Our unitholders who fail to furnish certain information requested by our general partner or who our general partner, upon receipt of such information, determines are not eligible citizens may not be entitled to receive distributions in kind upon our liquidation and their common units will be subject to redemption.

Our general partner may require each limited partner to furnish information about his nationality, citizenship or related status. If a limited partner fails to furnish information about his nationality, citizenship or other related status within a reasonable period after a request for the information or our general partner determines after receipt of the information that the limited partner is not an eligible citizen, the limited partner may be treated as an ineligible holder. An ineligible holder does not have the right to direct the voting of his common units and may not receive distributions in kind upon our liquidation. Furthermore, we have the right to redeem all of the common units of any holder that is an ineligible holder. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner.

Common units held by persons who are non-taxpaying assignees will be subject to the possibility of redemption.

To avoid any adverse effect on the maximum applicable rates chargeable to customers by us under certain laws or regulations that may be applicable to our future business or operations, or in order to reverse an adverse determination that has occurred regarding such maximum rate, our partnership agreement gives our general partner the power to amend the partnership agreement. If our general partner determines that our not being treated as an association taxable as a corporation or otherwise taxable as an entity for United States federal income tax purposes, coupled with the tax status (or lack of proof thereof) of one or more of our limited partners, has, or is reasonably likely to have, a material adverse effect on the maximum applicable rates chargeable to customers by us, then our general partner may adopt such amendments to our partnership agreement as it determines are necessary or advisable to obtain proof of the United States federal income tax status of our limited partners (and their owners, to the extent relevant) and permit us to redeem the common units held by any person whose tax status has or is reasonably likely to have a material adverse effect on the maximum applicable rates or who fails to comply with the procedures instituted by our general partner to obtain proof of the United States federal income tax status.

Our general partner’s interest in us and the control of our general partner may be transferred to a third party without unitholder consent.

Our general partner may transfer its general partner interest in us to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. Furthermore, there is no restriction in our partnership agreement on the ability of RNHI to transfer its equity interest in our general partner to a third party. The new equity owner of our general partner would then be in a position to replace the board of directors and the officers of our general partner with its own choices and to influence the decisions taken by the board of directors and officers of our general partner.

Increases in interest rates could adversely impact our unit price and our ability to issue additional equity or incur debt.

We cannot predict how interest rates will react to changing market conditions. Interest rates on our GE Credit Agreement and future credit facilities and debt securities could be higher than current levels, causing our financing costs to increase accordingly. Additionally, as with other yield-oriented securities, we expect that our unit price will be impacted by the level of our quarterly cash distributions and implied distribution yield. The distribution yield is often used by investors to compare and rank related yield-oriented

 

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securities for investment decision-making purposes. Therefore, changes in interest rates may affect the yield requirements of investors who invest in our common units, and a rising interest rate environment could have a material adverse impact on our unit price and our ability to issue additional equity or to incur debt as well as increasing our interest costs.

We may issue additional common units and other equity interests without your approval, which would dilute your existing ownership interests.

Under our partnership agreement, we are authorized to issue an unlimited number of additional interests without a vote of the unitholders. The issuance by us of additional common units or other equity interests of equal or senior rank will have the following effects:

 

    the proportionate ownership interest of unitholders immediately prior to the issuance will decrease;

 

    the amount of cash distributions on each unit will decrease;

 

    the ratio of our taxable income to distributions may increase;

 

    the relative voting strength of each previously outstanding unit will be diminished; and

 

    the market price of the common units may decline.

In addition, our partnership agreement does not prohibit the issuance by our subsidiaries of equity interests, which may effectively rank senior to the common units.

The level of indebtedness we could incur in the future could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from meeting our obligations.

In April 2013, the Partnership and Rentech Nitrogen Finance Corporation, our wholly owned subsidiary (“Finance Corporation” and collectively with the Partnership, the “Issuers”), issued the Notes. In July 2014, the Partnership and Finance Corporation entered into the GE Credit Agreement. The level of indebtedness we could incur in the future could have important consequences, including:

 

    increasing our vulnerability to general economic and industry conditions;

 

    requiring all or a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore restricting or reducing our ability to use our cash flow to make distributions or to fund our operations, capital expenditures and future business opportunities;

 

    limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, and general corporate or other purposes;

 

    incurring higher interest expense in the event of increases in our GE Credit Agreement’s variable interest rates;

 

    limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who have greater capital resources;

 

    limiting our ability to make investments, dispose of assets, pay cash distributions or repurchase common units; and

 

    subjecting us to financial and other restrictive covenants in our indebtedness, which may restrict our activities, and the failure to comply with which could result in an event of default.

Our ability to make scheduled debt payments, to refinance our obligations with respect to our indebtedness and to fund capital and non-capital expenditures necessary to maintain the condition of our operating assets and properties, as well as to provide capacity for the growth of our business, depends on our financial and operating performance, which, in turn, is subject to prevailing economic conditions and financial, business, competitive, legal and other factors.

If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce distributions, reduce or delay capital expenditures, investments or other business activities, sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Failure to pay our indebtedness on time would constitute an event of default under the agreements governing our indebtedness, which would give rise to our lenders’ ability to accelerate the obligations and seek other remedies against us.

We have identified and disclosed material weaknesses in our internal control over financial reporting, which could, if not remediated, result in material misstatements in our financial statements, adversely affect investor confidence, impair the value of our common units and increase our cost of raising capital. There is also the risk that additional control weaknesses could be discovered.

Our management identified material weaknesses in our internal control over financial reporting for the fiscal year ended December 31, 2014 relating to (i) the review of the cash flow forecasts used in the accounting for long-lived asset recoverability and goodwill impairment, (ii) the determination of the goodwill impairment charge in accordance with generally accepted accounting principles, and (iii) maintaining documentation supporting management’s review of events and changes in circumstances that indicate it is more likely than not that a goodwill impairment has occurred between annual impairment tests. For a discussion of our internal control over financial reporting and a description of the identified material weaknesses, see “Part II—Item 9A. Controls and Procedures.”

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. Although management has implemented, and is continuing to implement, certain procedures to strengthen our internal controls, material weaknesses in our internal control over financial reporting could adversely impact our ability to provide timely and accurate financial information. If we are unsuccessful in implementing or following our remediation plan, or if we discover additional control weaknesses, we may not be able to accurately report our financial condition, results of operations or cash flows or maintain effective internal control over financial reporting. If we are unable to report financial information timely and accurately or to maintain effective disclosure controls and procedures, we could be subject to, among other things, regulatory or enforcement actions by the SEC and NYSE, including a delisting from NYSE, securities litigation and a general loss of investor confidence, any one of which could adversely affect investor confidence, impair the value of our common units and increase our cost of raising capital.

 

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Tax Risks

Our tax treatment depends on our status as a partnership for United States federal income tax purposes, as well as our not being subject to a material amount of entity-level taxation by individual states. If the Internal Revenue Service (“IRS”) were to treat us as a corporation for United States federal income tax purposes or if we were to become subject to additional amounts of entity-level taxation for state tax purposes, then our cash available for distribution to our unitholders would be substantially reduced.

The anticipated after-tax economic benefit of an investment in our common units depends largely on our being treated as a partnership for United States federal income tax purposes. We have not requested, and do not plan to request, a ruling from the IRS regarding our classification as a partnership.

Despite the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for United States federal income tax purposes. A change in our current business or a change in current law could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to entity-level taxation.

If we were treated as a corporation for United States federal income tax purposes, we would pay United States federal income tax on our taxable income at the applicable corporate tax rate, which is currently a maximum of 35%, and would likely pay additional state and local income taxes at varying rates. Distributions to our unitholders would generally be taxed again as corporate dividends (to the extent of our current and accumulated earnings and profits), and no income, gains, losses, deductions or credits would flow through to our unitholders. Moreover, if we were to be treated as a corporation for United States federal income tax purposes, there would be a material reduction in the anticipated cash flow and after tax return to our unitholders, likely causing a substantial reduction in the value of our common units.

In addition, changes in current state laws may subject us to additional entity-level taxation by individual states. We own assets and conduct business in Illinois and Texas. Several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise or other forms of taxation. For example, the State of Texas currently imposes a franchise tax on the taxable margin of corporations and other entities, including limited partnerships. Imposition of taxes on us in other jurisdictions in which we may operate in the future could substantially reduce our cash available for distribution to unitholders.

The tax treatment of publicly traded limited partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

The present United States federal income tax treatment of publicly traded limited partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time, including on a retroactive basis. For example, from time to time, members of Congress and the President propose and consider substantive changes to the existing United States federal income tax laws that affect publicly traded limited partnerships, including the elimination of the qualifying income exception under Internal Revenue Code Section 7704(d), upon which we rely for our treatment as a partnership for United States federal income tax purposes. Any modification to the United States federal income tax laws and interpretations thereof may or may not be retroactively applied and could make it more difficult or impossible to meet the exception for us to be treated as a partnership for United States federal income tax purposes. However, we are unable to predict whether any such changes, or other proposals, will ultimately be enacted or, if enacted, whether they will be enacted in their proposed form, or whether they will apply to us. Any such changes could cause a substantial reduction in the value of our common units.

If the IRS contests any of the United States federal income tax positions we take, the market for our common units may be materially and adversely impacted, and the cost of any IRS contest will reduce our cash available for distribution to our unitholders.

We have not requested, and do not plan to request, a ruling from the IRS with respect to our treatment as a partnership for United States federal income tax purposes. The IRS may adopt positions that differ from the positions we take, and the IRS’s positions may ultimately be sustained. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we take and such positions may not ultimately be sustained. A court may not agree with some or all of the positions we take. Any contest with the IRS, and the outcome of any IRS contest, may materially and adversely impact the market for our common units and the price at which they trade. In addition, our costs of any contest with the IRS will be borne indirectly by our unitholders because the costs will reduce our cash available for distribution.

 

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Unitholders’ share of our income will be taxable for United States federal income tax purposes even if they do not receive any cash distributions from us.

Because we expect to be treated as a partnership for United States federal income tax purposes, our unitholders will be treated as partners to whom we will allocate taxable income that could be different in amount than the cash we distribute. A unitholder’s allocable share of our taxable income will be taxable to him, which may require the payment of United States federal income taxes and, in some cases, state and local income taxes on his share of our taxable income, even if he receives no cash distributions from us. Unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from that income. Adjustments resulting from an IRS audit may require each unitholder to adjust a prior year’s tax liability, and possibly may result in an audit of his or her return. Any audit of a unitholder’s return could result in adjustments not related to our returns, as well as those related to our returns.

Tax gain or loss on the disposition of our common units could be more or less than expected.

If our unitholders sell common units, they will recognize a gain or loss for United States federal income tax purposes equal to the difference between the amount realized and their tax basis in those common units. Because distributions in excess of their allocable share of our net taxable income decrease their tax basis in their common units, the amount, if any, of such prior excess distributions with respect to the common units our unitholders sell will, in effect, become taxable income to our unitholders if they sell such common units at a price greater than their tax basis in those common units, even if the price they receive is less than their original cost. Furthermore, a substantial portion of the amount realized on any sale of a unitholder’s common units, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, if our unitholders sell common units, they may incur a tax liability in excess of the amount of cash the unitholders receive from the sale.

Tax-exempt entities and non-U.S. persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.

Investment in our common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (known as IRAs), and non-U.S. persons, raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from United States federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes, generally at the highest applicable effective tax rate, and non-U.S. persons will be required to file United States federal and state income tax returns and pay United States federal and state tax on their share of our taxable income. Unitholders that are tax-exempt entities or non-U.S. persons should consult their tax advisors before investing in our common units.

We will treat each purchaser of our common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of our common units.

Due to our inability to match transferors and transferees of common units and for other reasons, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations promulgated under the Internal Revenue Code, referred to as “Treasury Regulations.” A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to our unitholders. It also could affect the timing of these tax benefits or the amount of gain from a unitholder’s sale of common units and could cause a substantial reduction in the value of our common units or result in audit adjustments to our unitholders’ tax returns.

We will prorate our items of income, gain, loss and deduction, for United States federal income tax purposes, between transferors and transferees of our common units each month based upon the ownership of our common units on the first day of each month, instead of on the basis of the date a particular common unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.

We will prorate our items of income, gain, loss and deduction between transferors and transferees of our common units each month based upon the ownership of our common units on the first day of each month, instead of on the basis of the date a particular common unit is transferred. The use of this proration method may not be permitted under existing Treasury Regulations. Recently, however, the United States Treasury Department issued proposed Treasury Regulations that provide a safe harbor pursuant to which publicly traded partnerships may use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders. Nonetheless, the proposed Treasury Regulations do not specifically authorize the use of the proration method we have adopted. If the IRS were to challenge our proration method or new Treasury Regulations were issued requiring a change, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders.

 

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A unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of those common units. If so, the unitholder would no longer be treated for United States federal income tax purposes as a partner with respect to those common units during the period of the loan and may recognize gain or loss from the disposition.

Because a unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of the loaned common units, he may no longer be treated for United States federal income tax purposes as a partner with respect to those common units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss or deduction with respect to those common units may not be reportable by the unitholder and any cash distributions received by the common unitholder as to those common units could be fully taxable as ordinary income. Unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller are advised to consult a tax advisor to discuss whether it is advisable to modify any applicable brokerage account agreements to prohibit their brokers from loaning their common units.

The sale or exchange of 50% or more of our capital and profits interests during any 12-month period will result in the termination of the Partnership for United States federal income tax purposes.

We will be considered to have technically terminated the Partnership for United States federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a 12-month period. For purposes of determining whether the 50% threshold has been met, multiple sales of the same common unit will be counted only once. While we would continue our existence as a Delaware limited partnership, our technical termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns (and our unitholders could receive two Schedules K-1 if relief was not available, as described below) for one fiscal year and could result in a significant deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may also result in more than 12 months of our taxable income or loss being includable in his taxable income for the year of termination. A technical termination currently would not affect our classification as a partnership for United States federal income tax purposes, but instead, we would be treated as a new partnership for such tax purposes. If treated as a new partnership, we must make new tax elections, including a new election under Section 754 of the Internal Revenue Code, and could be subject to penalties if we are unable to determine that a technical termination occurred. The IRS has announced a publicly traded limited partnership relief procedure whereby a publicly traded limited partnership that has technically terminated may request special relief that, if granted, would, among other things, permit the Partnership to provide only a single Schedule K-1 to unitholders for the tax year notwithstanding two partnership tax years.

Unitholders will likely be subject to state and local taxes and return filing requirements in jurisdictions where they do not live as a result of investing in our common units.

In addition to United States federal income taxes, unitholders will likely be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we do business or control property now or in the future, even if they do not live in any of those jurisdictions. Unitholders will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, unitholders may be subject to penalties for failure to comply with those requirements. We currently own assets and conduct business in Illinois and Texas, and Illinois currently imposes a personal income tax on individuals. As we expand our business, we may own or control assets or conduct business in additional states that impose a personal income tax. It is the responsibility of each unitholder to file all United States federal, state, local and non-United States tax returns.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not Applicable.

ITEM 2. PROPERTIES

The information required to be disclosed in this Item 2 is incorporated herein by reference to “Part I—Item 1. Business—Properties.”

ITEM 3. LEGAL PROCEEDINGS

We are party to litigation from time to time in the normal course of business. We maintain insurance to cover certain actions and believe that resolution of our current litigation matters will not have a material adverse effect on us.

 

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We are negotiating a settlement agreement with Region 6 of the Environmental Protection Agency relating to an ammonia release that occurred at our Pasadena Facility on April 20, 2014. We estimate the amount of the penalty required by the settlement agreement to be approximately $0.1 million.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON UNITS, RELATED UNITHOLDER MATTERS AND ISSUER PURCHASES OF COMMON UNITS

Our common units are traded on the New York Stock Exchange, or the NYSE, under the symbol “RNF.” The following table sets forth the range of high and low closing prices for our common units as reported by the NYSE for each quarterly period during the years ended December 31, 2014 and 2013:

 

Year Ended December 31, 2014

   High      Low  

First Quarter, ended March 31, 2014

   $ 21.10       $ 17.30   

Second Quarter, ended June 30, 2014

   $ 19.07       $ 15.42   

Third Quarter, ended September 30, 2014

   $ 16.79       $ 12.39   

Fourth Quarter, ended December 31, 2014

   $ 12.88       $ 8.97   

Year Ended December 31, 2013

   High      Low  

First Quarter, ended March 31, 2013

   $ 48.40       $ 33.20   

Second Quarter, ended June 30, 2013

   $ 37.00       $ 27.85   

Third Quarter, ended September 30, 2013

   $ 31.77       $ 24.52   

Fourth Quarter, ended December 31, 2013

   $ 28.91       $ 17.10   

The number of unitholders of record as of February 27, 2015 was 51. Based upon the securities position listings maintained for our common units by registered clearing agencies, we estimate the number of beneficial owners is not less than 12,200.

