UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended September 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 October 31, 2015, the registrant had 38,929,731 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 September 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 nine months ended September 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.

Proposed Merger

On August 9, 2015, the Partnership entered into an Agreement and Plan of Merger (the “Merger Agreement”) under which the Partnership and Rentech Nitrogen GP, LLC (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 of cash. The Merger Agreement requires the Partnership to 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 the Partnership’s unitholders, the effectiveness of a registration statement on Form S-4 relating to the unit component of the merger consideration and the sale or spin-off of the Pasadena Facility. The Merger Agreement includes customary termination provisions, including a provision allowing RNP to terminate the Merger Agreement in order to accept a superior proposal, as defined in the Merger Agreement, upon payment of a large termination fee. Rentech, Inc. (“Rentech”) has agreed, subject to certain terms and conditions, to vote its Partnership common units, constituting 59.7% of the outstanding common units of the Partnership in favor of the transaction. Subject to satisfaction of the closing conditions and receipt of the required approvals, the Partnership expects that the Merger will close in the first quarter of 2016.

 

 

 

 

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RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

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 of (or classifications of held-for-sale) 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 August 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.

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 has not historically reported any extraordinary items. The Partnership does not expect the adoption of this guidance to have any impact on its consolidated financial position, results of operations or 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.As of September 30, 2015, the Partnership had $7.3 million of debt issuance costs that would have been reclassified from assets to liabilities under this guidance. The Partnership does not expect the adoption of this guidance to have a material impact on its consolidated financial position, results of operations or 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.

In July 2015, the FASB issued guidance that replaces the current lower of cost or market method of measurement for inventory with a lower of cost and net realizable value measurement. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Partnership does not expect the adoption of this guidance to have a material impact on its consolidated financial position, results of operations or disclosures.

 

 

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RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

 

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 September 30, 2015.

 

 

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

 

 

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 September 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 nine months ended September 30, 2015 and 2014.

 

 

 

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RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

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 loss recorded was $0.6 million for the three months ended September 30, 2015. The amount of unrealized gain recorded was $3.7 million for the nine months ended September 30, 2015. For the three and nine months ended September 30, 2014, the amount of unrealized loss recorded was $0.3 million and $0.8 million, respectively. These forward natural gas contracts are recorded either in prepaid expenses and other current assets or in accrued liabilities on the consolidated balance sheets.

 

 

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

 

 

 

 

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RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

Note 5 — Inventories

Inventories consisted of the following:

 

 

During the three months ended September 30, 2015, the Partnership wrote down the value of the Pasadena Facility’s ammonium sulfate inventory by $0.5 million to estimated net realizable value. During the nine months ended September 30, 2015, the Partnership wrote down the value of the Pasadena Facility’s ammonium sulfate inventory by $1.5 million to estimated net realizable value. During the three and nine months ended September 30, 2014, the Partnership wrote down the value of the Pasadena Facility’s ammonium sulfate inventory by $1.8 million and $4.6 million, respectively, to estimated 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 that 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 have not been met as management does not have the authority to commit to, 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 Partnership performed an impairment test in the second quarter. 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 in the second quarter of 2015. The impairment reduced property, plant and equipment by $81.3 million and intangible assets, consisting of technology acquired in the 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.

During the third quarter of 2015 the Partnership updated forecasts of operating cash flows, assessed indications of interest from potential buyers, and updated its estimates of the probabilities of each scenario for the Pasadena Facility. As a result, the carrying value was further reduced by recording an asset impairment charge of $32.5 million. For the nine months ended September 30, 2015,

 

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RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

impairment charges relating to the Pasadena Facility totaled $134.3 million. 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 to a third party.

During the nine months ended September 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 September 30, 2015 was $16.7 million, which includes $0.4 million of capitalized interest costs. The construction in progress balance represents primarily the costs associated with the ammonia synthesis converter project at the East Dubuque Facility. 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 at the Pasadena Facility.

