UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended June 30, 2015

Or

For the transition period from                      to                     

Commission File No. 001-35334

 

RENTECH NITROGEN PARTNERS, L.P.

(Exact name of registrant as specified in its charter)

 

 

10877 Wilshire Boulevard, 10th Floor

Los Angeles, California 90024

(Address of principal executive offices)

(310) 571-9800

(Registrant’s telephone number, including area code)

 

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  o

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

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

 

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

As of July 31, 2015, the registrant had 38,927,609 common units outstanding.

 

 

 

 

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RENTECH NITROGEN PARTNERS, L.P.

Form 10-Q

Table of Contents

 

 

 

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RENTECH NITROGEN PARTNERS, L.P.

Consolidated Balance Sheets

(Amounts in thousands)

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

 

 

 

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RENTECH NITROGEN PARTNERS, L.P.

Consolidated Statements of Operations

(Amounts in thousands, except per unit data)

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

 

 

 

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RENTECH NITROGEN PARTNERS, L.P.

Consolidated Statements of Comprehensive Income (Loss)

(Amounts in thousands)

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

 

 

 

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RENTECH NITROGEN PARTNERS, L.P.

Consolidated Statement of Partners’ Capital (Deficit)

(Amounts in thousands)

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

 

 

 

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RENTECH NITROGEN PARTNERS, L.P.

Consolidated Statements of Cash Flows

(Amounts in thousands)

 

 

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

 

See Accompanying Notes to Consolidated Financial Statements.

 

 

 

 

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RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

Note 1 — Basis of Presentation

The accompanying unaudited consolidated financial statements of Rentech Nitrogen Partners, L.P. (the “Partnership”) and its consolidated subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in compliance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Neither authority requires all of the information and footnotes required by GAAP for complete financial statements. Accordingly, the accompanying financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair statement of the Partnership’s financial position as of June 30, 2015, and the results of operations and cash flows for the periods presented. The accompanying consolidated financial statements include the accounts of the Partnership and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Operating results for the three and six months ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015 or any other reporting period. The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2015 (the “Annual Report”).

The Partnership’s assets consist primarily of all of the equity interests, directly or indirectly held by it, of Rentech Nitrogen, LLC (“RNLLC”), which owns a fertilizer facility in East Dubuque, Illinois (the “East Dubuque Facility”), and Rentech Nitrogen Pasadena, LLC (“RNPLLC”), which owns a fertilizer facility in Pasadena, Texas (the “Pasadena Facility”).

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

 

Note 2 — Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (the “FASB”) issued guidance that provides a narrower definition of discontinued operations than under previous guidance. It requires that only disposals of components of an entity (or groups of components) that represent a strategic shift that has or will have a major effect on the reporting entity’s operations are to be reported in the financial statements as discontinued operations. It also provides guidance on the financial statement presentations and disclosures of discontinued operations. This guidance is effective prospectively for disposals (or classifications of held-for-sale) of components of an entity that occur in annual or interim periods beginning after December 15, 2014. The impact of this guidance is dependent on whether or not future disposals occur.

In May 2014, the FASB issued guidance that will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. In July 2015, the FASB approved a one-year deferral of the effective date making the guidance effective for interim and annual reporting periods beginning after December 15, 2017. In addition, the FASB will continue to permit entities to early adopt the guidance for annual periods beginning on or after December 15, 2016. The Partnership is evaluating the provisions of this guidance and the potential impact, if any, on its consolidated financial position, results of operations and disclosures.

In June 2014, the FASB issued guidance on accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The Partnership is evaluating the provisions of this guidance and the potential impact, if any, on its consolidated financial position, results of operations and disclosures.

In August 2014, the FASB issued guidance on presentation of financial statements – going concern, which applies to all companies. It requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. This guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Partnership is evaluating the provisions of this guidance and the potential impact, if any, on its consolidated financial position, results of operations and disclosures.

 

 

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RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

In January 2015, the FASB issued guidance that eliminates the concept of extraordinary items. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Partnership is evaluating the provisions of this guidance and the potential impact, if any, on its consolidated financial position, results of operations and disclosures.

 

In April 2015, the FASB issued guidance, which would require that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Partnership is evaluating the provisions of this guidance and the potential impact, if any, on its consolidated financial position, results of operations and disclosures.

In April 2015, the FASB issued guidance that will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The Partnership is evaluating the provisions of this guidance and the potential impact, if any, on its consolidated financial position, results of operations and disclosures.

 

 

Note 3 — Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants and is classified in one of the following three categories:

Fair values of cash, receivables, deposits, other current assets, accounts payable, accrued liabilities and other current liabilities were assumed to approximate carrying value since they are short term and can be settled on demand.

The following table presents the fair value and carrying value of the Partnership’s borrowings as of June 30, 2015.

 

 

The following table presents the fair value and carrying value of the Partnership’s borrowings as of December 31, 2014.

 

 

 

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RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

Notes

The $320.0 million of 6.5% second lien senior secured notes due 2021 (the “Notes”) are deemed to be Level 1 financial instruments because there is an active market for such debt. The fair value of such debt was determined based on market prices.

GE Credit Agreement

The credit agreement with General Electric Capital Corporation (the “GE Credit Agreement”) is deemed to be a Level 2 financial instrument because the measurement is based on observable market data. It is concluded that the carrying value of the GE Credit Agreement approximates the fair value of such loan as of June 30, 2015 and December 31, 2014 based on its floating interest rate and the Company’s assessment that the fixed-rate margin is still at market.

The levels within the fair value hierarchy at which the Partnership’s financial instruments have been evaluated have not changed for any of the Partnership’s financial instruments during the three and six months ended June 30, 2015 and 2014.

 

 

Note 4 — Derivative Instruments

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

Forward Natural Gas Contracts

The Partnership uses commodity-based derivatives to minimize its exposure to the fluctuations in natural gas prices. The Partnership recognizes the unrealized gains or losses related to the commodity-based derivative instruments in its consolidated financial statements. The Partnership does not have any master netting agreements or collateral relating to these derivatives.

Our East Dubuque Facility enters into forward natural gas purchase contracts to reduce its exposure to the fluctuations in natural gas prices. The forward natural gas contracts are deemed to be Level 2 financial instruments because the measurement is based on observable market data. The fair value of such contracts had been determined based on market prices. Gain or loss associated with forward natural gas contracts is recorded in cost of sales on the consolidated statements of operations. The amount of unrealized gain recorded was $1.7 million and $4.2 million for the three and six months ended June 30, 2015, respectively. For the three and six months ended June 30, 2014, the amount of unrealized loss recorded was $0.5 million. These forward natural gas contracts are recorded either in prepaid expenses and other current assets or in accrued liabilities on the consolidated balance sheets.