Our policy is to distribute to our unitholders all of the cash available for distribution that we generate each quarter, subject to a determination by the board of directors of our general partner that our projected liquidity is adequate to provide for our forecasted operating and working capital needs. Cash available for distribution for each quarter will be determined by the board of directors of our general partner following the end of each quarter. We expect that cash available for distribution for each quarter will generally be calculated as the cash we generate during the quarter, less cash needed for maintenance capital expenditures not funded by capital proceeds, debt service and other contractual obligations, and any increases in cash reserves for future operating or capital needs that the board of directors of our general partner deems necessary or appropriate. Increases or decreases in such reserves may be determined at any time by the board of directors of our general partner as it considers, among other things, the cash flows or cash needs expected in approaching periods. We do not intend to maintain excess distribution coverage for the purpose of maintaining stability or growth in our quarterly distribution, nor do we intend to incur debt to pay quarterly distributions. We have no legal obligation to pay distributions. Distributions are not required by our partnership agreement and our distribution policy is subject to change at any time at the discretion of the board of directors of the general partner. Any distributions made by us to our unitholders will be done on a pro rata basis. Distributions will be paid on or about 60 days after the end of each quarter.

The Notes and the GE Credit Agreement provide that dividends and distributions from us and our operating companies are permitted so long as no default or event of default has occurred, exists or will result therefrom and we have satisfied certain other conditions as described under “Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Notes Offering” and “Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—GE Credit Agreement.”

 

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The following is a summary of cash distributions paid to common unitholders and holders of phantom units during the years ended December 31, 2014 and 2013 for the respective quarters to which the distributions relate:

 

     December 31,
2013
     March 31,
2014
     June 30,
2014
     September 30,
2014
     Total Cash
Distributions
Paid in 2014
 
     (in thousands, except for per unit amounts)  

Distribution to common unitholders — affiliates

   $ 1,162       $ 1,861       $ 3,022       $ 1,163       $ 7,208   

Distribution to common unitholders — non-affiliates

     792         1,266         2,060         789         4,907   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total amount paid

$ 1,954    $ 3,127    $ 5,082    $ 1,952    $ 12,115   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Per common unit

$ 0.05    $ 0.08    $ 0.13    $ 0.05    $ 0.31   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Common and phantom units outstanding

  39,081      39,081      39,098      39,030   
  

 

 

    

 

 

    

 

 

    

 

 

    
     December 31,
2012
     March 31,
2013
     June 30,
2013
     September 30,
2013
     Total Cash
Distributions
Paid in 2013
 
     (in thousands, except for per unit amounts)  

Distribution to common unitholders — affiliates

   $ 17,437       $ 11,626       $ 19,762       $ 6,277       $ 55,102   

Distribution to common unitholders — non-affiliates

     11,809         7,873         13,393         4,254         37,329   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total amount paid

$ 29,246    $ 19,499    $ 33,155    $ 10,531    $ 92,431   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Per common unit

$ 0.75    $ 0.50    $ 0.85    $ 0.27    $ 2.37   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Common and phantom units outstanding

  38,996      38,995      39,004      39,003   
  

 

 

    

 

 

    

 

 

    

 

 

    

On February 27, 2015, we made a cash distribution to our common unitholders and payments to holders of phantom units for the period October 1, 2014 through and including December 31, 2014 of $0.30 per unit, or $11.7 million in the aggregate.

Equity Compensation Plan Information

See “Part III—Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Unitholder Matters” for information regarding securities authorized for issuance under equity compensation plans.

Purchases of Equity Securities by the Issuer

We did not repurchase any of our common units during the year ended December 31, 2014, and we do not have any announced or existing plans to repurchase any of our common units.

 

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ITEM 6. SELECTED FINANCIAL DATA

During 2012, the board of directors of our general partner approved a change in our fiscal year end from September 30 to December 31. The following tables include selected summary financial data for the years ended December 31, 2014, 2013, 2012 and 2011, the three months ended December 31, 2011 and 2010 and each of the two fiscal years ended September 30, 2011 and 2010. The statement of operations data for the calendar year ended December 31, 2011 was derived by deducting the statement of operations data for the three months ended December 31, 2010 from the statement of operations data for the fiscal year ended September 30, 2011 and then adding the statement of operations data from the three months ended December 31, 2011. The statements of operations data for calendar year ended December 31, 2011 and the three months ended December 31, 2010, while not required, are presented for comparison purposes.

The operations of the Pasadena Facility are included effective November 1, 2012, the date of the closing of the Agrifos Acquisition. The data below should be read in conjunction with “Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Part II—Item 8. Financial Statements and Supplementary Data.”

 

     Calendar Years Ended
December 31,
    Three Months Ended
December 31,
    Fiscal Years Ended
September 30,
 
     2014     2013     2012     2011     2011     2010     2011     2010  
                       (unaudited)           (unaudited)              
     (in thousands, except per unit data, product pricing, $ per MMBtu and on-stream factors)  

STATEMENTS OF OPERATIONS DATA

                

Revenues

   $ 334,612      $ 311,375      $ 261,635      $ 199,909      $ 63,014      $ 42,962      $ 179,857      $ 131,396   

Cost of sales

   $ 274,135      $ 240,021      $ 129,796      $ 113,911      $ 37,460      $ 26,835      $ 103,286      $ 106,020   

Gross profit

   $ 60,477      $ 71,354      $ 131,839      $ 85,998      $ 25,554      $ 16,127      $ 76,571      $ 25,376   

Operating income

   $ 13,213      $ 19,157      $ 111,563      $ 77,918      $ 22,648      $ 14,584      $ 69,854      $ 20,389   

Other expenses, net

   $ (14,257   $ (15,185   $ (4,257   $ (32,218   $ (12,193   $ (7,488   $ (27,513   $ (12,036

Income (loss) before income taxes

   $ (1,044   $ 3,972      $ 107,306      $ 45,700      $ 10,455      $ 7,096      $ 42,341      $ 8,353   

Income tax (benefit) expense

   $ 18      $ (96   $ 303      $ 14,643      $ —        $ 2,772      $ 17,415      $ 3,344   

Net income (loss)

   $ (1,062   $ 4,068      $ 107,003      $ 31,057      $ 10,455      $ 4,324      $ 24,926      $ 5,009   

Net income subsequent to initial public offering (November 9, 2011 through December 31, 2011)

         $ 11,331      $ 11,331         

Net income (loss) per common unit—Basic and Diluted

   $ (0.03   $ 0.10      $ 2.78      $ 0.30      $ 0.30         

Weighted-average units used to compute net income (loss) per common unit:

                

Basic

     38,898        38,850        38,350        38,250        38,250         

Diluted

     38,898        38,945        38,352        38,255        38,255         

FINANCIAL AND OTHER DATA

                

Net cash flow provided by (used in):

                

Operating activities

   $ 64,879      $ 44,458      $ 132,546      $ 53,973      $ (5,979   $ 23,717      $ 83,668      $ 20,144   

Investing activities

   $ (72,560   $ (90,540   $ (186,825   $ (26,740   $ (11,566   $ (2,212   $ (17,386   $ (11,583

Financing activities

   $ 1,649      $ 24,343      $ 65,242      $ (19,018   $ 11,009      $ (19,818   $ (49,844   $ (10,288

Adjusted EBITDA(1)

   $ 64,677      $ 66,498      $ 128,154      $ 88,624      $ 25,935      $ 17,189      $ 79,878      $ 30,967   

Cash available for distribution per unit(1)

   $ 0.56      $ 1.67      $ 3.30      $ 0.53      $ 0.53         

KEY OPERATING DATA

                

Products sold (tons):

                

Ammonia(2)

     153        103        149        135        55        44        125        153   

UAN(2)

     267        269        291        301        65        79        315        294   

Ammonium sulfate(3)

     572        428        115             

Products pricing (dollars per ton):

                

Ammonia(2)

   $ 549      $ 650      $ 669      $ 652      $ 684      $ 512      $ 588      $ 377   

UAN(2)

   $ 280      $ 295      $ 326      $ 297      $ 307      $ 193      $ 269      $ 180   

Ammonium sulfate(3)

   $ 203      $ 251      $ 300             

Production (tons):

                

Ammonia(2)

     324        244        293        261        63        75        273        267   

UAN(2)

     269        262        301        294        68        86        312        287   

Ammonium sulfate(3)

     522        465        88             

Natural gas used in production(2):

                

Volume (MMBtu)

     11,487        8,942        10,644        9,789        2,299        2,813        10,303        9,923   

Pricing ($ per MMBtu)

   $ 4.98      $ 4.18      $ 3.55      $ 4.74      $ 4.71      $ 4.82      $ 4.76      $ 4.95   

Natural gas in cost of sales (2):

                

Volume (MMBtu)

     11,335        10,085        11,166        10,893        3,414        3,056        10,275        11,757   

Pricing ($ per MMBtu)

   $ 5.00      $ 4.16      $ 3.59      $ 4.76      $ 4.75      $ 4.38      $ 4.66      $ 4.79   

On-stream factors(4):

                

Ammonia(2)

     95.6     83.6     95.4     92.3     83.7     100.0     96.4     91.8

UAN(2)

     95.3     84.1     95.1     92.6     84.8     100.0     96.4     92.9

Ammonium sulfate(3) (5)

     82.7     76.2     88.0          

 

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     As of December 31,     As of September 30,  
     2014      2013      2012      2011      2010     2011     2010  
                                 (unaudited)              
     (in thousands)  

BALANCE SHEET DATA

                  

Cash

   $ 28,028       $ 34,060       $ 55,799       $ 44,836       $ 36,621      $ 51,372      $ 34,934   

Working capital

   $ 14,499       $ 21,188       $ 23,218       $ 31,645       $ (6,350   $ (32,270   $ 22,565   

Construction in progress

   $ 47,758       $ 33,531       $ 61,147       $ 7,062       $ 4,553      $ 20,318      $ 2,474   

Total assets

   $ 414,316       $ 406,344       $ 376,645       $ 130,443       $ 114,052      $ 152,408      $ 108,837   

Debt

   $ 335,000       $ 320,000       $ 193,290       $ —         $ 91,779      $ 146,250      $ 60,875   

Total long-term liabilities

   $ 342,147       $ 324,642       $ 192,961       $ 277       $ 68,446      $ 114,981      $ 54,549   

Total partners’ capital / stockholder’s equity (deficit)

   $ 8,891       $ 23,125       $ 109,404       $ 99,191       $ (22,843   $ (76,133   $ 20,334   

 

(1) Adjusted EBITDA is defined as net income (loss) plus interest expense and other financing costs, loss on debt extinguishment, income tax (benefit) expense, depreciation and amortization, Pasadena goodwill impairment and fair value adjustment to earn-out consideration, less the loss on interest rate swaps. We calculate cash available for distribution as used in this table as Adjusted EBITDA plus non-cash compensation expense and distribution of cash reserves, less the sum of maintenance capital expenditures not funded by financing proceeds, net interest expense and other debt service and cash reserved for working capital purposes. Adjusted EBITDA and cash available for distribution are used as supplemental financial measures by management and by external users of our consolidated financial statements, such as investors and commercial banks, to assess:

 

    the financial performance of our assets without regard to financing methods, capital structure or historical cost basis; and

 

    our operating performance and return on invested capital compared to those of other publicly traded limited partnerships and other public companies, without regard to financing methods and capital structure.

Adjusted EBITDA and cash available for distribution should not be considered alternatives to net income, operating income, net cash provided by operating activities or any other measure of financial performance or liquidity presented in accordance with generally accepted accounting principles in the United States of America, or GAAP. Adjusted EBITDA and cash available for distribution may have material limitations as performance measures because they exclude items that are necessary elements of our costs and operations. In addition, Adjusted EBITDA and cash available for distribution presented by other companies may not be comparable to our presentation, since each company may define these terms differently.

 

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The table below reconciles Adjusted EBITDA, which is a non-GAAP financial measure, to net income (loss) for the periods presented.

 

     For the Years Ended
December 31,
    Three Months Ended
December 31,
     Fiscal Years Ended
September 30,
 
     2014     2013     2012     2011     2011     2010      2011      2010  
     (unaudited, in thousands)  

Net income (loss)

   $ (1,062   $ 4,068      $ 107,003      $ 31,057      $ 10,455      $ 4,324       $ 24,926       $ 5,009   

Add:

              

Net interest expense

     19,057        14,098        1,424        12,735        1,933        2,899         13,701         9,802   

Pasadena goodwill impairment

     27,202        30,029        —          —          —          —           —           —     

Agrifos settlement

     (5,632     —          —          —          —          —           —           —     

Loss on debt extinguishment

     635        6,001        2,114        19,486        10,263        4,593         13,816         2,268   

Gain on fair value adjustment to earn-out consideration

     —          (4,920     —          —          —          —           —           —     

Loss on interest rate swap

     —          7        951        —          —          —           —           —     

Income tax (benefit) expense

     18        (96     303        14,643        —          2,772         17,415         3,344   

Depreciation and amortization

     24,257        17,312        12,460        10,706        3,287        2,601         10,020         10,544   

Acquisition costs

     —          —          4,131        —          —          —           —           —     

Other

     202        (1     (232     (3     (3     —           —           —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

$ 64,677    $ 66,498    $ 128,154    $ 88,624    $ 25,935    $ 17,189    $ 79,878    $ 30,967   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

The table below reconciles cash available for distribution to Adjusted EBITDA, both of which are non-GAAP financial measures, for the periods presented.

 

     For the Years Ended
December 31,
    Three Months Ended
December 31,
 
     2014     2013     2012     2011     2014(a)     2011  

Adjusted EBITDA

   $ 64,677      $ 66,498      $ 128,154      $ 88,624      $ 13,422      $ 25,935   

Less: Activity prior to initial public offering

       —          —          (64,489     —          (1,800

Plus: Non-cash compensation expense

     1,283        1,460        2,827        63        124        63   

Less: Maintenance capital expenditures (b)

     (17,188     (10,984     (8,500     (266     (3,584     (266

Plus: Portion of maintenance capital expenditures funded by offering proceeds

     —          —          —          1,765        —          1,765   

Less: Net interest expense

     (19,057     (17,972     (1,446     (57     (4,620     (57

Less: Cash reserved for working capital

     (7,929     —          —          (5,391     —          (5,391

Plus: Distribution of cash reserves for working capital

     —          25,871        6,110        —          6,332        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash available for distribution

$ 21,786    $ 64,873    $ 127,145    $ 20,249    $ 11,674    $ 20,249   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash available for distribution per unit

$ 0.56    $ 1.67    $ 3.30    $ 0.53    $ 0.30    $ 0.53   

Common units outstanding(c)

  38,868      38,856      38,529      38,250      38,913      38,250   

 

(a) The amounts in this column are also included in the amounts for the calendar year ended December 31, 2014. This column provides information relating to the cash distribution paid on February 27, 2015.
(b) Excludes maintenance capital expenditures at our Pasadena Facility funded by debt in the amount of $14.5 million for the year ended December 31, 2014 and $7.3 million for the year ended December 31, 2013.
(c) Common units outstanding for each period represents average common units for distributions paid.

 

(2) Key operating data for the East Dubuque Facility.
(3) Key operating data for the Pasadena Facility.

 

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(4) The respective on-stream factors for the ammonia, UAN and ammonium sulfate plant equal the total days the applicable plant operated in any given period, divided by the total days in that period.
(5) The ammonium sulfate plant is typically out of service for 12 to 14 hours per week for regular maintenance.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition, results of operations and cash flows in conjunction with the consolidated financial statements and related notes included elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including, but not limited to, those set forth under “Part I—Item 1A. Risk Factors,” “Forward-Looking Statements” and elsewhere in this report.

OVERVIEW

We are a Delaware master limited partnership formed in July 2011 by Rentech to own, operate and expand our fertilizer business. We own and operate two fertilizer facilities: our East Dubuque Facility and our Pasadena Facility. Our East Dubuque Facility is located in East Dubuque, Illinois and produces primarily ammonia and urea ammonium nitrate solution, or UAN, using natural gas as the facility’s primary feedstock. Our Pasadena Facility is located in Pasadena, Texas, and produces ammonium sulfate, ammonium thiosulfate and sulfuric acid, using ammonia and sulfur as the facility’s primary feedstock. The facility also produces electricity for sale.

Our East Dubuque Facility is located in the center of the Mid Corn Belt, the largest market in the United States for direct application of nitrogen fertilizer products. The Mid Corn Belt includes the States of Illinois, Indiana, Iowa, Missouri, Nebraska and Ohio. The States of Illinois and Iowa have been the top two corn producing states in the United States for the last 20 years according to the USDA. We consider the market for our East Dubuque Facility to be comprised of the States of Illinois, Iowa and Wisconsin.

Our East Dubuque Facility’s core market consists of the area located within an estimated 200-mile radius of the facility. In most instances, our customers take delivery of our nitrogen products at our East Dubuque Facility and then arrange and pay to transport them to their final destinations by truck. To the extent our products are picked up at our East Dubuque Facility, we do not incur any shipping costs, in contrast to nitrogen fertilizer producers located outside of the facility’s core market that must incur transportation and storage costs to transport their products to, and sell their products in, our market. In addition, our East Dubuque Facility does not maintain a fleet of trucks and, unlike some of our major competitors, our East Dubuque Facility does not maintain a fleet of rail cars because the facility’s customers generally are located close to the facility and prefer to be responsible for transportation. Having no need to maintain a fleet of trucks or rail cars lowers our East Dubuque Facility’s fixed costs. The combination of our East Dubuque Facility’s proximity to its customers and our storage capacity at the facility also allows for better timing of the pick-up and application of the facility’s products, as nitrogen fertilizer product shipments from more distant locations have a greater risk of missing the short periods of favorable weather conditions during which the application of nitrogen fertilizer may occur.