 

 

Note 7 — Debt

The Partnership’s debt obligations at September 30, 2015 consist of $320.0 million of Notes and $26.5 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 September 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 October 2015, the Partnership entered into additional fixed-quantity forward purchase contracts at fixed and indexed prices for various delivery dates through May 31, 2016. The total MMBtus associated with these additional forward purchase contracts are 1.2 million and the total amount of the purchase commitments is $3.1 million, resulting in a weighted average rate per MMBtu of $2.65 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.

Litigation Relating to the CVR Transaction

On August 29, 2015, Mike Mustard, a purported unitholder of the Partnership, filed a class action complaint on behalf of the public unitholders of the Partnership against the Partnership, the General Partner, Rentech Nitrogen Holdings, Inc., Rentech, CVR Partners, DSHC, LLC, Lux Merger Sub 1 LLC (“Merger Sub 1”) and Lux Merger Sub 2 LLC (“Merger Sub 2”), and the members of the General Partner’s board of directors, in the Court of Chancery of the State of Delaware (the “Mustard Lawsuit”). On October 6, 2015, Jesse Sloan, a purported unitholder of the Partnership, filed a class action complaint on behalf of the public unitholders of the Partnership against the Partnership, the General Partner, CVR Partners, Merger Sub 1, Merger Sub 2 and members of the General Partner’s board of directors in the U.S. District Court for the Northern District of California (the “Sloan Lawsuit” and together with the Mustard Lawsuit, the “Lawsuits”).

The Lawsuits allege, among other things, that the consideration offered by CVR Partners is unfair and inadequate and that, by pursuing the proposed transaction with CVR Partners, the Partnership’s directors have breached their contractual and fiduciary duties to the Partnership’s unitholders.  The Lawsuits also allege that the non-director defendants aided and abetted the director defendants in their purported breach of contractual and fiduciary duties. Furthermore, the Sloan Lawsuit alleges that the registration statement filed with the SEC with respect to the transaction fails to disclose material information leading up to the Merger, fails to disclose or contains misleading disclosures concerning Morgan Stanley & Co. LLC’s financial analyses and fails to disclose or contains misleading disclosure concerning financial projections. The Lawsuits seek to enjoin the Merger.

The Lawsuits are at a preliminary stage. The Partnership cannot predict the outcome of the Lawsuits or any other lawsuit that might be filed with respect to the Merger, nor can it predict the amount of time and expense that will be required to resolve these or other lawsuits. The Partnership believes the Lawsuits are without merit and intend to defend against them vigorously.

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.

 

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RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

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 so RNPLLC contested the validity of these change orders and presented its own claims for damages under the EPC Contract to Abeinsa. Through a mediation in late October, the parties agreed in principle to resolve the entire contractual dispute with RNPLLC agreeing to pay Abeinsa $3.5 million by November 30, 2015. The specific terms and conditions of a mutual release and settlement agreement are being negotiated by the parties and the agreement is expected to be signed in the coming days.

 

 

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 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 September 30, 2015, the Partnership had outstanding 203,844 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 nine months ended September 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 September 30, 2015, a Texas margin tax benefit of approximately $19,000 was recorded. For the nine months ended September 30, 2015, a Texas margin tax of approximately $27,000 and a California annual minimum franchise tax expense of $1,000 were recorded. For the three months

 

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RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

ended September 30, 2014, a Texas margin tax expense of $27,000 was recorded. For the nine months ended September 30, 2014, California annual minimum franchise tax expense of $1,000 and Texas margin tax expense of $81,000 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 nine months ended September 30, 2015, 203,844 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 nine months ended September 30,

 

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RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

2014, 203,000 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 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 $2.5 million for the three months ended September 30, 2015, and $2.3 million for the same period in the prior year.  Rentech billed the Partnership $9.6 million for the nine months ended September 30, 2015, and $6.5 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 third quarter of 2015 of $0.25 per unit, which will result in total distributions in the amount of $9.8 million, including payments to phantom unitholders. The cash distribution will be paid on November 27, 2015 to unitholders of record at the close of business on November 20, 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.

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 segments have been affected in different ways by various negative and positive factors in 2015. Although operating results at the Pasadena Facility have improved as compared to recent years, we recorded an asset impairment of $134.3 million. Our East Dubuque Facility has improved its production levels and improved its results since 2014, and benefitted from lower prices of natural gas and $4.6 million of insurance proceeds related to the fire that occurred in 2013. We expect our current sources of liquidity to be adequate with substantial cushions in place.

