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RNF > SEC Filings for RNF > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for RENTECH NITROGEN PARTNERS, L.P.

Form 10-Q for RENTECH NITROGEN PARTNERS, L.P.


8-Nov-2012

Quarterly Report


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 Transition Report.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include the words "will," "believe," "expect," "anticipate," "intend," "estimate" and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. Our forward-looking statements include statements about our business strategy, our industry, our expected revenues, our future profitability, our expected capital expenditures (including for maintenance or expansion projects and environmental expenditures) and the impact of such expenditures on our performance, and the costs of operating as a public company. These statements involve known and unknown risks, uncertainties and other factors, including the factors described under "Risk Factors" in our Transition Report, that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. Such risks and uncertainties include, among other things:

our ability to make cash distributions on our common units;

the volatile nature of our business, our ability to remain profitable and the variable nature of our cash distributions;

a decline in demand for crops such as corn, soy beans, potatoes, cotton, canola, alfalfa and wheat or their prices or the use of nitrogen fertilizer for agricultural purposes;

adverse weather conditions, which can affect demand for, and delivery and production of, our products;

any interruption in the supply, or rise in the price levels, of natural gas and other essential raw materials;

our ability to identify and consummate acquisitions in related businesses, and the risk that any such acquisitions do not perform as anticipated;

intense competition from other nitrogen fertilizer producers;

planned or unplanned shutdowns, or any operational difficulties, at our facilities;

our ability to obtain debt financing on acceptable terms or at all;

any loss of Agrium Inc., or Agrium, as a distributor or customer of our nitrogen fertilizer products, loss of storage rights at Agrium's terminal in Niota, Illinois or decline in sales of products through or to Agrium;

any loss of Interoceanic Corporation, or Interoceanic, as a distributor of our ammonium sulfate fertilizer products or decline in sales of products through Interoceanic;

potential operating hazards from accidents, fire, severe weather, floods or other natural disasters;

the risk associated with governmental policies affecting the agricultural industry;

capital expenditures and potential liabilities arising from existing and proposed environmental laws and regulations, including those relating to climate change, alternative energy or fuel sources and the end-use and application of fertilizers;

the conflicts of interest faced by our senior management team and our general partner;

limitations on the fiduciary duties owed by our general partner which are included in the partnership agreement;

the inability of our public unitholders to influence our operating decisions or elect our general partner or our general partner's board of directors;

changes in our treatment as a partnership for U.S. federal income or state tax purposes; and

risks associated with the expansion and other projects at our facilities, including any disruption to operations at our facilities during construction and our ability to sell the incremental products resulting from such projects.

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

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

OVERVIEW

We are a Delaware limited partnership formed in July 2011 by Rentech, a publicly traded provider of clean energy solutions and nitrogen fertilizer, to own, operate and expand our fertilizer business. We own and operate two fertilizer facilities: our East Dubuque


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Facility, which produces primarily ammonia and urea ammonium nitrate solution, or UAN, and our Pasadena Facility, which produces primarily ammonium sulfate. Our East Dubuque Facility, which is located in East Dubuque, Illinois, has been in operation since 1965 with infrequent unplanned shutdowns. We produce ammonia and UAN at our East Dubuque Facility, using natural gas as the facility's primary feedstock. Our Pasadena Facility, which is located in Pasadena, Texas, has been in operation since 1949 with infrequent unplanned shutdowns. In 2011, our Pasadena Facility was retrofitted in order to produce our current products. We produce ammonium sulfate, ammonium thiosulfate and sulfuric acid at our Pasadena Facility, using ammonia and sulfur as the facility's primary feedstocks.

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 National Corn Growers Association. 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 purchase our nitrogen products at our East Dubuque Facility and then arrange and pay to transport them to their final destinations by truck. To the extent our products are picked up at our East Dubuque Facility, we do not incur any 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, that 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 the East Dubuque Facility's fixed costs. The combination of the 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.

The Pasadena Facility is 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 other competing products.

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 efficient/cost-effective distribution of its products west of the Mississippi River. Our Pasadena Facility's products are sold through distributors to customers in the U.S. and in Brazil, and are applied to many types of crops including soy beans, potatoes, cotton, canola, alfalfa, corn and wheat. We believe that the diversification of the geographic markets and applications for the products should improve the stability of our results. Ammonium sulfate prices and margins generally have been less volatile than the prices and margins for the products of the East Dubuque Facility.

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

FACTORS AFFECTING COMPARABILITY OF FINANCIAL INFORMATION

Our historical results of operations for our prior periods may not be comparable with our results of operations for the three and nine months ended September 30, 2012 or in the future for the reasons discussed below.

