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TNH > SEC Filings for TNH > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for TERRA NITROGEN CO L P /DE

Form 10-Q for TERRA NITROGEN CO L P /DE


8-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

You should read the following discussion and analysis in conjunction with Terra Nitrogen Company, L.P.'s (TNCLP, we, our or us) annual consolidated financial statements and related notes, which are included in our 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 27, 2014, as well as our Unaudited Consolidated Financial Statements and the related Notes thereto contained in Part I, Item 1 of this report.

The section entitled "Risk Factors" contained in Part I, Item 1A of our Annual Report on Form 10-K filed with the SEC on February 27, 2014, and similar discussions in our other SEC filings, describe some of the important risk factors that may affect our business, financial condition, results of operations and/or liquidity. You should read and consider carefully those risks, in addition to the other information in this report and in our other filings with the SEC.

We conduct our operations through an operating partnership, Terra Nitrogen, Limited Partnership (TNLP or the Operating Partnership, and collectively with TNCLP, the Partnership). Terra Nitrogen GP Inc. (TNGP or the General Partner), a Delaware corporation, is the general partner of both TNCLP and TNLP and owns a consolidated 0.05% general partner interest in the Partnership. The General Partner is an indirect, wholly-owned subsidiary of CF Industries Holdings, Inc. (CF Industries), a Delaware corporation.

CF Industries, through its subsidiaries, is a global leader in nitrogen fertilizer manufacturing and distribution, serving both agricultural and industrial customers. CF Industries operates world-class nitrogen fertilizer manufacturing complexes in the central United States and Canada and distributes fertilizer products through a system of terminals, warehouses, and associated transportation equipment located primarily in the Midwestern United States.

Throughout this document, the terms "affiliate of the General Partner" and "affiliates of the General Partner" refer to consolidated subsidiaries of CF Industries, including TNGP.

Dependence on CF Industries

We are dependent on CF Industries for our success in a number of respects. An affiliate of CF Industries is obligated to take all of the production from our Verdigris manufacturing facility and affiliates of CF Industries provide certain services to us, including production planning, manufacturing management, logistics, accounting, legal, risk management, investor relations and other general and administrative services. For additional information concerning CF Industries, refer to CF Industries' filings with the SEC on Form 10-K, Form 10-Q and current reports on Form 8-K, and for further information regarding transactions with CF Industries, please refer to Notes to the Unaudited Consolidated Financial Statements, Note 9-Related Party Transactions.

Introduction

In this discussion and analysis, we explain our business in the following areas:


Company Overview;


Results of Operations; and


Liquidity and Capital Resources


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TERRA NITROGEN COMPANY, L.P.

Company Overview

TNCLP is a Delaware limited partnership that produces nitrogen fertilizer products. Our principal products are anhydrous ammonia (ammonia) and urea ammonium nitrate solutions (UAN), which we manufacture at our facility in Verdigris, Oklahoma.

TNCLP and TNGP have no employees. An affiliate of the General Partner provides certain services to us under the Amendment to the General and Administrative Services and Product Offtake Agreement (the Services and Offtake Agreement). Pursuant to the Services and Offtake Agreement, the Partnership sells all of its fertilizer products to an affiliate of the General Partner at prices based on market prices for the Partnership's fertilizer products as defined in the Services and Offtake Agreement. Title and risk of loss transfer to an affiliate of the General Partner as the product is shipped from the plant gate. For further information regarding our agreements with the General Partner, see Notes to the Unaudited Consolidated Financial Statements, Note 9-Related Party Transactions.

Results of Operations

Consolidated Results

We reported net earnings for the three months ended March 31, 2014, of $102.9 million on net sales of $177.7 million, compared with net earnings for the three months ended March 31, 2013, of $166.8 million on net sales of $224.1 million. Net earnings per common unit for the three months ended March 31, 2014, were $3.26 compared with $4.98 for the three months ended March 31, 2013.


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                          TERRA NITROGEN COMPANY, L.P.