On August 9, 2015, we entered into the Merger Agreement under which we and the General Partner will merge with CVR Partners, and the Partnership will cease to be a public company and will become a wholly owned subsidiary of CVR Partners. 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 of cash. The Merger Agreement requires us to either sell the Pasadena Facility to a third party or spin-out ownership of the Pasadena Facility to our unitholders prior to closing of the Merger.

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 Project

We have a current project that will expand the production capabilities at our East Dubuque Facility. We expect to incur significant costs and expenses developing and building such project. 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 nine months ended September 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 in the summer and fall during the quarters ending September 30 and December 31 of each year when customers are filling their tanks for the next application season and applying ammonia after the fall harvest. 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 nine months ended September 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 nine months ended September 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 September 30, 2015 were $4.5 million, compared to $1.8 million for the same period in the prior year. The increase was primarily due to professional fees related to the Merger. Non-cash unit–based compensation expense, recorded in selling, general and administrative expenses, was $0.2 million for the three months ended September 30, 2015, compared to $0.3 million for the same period in the prior year. Partnership and unallocated expenses recorded as selling, general and administrative expenses for the nine months ended September 30, 2015 were $9.0 million, compared to $6.3 million for the same period in the prior year. The increase was primarily due to professional fees related to the Merger. Non-cash unit-based compensation expense, recorded in selling, general and administrative expenses, was $0.9 million for the nine months ended September 30, 2015, compared to $1.2 million for the same period in the prior year.

East Dubuque

COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014:

Revenues

 

 

 

 

 

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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 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 September 30, 2015 were $46.8 million, compared to $46.0 million for the same period in the prior year. The increase was primarily due to higher sales volumes for ammonia and UAN, partially offset by lower sales prices for almost all products, and lower natural gas sales. Revenues for the nine months ended September 30, 2015 were $155.6 million, compared to $148.5 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. 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 increased between the third quarters of each year due to lower demand in the spring of 2015 due to a significant amount of pre-plant ammonia applied, the availability of lower priced urea, and wet conditions during the UAN application period, pushing UAN sales into the third quarter.

Average sales prices per ton for the three months ended September 30, 2015 were 7% lower for ammonia and 10% lower for UAN, as compared with the same period in the prior year. These two products comprised 84% of our East Dubuque Facility’s revenues for the three months ended September 30, 2015 and 80% for the same period last year. Average sales prices per ton for the nine months ended September 30, 2015 were 1% higher for ammonia and 8% 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 nine months ended September 30, 2015 and 80% for the same period last year. The decrease in ammonia and UAN prices between the third quarters of each year is due primarily to an overall softening of the ammonia fertilizer market due to lower corn prices.

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, which was done in the first quarter of 2014.

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 September 30, 2015 was $27.9 million, compared to $30.6 million for the same period in the prior year. The decrease in cost of sales was primarily due to a decrease in natural gas prices, partially offset by a $0.3 million increase in unrealized loss on natural gas derivatives. Natural gas comprised 37% and labor costs comprised 14% of cost of sales on product shipments for the three months ended September 30, 2015. For the same period in the prior year, natural gas was 45% and labor was 12% of cost of sales.

Depreciation expense included in cost of sales was $4.8 million for the three months ended September 30, 2015 and $4.3 million for the same period in the prior year.

Cost of sales for the nine months ended September 30, 2015 was $76.6 million compared to $87.6 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. During the nine months ended September 30, 2015, we recorded $4.6 million in business interruption insurance proceeds relating to the 2013 fire. Decreased natural gas costs were due to a $4.5 million increase in unrealized gain on natural gas derivatives and a decrease in natural gas prices. Natural gas comprised 43% and labor costs comprised 16% of cost of sales on product shipments for the nine months ended September 30, 2015. For the same period in the prior year, natural gas was 48% and labor costs were 14% of cost of sales.

 

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Depreciation expense included in cost of sales was $13.3 million for the nine months ended September 30, 2015 and $11.7 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.