Our Pasadena Facility is the largest producer of synthetic ammonium sulfate and the third largest producer of ammonium sulfate in North America. We believe that our ammonium sulfate has several characteristics that distinguish it from competing products. In general, the ammonium sulfate that is available for sale in our industry is a byproduct of other processes and does not have certain characteristics valued by customers. Our ammonium sulfate is sized to the specifications preferred by customers and may more easily be blended with other fertilizer products. We also believe that our ammonium sulfate has a longer shelf-life, is more stable and is more easily transported and stored than many competing products.

Our Pasadena Facility is located on the Houston Ship Channel with access to transportation at favorable prices. The facility has two deep-water docks and access to the Mississippi waterway system and key international waterways. The facility is also connected to key domestic railways, which permit the efficient, cost-effective distribution of its products west of the Mississippi River. Our Pasadena Facility’s distributors purchase our products at our facility and then arrange and pay to transport them to their final destinations by truck, rail car or vessel. Our Pasadena Facility’s products are sold primarily through distributors to customers in the United States, and are applied to many types of crops including soybeans, potatoes, cotton, canola, alfalfa, corn and wheat.

While we experience seasonality in our domestic sales of ammonium sulfate and ammonium thiosulfate, our sales internationally offset a portion of this seasonal impact in our total revenues. Further, we adjust the sales prices of these products seasonally in order to facilitate distribution of the products throughout the year. We operate the ammonium sulfate plant at our Pasadena Facility throughout the year to the extent that there is available on-site storage capacity for this product. We have 60,000 tons of storage capacity for ammonium sulfate at the facility, and an arrangement with IOC that permits us to store approximately 60,000 tons of ammonium sulfate at IOC-controlled terminals. We manage the storage capacity by distributing the product through IOC to customers in both domestic and offshore markets throughout the year. If storage capacity becomes insufficient, we would be forced to cease production of the product until such capacity becomes available. Our Pasadena Facility’s fertilizer products are delivered to IOC and sold at prevailing market prices for immediate delivery.

 

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Our Pasadena Facility purchases ammonia as a feedstock at contractual prices based on the monthly Tampa Index market, while our East Dubuque Facility sells ammonia at prevailing prices in the Mid Corn Belt region. Ammonia prices are typically significantly higher in the Mid Corn Belt than in Tampa.

Several negative factors affected our operating results in 2014. Sales volumes were lower than we had expected due to both unplanned downtime at the East Dubuque Facility and a decision to reduce output and sales from our Pasadena Facility in order to improve the profitability of that facility. We also wrote down all of the remaining goodwill ($27.2 million) at our Pasadena Facility during the year, reflecting the continued outlook for profits to be lower than we had foreseen at the time of the Agrifos Acquisition. For further information concerning our potential financing needs and related risks, see “Part I—Item 1. Business” and “Part I— Item 1A. Risk Factors.”

Factors Affecting Comparability of Financial Information

Our historical results of operations for the periods presented may not be comparable with our results of operations for subsequent periods for the reasons discussed below.

Agrifos Acquisition

The Pasadena Facility’s operations are included in our historical operating results from the closing date of the Agrifos Acquisition, which was November 1, 2012. Our Pasadena Facility produces three products that we did not produce or sell before the Agrifos Acquisition: ammonium sulfate, ammonium thiosulfate and sulfuric acid. The Agrifos Acquisition also broadened the geographic area into which our products are sold. Upon the closing of the acquisition (i) general and administrative expenses as well as sales-related expenses increased due to the addition of RNPLLC’s operations, (ii) depreciation and amortization expenses have increased due to the increase in fixed and intangible assets, which were recorded at fair value on the date of the Agrifos Acquisition, and (iii) interest expense increased due to the debt incurred to finance a significant portion of the purchase price for the Agrifos Acquisition. As a result, our results of operations for the periods prior to and after the closing date of the Agrifos Acquisition may not be comparable.

Expansion Projects and Other Significant Capital Projects

As discussed in “Part I—Item 1. Business—Our East Dubuque Facility—Expansion Projects and Other Significant Capital Projects” and “Part I—Item 1. Business—Our Pasadena Facility —Expansion Projects and Other Significant Capital Projects,” we have commenced additional projects and are evaluating other potential projects to expand the production capabilities and product offerings at our facilities. We expect to incur significant costs and expenses developing and building such projects. Our depreciation expense has increased and we expect our depreciation expense to increase further as we place additional assets into service. Consequently, our operating results may not be comparable for periods before, during and after the construction of any expansion project or other significant capital project.

Restructuring of Pasadena’s Operations

In late 2014, we restructured operations at our Pasadena Facility. As part of the restructuring, our Pasadena Facility reduced expected annual production of ammonium sulfate by approximately 25 percent, to 500,000 tons. We intend to sell 70 percent of the 500,000 tons in the domestic market and the remaining tons in New Zealand and Australia, which are historically the international markets with the highest net prices for ammonium sulfate. Our sales plan reduces historically low-margin sales to Brazil, other than modest amounts expected during peak seasons when higher margins may be achievable. The restructuring plan provides the flexibility to increase ammonium sulfate production above the 500,000 ton rate for limited periods, if needed. The restructuring plan also included a reduction of the number of contractors and employees at the Pasadena Facility, which reduced the full-time equivalent workforce by approximately 20 percent. Severance and other one-time employee-related expenses of $0.2 million were recorded for the year ended December 31, 2014 in connection with these reductions in the workforce.

We expect the restructuring to reduce operating and selling, general and administrative expenses and annual maintenance capital expenditures. This should enable our Pasadena Facility’s operations, including the benefits from our power generation project, to generate positive EBITDA in 2015, based on our current outlook for input costs and prices of ammonium sulfate and other products. We cannot assure you that we will obtain these anticipated benefits from the restructuring. If we do not obtain the anticipated benefits, this could have a material adverse effect on our results of operations and financial condition.

 

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Key Industry Factors

Supply and Demand

Our earnings and cash flow from operations are significantly affected by nitrogen fertilizer product prices, the prices of the inputs to our production processes, and the timing of product deliveries as required by our customers. The price at which we ultimately sell our nitrogen fertilizer products depends on numerous factors, including the global and local supply and demand for nitrogen fertilizer products which, in turn, depends on, among other factors, world grain demand and prices, inventory and production levels, changes in world population, the cost and availability of natural gas, ammonia and sulfur in various regions of the world, the cost and availability of fertilizer transportation infrastructure, weather conditions, the availability of imports and the extent of government intervention in agriculture markets. Nitrogen fertilizer prices are also affected by local factors, including weather and soil conditions, local market conditions and the operating levels of competing facilities. Construction of new facilities or the expansion or upgrade of our competitors’ existing facilities, international political and economic developments and other factors are likely to continue to play an important role in nitrogen fertilizer industry economics. These factors can impact, among other things, the level of inventories in the market, resulting in price volatility and a reduction in product margins. In addition, demand for fertilizers is affected by the aggregate crop planting decisions and fertilizer application rate decisions of individual farmers. Individual farmers make planting decisions based largely on the prospective profitability of a harvest, while the specific varieties and amounts of fertilizer they apply depend on factors including crop prices, their current liquidity, soil conditions, weather patterns and the types of crops planted. Moreover, the industry typically experiences seasonal fluctuations in demand for nitrogen fertilizer products.

Our results for 2014 were adversely affected by escalating feedstock costs at our Pasadena Facility, higher exports of ammonium sulfate, which typically sells at a discount from products sold in the domestic market, and low-priced urea from China that put downward pressure on fertilizer prices. In addition, we incurred significant incremental maintenance costs due to unscheduled down time at both our East Dubuque and Pasadena facilities, which also decreased the amount of product available for sale. Escalating costs for ammonia and sulfur drove our Pasadena Facility’s production costs much higher than expected. Offshore ammonia prices surged higher during the second half of 2014, without a corresponding increase in nitrogen fertilizer prices that has historically occurred. The increase in ammonia prices was due to lower ammonia production caused by natural gas curtailments and political unrest in multiple areas of the globe. These conditions have improved with Black Sea ammonia shipments resuming along with increased ammonia production in Trinidad. Chinese urea exports rose throughout the year increasing by more than five million tons, as compared to 2013. Chinese ammonium sulfate exports also grew during the same period. These factors were the key reasons for the downward pressure on our fertilizer prices. Market conditions have improved during the first two months of 2015 for our Pasadena operations with Tampa ammonia prices declining. At the same time, ammonium sulfate prices remain firm along with lower levels of inventory available. Midwest ammonia prices have remained firm and stable during the dynamic swing in offshore pricing. The spread between Tampa and Midwest prices continues to widen. As of the date of this report, grain prices are lower than they have been in the past three years. Farmers may switch corn acres that generate low returns to other crops. Current corn planting estimates are slightly below the actual amounts for 2014. We do not anticipate that our East Dubuque Facility’s market will experience this decline. However, lower aggregate corn acres could reduce the total nitrogen consumed in North America, which could negatively impact our business. At this time, natural gas prices are very favorable, which is expected to positively impact our business.

Natural Gas Prices

Natural gas is the primary feedstock for the production of nitrogen fertilizers at our East Dubuque Facility. For the year ended December 31, 2014, natural gas accounted for 64% of the production costs for ammonia, 65% of ammonia production costs for the year ended December 31, 2013 and 64% of ammonia production costs for the year ended December 31, 2012. Over the last five years, United States natural gas reserves have increased significantly due to, among other factors, advances in extracting shale gas, which have reduced and stabilized natural gas prices, providing North America with a cost advantage over Europe. As a result, our competitive position and that of other North American nitrogen fertilizer producers have been positively impacted.

 

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We historically have purchased natural gas in the spot market, through the use of forward purchase contracts, or a combination of both. We historically have used forward purchase contracts to lock in pricing for a portion of our East Dubuque Facility’s natural gas requirements. These forward purchase contracts are generally either fixed-price or index-price, short-term in nature and for a fixed supply quantity. We are able to purchase natural gas at competitive prices due to our East Dubuque Facility’s connection to Nicor’s distribution system and its proximity to the Northern Natural Gas interstate pipeline system. Over the past several years, natural gas prices have experienced significant fluctuations, which has had an impact on our East Dubuque Facility’s cost of producing nitrogen fertilizer. The following table shows the amount we spent on natural gas in cost of sales and the average cost per MMBtu:

 

     For the Years Ended
December 31,
 
     2014      2013      2012  

Natural Gas in Cost of Sales:

        

Amount spent

   $ 56.7 million       $ 42.0 million       $ 39.9 million   

Pricing ($ per MMBtu)

   $ 5.00       $ 4.16       $ 3.59   

For more information on natural gas purchase commitments see “Part I—Item 1. Business—Our East Dubuque Facility—Raw Materials.”

Ammonia Prices

Ammonia, along with sulfuric acid, are the primary feedstocks for the production of ammonium sulfate at our Pasadena Facility. Ammonia accounts for 80% and sulfur accounts for 20% of the raw material composition of ammonium sulfate. Ammonia pricing is based on a published Tampa, Florida market index. The Tampa Index is commonly used in annual contracts for both the agricultural and industrial sectors, and is based on the most recent major industry transactions in the Tampa market. Pricing considerations for ammonia incorporate international supply-demand, ocean freight and production factors. Over the past several years, ammonia prices have experienced large fluctuations. During the year ended December 31, 2014, our Pasadena Facility spent $66.0 million on ammonia, $68.1 million on ammonia in the year ended December 31, 2013 and $74.8 million on ammonia in the year ended December 31, 2012. During the years ended December 31, 2014, 2013 and 2012, 90%, 90% and 75%, respectively, of the sulfuric acid used in our Pasadena Facility’s production of ammonium sulfate was produced at our Pasadena Facility.

Sulfur Prices

Sulfur is the primary feedstock for the production of sulfuric acid at our Pasadena Facility, accounting for 100% of the raw material composition of sulfuric acid. Our contracts with the major suppliers of sulfur generally have a term of one year. Once pricing for the first quarter of a year is negotiated, the price then fluctuates up or down each subsequent quarter based on changes to the Tampa Index that is set on a quarterly basis through negotiations between large industry producers and consumers. Over the past several years, sulfur prices have experienced significant fluctuations. Our Pasadena Facility spent $17.9 million on sulfur during the year ended December 31, 2014, $20.8 million for the year ended December 31, 2013 and $26.0 million for the year ended December 31, 2012.

Transportation Costs

Costs for transporting nitrogen fertilizer can be significant relative to its selling price. For example, ammonia is costly to transport because it is a toxic gas at ambient temperatures and therefore must be transported under refrigeration in specialized equipment. The United States imported an average of over 50% of its annual fertilizer needs between 1999 and 2009 according to the USDA. Therefore, nitrogen fertilizer prices in North America are influenced by the cost to transport product from exporting countries, granting an advantage to local producers who ship over shorter distances.

The price of our East Dubuque Facility’s nitrogen fertilizer products is impacted by our transportation cost advantage over out-of-region competitors serving our East Dubuque Facility’s core market. In most instances, our East Dubuque Facility’s customers purchase our nitrogen products at the facility and then arrange and pay to transport them to their final destinations by truck. To the extent our products are picked up at the facility, we do not incur any shipping costs, in contrast to nitrogen fertilizer producers outside of our East Dubuque Facility’s core market that must incur transportation and storage costs to transport their products to, and sell their products in, our market. Accordingly, we may offer our East Dubuque Facility’s nitrogen fertilizers at market prices that factor in the storage and transportation costs of out-of-region producers without having incurred such costs. In addition, we do not maintain a fleet of trucks and, unlike some of our major competitors, we do not maintain a fleet of rail cars, which lowers our fixed costs.

 

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Our Pasadena Facility is located on the Houston Ship Channel with access to transportation at favorable prices by barge, truck or rail. The facility has two deep-water docks and access to the Mississippi waterway system and international waterways. The docks at the facility are suitable for loading and unloading bulk or liquid barges with payloads of up to 35,000 tons. The facility is also connected to key domestic railways which permit the efficient, cost-effective distribution of its products west of the Mississippi River. Our location on the Houston Ship Channel allows our distributors or us to use low cost barge and vessel transport when selling products and purchasing feedstocks. Our Pasadena Facility’s distributors purchase our products at our facility and then arrange and pay to transport them to their final destinations by truck, rail car or vessel.

Key Operational Factors

Prepaid contracts

We enter into prepaid contracts committing our East Dubuque Facility’s customers to purchase the facility’s nitrogen fertilizer products at a later date. To a lesser extent, we also enter into prepaid contracts for our Pasadena Facility’s products. These customers pay a portion of the contract price for our products shortly after entering into such contracts and the remaining balance of the contract price prior to picking up or delivery of the products. We recognize revenue when products are picked-up or delivered and the customer takes title. The cash received from product prepayments increases our operating cash flow in the quarter in which the cash is received, but may effectively reduce our operating cash flow in a subsequent quarter if the cash was received in a quarter prior to the one in which the revenue is recorded. Our policy is to purchase under fixed-price forward contracts approximately enough natural gas to manufacture the products that have been sold by our East Dubuque Facility under prepaid contracts for later delivery, effectively fixing most of the gross margin on pre-sold product. Our earnings and operating cash flow in future periods may be affected by the degree to which we continue this practice or seek to maximize our gross margins by more opportunistically timing product sales and natural gas purchases.

Facility Reliability

Consistent, safe and reliable operations at our facilities are critical to our financial performance and results of operations. Unplanned shutdowns of our facilities may result in lost margin opportunity, increased maintenance expense, a temporary increase in working capital investment and reduced inventory available for sale. The financial impact of planned shutdowns, including facility turnarounds, is mitigated through a diligent planning process that takes into account the availability of resources to perform the needed maintenance, feedstock logistics and other factors. Our facilities generally undergo a facility turnaround every two years. Turnarounds at our East Dubuque Facility typically last 18 to 25 days and cost approximately $4.0 to $6.0 million per turnaround, and turnarounds at our Pasadena Facility generally last between 14 and 25 days and cost approximately $2.0 to $4.0 million per turnaround. These costs are expensed as incurred. Our East Dubuque Facility underwent a turnaround in the fourth quarter of 2013 at a cost of $7.9 million so that we could complete the ammonia production and storage capacity project at the East Dubuque Facility. This turnaround lasted longer than expected, which resulted in higher turnaround expenses than expected. Our Pasadena Facility underwent a turnaround in the third quarter of 2014 at a cost of $2.1 million plus unanticipated maintenance expenses of $1.3 million. In December 2013, the ammonium sulfate plant at the Pasadena Facility underwent a turnaround in order to complete the ammonium sulfate debottlenecking and production capacity project at a cost of $1.7 million. Except in cases in which a turnaround may be needed to complete expansion or other projects (as was the case in 2014 and 2013), we intend to alternate the year in which a turnaround occurs at each facility, so that both facilities do not experience a turnaround in the same year.

