<PAGE>
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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 30, 2000
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)
<TABLE>
<S> <C>
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)
</TABLE>
Registrant's telephone number:
(712) 277-1340
At the close of business on October 30, 2000, 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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PART I. FINANCIAL INFORMATION
TERRA NITROGEN COMPANY, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
2000 1999 1999
------------- ------------ -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,627 $ 13 $ 14
Accounts receivable 33,964 29,846 26,840
Inventory - finished products 14,330 25,611 25,628
Inventory - materials and supplies 9,287 13,501 12,116
Prepaid expenses and other current assets 1,483 1,583 615
---------------------------------------------------------------------------------------------
Total current assets 78,691 70,554 65,213
Net property, plant and equipment 148,701 157,275 159,595
Other assets 13,978 14,595 17,545
---------------------------------------------------------------------------------------------
Total assets $241,370 $242,424 $242,353
=============================================================================================
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Short-term note payable to affiliates $ --- $ 39,601 $ 41,532
Accounts payable and accrued liabilities 31,880 19,614 21,290
Customer prepayments 3,804 6,389 677
Current portion of long-term debt and
capital lease obligations 1,423 847 1,017
---------------------------------------------------------------------------------------------
Total current liabilities 37,107 66,451 64,516
Long-term debt and capital lease obligations 8,500 --- 386
Long-term payable to affiliates 5,316 5,316 5,316
Partners' capital 190,447 170,657 172,135
---------------------------------------------------------------------------------------------
Total liabilities and partners' capital $241,370 $242,424 $242,353
=============================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
2
<PAGE>
TERRA NITROGEN COMPANY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per unit amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues $58,997 $44,145 $214,092 $166,524
Other income 248 207 548 465
---------------------------------------------------------------------------
Total revenues 59,245 44,352 214,640 166,989
Cost of goods sold 54,281 49,085 186,735 166,887
---------------------------------------------------------------------------
Gross profit (loss) 4,964 (4,733) 27,905 102
Operating expenses 1,053 2,042 6,923 6,149
---------------------------------------------------------------------------
Operating income (loss) 3,911 (6,775) 20,982 (6,047)
Interest expense (275) (235) (1,262) (1,223)
Interest income 1 7 73 649
---------------------------------------------------------------------------
Net income (loss) $ 3,637 $(7,003) $ 19,793 $ (6,621)
===========================================================================
Net income (loss) allocable to
limited partners' interest $ 3,564 $(6,864) $ 19,396 $ (6,489)
===========================================================================
Net income (loss) per limited
partnership unit $ .19 $ (0.37) $ 1.05 $ (0.35)
===========================================================================
</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>
Nine Months Ended
September 30,
2000 1999
-------- --------
<S> <C> <C>
Operating activities:
Net income (loss) $ 19,793 $ (6,621)
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Depreciation and amortization 9,539 9,717
Changes in operating assets and liabilities:
Receivables (4,118) (20,178)
Inventories 15,494 12,712
Prepaid expenses 100 1,824
Accounts payable, accrued liabilities and
customer prepayments 9,679 (11,795)
Change in other assets 616 (7,185)
Other --- 380
---------------------------------------------------------------------------------------------
Net cash flows from operating activities 51,103 (21,146)
Net cash flows from investing activities:
Capital expenditures (964) (4,622)
Financing activities:
Net changes in short-term borrowings (39,601) 32,251
Issuance (repayment) of long-term debt
and capital lease obligations 9,076 (7,563)
---------------------------------------------------------------------------------------------
Net cash flows from financing activities (30,525) 24,688
---------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 19,614 (1,080)
Cash and cash equivalents at beginning of period 13 1,094
---------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 19,627 $ 14
=============================================================================================
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
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, 1999. 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 2% share allocable to the General Partner for the nine months ended
September 30, 2000 and 1999, respectively, by 18,501,576 limited partner
units. 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. If there
is no cash distribution, net income is allocated to the Limited Partners
and the General Partner generally 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 amounts.
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. No
distributions were made in 1999. The Partnership has announced a cash
distribution of $4.2 million ($0.22 per common unit) to be paid in
November, 2000.
