UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarter ended March 31, 2004
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-10877
TERRA NITROGEN COMPANY, L.P.
(Exact name of registrant as specified in its charter)
| Delaware | 73-1389684 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| Terra Centre PO Box 6000, 600 Fourth Street Sioux City, Iowa |
51102-6000 | |
| (Address of principal executive office) | (Zip Code) | |
Registrant’s telephone number:
(712) 277-1340
At the close of business on March 31, 2004, there were 18,501,576 Common Units outstanding.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TERRA NITROGEN COMPANY, L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
| March 31, 2004 |
December 31, 2003 |
March 31, 2003 |
||||||||||
| ASSETS |
||||||||||||
| Current assets: |
||||||||||||
| Cash and cash equivalents |
$ | 48,480 | $ | 39,596 | $ | 13,458 | ||||||
| Accounts receivable |
21,720 | 36,612 | 18,778 | |||||||||
| Inventory – finished products |
21,359 | 12,516 | 33,723 | |||||||||
| Inventory – materials and supplies |
6,587 | 6,848 | 10,140 | |||||||||
| Prepaid insurance and other current assets |
5,826 | 6,344 | 2,745 | |||||||||
| Total current assets |
103,972 | 101,916 | 78,844 | |||||||||
| Property, plant and equipment, net |
82,706 | 84,691 | 123,616 | |||||||||
| Other assets |
8,691 | 9,631 | 9,597 | |||||||||
| Total assets |
$ | 195,369 | $ | 196,238 | $ | 212,057 | ||||||
| LIABILITIES AND PARTNERS’ CAPITAL |
||||||||||||
| Current liabilities: |
||||||||||||
| Accounts payable and accrued liabilities |
$ | 6,446 | $ | 8,661 | $ | 24,196 | ||||||
| Customer prepayments |
38,241 | 41,251 | 21,176 | |||||||||
| Pension liabilities due to affiliate |
4,116 | 4,116 | — | |||||||||
| Current portion of long-term debt and capital lease obligations |
58 | 58 | 56 | |||||||||
| Total current liabilities |
48,861 | 54,086 | 45,428 | |||||||||
| Long-term debt due to affiliates |
8,200 | 8,200 | 8,200 | |||||||||
| Capital lease obligations |
59 | 75 | 119 | |||||||||
| Pension liabilities due to affiliate |
— | — | 5,316 | |||||||||
| Other liabilities |
1,600 | 1,600 | — | |||||||||
| Total liabilities |
58,720 | 63,961 | 59,063 | |||||||||
| Partners’ capital: |
||||||||||||
| Limited partners’ interests – common unitholders |
145,410 | 138,274 | 165,945 | |||||||||
| General partner’s interest |
(10,901 | ) | (11,047 | ) | (10,483 | ) | ||||||
| Accumulated other comprehensive income |
2,140 | 5,050 | (2,468 | ) | ||||||||
| Total partners’ capital |
136,649 | 132,277 | 152,994 | |||||||||
| Total liabilities and partners’ capital |
$ | 195,369 | $ | 196,238 | $ | 212,057 | ||||||
See Accompanying Notes to the Condensed Consolidated Financial Statements.
2
TERRA NITROGEN COMPANY, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit amounts)
(unaudited)
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Revenues |
$ | 108,213 | $ | 70,855 | ||||
| Other income |
71 | 82 | ||||||
| Total revenues |
108,284 | 70,937 | ||||||
| Cost of goods sold |
94,308 | 75,961 | ||||||
| Gross profit (loss) |
13,976 | (5,024 | ) | |||||
| Operating expenses |
2,173 | 2,019 | ||||||
| Operating income (loss) |
11,803 | (7,043 | ) | |||||
| Interest expense |
2 | 3 | ||||||
| Interest income |
(201 | ) | (13 | ) | ||||
| Net income (loss) |
$ | 12,002 | $ | (7,033 | ) | |||
| Net income (loss) allocable to limited partners’ interest |
$ | 11,762 | $ | (6,892 | ) | |||
| Net income (loss) per limited partnership unit |
$ | 0.64 | $ | (0.37 | ) | |||
See Accompanying Notes to the Condensed Consolidated Financial Statements.