 

 

 

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RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

The following table presents the financial instruments that were accounted for at fair value by level as of June 30, 2015 and December 31, 2014.

 

 

 

Note 5 — Inventories

Inventories consisted of the following:

 

 

During the three and six months ended June 30, 2015, the Partnership wrote down the value of the Pasadena Facility’s ammonium sulfate inventory by $1.0 million to net realizable value. During the three and six months ended June 30, 2014, the Partnership wrote down the value of the Pasadena Facility’s ammonium sulfate inventory by $2.8 million to net realizable value. The various write-downs were reflected in cost of goods sold for the applicable periods.

 

 

Note 6 — Property, Plant and Equipment

Property, plant and equipment consisted of the following:

 

 

After the Partnership launched and pursued its process to evaluate strategic alternatives, management determined in the second quarter of 2015, it was more likely than not that the Pasadena Facility would be sold or otherwise disposed of before the end of its previously estimated economic useful life. Although it is more likely than not the Pasadena Facility will be sold, held-for-sale accounting criteria has not been met as management does not have the authority and has not committed to a plan of sale. Because the Pasadena Facility will more likely than not be sold or otherwise disposed of before the end of its previously estimated useful life the Company performed an impairment test. Based on the results of the impairment test, management concluded the Pasadena Facility’s carrying value was no longer recoverable and wrote the associated assets down by $101.8 million to their estimated fair values. The impairment reduced property, plant and equipment by $81.3 million and intangible assets, consisting of technology acquired in the

 

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RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

acquisition of the Pasadena Facility, by $20.5 million. Fair value was based on probability weighting various cash flow scenarios using Level 3 inputs under the applicable accounting guidance. The cash flow scenarios were based on market participant assumptions and indications of value from potential buyers of the Pasadena Facility. Because of changing market conditions, it is reasonably possible that the cash flows ultimately received upon sale could change significantly from our estimate of fair value. There is also no guarantee that the Partnership will ultimately commit to or be able to sell the Pasadena Facility.

During the three months ended June 30, 2015, the Partnership received a one-time easement payment of $1.4 million to allow an adjacent property owner to construct some pipelines under the Pasadena Facility.

The construction in progress balance at June 30, 2015 was $12.7 million, which includes $0.2 million of capitalized interest costs. The construction in progress balance represents primarily the costs associated with the ammonia synthesis converter project. The construction in progress balance at December 31, 2014 was $47.8 million, which includes $1.7 million of capitalized interest costs, and represents primarily the costs associated with the power generation project.

 

 

Note 7 — Debt

The Partnership’s debt obligations at June 30, 2015 consist of $320.0 million of Notes and $24.0 million in outstanding advances under the GE Credit Agreement. The Partnership’s debt obligations at December 31, 2014 consist of $320.0 million of Notes and $15.0 million in outstanding advances under the GE Credit Agreement. Debt premium, discount and issuance expenses incurred in connection with financing are deferred and amortized on a straight-line basis.

As of June 30, 2015, the Partnership was in compliance with its covenants under the Notes and the GE Credit Agreement.

 

 

Note 8 — Commitments and Contingencies

Natural Gas Forward Purchase Contracts

The Partnership’s policy and practice are to enter into fixed-price forward purchase contracts for natural gas in conjunction with contracted nitrogen fertilizer product sales in order to substantially fix gross margin on those product sales contracts. The Partnership may also enter into a limited amount of additional fixed-price forward purchase contracts for natural gas in order to reduce monthly and seasonal natural gas price volatility. The Partnership occasionally enters into index-price contracts for the purchase of natural gas. The Partnership has entered into multiple natural gas forward purchase contracts for various delivery dates through December 31, 2015. Commitments for natural gas purchases consist of the following:

 

 

During July 2015, the Partnership entered into additional fixed-quantity forward purchase contracts at indexed prices for various delivery dates through July 31, 2015. The total MMBtus associated with these additional forward purchase contracts are 0.1 million and the total amount of the purchase commitments is $0.3 million, resulting in a weighted average rate per MMBtu of $2.86 in these new commitments. The Partnership is required to make additional prepayments under these forward purchase contracts in the event that market prices fall below the purchase prices in the contracts.

 

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RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

Litigation

The Partnership is party to litigation from time to time in the normal course of business. The Partnership accrues liabilities related to litigation only when it concludes that it is probable that it will incur costs related to such litigation, and can reasonably estimate the amount of such costs. In cases where the Partnership determines that it is not probable, but reasonably possible that it has a material obligation, it discloses such obligations and the possible loss or range of loss, if such estimate can be made. The outcome of the Partnership’s current material litigation matters is not estimable or probable. The Partnership maintains insurance to cover certain actions and believes that resolution of its current litigation matters will not have a material adverse effect on the Partnership’s financial statements.

Regulation

The Partnership’s business is subject to extensive and frequently changing federal, state and local, environmental, health and safety regulations governing a wide range of matters, including the emission of air pollutants, the release of hazardous substances into the environment, the treatment and discharge of waste water and the storage, handling, use and transportation of the Partnership’s fertilizer products, raw materials, and other substances that are part of our operations. These laws include the Clean Air Act (the “CAA”), the federal Water Pollution Control Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Toxic Substances Control Act, and various other federal, state and local laws and regulations. The laws and regulations to which the Partnership is subject are complex, change frequently and have tended to become more stringent over time. The ultimate impact on the Partnership’s business of complying with existing laws and regulations is not always clearly known or determinable due in part to the fact that the Partnership’s operations may change over time and certain implementing regulations for laws, such as the CAA, have not yet been finalized, are under governmental or judicial review or are being revised. These laws and regulations could result in increased capital, operating and compliance costs.

The Partnership entered into a settlement agreement with the Illinois Environmental Protection Agency in August 2013 requiring it to connect a device at the East Dubuque Facility to an ammonia safety flare by December 1, 2015. The Partnership estimates the cost of the project required by the settlement agreement as being $0.4 million.

The Partnership negotiated a settlement agreement with Region 6 of the Environmental Protection Agency relating to an ammonia release that occurred at the Pasadena Facility on April 20, 2014. The penalty required by the settlement agreement was $0.1 million.