3. Financing Arrangements
The Partnership has an arrangement for demand deposits and notes 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. At September 30, 2000 and 1999, no amounts were deposited with
Terra Capital, Inc. The amount of the demand notes was $32.3 million at
September 30, 1999, and bore interest at the rate paid by Terra Capital on
its short-term borrowings. At September 30, 2000, no demand notes were
outstanding.
4. Natural gas costs
Natural gas is the principal raw material used in the Partnership's
production of nitrogen products. The Partnership enters into forward
pricing arrangements for natural gas provided that such arrangements would
not result in costs that would be greater than expected selling prices for
nitrogen products. Under those conditions, the Partnership's natural gas
procurement policy is to effectively fix or cap the price of between 25%
and 80% of its natural gas requirements for a one-year period and up to 50%
of its natural gas
5
<PAGE>
requirements for the subsequent two-year period through supply contacts,
financial derivatives and other forward pricing techniques. Variances from
this policy are reviewed with the General Partner. The financial
derivatives are traded in months forward and settlement dates are scheduled
to coincide with gas purchases during that future period. 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 Partnership has entered into forward pricing positions for a portion of
its natural gas requirements for the remainder of 2000 and part of 2001,
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. Contracts
were in place at September 30, 2000 to cover approximately 20% of natural
gas requirements for the succeeding twelve months. Unrealized gains from
forward pricing positions totaled $11.7 million as of September 30, 2000.
The ultimate amount recognized by the Partnership will be dependent on
prices in effect at the time of settlement for unrealized positions at
September 30, 2000. The Partnership also had $5.1 million of realized gains
on closed contracts relating to future periods that have been deferred to
the respective period.
5. Idled facilities
On June 1, 2000, the Partnership reported that it would not restart ammonia
and urea production at its Blytheville, Arkansas plant in response to high
natural gas costs. The plant resumed production on August 19, 2000.
6
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Three months ended September 30, 2000 compared with
three months ended September 30, 1999
Volumes and prices for the three-month periods ended September 30, 2000 and 1999
were as follows:
<TABLE>
<CAPTION>
2000 1999
------------------------- -------------------------
Sales Average Sales Average
Volumes Unit Price Volumes Unit Price
(000 tons) ($/ton) (000 tons) ($/ton)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Ammonia 56 $181 80 $99
UAN 520 86 497 58
Urea 30 145 86 88
</TABLE>
Revenues for the quarter ended September 30, 2000 increased $14.9 million, or
34%, compared with the same quarter in 1999 primarily as the result of higher
prices for all Partnership products and increased demand for UAN. The higher
prices reflected lower industry inventories as a result of permanent plant
closures by other producers and production curtailment during the last half of
1999.
Third quarter gross profits increased $9.7 million from 1999. Higher UAN sales
prices and volumes increased gross profits by $15.9 million. These increases
were partly offset by higher natural gas costs, which increased from $2.32/MMBtu
in 1999 to $3.47/MMBtu in 2000 (net of $9.8 million in forward pricing gains).
The impact on the 2000 third quarter gross profits from lower sales volumes of
ammonia and urea were essentially offset by higher prices.
Operating expenses were $1.0 million lower in 2000 than in 1999 primarily as the
result of reduced General Partner charges for computer expenses and employee
compensation. Net interest expense of $274,000 was comparable to the 1999 third
quarter.
7
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH
NINE MONTHS ENDED SEPTEMBER 30, 1999
Volumes and prices for the nine-month periods ended September 30, 2000 and 1999
were as follows:
<TABLE>
<CAPTION>
2000 1999
------------------------- -------------------------
Sales Average Sales Average
Volumes Unit Price Volumes Unit Price
(000 tons) ($/ton) (000 tons) ($/ton)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Ammonia 317 $149 365 $112
UAN 1,863 75 1,589 61
Urea 215 130 311 93
</TABLE>
Revenues for the nine months ended September 30, 2000 increased $47.6 million,
or 29% compared with the 1999 period as a result of increased sales prices of
all of the Partnership products, caused primarily by lower industry wide
inventory levels. In addition, UAN volumes increased 17%, while volumes of
ammonia and urea decreased 13% and 31%, respectively. UAN volumes increased due
to plant closures by other domestic producers as well as mild winter weather,
which promoted early planting and top dressing in the Southeast.
