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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________ to _____________
Commission file number 1-10877
Terra Nitrogen Company, L.P.
(Exact name of registrant as specified in its charter)
Delaware 73-1389684
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
5100 East Skelly Drive, Suite 800
Tulsa, Oklahoma 74135
(Address of principal executive office) (Zip code)
Registrant's telephone number:
(918) 660-0050
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ----------------
Senior Preference Units New York Stock Exchange
Representing Limited
Partner Interests
Evidenced by Depositary Receipts
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's Senior Preference Units
held by nonaffiliates as of the close of business on February 27, 1997 was
$280,614,171.
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TABLE OF CONTENTS
PAGE
PART I
Items 1.
and 2. Business and Properties....................................... 1
Item 3. Legal Proceedings............................................. 7
Item 4. Submission of Matters to a Vote of Unitholders................ 7
PART II
Item 5. Market for Registrant's Units and Related Unitholder Matters.. 8
Item 6. Selected Financial Data....................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 10
Item 8. Financial Statements and Supplementary Data................... 15
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 16
PART III
Item 10. Directors and Executive Officers of the Registrant............ 17
Item 11. Executive Compensation........................................ 19
Item 12. Security Ownership of Certain Beneficial Owners and Management 24
Item 13. Certain Relationships and Related Transactions................ 25
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K........................................... 27
Signatures.............................................................. 31
TERRA NITROGEN COMPANY, L.P.
FORM 10-K
PART I
Items 1 and 2. Business and Properties
General
Terra Nitrogen Company, L.P. ("TNCLP") is a Delaware limited partnership that
conducts its operations through an operating partnership subsidiary, Terra
Nitrogen, Limited Partnership (the "Operating Partnership"). Terra Nitrogen
Corporation ("TNC"), a Delaware corporation, owns a combined 2.0% general
partner interest in, and serves as the general partner (the "General Partner")
of, both TNCLP and the Operating Partnership (collectively the "Partnership",
unless the context otherwise requires). TNC is an indirect, wholly owned
subsidiary of Terra Industries Inc. ("Terra"), a Maryland corporation. Terra,
through its various subsidiaries, is a leading marketer and producer of nitrogen
fertilizer, crop protection products, seed and services for agricultural, turf,
ornamental and other growers. Terra also produces nitrogen products and methanol
for industrial customers.
Ownership of TNCLP is comprised of the general partner interest and the
limited partner interests. Prior to December 31, 1996, the limited partner
interests consisted of 13,636,364 Senior Preference Units ("SPUs") and 5,172,414
Common Units. Terra and its subsidiaries owned 6,974,900 SPUs and all the Common
Units on December 31, 1996, and the balance of SPUs are currently traded on the
New York Stock Exchange under the symbol "TNH". The Senior Preference and
Common Units are referred to herein individually as a "Unit" and collectively as
"Units".
Pursuant to the provisions of the TNCLP limited partnership agreement, the
Preference Period for TNCLP ended on December 31, 1996, and holders of SPUs can
elect by March 31, 1997 to convert to Common Units. (See "Status of Units at end
of Preference Period").
Partnership products
The Partnership is one of the largest U.S. producers and distributors of
nitrogen fertilizer products, which are principally used by farmers to improve
the yield and quality of their crops. The Partnership's principal products
include ammonia, urea and urea ammonium nitrate solution ("UAN"). The
Partnership's product sales are heavily weighted toward UAN and all of its
products are sold on a wholesale basis. Although, to some extent, the various
nitrogen fertilizer products are interchangeable, each has its own distinct
characteristics which result in agronomic preferences among end users. Farmers
determine which type of nitrogen fertilizer to apply depending on the crop, soil
and weather conditions, regional farming practices and relative nitrogen
fertilizer prices.
The Partnership's sales mix for each of the years 1996, 1995 and 1994 was
(based on tons sold):
1996 1995 1994
----- ----- -----
Ammonia 13% 15% 19%
Urea 13% 15% 15%
UAN 74% 70% 66%
---- ---- ----
100% 100% 100%
Ammonia. The Partnership produces ammonia, the simplest form of nitrogen
fertilizer and the feedstock for the production of most other nitrogen
fertilizers, at its two plants (the "Plants") located in Verdigris, Oklahoma
(the "Verdigris Plant") and Blytheville, Arkansas (the "Blytheville Plant").
Ammonia is produced by reacting natural gas with steam and air at high
temperatures and pressures in the presence of catalysts.
1
Ammonia has a nitrogen content of 82% by weight and is the least expensive
form of fertilizer per unit of nitrogen. However, because it is a gas that must
be kept under pressure and refrigerated, ammonia is more costly to store, ship
and apply than other nitrogen fertilizer products and must be applied during a
shorter period of the growing season. Ammonia must be injected into the soil by
specialized equipment, and soil conditions often limit its application. In
addition, in certain areas, especially in lesser developed countries, dealers
and farmers lack the equipment necessary to store, ship and apply ammonia and
are required to use other forms of nitrogen fertilizer. Ammonia can be upgraded
to produce solid or liquid fertilizers, like urea and UAN, which are relatively
easier to transport, store and apply than ammonia.
Urea. The Partnership produces granular urea at the Blytheville Plant, by
upgrading a portion of its ammonia production. Solid urea is produced by
converting ammonia into liquid urea which is then dehydrated and turned into a
solid and either prilled or granulated. Prilled materials are the most common
form of solid urea. The granular form made by the Partnership may command a
modest price premium in certain markets because the consistency in size of the
granules (relative to prills) results in a more controllable spreading pattern
and better blending characteristics.
Urea has a nitrogen content of 46% by weight, the highest level for any solid
nitrogen product. Dry urea is used both as a direct application fertilizer and
as an ingredient in the dry bulk blending of mixed fertilizer grades. Urea is
transported and stored in bulk or in bags and is often blended by distributors
into customized fertilizers containing other nutrients.
UAN. The Partnership produces UAN at the Verdigris Plant and at the
Blytheville Plant by upgrading a portion of its ammonia production. UAN is
produced by combining liquid urea and ammonium nitrate in water. UAN is a liquid
fertilizer and, unlike ammonia, is odorless and does not need to be refrigerated
or pressurized for transportation or storage.
The nitrogen content of UAN is typically 28% to 32%. As a liquid, UAN has
many advantages over solid fertilizers and gaseous ammonia. UAN may be applied
more uniformly than non-liquid products and may be mixed with various
herbicides, pesticides and other nutrients, permitting the farmer to apply
several materials simultaneously rather than in separate applications, thus
reducing energy and labor costs. In addition, UAN, unlike ammonia, may be
applied from ordinary tanks and trucks and can be sprayed on, injected into the
soil, or applied through irrigation systems, throughout the growing season.
Marketing and distribution
The Partnership sells its products primarily in the Central and Southern
Plains and Cornbelt regions of the United States. The Partnership's two Plants
are located on waterways near the major crop producing and consuming areas of
the United States, where the Partnership has ready access to barge, truck and
rail transportation at both Plants and an ammonia pipeline at the Verdigris
Plant to transport product to its primary markets. As of December 31, 1996, the
General Partner marketed the Partnership's products through a distribution and
marketing organization of 31 persons, located in the field and at the
Partnership's headquarters in Tulsa, Oklahoma. For further information on the
combined organizations of the General Partner and its affiliates, see "Certain
Relationships and Related Transactions".
All of the Partnership's sales are at the wholesale level. The Partnership's
customers for fertilizer products are dealers, national farm retail chains,
distributors and other fertilizer producers and traders. National farm retail
chains have both distribution and application capabilities. Distributors operate
as wholesalers and sell directly to dealers and national farm retail chains,
who, in turn, sell directly to farmers. Many dealers maintain storage capacity
for year-round inventory as well as application equipment. The majority of the
Partnership's sales of nitrogen fertilizer is made to dealers. For the year
ended December 31, 1996, sales to Terra totalled $41.4 million, or 11.4% of the
Partnership's sales. For a description of the Partnership's sales to affiliates
of the General Partner, see "Certain Relationships and Related Transactions".
The Partnership exports UAN through an export marketing association comprised
of three domestic UAN producers.
2
Transportation. The Partnership transports product primarily via barge and
railcar. Additionally, the Partnership uses trucks to transport smaller
quantities of product, and the Verdigris Plant distributes ammonia through the
MAPCO pipeline. In addition, various supply terminals and transportation
equipment are generally available for the use and benefit of the Partnership and
affiliates of the General Partner. The transportation equipment includes access
to approximately 2,150 leased railcars. The Partnership has access to
significant storage capacity throughout the Midwestern U.S. and other major
fertilizer consuming regions in the U.S. through these supply terminals. See
"Certain Relationships and Related Transactions".
Production facilities
The following table illustrates the Partnership's gross production capacity
and percentage of capacity utilized.
Years Ended December 31,
--------------------------
1996 1995 1994
----- ----- ------
Capacity (000s tons)
Ammonia 1,470 1,470 1,400
Urea 480 480 480
UAN 2,250 2,150 2,050
----- ----- -----
Total 4,200 4,100 3,930
Capacity Utilization* 102% 102% 97%
* Capacity utilization is determined by dividing the gross tons of product
produced by the tons of capacity at expected operating rates and onstream
factors.
Verdigris Plant. The Verdigris facility is located at the Port of Catoosa,
in Rogers County, Oklahoma. On the Verdigris site are the Verdigris Plant and
the Port Terminal. The Verdigris Plant is owned in fee by the Partnership,
while the Port Terminal is leased from the Tulsa-Rogers County Port Authority.
The leasehold interest is scheduled to expire on April 30, 1999, and the
Partnership has the option to renew the lease for two additional, consecutive
terms of five years each. The Verdigris Plant consists of two ammonia plants,
two nitric acid plants and two UAN solution plants. The Verdigris Plant produces
primarily ammonia and UAN solution. In 1996, approximately 75 percent of its
ammonia production was converted into UAN. In addition, the Verdigris Plant
also contains carbon dioxide and argon recovery facilities. The Verdigris
Plant's sale of by-product carbon dioxide and argon reduces the cost of
production of nitrogen products. The Verdigris Plant delivers its products by
barge, truck, rail and pipeline.
Blytheville Plant. The Blytheville Plant is located in Mississippi County,
Arkansas, adjacent to the Mississippi River. The Blytheville Plant consists of
an anhydrous ammonia plant, a granular urea plant and a UAN solution plant. In
1996, approximately 68 percent of its ammonia was converted into granular urea
and UAN. The ammonia facility at the Blytheville Plant is leased from the City
of Blytheville at a nominal annual rental. The lease term is scheduled to
expire on November 30, 1999, and the Partnership has the option to extend the
lease for twelve successive terms of five years each at the same rental rate.
The Partnership has the unconditional right to purchase the Plant for a nominal
price at the end of the lease term (including any renewal term). The urea
facility is also leased from the City of Blytheville. The lease is scheduled to
expire on November 1, 1999, and the Partnership has the option to renew the
lease for four successive periods of five years each at a nominal annual rental.
