ITEM 1. BUSINESS
"Notes" referenced throughout this document refer to financial statement footnote disclosures that are found in Item 8. Financial Statements and Supplementary Data.
Overview
Terra Nitrogen Company, L.P. (TNCLP, we, our or us) 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.
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 percent 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. Ownership of TNCLP is comprised of the General Partner interests and the Limited Partner interests. Limited Partner interests consist of common units, which are listed for trading on the New York Stock Exchange under the symbol "TNH" and Class B common units. As of December 31, 2013, we had 18,501,576 common units and 184,072 Class B common units issued and outstanding. CF Industries through its subsidiaries owned 13,889,014 common units (representing approximately 75% of the total outstanding common units) and all of the Class B common units as of December 31, 2013.
CF Industries, through its subsidiaries, is a global leader in nitrogen and phosphate 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; conducts phosphate mining and manufacturing operations in Central Florida; and distributes fertilizer products through a system of terminals, warehouses, and associated transportation equipment located primarily in the Midwestern United States.
For the year ended December 31, 2013, we sold 2.3 million tons of nitrogen fertilizers, recognized net sales of $736.2 million and generated net earnings of $502.4 million. Additional financial information about our business is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
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 CF Industries and the General Partner, see Notes to the Consolidated Financial Statements, Note 10-Related Party Transactions.
Throughout this document, the terms "General Partner Affiliates," "Affiliates of the General Partner" or similar terms refer to CF Industries and consolidated subsidiaries of CF Industries, including TNGP. CF Industries acquired Terra Industries, Inc. (Terra) in April 2010, and acquired the General Partner and Terra's ownership in the Partnership at that time.
TERRA NITROGEN COMPANY, L.P.
We make available free of charge through CF Industries' Internet website, www.cfindustries.com, all of our reports on Forms 10-K, 10-Q and 8-K and all amendments to those reports as soon as reasonably practicable after such material is filed electronically with, or furnished to, the Securities and Exchange Commission (SEC). Copies of our Corporate Governance Guidelines and charters for the Audit Committee and Corporate Governance and Nominating Committee of our Board of Directors are also available on our Internet website. We will provide electronic or paper copies of these documents free of charge upon written request delivered to our principal executive offices at the address below. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.
Our principal executive offices are located outside of Chicago, Illinois, at 4 Parkway North, Suite 400, Deerfield, Illinois 60015.
Our Products
Our principal products are ammonia and UAN, which we manufacture at our Verdigris, Oklahoma facility. References to UAN in our Form 10-K is measured on a 32 percent nitrogen content basis. Our nitrogen products are used primarily by farmers to improve the yield and quality of their crops. Although ammonia and UAN are often interchangeable, each has its own characteristics and customer product preferences vary according to the crop planted, soil and weather conditions, regional farming practices, relative prices and the cost and availability of appropriate storage, handling and application equipment.
Our historical sales of nitrogen fertilizer products are shown in the following table. The sales shown do not reflect product used internally in the manufacture of other products (for example, in 2013 we used approximately 0.8 million tons of ammonia in the production of UAN).
(1)Other includes sales of nitric acid.
Our gross margin was $519.8 million, $577.8 million and $524.5 million for the years ended December 31, 2013, 2012 and 2011, respectively.
Our Facilities
Our sole production facility in Verdigris, Oklahoma is the second largest UAN production facility in North America. It has two ammonia plants, two nitric acid plants and two UAN plants. It has the annual capacity to produce approximately 1.1 million tons of ammonia (most of which is upgraded to UAN) and 2.0 million tons of UAN. The Verdigris facility represents approximately 6% of North American ammonia capacity and 14% of North American UAN capacity.
TERRA NITROGEN COMPANY, L.P.
The following table summarizes our nitrogen fertilizer production volume for the last three years.
(1)Gross ammonia production, including amounts subsequently upgraded to UAN.
Our Verdigris location is well suited to serve the United States Corn Belt. The Verdigris site has two ammonia plants, two nitric acid plants and two UAN plants, which provides us with some flexibility to adjust our product mix between ammonia and UAN. Verdigris is strategically located on approximately 650 acres near Tulsa's Port of Catoosa on the Verdigris River. We lease a port terminal from the Tulsa-Rodgers County Port Authority, which provides access to transport fertilizer by way of river barges. In addition, Verdigris is located on the Burlington Northern Santa Fe railroad, providing access to rail transport. We also have access to a 1,100-mile ammonia pipeline. The complex has on-site storage for 23,000 tons of ammonia and 49,100 tons of UAN, providing us with flexibility to handle temporary disruptions to shipping activities without impacting production.
In 2012, we began construction of two additional on-site storage tanks with maximum capacities of 30,000 tons of ammonia and 50,000 tons of UAN. These projects are expected to be completed by mid-2014.
Customers
We sell all of the fertilizer products that we produce to an affiliate of the General Partner, making it our only customer.
Raw Materials
Natural gas is the principal raw material and primary fuel source used in our ammonia production process. In 2013, natural gas accounted for approximately 65% of our total cost of goods sold for nitrogen fertilizers and a higher percentage of cash production costs (total production costs less depreciation and amortization). Our Verdigris facility has access to abundant, competitively-priced natural gas through the ONEOK intrastate gas pipeline.
In 2013, our Verdigris facility consumed approximately 40 million MMBtus of natural gas. We purchase natural gas from a variety of suppliers to maintain a reliable, competitively-priced supply of natural gas. We also use certain financial instruments to hedge natural gas prices. For further information about our natural gas hedging activities, see Notes to the Consolidated Financial Statements, Note 7-Derivative Financial Instruments.
Distribution
Our production facility in Verdigris is located near the agricultural areas of the central U.S., and has ready access to barge, truck and rail transportation. In addition, the Verdigris facility has access to an ammonia pipeline to transport product to high demand regions. We sell all of the fertilizer products that we produce to an affiliate of the General Partner.
TERRA NITROGEN COMPANY, L.P.
Competition
The market for nitrogen fertilizer products is global and intensely competitive. Competition in the nitrogen fertilizer market is based primarily on a delivered price and to a lesser extent on customer service and product quality. During the peak demand periods, product availability and delivery time also play a role in purchaser's buying decisions. Agrium Inc., Koch Nitrogen Company, CVR Partners, LP, LSB Industries, Inc. and CF Industries are all large North American-based producers of nitrogen fertilizer products. There is also significant competition from product sourced from other regions of the world. In 2013, 43% of nitrogen fertilizer products used in the United States were supplied by manufacturers outside of North America.
Seasonality
The sales patterns of each of our major products are seasonal. The strongest demand for fertilizer products occurs during the spring planting season, with a second period of strong demand following the fall harvest. Wholesale buyers generally build inventories during the low demand periods of the year in order to ensure timely product availability during the peak sales seasons. Seasonality is greatest for ammonia due to the short application season and limited ability of customers to store significant quantities of this product. The seasonality of fertilizer demand generally results in sales volumes and net sales being the highest during the spring and working capital requirements being the highest just prior to the start of the spring season. Our quarterly financial results can vary significantly from one year to the next due to weather-related shifts in planting schedules and purchasing patterns.
Environmental and Other Regulatory Matters
We are subject to numerous environmental, health and safety laws and regulations, including laws and regulations relating to land reclamation; the generation, treatment, storage, disposal and handling of hazardous substances and wastes; and the cleanup of hazardous substance releases. These laws include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), the Toxic Substances Control Act and various other federal, state and local statutes. Violations can result in substantial penalties, court orders to install emissions control equipment, civil and criminal sanctions, permit revocations and facility shutdowns. In addition, environmental, health and safety laws and regulations may impose joint and several liability, without regard to fault, for cleanup costs on potentially responsible parties who have released or disposed of hazardous substances into the environment.
Freeport-McMoRan Resource Partners, Limited Partnership (a former owner and operator of the Partnership's production facilities) has retained liability for certain environmental matters originating prior to the Partnership's acquisition of these facilities.
Environmental, Health and Safety Expenditures
Our environmental, health and safety capital expenditures in 2013 were approximately $9.2 million. In 2014, we estimate that we will spend approximately $2.9 million for environmental, health and safety capital expenditures. Environmental, health and safety laws and regulations are complex, change frequently and have tended to become more stringent over time. We expect that continued government and public emphasis on environmental issues will result in increased future expenditures for environmental controls at our operations. Such expenditures could have a material adverse effect on our business, financial condition, results of operations and cash flows.