Gross profit during the 2000 first nine months totaled $27.9 million or $27.8
million more than the prior year period. Higher UAN sales prices and volumes
increased gross profits by $42.8 million. Natural gas costs, net of $18.8
million in forward pricing gains, averaged $2.85/MMBtu during the 2000 first
nine months compared to $2.25/MMBtu in 1999. The impact on the 2000 first nine
months gross profits of decreased sales volumes of ammonia and urea were
essentially offset by higher prices.
Operating expenses were $.8 million higher in 2000 than in 1999, primarily as
the result of absorbing a higher percentage of the General Partner's operating
expenses after its Distribution business was sold. Net interest expense of $1.3
million was comparable to the first nine months of 1999. Interest income
decreased $576,000 compared with the 1999 period due to lower levels of cash and
short-term investments.
Capital resources and liquidity
Net cash flows from operations in the first nine months of 2000 totaled $51.1
million with $21.2 million generated from reductions to working capital balances
and $29.9 million of operating income after non-cash charges. Most of the
working capital reductions result from lower inventory balances which reflect,
in part, the Partnership's decision, announced on June 1, 2000, to idle the
Blytheville plant in response to high natural gas costs. The plant resumed
production on August 19, 2000.
The Partnership's principal needs for funds are for support of its working
capital and capital expenditures. The Partnership intends to fund its needs
primarily through net cash flows from operating activities, and, to the extent
required, from funds borrowed from others, including borrowings from Terra
Capital, Inc., the parent of the General Partner. The Partnership believes
8
<PAGE>
that such sources of funds will be adequate to meet the Partnership's working
capital needs and fund the Partnership's capital expenditures for at least the
next 12 months.
On April 7, 2000, the Partnership with Terra Industries Inc., Terra Capital and
other affiliates entered into an asset based financing agreement that provides
for the Partnership to borrow amounts generally up to 85% of eligible
receivables plus 65% of eligible inventory plus $10 million. The new financing
agreement, which expires January 2003, bears interest at floating rates and is
secured by substantially all of the Partnerships' assets. The new agreement also
requires the Partnership and its affiliates to adhere to certain limitations on
additional debt, capital expenditures, acquisitions, liens, asset sales,
investments, prepayments of subordinated indebtedness, changes in lines of
business and transactions with affiliates. In addition, Terra Industries is
required to maintain minimum levels of earnings before interest, income taxes,
depreciation and amortization (as defined in the financing agreement) computed
on a quarterly basis. Failure to meet these covenants would require Terra to
incur additional costs to amend the bank facilities or could result in
termination of the facilities.
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. In
consideration of the Partnership's working capital and operating cash needs at
September 30, 2000, the General Partner established reserves that resulted in
$4.2 million of Available Cash generated during the 2000 third quarter, which
will be distributed during November, 2000.
Capital expenditures
Capital expenditures totaled $1.0 million for the first nine months of 2000.
For the remainder of 2000, the Partnership plans to spend less than $5 million
for routine equipment replacement.
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 72.4% of the Common Units as of
October 31, 2000. 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 from time to time on the open market and through
privately negotiated transactions by affiliates of the General Partner and such
purchases may 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>
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 is effective for fiscal years
beginning after June 15, 2000, as amended by SFAS 137 "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133". The Partnership has reviewed SFAS 133 and intends to
implement the standard on January 1, 2001. At this time, the Partnership has not
determined the impact SFAS 133 will have on its financial position, results of
operations or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements". SAB 101 summarizes the SEC's view in applying generally accepted
accounting principles to selected revenue recognition issues. The application
of the guidance in SAB 101 will be required in the Company's fourth quarter of
2000. The Partnership does not expect the adoption of SAB 101 to have material
effect on its financial statements.
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.
10
<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
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
----------------------------------
Francis G. Meyer
Vice President
(Principal Accounting Officer)
Date: October 30, 2000
11