Loss Contingencies

Abeinsa Abener Teyma General Partnership (“Abeinsa”), the engineering, procurement and construction (“EPC”) contractor for the power generation facility at the Pasadena Facility, submitted to RNPLLC in March 2015 approximately $10.0 million of change orders for approval and payment. Under the terms of the EPC contract between RNPLLC and Abeinsa (the “EPC Contract”), RNPLLC must agree to any change order for it to be effective. RNPLLC has contested the validity of these change orders and presented its own change orders and claims for damages under the EPC Contract to Abeinsa. The parties are involved in the contractual dispute resolution process as to how to resolve the disputed change orders and other outstanding claims related to the construction of the power generation facility. The Company is unable at this time to estimate any potential liability from this contingency.

 

 

Note 9 — Partners’ Capital and Partnership Distributions

The Partnership’s policy is to distribute to its unitholders all of the cash available for distribution that it generates each quarter, subject to a determination by the board of directors (the “Board”) of the Partnership’s general partner (the “General Partner”) that the Partnership’s projected liquidity is adequate to provide for its forecasted operating and working capital needs. Cash available for distribution for each quarter will be determined by the Board of the General Partner following the end of each quarter. The Partnership expects that cash available for distribution for each quarter will generally be calculated as the cash it generates during the quarter, less cash needed for maintenance capital expenditures not funded by capital proceeds, debt service and other contractual obligations, and any increases in cash reserves for future operating or capital needs that the Board of the General Partner deems necessary or appropriate. Increases or decreases in such reserves may be determined at any time by the Board of the General Partner as it considers, among other things, the cash flows or cash needs expected in approaching periods. The Partnership does not intend to maintain excess

 

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RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

distribution coverage for the purpose of maintaining stability or growth in its quarterly distribution, nor does it intend to incur debt to pay quarterly distributions. The Partnership has no legal obligation to pay distributions. Distributions are not required by the Partnership’s partnership agreement and the Partnership’s distribution policy is subject to change at any time at the discretion of the Board of the General Partner. Any distributions made by the Partnership to its unitholders will be done on a pro rata basis.

At June 30, 2015, the Partnership had outstanding 206,842 unit-settled phantom units. Each phantom unit entitles the holder to payments in amounts equal to the amounts of any distributions made to an outstanding unit by the Partnership. Payments to outstanding phantom units are not subtracted from operating cash flow in the calculation of cash available for distribution, but the payments made to phantom unitholders are recorded as distributions for accounting purposes. For information on the announcement of cash distributions refer to “Note 14 — Subsequent Events — Distributions”.

The following is a summary of cash distributions paid to common unitholders and holders of phantom units during the six months ended June 30, 2015 for the respective quarter to which the distributions relate:

 

 

 

Note 10 — Income Taxes

The Partnership and its subsidiaries are not directly subject to federal and state income taxes. Instead, their taxable income or loss is allocated to their individual partners or members. However, the Partnership and its subsidiaries are subject to an Illinois replacement tax, Texas margin tax and California annual minimum franchise tax. For the three months ended June 30, 2015, Illinois replacement tax benefit of $(14,000) and Texas margin tax of $23,000  were recorded. For the six months ended June 30, 2015, Texas margin tax of $47,000 was recorded. For the three months ended June 30, 2014, Illinois replacement tax benefit of $2,000 and Texas margin tax expense of $27,000 were recorded. For the six months ended June 30, 2014, Illinois replacement tax expense of $1,000 and Texas margin tax expense of $54,000 were recorded.

 

 

Note 11 — Segment Information

The Partnership operates in two business segments, as described below:

 

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RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

The Partnership’s reportable operating segments have been determined in accordance with the Partnership’s internal management structure, which is organized based on operating activities. The Partnership evaluates performance based upon several factors, of which the primary financial measure is segment-operating income (loss).

 

 

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RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

 

 

 

 

Note 12 — Net Loss Per Common Unit

The Partnership’s net loss is allocated wholly to the common unitholders since the General Partner has a non-economic interest.

Basic loss per common unit allocated to common unitholders is calculated by dividing net loss allocated to common unitholders by the weighted average number of common units outstanding for the period. Diluted net loss per common unit allocated to common unitholders is calculated by dividing net loss allocated to common unitholders by the weighted average number of common units outstanding plus the dilutive effect, calculated using the “treasury stock” method for the unvested phantom units. Phantom units are settled for common units upon vesting and are issued in tandem with distribution rights during the vesting period.

The following table sets forth the computation of basic and diluted net loss per common unit:

 

 

For the three and six months ended June 30, 2015, 207,000 phantom units were excluded from the calculation of diluted net loss per common unit because their inclusion would have been anti-dilutive. For the three and six months ended June 30, 2014, 187,000

 

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RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

phantom units were excluded from the calculation of diluted net loss per common unit because their inclusion would have been anti-dilutive.

 

 

Note 13 — Related Parties

The Partnership, the General Partner and Rentech, Inc. (“Rentech”) have entered into a services agreement, pursuant to which the Partnership and the General Partner obtain certain management and other services from Rentech. Under the services agreement, the Partnership, its subsidiaries and the General Partner are obligated to reimburse Rentech for (i) all costs, excluding share-based compensation, incurred by Rentech or its affiliates in connection with the employment of its employees who are seconded to the Partnership and who provide the Partnership services under the agreement on a full-time basis; (ii) a prorated share of costs, excluding share-based compensation, incurred by Rentech or its affiliates in connection with the employment of its employees, excluding seconded personnel, who provide the Partnership services under the agreement on a part-time basis, with such prorated share determined by Rentech on a commercially reasonable basis, based on the estimated percent of total working time that such personnel are engaged in performing services for the Partnership; (iii) a prorated share of certain administrative costs, in accordance with the agreement, including office costs, services by outside vendors, other general and administrative costs; and (iv) any taxes (other than income taxes, gross receipt taxes and similar taxes) incurred by Rentech or its affiliates for the services provided under the agreement. In accordance with the services agreement, Rentech billed the Partnership $5.2 million for the three months ended June 30, 2015, and $1.6 million for the same period in the prior year.  Rentech billed the Partnership $7.1 million for the six months ended June 30, 2015, and $4.2 million for the same period in the prior year. In 2015, a vendor was billing directly to Rentech, instead of the Partnership.

 

 

Note 14 — Subsequent Events

Distributions

The Partnership declared a cash distribution to its common unitholders for the second quarter of 2015 of $1.00 per unit, which will result in total distributions in the amount of $39.1 million, including payments to phantom unitholders. The cash distribution will be paid on August 28, 2015 to unitholders of record at the close of business on August 21, 2015.