3
TERRA NITROGEN COMPANY, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Three Months Ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Operating activities: |
||||||||
| Net income (loss) from operations |
$ | 12,002 | $ | (7,033 | ) | |||
| Adjustments to reconcile net income (loss) to net cash flows from operating activities: |
||||||||
| Depreciation |
2,338 | 3,301 | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Receivables |
14,892 | 7,982 | ||||||
| Inventories |
(8,582 | ) | (23,760 | ) | ||||
| Prepaid insurance and other current assets |
(2,393 | ) | 3,914 | |||||
| Accounts payable, accrued liabilities and customer prepayments |
(5,225 | ) | (2,203 | ) | ||||
| Other |
682 | 518 | ||||||
| Net cash flows from operating activities |
13,714 | (17,281 | ) | |||||
| Investing activities: |
||||||||
| Capital expenditures |
(94 | ) | (861 | ) | ||||
| Other |
— | 593 | ||||||
| Net cash flows from investing activities |
(94 | ) | (268 | ) | ||||
| Financing activities: |
||||||||
| Repayment of long-term debt and capital lease obligations |
(16 | ) | (11 | ) | ||||
| Partnership distributions paid |
(4,720 | ) | (4,720 | ) | ||||
| Net cash flows from financing activities |
(4,736 | ) | (4,731 | ) | ||||
| Net increase (decrease) in cash and cash equivalents |
8,884 | (22,280 | ) | |||||
| Cash and cash equivalents at beginning of period |
39,596 | 35,738 | ||||||
| Cash and cash equivalents at end of period |
$ | 48,480 | $ | 13,458 | ||||
See Accompanying Notes to the Condensed Consolidated Financial Statements.
4
TERRA NITROGEN COMPANY, L.P.
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
(in thousands, except for units)
(unaudited)
| Limited Partners’ Interests |
General Partner’s Interests |
Accumulated Other Comprehensive Income (Loss) |
Total Partners’ Capital |
|||||||||||||
| Partners’ capital at January 1, 2004 |
$ | 138,274 | $ | (11,047 | ) | $ | 5,050 | $ | 132,277 | |||||||
| Net income |
11,762 | 240 | — | 12,002 | ||||||||||||
| Change in fair value of derivatives |
— | — | (2,910 | ) | (2,910 | ) | ||||||||||
| Comprehensive income |
— | — | — | 9,092 | ||||||||||||
| Distributions |
(4,626 | ) | (94 | ) | — | (4,720 | ) | |||||||||
| Partners’ capital at March 31, 2004 |
$ | 145,410 | $ | (10,901 | ) | $ | 2,140 | $ | 136,649 | |||||||
| Limited partner units issued and outstanding at March 31, 2004 |
18,501,576 | |
| Limited Partners’ Interests |
General Partner’s Interest |
Accumulated Other Comprehensive Income (Loss) |
Total Partners’ Capital |
|||||||||||||
| Partners’ capital at January 1, 2003 |
$ | 177,463 | $ | (10,248 | ) | $ | 2,273 | $ | 169,488 | |||||||
| Net loss |
(6,892 | ) | (141 | ) | — | (7,033 | ) | |||||||||
| Change in fair value of derivatives |
— | — | (4,741 | ) | (4,741 | ) | ||||||||||
| Comprehensive loss |
— | — | — | (11,774 | ) | |||||||||||
| Distributions |
(4,626 | ) | (94 | ) | — | (4,720 | ) | |||||||||
| Partners’ capital at March 31, 2003 |
$ | 165,945 | $ | (10,483 | ) | $ | (2,468 | ) | $ | 152,994 | ||||||
| Limited partner units issued and outstanding at March 31, 2003 |
18,501,576 | |
See Accompanying Notes to the Condensed Consolidated Financial Statements.
5
TERRA NITROGEN COMPANY, L.P.