TERRA NITROGEN COMPANY, L.P.
Legislation and Regulation of Greenhouse Gases
We are subject to greenhouse gas (GHG) regulations. There are substantial uncertainties as to the nature, stringency and timing of any future regulations. More stringent GHG limitations, if they are enacted, are likely to have significant impacts on the fertilizer industry and us due to the fact that our production facility emits GHGs such as carbon dioxide and nitrous oxide. Regulation of GHGs may require us to make changes in our operating activities that would increase our operating costs, reduce our efficiency, limit our output, require us to make capital improvements to our facilities, increase our costs for or limit the availability of energy, raw materials or transportation, or otherwise materially adversely affect our operating results and ability to pay cash distributions to unitholders. In addition, to the extent GHG restrictions are not imposed in countries where our competitors operate or are less stringent than in the United States, our competitors may have cost or other competitive advantages over us.
Employees
TNCLP and TNGP have no employees. An affiliate of the General Partner provides services to us under the Services and Offtake Agreement.
TERRA NITROGEN COMPANY, L.P.
ITEM 1A.
ITEM 1A. RISK FACTORS
In addition to the other information contained in this Annual Report on Form 10-K, you should carefully consider the factors discussed below before deciding to invest in TNCLP's common units. These risks and uncertainties could materially and adversely affect our business, financial condition, results of operations, cash flows and ability to pay cash distributions to unitholders.
RISKS RELATED TO OUR BUSINESS
We are wholly dependent on our Verdigris manufacturing facility, and any operational disruption could result in a reduction of sales volumes and could cause us to incur substantial expenditures.
Our manufacturing operations, located at a single site in Verdigris, Oklahoma, are subject to significant operating hazards and interruptions. Any significant curtailment of production at one or more of our production units could result in materially reduced revenues and cash flows for the duration of any shutdown. Operations at our manufacturing facility could be curtailed or partially or completely shut down, temporarily or permanently, as the result of a number of circumstances, most of which are not within our control, such as unscheduled maintenance or catastrophic events, like a major accident or fire or damage by severe weather or other natural disaster. In addition, our operations are subject to hazards inherent in nitrogen fertilizer manufacturing. Some of these hazards could cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage, and could result in suspension of operations and the imposition of civil or criminal penalties.
We are currently insured under CF Industries' property, business interruption, casualty and liability insurance policies, but we are not fully insured against all potential hazards and risks incident to our business. If we were to incur significant property damage, business interruption, environmental claims or other liabilities for which we were not fully insured, it could have a material adverse effect on our business, financial condition, results of operations, cash flows and ability to pay cash distributions to unitholders. CF Industries' insurance policies are subject to various self-retentions, deductibles and limits. As a result of market conditions, insurance premiums, self-retentions and deductibles for certain insurance policies can increase substantially and, in some instances (including if CF Industries had fully utilized the purchased coverage), certain insurance may become unavailable or available only for reduced amounts of coverage. In addition, significantly increased costs could lead CF Industries to decide to reduce, or possibly eliminate, coverage. There can be no assurance that CF Industries or we will be able to buy and maintain insurance with adequate limits and reasonable pricing terms and conditions.
The manufacturing operations at our facility could also be subject to interruption if our ammonia storage facilities were to be removed from service due to damage from an accident or natural disaster, or due to problems discovered during inspections associated with long-term maintenance or safety requirements.
Our business is cyclical, resulting in periods of industry oversupply during which our financial condition, results of operations and cash flows tend to be negatively affected.
Historically, selling prices for our products have fluctuated in response to periodic changes in supply and demand conditions. Demand is affected by planted acreage and application rates, driven by population growth, changes in dietary habits, non-food usage of crops, such as the production of ethanol and other biofuels, among other things. Supply is affected by available capacity and operating rates, raw material costs and availability, government policies and global trade.
TERRA NITROGEN COMPANY, L.P.
Periods of high demand, high capacity utilization and increasing operating margins tend to result in investment in production capacity, which may cause supply to exceed demand and selling prices and capacity utilization to decline. Future growth in demand for fertilizer may not be sufficient to absorb excess industry capacity.
During periods of industry oversupply, our results of operations tend to be affected negatively as the price at which we sell our products typically declines, resulting in possible reduced profit margins, write-downs in the value of our inventory and temporary or permanent curtailments of production.
Our products are global commodities and we face intense global competition from other fertilizer producers.
We are subject to intense price competition from both domestic and foreign sources. Fertilizers are global commodities, with little or no product differentiation, and customers make their purchasing decisions principally on the basis of delivered price and to a lesser extent on customer service and product quality. We compete with a number of domestic and foreign producers, including state-owned and government-subsidized entities.
Some of these competitors have greater total resources and are less dependent on earnings from fertilizer sales, which make them less vulnerable to industry downturns and better positioned to pursue new expansion and development opportunities. Our competitive position could suffer to the extent we are not able to expand our own resources either through investments in new or existing operations or through acquisitions, joint ventures or partnerships.
China, the world's largest producer and consumer of fertilizers, is expected to continue expanding its nitrogen fertilizer production capability. If Chinese policy encourages exports, this expected increase in capacity could adversely affect the balance between global supply and demand and may put downward pressure on global fertilizer prices, which could adversely affect our business, financial condition, results of operations, cash flows and ability to pay cash distributions to unitholders.
A decline in U.S. agricultural production or limitations on the use of our products for agricultural purposes could materially adversely affect the market for our products.
Conditions in the U.S. agricultural industry significantly impact our operating results. The U.S. agricultural industry can be affected by a number of factors, including weather patterns and field conditions, current and projected grain inventories and prices, domestic and international demand for U.S. agricultural products and U.S. and foreign policies regarding trade in agricultural products. These factors are outside of our control.
State and federal governmental policies, including farm and biofuel subsidies and commodity support programs, as well as the prices of fertilizer products, may also directly or indirectly influence the number of acres planted, the mix of crops planted and the use of fertilizers for particular agricultural applications. Ethanol production in the United States contributes significantly to corn demand, in part, due to federal legislation mandating use of renewable fuels. This increase in ethanol production has led to an increase in the amount of corn grown in the United States and to increased fertilizer usage on both corn and other crops that have also benefited from improved farm economics. While the current Renewable Fuels Standard (RFS) encourages continued high levels of corn-based ethanol production, a continuing "food versus fuel" debate and other factors have resulted in calls to allow increased ethanol imports and to reduce or eliminate the renewable fuel mandate, either of which could have an adverse effect on corn-based ethanol production, planted corn acreage and fertilizer demand. In November 2013, EPA proposed to reduce the total renewable fuel volumes required for calendar year 2014.
TERRA NITROGEN COMPANY, L.P.
Developments in crop technology, such as nitrogen fixation, the conversion of atmospheric nitrogen into compounds that plants can assimilate, could also reduce the use of chemical fertilizers and adversely affect the demand for our products. In addition, from time to time various state legislatures have considered limitations on the use and application of chemical fertilizers due to concerns about the impact of these products on the environment.
Our business is dependent on North American natural gas, the prices of which are subject to volatility.
Natural gas is the principal raw material used to produce nitrogen fertilizers and comprises a significant portion of the total cost of our products. The price of natural gas in North America has been highly volatile in recent years. During 2013, the average daily closing price at the Henry Hub, the most heavily-traded natural gas pricing basis in North America, reached a high of $4.52 per MMBtu on December 24, 2013 and a low of $3.08 per MMBtu on January 11, 2013.
Changes in the supply of and demand for natural gas can lead to periods of volatile natural gas prices. If high prices were to occur during a period of low fertilizer selling prices, it could have a material adverse effect on our business, financial condition, results of operations, cash flows and ability to pay cash distributions to unitholders. We sell all of our output of fertilizer products to CF Industries at prices determined based on market prices for our fertilizer products as defined in the General and Administrative Services and Product Offtake Agreement.
North American prices have declined in response to increased supply from the development of production from shale gas formations. Future production of natural gas from shale gas formations could be reduced by regulatory changes that restrict drilling or increase its cost for other reasons. If this were to occur, or if other developments adversely impact the supply/demand balance for natural gas in the United States, natural gas prices could rise, which could have a material adverse impact on our business, financial condition, results of operations, cash flows and ability to pay cash distributions to unitholders.