Proposed Merger

On August 9, 2015, the Partnership entered into an Agreement and Plan of Merger (the “Merger Agreement”) under which the Partnership and the General Partner will merge with affiliates of CVR Partners, L.P. (“CVR Partners”), and the Partnership will cease to be a public company and will become a wholly-owned subsidiary of CVR Partners (the “Merger”). Upon closing of the Merger, each outstanding unit of the Partnership will be exchanged for 1.04 common units of CVR Partners and $2.57 in cash. The Merger Agreement contemplates that the Partnership will either sell its Pasadena Facility to a third party or spin-out ownership of the Pasadena Facility to the Partnership unitholders prior to the closing of the Merger. The merger consideration therefore does not include any consideration attributable to the Pasadena Facility. Consummation of the Merger is subject to certain conditions, including approval from our unitholders, the effectiveness of a registration statement on Form S-4 relating to the unit component of the merger consideration and the expiration or termination of any waiting periods under applicable antitrust and competition laws. The Merger Agreement includes customary termination provisions, including a provision allowing RNP to terminate the Merger Agreement to enter into a “superior proposal” upon payment of a termination fee. Rentech, Inc. has agreed, subject to certain terms and conditions, to vote its approximately 60% stake in the Partnership in favor of the transaction. Subject to satisfaction of the closing conditions and receipt of the required approvals, it is expected that the Merger will close in the fourth calendar quarter of 2015.

 

 

 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition, results of operations and cash flows in conjunction with our consolidated financial statements and the related notes presented in this report and in our Annual Report.

FORWARD-LOOKING STATEMENTS

Certain information included in this report contains, and other reports or materials filed or to be filed by us with the SEC (as well as information included in oral statements or other written statements made or to be made by us or our management) contain or will contain, “forward-looking statements”. The forward-looking statements may relate to financial results and plans for future business activities, and are thus prospective. The forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by the forward-looking statements. They can be identified by the use of terminology such as “may,” “will,” “expect,” “believe,” “intend,” “plan,” “estimate,” “anticipate,” “should” and other comparable terms or the negative of them. You are cautioned that, while forward-looking statements reflect management’s good faith belief and best judgment based upon current information, they are not guarantees of future performance and are subject to known and unknown risks and uncertainties. Factors that could affect our results include the risk factors detailed in “Part I—Item 1A. Risk Factors” in the Annual Report and from time to time in our periodic reports and registration statements filed with the SEC. Such risks and uncertainties include, among other things:

 

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You should not place undue reliance on our forward-looking statements. Although forward-looking statements reflect our good faith beliefs, forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise, unless required by law.

References in this report to “the Partnership,” “we,” “our,” “us” and like terms refer to Rentech Nitrogen Partners, L.P. and our subsidiaries, unless the context otherwise requires or where otherwise indicated. References in this report to “Rentech” refer to Rentech and its consolidated subsidiaries other than us, unless the context otherwise requires or where otherwise indicated. References to “our operating companies” refer to RNLLC and RNPLLC.

OVERVIEW OF OUR BUSINESS

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

Our operating results to date in 2015 have been affected by both negative and positive factors. Although operating results at the Pasadena Facility have improved to positive EBITDA, we recorded a large asset impairment of $101.8 million for our Pasadena Facility due to our conclusion that our process to evaluate strategic alternatives made it more likely than not that that facility would be sold before the end of its economic life. This conclusion required the consideration of estimated proceeds from such a sale in the estimate of future cash flows used to calculate the fair value of the facility. Our East Dubuque Facility has improved its production levels and delivered operating results significantly better than those in 2014 periods, and benefitted from the receipt of $4.4 million of insurance proceeds from claims under coverage for business interruption related to the fire that occurred in 2013. We expect our current sources of liquidity to be adequate with substantial cushions in place.

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

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

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

 

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. Preparing our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. The most significant estimates and judgments relate to: revenue recognition, inventories, valuation of long-lived assets and intangible assets, recoverability of goodwill, accounting for major maintenance and the acquisition method of accounting. Actual amounts could differ significantly from these estimates. No material change has occurred to our critical accounting policies and estimates from the information provided in the Annual Report.

FACTORS AFFECTING COMPARABILITY OF FINANCIAL INFORMATION

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

Expansion Projects and Other Significant Capital Projects

We have commenced additional projects and are evaluating other potential projects to expand the production capabilities and product offerings at our facilities. We expect to incur significant costs and expenses developing and building such projects. Our depreciation expense has increased and we expect our depreciation expense to increase further as we place additional assets into service. Consequently, our operating results may not be comparable for periods before, during and after the construction of any expansion project or other significant capital project.

Restructuring of Pasadena’s Operations

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

 

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FACTORS AFFECTING RESULTS OF OPERATIONS

Seasonality

Our East Dubuque Facility

Our business is seasonal, based on planting, growing and harvesting cycles. Consequently, operating results for the interim periods do not necessarily indicate expected results for the year. The following table shows product tonnage shipped by our East Dubuque Facility by quarter for the six months ended June 30, 2015 and for each comparable quarter in the years ended December 31, 2014, 2013 and 2012.

 

 

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

As a result of the seasonality of shipments and sales, we experience significant fluctuations in our East Dubuque Facility’s revenues, income, net working capital levels and cash available for distribution from quarter to quarter. Weather conditions can significantly impact quarterly results by affecting the timing and amount of product deliveries. Our receivables and deferred revenues are seasonal and relatively unpredictable. Significant amounts of our East Dubuque Facility’s products are typically sold for later shipment under prepaid contracts. The timing of these sales and the amount of down payment as a percentage of the total contract price may vary with market conditions. The variation in the timing of these sales and contract terms may add to the seasonality of our cash flows and working capital.

 

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Our Pasadena Facility

Significant seasonality and weather factors affect demand, pricing and timing of deliveries for, our Pasadena Facility’s domestic agricultural products. Domestic prices for ammonium sulfate and ammonium thiosulfate normally reach their highest point in the spring, decreasing in the summer, and increasing again in the fall. Sales prices of these products are adjusted seasonally in order to facilitate distribution of the products throughout the year. Sales to Australia, Brazil and New Zealand may partially offset this domestic seasonal pattern because they are in the southern hemisphere. We operate the ammonium sulfate plant at our Pasadena Facility throughout the year to the extent that there is available storage capacity and demand at targeted sales prices for this product. We have 60,000 tons of storage capacity for ammonium sulfate at the facility. We also have an arrangement with IOC that permits us to store approximately 60,000 tons of ammonium sulfate at IOC-controlled terminals, which are located near our end customers. We manage our storage capacity by distributing the product through IOC to customers in both domestic and offshore markets throughout the year. If storage capacity were to be insufficient, we would be forced to reduce or cease production of the product until capacity became available. Our Pasadena Facility’s fertilizer products are typically sold on the spot market for immediate delivery and, to a much lesser extent, under prepaid contracts for future delivery at fixed prices. The following table shows product tonnage shipped by our Pasadena Facility by quarter for the six months ended June 30, 2015 and for each quarter in the years ended December 31, 2014 and 2013.