Gross Profit

 

 

Gross profit was $18.9 million for the three months ended September 30, 2015, compared to $15.5 million for the same period in the prior year. Gross profit margin was 40% for the three months ended September 30, 2015, compared to 34% for the same period in the prior year. The increases in gross profit and gross margin were primarily due to higher sales volumes for ammonia and UAN, and lower natural gas costs, partially offset by lower sales prices for ammonia and UAN. Gross profit margin, without natural gas derivatives, was 42% for the three months ended September 30, 2015, compared to 34%, without natural gas derivatives, for the same period in the prior year.

Gross profit was $79.0 million for the nine months ended September 30, 2015, compared to $60.8 million for the same period in the prior year. Gross profit margin was 51% for the nine months ended September 30, 2015, compared to 41% for the same period in the prior year. The increases in gross profit and gross margin were primarily due to higher sales volumes for ammonia, business interruption insurance proceeds and lower natural gas costs, partially offset by lower sales volumes and prices for UAN. Gross profit margin, without business interruption insurance proceeds and natural gas derivatives, was 46% for the nine months ended September 30, 2015, compared to 42%, 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 $1.1 million for the three months ended September 30, 2015, compared to $1.3 million for the three months ended September 30, 2014. Operating expenses were $4.1 million for the nine months ended September 30, 2015, compared to $3.8 million for the nine months ended September 30, 2014.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three-month period ended September 30, 2015 were $1.1 million, compared to $1.0 million for the same period in the prior year. Selling, general and administrative expenses for the nine-month period ended September 30, 2015 were $3.4 million, compared to $3.2 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 September 30, 2015, compared to $47,000 for the same period in the prior year. Depreciation expense included in operating expense was $0.2 million for the nine months ended September 30, 2015, compared to $0.1 million for the same period in the prior year. The majority of depreciation expense incurred was a manufacturing cost and was distributed between cost of sales and finished

 

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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.

Operating Income

 

 

Operating income was $17.8 million for the three months ended September 30, 2015, compared to $14.2 million for the same period in the prior year. The increase was primarily due to higher sales volumes for ammonia and UAN, and lower natural gas costs, partially offset by lower sales prices for ammonia and UAN. Operating income was $75.0 million for the nine months ended September 30, 2015, compared to $57.0 million for the same period in the prior year. The increase was primarily due to higher sales volumes for ammonia, business interruption insurance proceeds and lower natural gas costs, partially offset by lower sales volumes and prices for UAN.

Pasadena

COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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.

 

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Revenues for the three months ended September 30, 2015 were $37.5 million, compared to $38.1 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 nine months ended September 30, 2015 were $107.7 million, compared to $105.6 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 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 15% for ammonium sulfate and decreased by 10% for sulfuric acid for the three months ended September 30, 2015 as compared with the same period in the prior year. These two products comprised 92% of our Pasadena Facility’s revenues for the three months ended September 30, 2015 and 94% for the same period in the prior year. Average sales price per ton increased by 25% for ammonium sulfate and decreased by 6% for sulfuric acid for the nine months ended September 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 nine months ended September 30, 2015 and 91% for the same period in the prior year. Ammonium sulfate sales prices increased due to a higher percentage of sales in the domestic market; and continued demand for ammonium sulfate as retailers move away from ammonium nitrate. As part of our restructuring plan, we reduced our historically low-margin sales to Brazil. 22% of ammonium sulfate sales were to Brazil during the three months ended September 30, 2015, while 53% of ammonium sulfate sales were to Brazil during the three months ended September 30, 2014. Only 10% of ammonium sulfate sales were to Brazil during the nine months ended September 30, 2015, while 43% of ammonium sulfate sales were to Brazil during the nine months ended September 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.

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 September 30, 2015 was $37.1 million, compared to $46.9 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, and lower unit prices for ammonia, partially offset by selling a higher volume of sulfuric acid and higher unit prices for sulfur. Ammonia and sulfur together comprised 60% of cost of sales for each of the three months ended September 30, 2015 and 2014. Labor costs comprised 9% of cost of sales for the three months ended September 30, 2015 and 7% for the same period in the prior year. For the three months ended September 30, 2015, we wrote down our ammonium sulfate inventory by $0.5 million because production costs exceeded net realizable value. During the same period in the prior year, we wrote down our ammonium sulfate inventory by $1.8 million.

