<PAGE>
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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 MARCH 31, 1999
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 April 30, 1999, 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
- ---
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<PAGE>
PART I. FINANCIAL INFORMATION
TERRA NITROGEN COMPANY, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1999 1998 1998
--------- ------------ ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 36 $ 1,094 $ 1,535
Accounts receivable 2,281 6,663 2,389
Inventory - finished products 36,489 32,644 31,586
Inventory - materials and supplies 13,690 17,811 15,287
Prepaid expenses and other current assets 1,316 2,440 2,961
- ---------------------------------------------------------------------------------------
Total current assets 53,812 60,652 53,758
Net property, plant and equipment 164,241 164,689 169,073
Other assets 8,758 10,736 11,925
- ---------------------------------------------------------------------------------------
Total assets $226,811 $236,077 $234,756
=======================================================================================
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Short-term note payable $ 15,197 $ --- $ ---
Payable to affiliates 4,915 23,587 ---
Accounts payable and accrued liabilities 15,143 18,972 27,043
Customer prepayments 737 482 4,306
Current portion of long-term debt and
capital lease obligations 1,132 1,119 1,083
- ---------------------------------------------------------------------------------------
Total current liabilities 37,124 44,160 32,432
Long-term debt and capital lease obligations 7,655 7,846 8,770
Long-term payable to affiliates 5,316 5,316 4,996
Other long-term obligations --- --- 1,060
Partners' capital 176,716 178,755 187,498
- ---------------------------------------------------------------------------------------
Total liabilities and partners' capital $226,811 $236,077 $234,756
=======================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
2
<PAGE>
TERRA NITROGEN COMPANY, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per unit amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
--------- --------
<S> <C> <C>
Revenues $53,784 $48,499
Other income 289 417
------- -------
Total revenues 54,073 48,916
Cost of goods sold 53,763 40,595
------- -------
Gross profit 310 8,321
Operating expenses 2,217 2,443
------- -------
Operating income (loss) (1,907) 5,878
Interest expense (432) (491)
Interest income 300 414
------- -------
Net income (loss) $(2,039) $ 5,801
======= =======
Net income (loss) allocable to
limited partners' interest $(1,997) $ 5,685
======= =======
Net income (loss) per limited
partnership unit $ (0.11) $ 0.31
======= =======
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
3
<PAGE>
TERRA NITROGEN COMPANY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---------- ---------
<S> <C> <C>
Operating activities:
Net income (loss) $ (2,039) $ 5,801
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,233 3,045
Changes in operating assets and liabilities:
Receivables 4,382 1,618
Inventories 276 (16,195)
Prepaid expenses 1,124 (650)
Accounts payable, accrued liabilities and
customer prepayments (3,574) 79
Payable to affiliate (18,672) ---
Change in other assets 1,978 4,106
Other --- 311
-------- --------
Net cash provided by (used in) operating activities (13,292) (1,885)
NET CASH USED IN INVESTING ACTIVITIES:
Capital expenditures (2,785) (2,587)
FINANCING ACTIVITIES:
Borrowings of short-term debt 15,197 ---
Repayment of long-term debt and capital lease obligations (178) (183)
Partnership distributions --- (25,078)
-------- --------
Net cash provided by (used in) financing activities 15,019 (25,261)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS (1,058) (29,733)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,094 31,268
-------- --------
Cash and cash equivalents at end of period $ 36 $ 1,535
======== ========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
<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, 1998. 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 that 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 or loss per limited partnership unit is computed by dividing net
income, less a 2% and 28% share allocable to the General Partner for the
three months ended March 31, 1999 and 1998, respectively, by 18,501,576
limited partner units. According to the Agreement of Limited Partnership of
TNCLP, net loss is allocated to the General Partner and the Limited
Partners in each period in the same proportion as net income was allocated
to such Partners in prior years (up to the aggregate of such prior net
income allocations and beginning with the first taxable year). 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. If there
is no cash distribution during a year, net income for that year is
allocated to the Limited Partners and the General Partner based on their
respective ownership percentages.
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. There was
no Available Cash for the three months ended March 31, 1999 due primarily
to the net loss incurred for the period and payment of liabilities.
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). The
Partnership had no Available Cash, and therefore made no cash
distributions, for the three months ended March 31, 1999. For the three
months ended March 31, 1998 the Partnership distributed $21,647,000 (or
$1.17 per unit) to Common Unitholders and $3,431,000 to the General
Partner.
5
<PAGE>
3. Cash and cash equivalents
The Partnership has demand deposit and demand note arrangements with an
affiliate to allow for excess Partnership cash to be deposited with or
funds to be borrowed from Terra Capital, Inc., the parent of the General
Partner. The balance is due on demand and at March 31, 1999 the interest
rate was 7.45%. The amount owed by the Partnership under the demand note
was $15.2 million at March 31, 1999.