    The following table shows the results of operations for the three months
ended March 31, 2014 and 2013:

                                                   Three months ended March 31,
                                             2014            2013         2014 vs. 2013
                                              (in millions, except per unit amounts)
Net sales                                  $    177.7      $   224.1     $  (46.4 )   (21 )%
Cost of goods sold                               70.2           52.2         18.0      34 %


Gross margin                                    107.5          171.9        (64.4 )   (37 )%
Gross margin percentage                          60.5 %         76.7 %
Selling, general and administrative
expenses                                          4.6            5.1         (0.5 )   (10 )%


Operating earnings                              102.9          166.8        (63.9 )   (38 )%


Net earnings                               $    102.9      $   166.8     $  (63.9 )   (38 )%




Net earnings allocable to Common Units     $     60.4      $    92.2     $  (31.8 )   (34 )%
Net earnings per Common Unit               $     3.26      $    4.98     $  (1.72 )   (35 )%
Ammonia and UAN sales volume (tons in
thousands)
Ammonia                                            98             86           12      14 %
UAN(1)                                            530            540          (10 )    (2 )%


Total                                             628            626            2       - %
Average selling prices (dollars per
ton)
Ammonia                                    $      413      $     657     $   (244 )   (37 )%
UAN(1)                                            258            310     $    (52 )   (17 )%
Natural gas costs/MMBtu(2)                 $     4.02      $    3.43     $   0.59      17 %
Production volume by product (tons in
thousands)
Ammonia(3)                                        306            306            -       - %
UAN (32%)                                         520            524           (4 )    (1 )%


--------------------------------------------------------------------------------
    (1)


The nitrogen content of UAN is 32% by weight.

(2)
Includes the cost of natural gas purchases and realized gains and losses on natural gas derivatives.

(3)
Gross ammonia production, including amounts subsequently upgraded on-site into UAN.

First Quarter of 2014 Compared to the First Quarter of 2013

Our net sales for the first quarter of 2014 were $177.7 million, a decrease of $46.4 million, or 21%, from the first quarter of 2013 net sales of $224.1 million, due to a decrease in average selling prices. Ammonia prices decreased 37% from an average of $657 per ton in the three months ended March 31, 2013, to $413 per ton in the three months ended March 31, 2014, and UAN prices decreased 17% from an average of $310 per ton in the three months ended March 31, 2013 to $258 per ton in the three months ended March 31, 2014. The decrease in ammonia pricing was due primarily to higher producer inventories across North America. The 2013 North American fall ammonia application season was shortened due to cold winter weather conditions, which reduced the application period. This resulted in higher ammonia inventory levels at the producer level at the beginning of the first quarter of 2014, causing downward pressure on ammonia prices. The decrease in UAN selling prices was due primarily to lower demand caused by buyers cautious buying due to uncertainty related to pricing.

Ammonia volume increased from 86,000 tons in the first quarter of 2013 to 98,000 tons in the first quarter of 2014 due to ammonia shipments for pre-plant applications in the southern plains regions which experienced favorable weather conditions for fertilizer application. UAN volume decreased


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                          TERRA NITROGEN COMPANY, L.P.

slightly in the first quarter of 2014 to 530,000 tons from 540,000 tons in the
first quarter of 2013 as customers delayed spring purchasing.

    The following table shows the components of cost of goods sold and the
average cost of goods sold per ton for the three months ended March 31, 2014 and
2013:

                                                     Three months ended March 31,
                                               2014            2013         2014 vs. 2013
                                                 (in millions, except per ton amounts)
Realized natural gas costs                    $    43.3       $    36.9    $    6.4      17 %
Unrealized mark-to-market losses (gains)
on natural gas derivatives                          4.0            (3.7 )       7.7      NM
Payroll related expenses                            5.6             5.6           -       - %
Other                                              17.3            13.4         3.9      29 %


Total cost of goods sold                      $    70.2       $    52.2    $   18.0      34 %

Average cost of goods sold per ton $ 112 $ 83 $ 29 35 %

The average cost of goods sold per ton increased to $112 per ton in the first quarter of 2014 from $83 per ton in the first quarter of 2013. As shown in the preceding table, the 35% increase in the average cost of goods sold per ton was due primarily to higher realized natural gas costs, the effect of unrealized mark-to-market losses on natural gas derivatives and an increase in the other category which is primarily due to higher depreciation resulting from new assets being placed into service. Realized natural gas costs increased 17% from $3.43 per MMBtu in the first quarter of 2013 to $4.02 per MMBtu in the first quarter of 2014 due to strong market demand for natural gas due to the cold weather in North America. We recorded a $4.0 million unrealized mark-to-market loss for the first quarter of 2014, compared to $3.7 million unrealized mark-to-market gain on natural gas derivatives for the first quarter of 2013.

Our gross margin was $107.5 million in the first quarter of 2014 compared to $171.9 million in the first quarter of 2013. Gross margin decreased compared to the prior year quarter due primarily to a decrease in average selling prices and an increase in cost of goods sold due to the combination of higher natural gas prices and the impact of unrealized mark-to-market losses in the three months ended March 31, 2014 versus gains in the prior year period. Gross margin as a percent of net sales decreased to 60.5% during the first quarter of 2014 from 76.7% during the first quarter of 2013.