Publicly Traded Limited Partnership Expenses

Our general and administrative expense has increased due to the costs of operating as a publicly traded limited partnership, including costs associated with SEC reporting requirements, annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, work performed by our independent auditors, investor relations activities and registrar and transfer agent services. Our consolidated financial statements following the Offering reflect the impact of this expense, which affect the comparability of our post-offering results with our financial statements from periods prior to the closing of the Offering.


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Expansion and Other Projects

We have commenced or are evaluating potential projects to expand the production capabilities at our facilities. We expect to incur significant costs and expenses for the construction and development of such projects. We plan to pay for the costs and expenses of our ammonia production and storage capacity expansion project and capital expenditures at our Pasadena Facility with proceeds of indebtedness under our New 2012 Credit Agreement, which will significantly increase our interest expense. We also expect our depreciation expense to increase as we place additional assets into service from expansion and other projects. As a result, our results of operations for periods prior to, during and after the construction of any such project may not be comparable.

Acquisitions

One of our business strategies is to pursue acquisitions in related businesses. We are actively pursuing the acquisition of fertilizer assets that may benefit from our partnership structure. On November 1, 2012, we completed the Agrifos Acquisition. The Agrifos Acquisition, including the debt we incurred to finance the transaction, will have a significant impact on the comparability of our financial condition and results of operations for periods before and after the transaction. If completed, other potential acquisitions also could be significant to our business, financial condition and results of operations. We have not entered into definitive agreements for any potential acquisitions, other than the completed Agrifos Acquisition, and we cannot assure you that we will enter into any definitive agreements on satisfactory terms, or at all. Costs associated with potential acquisitions are expensed as incurred, and could be significant.

FACTORS AFFECTING RESULTS OF OPERATIONS

Seasonality

Results of operations for the interim periods are not necessarily indicative of results to be expected for the year primarily due to the impact of seasonality on our sales. Our and our customers' businesses are seasonal, based on planting, growing and harvesting cycles. The following table shows product tonnage (in thousands) shipped by quarter for the nine months ended September 30, 2012 and the years ended December 31, 2011, 2010 and 2009.

                                            2012      2011      2010      2009
               Quarter ended March 31          92        89        86        65
               Quarter ended June 30          160       213       206       203
               Quarter ended September 30     180       125       181       150
               Quarter ended December 31      n/a       145       167       124

               Total Tons Shipped             432       572       640       542

We typically ship the highest volume of tons during the spring planting season, which occurs during the quarter ended June 30, and the next highest volume of tons after the fall harvest during the quarter ended December 31. 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 the weather. These seasonal increases and decreases in demand also can cause fluctuations in sales prices. In more mild winter seasons with warmer weather, farmers prepare the soil with earlier application of ammonia fertilizer which may shift significant spring ammonia sales into the quarter ended March 31, as was the case during the three months ended March 31, 2012.

As a result of the seasonality of shipments and sales, we experience significant fluctuations in our 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 products are typically sold for later shipment under product prepayment contracts, and 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.

Our Pasadena Facility is not exposed to the effects of seasonality to the same extent as our East Dubuque Facility due to (i) the location of the facility and its customers in climate conditions that are different than those in our market near East Dubuque, (ii) the application of ammonium sulfate fertilizer to a broader range of crops in more locations, compared to the concentration on corn within 200 miles of East Dubuque, and (iii) sales to Brazil, which has different seasonal patterns than do our markets in North America.

Revenues

We generate revenue primarily from sales of nitrogen fertilizer products manufactured at our East Dubuque Facility, used primarily in corn production, and our Pasadena Facility, used for a variety of crops. Our East Dubuque Facility is designed to produce ammonia, UAN, liquid and granular urea, nitric acid and CO2 using natural gas as a feedstock. Our Pasadena Facility is designed to produce ammonium sulfate, ammonium thiosulfate and sulfuric acid.


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Cost of Sales

The cost of product shipments, the most significant element of cost of sales, primarily consists of natural gas, labor costs and depreciation.

Operating Expenses

Operating expenses primarily consist of selling, general and administrative expense and depreciation expense not included in cost of sales. Selling, general and administrative expense mainly consists of costs of operating as a publicly traded limited partnership; direct and allocated legal expenses; payroll expenses relating to treasury, accounting, marketing and human resources; and expenses for maintaining our corporate offices.

CRITICAL ACCOUNTING POLICIES

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. The preparation of 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 and the valuation of long-lived assets. Actual amounts could differ significantly from these estimates. There has been no material change to our critical accounting policies and estimates from the information provided in our Transition Report.


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SELECTED FINANCIAL DATA

The following table includes selected summary financial data for the three and nine months ended September 30, 2012 and 2011. The data below should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this report. The data below is in thousands, except for per unit data, product pricing, $ per MMBtu and on-stream factors. Since the Agrifos Acquisition was completed subsequent to September 30, 2012, all discussions and amounts related to the results of operations for the three and nine months ended September 30, 2012 and 2011 exclude the Pasadena Facility.

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