In many cases, we also perform significant maintenance capital projects at our facilities during a turnaround to minimize disruption to our operations. These capital projects are capitalized as property, plant and equipment rather than expensed as turnaround costs. See “—Liquidity and Capital Resources—Capital Expenditures” for more information related to maintenance capital expenditure at our East Dubuque Facility and at our Pasadena Facility.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Preparing our consolidated financial statements in conformity with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. Actual results may differ based on the accuracy of the information utilized and subsequent events. Our accounting policies are described in the notes to our audited consolidated financial statements included elsewhere in this report. Our critical accounting policies, estimates and assumptions could materially affect the amounts recorded in our consolidated financial statements. The most significant estimates and assumptions relate to: revenue recognition, inventories, valuation of long-lived assets and intangible assets, recoverability of goodwill, accounting for major maintenance and the acquisition method of accounting.

Revenue Recognition. We recognize revenue when the following elements are substantially satisfied: when the customer takes ownership from our facilities or storage locations and assumes risk of loss; there are no uncertainties regarding customer acceptance; collection of the related receivable is probable; there is persuasive evidence that a sale arrangement exists and the sales price is fixed or determinable. Management assesses the business environment, the customer’s financial condition, historical collection experience, accounts receivable aging and customer disputes to determine whether collectibility is reasonably assured. If collectibility is not considered reasonably assured at the time of sale, we do not recognize revenue until collection occurs.

 

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Certain product sales occur under prepaid contracts which require payment in advance of delivery. We record a liability for deferred revenue in the amount of, and upon receipt of, cash in advance of shipment. We recognize revenue related to prepaid contracts and relieve the liability for deferred revenue when customers take ownership of products. A significant portion of the revenue recognized during any period may be related to prepaid contracts, for which cash may have been collected during an earlier period, with the result being that a significant portion of revenue recognized during a period may not generate cash receipts during that period.

Natural gas, although not typically purchased for the purpose of resale, is occasionally sold under certain circumstances. Natural gas is sold when purchase commitments are in excess of production requirements or storage capacities, or when the margin from selling natural gas significantly exceeds the margin from producing additional ammonia, in which case the sales price is recorded in revenues and the related cost is recorded in cost of sales.

Inventories. Our inventory is stated at the lower of cost or estimated net realizable value. The cost of inventories is determined using the first-in first-out method. We perform an analysis of our inventory balances at least quarterly to determine if the carrying amount of inventories exceeds their net realizable value. The analysis of estimated net realizable value is based on customer orders, market trends and historical pricing. If the carrying amount exceeds the estimated net realizable value, the carrying amount is reduced to the estimated net realizable value. We allocate fixed production overhead costs to inventory based on the normal capacity of our production facilities.

Valuation of Long-Lived Assets and Finite-Lived Intangible Assets. We assess the realizable value of long-lived assets and finite-lived intangible assets for potential impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In assessing the recoverability of our assets, we make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. As applicable, we make assumptions regarding the useful lives of the assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets.

Recoverability of Goodwill. We recorded goodwill impairments in 2014 and 2013. We test goodwill for impairment annually, or more often if an event or change of circumstance indicates that an impairment may have occurred. The first step of the required impairment test consists of a comparison of the fair value of a reporting unit to its carrying value. The determination of fair value involves a high degree of judgment as there are significant assumptions underlying the valuation. If the fair value of a reporting unit is greater than its carrying value, then there is no indication of potential impairment and step two of the goodwill impairment test is not required. If an indication of potential impairment exists, then step two is required whereby the fair value of the reporting unit is allocated to all of its assets and liabilities excluding goodwill, with the residual amount representing the fair value of goodwill. An impairment loss is measured as the amount by which the book value of the reporting unit’s goodwill exceeds the estimated fair value of goodwill.

Accounting for Major Maintenance. Expenditures for improving, replacing or adding to assets are capitalized. Expenditures for the acquisition, construction or development of new assets to maintain operating capacity, or to comply with environmental, health, safety or other regulations, are also capitalized. Costs of general maintenance and repairs are expensed. The East Dubuque Facility and Pasadena Facility require a planned maintenance turnaround every two years. Turnarounds at the East Dubuque Facility generally last between 18 and 25 days, and turnarounds at the Pasadena Facility generally last between 14 and 25 days. We intend to alternate the year in which a turnaround occurs at each facility, so that both facilities do not experience a turnaround in the same year. As a result, the facilities incur turnaround expenses which represent the cost of shutting down the plants for planned maintenance. Such costs are expensed as incurred. In many cases, the East Dubuque Facility and the Pasadena Facility also perform significant maintenance capital projects at the plants during a turnaround to minimize disruption to operations. Such projects are capitalized as property, plant and equipment rather than expensed as turnaround costs.

Examples of maintenance capital projects include the installation of additional components and projects that increase an asset’s useful life, increase the quantity or quality of the product manufactured or create efficiencies in the production process. Major turnaround costs, which are expensed, include gas, electricity and other shutdown and startup costs, labor, contractor and materials costs used to complete non-capital activities such as opening, dismantling, inspecting and reassembling major vessels, testing pressure and safety devices, cleaning or hydro-jetting major exchangers, replacing gaskets, repacking valves, checking instrument calibration and performing mechanical integrity inspections, all of which are completed with the goal of improving reliability and likelihood for continuous operation until the next turnaround.

Acquisition Method of Accounting. We account for business combinations using the acquisition method of accounting, which requires, among other things, that assets acquired, liabilities assumed and potential earn-out consideration be recognized at their respective fair values as of the acquisition date. The earn-out consideration will be measured at each reporting date with changes in its fair value recognized in the consolidated statements of operations.

 

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Business Segments

We operate in two business segments, as described below. The Pasadena Facility’s operations are only included in our historical operating results from the closing date of the Agrifos Acquisition, which was November 1, 2012.

 

    East Dubuque – The operations of the East Dubuque Facility, which produces primarily ammonia and UAN.

 

    Pasadena – The operations of the Pasadena Facility, which produces primarily ammonium sulfate.

 

     For the Years Ended
December 31,
 
     2014      2013      2012  
     (in thousands)  

Revenues:

        

East Dubuque

   $ 196,379       $ 177,700       $ 224,205   

Pasadena

     138,233         133,675         37,430   
  

 

 

    

 

 

    

 

 

 

Total revenues

$ 334,612    $ 311,375    $ 261,635   
  

 

 

    

 

 

    

 

 

 

Gross profit (loss):

East Dubuque

$ 74,785    $ 80,883    $ 133,543   

Pasadena

  (14,308   (9,529   (1,704
  

 

 

    

 

 

    

 

 

 

Total gross profit

$ 60,477    $ 71,354    $ 131,839   
  

 

 

    

 

 

    

 

 

 

Operating income (loss)

East Dubuque

$ 69,888    $ 75,310    $ 125,984   

Pasadena

  (47,907   (48,208   (2,648
  

 

 

    

 

 

    

 

 

 

Total segment operating income

$ 21,981    $ 27,102    $ 123,336   
  

 

 

    

 

 

    

 

 

 

Net income (loss):

East Dubuque

$ 69,803    $ 75,244    $ 123,721   

Pasadena

  (47,925   (48,357   (2,648
  

 

 

    

 

 

    

 

 

 

Total segment net income

$ 21,878    $ 26,887    $ 121,073   
  

 

 

    

 

 

    

 

 

 

Reconciliation of segment net income to consolidated net income (loss):

Segment net income

$ 21,878    $ 26,887    $ 121,073   

Partnership and unallocated expenses recorded as selling, general and administrative expenses

  (8,768   (7,945   (11,773

Partnership and unallocated income (expenses) recorded as other income (expense)

  4,800      (1,081   232   

Unallocated interest expense and loss on interest rate swaps

  (18,972   (14,096   (2,226

Income tax benefit (expense)

  —        303      (303
  

 

 

    

 

 

    

 

 

 

Consolidated net income (loss)

$ (1,062 $ 4,068    $ 107,003   
  

 

 

    

 

 

    

 

 

 

Partnership and unallocated expenses represent costs that relate directly to us and our subsidiaries but are not allocated to a segment. Partnership and unallocated expenses recorded in selling, general and administrative expenses consist primarily of business development expenses for the Partnership; unit-based compensation expense for executives of the Partnership; services from Rentech for executive, legal, finance, accounting, human resources, and investor relations support in accordance with the services agreement between the Partnership and Rentech; audit and tax fees; legal fees; compensation for Partnership level personnel; certain insurance costs; and board of director expenses.

Partnership and unallocated expenses recorded as selling, general and administrative expenses for the year ended December 31, 2014 were $8.8 million, compared to $7.9 million for the same period in the prior year. The increase was primarily due to a one-time expense related to severance of $1.0 million, partially offset by a decrease in bonus expense of $0.5 million. Non-cash unit–based compensation expense, recorded in selling, general and administrative expenses, was $1.3 million for the year ended December 31, 2014, compared to $1.5 million for the same period in the prior year.

 

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Partnership and unallocated expenses recorded as selling, general and administrative expenses for the year ended December 31, 2013 were $7.9 million, compared to $11.8 million for the same period in the prior year. The decrease was primarily due to decreases in business development expenses of $3.5 million and unit-based compensation of $1.4 million, partially offset by increases in various professional services fees of $0.5 million and salaries of $0.5 million.

Partnership and unallocated income recorded as other income for the year ended December 31, 2014 was $4.8 million, compared to partnership and unallocated expense recorded as other expense of $1.1 million for the same period in the prior year. The primary reason for the change from expense to income was the Agrifos settlement of $5.6 million in October 2014. Under the Agrifos settlement, we reached an agreement to settle all existing and future indemnity claims we may have under the Membership Interest Purchase Agreement dated October 31, 2012, as amended, pursuant to the Agrifos Acquisition. The parties agreed to distribute $5.0 million of cash and 59,186 Partnership common units to us held in escrow accounts established at the closing of the acquisition from a portion of the initial purchase price to satisfy potential indemnity claims. The remaining $0.9 million of cash and 264,090 Partnership common units held in escrow was released to Agrifos Holdings Inc. We also had a loss on debt extinguishment for the year ended December 31, 2014 of $0.6 million. During the year ended December 31, 2013, we had a loss on debt extinguishment of $6.0 million partially offset by a fair value adjustment to earn-out consideration of $4.9 million.

Partnership and unallocated expense recorded as other expense for the year ended December 31, 2013 was $1.1 million, compared to partnership and unallocated income recorded as other income of $0.2 million for the year ended December 31, 2012. The increase in partnership and unallocated expenses recorded as other expense between the calendar years ended December 31, 2013 and 2012 was primarily due to loss on debt extinguishment of $6.0 million partially offset by a fair value adjustment to earn-out consideration of $4.9 million.

Unallocated interest expense for the years ended December 31, 2014 and 2013 represents primarily interest expense on the Notes, which were issued in April 2013.

East Dubuque

COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2014 AND 2013

Revenues

 

     For the Years Ended
December 31,
 
     2014      2013  
     (in thousands)  

Revenues:

     

Product shipments

   $ 189,778       $ 174,194   

Other

     6,601         3,506   
  

 

 

    

 

 

 

Total revenues

$ 196,379    $ 177,700   
  

 

 

    

 

 

 

 

     For the Year Ended
December 31, 2014
     For the Year Ended
December 31, 2013
 
     Tons      Revenue      Tons      Revenue  
     (in thousands)  

Revenues:

           

Ammonia

     153       $ 83,796         103       $ 66,796   

UAN

     267         74,666         269         79,377   

Urea (liquid and granular)

     55         24,920         43         20,455   

CO2

     81         2,593         71         2,416   

Nitric Acid

     11         3,803         14         5,150   

Other

     N/A         6,601         N/A         3,506   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  567    $ 196,379      500    $ 177,700   
  

 

 

    

 

 

    

 

 

    

 

 

 

We generate revenue primarily from the sale of nitrogen fertilizer products manufactured at our East Dubuque Facility. Our East Dubuque Facility produces ammonia, UAN, liquid and granular urea, which are nitrogen fertilizers that use natural gas as a feedstock. We also produce nitric acid and food-grade CO2. Nitrogen fertilizer products are used primarily in the production of corn. Revenues are seasonal based on the planting, growing, and harvesting cycles of customers who use nitrogen fertilizer.

 

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Revenues for the year ended December 31, 2014 were $196.4 million, compared to $177.7 million for the same period in the prior year. The increase was due to higher sales volumes for ammonia and urea and higher natural gas sales, partially offset by lower sales prices for ammonia, UAN and urea.

Ammonia production capacity increased 23% after we completed the ammonia expansion project in December 2013. This additional ammonia available for sale enabled higher ammonia deliveries during the year ended December 31, 2014. During the fourth quarter of 2013, production was interrupted due to a planned turnaround and a subsequent fire, which resulted in lower amounts of ammonia available for sale in 2013. Urea sales increased during 2014 due to higher sales of DEF and granular urea.

Average sales prices per ton for the year ended December 31, 2014 were 16% lower for ammonia and 5% lower for UAN, as compared to the year ended December 31, 2013. These two products comprised 81% of our East Dubuque Facility’s revenues for the year ended December 31, 2014 and 82% for the year ended December 31, 2013. The decreases in our sales prices for ammonia and UAN were consistent with the decline in global nitrogen fertilizer prices in the earlier portions of the respective years, partially offset by increases in the latter portions of the respective years. These decreases were caused by significantly higher levels of low-priced urea in the global market, particularly from China. Prices were also affected by additional nitrogen fertilizer production brought on line in North America over the last 12 months.

Other revenues consist primarily of natural gas sales. We occasionally sell natural gas when purchase commitments exceed production requirements or storage capacities, or when the margin from selling natural gas significantly exceeds the margin from producing additional ammonia. During the year ended December 31, 2014, we recorded $6.1 million in natural gas sales and $0.5 million in sales of nitrous oxide emission reduction credits. On rare occasions, we have also purchased natural gas with the specific intent of immediately reselling it when local market anomalies create low-risk opportunities for gain. During the first quarter of 2014, temporary operational problems with a natural gas pipeline in the Midwest caused a significant spike in the local price of natural gas. This created a unique opportunity to purchase natural gas from other locations at lower prices for the purpose of reselling it at significantly higher prices. We also sold natural gas originally purchased for production at a gross profit that exceeded the expected gross profits from additional production using that natural gas. During the first quarter of 2014, we sold, at an average price of $29.90 per MMBtu, 151,000 MMBtus of natural gas that cost an average of $9.42 per MMBtu. The total $4.5 million in natural gas sales in the first quarter resulted in a gross profit of $3.1 million, which was significantly higher than the profit we would likely have realized on the 2,900 tons of lost ammonia production. During the year ended December 31, 2013, we recorded $3.4 million in natural gas sales and $0.1 million in sales of nitrous oxide emission reduction credits.

Cost of Sales

 

     For the Years Ended
December 31,
 
     2014      2013  
     (in thousands)  

Total cost of sales

   $ 121,594       $ 96,817   
  

 

 

    

 

 

 

Cost of sales primarily consists of the cost of natural gas (East Dubuque’s primary feedstock), labor, depreciation and electricity. Cost of sales for the year ended December 31, 2014 was $121.6 million, compared to $96.8 million for the same period in the prior year. The increase in the cost of sales was primarily due to an increase in depreciation, the cost of natural gas and electricity. Increased natural gas costs were due to an increase in product sales volumes, additional natural gas purchased for resale and a loss on natural gas derivatives of $4.0 million. Natural gas comprised 47% and labor costs comprised 13% of cost of sales on product shipments for the year ended December 31, 2014. For the year ended December 31, 2013, natural gas was 43% and labor was 12% of cost of sales. Depreciation expense included in cost of sales was $15.7 million for the year ended December 31, 2014 and $9.0 million for the year ended December 31, 2013. The increase in depreciation expense was primarily due to the completion of the ammonia expansion project in late 2013. Increased electricity costs reflected higher rates and usage due in part to the new equipment installed as part of the ammonia expansion project. During the year ended December 31, 2014, we recorded an additional $0.9 million of expense reimbursements under an insurance claim filed for the fire, which occurred in 2013.

Gross Profit

 

     For the Years Ended
December 31,
 
     2014      2013  
     (in thousands)  

Total gross profit

   $ 74,785       $ 80,883   
  

 

 

    

 

 

 

 

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Gross profit was $74.8 million for the year ended December 31, 2014, compared to $80.9 million for the year ended December 31, 2013. Gross profit margin was 38% for the year ended December 31, 2014, compared to 46% for the year ended December 31, 2013. The decreases in gross profit and gross margin were primarily due to lower product pricing and increased costs of natural gas, depreciation and electricity.

Gross profit margin can vary significantly from period to period. Nitrogen fertilizer and natural gas are both commodities, the prices of which can vary significantly from period to period and do not always move in the same direction. In addition, certain fixed costs of operating our East Dubuque Facility are recorded in cost of sales. Their impact on gross profit and gross margins varies as product sales volumes vary seasonally.

During the fourth quarter of 2014, our East Dubuque Facility’s ammonia plant was shut down for seven days for unplanned maintenance. Also, during the third quarter of 2014, our East Dubuque Facility’s ammonia plant was shut down for ten days for unplanned maintenance. Gross profit was negatively impacted as the outages reduced the amount of product available for sale. Problems with the ammonia synthesis converter caused the shut-downs in both of the outage cases. The converter was damaged during a fire in 2013, then repaired and returned to service. The facility is currently operating near capacity, but it is possible that additional repairs will be needed before the converter is expected to be replaced at the end of 2016.

