<PAGE>
================================================================================
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-10877
TERRA NITROGEN COMPANY, L.P.
(Exact name of registrant as specified in its charter)
Delaware 73-1389684
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Terra Centre
PO Box 6000, 600 Fourth Street
Sioux City, Iowa 51102-6000
(Address of principal executive office) (Zip Code)
Registrant's telephone number:
(712) 277-1340
At the close of business on November 4, 1997, there were 18,501,576 Common
Units outstanding.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
- ----- -----
================================================================================
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TERRA NITROGEN COMPANY, L. P.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1997 1996 1996
------------ ----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 8,120 $ 46,762 $ 54,546
Accounts receivable 8,028 11,054 8,546
Inventory - finished products 26,603 15,209 12,007
Inventory - materials and supplies 13,294 14,489 17,078
Distribution reserve fund - 18,480 -
Prepaid expenses 2,409 2,353 3,643
--------- --------- ---------
Total current assets 58,454 108,347 95,820
Net property, plant and equipment 170,986 172,771 172,827
Distribution reserve fund - - 18,480
Other assets 18,515 25,550 14,285
--------- --------- ---------
Total assets $ 247,955 $ 306,668 $ 301,412
========= ========= =========
Liabilities and partners' capital
Current liabilities:
Accounts payable and accrued liabilities $ 37,445 $ 51,730 $ 34,396
Customer prepayments 304 5,936 2,462
Current portion of long-term debt and
capital lease obligations 1,059 1,162 1,285
--------- --------- ---------
Total current liabilities 38,808 58,828 38,143
Long-term debt and capital lease obligations 9,527 3,036 3,585
Other long-term obligations 1,060 1,060 1,060
Partners' capital 198,560 243,744 258,624
--------- --------- ---------
Total liabilities and partners' capital $ 247,955 $ 306,668 $ 301,412
========= ========= =========
</TABLE>
See accompanying notes.
<PAGE>
TERRA NITROGEN COMPANY, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except Per Unit Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 76,732 $ 81,961 $255,952 $277,463
Other income 388 296 948 480
--------- --------- --------- ---------
Total revenues 77,120 82,257 256,900 277,943
Cost of goods sold 54,993 44,572 157,756 129,495
--------- --------- --------- ---------
Gross profit 22,127 37,685 99,144 148,448
Operating expenses 3,192 2,799 9,394 9,156
--------- --------- --------- ---------
Operating income 18,935 34,886 89,750 139,292
Interest expense (553) (465) (1,571) (711)
Interest income 337 1,462 3,269 4,982
--------- --------- --------- ---------
Net income $ 18,719 $ 35,883 $ 91,448 $143,563
========= ========= ========= =========
Net income allocable to
limited partners' interest $ 14,394 $ 24,595 $ 64,480 $ 94,654
========= ========= ========= =========
Net income per limited
partnership unit $ 0.78 $ 1.31 $ 3.46 $5.03
========= ========= ========= =========
See accompanying notes.
</TABLE>
3
<PAGE>
TERRA NITROGEN COMPANY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Operating activities:
Net income $ 91,448 $ 143,563
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,862 8,526
Amortization of deferred finance fees - 29
Changes in operating assets and liabilities:
Receivables 3,026 19,880
Inventories (10,199) (1,512)
Prepaid expenses (56) 2,358
Accounts payable, accrued liabilities and
customer prepayments (19,917) (13,637)
Other 7,116 1,748
------------ ------------
Net cash provided by operating activities 80,280 160,955
Net cash used in investing activities:
Capital expenditures (7,158) (5,771)
Financing activities:
Proceeds from elimination of distribution reserve fund 18,480 -
Borrowings under revolving credit agreement 7,000 -
Repayment of long-term debt and capital lease obligations (612) (832)
Redemption of Senior Preference Units (6,605) -
Partnership distributions (130,027) (171,296)
------------ ------------
Net cash used in financing activities (111,764) (172,128)
------------ ------------
Net decrease in cash and cash equivalents (38,642) (16,944)
Cash and cash equivalents at beginning of period 46,762 71,490
------------ ------------
Cash and cash equivalents at end of period $ 8,120 $ 54,546
============ ============
See accompanying notes.
</TABLE>
4
<PAGE>
TERRA NITROGEN COMPANY, L.P.