Depreciation expense included in cost of sales was $1.6 million for the three months ended September 30, 2015 and $2.2 million for the same period in the prior year.

Cost of sales for the nine months ended September 30, 2015 was $103.9 million, compared to $117.7 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, and lower unit prices for ammonia, 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 nine months ended September 30, 2015 and 60% for the same period in the prior year. Labor costs comprised 9% of cost of sales for the nine months ended September 30, 2015 and 7% for the same period in the prior year. For the nine months ended September 30, 2015, we wrote down our ammonium sulfate inventory by $1.5 million. During the same period in the prior year, we wrote down our ammonium sulfate inventory by $4.6 million.

Depreciation expense included in cost of sales was $5.3 million for the nine months ended September 30, 2015 and $5.1 million for the same period in the prior year. The increase in depreciation expense was primarily due to an increase in property, plant and

 

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equipment resulting from the completion of the power generation project in the first quarter of 2015 and the sulfuric acid converter project in 2014.

Gross Profit (Loss)

 

 

Gross profit was $0.5 million for the three months ended September 30, 2015, compared to a gross loss of $8.8 million for the same period in the prior year. Gross profit margin for the three months ended September 30, 2015 was 1%, compared to gross loss margin of 23% for the same period in the prior year. Gross profit was $3.9 million for the nine months ended September 30, 2015, compared to a gross loss of $12.1 million for the same period in the prior year. Gross profit margin for the nine months ended September 30, 2015 was 4%, compared to gross loss margin of 12% 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 $33.7 million for the three months ended September 30, 2015, compared to $1.4 million for the same period in the prior year. Operating expenses were $137.8 million for the nine months ended September 30, 2015, compared to $32.3 million for the same period in the prior year.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for each of the three months ended September 30, 2015 and 2014 were $1.1 million. Selling, general and administrative expenses for the nine months ended September 30, 2015 were $2.8 million, compared to $4.1 million for the same period in the prior year. The decrease was primarily due to our 2014 restructuring, partially offset by approximately $0.5 million of transaction costs relating to the sale or spin-off of the Pasadena Facility.

Depreciation and Amortization. Depreciation and amortization expense included in operating expense was $25,000 for the three months ended September 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 nine months ended September 30, 2015, compared to $1.0 million for the same period in the prior year. Depreciation and amortization expense represents primarily amortization of intangible assets, which was fully written off during the second quarter of 2015, as described below. 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 $134.3 million for the nine months ended September 30, 2015. The impairment reduced property, plant and equipment by $113.8 million and eliminated intangible assets by $20.5 million. See “Note 6

 

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— 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 nine months ended September 30, 2014. There is no remaining goodwill associated with the Pasadena Facility.

Operating Loss

 

 

Operating loss was $33.2 million for the three months ended September 30, 2015, compared to $10.2 million for the same period in the prior year. Operating loss was $133.9 million for the nine months ended September 30, 2015, compared to $44.5 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 $263.4 million for the nine months ended September 30, 2015, compared to $254.1 million for the same period in the prior year. The increase in revenue for the nine months ended September 30, 2015 compared to the nine months ended September 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 increased $10.7 million during the nine months ended September 30, 2015, compared to an increase of $27.7 million during the same period in the prior year. The increase in deferred revenue was due to collections of cash for fall prepaid sales contracts at our East Dubuque Facility and products stored at a distributor for our Pasadena Facility, partially offset by fulfilling older prepaid contracts.

Net cash provided by operating activities for the nine months ended September 30, 2015 was $86.8 million. We had net loss of $82.8 million for the nine months ended September 30, 2015 including an asset impairment charge of $134.3 million. We also had non-cash unit-based compensation expense relating to our common units of $0.9 million. We had an unrealized gain on natural gas derivatives of $3.7 million relating to our forward purchase natural gas contracts. We recorded $4.6 million in business interruption insurance proceeds relating to the 2013 fire at our East Dubuque Facility. Inventories increased by $5.3 million during the nine months ended September 30, 2015 due to build-up of inventory at our Pasadena Facility as part of our restructuring of operations to focus on high-margin sales in the domestic market. This increase was partially offset by a reduction of inventory at the East Dubuque Facility due to lower natural gas prices and higher-than-normal ammonia inventory levels at December 31, 2014 due to an early onset of winter weather limiting fall ammonia application.