The Partnership also has an option to purchase the property for a nominal price.
The Blytheville Plant has access to a distribution system which includes rail,
truck and barge transportation. This distribution network gives the Blytheville
Plant the flexibility to serve the Eastern U.S. fertilizer markets.
Terminal Facilities. The Partnership owns and operates four terminals used
in the storage and distribution of product to customers. The Dublin Terminal, a
UAN terminal owned by the Partnership in fee, is located in Henry and Wayne
Counties, Indiana. The Blair Terminal, an ammonia and UAN terminal facility in
which the Partnership holds a fee interest and a leasehold interest, is located
in Washington County, Nebraska. The Pekin Terminal, a UAN terminal in which the
Partnership holds a leasehold interest, is located in Tazewell
3
County, Illinois. The Shattuc Terminal, a UAN terminal owned by the Partnership
in fee, is located in Clinton County, Illinois. The leasehold portions of both
the Blair Terminal and the Pekin Terminal properties are leased from Conoco Inc.
under a capital lease. The lease is scheduled to terminate on November 30, 2000.
The Partnership has an option to purchase these properties for a nominal price
at the end of the lease term. In addition, as of December 31, 1996, the
Partnership leased space in 59 terminals located in numerous states.
Raw materials
Natural gas is the primary raw material used in the production of ammonia and
is also the primary fuel used in the Partnership's ammonia production processes.
The Partnership purchases natural gas from unaffiliated sources. The purchase
and transportation of natural gas account for a large majority of the
Partnership's production costs, representing approximately 50% of total costs
and expenses. A significant increase in the price of natural gas that is not
recovered through an increase in nitrogen fertilizer prices would have a
material adverse effect on the Partnership's profitability and cash flow. Annual
gas usage in the Partnership's plants is approximately 56 million MMbtus
(million British Thermal Units).
The Partnership's natural gas procurement policy is to effectively fix or cap
the unit cost of approximately 40% to 80% of its natural gas requirements for
the upcoming 12 months and up to 50% of its natural gas requirements for the
subsequent two-year period using supply contracts, financial derivatives and
other forward pricing techniques in an attempt to gain some protection against
natural gas price increases on the spot market. Consequently, if natural gas
prices were to increase in a future period the Partnership may benefit from
these forward pricing techniques; however, if natural gas prices were to fall,
the Partnership may incur costs above the spot market price as a result of such
policies.
The settlement dates for such financial instruments are scheduled to coincide
with gas purchases during such future periods. These instruments reference
physical natural gas prices or appropriate NYMEX futures contract prices. The
contracts' physical prices are frequently based on the Henry Hub Louisiana
price, which is the most common and financially liquid location of reference for
financial derivatives related to natural gas; however, natural gas supplies for
the Partnership's two production facilities are purchased from various suppliers
at locations that are different from Henry Hub. This creates a location basis
differential between the contract price and the physical price of natural gas.
Accordingly, the use of financial derivatives may not exactly offset the change
in price of physical gas. The partnership has entered into firm transportation
contracts to minimize the risk of interruption or curtailment of natural gas
supplies. As of December 31, 1996, the Partnership had effectively fixed or
capped the price of a substantial portion of its natural gas requirements for
1997 and 1998. Liquidation of these financial derivatives based on December 31,
1996 market prices would have resulted in a gain of $20 million.
Verdigris Plant Supply. The Verdigris Plant obtains natural gas under a
transportation agreement with Oklahoma Natural Gas Company ("ONG") that will
expire in 2004. Under the provisions of the agreements, the Partnership has the
option to: (a) purchase all or part of its natural gas requirements from ONG at
prices periodically offered by ONG, (b) purchase natural gas from third parties
or (c) use any combination of (a) or (b). Except under certain limited
circumstances, all natural gas purchased by the Verdigris Plant must be
transported to the Plant on ONG's pipeline system under interruptible
transportation agreements.
Blytheville Plant Supply. The Partnership has agreements for the
transportation of natural gas to the Blytheville Plant. The primary term of the
agreements expires on September 30, 1998.
Seasonality and volatility
Nitrogen fertilizer is a global commodity and generally has no proprietary
distinction. The U.S. nitrogen fertilizer business is both seasonal and volatile
due to a number of factors that affect U.S. and world supply and demand.
Approximately 60% of all nitrogen fertilizer consumed in the United States is
applied on acreage used for growing corn and wheat. Because of its dependence
on the U.S. agricultural markets, the Partnership's business is seasonal to the
extent that the Partnership typically realizes higher prices and accordingly
more revenues on its products in the second quarter. The seasonality of the
partnership's business is the result of the U.S. agricultural growing season,
which imposes the need to build inventories for the annual peak periods of
fertilizer application and generally results in higher fertilizer prices during
such peak periods. Prices for
4
fertilizer typically peak in the spring, drop in the summer, increase in the
fall (as depleted inventories are restored) through the spring.
In recent years, additional nitrogen fertilizer storage capacity has been
built which allows the Partnership's customers to purchase more product during
the fall and winter months. As a result, there has been a shift in Partnership
sales from the first and second quarters of the year to the third and fourth
quarters. While the third and fourth quarter revenues now represent a higher
percentage of the annual revenues, the second quarter continues to be the
Partnership's strongest quarter producing the highest revenues and earnings.
The Partnership's revenues are primarily dependent on U.S. agricultural
conditions, which can be volatile as a result of a number of factors, the most
important of which are weather patterns and conditions (particularly during
periods of high fertilizer application), current and projected grain stocks and
prices, grain export prices and supports, and the U.S. government's agricultural
policy. U.S. governmental policies were designed to regulate or influence the
number of acres planted, the level of grain inventories, the mix of crops
planted and crop prices in order to mitigate price and grain inventory
volatility. The enactment of the Federal Agriculture Improvement and Reform
("FAIR") act during 1996 ended government acreage reduction and production
control measures and allowed farmers more flexibility in planting. As a result,
additional acres were brought into production during 1996 and this increase in
acreage production, if sustained, could have a positive impact on the fertilizer
industry over the next few years. However, there can be no assurance that the
relatively high nitrogen fertilizer price levels achieved in 1996 will continue.
Competition
The nitrogen fertilizer industry is highly competitive. Competition takes
place largely on the basis of price, reliability and deliverability, since
fertilizer is a commodity. The relative cost and availability of natural gas,
the efficiency of production facilities and the ability to transport finished
goods to end users are important competitive factors. The Partnership's
domestic competitors include large farm cooperatives, other independent
fertilizer companies and subsidiaries or divisions of larger chemical or energy
companies. In addition, nitrogen fertilizers imported into the United States
compete with domestically produced nitrogen fertilizers, including those of the
Partnership. Some of the Partnership's principal competitors may have greater
total resources and may be less dependent on earnings from nitrogen fertilizer
sales than is the Partnership. Countries with inexpensive sources of natural
gas, particularly those in the former Soviet Union and the Middle East, can
produce nitrogen fertilizers at a low cost. However, political instability and
high transportation costs can serve as deterrents to exporting nitrogen
fertilizers to the U.S.
Tight market conditions and higher ammonia prices since the spring of 1994
have created interest in construction of new plants and expansion of existing
plants in the nitrogen fertilizer industry. Consequently, new nitrogen
fertilizer production facilities are anticipated to come on stream during the
next few years. If increasing demand is insufficient to absorb new supplies
generated by these facilities, profit margins could decline in future periods.
Environmental matters
The Partnership is subject to federal, state and local environmental, health
and safety laws and regulations, particularly relating to air and water quality.
In the course of its ordinary operations, the Partnership has and will generate
wastes, which may fall within the definition of "hazardous substances" under
federal or state laws. If such wastes have been disposed of at sites which are
targeted for cleanup by federal or state regulatory authorities, the Partnership
may be among those responsible under Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") or analogous state laws for all or
part of the costs of such cleanup.
The Partnership believes that the procedures currently in effect at all of its
facilities for the production, handling and transportation of all materials are
consistent with industry standards and in compliance with applicable
environmental, health and safety laws in all material respects. In addition, in
connection with the Asset Purchase Agreement dated February 7, 1990, between TNC
and FreeportMcMoRan Resource Partners, Limited Partnership ("FMRP"), as
amended, by which TNC purchased certain nitrogen fertilizer operations from FMRP
(the "1990 TNC Acquisition"), FMRP agreed to provide TNC a limited indemnity
(the "Freeport
5
Indemnity") for certain environmental liabilities that are the subject of
official notice from a court or governmental agency. The Freeport Indemnity
encompasses all costs incurred in respect of all such liabilities associated
with the off-site disposal of hazardous substances or other solid wastes
generated by FMRP prior to the 1990 TNC acquisition's closing date, February 28,
1990.
Certain state regulatory agencies have enacted requirements to provide
secondary containment for bulk agricultural chemical storage facilities present
at the Partnership's terminals. It is expected that other states will adopt
similar requirements pursuant to federal mandate. The Partnership has commenced
construction of these facilities at its terminals, and estimates that the future
cost of complying with these regulations in 1997 and beyond will be
approximately $1.0 million.
The Partnership may be required to install additional air and water quality
control equipment, such as low nitrous oxide burners, scrubbers, ammonia sensors
and continuous emission monitors, at certain of its facilities in order to
maintain compliance with Clean Air Act and Clean Water Act requirements. These
equipment requirements are also typically applicable to competitors as well. The
Partnership estimates that the cost of complying with these requirements will be
approximately $2.5 million through 1998.
Based on its current knowledge, the Partnership does not expect any capital
expenditures relating to environmental matters to have a material adverse effect
on its results of operations, financial condition, capital resources, liquidity
or cash flow. There can be no assurance, however, that additional environmental
matters resulting in material liabilities or expenditures will not be discovered
or that, in the future, material expenditures for such matters will not be
required by changes in law.
Employees
The Partnership does not have any employees, officers or directors.
The General Partner is responsible for the management of the Partnership. As
of December 31, 1996, the General Partner had 361 employees. None of the
General Partner's employees are subject to collective bargaining agreements.
The General Partner considers its labor relations to be good.
Status of Units at end of Preference Period
Pursuant to the provisions of the TNCLP limited partnership agreement, the
Preference Period for TNCLP ended on December 31, 1996. Until March 31, 1997 the
holders of all SPUs have the right to elect to convert their SPUs into Common
Units on a one-for-one basis, effective as of December 31, 1996 by delivering to
the General Partner a conversion notice. Any Units for which a conversion notice
is not received on or prior to March 31, 1997 remain SPUs (see "Redemption").
Those units that remain SPUs and do not convert into Common Units will continue
to be entitled to the Minimum Quarterly Distribution but will not participate
with the Common Units in any additional distributions.
The Common Units have been approved for listing on the New York Stock Exchange
under the symbol "TNH". The SPUs will, if not delisted, be traded under the new
symbol "TNH PR". In the event that too few SPUs convert to Common Units and
therefore such Common Units do not meet the exchange listing requirements, only
SPUs owned by the General Partner and its affiliates may be converted into
Common Units, and SPUs held by all other holders will remain SPUs.