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The consolidated financial statements contained herein should be read in
conjunction with the consolidated financial statements and notes thereto
contained in the Terra Nitrogen Company, L.P. ("TNCLP") Annual Report on Form
10-K for the year ended December 31, 1996. TNCLP and its operating partnership
subsidiary, Terra Nitrogen, Limited Partnership (the "Operating Partnership"),
are referred to herein, collectively, as the "Partnership".
The accompanying unaudited consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary for the fair
statement of the results for the periods presented. All of these adjustments
are of a normal and recurring nature. Results for the quarter are not
necessarily indicative of future financial results of the Partnership.
Net income per limited partnership unit is computed by dividing net income,
less a 29% and 34% share allocable to the General Partner for the nine months
ended September 30, 1997 and 1996, respectively, by 18,501,576 and 18,808,778
limited partner units for the 1997 and 1996 periods, respectively. The net
income allocated to the General Partner decreased to 29% during the nine months
ended September 30, 1997 due to the reduction in Available Cash distributed to
the General Partner. According to the Agreement of Limited Partnership of TNCLP,
net income is allocated to the General Partner and the Limited Partners in each
taxable year in the same proportion as Available Cash for such taxable year was
distributed to the General Partner and the Limited Partners. Distributions of
Available Cash are made 98% to the Limited Partners and 2% to the General
Partner, except that the General Partner is entitled, as an incentive, to larger
percentage interests (up to 50%) to the extent that distributions of Available
Cash exceed specified target levels. Available Cash for the nine months ended
September 30, 1997 decreased $68.9 million from the nine months ended September
30, 1996 due primarily to lower net income in 1997 and to an increase in 1996
Available Cash as a result of the impact of TNCLP's participation in an accounts
receivable securitization facility entered into during the third quarter of
1996, partially offset by the elimination of the $18.5 million Reserve Amount
during 1997 (see Note 2).
2. Distributions to Unitholders
The Partnership makes quarterly cash distributions to Unitholders and the
General Partner in an amount equal to 100% of its Available Cash (as this and
other capitalized terms are defined in the Partnership Agreement).
5
<PAGE>
The quarterly cash distributions paid to the Units and to the General
Partner applicable to 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Senior Preference Units Common Units General Partner
----------------------- --------------------- --------------------
Total $ Per Total $ Per Total $ Per
(000s) Unit (000s) Unit (000s) Unit
---------- ------- ---------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
1997:
First Quarter $186 $.605 $27,752 $1.50 $10,477 --
Second Quarter 186 .605 18,872 1.02 1,835 --
Third Quarter -- -- 44,034 2.38 26,686 --
1996:
First Quarter 26,046 1.91 9,880 1.91 18,290 --
Second Quarter 22,227 1.63 8,431 1.63 13,022 --
Third Quarter 33,000 2.42 12,517 2.42 27,883 --
Fourth Quarter 24,136 1.77 9,155 1.77 15,658 --
</TABLE>
The distributions paid in the first and second quarters of 1997 to the
holders of the Senior Preference Units ("SPUs") represented an amount equal to
the minimum quarterly distribution ("MQD") for each quarter. Nonconverting SPU
holders were not entitled to participate in cash distributions in excess of the
MQD after December 31, 1996.
The Reserve Amount of $18.5 million was distributed out of Available Cash
on May 27, 1997 to holders of the Common Units and to the General Partner.
Since the SPUs were redeemed on May 27, 1997 (see "Redemption of SPUs" below),
the Reserve Amount is no longer required to be maintained.
3. Cash and cash equivalents
The Partnership has a demand deposit with an affiliate that represents
excess Partnership cash deposited with Terra Capital, Inc., the parent of the
General Partner. The deposit is due on demand and at September 30, 1997 the
interest rate was 6.4%. The amount of the demand deposit included in cash and
cash equivalents was $8.0 million at September 30, 1997.
4. Conversion of SPUs
Pursuant to the provisions of the Agreement of Limited Partnership of
TNCLP, the Preference Period for TNCLP ended on December 31, 1996. For a 90-day
period commencing on December 31, 1996, the holders of all SPUs had the right to
elect to convert their SPUs into Common Units on a one-for-one basis, effective
as of the Senior Conversion Date, by delivering to the General Partner a
conversion notice. Any SPUs for which a conversion notice was not received
during the 90-day period remained SPUs. Those units that remained SPUs were
entitled to the MQD until redeemed (see "Redemption of SPUs" below), but did not
participate with the Common Units in any additional distributions after December
31, 1996.