Selling, general and administrative expenses were $4.6 million in the first quarter of 2014 compared to $5.1 million in the first quarter of 2013.

Our net earnings were $102.9 million in the first quarter of 2014, a decrease of $63.9 million, or 38%, as compared to $166.8 million in the first quarter of 2013. Net earnings decreased primarily due to the lower gross margin.

Liquidity and Capital Resources

Our principal funding needs and uses of cash are working capital, plant turnaround costs, capital expenditures, and quarterly distributions. Our cash and cash equivalents balance at March 31, 2014, was $113.9 million, an increase of $27.0 million from the balance of $86.9 million at December 31, 2013. Our cash and cash equivalents consist primarily of U.S. Treasury Bills and money market mutual funds that invest in U.S. government obligations.


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TERRA NITROGEN COMPANY, L.P.

We receive cash and make expenditures directly from our cash accounts. Because we sell our product to and receive payroll and other related services from affiliates of the General Partner, the affiliates of the General Partner continue to be both a debtor and creditor to us.

Cash Flows

    The following table summarizes our cash flows from operating, investing and
financing activities for the three months ended March 31, 2014 and 2013:

                                                        Three months
                                                       ended March 31,
                                                       2014       2013
                                                        (in millions)
             Total cash provided by (used in):
             Operating activities                     $  112.5   $ 170.1
             Investing activities                        (16.4 )   (12.2 )
             Financing activities                        (69.1 )   (16.7 )


             Increase in cash and cash equivalents    $   27.0   $ 141.2

Operating Activities

Net cash provided by operating activities was $112.5 million for the first three months of 2014 compared to $170.1 million for the same period of 2013. The $57.6 million decrease in cash provided by operating activities in the first three months of 2014 was due primarily to the $63.9 million decrease in net earnings. Net earnings included noncash depreciation and amortization expense of $7.6 million and $4.1 million during the three months ended March 31, 2014 and 2013, respectively, and an unrealized mark-to-market loss (gain) on derivatives of $2.9 million and ($3.9) million, respectively.

Investing Activities

Net cash used in investing activities was $16.4 million for the first three months of 2014 compared to $12.2 million in the first three months of 2013. The $4.2 million increase in cash used in investing activities in 2014 was due primarily to a decrease in demand deposits with affiliates of the General Partner. Because we sell our products to and receive payroll and other related services from affiliates of the General Partner, the affiliates of the General Partner continue to be both a debtor and creditor to us. Additions to property, plant and equipment were $16.4 million and $17.6 million during the three months ended March 31, 2014 and 2013, respectively.

Financing Activities

Net cash used in financing activities was $69.1 million for the first three months of 2014 compared to $16.7 million in the first three months of 2013, and consists of distributions paid to our unitholders. The increase in cash used in financing activities was due to the fact that $101.3 million of the cash distribution in the first quarter of 2013 that was due to affiliates of the General Partner was not paid until after March 31, 2013. The distributions paid are based on "Available Cash," as defined in our agreement of limited partnership. For additional information, see Notes to the Unaudited Consolidated Financial Statements, Note 3-Agreement of Limited Partnership.


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TERRA NITROGEN COMPANY, L.P.

Capital Expenditures

Capital expenditures totaled $18.2 million in the first quarter of 2014 as compared to $17.6 million in the first quarter of 2013. We expect to make capital expenditures in the range of $70 to $90 million in 2014. Capital expenditures are made to sustain our asset base, to increase capacity, to improve plant efficiency and to comply with various environmental, health and safety requirements. Due to the size, scope and timing of capital projects, certain projects require more than a year to complete.

Approximately one-half of the projected capital expenditures relate to sustaining projects. The remaining expenditures relate to certain major projects such as an ammonia debottlenecking project and an upgrade to a plant digital control system. These major projects began in 2013 and are expected to be completed in 2015. Additionally, during the first quarter of 2015, we expect to initiate a turnaround of one ammonia plant and one UAN plant, which will result in approximately one-half of the complex being shut down for the duration of the turnaround, which is expected to be approximately one-month. This will result in lower production and lower sales during this period, which will reduce Available Cash for distributions to unitholders. Capital expenditures will be made in 2014 to support the 2015 turnaround project. Planned capital expenditures and turnarounds are subject to change due to delays in regulatory approvals and/or permitting, unanticipated increases in cost, changes in scope and completion time, performance of third parties, adverse weather, defects in materials and workmanship, labor or material shortages, transportation constraints, and other unforeseen difficulties. Capital expenditures reduce the Available Cash for unit holder distributions.