Operating Expenses

 

     For the Years Ended
December 31,
 
     2014      2013  
     (in thousands)  

Operating expenses:

     

Selling, general and administrative

   $ 4,165       $ 4,576   

Depreciation and amortization

     194         191   

Other

     537         806   
  

 

 

    

 

 

 

Total operating expenses

$ 4,896    $ 5,573   
  

 

 

    

 

 

 

Operating expenses were $4.9 million for the year ended December 31, 2014, compared to $5.6 million for the year ended December 31, 2013. These expenses were primarily comprised of selling, general and administrative expenses, depreciation expense and asset disposal costs.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 2014 were $4.2 million, compared to $4.6 million for the year ended December 31, 2013. This decrease was primarily due to decreases in various professional services fees of $0.3 million.

Depreciation and Amortization. Depreciation expense included in operating expense was $0.2 million for the years ended December 31, 2014 and 2013. The majority of depreciation expense incurred was a manufacturing cost and was distributed between cost of sales and finished goods inventory, based on production volumes and ending inventory levels. However, a portion of depreciation expense was associated with assets supporting general and administrative functions and was recorded in operating expense.

Other. Other expenses include loss on disposal of fixed assets, which was $0.5 million for the year ended December 31, 2014, compared to $0.8 million for the prior year.

Operating Income

 

     For the Years Ended
December 31,
 
     2014      2013  
     (in thousands)  

Total operating income

   $ 69,888       $ 75,310   
  

 

 

    

 

 

 

 

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Operating income was $69.9 million for the year ended December 31, 2014, compared to $75.3 million for the year ended December 31, 2013. The decrease was primarily due to lower product pricing, and increased costs of natural gas, depreciation and electricity.

COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2013 AND 2012

Revenues

 

     For the Years Ended
December 31,
 
     2013      2012  
     (in thousands)  

Revenues:

     

Product shipments

   $ 174,194       $ 222,936   

Other

     3,506         1,269   
  

 

 

    

 

 

 

Total revenues

$ 177,700    $ 224,205   
  

 

 

    

 

 

 

 

     For the Year Ended
December 31, 2013
     For the Year Ended
December 31, 2012
 
     Tons      Revenue      Tons      Revenue  
     (in thousands)  

Revenues:

           

Ammonia

     103       $ 66,796         149       $ 99,378   

UAN

     269         79,377         291         94,836   

Urea (liquid and granular)

     43         20,455         35         21,189   

CO2

     71         2,416         76         2,517   

Nitric Acid

     14         5,150         14         5,016   

Other

     N/A         3,506         N/A         1,269   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  500    $ 177,700      565    $ 224,205   
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues were $177.7 million for the year ended December 31, 2013 compared to $224.2 million for the year ended December 31, 2012. The decrease in revenue for the year ended December 31, 2013 compared to the year ended December 31, 2012 was primarily the result of a decrease in ammonia and UAN sales volumes and sales prices.

Average sales prices per ton for the year ended December 31, 2013 were 3% lower for ammonia and 10% lower for UAN, as compared to the year ended December 31, 2012. These two products comprised 82% of our East Dubuque Facility’s revenues for the year ended December 31, 2013 and 87% for the year ended December 31, 2012. The decrease in sales prices for UAN for the year ended December 31, 2013 as compared to 2012 was largely due to weather. The drought in the Midwestern region of the United States during the spring and summer of 2012 created expectations of poor corn yields and anticipated increases in acreage dedicated to corn in 2013; as a result, fertilizer prices remained high throughout 2012. Nitrogen fertilizer prices then declined significantly in the second half of 2013 as wet weather persisted throughout much of the country which severely limited the spring planting and application season.

During the fourth quarter of 2013, our East Dubuque Facility halted production due to a planned turnaround and a fire. For most of October and a portion of November, we underwent a turnaround, which lasted slightly longer than anticipated due to operating difficulties experienced while commissioning new equipment. Our East Dubuque Facility also operated at reduced rates following the turnaround after the discovery of the need for repairs to the foundation of one of its syngas compressors. At the end of November, we experienced a fire that began in the ammonia converter of the ammonia synthesis loop. As a result of the fire, the production of all products was halted in late November and for most of December. During the turnaround and the aftermath of the fire, we were able to continue shipments of our products from inventory. These fourth quarter events were the primary reason why ammonia and UAN sales volume decreased between the years ended December 31, 2013 and 2012.

 

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Other revenue consists primarily of sales of excess inventory of natural gas. Sales of natural gas for the year ended December 30, 2013 was $3.4 million, compared to $1.1 million for the year ended December 31, 2012.

Cost of Sales

 

     For the Years Ended
December 31,
 
     2013      2012  
     (in thousands)  

Total cost of sales

   $ 96,817       $ 90,662   
  

 

 

    

 

 

 

Cost of sales was $96.8 million for the year ended December 31, 2013 compared to $90.7 million for the year ended December 31, 2012. The increase in cost of sales was primarily due to turnaround expenses in 2013 of $7.9 million, higher market prices for natural gas which increased the cost of natural gas by $2.7 million, fixed operating costs while idle of $4.3 million, and the $1.0 million insurance deductible for the fire which occurred in late November 2013, all of which were partially offset by lower sales volumes. Turnaround expenses represent the cost of maintenance during turnarounds, which occur every two years. A facility turnaround at the East Dubuque Facility occurred in October and November of 2013. The East Dubuque Facility has fixed production costs that it incurs whether or not the facility is operating. These production costs are recorded directly to cost of sales when the facility is idle. We filed an insurance claim for $2.7 million related to damage caused by the fire, and incurred the $1.0 million deductible under our property insurance policy in 2013. We received payment of $1.7 million for the claim in 2014.

Natural gas costs comprised 43% of cost of sales for each of the years ended December 31, 2013 and December 31, 2012. Labor costs comprised 12% of cost of sales for the year ended December 31, 2013 compared to 14% of cost of sales for the year ended December 31, 2012. Depreciation expense included in cost of sales was $9.0 million, or 10% of cost of sales, for the year ended December 31, 2013, and $10.7 million, or 12% of cost of sales, for the year ended December 31, 2012.

Gross Profit

 

     For the Years Ended
December 31,
 
     2013      2012  
     (in thousands)  

Total gross profit

   $ 80,883       $ 133,543   
  

 

 

    

 

 

 

Gross profit was $80.9 million for the year ended December 31, 2013 compared to $133.5 million for the year ended December 31, 2012. Gross profit margin was 46% for the year ended December 31, 2013 as compared to 60% for the year ended December 31, 2012.

Gross profit margin can vary significantly from period to period due to changes in nitrogen fertilizer prices and natural gas costs, both of which are commodities. The prices of these commodities can vary significantly from period to period and do not always move in the same direction. In addition, there are certain fixed costs of operating our East Dubuque Facility that are recorded in cost of sales and whose impact on gross profit and gross margins varies as product sales volumes vary seasonally. The decrease in gross profit margin during the year ended December 31, 2013 was primarily due to a decrease in revenues and an increase in cost of sales as described above.

Operating Expenses

 

     For the Years Ended
December 31,
 
     2013      2012  
     (in thousands)  

Operating expenses:

     

Selling, general and administrative

   $ 4,576       $ 6,242   

Depreciation and amortization

     191         807   

Other

     806         510   
  

 

 

    

 

 

 

Total operating expenses

$ 5,573    $ 7,559   
  

 

 

    

 

 

 

 

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Operating expenses were $5.6 million for the year ended December 31, 2013 compared to $7.6 million for the year ended December 31, 2012. These expenses were primarily comprised of selling, general and administrative expenses and depreciation expense.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $4.6 million for the year ended December 31, 2013 compared to $6.2 million for the year ended December 31, 2012.

This decrease was primarily due to decreases in various professional services fees of $0.6 million, salaries of $0.4 million and debt related expenses of $0.4 million.

Depreciation and Amortization. Depreciation expense for the year ended December 31, 2013 was $0.2 million, compared to $0.8 million for the year ended December 31, 2012. This decrease was primarily due to the acceleration of depreciation in 2012 on an asset that was dismantled as part of the ammonia production and storage capacity expansion project and certain software having been fully depreciated. A portion of depreciation expense is associated with assets supporting general and administrative functions and is recorded in operating expense. The majority of depreciation expense, as a manufacturing cost, is distributed between cost of sales and finished goods inventory, based on production volumes and ending inventory levels.

Operating Income

 

     For the Years Ended
December 31,
 
     2013      2012  
     (in thousands)  

Total operating income

   $ 75,310       $ 125,984   
  

 

 

    

 

 

 

Operating income was $75.3 million for the year ended December 31, 2013 compared to $126.0 million for the year ended December 31, 2012. The decrease was primarily due to lower revenues and higher cost of sales partially offset by lower selling, general and administrative expenses and depreciation and amortization expense as described above.

Other Income (Expense), Net

 

     For the Years Ended
December 31,
 
     2013      2012  
     (in thousands)  

Other income (expense), net:

     

Interest expense

   $ —        $ (194

Loss on debt extinguishment

     —          (2,114

Other income, net

     —          45   
  

 

 

    

 

 

 

Total other expense, net

$ —     $ (2,263
  

 

 

    

 

 

 

Other expense, net was $0 for the year ended December 31, 2013 compared to $2.3 million for the year ended December 31, 2012. The entry into the credit agreement entered into in October 2012, or the Second 2012 Credit Agreement, and the payoff of the credit agreement entered into in February 2012, or the First 2012 Credit Agreement, resulted in a loss on debt extinguishment of $2.1 million for the year ended December 31, 2012.

 

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Pasadena

COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2014 AND 2013

Revenues

 

     For the Years Ended
December 31,
 
     2014      2013  
     (in thousands)  

Total revenues

   $ 138,233       $ 133,675   
  

 

 

    

 

 

 

 

     For the Year Ended
December 31, 2014
     For the Year Ended
December 31, 2013
 
     Tons      Revenue      Tons      Revenue  
     (in thousands)  

Revenues:

           

Ammonium sulfate

     572       $ 116,330         428       $ 107,435   

Sulfuric acid

     112         9,624         148         13,514   

Ammonium thiosulfate

     67         10,217         54         10,221   

Other

     N/A         2,062         N/A         2,505   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  751    $ 138,233      630    $ 133,675   
  

 

 

    

 

 

    

 

 

    

 

 

 

We generate revenue from sales of nitrogen fertilizer and other products manufactured at our Pasadena Facility. The facility produces ammonium sulfate and ammonium thiosulfate, which are nitrogen fertilizers, as well as sulfuric acid. These fertilizer products are used in growing corn, soybeans, potatoes, cotton, canola, alfalfa and wheat. Revenues from domestic sales are seasonal based on planting, growing, and harvesting cycles of customers who use nitrogen fertilizer. Planting seasons in the Southern Hemisphere are typically opposite those in the United States thus ammonium sulfate international sales partially offset domestic seasonality.

Revenues for the year ended December 31, 2014 were $138.2 million, compared to $133.7 million for the year ended December 31, 2013. The increase was due to higher sales volumes for ammonium sulfate, partially offset by lower sales volumes for sulfuric acid and lower sales prices for ammonium sulfate and sulfuric acid.

Ammonium sulfate production increased after we completed the debottlenecking project in December 2013. Also, demand increased due to favorable weather during the planting season and an increase in international orders. We produce ammonium sulfate by combining ammonia and sulfuric acid, which we also produce to make ammonium sulfate or to sell to the industrial market. After expanding ammonium sulfate production capacity, less sulfuric acid was available for sale causing a decline in sulfuric acid sales volume during the year ended December 31, 2014 as compared to the same period in the prior year.

Average sales prices per ton decreased by 19% for ammonium sulfate and 6% for sulfuric acid for the year ended December 31, 2014, as compared with the same period in the prior year. These two products comprised 91% of our Pasadena Facility’s revenues for the year ended December 31, 2014 and 90% for the year ended December 31, 2013. A higher proportion of export sales, priced lower than domestic sales, contributed to the decline in average product price. Furthermore, higher exports of ammonium sulfate from China put downward pressure on prices. The additional supplies from China originated from new plants that produce ammonium sulfate as a by-product of manufacturing caprolactam.

Cost of Sales

 

     For the Years Ended
December 31,
 
     2014      2013  
     (in thousands)  

Total cost of sales

   $ 152,541       $ 143,204   
  

 

 

    

 

 

 

Cost of sales primarily consists of the cost of ammonia, sulfur, labor, depreciation and electricity. Cost of sales for the year ended December 31, 2014 was $152.5 million, compared to $143.2 million for the year ended December 31, 2013. The increase in cost of sales was primarily due to selling a higher volume of ammonium sulfate and higher unit prices for inputs. Ammonia and sulfur

 

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together comprised 61% of cost of sales for the year ended December 31, 2014, compared to 59% for the same period in the prior year. Labor costs comprised 7% of cost of sales for each of the years ended December 31, 2014 and 2013. For the year ended December 31, 2014, we wrote down our ammonium sulfate inventory by $6.0 million because production costs exceeded market prices. During the same period in the prior year, we wrote down our ammonium sulfate, sulfur and sulfuric acid inventory by $12.4 million due to lower market prices of ammonium sulfate and sulfuric acid. During the year ended December 31, 2014, we incurred turnaround expenses of $2.1 million and unanticipated maintenance expenses of $1.3 million. Turnaround expenses represent maintenance costs incurred during planned shut-downs. The duration of the 2014 turnaround was extended by 13 days, as compared to the duration of a typical turnaround, to undertake activities necessary to tie-in the new sulfuric acid converter and cogeneration projects. During the extended outage, we conducted a comprehensive examination of other components within the sulfuric acid plant. This examination resulted in the discovery and repair of previously unidentified items. The incremental cost of these items and the extended downtime was approximately $1.3 million. These activities are not expected to recur in the future. Prices for ammonia and sulfur, key inputs for ammonium sulfate, increased significantly during 2014. Global ammonia supplies were lower than normal due to production issues in Egypt, Algeria, Trinidad and Qatar, as well as political issues in Libya and Ukraine. Because our sulfuric acid plant was down during the turnaround period, in order to continue producing ammonium sulfate and meet sales demand for sulfuric acid, we purchased sulfuric acid, which increased the cost of sales for the year ended December 31, 2014.

Depreciation expense included in cost of sales was $7.0 million for the year ended December 31, 2014 and $4.2 million for the year ended December 31, 2013. The increased depreciation expense was primarily due to an increase in property, plant and equipment resulting from the completion of the debottlenecking project in late 2013, and the increase in ammonium sulfate volumes sold in 2014 compared to 2013.

Gross Loss

 

     For the Years Ended
December 31,
 
     2014      2013  
     (in thousands)  

Total gross loss

   $ (14,308    $ (9,529
  

 

 

    

 

 

 

Gross loss was $14.3 million for the year ended December 31, 2014, compared to $9.5 million for the year ended December 31, 2013. Gross loss margin for the year ended December 31, 2014 was 10%, compared to gross loss margin of 7% for the year ended December 31, 2013. The decreases in gross profit and gross profit margin were primarily due to declines in average sales prices for ammonium sulfate, increases in the unit prices of raw materials, turnaround expenses and other unplanned maintenance expenses.

Gross profit margin at our Pasadena Facility can vary significantly from period to period due to changes in the prices of nitrogen fertilizer, ammonia and sulfur, which are all commodities. The prices of these commodities can vary significantly from period to period and do not always move in the same direction. In addition, certain fixed costs of operating our Pasadena Facility are recorded in cost of sales. Their impact on gross profit and gross margins varies as product sales volumes vary seasonally. Moreover, forward sales contracts have not developed for ammonium sulfate to the extent that they have for other nitrogen fertilizer products, so it is not possible to lock in product prices and input prices at the same time, as has been our practice for a significant portion of the sales at our East Dubuque Facility. Since input prices for ammonium sulfate are typically fixed several months before the corresponding product sales prices are known, margins may be compressed during a declining commodity market. See “Note 8 — Goodwill” to the consolidated financial statements included in “Part II — Item 8. Financial Statements and Supplementary Data” in this report.

Operating Expenses

 

     For the Years Ended
December 31,
 
     2014      2013  
     (in thousands)  

Operating expenses:

     

Selling, general and administrative

   $ 5,078       $ 4,764   

Depreciation and amortization

     1,315         3,886   

Pasadena goodwill impairment

     27,202         30,029   

Other

     5         —     
  

 

 

    

 

 

 

Total operating expenses

$ 33,600    $ 38,679   
  

 

 

    

 

 

 

 

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Operating expenses were comprised primarily of selling, general and administrative expenses, depreciation expense and Pasadena goodwill impairment. Operating expenses were $33.6 million for the year ended December 31, 2014, compared to $38.7 million for the same period in the prior year.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the year ended December 31, 2014 were $5.1 million, compared to $4.8 million for the same period in the prior year.

Depreciation and Amortization. Depreciation and amortization expense included in operating expenses was $1.3 million for the year ended December 31, 2014, compared to $3.9 million for the years ended December 31, 2013. Depreciation and amortization expense represents primarily amortization of intangible assets. The decreases between periods were primarily due to an intangible asset having been fully amortized at December 31, 2013. The majority of depreciation expense incurred was a manufacturing cost and was distributed between cost of sales and finished goods inventory, based on production volumes and ending inventory levels.

Pasadena Goodwill Impairment. Pasadena goodwill impairment was $27.2 million for the year ended December 31, 2014, compared to $30.0 million for the year ended December 31, 2013. There is no remaining goodwill associated with the Pasadena Facility. See “Note 8 — Goodwill” to the consolidated financial statements included in “Part II — Item 8. Financial Statements and Supplementary Data” in this report.