6
<PAGE>
As of March 31, 1997 (the end of the Conversion Period) holders of
13,329,162 SPUs converted their units to Common Units and 307,202 units remained
SPUs. The Common Units began trading on the New York Stock Exchange on April 1,
1997 under the symbol TNH.
5. Redemption of SPUs
Pursuant to the provisions of the Agreement of Limited Partnership, on May
27, 1997, the Partnership redeemed all SPUs that did not convert to Common
Units. The redemption price was $21.50 per unit. On May 27, 1997, the SPUs
received the MQD of $.605 per unit for the quarter ended March 31, 1997, in
addition to the redemption price.
The Partnership funded the redemption of the SPUs with borrowings under its
revolving credit agreement. The Partnership has classified this borrowing as
long-term debt since the Partnership has the ability under its credit agreement,
and the intent, to maintain this obligation for longer than one year.
6. Natural gas costs
The Partnership's natural gas procurement policy is to effectively fix or
cap the unit cost of 40-80% of its natural gas requirements for the upcoming 12
months and up to 50% of its natural gas requirements for the subsequent two-year
period using supply contracts, financial derivatives and other forward pricing
techniques in an attempt to gain some protection against natural gas price
increases on the spot market. Consequently, if natural gas prices were to
increase in a future period, the Partnership may benefit from these forward
pricing techniques; however, if natural gas prices were to decline, the
Partnership may incur costs above the spot market price as a result of such
policies.
The settlement dates for such financial instruments are scheduled to
coincide with gas purchases during future periods. These instruments are based
on a designated price, which is referenced to market natural gas prices or
appropriate NYMEX futures contract prices. The Partnership frequently uses
prices at the Henry Hub in Louisiana, the most common and financially liquid
location of reference for financial derivatives related to natural gas; however,
natural gas supplies for the Partnership's two production facilities are
purchased from various suppliers at locations that are different from Henry Hub.
This creates a location basis differential between the contract price and the
physical price of natural gas. Accordingly, the use of financial derivatives
may not exactly offset the change in the price of physical gas.
As of September 30, 1997, the Partnership had effectively fixed or capped
the price of a substantial portion of its natural gas requirements for 1997 and
1998, consistent with its policy mentioned above. Unrealized gains from forward
pricing positions totaled $29.2 million and $11.3 million as of September 30,
1997 and 1996, respectively.
For the nine months ended September 30, 1997, natural gas hedging
activities produced cost savings compared with spot prices of $15.1 million
compared with savings of $28.4 million for the 1996 period.
7
<PAGE>
7. Hedging
During 1997, the Partnership recorded hedging gains or losses based on a
pooled resources concept with Terra Capital, Inc. Under the pooled resources
concept, hedging gains and losses are allocated to each manufacturing plant
based on gas usage for such plant. Prior to 1997, hedging gains and losses were
specifically identified with a particular plant based on contractual
arrangements for that plant. This change in accounting for hedging gains and
losses did not have a material impact on the consolidated financial position or
results of operations for the quarter or nine months ended September 30, 1997.
8. New accounting standards
In June 1996, The Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities", which establishes accounting and reporting standards for such
transfers. The Partnership adopted SFAS No. 125 effective January 1, 1997 and
there was no material impact on the Partnership's consolidated financial
position or results of operations.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three months ended September 30, 1997, compared with the three months ended
September 30, 1996
Volumes and prices for the three-month periods ended September 30, 1997 and 1996
were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
Sales Average Sales Average
Volumes Unit Price Volumes Unit Price
(000 tons) ($/ton) (000 tons) ($/ton)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Ammonia 122 175 104 164
UAN 562 73 585 85
Urea 116 122 94 160
</TABLE>
Revenues for the quarter ended September 30, 1997 declined $5.1 million, or
6%, compared with the same quarter in 1996 as lower sales prices for nitrogen
solutions (UAN) and urea were partially offset by higher sales volumes for urea
and higher sales volumes and prices for ammonia. Last year substantial UAN
sales carried over from the second to the third quarter due to a late planting
season and, as a result, UAN sales prices remained relatively firm during that
period. In addition, UAN sales prices in the 1997 period were down compared
with the 1996 quarter due to higher inventories as a result of reduced dealer
demand. Lower worldwide demand for urea during 1997, especially in China,
caused urea pricing to decline 23% from prior-year levels. However, contrary to
the industry, urea and ammonia sales volumes increased in 1997 as a result of a
scheduled 1996 turnaround performed at the Blytheville Plant and reduced
shipments for wheat pre-plant applications during the 1996 period.