Because our products are global commodities, we may not be able to pass along higher operating costs in the form of higher product prices. A significant increase in the price of natural gas (which can be driven by, among other things, supply disruptions, governmental or regulatory actions, cold weather and oil price spikes) for quantities that are not hedged or for which the cost increase cannot be recovered through an increase in the price of related nitrogen products could result in reduced profit margins and lower product production. Production rates at our Verdigris facility have previously been reduced in response to high natural gas prices and such reductions could occur again in the future.
Transportation and distribution activities rely on third party providers, which subjects us to risks and uncertainties beyond our control that may adversely affect our operations.
Our industry relies on railroad, trucking, pipeline, and river barge companies to transport raw materials to manufacturing facilities and to deliver finished products into CF Industries' distribution system and to CF Industries' customers. These transportation operations, equipment and services are subject to various hazards, including adverse operating conditions on the inland waterway system, extreme weather conditions, system failures, work stoppages, delays, accidents such as spills and derailments and other accidents and other operating hazards.
These transportation operations, equipment and services are also subject to environmental, safety, and regulatory oversight. Due to concerns related to accidents, terrorism or the potential use of fertilizers as explosives, local, state and federal governments could implement new regulations affecting the transportation of raw materials or finished products.
TERRA NITROGEN COMPANY, L.P.
If shipping of our products is delayed or we are unable to obtain raw materials as a result of these transportation companies' failures to operate properly, or if new and more stringent regulatory requirements are implemented affecting transportation operations or equipment, or if there are significant increases in the cost of these services or equipment, our revenues and cost of operations could be adversely affected. In addition, increases in transportation costs, or changes in such costs relative to transportation costs incurred by our competitors, could have an adverse effect on our business, financial condition, results of operations, cash flows and ability to pay cash distributions to unitholders.
The railroad industry continues various efforts to limit the railroads' potential liability stemming from the transportation of Toxic Inhalation Hazard (TIH) materials, such as the anhydrous ammonia that is transported to and from our facilities. For example, various railroads have implemented tariffs that include provisions that purport to shift liability to shippers to the extent that liabilities arise from third parties with insufficient resources. These initiatives could materially and adversely affect operating expenses and potentially the ability to transport anhydrous ammonia and increase the liability for releases of anhydrous ammonia while in the care, custody and control of the railroads, for which our insurance may be insufficient or unavailable. New regulations also could be implemented affecting the equipment used to ship our raw materials or finished products.
Adverse weather conditions may decrease demand for our fertilizer products, increase the cost of natural gas or materially disrupt our operations.
Weather conditions that delay or intermittently disrupt field work during the planting and growing seasons may cause agricultural customers to use different forms of nitrogen fertilizer, which may adversely affect demand for the forms that we sell or may impede farmers from applying our fertilizers until the following growing season, resulting in lower demand for our products.
Adverse weather conditions following harvest may delay or eliminate opportunities to apply fertilizer in the fall. Weather can also have an adverse effect on crop yields, which could lower the income of growers and impair their ability to purchase fertilizer from CF Industries' customers. Our quarterly financial results can vary significantly from one year to the next due to weather-related shifts in planting schedules and purchasing patterns.
Weather conditions or, in certain cases, weather forecasts, also can affect the price of natural gas, the principal raw material used to make our nitrogen based fertilizers. Colder than normal winters and warmer than normal summers increase the demand for natural gas for residential and industrial use. In addition, hurricanes affecting the Gulf of Mexico coastal states can impact the supply of natural gas and cause prices to rise.
We are subject to numerous environmental and health and safety laws, regulations and permitting requirements, as well as potential environmental liabilities, which may require us to make substantial expenditures.
We are subject to numerous environmental and health and safety laws and regulations in the United States, including laws and regulations relating to the generation, treatment, storage, disposal and handling of hazardous substances and wastes, the discharge of regulated substances to air or water and the cleanup of hazardous substance releases. These laws include the Clean Air Act, the Clean Water Act, the CERCLA, the Toxic Substances Control Act and various other federal, state, provincial, local and international statutes.
As a fertilizer company working with chemicals and other hazardous substances, our business is inherently subject to spills, discharges or other releases of hazardous substances into the environment.
TERRA NITROGEN COMPANY, L.P.
Certain environmental laws, including CERCLA, impose joint and several liability, without regard to fault, for cleanup costs on persons who have disposed of or released hazardous substances into the environment. Given the nature of our business, we have incurred, are incurring currently, and are likely to incur periodically in the future, liabilities under CERCLA and other environmental cleanup laws at our facility, adjacent or nearby third-party facilities or offsite disposal locations. The costs associated with future cleanup activities that we may be required to conduct or finance may be material. Additionally, we may become liable to third parties for damages, including personal injury and property damage, resulting from the disposal or release of hazardous substances into the environment.
Violations of environmental and health and safety laws can result in substantial penalties, court orders to install emissions-control equipment, civil and criminal sanctions, permit revocations and facility shutdowns. Environmental and health and safety laws change rapidly and have tended to become more stringent over time. As a result, we have not always been and may not always be in compliance with all environmental and health and safety laws and regulations. Additionally, future environmental and health and safety laws and regulations or reinterpretation of current laws and regulations may require us to make substantial expenditures. Additionally, our costs to comply with, or any liabilities under, these laws and regulations could have a material adverse effect on our business, financial condition, results of operations, cash flows and ability to pay cash distributions to unitholders.
From time to time, our production of anhydrous ammonia has resulted in accidental releases that have temporarily disrupted our manufacturing operations and resulted in liability for administrative penalties and claims for personal injury. To date, our costs to resolve these liabilities have not been material. However, we could incur significant costs if our liability coverage is not sufficient to pay for all or a large part of any judgments against us, or if our insurance carrier refuses coverage for these losses.
Expansion of our operations is predicated upon securing necessary environmental or other permits or approvals. A decision by a government agency to deny or delay issuing a new or renewed material permit or approval, or to revoke or substantially modify an existing permit or approval, could have a material adverse effect on our ability to continue operations at the Verdigris facility and on our business, financial condition, results of operations, cash flows and ability to pay cash distributions to unitholders.
Future regulatory restrictions on greenhouse gas emissions in the jurisdictions in which we operate could materially adversely affect our business, financial condition, results of operations, cash flows and ability to pay cash distributions to unitholders.
We are subject to greenhouse gas (GHG) regulations. There are substantial uncertainties as to the nature, stringency and timing of any future regulations. More stringent GHG limitations, if they are enacted, are likely to have significant impacts on the fertilizer industry due to the fact that our production facility emits GHGs such as carbon dioxide and nitrous oxide. Regulation of GHGs may require us to make changes in our operating activities that would increase our operating costs, reduce our efficiency, limit our output, require us to make capital improvements to our facilities, increase our costs for or limit the availability of energy, raw materials or transportation, or otherwise materially adversely affect our business, financial condition, results of operations, cash flows and ability to pay cash distributions to unitholders. In addition, to the extent that GHG restrictions are not imposed in countries where our competitors operate or are less stringent than regulations that may be imposed in the United States, our competitors may have cost or other competitive advantages over us.
TERRA NITROGEN COMPANY, L.P.
Cyber security risks could result in disruptions in business operations and adverse operating results.
The information management systems that we use are those provided by CF Industries. As we continue to increase our dependence on information technologies to conduct our operations, the risks associated with cyber security also increase. We rely on management information systems, among other things, to manage our accounting, manufacturing, supply chain and financial functions. This risk not only applies to us, but also to third parties on whose systems we place significant reliance for the conduct of our business. We have implemented security procedures and measures in order to protect our information from being vulnerable to theft, loss, damage or interruption from a number of potential sources or events. We believe these measures and procedures are appropriate. However, we may not have the resources or technical sophistication needed to anticipate, prevent, or recover from rapidly evolving types of cyber attacks. Compromises to information systems could have severe financial and other business implications.
Our inability to predict future seasonal fertilizer demand accurately could result in excess inventory, potentially at costs in excess of market value, or product shortages.
The fertilizer business is seasonal. The degree of seasonality of our business can change significantly from year to year due to conditions in the agricultural industry and other factors. The strongest demand for fertilizer products occurs during the spring planting season, with a second period of strong demand following the fall harvest. Wholesale buyers generally build inventories during the low demand periods of the year in order to ensure timely product availability during the peak sales seasons. Seasonality is greatest for ammonia due to the short application season and the limited ability of their customers to store significant quantities of this product. The seasonality of fertilizer demand results in sales volumes and net sales being the highest during the spring and working capital requirements being the highest just prior to the start of the spring season.
As a result of this seasonality, you will not be able to rely on our operating results in any particular period as an indication of our future performance. In addition, as a consequence of our seasonality, our distributions can be volatile and will vary quarterly and annually.