 

 

 

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SELECTED FINANCIAL DATA

The following table includes selected summary financial data for the three and six months ended June 30, 2015 and 2014. The data below should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this report.

 

 

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

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

 

 

 

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

 

 

Business Segments

We operate in two business segments, which are East Dubuque and Pasadena. See “Note 11 — Segment Information” in “Part I—Item 1. Financial Statements” in this report for more information on the description of the segments.

 

 

 

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

Partnership and unallocated expenses recorded as selling, general and administrative expenses for the three months ended June 30, 2015 were $2.3 million, compared to $2.2 million for the same period in the prior year. Non-cash unit–based compensation expense, recorded in selling, general and administrative expenses, was $0.4 million for each of the three months ended June 30, 2015 and 2014. Partnership and unallocated expenses recorded as selling, general and administrative expenses for each of the six months ended June 30, 2015 and 2014 were $4.5 million.  Non-cash unit-based compensation expense, recorded in selling, general and administrative expenses, was $0.7 million for the six months ended June 30, 2015, compared to $0.9 million for the same period in the prior year.

East Dubuque

COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014:

Revenues

 

 

 

 

We generate revenue from the sale of nitrogen fertilizer products manufactured at our East Dubuque Facility. Our East Dubuque Facility produces ammonia, UAN, liquid and granular urea, which are nitrogen fertilizers that use natural gas as a feedstock. We also

 

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produce nitric acid and food-grade CO₂. Nitrogen fertilizer products are used primarily in the production of corn. Revenues are seasonal based on the planting, growing, and harvesting cycles.

Revenues for the three months ended June 30, 2015 were $72.1 million, compared to $73.9 million for the same period in the prior year. The decrease was primarily due to lower sales volumes and prices for UAN, partially offset by higher sales volumes and prices for ammonia. Revenues for the six months ended June 30, 2015 were $108.8 million, compared to $102.4 million for the same period last year. The increase was primarily due to higher sales volumes and prices for ammonia, partially offset by lower sales volumes and prices for UAN, and lower natural gas sales.

Ammonia deliveries increased due to strong demand from agricultural and industrial customers and an increase in production, due to expansion, leading into the spring planting season. Volumes were low in 2014 because production was interrupted by a planned turnaround and a fire in the fourth quarter of 2013, and production was purposely reduced in order to sell natural gas at high prices in the first quarter of 2014. UAN deliveries decreased due to greater demand for ammonia and lower priced urea, and wet conditions during the UAN application period.

Average sales prices per ton for the three months ended June 30, 2015 were 6% higher for ammonia and 7% lower for UAN, as compared with the same period in the prior year. These two products comprised 88% of our East Dubuque Facility’s revenues for the three months ended June 30, 2015 and 88% for the same period last year. Average sales prices per ton for the six months ended June 30, 2015 were 3% higher for ammonia and 5% lower for UAN, as compared with the same period last year. These two products comprised 85% of our East Dubuque Facility’s revenues for the six months ended June 30, 2015 and 80% for the same period last year. The increase in ammonia prices is due primarily to an increase in demand due to ideal conditions for applying ammonia. The decrease in UAN prices is due primarily to lower demand for UAN.

Other revenues consist of natural gas sales and nitrous oxide emission reduction credits. We occasionally sell natural gas when purchase commitments exceed production requirements or storage capacities, or when the margin from selling natural gas significantly exceeds the margin from producing additional ammonia. On rare occasions, we have also purchased natural gas with the specific intent of immediately reselling it when local market anomalies create low-risk opportunities for gain.

Cost of Sales

 

 

Cost of sales primarily consists of the cost of natural gas (East Dubuque’s primary feedstock), labor, depreciation and electricity. Cost of sales for the three months ended June 30, 2015 was $29.4 million, compared to $41.0 million for the same period in the prior year. The decrease in the cost of sales was primarily due to business interruption insurance proceeds and a decrease in natural gas and labor costs. During the three months ended June 30, 2015, we received $4.4 million in business interruption insurance proceeds relating to the 2013 fire. The decrease in natural gas costs was due to a $1.7 million unrealized gain on natural gas derivatives and a decrease in natural gas costs. Labor costs decreased due to lower sales volumes for UAN. Natural gas comprised 51% and labor costs comprised 16% of cost of sales on product shipments for the three months ended June 30, 2015. For the same period in the prior year, natural gas was 51% and labor was 14% of cost of sales.

Depreciation expense included in cost of sales was $5.3 million for the three months ended June 30, 2015 and $5.1 million for the same period in the prior year.

Cost of sales for the six months ended June 30, 2015 was $48.7 million compared to $57.1 million for the same period last year. The decrease in cost of sales was primarily due to business interruption insurance proceeds and a decrease in natural gas costs. Decreased natural gas costs were due to a $4.2 million unrealized gain on natural gas derivatives and a decrease in natural gas costs. Natural gas comprised 47% and labor costs comprised 17% of cost of sales on product shipments for the six months ended June 30, 2015. For the same period in the prior year, natural gas was 51% and labor costs were 15% of cost of sales.

Depreciation expense included in cost of sales was $8.6 million for the six months ended June 30, 2015 and $7.3 million for the same period in the prior year. The increase in depreciation expense included in cost of sales was primarily due to the increase in ammonia sales volumes.

 

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Gross Profit

 

 

Gross profit was $42.7 million for the three months ended June 30, 2015, compared to $33.0 million for the same period in the prior year. Gross profit margin was 59% for the three months ended June 30, 2015, compared to 45% for the same period in the prior year. Gross profit was $60.1 million for the six months ended June 30, 2015, compared to $45.4 million for the same period in the prior year. Gross profit margin was 55% for the six months ended June 30, 2015, compared to 44% for the same period in the prior year. The increases in gross profit and gross margin were primarily due to higher sales volumes and prices for ammonia, business interruption insurance proceeds and unrealized gains on natural gas derivatives, partially offset by lower sales volumes and prices for UAN. Gross profit margin, without business interruption insurance proceeds and natural gas derivatives, was 51% for the three months ended June 30, 2015, compared to 45%, without natural gas derivatives, for the same period in the prior year. Gross profit margin, without business interruption insurance proceeds and natural gas derivatives, was 47% for the six months ended June 30, 2015, compared to 45%, without natural gas derivatives, for the same period in the prior year.