Cost of goods sold as a percentage of revenues increased to 71% for the
1997 quarter from 54% in the 1996 period as a result of higher natural gas costs
and lower product prices. The Partnership's natural gas costs increased 18%
over the prior-year quarter. The Partnership's natural gas forward pricing
activities produced $4.0 million in cost savings during the 1997 period compared
with $5.7 million in the 1996 quarter.
Interest income decreased $1.1 million compared with the 1996 period due to
lower levels of cash and short term investments and due to the elimination of
the Reserve Amount as a result of the redemption of the SPUs during the second
quarter of 1997 (see Note 2).
9
<PAGE>
Nine months ended September 30, 1997, compared with the nine months ended
September 30, 1996
Volumes and prices for the nine-month periods ended September 30, 1997 and 1996
were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
Sales Average Sales Average
Volumes Unit Price Volumes Unit Price
(000 tons) ($/ton) (000 tons) ($/ton)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Ammonia 375 189 311 183
UAN 1,525 85 1,731 95
Urea 364 150 312 180
</TABLE>
Revenues for the nine months ended September 30, 1997 declined $21.0
million, or 8%, compared with the same period in 1996 primarily due to lower UAN
sales volumes and prices and lower urea sales prices partially offset by higher
ammonia sales volumes. UAN sales volumes declined during 1997 as weather
conditions were more conducive to ammonia application than to UAN application
compared with the 1996 period. Wet weather in the South and Southwest and
carryover stocks at the dealer level reduced UAN sales volumes and prices 12%
and 10%, respectively, during 1997. Lower worldwide demand for urea, especially
in China, caused urea prices to fall 16% from prior year levels. Ammonia sales
prices were favorably impacted by tight market conditions as a result of
favorable weather patterns, increased corn acres planted and more ammonia used
in the manufacture of upgraded products. Urea and ammonia sales volumes
increased during 1997 due in part to a scheduled turnaround performed at the
Blytheville Plant during the third quarter of 1996.
Cost of goods sold as a percentage of revenues increased to 61% in 1997
from 47% in 1996 primarily as a result of a 28% increase in natural gas costs
during 1997 and due to lower product sales prices. In addition, the
Partnership's natural gas forward pricing activities produced $15.1 million in
cost savings during 1997 compared with $28.4 million during 1996.
Interest expense increased $860,000 for the nine months ended September 30,
1997 compared with the same period in 1996 primarily due to the discount on
accounts receivable sold under the accounts receivable securitization facility
entered into during the third quarter of 1996 and to the borrowings under the
revolving credit agreement used to fund the redemption of SPUs in May 1997.
Interest income declined $1.7 million, or 34%, compared with the 1996
period due to lower levels of cash and short term investments and the
elimination of the Reserve Amount along with the redemption of the SPUs.
10
<PAGE>
Capital resources and liquidity
Net cash provided by operating activities for the first nine months of 1997
was $80.3 million, a decrease of $80.7 million compared with the same period in
1996, principally due to lower net income and higher working capital
requirements. Working capital requirements increased primarily due to higher UAN
inventory levels as a result of lower UAN sales during 1997 while the 1996
period reflected the proceeds received from the accounts receivable
securitization program entered into during the third quarter of 1996.
The Partnership's principal needs for funds are for support of its working
capital, distributions to Partners, and capital expenditures. The Partnership
intends to fund such needs primarily from net cash provided by operating
activities and, to the extent permitted thereunder, from funds available under
the Operating Partnership's revolving credit facility. During the second
quarter of 1997, the Partnership borrowed $7 million under its revolving credit
facility to fund the redemption of the SPUs. At September 30, 1997, the
Operating Partnership had $18 million of unused borrowing capacity under its
revolving credit facility. The Partnership believes that such sources of funds
will be adequate to meet the Partnership's working capital needs, make quarterly
distributions to Partners and fund the Partnership's capital expenditures for at
least the next twelve months.