Operating Loss

 

     For the Years Ended
December 31,
 
     2014      2013  
     (in thousands)  

Total operating loss

   $ (47,907    $ (48,208
  

 

 

    

 

 

 

Operating loss was $47.9 million for the year ended December 31, 2014, compared to an operating loss of $48.2 million for the year ended December 31, 2013. The improvement in the operating loss was primarily due to a lower goodwill impairment, inventory write-down, and depreciation and amortization expense, partially offset by the decline in average sales prices for ammonium sulfate, increases in the unit price of raw materials, and turnaround and maintenance expenses in 2014, as described above.

COMPARISON OF THE RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012

The Pasadena Facility’s operations are only included in our historical operating results from the closing date of the Agrifos Acquisition, which was November 1, 2012.

Revenues

 

     For the Years Ended
December 31,
 
     2013      2012  
     (in thousands)  

Total revenues

   $ 133,675       $ 37,430   
  

 

 

    

 

 

 

 

     For the Year Ended
December 31, 2013
     For the Year Ended
December 31, 2012
 
     Tons      Revenue      Tons      Revenue  
     (in thousands)  

Revenues:

           

Ammonium sulfate

     428       $ 107,435         115       $ 34,493   

Sulfuric acid

     148         13,514         27         2,586   

Ammonium thiosulfate

     54         10,221         —          —    

Other

     N/A         2,505         N/A         351   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  630    $ 133,675      142    $ 37,430   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Revenues were $133.7 million for the year ended December 31, 2013, compared to $37.4 million for the year ended December 31, 2012. The increase in revenue for the year ended December 31, 2013 compared to the year ended December 31, 2012 reflects our full year of ownership of the Pasadena Facility.

Average sales prices per ton decreased by 16% for ammonium sulfate and by 5% for sulfuric acid for the year ended December 31, 2013 as compared with the year ended December 31, 2012. These two products comprised 90% of our Pasadena Facility’s revenues for the year ended December 31, 2013 and 99% for the year ended December 31, 2012. The decrease in sales prices for the ammonium sulfate for the year ended December 31, 2013 was in part a result of weather which delayed the application of the product. During the year ended December 31, 2013 significant volumes of urea were exported from China and this supply also suppressed global urea and other nitrogen fertilizer prices. The sales price for ammonium sulfate has significantly worsened and still remains low. Our Pasadena Facility also underwent a turnaround in December 2013, which lasted a little longer than anticipated due to issues with a contractor and weather delays, and experienced several relatively small disruptions in production that reduced production during 2013. During the turnaround, we conducted scheduled debottlenecking and reliability improvement projects. Our Pasadena Facility was off-line for three weeks in December 2013.

Cost of Sales

 

     For the Years Ended
December 31,
 
     2013      2012  
     (in thousands)  

Total cost of sales

   $ 143,204       $ 39,134   
  

 

 

    

 

 

 

Costs of sales were $143.2 million for the year ended December 31, 2013 compared to $39.1 million for the year ended December 31, 2012. The increase in cost of sales for the year ended December 31, 2013 compared to the year ended December 31, 2012 reflects our full year of ownership of the Pasadena Facility. Cost of sales consists primarily of expenses for ammonia, sulfur, labor and depreciation. Ammonia and sulfur together comprised 59% of cost of sales for the year ended December 31, 2013, compared to 64% for the year ended December 31, 2012. Labor costs comprised 7% of cost of sales for the year ended December 31, 2013, compared to 5% for the year ended December 31, 2012. Depreciation expense included in cost of sales was $4.2 million for the year ended December 31, 2013 and $0.4 million for the year ended December 31, 2012. During the year ended December 31, 2013, we incurred a write-down of ammonium sulfate, sulfur and sulfuric acid inventory to market value of $12.4 million due primarily to lower market prices of ammonium sulfate, in accordance with accounting guidance. Cost of sales includes turnaround expenses of $1.7 million. Turnaround expenses represent the cost of maintenance during turnarounds, which occur every two years.

Cost of sales also includes maintenance expenses. Turnaround at the sulfuric acid plant occurred in November 2012. As a result, we incurred turnaround expenses of $0.8 million. The turnaround was originally scheduled for the first quarter of 2013, but due to two unexpected outages at the sulfuric acid plant, we decided to conduct the turnaround early. As a result of the two unexpected outages, we incurred $0.5 million in additional expenses. The acquisition method of accounting required that the inventory be recognized at fair value as of the closing date of the Agrifos Acquisition. This resulted in the value of inventory, which was sold during the two-month period ended December 31, 2012, being increased by $3.4 million.

Gross Loss

 

     For the Years Ended
December 31,
 
     2013      2012  
     (in thousands)  

Total gross loss

   $ (9,529    $ (1,704
  

 

 

    

 

 

 

Gross loss margins for the year ended December 31, 2013 was 7% and 5% for the year ended December 31, 2012. Gross loss for year ended December 31, 2013 is due to lower ammonium sulfate sale prices and the write-down of inventory, as described above. Similar to our East Dubuque Facility, gross profit margin can vary significantly from period to period due to changes in the prices of nitrogen fertilizer, ammonia and sulfur, which are commodities. The prices of these commodities can vary significantly from period to period and do not always move in the same direction. In addition, there are certain fixed costs of operating our Pasadena Facility that are recorded in cost of sales and whose impact on gross profit and gross margins varies as product sales volumes vary seasonally. Moreover, forward sales contracts have not developed for ammonium sulfate to the extent that they have for other nitrogen fertilizer products, so it is not possible to lock product prices and input prices at the same time, as has been our practice for a portion of the

 

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sales of the most important products of our East Dubuque Facility. Since input prices for ammonium sulfate are typically fixed several months before the corresponding product price, margins may be compressed during a declining commodity market. Gross loss for year ended December 31, 2012 was primarily due to reduced margins due to the write-up of inventory to fair value, along with the turnaround expenses at the sulfuric acid plant and expenses related to two unexpected outages of the sulfuric acid plant.

Operating Expenses

 

     For the Years Ended
December 31,
 
     2013      2012  
     (in thousands)  

Operating expenses:

     

Selling, general and administrative

   $ 4,764       $ 361   

Depreciation and amortization

     3,886         583   

Pasadena goodwill impairment

     30,029         —    
  

 

 

    

 

 

 

Total operating expenses

$ 38,679    $ 944   
  

 

 

    

 

 

 

Operating expenses were $38.7 million for the year ended December 31, 2013 compared to $0.9 million for the year ended December 31, 2012. These expenses were primarily comprised of selling, general and administrative expense, depreciation expense and Pasadena goodwill impairment.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $4.8 million for the year ended December 31, 2013. These expenses are for general administrative purposes at our Pasadena Facility, such as general management salaries and travel, legal, consulting, information technology, and banking fees. Selling, general and administrative expenses for the year ended December 31, 2013 included $0.7 million in integration related expenses.

Depreciation and Amortization. Amortization expense was $3.9 million for the year ended December 31, 2013. This amount represents amortization of intangible assets. The depreciation expense relating to fixed assets is a manufacturing cost which is distributed between cost of sales and finished goods inventory, based on production volumes and ending inventory levels.

Pasadena Goodwill Impairment. Pasadena goodwill impairment was $30.0 million for the year ended December 31, 2013. See “Note 8 — Goodwill” to the consolidated financial statements included in “Part II — Item 8. Financial Statements and Supplementary Data” in this report.

Operating Loss

 

     For the Years Ended
December 31,
 
     2013      2012  
     (in thousands)  

Total operating loss

   $ (48,208    $ (2,648
  

 

 

    

 

 

 

Operating loss for the year ended December 31, 2013 was $48.2 million, compared to operating loss of $2.6 million for the same period in the prior year. The increase in operating loss was due to lower ammonium sulfate sale prices, the write-down of inventory and the Pasadena goodwill impairment, as described above.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2014, our current assets totaled $77.8 million. Current assets included cash of $28.0 million, accounts receivable of $16.7 million and inventories of $27.7 million. At December 31, 2014, our current liabilities were $63.3 million and our long-term liabilities were $342.1 million, comprised primarily of the Notes.

On February 17, 2015, we announced that our general partner’s board has initiated a process to explore and evaluate potential strategic alternatives for the Partnership, which may include a sale of the Partnership, a merger with another party, a sale of some or all of our assets, or another strategic transaction. There can be no assurance that this strategic review process will result in a transaction.

 

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Sources of Capital

Our principal sources of capital have historically been cash from operations, the proceeds of our initial public offering, and borrowings. Our current outstanding debt obligations are the Notes and the GE Credit Agreement. We expect to be able to fund our operating needs, including maintenance capital expenditures, from operating cash flow, cash on hand and borrowings under the GE Credit Agreement, for at least the next 12 months. We expect to fund our announced expansion projects through borrowings under the GE Credit Agreement. If additional expansion projects were to exceed the capacity available under the GE Credit Agreement, we would need to fund them with new capital.

Capital markets have experienced periods of significant volatility in the recent past, and access to those markets may become difficult. If we need to access capital markets, we cannot assure you that we will be able to do so on acceptable terms, or at all.

Notes Offering

The Notes, with a principal amount of $320.0 million, bear interest at a rate of 6.5% per year, and are payable semi-annually in arrears on April 15 and October 15 of each year. The Notes will mature on April 15, 2021, unless repurchased or redeemed earlier in accordance with their terms. For a description of the terms of the Notes, see “Note 9 — Debt” to the consolidated financial statements included in “Part II—Item 8. Financial Statements and Supplementary Data” in this report.

GE Credit Agreement

On July 22, 2014, we replaced a prior revolving credit agreement by entering into the GE Credit Agreement. The GE Credit Agreement consists of a $50.0 million senior secured revolving credit facility with a $10.0 million letter of credit sublimit. As of December 31, 2014, we had $15.0 million outstanding borrowings under the GE Credit Agreement.

Under the GE Credit Agreement, in the event that, on a pro forma basis, less than 30% of the commitment amount is available for borrowing on any distribution date, then in order to make a distribution on such date (a) we must maintain a first lien leverage ratio no greater than 1 to 1 on a pro forma basis and (b) the sum of (i) the undrawn amount under the GE Credit Facility and (ii) cash maintained by us and our subsidiaries in collateral deposit accounts must be at least $5 million (after giving effect to the distribution). In addition, before we can make distributions, there cannot be any default under the GE Credit Agreement. The GE Credit Agreement also contains a requirement that we maintain a first lien leverage ratio not to exceed 1.0 to 1.0 at the end of each fiscal quarter where less than 30% of the commitment amount is available for drawing under the GE Credit Facility or a default has occurred and is continuing. The first lien leverage ratio as of December 31, 2014 was 0.20 to 1.0.

Borrowing pursuant to our GE Credit Agreement is subject to compliance with certain conditions, and we, as of the filing date of this report, are in compliance with those conditions. Based on our current forecast, we expect to be able to borrow under the GE Credit Agreement. For a description of the terms of the GE Credit Agreement, see “Note 9 — Debt” to the consolidated financial statements included in “Part II—Item 8. Financial Statements and Supplementary Data” in this report.

Shelf Registration

We have an effective shelf registration statement with the SEC, which allows us and Rentech’s subsidiary RNHI, from time to time, in one or more offerings, to offer and sell up to $500.0 million in the aggregate of securities comprised of (i) up to $265.5 million of common units and debt securities to be offered and sold by us in primary offerings and (ii) up to 12.5 million common units to be offered and sold by RNHI in secondary offerings. This report shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

Uses of Capital

Our primary uses of cash have been, and are expected to continue to be, for operating expenses, capital expenditures, debt service and cash distributions to common unitholders.

Capital Expenditures

We divide our capital expenditures into two categories: maintenance and expansion. Maintenance capital expenditures include those for improving, replacing or adding to our assets, as well as expenditures for acquiring, constructing or developing new assets to maintain our operating capacity, or to comply with environmental, health, safety or other regulations. Maintenance capital expenditures that are required to comply with regulations may also improve the output, efficiency or reliability of our facilities. Expansion capital expenditures are those incurred for acquisitions or capital improvements that we expect will increase our operating capacity or operating income over the long term. We generally fund maintenance capital expenditures from operating cash flow, and expansion capital expenditures from new capital. However, at our Pasadena Facility, we funded the sulfuric acid converter, a major maintenance project, from the proceeds of the Notes.

 

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Maintenance capital expenditures for our East Dubuque Facility totaled $9.4 million for the year ended December 31, 2014, $9.3 million for the year ended December 31, 2013, and $7.9 million for the year ended December 31, 2012. Maintenance capital expenditures for our East Dubuque Facility are expected to be $10.7 million for the year ending December 31, 2015. Expansion capital expenditures for our East Dubuque Facility totaled $14.4 million for the year ended December 31, 2014, $50.5 million for the year ended December 31, 2013, and $52.4 million for the year ended December 31, 2012. Expansion capital expenditures for our East Dubuque Facility are expected to be $19.0 million for the year ending December 31, 2015, of which $14.1 million is related to the ammonia synthesis converter project.

Maintenance capital expenditures for our Pasadena Facility totaled $22.3 million, including $14.5 million spent as part of the project to replace the sulfuric acid converter, for the year ended December 31, 2014. In 2013, maintenance capital expenditures for the Pasadena Facility totaled $9.0 million, including $2.4 million spent as part of the project to replace the sulfuric acid converter. Maintenance capital expenditures for our Pasadena Facility are expected to be $4.0 million for the year ending December 31, 2015. Expansion capital expenditures for our Pasadena Facility totaled $14.4 million for the year ended December 31, 2014, primarily related to the power generation project, and $24.2 million in the year ended December 31, 2013, primarily related to the power generation project and the ammonium sulfate debottlenecking and production capacity project. Expansion capital expenditures for our Pasadena Facility are expected to be $1.8 million for the year ending December 31, 2015, primarily related to the power generation project.

Our forecasted capital expenditures are subject to change due to unanticipated increases in the cost, scope and completion time for our capital projects. For example, we may experience increases in labor or equipment costs necessary to comply with government regulations or to complete projects that sustain or improve the profitability of our facilities.

Distributions

Our policy is generally to distribute to our unitholders all of the cash available for distribution we generate each quarter, which could materially affect our liquidity and limit our ability to grow. Cash available for distribution for each quarter will be determined by the board of directors of our general partner following the end of such quarter. Cash available for distribution for each quarter will generally be calculated as the cash we generate during the quarter, less cash needed for maintenance capital expenditures not funded by capital proceeds, debt service and other contractual obligations and any increases in cash reserves for future operating or capital needs that the board deems necessary or appropriate. Increases or decreases in such reserves may be determined at any time by the board as it considers, among other things, the cash flows or cash needs expected in approaching periods. We do not intend to maintain excess distribution coverage for the purpose of maintaining stability or growth in our quarterly distribution, nor do we intend to incur debt to pay quarterly distributions. As a result of our quarterly distributions, our liquidity may be significantly affected. However, our partnership agreement does not require us to pay cash distributions on a quarterly or other basis, and we may change our distribution policy at any time and from time to time.

The following is a summary of cash distributions paid to common unitholders and holders of phantom units during the year ended December 31, 2014 for the respective quarter to which the distributions relate:

 

     December 31,
2013
     March 31,
2014
     June 30,
2014
     September 30,
2014
     Total Cash
Distributions
Paid in 2014
 

Distribution to common unitholders — affiliates

   $ 1,162       $ 1,861       $ 3,022       $ 1,163       $ 7,208   

Distribution to common unitholders — non-affiliates

     792         1,266         2,060         789         4,907   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total amount paid

$ 1,954    $ 3,127    $ 5,082    $ 1,952    $ 12,115   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Per common unit

$ 0.05    $ 0.08    $ 0.13    $ 0.05    $ 0.31   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Common and phantom units outstanding

  39,081      39,081      39,098      39,030   
  

 

 

    

 

 

    

 

 

    

 

 

    

On February 12, 2015, we announced a cash distribution to our common unitholders and payments to holders of phantom units for the period October 1, 2014 through and including December 31, 2014 of $0.30 per common unit or $11.7 million in the aggregate. This distribution will bring cumulative cash distributed for the twelve months ended December 31, 2014 to $0.56 per common unit. The cash distribution was paid on February 27, 2015, to unitholders of record at the close of business on February 23, 2015.

CASH FLOWS

Operating Activities

Net cash provided by operating activities for the year ended December 31, 2014 was $64.9 million. We had net loss of $1.1 million for the year ended December 31, 2014 including a goodwill impairment charge of $27.2 million, which relates to the Agrifos Acquisition. We also had non-cash unit-based compensation expense relating to our common units of $1.3 million. We had a loss on gas derivatives of $4.0 million relating to our forward purchase natural gas contracts. Accounts receivable increased by $9.3 million due primarily to collections timing at our Pasadena Facility and higher ammonia deliveries at our East Dubuque Facility during the year ended December 31, 2014.