Our business is subject to risks involving derivatives, including the risk that our hedging activities might not prevent losses.
Our business, financial condition, results of operations, cash flows and ability to pay cash distributions to unitholders could be adversely affected by changes involving commodity price volatility, adverse correlation of commodity prices, or market liquidity issues.
In order to manage financial exposure to commodity price and market fluctuations, we often utilize natural gas derivatives to hedge our exposure to the price volatility of natural gas, the principal raw material used in the production of nitrogen based fertilizers. We have used fixed-price, forward, and physical purchase and sales contracts, and futures, financial swaps and option contracts traded in the over-the-counter markets or on exchanges. Hedging arrangements are imperfect and, therefore, unhedged risks will always exist.
Our use of derivatives can result in volatility in reported earnings due to the unrealized mark-to-market adjustments that occur from changes in the value of the derivatives for which we do not apply hedge accounting. To the extent that our derivative positions lose value, we may be required to post collateral with our counterparties, thereby negatively affecting our liquidity.
In addition, our hedging activities may themselves give rise to various risks that could adversely affect us. For example, we are exposed to counterparty credit risk when our derivatives are in a net asset position. The counterparties to our derivatives are large oil and gas companies and/or large
TERRA NITROGEN COMPANY, L.P.
financial institutions. We monitor the derivative portfolio and credit quality of our counterparties and adjust the level of activity we conduct with individual counterparties as necessary. We also manage the credit risk through the use of multiple counterparties, established credit limits, cash collateral requirements and master netting arrangements. However, our liquidity could be negatively impacted by a counterparty default on derivative settlements.
Our limited access to capital in a time of need could materially adversely impact our business.
We invest capital in our business to comply with environmental, health and safety regulations and policies, maintain our manufacturing assets, improve our production capabilities and capitalize on certain growth opportunities. The primary source of capital invested in the business is cash from operations. In the event that cash generated from operations is insufficient to fund capital investments, we would need to obtain additional funding in the form of loans or equity. Our ability to obtain such funding would be determined by market conditions at the time of the capital need. Our partnership structure and our reliance on a single manufacturing facility in Verdigris, Oklahoma could impede our ability to obtain such capital, which could materially adversely impact our business, financial condition, results of operations, liquidity and ability to pay cash distributions to unitholders.
Acts of terrorism and regulations to combat terrorism could negatively affect our business.
Like other companies with major industrial facilities, our Verdigris facility may be the target of terrorist activities. This facility stores significant quantities of ammonia and other materials that can be dangerous if mishandled. Any damage to infrastructure facilities, such as electric generation, transmission and distribution facilities, or injury to employees, who could be direct targets or indirect casualties of an act of terrorism, may affect our operations. Any disruption of our ability to produce or distribute our products could result in a significant decrease in revenues and significant additional costs to replace, repair or insure our assets, which could have a material adverse impact on our business, financial condition, results of operations, cash flows and ability to pay cash distributions to unitholders.
In addition, due to concerns related to terrorism or the potential use of certain fertilizers as explosives, local, state, federal and foreign governments could implement new regulations impacting the security of our plants, terminals and warehouses or the transportation and use of fertilizers. These regulations could result in higher operating costs or limitations on the sale of our products and could result in significant unanticipated costs, lower revenues and reduced profit margins.
We are dependent on CF Industries and its employees for the success of our business.
We are dependent on CF Industries for our success in a number of respects. CF Industries, through a subsidiary, purchases all of the production from our manufacturing facility and, together with its affiliates, provides certain services to us, including staffing, benefits, human resources administration, production planning, manufacturing management, logistics, accounting, legal, risk management, investor relations and other general and administrative services. CF Industries and its wholly-owned subsidiaries have debt and debt service requirements and we currently do not. Although CF Industries is affected by most of the factors that affect us, a higher level of debt could put CF Industries at greater risk than us in the event business conditions deteriorate materially. Our business, financial condition, results of operations, cash flows and ability to pay cash distributions to unitholders might be adversely affected by financial difficulties at CF Industries, including default by them or their subsidiaries on their debt or their bankruptcy. Information regarding CF Industries can be obtained in the various filings with the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
TERRA NITROGEN COMPANY, L.P.
Deterioration of global market and economic conditions could have a material adverse effect on our business, financial condition, results of operations, cash flows and ability to pay cash distributions to unitholders.
A slowdown of, or persistent weakness in, economic activity caused by a deterioration of global market and economic conditions could adversely affect our business in the following ways, among others: conditions in the credit markets could impact the ability of CF Industries' customers and their customers to obtain sufficient credit to support their operations and the failure of certain key suppliers could increase our exposure to disruptions in supply or to financial losses. We also may experience declining demand and falling prices for some of our products due to CF Industries' customers' reluctance to replenish inventories. The overall impact of a global economic downturn on us is difficult to predict, and our business could be materially adversely impacted.
RISKS RELATED TO OUR PARTNERSHIP STRUCTURE
The General Partner's discretion in determining the level of cash reserves may adversely affect our ability to make cash distributions to our unitholders.
Our cash distributions to our unitholders are based on Available Cash as defined in our agreement of limited partnership. Our agreement of limited partnership provides that the General Partner may reduce Available Cash by establishing cash reserves for the proper conduct of our business or the business of the Operating Partnership (including reserves for future operating and capital needs), to provide funds for future distributions to our unitholders in any one or more of the next four quarters or to comply with applicable law or any agreement or obligation to which we or the Operating Partnership are a party or otherwise bound. These cash reserves will affect the amount of cash available for current distribution to our unitholders.
Our unitholders have limited voting rights and are not entitled to elect the General Partner or the General Partner's directors.
Unlike the holders of common stock in a corporation, our unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management's decisions regarding our business. Unitholders have no right to elect the General Partner or the General Partner's board of directors on an annual or other continuing basis. The board of directors of the General Partner, including the independent directors, is chosen entirely by CF Industries as the indirect owner of the General Partner and not by our common unitholders. Unlike publicly traded corporations, we do not hold annual meetings of our unitholders to elect directors or conduct other matters routinely conducted at annual meetings of shareholders. Furthermore, even if our unitholders are dissatisfied with the performance of the General Partner, the General Partner may only be removed by a vote of the holders of at least 66.6% of our outstanding common units, including any common units held by the General Partner and its affiliates (including CF Industries), voting together as a single class. As a result, given that the General Partner and its affiliates own approximately 75.3% of our outstanding common units, holders of our publicly traded common units are not able to remove the General Partner under any circumstances.
The control of the General Partner may be transferred to a third party without unitholder consent.
There is no restriction in our agreement of limited partnership on the ability of CF Industries to transfer its equity interest in the General Partner to a third party. The new equity owner of the General Partner would then be in a position to replace the board of directors and the officers of the
TERRA NITROGEN COMPANY, L.P.
General Partner with its own choices and to influence the decisions taken by the board of directors and officers of the General Partner.
The board of directors and officers of the General Partner have fiduciary duties to TNGP and its stockholders, and the interests of TNGP and its stockholders may differ significantly from, or conflict with, the interests of our public common unitholders.
The General Partner is responsible for managing us. Although the General Partner has, as limited and reduced by the agreement of limited partnership, fiduciary duties to manage us in a manner that is beneficial to our common unitholders, the directors and officers of the General Partner also have fiduciary duties to manage the General Partner in a manner beneficial to TNGP and its stockholders. The interests of TNGP and its stockholders may differ from, or conflict with, the interests of our common unitholders. In resolving these conflicts, the General Partner may favor its own interests or the interests of holders of TNGP's common stock over our interests and those of our common unitholders.
The potential conflicts of interest include, among others, the following:
•the General Partner's determination of the amount of our cash expenditures, borrowings and reserves;
•the issuance of additional units or the purchase, call, or redemption of outstanding units;
•transactions with CF Industries and its affiliates;
•the decision to retain separate counsel, accountants or others to perform services on our behalf;
•the decision by affiliates of the General Partner to engage in activities that would compete with us; and
•the fact that all executive officers of the General Partner, and the majority of the directors of the General Partner, also serve as directors and/or executive officers of CF Industries. Such executive officers, including our chief executive officer, chief financial officer, senior vice presidents, divide their time between our business and the business of CF Industries. These executive officers will face conflicts of interest from time to time in making decisions which may benefit either us or CF Industries.