Redemption
SPUs that fail to convert to Common Units may be redeemed at the option of the
Partnership, exercised in the sole discretion of the General Partner, upon at
least 30 but not more than 60 days' notice at a price equal to Unrecovered
Capital plus accrued arrearages, if any. Unrecovered Capital, as further defined
in the Partnership Agreement, currently equals $21.50. If after giving effect to
an anticipated redemption, fewer than 1.0 million SPUs would be held by non-
affiliates of the General Partner, the Partnership must redeem all such SPUs if
it redeems any SPUs.
6
Limited Call Right
If at any time less than 25% of the issued and Outstanding Units of any class
(Senior Preference or Common) are held by non-affiliates of the General Partner,
the Partnership may call, or assign to the General Partner or its affiliates its
right to acquire all such Outstanding Units held by non-affiliated persons.
TNCLP shall give at least 30 but not more than 60 days notice of its decision to
purchase the Outstanding Units. The purchase price per unit will be the greater
of (1) the average of the previous twenty trading days closing prices as of the
date five days before the purchase is announced or (2) the highest price paid by
the General Partner or any of its affiliates for any unit within the 90 days
preceding the date the purchase is announced.
Item 3. Legal Proceedings
There is no pending or threatened litigation to the knowledge of the
Partnership that would have a material adverse effect on the business or
financial condition of the Partnership.
Item 4. Submission of Matters to a Vote of Unitholders
Not Applicable.
7
PART II
ITEM 5. Market for Registrant's Units and Related Unitholder Matters
Prior to January 1, 1997, the SPUs of TNCLP were listed and traded on the
New York Stock Exchange under the symbol, TNH. The high and low sales prices of
the SPUs for each quarterly period for 1996 and 1995, as reported on the New
York Stock Exchange Composite Tape, were as follows:
1996 1995
--------------------- ---------------------
Quarter High Low High Low
- ------- -------- ------- --------- ------
1st $47 1/4 $35 3/4 $30 1/2 $24 1/8
2nd 49 1/4 37 32 1/4 28 1/2
3rd 46 1/2 37 1/2 32 1/2 29 1/2
4th 45 3/4 41 1/2 38 7/8 31 5/8
Based on information received from TNCLP's transfer and servicing agent,
the number of registered unitholders as of February 7, 1997 is 1,019. TNC owns
6,000,000 SPUs. TNC is the record holder of all 5,172,414 Common Units
outstanding on February 7, 1997.
The quarterly cash distributions paid to the Units and the General Partner
in 1996 and 1995 were as follows:
Amount Per Amount Per Amount Per
Senior Preference Junior Preference Common Amount Distributed
Unit Unit Unit to General Partner
----------------- ----------------- ---------- ------------------
1996:
First quarter $1.91 * $1.91 $18,290,234
Second quarter 1.63 * 1.63 13,022,192
Third quarter 2.42 * 2.42 27,882,757
Fourth quarter 1.77 * 1.77 15,658,463
1995:
First quarter .66 .66 .66 253,343
Second quarter 1.14 1.14 1.14 3,794,993
Third quarter 1.73 1.73 1.73 14,903,814
Fourth quarter 1.47 1.47 1.47 9,995,096
* On December 31, 1995, the Junior Preference Units automatically became
SPUs pursuant to the terms of the TNCLP limited partnership agreement.
Cash distributions are based on Available Cash for the quarter as defined
in TNCLP's limited partnership agreement. Available Cash is defined generally
as all cash receipts less all cash disbursements, adjusted for changes in
certain reserves established as the General Partner determines in its reasonable
discretion to be necessary. There are a number of factors which affect the
amount of taxable income reported to unitholders including Partnership earnings,
capital spending and cash distributions.
Item 6. Selected Financial Data
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following table sets forth the Partnership's historical financial and
operating data for each of the five years ended December 31, 1996. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes included elsewhere in this report.
8
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------- ------------ ------------
(Dollars in Thousands, except Income per Unit and Average Realized Prices)
INCOME STATEMENT DATA:
Revenues.................... $362,730 $373,325 $300,269 $259,782 $243,397
Other income............... 408 650 2,565 968 1,360
-------- -------- -------- -------- --------
Total revenues............ 363,138 373,975 302,834 260,750 244,757
-------- -------- -------- -------- --------
Cost of goods sold.......... 177,502 187,615 193,541 190,192 170,033
-------- -------- -------- -------- --------
Gross profit.............. 185,636 186,360 109,293 70,558 74,724
Operating expenses.......... 13,035 16,840 20,000 17,645 17,414
-------- -------- -------- -------- --------
Operating income.......... 172,601 169,520 89,293 52,913 57,310
Interest expense............ (1,210) (1,748) (3,575) (4,015) (4,629)
Interest income............. 6,242 4,696 2,038 831 811
-------- -------- -------- -------- --------
Income before income taxes and
extraordinary expense..... 177,633 172,468 87,756 49,729 53,492
Income taxes................ -- -- -- -- --
-------- -------- -------- -------- --------
Income before extraordinary
expense................... $177,633 $172,468 $ 87,756 $ 49,729 $ 53,492
======== ======== ======== ======== ========
Income before extraordinary
expense per limited
partner unit.............. $ 6.35 $ 6.55 $ 4.57 $ 2.59 $ 2.79
======== ======== ======== ======== ========
Balance Sheet Data (at period end):
Net property, plant and
equipment................. $172,771 $177,358 $179,028 $184,629 $194,171
Total assets............... 306,668 338,123 316,645 286,355 290,234
Capital lease obligations
including including current
maturities................ 4,198 5,702 42,450 38,418 39,119
Partners' capital.......... 243,744 286,356 236,879 201,003 197,720
OPERATING DATA:
Production (000s tons):(a)
Ammonia--net of
upgrades............... 397 427 535 422 481
UAN..................... 2,286 2,158 1,890 1,974 1,918
Urea.................... 447 453 424 451 472
-------- -------- -------- -------- --------
Total production..... 3,130 3,038 2,849 2,847 2,871
Sales Volume (000s tons):(a)
Ammonia................. 394 451 541 453 472
UAN..................... 2,324 2,133 1,884 1,985 1,966
Urea.................... 419 455 418 460 472
-------- -------- -------- -------- --------
Total sales.......... 3,137 3,039 2,843 2,898 2,910
Average realized prices ($/ton)
Ammonia................. 186 199 174 115 106
UAN...................... 92 93 77 74 66
Urea..................... 179 187 147 132 134
- ------------------------
(a) Sales volume differs from production due to the purchase and resale by the
Partnership of ammonia, UAN and urea as well as changes in the quantities
of inventory of each of the products of the Partnership.
9
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The demand for nitrogen fertilizer is subject to changes in the economy and
agricultural conditions that can significantly affect prices and the
Partnership's profitability. See "Business and Properties Seasonality and
volatility" in Items 1 and 2. Demand for nitrogen fertilizer comes primarily
from the agricultural market with approximately 60% of all nitrogen fertilizer
consumed in the United States being applied to acreage for corn and wheat.
The U.S. is the primary market for the Partnership's products. Generally,
U.S. nitrogen demand is dependent on unpredictable factors such as weather,
agricultural policy, and planted acreage. While almost all the Partnership's
sales are domestic, nitrogen fertilizer is a global commodity and thus, the
worldwide relative balance of supply and demand for nitrogen fertilizers may
impact future Partnership sales.
Weather can have a significant effect on demand for the Partnership's
products. Weather conditions that delay or intermittently disrupt field work
during the planting season may result in fewer nitrogen applications. Similar
conditions following harvest may delay or eliminate opportunities to apply
fertilizer in the fall. Weather can also have an adverse effect on crop yields,
which lowers the income of growers and could reduce the amount of fertilizer
purchased in the future.
The enactment of the FAIR act during 1996 ended government acreage reduction
and production control measures and allowed farmers more flexibility in
planting. As a result, additional acres were brought into production during
1996 and this increase in acreage production, if sustained, could have a
positive impact on the fertilizer industry over the next few years.
Increased foreign and domestic demand, the breakup of the Soviet Union and
relatively few nitrogen capacity additions up until 1996 have maintained a
favorable supply and demand balance in the industry since the spring of 1994.
This supply and demand balance has led to substantial increases in nitrogen
fertilizer prices and has vastly improved the margins of the Partnership's
business over the last two and one half years. Due to factors beyond the
control of the Partnership, there is no assurance that these favorable nitrogen
prices can be maintained.
Higher worldwide nitrogen demand and higher industrial demand in the U.S. have
produced a favorable market for nitrogen products in recent years. Worldwide
demand has been fueled by a growing population and improving economies in
developing countries. As per capita income has increased in some of these
developing countries, meat consumption has also increased. The animal feed for
poultry, hogs and cattle comes from grain production. Due to higher worldwide
and domestic demand for grains, lower than expected corn and wheat harvests in
1995 (somewhat offset by a good corn harvest in 1996), grain inventories are
near their lowest level in twenty years. As a result, corn acres planted in the
U.S. in 1997 may increase approximately 1 million acres over 1996 levels.
The Former Soviet Union ("FSU") has the world's second largest nitrogen
production capability and has a tremendous influence over the world markets,
accounting for more than one-third of the world's nitrogen exports in 1996. The
breakup of the Soviet Union and its shift from a communist state to a market-
driven economy resulted in several changes to the FSU fertilizer industry.
Under the current economy, FSU fertilizer producers lost the benefit of low cost
raw materials and rail transportation and are now faced with income taxes levied
by the government. Higher costs combined with lower internal consumption led
the FSU to cut back production in an attempt to maintain higher prices which, in
turn, has lowered exports.
The improved supply and demand balance and higher prices obtained for nitrogen
fertilizers since 1994 have allowed plants to run at or above 100% of nameplate
capacity. These favorable market conditions for nitrogen producers have created
interest in the construction of new plants and expansion of existing plants.
Consequently, new nitrogen fertilizer production facilities are anticipated to
come on stream during the next few years. If increasing demand is insufficient
to absorb new supplies generated by these facilities, profit margins could
decline in future periods.
10
The Partnership's margins are also influenced by the cost of natural gas,
the primary raw material in the production of nitrogen fertilizers. In 1996,
natural gas costs accounted for approximately 50% of the Partnership's total
costs and expenses.
Results of operations
1996 compared with 1995
1996 1995
---- ----
SALES VOLUMES AVG. UNIT PRICE SALES VOLUMES AVG. UNIT PRICE
(000 TONS) ($/TON) (000 TONS) ($/TON)
------------- --------------- ------------- ---------------
Ammonia 394 186 451 199
UAN 2,324 92 2,133 93
Urea 419 179 455 187
Revenues for the year ended December 31, 1996 declined $10.8 million, or
3%, due to lower sales prices for all products. Also contributing to the lower
revenues were lower sales volumes for ammonia and urea partially offset by
higher UAN sales volumes. Erratic weather patterns reduced ammonia and urea
applications and prices during 1996. Wet weather in parts of the corn belt
during the 1996 planting season created unfavorable conditions for ammonia
application. The wet weather combined with reduced demand for use in the
manufacture of phosphate fertilizers and lower industrial demand caused ammonia
prices to decline approximately 7% from 1995. Urea and ammonia sales volumes
were also impacted by a scheduled turnaround performed at the Blytheville Plant
during the third quarter of 1996 and reduced shipments for wheat pre-plant
application during 1996. UAN sales volumes increased 9% primarily due to a 12%
increase in corn acres planted during 1996.