 

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Net cash provided by operating activities for the year ended December 31, 2013 was $44.5 million. We had net income of $4.1 million for the year ended December 31, 2013. For the year ended December 31, 2013, we had Pasadena goodwill impairment of $30.0 million relating to the Agrifos Acquisition. During this period, we issued the Notes and paid off the outstanding principal balance under our Second 2012 Credit Agreement, which resulted in a loss on the extinguishment of debt of $6.0 million. We also had unit-based compensation expense relating to our common units of $1.5 million. Due to the fire and the resulting interruption of production, our East Dubuque Facility had excess natural gas which it sold. Accrued interest increased by $3.8 million due to the Notes.

Net cash provided by operating activities for the year ended December 31, 2012 was $132.5 million. We had net income of $107.0 million for the year ended December 31, 2012. During this period, we entered into our Second 2012 Credit Agreement and paid off the outstanding principal balance under our First 2012 Credit Agreement. This transaction resulted in a loss on the extinguishment of debt of $2.1 million. We also had unit-based compensation expense relating to our common units of $2.8 million. Deposits on natural gas contracts decreased by $2.8 million due to obtaining lines of credit with two natural gas vendors that had previously required prepayment. Accrued liabilities decreased by $4.7 million due to a decrease in Pasadena Facility’s accrued liabilities of $9.1 million primarily due to the payment of bonuses of $7.2 million, which was partially offset by an increase in East Dubuque Facility’s accrued liabilities primarily from amounts due to customers for recent overpayments and refunds on prepaid contracts that we chose to cancel.

Investing Activities

Net cash used in investing activities was $72.6 million for the year ended December 31, 2014, $90.5 million for the year ended December 31, 2013 and $186.8 million for the year ended December 31, 2012. Net cash used in the investing activities for the year ended December 31, 2014 was primarily related to the projects at our East Dubuque Facility and our Pasadena Facility. At our East Dubuque Facility, we are upgrading a nitric acid compressor train and completed our urea expansion project during the year ended December 31, 2014. At our Pasadena Facility, we replaced our sulfuric acid converter and completed our power generation project during the year ended December 31, 2014.

Net cash used in investing activities for the year ended December 31, 2013 was primarily related to the ammonia production and storage capacity expansion project at our East Dubuque Facility, and the ammonium sulfate debottlenecking and production capacity project, the power generation project and the initial phases of the sulfuric acid converter replacement project at our Pasadena Facility.

In the year ended December 31, 2012, we paid $128.6 million, net of cash received, for the Agrifos Acquisition. The amount for purchase of property, plant, equipment and construction in progress of $57.6 million for the year ended December 31, 2012 relates primarily to the ammonia production and storage capacity expansion project, the urea expansion project and the DEF build-out.

Financing Activities

Net cash provided by financing activities was $1.6 million for the year ended December 31, 2014, $24.3 million for the year ended December 31, 2013 and $65.2 million for the year ended December 31, 2012. During the year ended December 31, 2014, we borrowed $15.0 million under the GE Credit Agreement. We also made distributions of $12.1 million to our unitholders in 2014. During the year ended December 31, 2013, we issued the Notes for $320.0 million and paid off the Second 2012 Credit Agreement in the amount of $205.0 million. We also made distributions of $92.4 million during the year ended December 31, 2013. During the year ended December 31, 2012, we had borrowings under our Second 2012 Credit Agreement and our First 2012 Credit Agreement which totaled $222.8 million and repaid borrowings under our First 2012 credit agreement of $29.5 million. We also made distributions of $118.8 million during the year ended December 31, 2012.

CONTRACTUAL OBLIGATIONS

The following table lists our significant contractual obligations and their future payments at December 31, 2014:

 

Contractual Obligations

   Total      Less than
1 Year
     1-3 Years      3-5 Years      More than
5 Years
 
     (in thousands)  

Notes (1)

   $ 320,000       $ —        $ —        $ —        $ 320,000   

GE Credit Agreement (2)

     15,000         —           —          15,000        —    

Interest on debt (3)

     133,171         21,323         42,646         42,418         26,784   

Natural gas (4)

     15,568         15,568         —          —          —    

Purchase obligations (5)

     13,850         13,850         —          —          —    

Asset retirement obligation (6)

     4,194         —          —          —          4,194   

Operating leases

     7,624         3,612         4,012         —          —    

Gas and electricity fixed charges (7)

     679         679         —           —          —    

Pension plans and postretirement plan (8)

     83        83         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 510,169    $ 55,115    $ 46,658    $ 57,418    $ 350,978   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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(1) There is $320.0 million of principal outstanding under the Notes.
(2) There is $15.0 million of principal outstanding under the GE Credit Agreement.
(3) Interest on debt assumes interest rates existing at December 31, 2014 for variable rate debt.
(4) As of December 31, 2014, the natural gas forward purchase contracts included delivery dates through June 30, 2015. During January and February 2015, we entered into additional fixed-quantity forward purchase contracts at fixed and indexed prices for various delivery dates through December 31, 2015. The total MMBtus associated with these additional forward purchase contracts are 2.7 million and the total amount of the purchase commitments is $7.7 million, resulting in a weighted average rate per MMBtu of $2.88 in these new commitments. We are required to make additional prepayments under these forward purchase contracts in the event that market prices fall below the purchase prices in the contracts.
(5) The amount presented represents certain open purchase orders with our vendors. Not all of our open purchase orders are purchase obligations, since some of the orders are not enforceable or legally binding on us until the goods are received or the services are provided.
(6) We have recorded asset retirement obligations, or AROs, related to future costs associated with the removal of contaminated material upon removal of the phosphoric acid plant at our Pasadena Facility and handling and disposal of asbestos at our East Dubuque Facility. 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. The obligation is considered long-term and, therefore, considered to be incurred more than five years after December 31, 2014.
(7) As part of the natural gas transportation and electricity supply contracts at our East Dubuque Facility, we must pay monthly fixed charges over the term of the contracts.
(8) We expect to contribute $0 to the pension plans and $83,000 to the postretirement plan in 2015.

OFF-BALANCE SHEET ARRANGEMENTS

We did not have any material off-balance sheet arrangements as of December 31, 2014.

RECENT ACCOUNTING PRONOUNCEMENTS FROM FINANCIAL STATEMENT DISCLOSURES

For a discussion of the recent accounting pronouncements relevant to our operations, please refer to “Note 2 — Recent Accounting Pronouncements” of the consolidated financial statements included in “ Part II — Item 8. Financial Statements and Supplementary Data.”

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk. We are exposed to interest rate risks related to the GE Credit Agreement. Borrowings under the GE Credit Agreement bear interest at a rate equal to an applicable margin plus, at our option, either (a) in the case of base rate borrowings, a rate equal to the highest of (1) the prime rate, (2) the federal funds rate plus 0.5% or (3) LIBOR for an interest period of one month plus 1.00% or (b) in the case of LIBOR borrowings, the offered rate per annum for deposits of dollars for the applicable interest period on the day that is two business days prior to the first day of such interest period. The applicable margin for borrowings under the GE Credit Agreement is 2.25% with respect to base rate borrowings and 3.25% with respect to LIBOR borrowings. As of the date of this report, we had $15.0 million outstanding borrowings under the GE Credit Agreement. Assuming the entire $50.0 million was outstanding under the GE Credit Agreement, an increase or decrease of 100 basis points in the LIBOR rates would result in an increase or decrease in annual interest expense of $0.5 million.

Commodity Price Risk. Our East Dubuque Facility is exposed to significant market risk due to potential changes in prices for fertilizer products and natural gas. Natural gas is the primary raw material used in the production of various nitrogen-based products manufactured at our East Dubuque Facility. Market prices of nitrogen-based products are affected by changes in the prices of commodities such as corn and natural gas as well as by supply and demand and other factors. Currently, we purchase natural gas for use in our East Dubuque Facility on the spot market, and through short-term, fixed supply, fixed price and index price purchase contracts. Natural gas prices have fluctuated during the last several years, increasing substantially in 2008 and subsequently declining to the current lower levels. A hypothetical increase of $0.10 per MMBtu of natural gas would increase the cost to produce one ton of ammonia by $3.30.

In the normal course of business, we currently produce nitrogen-based fertilizer products throughout the year to supply the needs of our East Dubuque Facility’s customers during the high-delivery-volume spring and fall seasons. The value of fertilizer

 

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product inventory is subject to market risk due to fluctuations in the relevant commodity prices. Prices of nitrogen fertilizer products can be volatile. We believe that market prices of nitrogen products are affected by changes in grain prices and demand, natural gas prices and other factors.

We enter into fixed-price prepaid contracts committing our East Dubuque Facility’s customers to purchase our nitrogen fertilizer products at a later date. To a lesser extent, we also enter into prepaid contracts for our Pasadena Facility’s products. By using fixed-price forward contracts, we purchase enough natural gas to manufacture the products that have been sold by our East Dubuque Facility under prepaid contracts for later delivery. We believe that entering into such fixed-price contracts for natural gas and prepaid contracts effectively allows us to fix most of the gross margin on pre-sold product and mitigate risk of increasing market prices of natural gas or decreasing market prices of nitrogen to the extent of such pre-sold products. However, this practice also subjects us to the risk that we may have locked in margins at levels lower than those that might be available if, in periods following these contract dates, natural gas prices were to fall, or nitrogen fertilizer commodity prices were to increase. In addition, we occasionally make forward purchases of natural gas that are not directly linked to specific prepaid contracts. To the extent we make such purchases, we may be unable to benefit from lower natural gas prices in subsequent periods.

Our Pasadena Facility is exposed to significant market risk due to potential changes in prices for fertilizer products, and for ammonia, sulfuric acid and sulfur. Ammonia and sulfuric acid are the primary raw materials used in the production of ammonium sulfate which is the primary product manufactured at our Pasadena Facility. Sulfur is the primary raw material used in the production of sulfuric acid, which our Pasadena Facility produces for both internal consumption in the production of ammonium sulfate and for sales to third parties. During the year ended December 31, 2014, 90% of the sulfuric acid used in our Pasadena Facility’s production of ammonium sulfate was produced at our Pasadena Facility. We purchase a substantial portion of our ammonia and sulfur for use in our Pasadena Facility at prices based on market indices. The market price of ammonium sulfate is affected by changes in the prices of commodities such as soybeans, potatoes, cotton, canola, alfalfa, corn, wheat, ammonia and sulfur as well as by supply and demand for ammonium sulfate and other nitrogen fertilizers, and by other factors such as the price of its other inputs. The margins on the sale of ammonium sulfate fertilizer products are relatively low. If our costs to produce ammonium sulfate fertilizer products increase and the prices at which we sell these products do not correspondingly increase, our profits from the sale of these products may decrease or we may suffer losses on these sales. If the price of our products falls rapidly, we may not be able to recover the costs of our raw materials inventory that was purchased at an earlier time when commodity prices were at higher levels. A hypothetical increase of $10.00 per ton of ammonia would increase the cost to produce one ton of ammonium sulfate by $2.50. A hypothetical increase of $10.00 per ton of sulfur would also increase the cost to produce one ton of ammonium sulfate by $2.50.

Our Pasadena Facility purchases ammonia as a feedstock at contractual prices based on a published Tampa, Florida market index, while our East Dubuque Facility sells similar quantities of ammonia at prevailing prices in the Mid Corn Belt, which are typically significantly higher than Tampa ammonia prices.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

RENTECH NITROGEN PARTNERS, L.P.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Consolidated Financial Statements of Rentech Nitrogen Partners, L.P.:

  

Report of Independent Registered Public Accounting Firm

     73   

Consolidated Balance Sheets

     74   

Consolidated Statements of Operations

     75   

Consolidated Statements of Comprehensive Income (Loss)

     76   

Consolidated Statements of Partners’ Capital

     77   

Consolidated Statements of Cash Flows

     78   

Notes to Consolidated Financial Statements

     80   

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors of Rentech Nitrogen GP, LLC and Unitholders of Rentech Nitrogen Partners, L.P.

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Rentech Nitrogen Partners, L.P. and its subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Partnership did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2014 based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because material weaknesses in internal control over financial reporting related to (i) the review of the cash flow forecasts used in the accounting for long-lived asset recoverability and goodwill impairment, (ii) the determination of the goodwill impairment charge in accordance with generally accepted accounting principles, and (iii) maintaining documentation supporting management’s review of events and changes in circumstances that indicate it is more likely than not that a goodwill impairment has occurred between annual impairment tests existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the 2014 consolidated financial statements, and our opinion regarding the effectiveness of the Partnership’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Partnership’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Partnership’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ PricewaterhouseCoopers LLP
Los Angeles, California
March 16, 2015

 

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RENTECH NITROGEN PARTNERS, L.P.

Consolidated Balance Sheets

(Amounts in thousands, except per share data)

 

     As of December 31,  
     2014      2013  
ASSETS      

Current assets

     

Cash

   $ 28,028       $ 34,060   

Accounts receivable

     16,714         7,434   

Inventories

     27,736         31,102   

Prepaid expenses and other current assets

     4,942         4,942   

Other receivables, net

     357         2,227   
  

 

 

    

 

 

 

Total current assets

  77,777      79,765   
  

 

 

    

 

 

 

Property, plant and equipment, net

  259,011      234,359   
  

 

 

    

 

 

 

Construction in progress

  47,758      33,531   
  

 

 

    

 

 

 

Other assets

Goodwill

  —       27,202   

Intangible assets

  21,114      22,298   

Debt issuance costs

  8,315      8,404   

Other assets

  341      785   
  

 

 

    

 

 

 

Total other assets

  29,770      58,689   
  

 

 

    

 

 

 

Total assets

$ 414,316    $ 406,344   
  

 

 

    

 

 

 
LIABILITIES AND PARTNERS’ CAPITAL

Current liabilities

Accounts payable

$ 14,846    $ 9,793   

Payable to general partner

  3,035      5,353   

Accrued liabilities

  14,203      18,444   

Deferred revenue

  26,700      20,365   

Accrued interest

  4,494      4,622   
  

 

 

    

 

 

 

Total current liabilities

  63,278      58,577   
  

 

 

    

 

 

 

Long-term liabilities

Debt

  335,000      320,000   

Asset retirement obligation

  4,194      2,822   

Other

  2,953      1,820   
  

 

 

    

 

 

 

Total long-term liabilities

  342,147      324,642   
  

 

 

    

 

 

 

Total liabilities

  405,425      383,219   
  

 

 

    

 

 

 

Commitments and contingencies (Note 10)

Partners’ capital

Common unitholders — 38,913 and 38,889 units issued and outstanding at December 31, 2014 and 2013, respectively

  8,886      21,816   

Accumulated other comprehensive income

  5      1,309   

General partner’s interest

  —       —    
  

 

 

    

 

 

 

Total partners’ capital

  8,891      23,125   
  

 

 

    

 

 

 

Total liabilities and partners’ capital

$ 414,316    $ 406,344   
  

 

 

    

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

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RENTECH NITROGEN PARTNERS, L.P.

Consolidated Statements of Operations

(Amounts in thousands, except per unit data)

 

     For the Years Ended
December 31,
 
     2014     2013     2012  

Revenues

   $ 334,612      $ 311,375      $ 261,635   

Cost of sales

     274,135        240,021        129,796   
  

 

 

   

 

 

   

 

 

 

Gross profit

  60,477      71,354      131,839   
  

 

 

   

 

 

   

 

 

 

Operating expenses

Selling, general and administrative expense

  18,011      17,285      18,376   

Depreciation and amortization

  1,509      4,077      1,390   

Pasadena goodwill impairment

  27,202      30,029      —    

Other

  542      806      510   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

  47,264      52,197      20,276   
  

 

 

   

 

 

   

 

 

 

Operating income

  13,213      19,157      111,563   
  

 

 

   

 

 

   

 

 

 

Other income (expense), net

Interest expense

  (19,057   (14,098   (1,469

Agrifos settlement

  5,632     —        —    

Loss on debt extinguishment

  (635   (6,001   (2,114

Gain on fair value adjustment to earn-out consideration

  —       4,920      —    

Other expense, net

  (197   (6   (674
  

 

 

   

 

 

   

 

 

 

Total other expenses, net

  (14,257   (15,185   (4,257
  

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  (1,044   3,972      107,306   

Income tax (benefit) expense

  18      (96   303   
  

 

 

   

 

 

   

 

 

 

Net income (loss)

$ (1,062 $ 4,068    $ 107,003   
  

 

 

   

 

 

   

 

 

 

Net income (loss) per common unit allocated to common unitholders — Basic and Diluted

$ (0.03 $ 0.10    $ 2.78   

Weighted-average units used to compute net income (loss) per common unit:

Basic

  38,898      38,850      38,350   

Diluted

  38,898      38,945      38,352   

See Accompanying Notes to Consolidated Financial Statements.

 

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RENTECH NITROGEN PARTNERS, L.P.

Consolidated Statements of Comprehensive Income (Loss)

(Amounts in thousands)

 

     For the Years Ended
December 31,
 
     2014     2013      2012  

Net income (loss)

   $ (1,062   $ 4,068       $ 107,003   

Other comprehensive income (loss), net of tax:

       

Pension and postretirement plan adjustments

     (1,304     1,143         166   
  

 

 

   

 

 

    

 

 

 

Other comprehensive income (loss)

  (1,304   1,143      166   
  

 

 

   

 

 

    

 

 

 

Comprehensive income (loss)

$ (2,366 $ 5,211    $ 107,169   
  

 

 

   

 

 

    

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

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RENTECH NITROGEN PARTNERS, L.P.