The agreement of limited partnership limits the liability and reduces the fiduciary duties of the General Partner and restricts the remedies available to us and our common unitholders for actions taken by the General Partner that might otherwise constitute breaches of fiduciary duty.
The agreement of limited partnership limits the liability and reduces the fiduciary duties of the General Partner and its directors and officers, while also restricting the remedies available to our common unitholders for actions that, without these limitations and reductions, might constitute breaches of fiduciary duty. For example:
•The agreement of limited partnership provides that none of General Partner, any of its affiliates, or any director or officer of the General Partner or any of its affiliates will have any liability for monetary damages to us or our unitholders for any act or omission if such person acted in good faith.
•The agreement of limited partnership provides broad flexibility for the directors and officers of the General Partner to be involved in the management of the businesses of the owners of the General Partner, including any businesses that are in competition with our business, and specifically permits the owners of the General Partner to engage in activities that are competitive
TERRA NITROGEN COMPANY, L.P.
with our business. The agreement of limited partnership provides that no such activities will constitute a breach of any fiduciary duty owed by the General Partner.
•The agreement of limited partnership provides that in connection with its resolution of any conflict of interest by the General Partner, the General Partner may consider: the relative interests of any party involved in such conflict or affected by such action, agreement, transaction or situation and the benefits and burdens relating to such interest, as well as any additional factors as the General Partner determines in its sole discretion to be relevant, reasonable or appropriate under the circumstances. The agreement of limited partnership further provides that, in the absence of bad faith by the General Partner, the resolution provided by the General Partner with respect to any conflict of interest will not constitute a breach of the agreement of limited partnership or any standard of care or duty imposed in the agreement of limited partnership or under any law, rule or regulation.
By purchasing a common unit, a unitholder becomes bound by the provisions of the agreement of limited partnership, including the provisions described above.
CF Industries and its affiliates are also engaged in fertilizer manufacturing.
The agreement of limited partnership does not prohibit CF Industries and its affiliates, other than TNGP, from owning and operating nitrogen fertilizer manufacturing plants and storage and distribution assets or engaging in any businesses which could compete with our business. In addition, CF Industries, may acquire, construct or dispose of additional assets related to our business, without any obligation to offer us the opportunity to purchase or construct any of these assets.
As a publicly traded partnership we qualify for, and are relying on, certain exemptions from the corporate governance requirements of the New York Stock Exchange (NYSE).
As a publicly traded partnership, we qualify for, and are relying on, certain exemptions from the NYSE's corporate governance requirements, including:
•the requirement that a majority of the board of directors of the General Partner consist of independent directors; and
•the requirement that the board of directors of the General Partner have a compensation committee that is composed entirely of independent directors.
As a result of these exemptions, the General Partner's board of directors is not comprised of a majority of independent directors and the General Partner's board of directors did not establish a compensation committee. Accordingly, unitholders do not have the same protections afforded to equityholders of companies that are subject to all of the corporate governance requirements of the NYSE.
Common units are subject to the General Partner's call right.
The General Partner and its affiliates own approximately 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, 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. The purchase price per unit will be the greater of (i) the average of the previous 20 trading days' closing prices as of the date five days before the purchase is announced and (ii) 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. As a result of this right, you may be required to sell your common units at an undesirable
TERRA NITROGEN COMPANY, L.P.
time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your common units.
Limited Partners may not have limited liability if a court finds that unitholder action constitutes control of our business.
A general partner of a limited partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to the general partner. TNCLP is organized under Delaware law and the Operating Partnership conducts business in Oklahoma. Limited Partners could be liable for our obligations as if such Limited Partners were general partners if a court or government agency determined that:
•we were conducting business in a state but had not complied with that particular state's partnership statute; or
•Limited Partners' right to act with other unitholders to remove or replace the General Partner, to approve some amendments to our agreement of limited partnership or to take other actions under our agreement of limited partnership constituted "control" of our business.
Unitholders may have liability to repay distributions.
In the event that: (i) we make distributions to our unitholders when our nonrecourse liabilities exceed the sum of (a) the fair market value of our assets not subject to recourse liability and (b) the excess of the fair market value of our assets subject to recourse liability over such liability, or a distribution causes such a result, and (ii) a unitholder knows at the time of the distribution of such circumstances, such unitholder will be liable for a period of three years from the time of the impermissible distribution to repay the distribution under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act (the "Delaware Act").
Likewise, upon the winding up of TNCLP, in the event that (a) we do not distribute assets in the following order: (i) to creditors in satisfaction of their liabilities; (ii) to partners and former partners in satisfaction of liabilities for distributions owed under the agreement of limited partnership; (iii) to partners for the return of their contribution; and (iv) to the partners in the proportions in which the partners share in distributions, and (b) a unitholder knows at the time of such circumstances, then such unitholder will be liable for a period of three years from the impermissible distribution to repay the distribution under Section 17-804 of the Delaware Act.
A purchaser of common units who becomes a Limited Partner is liable for the obligations of the transferring Limited Partner to make contributions to TNCLP that are known by the purchaser at the time it became a Limited Partner, and for unknown obligations if the liabilities could be determined from the agreement of limited partnership.
We may issue additional common units and other equity interests without your approval, which would dilute your existing interests.
Under our agreement of limited partnership, we are authorized to issue an unlimited number of additional interests without a vote of the unitholders. The issuance by us of additional common units or other equity interests of equal or senior rank will have the following effects:
•the proportionate ownership interest of unitholders immediately prior to the issuance will decrease;
•the amount of cash distributions on each unit will decrease;
TERRA NITROGEN COMPANY, L.P.
•the ratio of our taxable income to distributions may increase;
•the relative voting strength of each previously outstanding unit will be diminished; and
•the market price of the common units may decline.
TAX RISKS TO OUR COMMON UNIT HOLDERS
TNCLP's tax treatment depends on its status as a partnership for U.S. federal income tax purposes, as well as it not being subject to a material amount of entity-level taxation by individual states. If the Internal Revenue Service were to treat TNCLP as a corporation for federal income tax purposes or if it were to become subject to a material amount of entity-level taxation for state tax purposes, then TNCLP's available cash would be substantially reduced.
The anticipated after-tax economic benefit of an investment in our common units depends largely on TNCLP being treated as a partnership for federal income tax purposes. To maintain its status as a partnership for federal income tax purposes, current law requires that 90% or more of TNCLP's gross income for every taxable year consist of "qualifying income," as defined in Section 7704 of the Internal Revenue Code of 1986, as amended (the "Code"). We have not requested, and do not plan to request, a ruling from the Internal Revenue Service (the "Service") on this or any other matter affecting us.
If the Service were to challenge the federal income tax status of TNCLP, it could result in an audit of a unitholder's entire tax return and in adjustments to items on that return which are unrelated to the ownership of our units. In addition, each unitholder would bear the cost of any expenses incurred in connection with an examination of its personal tax return.
If TNCLP was to be treated as a corporation in any taxable year, its income, gains, losses, deductions and credits would be reflected on its tax return rather than being passed through to unitholders, and its net income would be taxed at corporate rates. In addition, distributions made to unitholders would be treated as dividend income, to the extent of current and accumulated earnings and profits, and in the absence of earnings and profits, as a nontaxable return of capital (to the extent of a unitholder's basis in his units) or as capital gain (after a unitholder's basis in his units has been reduced to zero). Furthermore, losses realized by TNCLP would not flow through to unitholders.
There can be no assurance that the law will not be changed to make TNCLP taxable as a corporation for federal income tax purposes. If such a new law were enacted, then the Minimum Quarterly Distribution and each of the target distribution levels would be adjusted downward. In such an event, the Minimum Quarterly Distribution and first, second and third target distributions for each quarter thereafter would be reduced to take into account the federal, state and local taxes applicable to TNCLP that would be imposed on the earnings used to make such distributions. For additional information regarding cash distributions, see the "Liquidity and Capital Resources" section of Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of this Annual Report on Form 10-K.
If the Service contests the federal income tax positions we take, the market for our units may be adversely impacted and the cost of any Service contest will reduce available cash.
We have not requested a ruling from the Service with respect to TNCLP's treatment as a partnership for federal income tax purposes or any other matter. The Service may adopt positions that differ from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we take. A court may not agree with some or all of our positions. Any contest with the Service could materially and adversely impact the market for our units
TERRA NITROGEN COMPANY, L.P.
and the price at which they trade. In addition, the costs of any contest with the Service will be borne indirectly by our unitholders because the costs would reduce our available cash.