Net cash provided by operating activities for the nine months ended September 30, 2014 was $78.2 million. We had a net loss of $8.9 million for the nine months ended September 30, 2014 and a goodwill impairment charge of $27.2 million in connection with our Pasadena Facility. Accounts receivable increased by $9.1 million due primarily to higher ammonia deliveries at our East Dubuque

 

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Facility and collections timing at our Pasadena Facility during the nine months ended September 30, 2014. Inventories decreased by $1.8 million during the nine months ended September 30, 2014 due to more ammonium sulfate and ammonium thiosulfate deliveries at our Pasadena Facility, partially offset by an increase in inventories at our East Dubuque Facility due to a low inventory balance at December 31, 2013 because of a turnaround and a fire in the ammonia plant in the fourth quarter last year. Accounts payable increased by $4.4 million due primarily to increased costs for 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 $5.6 million due to the Notes.

Investing Activities

Net cash used in investing activities was $23.2 million for the nine months ended September 30, 2015, compared to $57.0  million for the same period in the prior year. Net cash used in investing activities for the nine months ended September 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 nine months ended September 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 $53.5 million for the nine months ended September 30, 2015, compared to $11.2 million for the same period in the prior year. During the nine months ended September 30, 2015, we made distributions of $65.0 million to our unitholders. We also borrowed an additional $11.5 million under the GE Credit Agreement. During the nine months ended September 30, 2014, we made distributions of $10.2 million.

 

 

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2015, our current assets totaled $89.3 million. Current assets included cash of $38.2 million, accounts receivable of $12.2 million and inventories of $31.9 million. At September 30, 2015, our current liabilities were $75.7 million and our long-term liabilities were $353.4 million, comprised primarily of the Notes.

On August 9, 2015, we entered into the Merger Agreement under which the Partnership and the General Partner will merge with CVR Partners, and we will cease to be a public company and will become a wholly owned subsidiary of CVR Partners. 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 of cash. The Merger Agreement requires that we will either sell our Pasadena Facility to a third party or spin out ownership of our Pasadena Facility to our unitholders prior to the closing of the Merger. The Merger Agreement provides for the continuation of business in the ordinary course before closing, and it does not change our liquidity outlook.

In the event of a termination of the Merger Agreement, depending on the reason for termination, we may be required to pay to CVR Partners or CVR Partners may be required to pay to us, $10.0 million, as a reimbursement of expenses. We may furthermore be required to pay to CVR Partners a fee of $31.2 million if we were to terminate the Merger in order to pursue a superior proposal, as defined in the Merger Agreement. The Merger Agreement also provides that the Partnership and the East Dubuque Facility generally may not transfer any assets to the Pasadena Facility, or assume any liability of the Pasadena Facility. As a result, the Partnership and the Pasadena Facility maintain segregated cash accounts. At September 30, 2015, the Partnership and the East Dubuque Facility had a combined cash balance of $27.3 million, and the Pasadena Facility had a cash balance of $10.9 million.

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.

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.

 

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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, operating expenses, capital expenditures, debt service and cash distributions to common unitholders. Operating expenses will include significant transaction costs relating to the Merger. The Merger Agreement limits quarterly cash distributions from us to cash available for distribution, as defined in the Merger Agreement.

Capital Expenditures

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

Maintenance capital expenditures for our East Dubuque Facility totaled $6.1 million for the nine months ended September 30, 2015 and $6.2 million for the nine months ended September 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 $10.6 million for the nine months ended September 30, 2015 and $7.6 million for the nine months ended September 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 $2.2 million for the nine months ended September 30, 2015 and $21.4 million for the nine months ended September 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 nine months ended September 30, 2015 and $12.5 million for the nine months ended September 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. Additionally, the Merger Agreement permits us to make distributions of cash available for distribution calculated in accordance with the Merger Agreement, which generally requires the calculation to be consistent with our historical practice.