Consolidated Statements of Partners’ Capital

(Amounts in thousands)

 

     Number of
Common

Units
    Common
Unitholders
    Accumulated
Other
Comprehensive
Income
    General
Partner
     Total
Partners’
Capital
 

Balance, December 31, 2011

     38,250      $ 99,191      $ —       $ —        $ 99,191   

Common units issued for acquisition

     539        20,000        —         —          20,000   

Common units

     50        (736     —         —          (736

Distributions to common unitholders — affiliates

     —         (71,610     —         —          (71,610

Distributions to common unitholders — non-affiliates

     —         (47,205     —         —          (47,205

Unit-based compensation expense

     —         2,827        —         —          2,827   

Net income

     —         107,003        —         —          107,003   

Other comprehensive income

     —         —         166        —           166   

Other

     —         (232     —         —          (232
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, December 31, 2012

  38,839    $ 109,238    $ 166    $ —     $ 109,404   

Common units

  50      (519   —       —       (519

Distributions to common unitholders — affiliates

  —       (55,102   —       —       (55,102

Distributions to common unitholders — non-affiliates

  —       (37,329   —       —       (37,329

Unit-based compensation expense

  —       1,460      —       —       1,460   

Net income

  —       4,068      —       —       4,068   

Other comprehensive income

  —       —       1,143      —        1,143   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, December 31, 2013

  38,889    $ 21,816    $ 1,309    $ —     $ 23,125   

Common units

  83      (404   —       —       (404

Common units returned — Agrifos settlement

  (59   (632   —       —       (632

Distributions to common unitholders — affiliates

  —       (7,208   —       —       (7,208

Distributions to common unitholders — non-affiliates

  —       (4,907   —       —       (4,907

Unit-based compensation expense

  —       1,283      —       —       1,283   

Net loss

  —       (1,062   —       —       (1,062

Other comprehensive loss

  —       —       (1,304   —        (1,304
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, December 31, 2014

  38,913    $ 8,886    $ 5    $ —     $ 8,891   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

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RENTECH NITROGEN PARTNERS, L.P.

Consolidated Statements of Cash Flows

(Amounts in thousands)

 

     For the Years Ended
December 31,
 
     2014     2013     2012  

Cash flows from operating activities

      

Net income (loss)

   $ (1,062   $ 4,068      $ 107,003   

Adjustments to reconcile net income (loss) to net cash provided by operating activities

      

Depreciation and amortization

     24,257        17,312        12,460   

Utilization of spare parts

     5,398        3,778        2,042   

Write-down of inventory

     6,045        12,360        —    

Non-cash interest expense

     1,192        961        387   

Pasadena goodwill impairment

     27,202        30,029        —    

Loss on debt extinguishment

     635        6,001        2,114   

(Gain) loss on interest rate swaps

     —         (17     929   

Unit-based compensation

     1,283        1,460        2,827   

Unrealized loss on gas derivatives

     3,955        —         —    

Other

     (1,287     1,779        (118

Changes in operating assets and liabilities:

      

Accounts receivable

     (9,280     2,271        999   

Other receivables

     1,870        399        2   

Inventories

     (1,757     (16,190     8,727   

Other assets

     322        (767     2,807   

Prepaid expenses and other current assets

     (707     (1,515     (90

Accounts payable

     4,887        (5,289     1,020   

Deferred revenue

     6,335        (9,295     (3,972

Accrued interest

     438        3,780        119   

Accrued liabilities, accrued payroll and other

     (4,847     (6,667     (4,710
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

  64,879      44,458      132,546   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

Payment for acquisition, net of cash acquired

  —       (290   (128,596

Capital expenditures

  (71,663   (90,288   (57,571

Other items

  (897   38      (658
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

  (72,560   (90,540   (186,825
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

Proceeds from issuance of notes

  —       320,000      —    

Payment of offering costs

  —       (972   —    

Proceeds from initial public offering, net of costs

  —       —       (245

Proceeds from credit facilities and term loan, net of original issue discount

  15,000      15,600      222,780   

Proceeds from bridge loan from parent

  —       —       5,860   

Payment of bridge loan to parent

  —       —       (5,860

Payments and retirement of debt

  —       (208,890   (30,490

Payment of debt issuance costs

  (1,236   (8,964   (7,788

Payment of bridge loan fee to parent, net

  —       —       (200

Distributions to common unitholders – affiliates

  (7,208   (55,102   (71,610

See Accompanying Notes to Consolidated Financial Statements.

 

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RENTECH NITROGEN PARTNERS, L.P.

Consolidated Statements of Cash Flows—Continued

(Amounts in thousands)

 

     For the Years Ended
December 31,
 
     2014     2013     2012  

Distribution to common unitholders — non-affiliates

     (4,907     (37,329     (47,205
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

  1,649      24,343      65,242   
  

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash

  (6,032   (21,739   10,963   

Cash, beginning of period

  34,060      55,799      44,836   
  

 

 

   

 

 

   

 

 

 

Cash, end of period

$ 28,028    $ 34,060    $ 55,799   
  

 

 

   

 

 

   

 

 

 

For the years ended December 31, 2014, 2013 and 2012, the Partnership made certain cash payments as follows:

 

     For the Years Ended
December 31,
 
     2014      2013      2012  

Cash payments of interest, net of capitalized interest of $3,077 (Dec 2014), $3,243 (Dec 2013) and $701 (Dec 2012)

   $ 17,787       $ 9,674       $ 964   

Excluded from the consolidated statements of cash flows were the effects of certain non-cash financing and investing activities as follows:

 

     For the Years Ended
December 31,
 
     2014      2013      2012  

Purchase of property, plant, equipment and construction in progress in accounts payable and accrued liabilities

   $ 5,739      $ 10,509       $ 5,223   

Increase in asset retirement obligation

     1,265        —          —     

Current deposits transferred into construction in progress

     —          —          1,505   

Units issued related to acquisition

     —           —          20,000   

See Accompanying Notes to Consolidated Financial Statements.

 

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RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements

Note 1 — Description of Business

Description of Business

Rentech Nitrogen Partners, L.P. (“RNP”, “the Partnership,” “we,” “us” or “our”) owns and operates two fertilizer facilities: our East Dubuque Facility and our Pasadena Facility. Our East Dubuque Facility is located in East Dubuque, Illinois. We produce primarily ammonia and urea ammonium nitrate solution (“UAN”) at our East Dubuque Facility, using natural gas as the facility’s primary feedstock. Our Pasadena Facility, which we acquired in November 2012, is located in Pasadena, Texas. We produce ammonium sulfate, ammonium thiosulfate and sulfuric acid at our Pasadena Facility, using ammonia and sulfur as the facility’s primary feedstocks.

We were formed in 2011 by Rentech, Inc. (“Rentech”). Rentech Nitrogen Holdings, Inc. (“RNHI”), Rentech’s indirect wholly owned subsidiary, owns approximately 60% of the outstanding Partnership common units and Rentech Nitrogen GP, LLC (the “General Partner”), RNHI’s wholly owned subsidiary, owns 100% of the non-economic general partner interest in us.

On November 1, 2012, the Partnership completed its acquisition of 100% of the membership interests of Agrifos LLC (“Agrifos”) from Agrifos Holdings Inc. (the “Seller”), pursuant to a Membership Interest Purchase Agreement (the “Agrifos Purchase Agreement”). Upon the closing of this transaction (the “Agrifos Acquisition”), Agrifos became a wholly owned subsidiary of the Partnership and its name changed to Rentech Nitrogen Pasadena Holdings, LLC (“RNPH”). RNPH owns all of the member interests in Rentech Nitrogen Pasadena, LLC (“RNPLLC”), formerly known as Agrifos Fertilizer, LLC, which owns and operates the Pasadena Facility. For information on the Agrifos Acquisition refer to Note 3 Agrifos Acquisition.

Note 2 — Summary of Certain Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Partnership and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

East Dubuque and Pasadena Policy

Revenues are recognized when customers take ownership upon shipment from the East Dubuque Facility, Pasadena Facility, East Dubuque Facility’s leased facility or Pasadena Facility’s distributors’ facilities and (i) customer assumes risk of loss, (ii) there are no uncertainties regarding customer acceptance, (iii) collection of the related receivable is probable, (iv) persuasive evidence of a sale arrangement exists and (v) the sales price is fixed or determinable. Management assesses the business environment, the customer’s financial condition, historical collection experience, accounts receivable aging and customer disputes to determine whether collectability is reasonably assured. If collectability is not considered reasonably assured at the time of sale, the Partnership does not recognize revenue until collection occurs.

Natural gas, though not typically purchased for the purpose of resale, is occasionally sold by the East Dubuque Facility when contracted quantities received are in excess of production and storage capacities, in which case the sales price is recorded in revenues and the related cost is recorded in cost of sales. Natural gas sales were $6.1 million for the year ended December 31, 2014, $3.4 million for the year ended December 31, 2013 and $1.1 million for the year ended December 31, 2012.

East Dubuque Contracts

RNLLC has a distribution agreement (the “Distribution Agreement”) with Agrium U.S.A., Inc. (“Agrium”). The Distribution Agreement is for a 10 year period, subject to renewal options. Pursuant to the Distribution Agreement, Agrium is obligated to use commercially reasonable efforts to promote the sale of, and solicit and secure orders from its customers for nitrogen fertilizer products

 

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manufactured at the East Dubuque Facility, and to purchase from RNLLC nitrogen fertilizer products manufactured at the facility for prices to be negotiated in good faith from time to time. Under the Distribution Agreement, Agrium is appointed as the exclusive distributor for the sale, purchase and resale of nitrogen products manufactured at the East Dubuque Facility. Sale terms are negotiated and approved by RNLLC. Agrium bears the credit risk on products sold through Agrium pursuant to the Distribution Agreement. If an agreement is not reached on the terms and conditions of any proposed Agrium sale transaction, RNLLC has the right to sell to third parties provided the sale is on the same timetable and volumes and at a price not lower than the one proposed by Agrium. For the years ended December 31, 2014, 2013 and 2012, the Distribution Agreement accounted for 78%, 79% and 83%, respectively, of net revenues from product sales for the East Dubuque Facility. Receivables from Agrium accounted for 36% and 84% of the total accounts receivable balance of the East Dubuque Facility as of December 31, 2014 and 2013, respectively. Agrium made more timely payments in 2014 than in 2013 which accounted for the lower percentage in 2014.

RNP negotiates sales with other customers and these transactions are not subject to the terms of the Distribution Agreement.

Under the Distribution Agreement, the East Dubuque Facility pays commissions to Agrium not to exceed $5 million during each contract year on applicable gross sales during the first 10 years of the agreement. The commission rate is 5%. The effective commission rate for the year ended December 31, 2014 was 3.4%, 3.6% for the year ended December 31, 2013 and 2.7% for the year ended December 31, 2012. The commission expense was recorded in cost of sales for all periods.

Pasadena Contracts

We sell substantially all of our Pasadena Facility’s products through marketing and distribution agreements. Pursuant to an exclusive marketing agreement we have entered into with Interoceanic Corporation (“IOC”), IOC has the exclusive right and obligation to market and sell all of our Pasadena Facility’s ammonium sulfate product. Under the marketing agreement, IOC is required to use commercially reasonable efforts to market the product to obtain the most advantageous price. We compensate IOC for transportation and storage costs relating to the ammonium sulfate product it markets through the pricing structure under the marketing agreement. The marketing agreement has a term that ends December 31, 2016, but automatically renews for subsequent one-year periods (unless either party delivers a termination notice to the other party at least 210 days prior to an automatic renewal). The marketing agreement may be terminated prior to its stated term for specified causes. During the years ended December 31, 2014, 2013 and the period beginning November 1, 2012 through December 31, 2012, the marketing agreement with IOC accounted for 100% of our Pasadena Facility’s revenues from the sale of ammonium sulfate. In addition, we have an arrangement with IOC that permits us to store approximately 60,000 tons of ammonium sulfate at IOC-controlled terminals, which are located near end customers of our Pasadena Facility’s ammonium sulfate. This arrangement currently is not governed by a written contract. We also have marketing and distribution agreements to sell other products that automatically renew for successive one year periods.

Deferred Revenue

A significant portion of the revenue recognized during any period may be related to prepaid contracts or products stored at IOC facilities, for which cash was collected during an earlier period, with the result that a significant portion of revenue recognized during a period may not generate cash receipts during that period. As of December 31, 2014 deferred revenue was $26.7 million and $20.4 million for the year ended December 31, 2013. At the East Dubuque Facility, we record a liability for deferred revenue to the extent that payment has been received under prepaid contracts, which create obligations for delivery of product within a specified period of time in the future. The terms of these prepaid contracts require payment in advance of delivery. At the Pasadena Facility, IOC pre-pays a portion of the sales price for shipments received into its storage facilities. The Partnership recognizes revenue related to the prepaid contracts or products stored at IOC facilities and relieves the liability for deferred revenue when products are shipped (including shipments to end customers from IOC facilities).

Cost of Sales

Cost of sales are comprised of manufacturing costs related to the Partnership’s fertilizer products. Cost of sales expenses include direct materials (such as natural gas, ammonia, sulfur and sulfur acid), direct labor, indirect labor, employee fringe benefits, depreciation on plant machinery, electricity and other costs, including shipping and handling charges incurred to transport products sold.

The Partnership enters into short-term contracts to purchase physical supplies of natural gas in fixed quantities at both fixed and indexed prices. The Partnership anticipates that it will physically receive the contract quantities and use them in the production of fertilizer. The Partnership believes it is probable that the counterparties will fulfill their contractual obligations when executing these contracts. Natural gas purchases, including the cost of transportation to the East Dubuque Facility, are recorded at the point of delivery into the pipeline system.

 

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Accounting for Derivative Instruments

Accounting guidance establishes accounting and reporting requirements for derivative instruments and hedging activities. This guidance requires recognition of all derivative instruments as assets or liabilities on the Partnership’s consolidated balance sheets and measurement of those instruments at fair value. The accounting treatment of changes in fair value is dependent upon whether or not a derivative instrument is designated as a hedge and if so, the type of hedge. The Partnership currently does not designate any of its derivatives as hedges for financial accounting purposes. Gains and losses on derivative instruments not designated as hedges are currently included in earnings and reported under cash flows from operating activities.

Cash

The Partnership has checking and savings accounts with major financial institutions. At times balances with these financial institutions may be in excess of federally insured limits.

Accounts and Other Receivables

Trade receivables are recorded at net realizable value. The allowance for doubtful accounts reflects the Partnership’s best estimate of probable losses inherent in the accounts receivable balance. The Partnership determines the allowance based on known troubled accounts, historical experience, and other currently available evidence. The Partnership reviews its allowance for doubtful accounts quarterly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

Inventories

Inventories consist of raw materials and finished goods. The primary raw material used by the East Dubuque Facility in the production of its nitrogen products is natural gas. The primary raw materials used by the Pasadena Facility in the production of its products are ammonia and sulfur. Raw materials also include certain chemicals used in the manufacturing process. Finished goods include the products stored at each plant that are ready for shipment along with any inventory that may be stored at remote facilities. Inventories on the balance sheets included depreciation in the amount of $2.1 million at December 31, 2014 and $1.2 million at December 31, 2013.

Inventories are stated at the lower of cost or estimated net realizable value. The cost of inventories is determined using the first-in first-out method. The estimated net realizable value is based on customer orders, market trends and historical pricing. On at least a quarterly basis, the Partnership performs an analysis of its inventory balances to determine if the carrying amount of inventories exceeds its net realizable value. If the carrying amount exceeds the estimated net realizable value, the carrying amount is reduced to the estimated net realizable value. During turnarounds at the East Dubuque and Pasadena Facilities, the Partnership allocates fixed production overhead costs to inventory based on the normal capacity of its production facilities and unallocated overhead costs are recognized as expense in the period incurred.

Property, Plant and Equipment

Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation expense is calculated using the straight-line method over the estimated useful lives of the assets, except for platinum catalyst, as follows:

 

Type of Asset

  

Estimated Useful Life

Building and building improvements    20-40 years
Land improvements    10-20 years
Machinery and equipment    7-10 years
Furniture, fixtures and office equipment    5-10 years
Computer equipment and software    3-5 years
Vehicles    3-5 years
Ammonia catalyst    3-10 years
Platinum catalyst    Based on units of production

Expenditures during turnarounds or at other times for improving, replacing or adding to RNP’s assets are capitalized. Expenditures for the acquisition, construction or development of new assets to maintain RNP’s operating capacity, or to comply with environmental, health, safety or other regulations, are also capitalized. Costs of general maintenance and repairs are expensed.

 

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When property, plant and equipment is retired or otherwise disposed of, the asset and accumulated depreciation are removed from the accounts and the resulting gain or loss is reflected in operating expenses.

Spare parts are maintained by each facility to reduce the length of possible interruptions in plant operations from an infrastructure breakdown at the facility. The spare parts may be held for use for years before the spare parts are used. As a result, they are capitalized as a fixed asset at cost. When spare parts are utilized, the book values of the assets are charged to earnings as a cost of production. Periodically, the spare parts are evaluated for obsolescence and impairment and if the value of the spare parts is impaired, it is charged against earnings.

Long-lived assets and construction in progress are reviewed whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the expected future cash flow from the use of the asset and its eventual disposition is less than the carrying amount of the asset, an impairment loss is recognized and measured using the asset’s fair value.

The Partner