The tax treatment of publicly traded partnerships or an investment in our units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.
The present U.S. federal income tax treatment of publicly traded partnerships, including us, or an investment in our units, may be modified by administrative, legislative or judicial interpretation at any time. For example, from time to time members of the U.S. Congress have proposed substantive changes to the existing U.S. federal income tax laws that would have affected the tax treatment of certain publicly traded partnerships. Any modification to the U.S. federal income tax laws or interpretations thereof may or may not be applied retroactively. Although we are unable to predict whether any of these changes or any other proposals will ultimately be enacted, any such changes could negatively impact the value of an investment in our units.
Our unitholders will be required to pay taxes on their share of TNCLP income even if they do not receive any cash distributions from us.
A unitholder is required to pay U.S. federal income tax and, in certain cases, state and local income taxes on its allocable share of TNCLP's income, whether or not such unitholder receives cash distributions from us. No assurance is given that our unitholders will receive cash distributions equal to their allocable share of taxable income from us. Further, a unitholder may incur tax liability in excess of the amount of cash received, particularly upon the sale or other disposition of its units.
We prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of units as of the close of business on the last day of the preceding month, instead of on the basis of the date a particular unit is transferred.
We prorate our items of income and loss between transferors and transferees of our units each month based upon the ownership of our units as of the close of business on the last day of the preceding month instead of the date a particular unit is transferred. As a result of this monthly allocation, a unitholder transferring units may be allocated income, gain, loss, deduction and credit recognized after the transfer. The use of these proration methods may not be permitted under existing Treasury Regulations promulgated under the Code ("Treasury Regulations"). If the Service was to challenge this method or new Treasury Regulations were issued, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders.
Tax gain or loss on disposition of our units could be more or less than expected.
If a unitholder sells its units, for income tax purposes, the unitholder will recognize a gain or loss equal to the difference between the amount realized and that unitholder's adjusted tax basis in those units. Because distributions in excess of a unitholder's allocable share of our net taxable income decrease that unitholder's tax basis in its units, the amount, if any, of such prior excess distributions with respect to the units sold will, in effect, become taxable income allocated to that unitholder if the unitholder sells such units at a price greater than that unitholder's tax basis in those units, even if the price received is less than the original cost. Furthermore, a portion of the amount realized, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized may include a unitholder's share of our nonrecourse liabilities, if a unitholder sells its units, such unitholder may incur a tax liability in excess of the amount of cash received from the sale.
TERRA NITROGEN COMPANY, L.P.
Tax-exempt entities and non-U.S. persons face unique tax issues from owning our units that may result in adverse tax consequences to them.
Investment in our common units by tax-exempt entities, including employee benefit plans and individual retirement accounts (known as IRAs), and non-U.S. persons raises issues unique to them. For example, substantially all of our income allocated to organizations exempt from U.S. federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and may be taxable to such unitholders. Distributions to non-U.S. persons will be reduced by withholding taxes imposed at the highest applicable effective tax rate, and non-U.S. persons will be required to file U.S. federal income tax returns and pay tax on their share of our taxable income. Any tax-exempt entity or non-U.S. person should consult its tax advisor before investing in our units.
We treat each purchaser of our units as having the same tax benefits without regard to the actual units purchased. The Service may challenge this treatment, which could adversely affect the value of our units.
Because we cannot match transferors and transferees of our units and to maintain the uniformity of the economic and tax characteristics of our common units, we have adopted depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations. A successful Service challenge to these positions could adversely affect the amount of tax benefits available to a unitholder or the value of our common units.
The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in a termination of TNCLP for federal income tax purposes.
TNCLP and the Operating Partnership will be considered to have constructively terminated for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in TNCLP capital and profits within a 12-month period. For purposes of determining whether the 50% threshold has been met, multiple sales of the same interest are counted only once. Because CF Industries currently owns approximately 75.3% of the outstanding common units of TNCLP, a sale or exchange of all or a substantial portion of CF Industries' interests in TNCLP, when combined with trading in the open market, may constitute a sale or exchange of 50% or more of the total interest in TNCLP. A constructive termination would, among other things, result in the closing of the TNCLP's taxable year for all unitholders and could result in a deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a calendar year, the closing of a tax year of TNCLP may also result in more than twelve months of our taxable income or loss being included in such unitholder's taxable income for the year of termination. Termination could also subject us to penalties if we are unable to determine that a termination occurred and therefore failed to make necessary elections in a timely manner.
A unitholder whose units are loaned to a "short seller" to cover a short sale may be considered as having disposed of those units. If so, the unitholder would no longer be treated for federal income tax purposes as a partner with respect to those units during the period of the loan and may recognize gain or loss from the disposition.
Because a unitholder whose units are loaned to a "short seller" to cover a short sale may be considered as having disposed of the loaned units, the unitholder may no longer be treated for federal income tax purposes as a partner with respect to those units during the period of the loan, and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss or deduction with respect to those units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those units
TERRA NITROGEN COMPANY, L.P.
could be fully taxable as ordinary income. Unitholders desiring to assure their status as partners should modify any applicable brokerage account agreements to prohibit their brokers from borrowing their units.
As a result of investing in our units, a unitholder may become subject to state and local taxes and return filing requirements in jurisdictions where we operate or own or acquire property.
In addition to federal income taxes, our unitholders will likely be subject to other taxes, including state and local taxes, imposed by the various jurisdictions in which we conduct business or own property now or in the future, even if our unitholders do not live in any of those jurisdictions. Our unitholders will likely be required to file state income tax returns and pay state income taxes in some or all of these various jurisdictions. Further, our unitholders may be subject to penalties for failure to comply with such requirements.
Income allocated to our common unit holders may be subject to the 3.8% Health Care Surtax.
Beginning in 2013, certain investment income will be subject to an additional 3.8% surtax enacted as part of the Health Care and Education Reconciliation Act of 2010 (the "Health Care Surtax"). This Health Care Surtax will also have to be taken into account for estimated tax purposes. Gross income from a passive activity, or a trade or business of trading in financial instruments or commodities can be subject to the Health Care Surtax. A "passive activity" is defined to be a trade or business in which the taxpayer does not "materially" participate. This category would include net business income from Master Limited Partnerships (MLPs) such as the Company. Investors in our common units are encouraged to consult their tax advisors as to the applicability of the Health Care Surtax to their particular tax situation.
TERRA NITROGEN COMPANY, L.P.
FORWARD LOOKING STATEMENTS
From time to time, in this Annual Report on Form 10-K as well as in other written reports and verbal statements, we make forward-looking statements that are not statements of historical fact and may involve a number of risks and uncertainties. These statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These statements may also relate to our future prospects, developments and business strategies. We have used the words "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "predict," "project," and similar terms and phrases, including references to assumptions, to identify forward-looking statements in this document. These forward-looking statements are made based on currently available competitive, financial and economic data, our current expectations, estimates, forecasts and projections about the industries and markets in which we operate and management's beliefs and assumptions concerning future events affecting us. These statements are not guarantees of future performance and are subject to risks, uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Therefore, our actual results may differ materially from what is expressed in or implied by any forward-looking statements. We want to caution you not to place undue reliance on any forward-looking statements. We do not undertake any responsibility to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this document. Additionally, we do not undertake any responsibility to provide updates regarding the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by the forward- looking statements contained in this document.
Important factors that could cause actual results to differ materially from our expectations are disclosed under "Risk Factors" and elsewhere in this Form 10-K. Such factors include, among others:
•risks related to our reliance on one production facility;
•the cyclical nature of our business;
•the global commodity nature of our fertilizer products, the impact of global supply and demand on our selling prices, and the intense global competition from other fertilizer producers;
•conditions in the U.S. agricultural industry;
•the volatility of natural gas prices in North America;
•reliance on third party transportation providers;
•weather conditions;
•potential liabilities and expenditures related to environmental and health and safety laws and regulations;
•future regulatory restrictions and requirements related to GHG emissions or other environmental requirements;
•risks associated with cyber security;
•our inability to predict seasonal demand for our products accurately;
•risks involving derivatives and the effectiveness of our risk measurement and hedging activities;
•limited access to capital;
•acts of terrorism and regulations to combat terrorism;
TERRA NITROGEN COMPANY, L.P.
•risks related to our dependence on and relationships with CF Industries;
•deterioration of global market and economic conditions;
•risks related to our partnership structure and control of our General Partner by CF Industries;
•the conflicts of interest that may be faced by the executive officers of our General Partner, who operate both us and CF Industries; and
•tax risks to our common unit holders and changes in our treatment as a partnership for U.S. or state income tax purposes.