 

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The following is a summary of cash distributions paid to common unitholders and holders of phantom units during the nine months ended September 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 third quarter of 2015 of $0.25 per common unit or $9.8 million in the aggregate. The cash distribution will be paid on November 27, 2015, to unitholders of record at the close of business on November 20, 2015.

CONTRACTUAL OBLIGATIONS

Our contractual obligations as of September 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.

OFF-BALANCE SHEET ARRANGEMENTS

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

 

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Material Weaknesses in Internal Control over Financial Reporting

As we reported in 2014, we identified the following material weakness that continues to exist as of September 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 the review of assumptions used in our cash flow forecasts that were used to assess the recoverability of long-lived assets.

This control deficiency did not result in a material misstatement to our consolidated financial statements for the quarter ended September 30, 2015. However, this control deficiency, 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 control. Accordingly, our management has determined that this control deficiency constitutes a material weakness.

Remediation Steps to Address the 2014 Material Weaknesses

Previously, we reported on material weaknesses related to the review of assumptions used in our cash flow forecasts that were used for testing of goodwill impairment and the determination of the goodwill impairment charge. During the quarter ended September 30, 2015, management implemented additional controls over the documentation and review of the inputs and results of our cash flow forecasts used in our goodwill impairment tests. These additional controls include additional review by qualified personnel and the preparation and retention of additional documentation supporting such assumptions. Based on management’s evaluation of the design and operating effectiveness of this control, we believe that the material weaknesses relating to management’s review of assumptions used in cash flow forecasts for testing of goodwill impairment and the determination of the goodwill impairment charge have been remediated.

Plan for Remediation of the Material Weakness

We have implemented and are continuing to implement a number of measures to address the remaining material weakness. Specifically, we are implementing additional controls over documentation and review of the inputs and results of our cash flow forecasts that are used in our tests for long-lived asset recoverability. These controls 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 weakness 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 weakness we have identified or avoid potential future material weaknesses.

Changes in Internal Control Over Financial Reporting

As described above under “Remediation Steps to Address the 2014 Material Weaknesses”, there were changes in our ICFR during the quarter ended September 30, 2015 that materially affected, or are reasonably likely to materially affect, our ICFR. During the third quarter of 2015, we implemented additional controls supporting management’s review of the cash flow forecasts used in our goodwill impairment testing and determination of the goodwill impairment charge.

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.

 

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ITEM 1A. RISK FACTORS

The risks described in the Annual Report and this report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially adversely affect our business and cash flow. The risk factor set forth below updates, and should be read together with, the risk factors disclosed in “Part I — Item 1A. Risk Factors” of the Annual Report.

Any failure to consummate the Merger, or significant delays in consummating the Merger, could negatively affect the Partnership’s unit price, business and financial results.

On August 9, 2015, the Partnership entered into the Merger Agreement under which the Partnership and the General Partner will merge with affiliates of CVR Partners. Consummation of the Merger is subject to certain conditions, including approval from the Partnership’s unitholders, the sale or spin-out of the Pasadena Facility and the effectiveness of a registration statement on Form S-4 relating to the unit component of the merger consideration. We cannot assure you that the conditions to the Merger will be satisfied, or where waiver is permissible, waived, or that the Merger will close in the expected time frame or at all.  If the Merger is not consummated, or if there are significant delays in consummating the Merger, our unit price and future business and financial results could be negatively affected, and will be subject to several risks, including the following:

Subsequent to the announcement of the Merger, two putative class action lawsuits were commenced on behalf of the public unitholders of the Partnership against the Partnership, the General Partner and certain other parties seeking, among other things, to enjoin the Merger. Additional lawsuits with similar allegations may be filed. One of the conditions to the closing of the Merger is that no law, order, judgment or injunction shall have been issued, enacted or promulgated by a court of competent jurisdiction or other governmental authority restraining or prohibiting a party from consummating the Merger. Accordingly, if any plaintiff is successful in obtaining an injunction prohibiting the consummation of the Merger, then such injunction may prevent the Merger from becoming effective, or delay its becoming effective within the expected time frame.

 

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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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