Cost of goods sold as a percentage of revenues decreased to 49% for 1996
from 50% in 1995, despite slightly lower sales prices, reflecting the favorable
impact of the Partnership's natural gas procurement activities. The
Partnership's forward pricing activities decreased its overall cost of natural
gas from market prices by $37.1 million during 1996. Conversely, natural gas
forward pricing activities increased cost by $18.2 million during 1995. Spot
natural gas prices were higher during 1996 due to cold weather during the first
quarter of 1996 which caused spot natural gas prices to increase and remain high
during the second and third quarters as natural gas storage levels were
replenished. Toward the end of 1996, spot natural gas prices increased
dramatically due to cold weather and an anticipation that storage levels may
need to be drawn down even further to meet increased demand.
Operating expenses decreased $3.8 million, or 23%, compared with 1995
primarily due to lower data processing, legal and employee benefit expenses
during 1996. Incentive compensation expenses were also lower due to changes in
profit sharing plans.
Interest expense declined $538,000 in 1996 due to the repayment of the
Partnership's $35 million term loan during the second quarter of 1995.
Interest income increased $1.5 million due to the higher level of cash and
short term investments.
The net income allocated to the General Partner increased to 33% for the
year ended December 31, 1996 due to the increase in Available Cash distributed
to the General Partner. According to the Agreement of Limited Partnership of
TNCLP, net income is allocated to the General Partner and the Limited Partners
in each taxable year in the same proportion that Available Cash for such taxable
year was distributed to the General Partner and the Limited Partners.
Distributions of Available Cash are made 98% to the Limited Partners and 2% to
the General Partner, except that the General Partner is entitled, as an
incentive, to larger percentage interests to the extent that distributions of
Available Cash exceed specified target levels that are significantly above the
Minimum Quarterly Distribution ("MQD") of $.605 per unit. Available Cash for
1996 increased $39.9 million over 1995 due primarily to the reduction in 1995
Available Cash as a result of the repayment of the Partnership's $35 million
term loan; an increase in 1996 Available Cash as a result of the impact of
TNCLP's participation in an accounts receivable securitization facility entered
into during the third quarter of 1996 and higher net income in 1996.
11
1995 compared with 1994
Revenues for the year ended December 31, 1995 increased $73.1 million, or 24%,
primarily due to higher selling prices for all products and higher UAN sales
volumes, partially offset by lower ammonia sales volumes. Prices for ammonia,
urea and UAN ranged from approximately 14% to 27% higher during 1995 as a result
of a favorable market for nitrogen products. Ammonia sales volumes were down 17%
from the prior year as a result of less favorable weather conditions for
applying ammonia in 1995 and reduced corn acres planted.
Wet weather in the U.S. during 1995 shortened the growing season and reduced
grain harvests. The reduced yields and higher international demand for grains
dropped grain inventories to their lowest levels in twenty years. As a result,
demand for nitrogen products increased during the third and fourth quarters of
1995 in anticipation of increased corn and wheat plantings in the spring of
1996.
Cost of goods sold as a percentage of revenues decreased to 50% in 1995 from
65% in 1994 primarily due to higher sales prices and a 6% decrease in natural
gas costs.
Operating expenses decreased $3.2 million, or 16%, during 1995 compared with
1994 primarily due to the reduction of general and administrative expenses and
other synergies gained from the combination of the management and marketing
organizations of Terra and the General Partner. Incentive compensation expense
was also lower due to changes in the incentive plans during 1995.
Interest expense decreased $1.8 million during 1995 due to the prepayment of
the Partnership's $35 million term loan in the second quarter of 1995.
Interest income increased $2.7 million due to the higher level of cash and
short term investments generated from higher earnings in 1995.
Other income decreased $1.9 million from 1994 due primarily to the recovery of
$1.4 million of precious metals from a boiler replaced at TNCLP's Verdigris
plant during the third quarter of 1994.
Seasonality
The U.S. nitrogen fertilizer business is seasonal. Because of its dependence
on the U.S. agricultural markets, the Partnership's business typically realizes
greater volume and higher prices, and accordingly, more revenues on its products
in the second quarter. The seasonality of the Partnership's business is the
result of the U.S. agricultural growing season, which requires producers to
build inventories for the annual peak periods of fertilizer application and
generally results in higher fertilizer prices during such peak periods. Prices
for fertilizer typically peak in the spring, drop in the summer, increase in the
fall (as depleted inventories are restored) through the spring.
In recent years, additional nitrogen fertilizer storage capacity has been
built which allows the Partnership's customers to purchase more product during
the fall and winter months. As a result, there has been a shift in Partnership
sales from the first and second quarters of the year to the third and fourth
quarters. While the third and fourth quarter revenues now represent a higher
percentage of the annual revenues, the second quarter continues to be the
Partnership's strongest quarter producing the highest revenues and earnings.
Natural gas costs
The Partnership's natural gas procurement policy is to effectively fix or cap
the unit cost of approximately 40% to 80% of its natural gas requirements for
the upcoming 12 months and up to 50% of its natural gas requirements for the
subsequent two-year period using supply contracts, financial derivatives and
other forward pricing techniques in an attempt to gain some protection against
natural gas price increases on the spot market. Consequently, if natural gas
prices were to increase in a future period, the Partnership may benefit from
these forward pricing techniques; however, if natural gas prices were to fall,
the Partnership may incur costs above the spot market price as a result of such
policies.
The settlement dates for such financial instruments are scheduled to coincide
with gas purchases during future periods. These instruments are based on a
designated price which is referenced to market natural gas
12
prices or appropriate NYMEX futures contract prices. The Partnership frequently
uses prices at the Henry Hub in Louisiana, the most common and financially
liquid location of reference for financial derivatives related to natural gas;
however, natural gas supplies for the Partnership's two production facilities
are purchased from various suppliers at locations that are different from Henry
Hub. This creates a location basis differential between the contract price and
the physical price of natural gas. Accordingly, the use of financial derivatives
may not exactly offset the change in the price of physical gas. As of December
31, 1996, the Partnership had effectively fixed or capped the price of a
substantial portion of its natural gas requirements for 1997 and 1998.
Liquidation of these financial derivatives based on December 31, 1996 market
prices would have resulted in a gain of $20 million.
Increases in the price of natural gas normally do not affect the level of
ammonia production. However, since the Partnership's gas procurement includes a
range of volumes and prices, it may be cost effective to eliminate certain
higher priced increments if the purchase of that increment would result in a
negative variable cash margin on the ammonia produced from such incremental gas
purchase. Under these circumstances, production levels may be curtailed.
Production rates can be reduced by up to 10-12% of capacity, thereby reducing
operating rates to 88-90% of capacity, without significantly affecting operating
efficiency.
Capital resources and liquidity
Net cash provided by operating activities for 1996 was $206.1 million, an
increase of $15.2 million over 1995, principally due to the proceeds received
from the accounts receivable securitization program entered into during the
third quarter of 1996 and higher net income. The Partnership's principal needs
for funds are for support of its working capital, distributions to partners and
capital expenditures. The Partnership intends to fund such needs from net cash
provided by operating activities. The Partnership believes that such sources of
funds will be adequate to meet the Partnership's working capital needs, make the
quarterly distributions to partners, and fund the Partnership's capital
expenditures during 1997.
Quarterly distributions to the partners of TNCLP are based on Available Cash
for the quarter as defined in the TNCLP Agreement of Limited Partnership.
Available Cash is defined generally as all cash receipts less all cash
disbursements, adjusted for changes in certain reserves established as the
General Partner determines in its reasonable discretion to be necessary.
Distributions paid to all partners were $220.2 million in 1996, including $105.4
million in distributions to holders of SPUs. On January 27, 1997, the
Partnership declared a distribution of $8.3 million ($.605 per unit) to holders
of the SPUs as of February 7, 1997 payable on February 28, 1997. This
distribution represents only the MQD for the quarter. The remainder of the
Available Cash for the quarter ended December 31, 1996 ($26.8 million, or at
least $.885 per Common Unit) will be paid April 30, 1997 to Common Unitholders
of record as of April 18, 1997 (including those holders of the SPUs that have
converted to Common Units) and to the General Partner. Nonconverting SPU holders
are not entitled to participate in cash distributions in excess of the MQD after
December 31, 1996 (the end of the Preference Period). Also on January 27, 1997,
the Partnership declared distributions of $3.1 million to Common Unitholders
($.605 per unit), and $232,000 to the General Partner (equaling 2% of total
distributions declared above, as required). There were no accumulated
distribution arrearages for the Senior Preference or Common Units as of December
31, 1996.
According to the terms of the TNCLP Agreement of Limited Partnership, the
Partnership is required to maintain a Reserve Amount to support distributions of
the MQD on the SPUs. The Reserve Amount is equal to the lesser of $18.5 million
or four MQDs on the SPUs. At December 31, 1996, the Reserve Amount remained
fully funded. After the conversion period expires on March 31, 1997, the Reserve
Amount will be maintained only to support four quarters of MQDs on all
nonconverted SPUs. It is anticipated that any reduction in the Reserve Amount
from its current level of $18.5 million will be available for cash distributions
in May 1997.
On August 20, 1996, TNCLP and certain affiliates of the General Partner,
through Terra Funding Corporation ("TFC"), an affiliate of the General Partner
and a limited purpose corporation, entered into an agreement with a financial
institution to sell an undivided interest in their accounts receivable.
Undivided interests in new receivables may be sold as amounts are collected on
previously sold amounts. This agreement accelerates the receipt of cash on
outstanding Partnership accounts receivable and should benefit the Partnership's
cash flow during the term of the agreement which expires in 1999.
13
Financial condition
The demand deposit (which represents excess Partnership cash deposited with
Terra) declined $21.8 million from the December 31, 1995 balance primarily due
to higher Partnership distributions paid during 1996 partially offset by higher
cash generated from operations and lower debt payments in 1996.
Trade accounts receivable declined $25.6 million from the December 31, 1995
balance due to the accounts receivable securitization facility entered into in
the third quarter of 1996.
Accounts payable and payable to affiliates increased $18.6 million from the
December 31, 1995 balance primarily due to higher natural gas costs at the end
of 1996 compared with the end of 1995 and due to the timing of cash transfers
between the Partnership and its affiliates.
Customer prepayments declined $9.6 million from the December 31, 1995 balance
due to fewer customers participating in the prepay program at the end of 1996.
Certain customers prepay for product during the fall and winter months to take
advantage of favorable pricing conditions. The customers then take delivery of
the product as needed during the spring planting season.