4. Natural gas costs
The Partnership's natural gas procurement policy is to effectively fix or
cap the price of between 40% and 80% of its natural gas requirements for a
one-year period and up to 50% of its natural gas requirements for the
subsequent two-year period through supply contracts, financial derivatives
and other forward pricing techniques. These contracts reference physical
natural gas prices or appropriate NYMEX futures contract prices. Contract
physical prices are frequently based on the Henry Hub Louisiana price, but
natural gas supplies for the Partnership's production facilities are
physically purchased from various suppliers which often 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. The contracts are traded in
months forward and settlement dates are scheduled to coincide with gas
purchases during that future period.
The Partnership has entered into firm contracts to minimize the risk of
interruption or curtailment of natural gas supplies. Additionally, the
Partnership has entered into forward pricing positions for a substantial
portion of its natural gas requirements for the remainder of 1999 and 2000,
consistent with its policy. As a result of its policies, the Partnership
has reduced the potential adverse financial impact of natural gas price
increases during the forward pricing period, but conversely, if natural gas
prices were to fall, the Partnership will incur higher costs. Unrealized
gains from forward pricing positions totaled $1.6 million and $24.8 million
as of March 31, 1999 and 1998, respectively. The amount recognized by the
Partnership will be dependent on prices in effect at the time of
settlement.
For the first three months of 1999 and 1998, natural gas hedging activities
resulted in additional costs of approximately $5.1 million and cost savings
of $1.8 million, respectively, compared with spot prices.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
Results Of Operations
RESULTS OF OPERATIONS
Three months ended March 31, 1999, compared with
Three Months Ended March 31, 1998
Volumes and prices for the three-month periods ended March 31, 1999 and 1998
were as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------- -----------------------------------
Sales Average Sales Average
Volumes Unit Price Volumes Unit Price
(000 tons) ($/ton) (000 tons) ($/ton)
------------ ----------- ------------- ---------------
<S> <C> <C> <C> <C>
Ammonia 131 104 63 142
UAN 470 61 390 63
Urea 127 91 137 108
</TABLE>
Revenues for the quarter ended March 31, 1999 increased $5.2 million, or 11%,
compared with the same quarter in 1998 due to significantly increased volumes of
ammonia and UAN products. Decreased volumes of urea sales as well as lower
average unit prices for all of the Partnerships products offset the effects on
revenue for most of these volume increases. Surplus worldwide nitrogen
production continued to put pressure on prices during the 1999 quarter resulting
in price reductions of 27%, 3% and 16% for ammonia, UAN and urea, respectively,
compared with the 1998 quarter. Volumes were more than the comparable quarter
a year ago due to customers' decisions to delay late 1998 purchases to fill
storage in anticipation of continuing price reductions, and an early start to
the planting season due to favorable weather conditions in the southeast.
Cost of goods sold as a percentage of revenues increased to 99% for the 1999
quarter from 83% in the 1998 period primarily due to the lower nitrogen selling
prices. Gas costs increased 4% during the 1999 quarter compared with the 1998
quarter. The Partnership's natural gas forward pricing activities produced $5.1
million in additional costs during the 1999 period.
Operating expenses decreased $0.2 million, or 9%, due to lower pension,
administrative, and overhead expense allocations from Terra Nitrogen Corporation
and Terra Industries.
Net interest increased slightly compared with the 1998 period primarily due to
the loss incurred for the period.
7
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
Net cash used in operating activities for the first three months of 1999 was
$13.3 million to fund the loss for the period and repay affiliates for trade
items. These uses were partly offset by reductions to accounts receivable,
prepaid expenses and other assets.
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. Under certain
circumstances an affiliate of the Partnership may advance funds to the
Partnership under a demand note. At March 31, 1999, the Operating Partnership
had $18 million of unused borrowing capacity under its revolving credit
facility, and had $15.2 million outstanding under a demand note with an
affiliate. 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.
On April 22, 1999, Terra Nitrogen Company, L.P. announced there would be no cash
distribution for the quarter ended March 31, 1999 since there was no Available
Cash for distribution for the quarter.
CAPITAL EXPENDITURES
Capital expenditures totaled $2.8 million for the first three months of 1999.
For the remainder of 1999, the Partnership plans to spend approximately $4.1
million. Plans for 1999 include the purchase of heavy equipment to be installed
in 2001 at the Blytheville plant and environmental control, equipment
replacement and efficiency and capacity improvements at both plants.
YEAR 2000 ISSUE
The Year 2000 issue concerns computer programs that use only the last two digits
to identify the year in date fields. If not corrected, many of these computer
applications could fail or create erroneous results near January 1, 2000. This
issue affects virtually every company.
The Partnership relies upon Terra to provide Management Information Systems
services.
Terra has assigned dedicated resources to address its year 2000 issues with a
Year 2000 Steering Committee providing management oversight and coordination.
The Partnership has also published Year 2000 Information and Disclosures on
Terra's website (http://www.terraindustries.com). In general, management
-------------------------------
believes the "State of Readiness" for the Partnership is such that it will be
ready for Year 2000 issues on time.
Terra's management information systems (MIS) environment has been assessed for
Year 2000 issues and some remedial actions have been identified. The cost of
remedial actions for the MIS area is not material to the Partnership. Nearly all
of these remedial actions are complete with minimal cost. Testing is
substantially complete with the mainframe hardware systems and the associated
software,
8
<PAGE>
with the exception of a few software packages originally purchased from third
parties that are scheduled to be updated in 1999.