General Partner

The General Partner is an indirect, wholly-owned subsidiary of CF Industries. Under the General Partner's governing documents, neither we nor the General Partner may make any bankruptcy filing (or take similar action) without the approval of the General Partner's independent directors.

Partnership Distributions

We make quarterly distributions to holders of our General Partner interest and Limited Partner interests based on Available Cash for the quarter as defined in our agreement of limited partnership. Available Cash is defined generally as all cash receipts less all cash disbursements, less certain reserves (including reserves for future operating and capital needs) established as the General Partner determines in its reasonable discretion to be necessary or appropriate. Changes in working capital affect Available Cash as changes in the amount of cash invested in working capital items (such as increases in inventory and decreases in accounts payable) reduce Available Cash, while declines in the amount of cash invested in working capital items increase Available Cash. During the three months ended March 31, 2014, we paid partnership distributions of $61.1 million. During the three months ended March 31, 2013, we declared partnership distributions of $118.0 million, of which $16.7 million was paid as of March 31, 2013. The remaining $101.3 million was paid during the second quarter of 2013.

We receive 99% of the Available Cash from the Operating Partnership and 1% is distributed to its General Partner. Cash distributions from the Operating Partnership generally represent the Operating Partnership's Available Cash from operations. Our cash distributions are made 99.975% to common and Class B common unitholders and 0.025% to our General Partner except when cumulative distributions of Available Cash exceed specified target levels above the Minimum Quarterly Distributions (MQD) of $0.605 per unit. Under such circumstances, our General Partner is entitled to receive Incentive Distribution Rights.


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                          TERRA NITROGEN COMPANY, L.P.

    On May 7, 2014, we announced a $3.01 cash distribution per common limited
partnership unit, payable on May 30, 2014 to holders of record as of May 19,
2014. In the first quarter, we exceeded the cumulative MQD amounts and will
distribute Available Cash as summarized in the following table:

                                              Income and Distribution Allocation
                                                                  Class B
                               Target      Target       Common     Common    General
                               Limit      Increment     Units      Units     Partner     Total
Minimum Quarterly
Distributions                 $  0.605    $    0.605     98.990 %    0.985 %    0.025 %   100.00 %
First Target                     0.715         0.110     98.990 %    0.985 %    0.025 %   100.00 %
Second Target                    0.825         0.110     85.859 %    0.985 %   13.156 %   100.00 %
Third Target                     1.045         0.220     75.758 %    0.985 %   23.257 %   100.00 %
Final Target and Beyond         >1.045             -     50.505 %    0.985 %   48.510 %   100.00 %

The General Partner is required to remit the majority of cash distributions it receives from the Partnership, in excess of its 1% Partnership equity interest, to an affiliated company.

General Partner Option to Effect Mandatory Redemption of Partnership Units

At March 31, 2014, the General Partner and its affiliates owned 75.3% of our outstanding units. When not more than 25% of the issued and outstanding units are held by non-affiliates of the General Partner, as was the case at March 31, 2014, we, at the General Partner's sole discretion, may call, or assign to the General Partner or its affiliates, our right to acquire all such outstanding units held by non-affiliated persons. If the General Partner elects to acquire all outstanding units, we are required to give at least 30 but not more than 60 days notice of our decision to purchase the outstanding units. The purchase price per unit will be the greater of (1) the average of the previous 20 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 the 90 days preceding the date the purchase is announced.

Cash Transactions with Affiliates

We receive cash and make expenditures directly from our cash accounts. Because we sell our product to and receive payroll and other related services from affiliates of the General Partner, the affiliates of the General Partner continue to be both a debtor and creditor to us.

Derivatives

We purchase natural gas at market prices to meet production requirements at our manufacturing facility. Natural gas prices are volatile, and our natural gas acquisition policy allows us to establish derivative positions that are associated with anticipated natural gas requirements. The natural gas derivatives that we use are primarily natural gas fixed price swaps and call options.

Natural gas derivatives involve the risk of dealing with counterparties and their ability to meet the terms of the contracts. The counterparties to our natural gas derivatives are either large energy companies or large financial institutions. For derivatives that are in net asset positions, we are exposed to credit loss from nonperformance by the counterparties. Credit risk is controlled through the use of multiple counterparties, individual credit limits, monitoring procedures, cash collateral requirements and master netting arrangements.


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TERRA NITROGEN COMPANY, L.P.

Contractual Obligations

At March 31, 2014, there were no material changes to the Partnership's contractual obligations, critical accounting policies or off-balance sheet arrangements presented in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended December 31, 2013.

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