Notes to Consolidated Financial Statements (Unaudited)
| 1. | Basis of Presentation |
The condensed consolidated financial statements contained herein should be read in conjunction with the consolidated financial statements and notes thereto contained in the Terra Nitrogen Company, L.P. (“TNCLP”) Annual Report on Form 10-K for the year ended December 31, 2003. TNCLP and its operating partnership subsidiary, Terra Nitrogen, Limited Partnership (the “Operating Partnership”), are referred to herein, collectively, as the “Partnership”.
The accompanying unaudited condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary for the fair statement of the results for the periods presented. All of these adjustments are of a normal and recurring nature. Results for the quarter are not necessarily indicative of future financial results of the Partnership.
| 2. | Agreement of Limited Partnership |
The Partnership makes quarterly cash distributions to Unitholders and the General Partner in an amount equal to 100% of its “Available Cash” (as defined in the Partnership Agreement).
The Partnership paid a $4.7 million cash distribution ($0.25 per common unit) on February 25, 2004 and February 27, 2003.
At March 31, 2004, the General Partner and its affiliates owned 75.1% of the Partnership’s outstanding units. When less than 25% of the issued and outstanding units are held by non-affiliates of the General Partner, the Partnership, at the General Partner’s sole discretion, may call, or assign to the General Partner or its affiliates, its right to acquire all such outstanding units held by non-affiliated persons. If the General Partner elects to acquire all outstanding units, the Partnership is required to give at least 30 but not more than 60 days’ notice of its decision to purchase the outstanding units. The purchase price per unit will be the greater of 1) the average of the previous 20 trading days’ closing prices as of the date five days before the purchase is announced and 2) the highest price paid by the General Partner of any of its affiliates for any unit within the 90 days preceding the date the purchase is announced. Additional purchases of common units by the General Partner are restricted under the terms of Terra’s (“Terra”) bank credit agreement as described therein.
| 3. | Derivative Financial Instruments |
Natural gas is the principal raw material used in the Partnership’s production of nitrogen products. Natural gas prices are volatile and we manage this volatility through the use of
6
derivative commodity instruments. Terra Industries’ policy is to hedge 20-80% of its natural gas requirements for the upcoming 12 months and up to 50% of the requirements for the following 24-month period, provided that such arrangements would not result in costs greater than expected selling prices for our finished products. Deviations from this policy are permitted by notification of Terra Industries’ Board of Directors. The financial derivatives are traded in months forward and settlement dates are scheduled to coincide with gas purchases during those future periods. These contracts reference physical natural gas prices or approximate NYMEX futures contract prices. Contract prices are frequently based on prices at the most common and financially liquid location of reference for financial derivatives related to natural gas. However, natural gas supplies for our facilities are purchased for each plant at locations other than reference points, which often creates a location basis differential between the contract price and the physical price of natural gas. Accordingly, use of financial derivatives may not exactly offset the change in the price of physical gas.
The Partnership has entered into forward pricing positions for a portion of its natural gas requirements for the remainder of 2004, consistent with its policy. As a result of its policies, the Partnership has reduced the potential adverse financial impact of natural gas increases during the forward pricing period, but conversely, if natural gas prices were to fall, the Partnership will incur higher costs. Contracts were in place at March 31, 2004 to cover 23% of natural gas requirements for the succeeding twelve months.
Unrealized gains from forward pricing positions totaled $1.9 million as of March 31, 2004. The amount ultimately recognized by the Partnership will be dependent on published prices in effect at the time of settlement. The Partnership also had $.4 million of realized gains on closed contracts relating to future periods that have been deferred to the respective period.
For the period ending March 31, 2004, recording the fair value of natural gas derivatives resulted in a $3.3 million decrease to current assets, a $.4 million increase to cost of sales and a $2.9 million decrease to accumulated other comprehensive income. The decrease to current assets was to recognize the value of open natural gas contracts; the increase to current liabilities was to reclassify deferred gains on closed contracts.
| 4. | Impairment of Long-Lived Assets |
The Partnership reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows expected to result from the use of the asset (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized based on the difference between the carrying amount and the fair value of the asset.
On June 26, 2003, we suspended production at our Blytheville facility due to expectations that the facility would not cover its cash costs because of continuing high natural gas costs and the seasonal decline in nitrogen fertilizer demand and prices. In response to this act