Organization-wide reviews of all possible computing functions have been
completed, including the process control systems and instrumentation in the
manufacturing facilities. Some remedial actions have been identified in a few
areas and the cost of these remedial actions is not expected to be material to
the Partnership.
Terra is also assessing Year 2000 issues in relation to its customers, suppliers
and other constituents because the action or inaction of third parties may
materially affect the Partnership. An initial assessment of key third parties,
including utility suppliers, has been completed and some follow up is ongoing.
Although the Partnership expects that there will be no significant adverse
consequences relating to its Year 2000 issues, the Partnership believes its most
reasonably likely worst case Year 2000 scenario involves the interruption of its
manufacturing facilities due to failed utility supplies or some other cause. The
Partnership has in place contingency plans to deal with such interruptions,
although restarting these facilities may be dependent on the resumption of
utilities from sole source suppliers. Other general contingency planning efforts
continue to be evaluated and refined for precautionary purposes.
Terra anticipates that it will complete all assessment, remediation, testing,
and contingency planning efforts for Year 2000 issues in the third quarter of
1999. Based on substantial completion of activities to date, the Partnership
anticipates that Year 2000 issues, including the historical and estimated costs
of remediation, will not have a material effect on its business, results of
operations or financial condition. However, the costs or consequences of
incomplete or untimely resolution of Year 2000 issues by the Partnership or
third parties could have a material adverse affect on the Partnership.
LIMITED CALL RIGHT
If at any time not more than 25% of the Common Units are held by non-affiliates
of the General Partner, either TNCLP, the General Partner or its affiliates may
call all such outstanding units held by non-affiliated persons in accordance
with the terms of the TNCLP partnership agreement. TNCLP is required to give at
least 30 but not more than 60 days notice of its decision to purchase the
outstanding Common Units. The purchase price per unit is required to be the
greater of (1) the average of the previous twenty trading days closing prices as
of the date five days before the purchase is announced or (2) the highest price
paid by the General Partner or any of its affiliates for any unit within 90 days
preceding the date the purchase is announced.
The General Partner and its affiliates own 69% of the Common Units as of March
31, 1999. Under existing authorization of the board of directors of Terra
Industries, Inc., the indirect parent of the General Partner, additional Common
Units may be purchased on the open market and through privately negotiated
transactions by affiliates of the General Partner to bring this ownership level
above 75%. Although TNCLP and its affiliates reserve the right to consider in
the future whether to acquire all of the Common Units, they do not have any
present plan or intention to do so.
9
<PAGE>
FORWARD LOOKING PRECAUTIONS
---------------------------
Information contained in this report, other than historical information, may be
considered forward looking. Forward looking information reflects Management's
current views of future events and financial performance that involve a number
of risks and uncertainties. The factors that could cause actual results to
differ materially include, but are not limited to the following: general
economic conditions within the agricultural industry, competitive factors and
price changes (principally, sales prices of products and natural gas costs),
changes in product mix, changes in the seasonality of demand patterns, changes
in weather conditions, changes in agricultural regulations, and other risks
detailed in the Partnership's Securities and Exchange Commission filings, in
particular the "Factors that Affect Operating Results" section of its most
recent Form 10-K.
PART II. OTHER INFORMATION
ITEM 5. OTHER MATTERS
The majority shareholder of Terra Industries Inc. has announced its
intention to sell its stake in Terra Industries. Terra Industries is the
indirect parent of the General Partner and the indirect majority owner of
approximately 70% of Terra Nitrogen Company, L.P.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.40 Limited Waiver dated as of March 22, 1999 to the 1998 Credit
Agreement, filed as Exhibit 4.5 to the Terra Industries Inc. Form 10-
Q for the quarter ended March 31, 1999 (File No. 1-8520), is
incorporated herein by reference.
27 Financial Data Schedule. (EDGAR only)
(b) Reports on Form 8-K:
None.
10
<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/ Francis G. Meyer
------------------------------------
Vice President
(Principal Accounting Officer)
Date: May 14, 1999
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TERRA
NITROGEN COMPANY, L.P., AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 36
<SECURITIES> 0
<RECEIVABLES> 2,281
<ALLOWANCES> 0
<INVENTORY> 50,179
<CURRENT-ASSETS> 53,812
<PP&E> 286,185
<DEPRECIATION> 121,944
<TOTAL-ASSETS> 226,811
<CURRENT-LIABILITIES> 37,124
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 176,716<F1>
<TOTAL-LIABILITY-AND-EQUITY> 226,811
<SALES> 53,784
<TOTAL-REVENUES> 54,073
<CGS> 53,763
<TOTAL-COSTS> 53,763
<OTHER-EXPENSES> 2,217
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 132
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,039)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,039)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
<FN>
<F1>DUE TO THE NATURE OF THE PARTNERSHIP, THIS REPRESENTS PARTNERS' CAPITAL.
</FN>
</TABLE>