Financing arrangements
The Partnership and certain affiliates of the General Partner are included
under an amended credit agreement (the "Credit Agreement") entered into by the
Operating Partnership and certain Terra subsidiaries with certain senior lenders
and Citibank, N.A. as agent. The Operating Partnership's facilities under the
Credit Agreement include a $25 million revolving credit facility. The revolving
credit facility expires December 31, 2000. At December 31, 1996, the Operating
Partnership had $25 million of unused borrowing capacity under its revolving
credit facility.
Loans under the Credit Agreement are guaranteed by Terra and certain
subsidiaries, including the General Partner, and are secured by pledges of the
stock of significant Terra subsidiaries, including the General Partner, and are
secured by substantially all of the assets of the Operating Partnership. The
security interest granted in the Operating Partnership's assets secure only its
revolving credit facility.
The Credit Agreement contains customary events of default, including those
relating to failure to pay amounts due, misrepresentation, failure to perform
covenants, bankruptcy or insolvency, litigation and unsatisfied judgments,
violations of the Employee Retirement Income Security Act of 1974, as amended,
and environmental laws and changes in control or ownership.
The Credit Agreement contains covenants customary for financings of this type
including limitations on capital expenditures, additional debt, liens,
receivables sales, investments, changes in lines of business, transactions with
affiliates and limitations on acquisitions. The Credit Agreement also includes
covenants requiring Terra to meet certain financial tests. The Partnership is
not required to meet such financial tests under the Credit Agreement. All
outstanding amounts under the revolving credit facility must be repaid and not
reborrowed for a period of 30 consecutive days in each year.
Capital expenditures
Capital expenditures totalled $9.1 million, $8.3 million and $8.9 million for
the years ended December 31, 1996, 1995 and 1994, respectively. Expenditures for
1996 and 1995 were primarily for equipment replacement, environmental controls,
efficiency improvements and minor capacity expansions. The 1994 spending
included capacity additions for UAN at the Verdigris Plant and installation of a
small UAN plant at Blytheville. In 1997, the Partnership plans to spend
approximately $16 million for capital expenditures. Plans for 1997 include urea
storage and loading improvements at the Blytheville plant and environmental
control and ammonia efficiency improvements at the Verdigris plant. The
Partnership believes that after 1997 capital spending will range between $6
million and $10 million per year in order to maintain current operating
efficiencies. The actual amount of capital expenditures may be greater if the
Partnership decides to expand nitrogen fertilizer capacity or increase the
efficiency of its facilities.
14
Environmental matters
The Partnership is subject to federal, state, and local environmental, health
and safety laws and regulations, particularly relating to air and water quality.
In the course of its ordinary operations, the Partnership has and will generate
wastes which may fall within the definition of "hazardous substances" under
federal or state laws. The Partnership's production facilities and storage
locations require ongoing operating expenditures in order to remain in
compliance with environmental regulations. Environmental operating costs in
1996, 1995, and 1994 were approximately $2.3 million, $2.3 million and $2.2
million, respectively. These operating costs consist largely of such items as
electrical and chemical usage, waste disposal, laboratory analysis, fees for
outside consultants and contractors, and salaries for environmental employees.
Environmental capital expenditures in 1996, 1995, and 1994 were approximately
$1.4 million, $133,000, and $1.4 million, respectively.
Based on its current knowledge, the Partnership does not expect capital
expenditures relating to environmental matters to have a material adverse effect
on its results of operations, financial condition, capital resources, liquidity
or cash flow. Based on information presently available, the Partnership does not
expect that any further material capital expenditures will be required to comply
with existing environmental regulations. Based on such regulations, the
Partnership does not believe that it will be required to make any material
environmental remediation expenditures in the foreseeable future.
New accounting standards
The Partnership adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Assets to be Disposed of", during 1996. There have been no events or
changes in the Partnership's business environment which would indicate that the
carrying amount of its property, plant and equipment may not be recoverable
through future cash flows generated by such assets.
In June 1996, The Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities", which establishes accounting and reporting standards for such
transfers. The Partnership will adopt SFAS No. 125 effective January 1, 1997.
Management does not expect that there will be a material impact on the
Partnership's consolidated financial position or results of operations.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Partnership together with the
reports thereon of Deloitte & Touche LLP, independent auditors, and Ernst &
Young LLP, independent auditors, appear on pages F-2 through F-19 of this
report. See Index to Financial Statements on page F-1.
15
QUARTERLY FINANCIAL DATA (Unaudited)
Summarized quarterly financial data are as follows (in thousands, except per
unit amounts):
1996 FIRST SECOND THIRD FOURTH
Quarter Quarter Quarter Quarter
------- -------- ------- -------
Revenues.............................. $89,448 $106,238 $82,257 $85,195
Gross profit.......................... 54,206 56,557 37,685 37,188
Income before extraordinary expense... 52,998 54,682 35,883 34,070
Income before extraordinary expense
per limited partnership unit...... 1.98 1.74 1.31 1.32
Net income............................ 52,998 54,682 35,883 34,070
1995 FIRST SECOND THIRD FOURTH
Quarter Quarter Quarter Quarter
------- -------- ------- -------
Revenues.............................. $89,846 $104,402 $85,474 $94,014
Gross profit.......................... 46,523 55,807 39,866 43,925
Income before extraordinary expense... 41,701 51,850 37,111 41,806
Income before extraordinary expense
per limited partnership unit...... 1.88 1.81 1.45 1.41
Net income............................ 41,701 51,850 37,111 41,806
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
16
PART III
Item 10. Directors and Executive Officers of the Registrant
TNC, in its capacity as General Partner, manages and controls the activities
of TNCLP and the Operating Partnership. Unitholders do not direct or
participate in the management or control of either TNCLP or the Operating
Partnership. The General Partner does not intend to establish any advisory
board or similar body to which the Unitholders would be entitled to elect
representatives.
The Partnership has no directors or executive officers. Set forth below is
certain information concerning the directors and executive officers of the
General Partner. The sole stockholder of the General Partner elects the
directors of the General Partner. All directors hold office until their
successors are duly elected and qualified or their earlier resignation or
removal. All officers of the General Partner serve at the discretion of the
directors.
DIRECTORS: AGE POSITION WITH THE GENERAL PARTNER (POSITION WITH TERRA INDUSTRIES INC.)
Michael L. Bennett 43 Director (Executive Vice President and Chief Operating Officer,
Terra Industries Inc.)
Thomas Buck.............................. 69 Director
Lawrence S. Hlobik....................... 52 Chairman of the Board of Directors and President
(Senior Vice President, Terra Industries Inc.)
Francis G. Meyer......................... 45 Director (Senior Vice President and Chief Financial Officer, Terra Industries
Inc.)
W. Mark Rosenbury........................ 49 Director (Vice President--Business Development and Strategic Planning,
Terra Industries Inc.)
Robert W. Todd........................... 69 Director
PRINCIPAL OPERATING EXECUTIVE OFFICERS OF TERRA NITROGEN CORPORATION:
Bryan D. Evans........................... 41 Vice President--Marketing
Lawrence S. Hlobik....................... 52 Chairman of the Board of Directors and President
Charles J. Pero.......................... 48 Vice President--Human Resources
Steven A. Savage......................... 52 Senior Vice President--Manufacturing
Scott C. Shelton......................... 50 Vice President--Energy
Erik L. Slockers......................... 45 Vice President--Controller
OTHER EXECUTIVE OFFICERS OF TERRA NITROGEN CORPORATION (INCLUDING OFFICES WITH TERRA INDUSTRIES INC.):
Michael L. Bennett 43 Director (Executive Vice President and Chief Operating Officer,
Terra Industries Inc.)
Francis G. Meyer......................... 45 Director (Senior Vice President and Chief Financial Officer, Terra Industries
Inc.)
W. Mark Rosenbury........................ 49 Director (Vice President--Business Development and Strategic Planning,
Terra Industries Inc.)
John S. Burchfield....................... 56 (Vice President--Human Resources, Terra Industries Inc.)
Burton M. Joyce.......................... 55 (President and Chief Executive Officer, Terra Industries Inc.)
Paula C. Norton.......................... 51 (Vice President--Corporate and Investor Relations, Terra Industries Inc.)
Robert E. Thompson....................... 45 Vice President (Vice President--Controller, Terra Industries Inc.)
George H. Valentine...................... 48 Vice President and General Counsel (Senior Vice President, General Counsel
and Corporate Secretary, Terra Industries Inc.)
The Audit Committee of the Board of Directors of TNC is comprised of Messrs.
Buck and Todd. The Audit Committee has authority to review policies and
practices of TNC dealing with various matters relating to the financial
condition and auditing procedures of TNC, the Partnership and the Operating
Partnership.
Mr. Bennett has been a director since March 1995. He has been Executive Vice
President and Chief Operating Officer of Terra since February 1997 and was
President of Terra Distribution Division from November 1995 to February 1997,
Senior Vice President of Terra from February 1995 to February 1997. He was
Senior Vice President, Distribution of Terra International from October 1994 to
February 1997. He was Vice President, Northern Division thereof from January
1992 to October 1994.
17
Mr. Buck has been a director since March 1995. He was a Partner with Price
Waterhouse until retiring in July 1988.
Mr. Meyer has been Vice President of TNC since December 1994 and a director
since March 1995. He has been Senior Vice President and Chief Financial Officer
of Terra since November 1995. He was Vice President and Chief Financial Officer
of Terra from November 1993 to November 1995. He was Controller thereof from
August 1991 to November 1993.
Mr. Rosenbury has been a director since November 1994 and Vice President,
Business Development and Strategic Planning of Terra since November 1995. He was
Chairman of the Board of Directors and President of TNC from November 1994 to
February 1996. He was Executive Vice President of Terra from November 1993 to
November 1995. He was Chief Operating Officer of Terra from November 1993 to
November 1994. He was Vice President and Chief Financial Officer of Terra from
August 1991 to November 1993.
Mr. Todd has been a director since March 1995. He was Vice President, Chemical
Industry Services for Citibank, N.A. until retiring in June 1990.
Mr. Evans has been Vice President, Marketing since November 1996. He was Vice
President, Marketing of Tessenderlo Kerley from 1992 to November 1996.
Mr. Hlobik has been Chairman of the Board of Directors and President of TNC,
President of Terra Nitrogen Division and Senior Vice President of Terra since
February 1996. He was Senior Vice President, Marketing of TNC from February 1995
to February 1996. He was Vice President, Marketing for Arcadian Corporation from
1989 to February 1995.
Mr. Pero has been Vice President, Human Resources since February 1990.
Mr. Savage has been Senior Vice President, Manufacturing since April 1995. He
was Vice President, Engineering and Plant Manager, Verdigris facility from
February 1990 to April 1995.
Mr. Shelton has been Vice President, Energy since April 1995. From 1990 to
April 1995, he held various director and managerial positions in natural gas
supply and business development responsibilities for Williams Gas Marketing,
Williams Energy Company and Williams Field Services.
Mr. Slockers has been Vice President and Controller since September 1995. He
was Vice President, Supply and Distribution from March 1993 to September 1995.
He was Vice President, Marketing Administration, of TNC from February 1990 to
March 1993.