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

Operating Expenses

 

 

Operating expenses were $1.5 million for the three months ended June 30, 2015, compared to $1.4 million for the three months ended June 30, 2014. Operating expenses were $2.9 million for the six months ended June 30, 2015, compared to $2.5 million for the six months ended June 30, 2014.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three-month period ended June 30, 2015 were $1.0 million, compared to $1.1 million for the same period in the prior year. Selling, general and administrative expenses for the six-month period ended June 30, 2015 were $2.3 million, compared to $2.2 million for the same period in the prior year.

Depreciation and Amortization. Depreciation expense included in operating expense was $0.1 million for the three months ended June 30, 2015, compared to $38,000 for the same period in the prior year. Depreciation expense included in operating expense was $0.1 million for each of the six months ended June 30, 2015 and 2014. The majority of depreciation expense incurred was a manufacturing cost and was distributed between cost of sales and finished goods inventory, based on production volumes and ending inventory levels. However, a portion of depreciation expense was associated with assets supporting general and administrative functions and was recorded in operating expense.

 

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Operating Income

 

 

Operating income was $41.2 million for the three months ended June 30, 2015, compared to $31.6 million for the same period in the prior year. Operating income was $57.2 million for the six months ended June 30, 2015, compared to $42.8 million for the same period in the prior year.  The increases were primarily due to higher sales volumes and prices for ammonia, business interruption insurance proceeds and unrealized gains on natural gas derivatives, partially offset by lower sales volumes and prices for UAN.

Pasadena

COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014:

Revenues

 

 

 

 

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

Revenues for the three months ended June 30, 2015 were $37.8 million, compared to $39.7 million for the same period in the prior year. The decrease was due to lower sales volumes for ammonium sulfate and ammonium thiosulfate, and lower sales prices for sulfuric acid, partially offset by higher sales prices for ammonium sulfate and ammonium thiosulfate, and higher sales volumes for sulfuric acid. Revenues for the six months ended June 30, 2015 were $70.2 million, compared to $67.5 million for the same period in the prior year. The increase was due to higher sales prices for ammonium sulfate and ammonium thiosulfate, and higher sales volumes

 

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for sulfuric acid, partially offset by lower sales volumes for ammonium sulfate and ammonium thiosulfate, and lower sales prices for sulfuric acid.

Average sales prices per ton increased by 35% for ammonium sulfate and decreased by 12% for sulfuric acid for the three months ended June 30, 2015 as compared with the same period in the prior year. These two products comprised 91% of our Pasadena Facility’s revenues for the three months ended June 30, 2015 and 93% for the same period in the prior year. Average sales price per ton increased by 32% for ammonium sulfate and decreased by 5% for sulfuric acid for the six months ended June 30, 2015 as compared with the same period in the prior year.  These two products comprised 90% of our Pasadena Facility’s revenues for the six months ended June 30, 2015 and 89% for the same period in the prior year. Ammonium sulfate sales prices increased due to a higher percentage of sales in the domestic market; continued demand for ammonium sulfate as retailers move away from ammonium nitrate; and production issues at other North American facilities. As part of our restructuring plan, we reduced our historically low-margin sales to Brazil. No ammonium sulfate sales were to Brazil during the three months ended June 30, 2015, while 36% of ammonium sulfate sales were to Brazil during the three months ended June 30, 2014. Only 2% of ammonium sulfate sales were to Brazil during the six months ended June 30, 2015, while 37% of ammonium sulfate sales were to Brazil during the six months ended June 30, 2014.

The higher sales volumes for sulfuric acid and lower sales volumes for ammonium sulfate were the result of our restructuring plan implemented in late 2014. In addition to reducing sales to Brazil, the restructuring plan included reducing expected annual production of ammonium sulfate by approximately 25 percent, to 500,000 tons. Sulfuric acid is a component in the production of ammonium sulfate. With reduced production of ammonium sulfate, less sulfuric acid is needed, which results in more sulfuric acid being available for sale.

During the second quarter of 2015, the sulfuric acid plant operated at reduced rates, due to a crack on the boiler exit duct. The crack was repaired during planned downtime in July 2015, and the sulfuric acid plant has subsequently operated at full rates.    

Cost of Sales

 

 

Cost of sales primarily consists of the cost of ammonia, sulfur, labor, depreciation and electricity. Cost of sales for the three months ended June 30, 2015 was $35.7 million, compared to $44.4 million for the same period in the prior year. The decrease in cost of sales was primarily due to selling a lower volume of ammonium sulfate and ammonium thiosulfate, partially offset by selling a higher volume of sulfuric acid and higher unit prices for sulfur. Ammonia and sulfur together comprised 58% of cost of sales for the three months ended June 30, 2015, compared to 55% for the same period in the prior year. Labor costs comprised 9% of cost of sales for each of the three months ended June 30, 2015 and 2014. For the three months ended June 30, 2015, we wrote down our ammonium sulfate inventory by $1.0 million because production costs exceeded net realizable value. During the same period in the prior year, we wrote down our ammonium sulfate inventory by $2.8 million.

Depreciation expense included in cost of sales was $2.2 million for the three months ended June 30, 2015 and $2.1 million for the same period in the prior year.

Cost of sales for the six months ended June 30, 2015 was $66.8 million, compared to $70.8 million for the same period last year. The decrease in cost of sales was primarily due to selling a lower volume of ammonium sulfate and ammonium thiosulfate, partially offset by selling a higher volume of sulfuric acid and higher unit prices for sulfur. Ammonia and sulfur together comprised 62% of cost of sales for the six months ended June 30, 2015 and 61% for the same period in the prior year. Labor costs comprised 8% of cost of sales for each of the six months ended June 30, 2015 and 2014. For the six months ended June 30, 2015, we wrote down our ammonium sulfate inventory by $1.0 million. During the same period in the prior year, we wrote down our ammonium sulfate inventory by $2.8 million.

Depreciation expense included in cost of sales was $3.7 million for the three months ended June 30, 2015 and $2.9 million for the same period in the prior year. The increase in depreciation expense was primarily due to an increase in property, plant and equipment resulting from the completion of the power generation project in the first quarter of 2015 and the sulfuric acid converter project in 2014.