TERRA NITROGEN COMPANY, L.P.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2.
ITEM 2. PROPERTIES
Information regarding our Verdigris facility and properties is included in Part I, Item 1. Business-Our Products and Our Facilities.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in claims, disputes, administrative proceedings and litigation arising in the ordinary course of business. Based on the information available as of the date of this filing, we do not believe that the matters in which the Partnership may be currently involved, either individually or in the aggregate, will have a material adverse effect on the business, results of operations, financial position or net cash flows of the Partnership.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
TERRA NITROGEN COMPANY, L.P.
Part II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S UNITS AND RELATED UNITHOLDER MATTERS AND ISSUER PURCHASES OF SECURITIES
TNCLP's common units are traded on the New York Stock Exchange (NYSE) under the symbol "TNH." There is no public trading market with respect to TNCLP's Class B common units. The table below discloses the high and low sales prices of the common units for each quarterly period for 2013 and 2012, as reported on the NYSE Composite Price History.
Ownership of TNCLP is composed of the General Partner interests and the Limited Partner interests. The Limited Partners' interests consist of 18,501,576 common units and 184,072 Class B common units. CF Industries Holdings through its subsidiaries owned 13,889,014 common units and all of the Class B common units as of December 31, 2013. Based on information received from TNCLP's transfer and service agent, the number of registered unitholders as of February 12, 2014 was 103.
Under TNCLP's agreement of limited partnership, cash distributions to unitholders are based on Available Cash for the quarter as defined therein. 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. For additional information regarding cash distributions, see the "Liquidity and Capital Resources" section of Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of this Annual Report on Form 10-K.
The following table represents cash distributions paid to the holders of common units, Class B common units and the General Partner in the years ended December 31, 2013 and 2012:
TERRA NITROGEN COMPANY, L.P.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data as of December 31, 2013 and 2012 and for the years ended December 31, 2013, 2012 and 2011 have been derived from our audited consolidated financial statements and related notes included elsewhere in this document. The following selected historical financial data as of December 31, 2011, 2010 and 2009 and for the years ended December 31, 2010 and 2009 have been derived from our consolidated financial statements. The selected financial data should be read in conjunction with Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
TERRA NITROGEN COMPANY, L.P.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
As you read this management's discussion and analysis of financial condition and results of operations, you should refer to our Consolidated Financial Statements and related Notes included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
INTRODUCTION
In this discussion and analysis, we explain our business in the following areas:
•Company Overview
•Results of Operations
•Liquidity and Capital Resources
•Off-Balance Sheet Arrangements and Contractual Obligations
•Application of Critical Accounting Policies and Estimates
•Recent Accounting Pronouncements
COMPANY OVERVIEW
Terra Nitrogen Company, L.P. (TNCLP, we, our or us) 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.
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 percent 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. Ownership of TNCLP is comprised of the General Partner interests and the Limited Partner interests. Limited Partner interests consist of common units, which are listed for trading on the New York Stock Exchange under the symbol "TNH" and Class B common units. As of December 31, 2013, we had 18,501,576 common units and 184,072 Class B common units issued and outstanding. CF Industries through its subsidiaries owned 13,889,014 common units (representing approximately 75% of the total outstanding common units) and all of the Class B common units as of December 31, 2013.
CF Industries, through its subsidiaries, is a global leader in nitrogen and phosphate 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; conducts phosphate mining and manufacturing operations in Central Florida; and distributes fertilizer products through a system of terminals, warehouses, and associated transportation equipment located primarily in the Midwestern United States.
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
TERRA NITROGEN COMPANY, L.P.
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 CF Industries and the General Partner, see Notes to the Consolidated Financial Statements, Note 10-Related Party Transactions.
Throughout this document, the terms "General Partner Affiliates," "Affiliates of the General Partner" or similar terms refer to CF Industries and consolidated subsidiaries of CF Industries, including TNGP. CF Industries acquired Terra Industries, Inc. (Terra) in April 2010, and acquired the General Partner and Terra's ownership in the Partnership at that time.
RESULTS OF OPERATIONS
Consolidated Results
Net earnings in 2013 were $502.4 million on net sales of $736.2 million compared with 2012 net earnings of $560.8 million on net sales of $780.1 million. Net earnings per common unit in 2013 were $15.77 compared with $17.06 in 2012.
TERRA NITROGEN COMPANY, L.P.
The following table shows the results of operations for the three years ended December 31, 2013, 2012 and 2011:
NM-Not meaningful
(1)The nitrogen content of UAN is 32 percent 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.
Year ended December 31, 2013 Compared to Year ended December 31, 2012
Our net sales for 2013 were $736.2 million, a decrease of $43.9 million, or 6%, from net sales of $780.1 million in 2012. The decrease was due primarily to lower sales volumes. Ammonia volume decreased 14% in 2013, from 371,000 tons in 2012 to 319,000 tons in 2013, while UAN volume decreased 3% in 2013, from 1,999,000 tons in 2012 to 1,944,000 tons in 2013. The decreases in volumes were due primarily to lower production resulting from a planned plant turnaround that was completed during the third quarter of 2013.
TERRA NITROGEN COMPANY, L.P.
Selling prices for ammonia increased 1% from an average of $550 per ton in 2012 to $556 per ton in 2013, while UAN selling prices were $286 per ton in 2013, unchanged from 2012. Ammonia selling prices increased modestly due primarily to strong demand during the first half of the year reflecting a large number of planted acres in 2013 partially offset by weak demand in the second half of the year due to unfavorable weather conditions during the fall application season. UAN selling prices remained unchanged as tight inventories in the first half of the year were offset by a decrease in demand and increased supply during the second half of the year.
The following table shows the components of cost of goods sold and the average cost of goods sold per ton for the years ended December 31, 2013 and 2012:
The average cost of goods sold per ton increased to $96 per ton in 2013 from $85 per ton in 2012. The 13% increase is attributable primarily to higher realized natural gas prices on a per ton basis, higher maintenance costs resulting from increased maintenance activities, higher payroll costs associated with a plant turnaround and higher depreciation costs. Realized natural gas cost per MMBtu increased 8%, from $3.31 in 2012 to $3.58 in 2013. We recorded a $9.1 million unrealized mark-to-market gain for 2013, compared to a $10.6 million unrealized mark-to-market gain on natural gas derivatives for 2012.
Our gross margin was $519.8 million in 2013 compared to $577.8 million in 2012. Gross margin as a percent of sales decreased to 70.6% in 2013 from 74.1% in 2012 due to the combination of higher realized natural gas prices and higher maintenance and payroll related costs.
Selling, general and administrative costs were $17.4 million in 2013, compared to $17.0 million in 2012.
Our net earnings decreased to $502.4 million in 2013, a decrease of $58.4 million, or 10%, as compared to $560.8 million in 2012, due primarily to the lower gross margin.
Year ended December 31, 2012 Compared to Year ended December 31, 2011
Our net sales for 2012 were $780.1 million, a decrease of $18.8 million, or 2%, from net sales of $798.9 million in 2011. The decrease was due to lower sales volumes and lower UAN average selling prices partially offset by higher ammonia average selling prices. Ammonia volume decreased 4% in 2012, from 385,000 tons in 2011 to 371,000 tons in 2012. The decline was due primarily to lower ammonia inventory levels entering 2012 as compared to the inventory levels entering 2011, and the timing impact of the implementation of the Services and Offtake Agreement on January 1, 2011, which resulted in a one-time additional 5,000 tons of ammonia being sold upon the adoption of the agreement. UAN volume decreased 2% in 2012, from 2,047,000 tons in 2011 to 1,999,000 tons in 2012. The decline was due primarily to the timing impact of the implementation of the Services and Offtake Agreement on January 1, 2011, which resulted in a one-time additional 59,000 tons of UAN being sold
TERRA NITROGEN COMPANY, L.P.
upon the adoption of the agreement. Additionally, usage of UAN declined in 2012 due to drought conditions in much of the Cornbelt.
Selling prices for ammonia increased 16% from an average of $473 per ton in 2011 to $550 per ton in 2012. This increase was due to a favorable agricultural marketplace that featured strong corn pricing and high planted acres, which supported strong demand for ammonia. This demand in conjunction with lower international ammonia production and lower imports into the U.S. market supported higher ammonia prices. Average selling prices for UAN decreased 4% from an average of $299 per ton in 2011 to $286 per ton in 2012 as a result of increased availability of imported product coupled with the poor wheat crop conditions attributed to the drought. For additional information on the Services and Offtake Agreement, see Notes to the Consolidated Financial States, Note 10-Related Party Transactions.