Mr. Burchfield has been Vice President, Human Resources of Terra since March
1992. He was Vice President, Human Resources of AON Corporation from January
1989 to August 1991.
Mr. Joyce has been President and Chief Executive Officer of Terra since May
1991.
Ms. Norton has been Vice President, Corporate and Investor Relations of Terra
since February 1995. She was Director, Corporate Relations of Terra from January
1993 to February 1995. She was Director, Corporate Communications of Universal
Foods Corp. prior thereto.
Mr. Thompson has been Vice President of TNC since December 1994 and Vice
President, Controller of Terra since November 1994. He was Vice President,
Finance and Controller of Ameritech Custom Business Services from April 1993 to
June 1994 and Controller of Ameritech Services, Inc. from October 1990 to April
1993.
Mr. Valentine has been Vice President and General Counsel of TNC since
December 1994 and Senior Vice President, General Counsel and Corporate Secretary
of Terra since November 1995 . He was Vice President, General Counsel and
Corporate Secretary of Terra from November 1993 to November 1995. He was
Assistant General Counsel of Household International, Inc. from February 1986 to
November 1993.
None of the executive officers or directors of TNC is related by blood,
marriage or adoption to any other executive officer or director of TNC.
18
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the
Partnership's executive officers, directors and greater than ten percent
beneficial owners to file initial reports of ownership and reports of changes in
beneficial ownership with the Securities and Exchange Commission ("SEC") and the
New York Stock Exchange. Executive officers and directors are required by SEC
regulations to furnish the Partnership with copies of all Section 16(a) forms
they file. Based solely on a review of the copies of such forms furnished to the
Partnership and written representations from the Partnership's executive
officers and directors, all of the Partnership's officers, directors and greater
than ten percent beneficial owners made all required filings, except Mr. Erik L.
Slockers, an executive officer of the Partnership, who reported one transaction
late on a subsequently filed Form 4.
Item 11. Executive Compensation
TNCLP and the Operating Partnership have no executive officers or employees.
The following table sets forth certain summary information concerning the
combined compensation of the named executive officers of TNC, including
compensation from Terra (a portion of which is allocated to the Partnership).
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
-----------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------------------- -------------------------- -------
RESTRICTED SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
POSITION WITH TNC YEAR SALARY/1/ BONUS/2/ COMPENSATION/3/ AWARDS/4/ OPTIONS(#) PAYOUTS COMPENSATION/8/
- ------------------------- ---- --------- -------- --------------- -------------- ---------- ------- ----------------
Burton M. Joyce 1996 $543,115 $450,000 $ 3,764 $1,828,125 /5/ 60,000 $24,682
Interim Chief Executive 1995 485,257 375,000 3,513 -- -- -- 21,985
Officer /9/ 1994 444,691 450,000 5,458 -- 250,000 -- 4,500
Lawrence S. Hlobik 1996 200,385 119,900 -- 558,750 /5/ 30,000 -- 8,807
Chairman of the Board 1995 143,180 85,781 -- 191,250 /6/ -- -- 86,516
of Directors and
President /9/
Charles J. Pero 1996 134,873 36,900 -- 29,250 /5/ 6,500 -- 5,220
Vice President, 1995 127,543 95,098 -- -- -- -- 5,739
Human Resources 1994 86,500 72,959 8,275 58,800 /7/ -- -- 6,325
Steven A. Savage 1996 167,411 50,800 -- 134,550 /5/ 11,300 -- 6,479
Senior Vice President, 1995 160,014 107,923 -- 140,250 /6/ -- -- 6,930
Manufacturing 1994 117,440 86,874 15,395 42,000 /7/ -- -- 7,872
Scott C. Shelton 1996 110,519 31,300 -- 24,863 /5/ 5,100 -- 4,725
Vice President, 1995 /10/
Energy
Erik L. Slockers 1996 125,891 32,900 -- 29,250 /5/ 6,000 -- 5,100
Vice President and 1995 117,864 92,662 -- -- -- -- 5,312
Controller 1994 96,500 75,878 8,279 58,800 /7/ -- -- 5,825
/1/ "Salary" includes amounts deferred at the election of the named executive
officer under the Terra Industries Employees' Savings and Investment Plan
and Supplemental Deferred Compensation Plan.
/2/ "Bonus" includes amounts awarded under the Terra Industries Incentive
Award Program for Key Executives. Except for Messrs. Joyce and Hlobik, the
amounts shown as bonuses for 1995 and 1994 include payments pursuant to
the TNC Profit Sharing Plan and the TNC Supplemental Profit Sharing Plan,
which were computed on a fiscal year basis. The amounts of bonuses paid in
1995 and 1994 were related to the fiscal years July 1, 1994 to June 30,
1995 and July 1, 1993 to June 30, 1994, respectively. Effective January 1,
1995, the TNC Supplemental Profit Sharing Plan was terminated and as a
result, a pro rata payment was made for the period July 1, 1994 to
December 31, 1994 in the first quarter of 1995. Effective June 30, 1995,
the TNC Profit Sharing Plan was terminated. Approximately 40%, 45% and
100% of TNC salaries and bonuses for 1996, 1995 and 1994, respectively,
included in the table were reimbursed to TNC by the Partnership.
19
/3// Except for Messrs. Joyce, Hlobik and Shelton consists of certain payments
under the 1993 Agricultural Minerals and Chemicals Inc. ("AMCI"), a former
parent, Management Equity Plan (the "1993 AMCI MEP") that represent
dividend equivalent payments made to holders of AMCI Options (as defined
below) in respect of a pro rata portion of the shares that were available
for future awards under the 1993 AMCI MEP. All such dividend equivalent
payments in 1994 were reimbursed to TNC by the Partnership. Dividends on
AMCI Restricted Shares (as defined below) and dividend equivalent payments
in respect of shares subject to outstanding AMCI Options are not included
above. In connection with a merger agreement (the "Merger Agreement") in
October 1994 between Terra and AMCI, the 1993 AMCI MEP was terminated. See
"1993 AMCI Management Equity Plan". Amounts for Mr. Joyce include tax
reimbursements or "gross ups". While the named executive officers enjoy
certain other perquisites, such perquisites do not exceed the lesser of
$50,000 or 10% of such person's salary and bonus.
/4// The restricted stock awards relate to Common Shares of Terra Industries,
not Terra Nitrogen Corporation or Terra Nitrogen Company, L.P. The number
of restricted Common Shares ("Restricted Shares") of Terra held, and the
value thereof (shown in parenthesis) at December 31, 1996 by each of the
Named Executive Officers is: Burton M. Joyce: 125,000 ($1,843,750);
Lawrence S. Hlobik: 55,000 ($811,250); Charles J. Pero: 4,800 ($70,800);
Steven A. Savage: 22,200 ($327,450); Scott C. Shelton: 7,700 ($113,575)
and Erik L. Slockers: 4,800 ($70,800). During the restricted period, a
holder of Restricted Shares is entitled to all benefits incidental to
ownership of the Common Shares, including voting the Common Shares and
receiving such dividends as from time to time may be declared by the Board
of Directors of Terra.
/5// On November 12, 1996, the Personnel Committee of Terra's Board of
Directors approved the grant of 125,000, 25,000, 2,000, 9,200, 1,700 and
2,000 Restricted Shares under its 1992 Stock Incentive Plan to each of
Messrs. Joyce, Hlobik, Pero, Savage, Shelton and Slockers, respectively.
The closing per share price of the Common Shares on the New York Stock
Exchange ("NYSE") on the date of award was $14.625. The restrictions lapse
(i) if the executive remains employed by the Corporation until November
12, 2005 or (ii) with respect to 25%, 25% and 50% of these Restricted
Shares if, prior to November 12, 2001, the 30 business day average closing
price of the Common Shares on the NYSE is at least $20.50, $22.50 and
$24.625 per share, respectively. The restrictions lapse earlier in the
event of a change in control. See "Employee Contracts and Termination of
Employment and Change in Control Arrangements".
Mr. Hlobik also received a grant of 15,000 Restricted Shares as approved
by the Personnel Committee on February 19, 1996. The closing per share
price of the Common Shares on the NYSE on the first trading day following
the date of award was $12.875. The restrictions lapse with respect to 50%,
25% and 25% of these Restricted Shares if, prior to February 20, 2002, the
30 business day average closing price of the Common Shares on the NYSE is
at least $16.375, $18.25 and $20.00 per share, respectively. The
restrictions lapse earlier in the event of a change in control. See
"Employee Contracts and Termination of Employment and Change in Control
Arrangements".
/6// On February 16, 1995, 15,000 and 11,000 Restricted Shares were granted to
each of Messrs. Hlobik and Savage, respectively. The closing per share
price of the Common Shares on the NYSE on the first trading day following
the date of award was $12.75. The restrictions lapse with respect to 50%,
25% and 25% of these Restricted Shares if, prior to June 16, 2001, the 30
business day average closing price of the Common Shares on the NYSE is at
least $16.25, $18.125 and $19.875 per share, respectively. The
restrictions lapse earlier in the event of a change in control. See
"Employee Contracts and Termination of Employment and Change in Control
Arrangements".
/7// On November 2, 1994, the Personnel Committee of Terra's Board of Directors
approved the grant of 5,600, 4,000 and 5,600 Restricted Shares to each of
Messrs. Pero, Savage and Slockers, respectively. The closing per share
price of the Common Shares on the NYSE on the date of award was $10.50.
The restricted period terminated with respect to 50% of the Restricted
Shares on October 10, 1996 after satisfying certain stock performance
thresholds. The Restricted Shares vest with respect to an additional 25%
if, prior to February 28, 2001, the 30 business day average closing price
of the Common Shares on the NYSE is at least $15.875 per share and with
respect to the remaining 25% if, prior to February 28, 2001, the 30
business day average price is at least $17.625 per share. The restrictions
lapse earlier under certain circumstances involving a change in control.
See "Employee Contracts and Termination of Employment and Change in
Control Arrangements".
/8// "All Other Compensation" includes amounts contributed, allocated or
accrued for the named executive officers under Terra's Employees' Savings
and Investment Plan and Supplemental Deferred Compensation Plan. Prior to
1995, includes employer contributions under the TNC Employees' Savings
Plan, the TNC Supplemental Employees' Savings Plans and term life
insurance premiums. All such amounts under a TNC plan or arrangement were
reimbursed to TNC by the Partnership.
20
/9/ Mr. Joyce served as Interim Chief Executive Officer of TNC from November
1995 to February 1996. Mr. Hlobik became Chairman of the Board of
Directors and President of TNC in February 1996.
/10/ Mr. Shelton was hired during 1995 and his total annual compensation for
1995 was below the threshold for disclosure in this table.