 

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Gross Profit

 

 

Gross profit was $2.0 million for the three months ended June 30, 2015, compared to a gross loss of $4.7 million for the same period in the prior year. Gross profit margin for the three months ended June 30, 2015 was 5%, compared to gross loss margin of 12% for the same period in the prior year.  Gross profit was $3.4 million for the six months ended June 30, 2015, compared to a gross loss of $3.4 million for the same period in the prior year.  Gross profit margin for the six months ended June 30, 2015 was 5%, compared to gross loss margin of 5% for the same period in the prior year. The increases in gross profit and gross profit margins were primarily due to higher sales prices for ammonium sulfate and ammonium thiosulfate, higher sales volumes for sulfuric acid and a decrease in the write down of inventories.

Gross profit margin at our Pasadena Facility can vary significantly from period to period due to changes in the prices of nitrogen fertilizer, ammonia and sulfur, which are all commodities. The prices of these commodities can vary significantly from period to period and do not always move in the same direction. In addition, certain fixed costs of operating our Pasadena Facility are recorded in cost of sales. Their impact on gross profit and gross margins varies as product sales volumes vary seasonally.

Operating Expenses

 

 

Operating expenses were comprised primarily of selling, general and administrative expenses, depreciation and amortization expense and impairment charges. Operating expenses were $103.0 million for the three months ended June 30, 2015, compared to $28.8 million for the same period in the prior year. Operating expenses were $104.1 million for the six months ended June 30, 2015, compared to $30.9 million for the same period in the prior year.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended June 30, 2015 were $0.8 million, compared to $1.2 million for the same period in the prior year. Selling, general and administrative expenses for the six months ended June 30, 2015 were $1.6 million, compared to $3.1 million for the same period in the prior year. The decreases were primarily due to our 2014 restructuring.

Depreciation and Amortization. Depreciation and amortization expense included in operating expense was $0.4 million for the three months ended June 30, 2015, compared to $0.3 million for the same period in the prior year. Depreciation and amortization expense included in operating expenses was $0.7 million for the six months ended June 30, 2015, compared to $0.6 million for the same period in the prior year. Depreciation and amortization expense represents primarily amortization of intangible assets. The majority of depreciation expense incurred was a manufacturing cost and was distributed between cost of sales and finished goods inventory, based on production volumes and ending inventory levels.

Pasadena Asset Impairment. Pasadena asset impairment was $101.8 million for the three and six months ended June 30, 2015. The impairment reduced property, plant and equipment by $81.3 million and eliminated intangible assets by $20.5 million. See “Note 6 — Property, Plant and Equipment” to the consolidated financial statements included in “Part I—Item 1. Financial Statements” in this report.

Pasadena Goodwill Impairment. Pasadena goodwill impairment was $27.2 million for the three and six months ended June 30, 2014. There is no remaining goodwill associated with the Pasadena Facility.

 

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Operating Loss

 

 

Operating loss was $100.9 million for the three months ended June 30, 2015, compared to $33.5 million for the same period in the prior year. Operating loss was $100.7 million for the six months ended June 30, 2015, compared to $34.3 million for the same period in the prior year. The increase in operating loss was primarily due to the asset impairment, partially offset by higher sales prices for ammonium sulfate and ammonium thiosulfate, higher sales volumes for sulfuric acid and a decrease in the write down of inventories and goodwill impairment.

CASH FLOWS

The following table summarizes our consolidated statements of cash flows:

 

 

Operating Activities

Revenues were $179.0 million for the six months ended June 30, 2015, compared to $169.9 million for the same period in the prior year. The increase in revenue for the six months ended June 30, 2015 compared to the six months ended June 30, 2014 was primarily due to higher sales volumes for ammonia and sulfuric acid, and higher sales prices for ammonia, ammonium sulfate and ammonium thiosulfate, partially offset by lower sales volumes and prices for UAN, lower sales prices for sulfuric acid and lower sales volumes for ammonium sulfate and ammonium thiosulfate. Deferred revenue decreased $14.1 million during the six months ended June 30, 2015, compared to a decrease of $1.8 million during the same period in the prior year. The decrease in deferred revenue was due to the East Dubuque Facility delivering a significant amount of product under prepaid contracts.

Net cash provided by operating activities for the six months ended June 30, 2015 was $42.0 million. We had net loss of $57.3 million for the six months ended June 30, 2015 including an asset impairment charge of $101.8 million. We also had non-cash unit-based compensation expense relating to our common units of $0.7 million. We had an unrealized gain on natural gas derivatives of $4.2 million relating to our forward purchase natural gas contracts. We received $4.5 million in business interruption insurance proceeds relating to the 2013 fire at our East Dubuque Facility. Inventories increased by $7.0 million during the six months ended June 30, 2015 due to lower sales volumes for UAN.

Net cash provided by operating activities for the six months ended June 30, 2014 was $27.6 million. We had a net loss of $5.8 million for the six months ended June 30, 2014 including a goodwill impairment charge of $27.2 million. Accounts receivable increased by $6.0 million due primarily to increased sales volumes at our facilities and a change in payment terms for a major customer at the Pasadena Facility during the six months ended June 30, 2014. Inventories increased by $3.9 million during the six months ended June 30, 2014 due to the normal seasonality of the East Dubuque Facility’s business, along with the increased production capacity due to the completion of the ammonia expansion project. Inventories also were higher at our Pasadena Facility because of the increased production capacity. Accounts payable increased by $2.6 million due primarily to increased costs of natural gas and electricity at our East Dubuque Facility and ammonia at our Pasadena Facility. These additional costs at both of our facilities were due to increased production as a result of recently completed expansion projects. Accrued interest increased by $0.6 million due to the Notes.

 

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Investing Activities

Net cash used in investing activities was $14.7 million for the six months ended June 30, 2015, compared to $36.4  million for the same period in the prior year. Net cash used in investing activities for the six months ended June 30, 2015 was primarily related to the projects at our East Dubuque Facility. At our East Dubuque Facility, we upgraded a nitric acid compressor train and we are replacing the ammonia synthesis converter. Net cash used in investing activities for the six months ended June 30, 2014 was primarily related to the projects at our East Dubuque Facility and our Pasadena Facility. At our East Dubuque Facility, we were upgrading a nitric acid compressor train and completing our urea expansion project. At our Pasadena Facility, we were replacing our sulfuric acid converter and completing our power generation project.

Financing Activities

Net cash used in financing activities was $16.8 million for the six months ended June 30, 2015, compared to $5.1 million for the same period in the prior year. During the six months ended June 30, 2015, we made distributions of $25.8 million to our unitholders. We also borrowed an additional $9.0 million under the GE Credit Agreement. During the six months ended June 30, 2014, we made distributions of $5.1 million.