Quarterly distributions to the Partners of TNCLP are based on Available
Cash for the quarter as defined in the Agreement of Limited Partnership of
TNCLP. Available Cash is defined generally as all cash receipts less all cash
disbursements, adjusted for changes in certain reserves established as the
General Partner determines in its reasonable discretion to be necessary.
Available Cash for the nine months ended September 30, 1997 decreased $68.9
million compared with the nine months ended September 30, 1996 due primarily to
lower net income in 1997 and to an increase in 1996 Available Cash as a result
of the impact of TNCLP's participation in an accounts receivable securitization
facility entered into during the third quarter of 1996, partially offset by the
elimination of the $18.5 million Reserve Amount during 1997. On October 21,
1997, the General Partner announced a cash distribution of $5.4 million ($0.29
per Unit) to holders of the Common Units of record as of November 3, 1997,
payable on November 28, 1997, based on Available Cash for the quarter ended
September 30, 1997. A cash distribution of $110,000 to the General Partner was
also declared. During the first nine months of 1997, the Partnership paid
$130.0 million in distributions to its Partners.
Finished products inventory increased $11.4 million and $14.6 million from
the December 31, 1996 and September 30, 1996 balances, respectively, primarily
due to lower than anticipated UAN sales volumes during 1997.
Accounts payable and accrued liabilities declined $14.3 million from the
December 31, 1996 balance due to lower natural gas costs at September 30, 1997
compared with the end of 1996 and due to the timing of cash transfers between
the Partnership and its affiliates.
11
<PAGE>
Capital expenditures
Capital expenditures totaled $7.2 million for the first nine months of
1997. In the remainder of 1997, the Partnership plans to spend approximately $5
million. Plans for 1997 include urea storage and loading improvements at the
Blytheville plant and environmental control and ammonia efficiency improvements
at the Verdigris plant.
Environmental matters
The Partnership is subject to federal, state and local environmental,
health and safety laws and regulations, particularly relating to air and water
quality. In the course of its ordinary operations, the Partnership has and will
generate wastes which may fall within the definition of "hazardous substances"
under federal or state laws. The Partnership's production facilities and
storage locations require ongoing operating expenditures in order to remain in
compliance with environmental regulations. These operating costs consist largely
of such items as electrical and chemical usage, waste disposal, laboratory
analysis, fees for outside consultants and contractors, and salaries for
environmental employees.
Based on its current knowledge, the Partnership does not expect capital
expenditures relating to environmental matters to have a material adverse effect
on its results of operations, financial condition, capital resources, liquidity
or cash flow. The Partnership does not expect that any further material capital
expenditures will be required to comply with existing environmental regulations.
Based on such regulations, the Partnership does not believe that it will be
required to make any material environmental remediation expenditures in the
foreseeable future.
12
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule. (EDGAR only)
(b) Reports on Form 8-K:
None.
13
<PAGE>
SIGNATURE
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.
TERRA NITROGEN COMPANY, L.P.
By: TERRA NITROGEN CORPORATION
as General Partner
By: /s/ Erik L. Slockers
--------------------------------------
Erik L. Slockers
Vice President, Controller
(Principal Accounting Officer)
Date: November 12, 1997
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This Schedule contains summary financial information extracted from the
consolidated statement of financial position of Terra Nitrogen Company, L.P. as
of September 30, 1997 and the related consolidated statement of income for the
nine months then ended.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,120
<SECURITIES> 0
<RECEIVABLES> 8,028
<ALLOWANCES> 0
<INVENTORY> 39,897
<CURRENT-ASSETS> 58,454
<PP&E> 274,426
<DEPRECIATION> (103,440)
<TOTAL-ASSETS> 247,955
<CURRENT-LIABILITIES> 38,808
<BONDS> 9,527
0
0
<COMMON> 0
<OTHER-SE> 198,560<F1>
<TOTAL-LIABILITY-AND-EQUITY> 247,955
<SALES> 255,952
<TOTAL-REVENUES> 256,900
<CGS> 157,756
<TOTAL-COSTS> 157,756
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,571
<INCOME-PRETAX> 91,448
<INCOME-TAX> 0
<INCOME-CONTINUING> 91,448
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 91,448
<EPS-PRIMARY> 3.46
<EPS-DILUTED> 0
<FN>
<F1> Due to the nature of the partnership, this represents partners capital.
</FN>
</TABLE>