1993 AMCI Management Equity Plan
As a part of a 1993 AMCI recapitalization, AMCI adopted the 1993 AMCI MEP,
under which options ("AMCI Options") were granted to purchase shares of AMCI
Common Stock or the right to purchase restricted shares of AMCI Common Stock
("AMCI Restricted Shares") was offered to officers and key employees of AMCI and
its subsidiaries, including TNC. Each AMCI Option represented the right to
purchase one share of AMCI Common Stock. The maximum number of shares of AMCI
Common Stock that could have been issued in connection with AMCI Options or as
AMCI Restricted Shares was 3,056,838 (subject to adjustment), which constituted
15.0% of the fully diluted common equity of AMCI prior to the consummation of
the Merger Agreement.
Prior to the consummation of the Merger Agreement, Management Stockholders
owned 272,672 AMCI Restricted Shares and 1,833,131 AMCI Options. Such AMCI
Options had an exercise price of $10.73 per share. In the event that cash
dividends were paid on the outstanding AMCI Common Stock, each holder of an
outstanding AMCI Option was entitled, pursuant to the 1993 AMCI MEP, to receive
in cash a dividend equivalent payment in respect of the shares subject to such
AMCI Option and an additional dividend equivalent payment in respect of a pro
rata portion of the shares, if any, available at such time for future awards of
AMCI Options or AMCI Restricted Shares under the 1993 AMCI MEP. Dividend
equivalent payments were made at the same rate as cash dividends were paid on
outstanding shares.
In connection with the Merger Agreement in October 1994, the 1993 AMCI MEP was
terminated and each share of AMCI Common Stock was converted into the right to
receive $21.2065 in cash and each share of AMCI Common Stock subject to a stock
option was cancelled and converted into the right to receive $10.4765 in cash
(calculated as $21.2065 less the exercise price of $10.73 per share under each
such option). None of the stock option expense incurred by the General Partner
as a result of the Merger Agreement was charged to the Partnership.
Stock Options
The following table contains information concerning the grant of options to
purchase Terra Industries' Common Shares granted in 1996 under the Terra
Industries' 1992 Stock Incentive Plan to the named executive officers. No stock
appreciation rights were granted under the Plan during fiscal year 1996.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
FOR OPTION TERM /2/
% of Total
NUMBER OF OPTIONS GRANTED
OPTIONS TO EMPLOYEES EXERCISE OR BASE EXPIRATION
NAME GRANTED IN 1996 /1/ IN 1996 PRICE PER SHARE DATE 5% 10%
Burton M. Joyce 60,000 11.2% $14.625 11/12/06 $551,855 $1,398,509
Lawrence S. Hlobik 30,000 5.6 14.625 11/12/06 275,928 699,255
Charles J. Pero 6,500 1.2 14.625 11/12/06 59,784 151,505
Steven A. Savage 11,300 2.1 14.625 11/12/06 103,933 263,386
Scott C. Shelton 5,100 1.0 14.625 11/12/06 46,908 118,873
Erik L. Slockers 6,000 1.1 14.625 11/12/06 55,186 139,851
21
/1/ The Options vest in one-third increments on the business day following
each of the first, second and third anniversary of the date of grant. The
options are exercisable with respect to all of the Common Shares set forth
above following a change in control. See "Employee Contracts and
Termination of Employment and Change in Control Arrangements".
/2/ The amounts reflected in the table represent assumed rates of appreciation
only. Actual gains, if any on stock options exercised by the named
executive officers depend on the future performance of the Terra
Industries' Common Shares, overall market conditions as well as continued
employment.
Option Year-End Value Table
The following table provides information concerning the exercise of stock
options during 1996 and unexercised options to purchase Terra Industries' Common
Shares granted under the 1983 Stock Option Plan and the 1987 and 1992 Stock
Incentive Plans of Terra Industries. None of the named executive officers
exercised any stock options during 1996.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT DECEMBER 31, 1996 OPTIONS AT DECEMBER 31, 1996 /1/
Name Exercisable Unexercisable Exercisable Unexercisable
------------------ ----------- ------------- ----------- -------------
Burton M. Joyce 575,000 185,000 $4,655,000 $538,750
Lawrence S. Hlobik -0- 30,000 -0- 3,750
Charles J. Pero -0- 6,500 -0- 813
Steven A. Savage -0- 11,300 -0- 1,413
Scott C. Shelton -0- 5,100 -0- 638
Erik L. Slockers -0- 6,000 -0- 750
/1/ Based on the closing price on the New York Stock Exchange-Composite
Transaction of Terra Industries' Common Shares on December 31, 1996
($14.75).
Pension Plan
In connection with the Merger Agreement, the AMCI Pension Plan was merged into
the Terra Industries Inc. Employees' Retirement Plan (the "Terra Retirement
Plan") effective December 31, 1994. Vesting service and benefit service that
were earned under the AMCI Pension Plan were credited under the terms of the
Terra Retirement Plan.
The following table shows, for employees retiring in 1996, the estimated
annual retirement benefit payable on a straight life annuity basis under Terra's
Retirement Plan and Terra's Excess Benefit Plan, on a non-contributory basis,
which covers Burton M. Joyce and certain other employees of Terra, at various
levels of accrued service and compensation.
Years of Credited Service
-------------------------
Remuneration 5 10 15 20 25 30
------------ ------- -------- -------- -------- -------- --------
$ 150,000 $12,347 $ 24,695 $ 37,042 $ 49,390 $ 61,737 $ 74,084
250,000 21,097 42,195 63,292 84,390 105,487 126,584
500,000 42,972 85,945 128,917 171,890 214,862 257,834
750,000 64,847 129,695 194,542 259,390 324,237 389,084
1,000,000 86,722 173,445 260,167 346,890 433,612 520,334
"Compensation" under Terra's Retirement Plan includes all salaries and wages
paid to a participant, including bonuses, overtime, commissions and amounts the
participant elects to defer under the Terra Employees' Savings and Investment
Plan. Covered earnings are limited by Section 401 (a)(17) of the Internal
Revenue Code ("Code") to $150,000 in 1996. The above benefits are subject to the
limitations of Section 415 of the Code, which, in 1996, provided for a maximum
annual payment of approximately $120,000. Under
22
Terra's Excess Benefit Plan, however, Terra will supplement those benefits so
that the amount the participant will receive will be equal to the amount that
would have been received under Terra's Retirement Plan but for such limitations.
"Compensation" under the Excess Benefit Plan also includes amounts deferred
under the Supplemental Deferred Compensation Plan. Eligible compensation for
Burton M. Joyce as of the end of the last calendar year is $918,115 and the
estimated years of service for Mr. Joyce is 10.
Certain named executive officers and certain other employees are entitled
to the estimated annual retirement benefit under the Retirement Plan and Excess
Benefit plan as set forth in the following table.
- --------------------------------------------------------------------------------------
Years of Credited Service
--------------------------------------------------------------
Remuneration 5 10 15 20 25 30
- ------------ ------- -------- -------- -------- -------- --------
$ 150,000 $10,847 $ 21,695 $ 32,542 $ 43,390 $ 54,237 $ 65,084
250,000 18,597 37,195 55,792 74,390 92,987 111,584
500,000 37,972 75,945 113,917 151,890 189,862 227,834
750,000 57,347 114,695 172,042 229,390 286,737 344,084
1,000,000 76,722 153,445 230,167 306,890 383,612 460,334
- --------------------------------------------------------------------------------------
Eligible compensation for the following named executive officers as of the end
of the last calendar year is: Mr. Hlobik: $286,166; Mr. Pero: $229,971; Mr.
Savage: $275,334; Mr. Shelton: $110,519; and Mr. Slockers: $218,532. The
estimated years of service for each such officer is as follows: Mr. Hlobik: 2,
Mr. Pero: 10, Mr. Savage: 10, Mr. Shelton: 2 and Mr. Slockers: 10.
Eligible compensation for each of the named executive officers includes the
salary paid in 1996 to each of the named executive officers plus the bonus paid
in 1996 to such executive officers for service to the Corporation and its
subsidiaries in 1995. Amounts reported in the table entitled "Summary
Compensation Table" for 1996 include the salary paid to each of the named
executive officers in 1996 plus the bonus paid to such executive officers in
1997 for service to the Corporation and its subsidiaries in 1996.
EMPLOYEE CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
Stock awards granted after October 1996 to the named executive officers
automatically vest or become exercisable in the event of any of the following
changes in control of Terra Industries (the "Corporation"): (i) any person or
group of persons (other than Minorco and its affiliates) acquires beneficial
ownership of the outstanding securities in an amount having, or convertible into
securities having, 25% or more of the ordinary voting power for the election of
directors of the Corporation, provided that this 25% beneficial ownership
trigger shall apply only when Minorco and its affiliates no longer own 50% or
more of the voting shares of the Corporation; (ii) during a period of not more
than 24 months, a majority of the Board of Directors of the Corporation ceases
to consist of the existing membership or successors nominated by the existing
membership or their similar successors; (iii) all or substantially all of the
individuals and entities who were the beneficial owners of the Corporation's
outstanding securities entitled to vote do not own more than 60% of such
securities in substantially the same proportions following a shareholder
approved reorganization, merger, or consolidation; or (iv) shareholder approval
of either (A) a complete liquidation or dissolution of the Corporation or (B) a
sale or other disposition of all or substantially all of the assets of the
Corporation, or a transaction having a similar effect.
Stock awards granted prior to November 1996 automatically vest or become
exercisable beginning on the day that any such officer's employment with the
Corporation is terminated involuntarily or such officer's responsibilities or
compensation are substantially reduced, if such termination or reduction occurs
within twelve months of the date on which any person or group of persons acting
in concert (other than Minorco and its affiliates) acquires beneficial ownership
of the outstanding securities of the Corporation in an amount having, or
convertible into securities having, 50% or more of the ordinary voting power for
the election of directors of the Corporation.
BOARD OF DIRECTORS COMPENSATION
Independent directors of TNC receive an annual retainer fee of $15,000 for
their directorship, plus a fee of $1,000 for each TNC board meeting attended and
each Audit Committee meeting attended. No other director of TNC receives any
compensation for serving as a director.
23
Compensation Committee Interlocks and Insider Participation
Since the merger of AMCI into Terra, TNC has not had a compensation committee
and executive officer compensation decisions with respect to TNC have been made
by Terra and, in the case of those TNC executive officers who are key employees
of Terra, by the Personnel Committee of the Board of Directors of Terra, none of
the members of which are employees of Terra or its subsidiaries.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The entire general partner interest in both TNCLP and the Operating
Partnership is owned by TNC and certain limited partner interests in TNCLP are
owned by TNC, 5100 East Skelly Drive, Suite 800, Tulsa, Oklahoma 74135. All
the outstanding capital stock of TNC is owned by Terra Capital, Inc., an
indirect, wholly-owned subsidiary of Terra. The stock of TNC is pledged as
security under the Credit Agreement. See "Financing arrangements" under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". Terra Capital, Inc. also owns 974,900 SPUs of TNCLP. Terra and its
subsidiaries are engaged in certain transactions with the Partnership described
under the caption "Certain Relationships and Related Transactions" below.
The capital stock of Terra is owned, as of December 31, 1996, in part as
follows: 49.5% by Taurus International S.A. and 7.2% by Taurus Investments S.A.