 

 

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2015, our current assets totaled $94.3 million. Current assets included cash of $38.5 million, accounts receivable of $14.3 million and inventories of $34.7 million. At June 30, 2015, our current liabilities were $50.5 million and our long-term liabilities were $351.0 million, comprised primarily of the Notes.

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

Sources of Capital

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

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

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

Uses of Capital

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

Capital Expenditures

We divide our capital expenditures into two categories: maintenance and expansion. Maintenance capital expenditures include those for improving, replacing or adding to our assets, as well as expenditures for acquiring, constructing or developing new assets to maintain our operating capacity, or to comply with environmental, health, safety or other regulations. Maintenance capital expenditures that are required to comply with regulations may also improve the output, efficiency or reliability of our facilities. Expansion capital expenditures are those incurred for acquisitions or capital improvements that we expect will increase our operating

 

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capacity or operating income over the long term. We generally fund maintenance capital expenditures from operating cash flow, and expansion capital expenditures from new capital.

Maintenance capital expenditures for our East Dubuque Facility totaled $3.9 million for the six months ended June 30, 2015 and $4.1 million for the six months ended June 30, 2014. Maintenance capital expenditures for our East Dubuque Facility are expected to be $10.7 million for the year ending December 31, 2015. Expansion capital expenditures for our East Dubuque Facility totaled $7.7 million for the six months ended June 30, 2015 and $4.5 million for the six months ended June 30, 2014. Expansion capital expenditures for our East Dubuque Facility are expected to be $19.0 million for the year ending December 31, 2015, of which $14.1 million is related to the ammonia synthesis converter project.

Maintenance capital expenditures for our Pasadena Facility totaled $1.1 million for the six months ended June 30, 2015 and $12.0 million for the six months ended June 30, 2014. Maintenance capital expenditures for our Pasadena Facility are expected to be $4.0 million for the year ending December 31, 2015. Expansion capital expenditures for our Pasadena Facility totaled $2.1 million for the six months ended June 30, 2015 and $6.7 million for the six months ended June 30, 2014. Expansion capital expenditures for our Pasadena Facility are expected to be $2.1 million for the year ending December 31, 2015, related to the power generation project.

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

Cash Distributions

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

The following is a summary of cash distributions paid to common unitholders and holders of phantom units during the six months ended June 30, 2015 for the respective quarter to which the distributions relate:

 

We declared a cash distribution to our common unitholders and payments to holders of phantom units for the second quarter of 2015 of $1.00 per common unit or $39.1 million in the aggregate. The cash distribution will be paid on August 28, 2015, to unitholders of record at the close of business on August 21, 2015.

CONTRACTUAL OBLIGATIONS

Our contractual obligations as of June 30, 2015 are not materially different from those disclosed in “Part II—Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations” in our Annual Report.

 

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OFF-BALANCE SHEET ARRANGEMENTS

We did not have any material off-balance sheet arrangements as of June 30, 2015.

RECENTLY ISSUED ACCOUNTING STANDARDS

Refer to “Note 2 — Recent Accounting Pronouncements” to the consolidated financial statements, included in “Part I — Item 1. Financial Statements” of this report.

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For qualitative and quantitative discussion about market risk, see “Part II—Item 7A. Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report. As of June 30, 2015, no material changes have occurred in the types or nature of market risk described in our Annual Report.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, or DCP, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our general partners’ principal executive officer, or Chief Executive Officer, and principal financial officer, or Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating DCP, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

The Partnership, under the supervision and with the participation of the Partnership’s management, including the Partnership’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Partnership’s DCP as of the end of the period covered by this report. As we previously reported in 2014, management identified material weaknesses in internal control over financial reporting, or ICFR, as described below. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our DCP were not effective as of June 30, 2015.

Material Weaknesses in Internal Control over Financial Reporting

As we previously reported in 2014, we identified the following material weaknesses that continue to exist as of June 30, 2015. A material weakness is a deficiency, or combination of deficiencies, in ICFR, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

We did not design and maintain effective internal controls over (i) the review of the cash flow forecasts used in the accounting for long-lived asset recoverability and goodwill impairment and (ii) the determination of the goodwill impairment charge in accordance with generally accepted accounting principles. Specifically, we did not design and maintain effective internal controls related to determining the fair value of reporting units for the purpose of performing goodwill impairment testing and documenting management’s review of assumptions used in our cash flow forecasts for long-lived asset recoverability and goodwill impairment.

These control deficiencies did not result in a material misstatement to our consolidated financial statements for the quarter ended June 30, 2015. However, these control deficiencies, if unremediated, could, in another reporting period, result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected by the controls. Accordingly, our management has determined that these control deficiencies constitute material weaknesses.

Previously, we reported on a third material weakness over maintaining documentation supporting management’s review of events and changes in circumstances that indicate it is more likely than not that a goodwill impairment has occurred between annual impairment tests. During the quarter ended June 30, 2015, management has implemented additional controls, including the development and retention of documentation supporting management’s review of events and changes in circumstances that indicate it is more likely than not that a goodwill impairment has occurred between annual impairment tests. Based on management’s evaluation of the design and operating effectiveness of this control, we believe that this material weakness has been remediated.

 

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Plan for Remediation of the Material Weaknesses

We have implemented and are continuing to implement a number of measures to address the material weaknesses identified. Specifically, we are implementing additional controls over documentation and review of the inputs and results of our cash flow forecasts used in our tests for long-lived asset recoverability and goodwill impairment. These controls are expected to include additional review by qualified personnel, additional documentation and the development and use of checklists. We are implementing our remediation plan, and expect the control weaknesses to be remediated in the coming reporting periods, through the operation of the new controls. However, we are unable at this time to estimate when the remediation will be completed.

The process of designing and implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligations. As we continue to evaluate and take actions to improve our ICFR, we may determine to take additional actions to address control deficiencies or determine to modify certain of the remediation measures described above. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate the material weaknesses we have identified or avoid potential future material weaknesses.

Changes in Internal Control Over Financial Reporting

There were changes in our ICFR during the quarter ended June 30, 2015 that materially affected, or are reasonably likely to materially affect, our ICFR. During the second quarter of 2015, we implemented additional controls, including the development and retention of documentation supporting management’s review of events and changes in circumstances that indicate it is more likely than not that a goodwill impairment has occurred between annual impairment tests.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

A description of the legal proceedings to which the Partnership and its subsidiaries are a party is contained in “Note 8 — Commitments and Contingencies — Litigation” to the consolidated financial statements, included in “Part I — Item 1. Financial Statements” of this report.

ITEM 6. EXHIBITS.

Exhibit Index

 

 

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

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