Each of Taurus International S.A. and Taurus Investments S.A. is a company
incorporated under the laws of Luxembourg as a societe anonyme and is wholly
owned by Minorco. Minorco is a company incorporated under the laws of Luxembourg
as a societe anonyme and is an international natural resources company with
operations in gold, base metals, industrial minerals, paper and packaging and
agribusiness. Minorco's address is 9 rue Sainte Zithe, L-2763 Luxembourg City,
Grand Duchy of Luxembourg. The capital stock of Minorco is owned in part as
follows: approximately 45.8%, directly or through subsidiaries, by Anglo
American Corporation of South Africa Limited ("Anglo American"), a publicly held
mining and finance company, and approximately 22.6%, directly or through
subsidiaries, by De Beers Centenary AG ("Centenary"), a publicly held Swiss
diamond mining and investment company. Approximately 38.5% of the capital stock
of Anglo American is owned, directly or through subsidiaries, by De Beers
Consolidated Mines Limited ("De Beers"), a publicly held diamond mining and
investment company. Approximately 29.4% of the capital stock of Centenary and
approximately 32.5% of the capital stock of De Beers is owned, directly or
through subsidiaries, by Anglo American. De Beers owns approximately 9.5% of
Centenary.
Mr. Nicholas F. Oppenheimer, Deputy Chairman and a director of Anglo American,
Centenary and De Beers, and a director of Minorco, and Mr. Henry R. Slack, a
director of Terra, Chief Executive, President and a director of Minorco and a
director of Anglo American, have indirect partial interests in approximately 7%
of the outstanding shares of Minorco and approximately 8% of the outstanding
shares of Anglo American. Also, Mr. Basil T.A. Hone, a director of Terra,
beneficially owns 3,000 Minorco Ordinary Shares, and 1,000 Anglo American
Ordinary Shares, each constituting less than one percent of the outstanding
shares of the respective issuers. Mr. Edward G. Beimfohr, Mr. David E. Fisher ,
Mr. Anthony W. Lea and Mr. William R. Loomis, Jr. are directors of Terra and
Minorco. Mr. Fisher is also a director of Taurus International S.A. and Taurus
Investments S.A. Mr. Lea is also a director of Anglo American and Taurus
Investments S.A.
Set forth on the following page is certain information concerning the
beneficial ownership, as of December 31, 1996, of the TNCLP SPUs and the Terra
Industries Common Shares, by each person known to TNC to be a beneficial owner
of more than 5% of the TNCLP SPUs, by each director of TNC, by each of the Named
Executive Officers of TNC, and by all directors and executive officers of TNC as
a group.
24
NUMBER OF TERRA
NUMBER OF PERCENT OF COMMON SHARES PERCENT OF
NAME UNITS /1/ CLASS BENEFICIALLY OWNED /1/ CLASS
---- --------- ----------- ---------------------- ----------
Terra Nitrogen Corporation /2// 6,000,000 44% -- --
5100 East Skelly Drive
Tulsa, Oklahoma 74135
Terra Capital, Inc. /2// 974,900 7% -- --
600 Fourth Street
Sioux City, Iowa 51101
Michael L. Bennett -- -- 66,704 *
Thomas Buck -- -- -- --
Lawrence S. Hlobik -- -- 56,010 *
Burton M. Joyce -- -- 794,665 /3 *
Francis G. Meyer -- -- 102,268 /3/ *
Charles J. Pero 750 * 5,660 *
W. Mark Rosenbury -- -- 148,450 /3/ *
Steven A. Savage 4,000 * 25,561 *
Scott C. Shelton -- -- 8,337 *
Erik L. Slockers 1,800 * 10,742 *
Robert W. Todd -- -- -- --
All directors and executive officers
as a group (16 persons) 6,550 * 1,382,617 /3/ *
-------------------------
*Represents less than 1% of class.
/1/ Each has sole voting and investment power of all the securities
indicated. The number of Terra Common Shares shown also reflect the
ownership of certain restricted Common Shares subject to certain
performance related vesting conditions and Common Shares under Terra's
Employees' Savings and Investment Plan as of December 31, 1996.
/2/ Each of Terra Nitrogen Corporation and Terra Capital, Inc. is an
indirect, wholly owned subsidiary of Terra Industries Inc. Terra Nitrogen
Corporation also owns 5,172,414 Common Units. See "Status of Units at end
of Preference Period" in Items 1 and 2.
/3/ The number of Terra Industries Common Shares shown as beneficially owned
by Messrs. Joyce, Meyer, Rosenbury and by all directors and executive
officers as a group, include 575,000, 21,700, 61,000 and 657,700 Common
Shares, respectively, as to which such person or group had the right to
acquire beneficial ownership pursuant to the exercise, on or before April
30, 1997, of employee stock options. No other individual listed held any
employee stock options that are exercisable on or before April 30, 1997.
ITEM 13. Certain Relationships and Related Transactions
The General Partner does not receive a management fee or similar
compensation in connection with its management of the Partnership. Pursuant to
TNCLP's limited partnership agreement and the Operating Partnership's limited
partnership agreement, the General Partner receives:
(i) distributions in respect of its 2% General Partner interest on a
combined basis in TNCLP and the Operating Partnership (See "Market for
Registrant's Units and Related Unitholders Matters");
(ii) distributions in respect of its ownership of limited partner interests
of TNCLP;
(iii) incentive distributions payable to the General Partner out of
TNCLP's Available Cash (as defined) in the event quarterly distributions
exceed specified target levels; and
(iv) reimbursement for all direct and indirect costs and expenses incurred
on behalf of the Partnership, all general and administrative expenses
incurred by the General Partner or its affiliates for or on behalf of the
Partnership and all other expenses necessary or appropriate to the conduct
of the business of, and reasonably allocable to, the Partnership.
Such reimbursement includes the costs of compensation and employee benefit
plans properly allocable to the Partnership. Because certain of the plans are
incentive based, the maximum amount to be reimbursed by the Partnership under
such plans cannot be determined in advance. For the years ended December 31,
1996,
25
1995 and 1994, the General Partner was entitled to reimbursement in the
amount of $25.9 million, $29.1 million and $36.6 million (including $3.7 million
for 1994 of compensation expense related to the 1993 AMCI MEP), respectively,
for the direct and indirect costs and expenses related to the business
activities of the Partnership.
Effective January 1,1995, TNC and Terra entered into an administrative
services agreement whereby TNC provides certain general and administrative
services for certain Terra affiliates. Certain costs and expenses incurred by
TNC for providing such services are charged (based on cost) to such affiliates,
including the Partnership. Such expenses charged to the Partnership were $7.9
million and $12.4 million for 1996 and 1995, respectively.
Beaumont Methanol, Limited Partnership ("BMLP") formerly a subsidiary of
AMCI and now a subsidiary of Terra, and TNC, were parties to an administrative
services agreement that was terminated effective January 1, 1995, pursuant to
which TNC provided (based on cost) all administrative support services required
by BMLP. BMLP paid TNC a total of $612,000 for such services for the year ended
December 31, 1994.
Effective January 1, 1995, under a general and administrative services
agreement between TNC and Terra, certain management and other services,
including, advertising, accounting, legal, human resources, insurance and risk
management, safety and environmental, and corporate relations are provided by
Terra or certain of its affiliates (other than TNC) and charged to either TNC or
the Partnership, as appropriate. Expenses under this agreement charged to the
Partnership were $5.1 million and $3.7 million for the years ended December 31,
1996 and 1995, respectively. No such expenses were charged to the Partnership
for the period October 20, 1994 to December 31, 1994.
Certain Terra supply terminals and transportation equipment are generally
available for use by the Partnership and affiliates of TNC. TNC pays the costs
associated with the operation of such terminals and transportation equipment and
related freight costs incurred to ship product to the various sales points in
the distribution system. TNC charges the Partnership or Terra based on usage of
such assets and freight costs incurred. Amounts charged to the Partnership for
the years ended December 31, 1996 and 1995 were $20.5 million and $21.0 million,
respectively.
The Partnership sells product to affiliates of the General Partner at market
prices and terms. During the years ended December 31,1996 and 1995 and the
period October 20,1994 through December 31,1994, the Partnership sold $41.4
million, $26.5 million and $7.3 million, respectively, of nitrogen fertilizer
products to affiliates of the General Partner at market prices and terms.
Accounts receivable from Terra were $201,000 and $347,000 at December 31, 1996
and 1995, respectively.
The Partnership has a demand deposit with a Terra subsidiary that represents
excess Partnership cash deposited with such affiliate. The deposit is due on
demand and bears interest based on the Cost Rate under the Accounts Receivable
Sale Agreement (6.28% at December 31, 1996). Interest income recorded by the
Partnership on this deposit was $5.1 million for 1996.
26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this annual report:
(1) Financial Statements and (2) Financial Statement Schedules: See Index
to Financial Statements on page F-1 for financial statements and financial
statement schedules filed as part of this annual report.
(3) The exhibits listed below are filed as part of this annual report.
#3.1 -- Agreement of Limited Partnership of TNCLP.
3.2 -- Certificate of Limited Partnership of TNCLP.
#4.1 -- Deposit Agreement among TNCLP, the Depositary and Unitholders.
#4.2 -- Form of Depositary Receipt for SPUs (included as Exhibit A to the Deposit
Agreement filed as Exhibit 4.1 hereto).
#4.3 -- Form of Depositary Receipt for Common Units (included as Exhibit B to the Deposit
Agreement filed as Exhibit 4.1 hereto).
#4.4 -- Form of Transfer Application (included in Exhibit A to the Deposit Agreement filed
as Exhibit 4.1 hereto).
4.5 -- Certificate of Limited Partnership of the Operating Partnership.
#10.1 -- Agreement of Limited Partnership of the Operating Partnership.
**10.2 -- Master Agreement dated October 11, 1989, among ONEOK Inc., Oklahoma Natural Gas
Company, ONG Western Inc., ONG Red Oak Transmission Company, ONG Transmission
Company, Agrico Chemical Company and Freeport-McMoRan Resource Partners, Limited
Partnership.
**10.3 -- Lease Agreement dated October 11, 1989, among ONEOK Inc., Oklahoma Natural Gas
Company, ONG Western Inc., ONG Red Oak Transmission Company, ONG Transmission
Company, Agrico Chemical Company and Freeport-McMoRan Resource Partners, Limited
Partnership.
10.4 -- Gas Service Agreement dated October 11, 1989, between Oklahoma Natural Gas Company
and Agrico Chemical Company.
**10.5 -- Transportation Service Agreement dated as of September 1, 1988, among ARKLA Energy
Resources, Arkansas Louisiana Gas Company and Agrico Chemical Company, as
supplemented by Letter Agreements dated September 2, 1988, and November 1, 1990,
and Consent to Assignment dated March 9, 1990.
10.6 -- Transportation Service Agreement effective January 1, 1990, between MAPCO Ammonia
Pipeline, Inc. and Agrico Chemical Company, and Consent to Assignment dated
January 22, 1991.
10.7 -- Omitted.
10.8 -- Car Service Contract dated as of March 2, 1990, between General American
Transportation