The following table shows the components of cost of goods sold and the average cost of goods sold per ton for the years ended December 31, 2012 and 2011:
NM-Not meaningful
The average cost of goods sold per ton declined to $85 per ton in 2012 compared to $113 per ton in 2011. As shown in the table above, the 25% decline in the average cost of goods sold per ton is attributable primarily to lower realized natural gas prices, the effect of non-cash mark-to-market gains and losses on natural gas derivatives and lower depreciation. Realized natural gas cost per MMBtu declined 23%, from $4.31 in 2011 to $3.31 in 2012, due to the abundant supply of natural gas from shale gas production. We recorded a $10.6 million unrealized mark-to-market gain on natural gas derivatives for the year ended December 31, 2012, compared to an $11.9 million unrealized mark-to-market loss for the year ended December 31, 2011.
Our gross margin was $577.8 million in 2012 compared to $524.5 million in 2011. The increase in gross margin was primarily driven by the impact of lower manufacturing costs due to the combination of lower realized natural gas costs and the impact of unrealized mark-to-market gains in 2012 versus losses in 2011, partially offset by lower net sales. Gross margin as a percent of sales increased to 74.1% in 2012 from 65.7% in 2011.
Selling, general and administrative costs were $17.0 million in 2012, compared to $16.6 million in 2011.
Our net earnings increased to $560.8 million in 2012, an increase of $52.8 million, or 10%, as compared to $508.0 million in 2011. Net earnings increased due primarily to higher gross margin.
TERRA NITROGEN COMPANY, L.P.
LIQUIDITY AND CAPITAL RESOURCES
Summary
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 December 31, 2013, was $86.9 million, a decrease of $62.5 million from the balance of $149.4 million at December 31, 2012.
Prior to January 1, 2013, our cash was collected and our expenditures were made by an affiliate of the General Partner. Cash receipts, net of cash payments made on our behalf were transferred to us weekly. Because of this cash collection and disbursement arrangement, an affiliate of the General Partner was both a debtor and creditor to us.
Effective January 1, 2013, 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 debtors and creditors to us.
Cash Flows
The following table summarizes our cash flows from operating, investing and financing activities for each of the past three fiscal years:
Operating Activities
Net cash provided by operating activities was $488.9 million in 2013 compared to $572.5 million in 2012 and $521.2 million in 2011. The $83.6 million decrease in 2013 was due primarily to a $58.4 million decrease in net earnings and an increase in working capital invested in the business primarily due to higher receivables due from the General Partner. The $51.3 million increase in cash provided by operating activities in 2012 was due primarily to a $52.8 million increase in net earnings. Net earnings included noncash depreciation and amortization expense of $19.3 million, $20.9 million and $25.6 million in 2013, 2012 and 2011, respectively, and noncash (gain) loss on derivatives of $(8.6) million, $(11.2) million and $11.9 million in 2013, 2012 and 2011, respectively.
Investing Activities
Net cash used in investing activities was $94.2 million in 2013 compared to $44.6 million in 2012 and $17.5 million in 2011. Cash used in investing activities increased by $49.6 million in 2013 from 2012 primarily due to an increase in capital expenditures due to certain major capital projects and the plant turnaround. Cash used in investing activities increased by $27.1 million in 2012 from 2011 primarily because of higher capital expenditures. Capital expenditures were made primarily for major capital projects, including an expansion of our rail yard, the construction of new ammonia and UAN storage tanks, an upgrade to a plant distribution control system and a complex wide electrical system upgrade. Additions to property, plant and equipment, and plant turnaround expenditures accounted for $99.6 million, $47.8 million and $15.0 million of cash used in investing activities in 2013, 2012 and 2011,
TERRA NITROGEN COMPANY, L.P.
respectively. See further discussion below regarding our capital expenditure program that is planned for 2014.
Financing Activities
Net cash used in financing activities was $457.2 million in 2013 compared to $558.3 million in 2012. The $101.1 million decrease in 2013 and a $109.6 million increase in cash used in financing activities in 2012 compared to 2011 were both due primarily to changes in distributions paid to unitholders. Distributions to our unitholders accounted for $465.2 million, $558.3 million and $448.7 million of cash used in financing activities in 2013, 2012 and 2011, respectively. The distributions paid are based on "Available Cash," as defined in our agreement of limited partnership. Cash used to fund capital expenditures is a reduction of Available Cash. See further discussion below regarding capital expenditure programs for 2014. For additional information on distributions, see "Partnership Distributions" below and Notes to the Consolidated Financial Statements, Note 4-Agreement of Limited Partnership, included herein.
Capital Expenditures
Capital expenditures totaled $99.6 million in 2013 compared to $47.8 million in 2012 because of a combination of sustaining capital projects and upgrades to certain machinery and equipment. 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.
In 2014, we expect to make capital expenditures in the range of $75 million to $125 million. Approximately one-half of the projected capital expenditures relate to sustaining projects and a 2014 turnaround. The remaining expenditures pertain 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 2014. Additionally, during the fourth quarter of 2014 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. Planned capital expenditures are subject to change due to delays in regulatory approvals and/or permitting, unanticipated increases in the 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. Increases in capital expenditures will reduce the Available Cash for unit holder distributions.
Services and Offtake Agreement
TNCLP and TNGP have no employees. CF Industries provides certain services to us under 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 CF Industries and the General Partner, see Notes to the Consolidated Financial Statements, Note 10-Related Party Transactions.
TERRA NITROGEN COMPANY, L.P.
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. We paid distributions of $465.2 million, $558.3 million and $448.7 million to our partners in 2013, 2012 and 2011, respectively.
We receive 99 percent of the Available Cash from the Operating Partnership and 1 percent 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 percent to Common and Class B common unitholders and 0.025 percent 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.
On February 10, 2014, we announced a $2.10 cash distribution per common unit, payable on February 28, 2014 to holders of record as of February 21, 2014. In the fourth quarter of 2013, we exceeded the cumulative MQD amounts and will distribute Available Cash as summarized in the following table:
The General Partner is required to remit the majority of cash distributions it receives from the Partnership, in excess of its 1 percent Partnership equity interest, to an affiliated company.
General Partner Option to Effect Mandatory Redemption of Partnership Units
At December 31, 2013, 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 December 31, 2013, 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.
TERRA NITROGEN COMPANY, L.P.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
We have operating leases that are off-balance sheet arrangements. Contractual obligations and commitments to make future payments were as follows at December 31, 2013:
(1)Includes minimum commitments to purchase natural gas based on prevailing Panhandle forward prices at December 31, 2013.
(2)Purchase obligations do not include any amounts related to our natural gas derivatives.
(3)We have unrecorded asset retirement obligations (AROs) at our Verdigris facility that are conditional upon cessation of operations and are not included in this table. The estimated cost of these AROs expressed in 2013 dollars is $5.9 million. We have not recorded a liability for these conditional AROs at December 31, 2013, because currently we do not believe there is a reasonable basis for estimating a date or range of dates of cessation of operations at this facility, which is necessary in order to estimate fair value. For additional information on our AROs, see Notes to the Consolidated Financial Statements, Note 11-Asset Retirement Obligations.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition, results of operations, liquidity and capital resources is based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles (GAAP). GAAP requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates. We base our estimates on historical experience, technological assessment, opinions of appropriate outside experts, and the most recent information available to us. Actual results may differ from these estimates. Changes in estimates that may have a material impact on our results are discussed in the context of the underlying financial statements to which they relate. The following discussion presents information about our most critical accounting policies and estimates.
Inventories
We review our inventory values at least quarterly, and more frequently if required by market conditions, to determine the carrying amount of inventories exceeds their net realizable value. This review process incorporates current industry and customer-specific trends, current operating plans, historical price activity, and selling prices expected to be realized. If the carrying amount of our inventories exceeds its estimated net realizable value, we immediately adjust our carrying values accordingly. Upon inventory liquidation, if the actual sales prices ultimately realized are less than our current estimate of net realizable value, additional losses will be recorded in the period of liquidation. Fixed production costs related to idle capacity are not included in the cost of inventories but are charged directly to cost of sales.
TERRA NITROGEN COMPANY, L.P.
Property, Plant and Equipment
Property, plant and equipment is stated at historical cost and depreciation is computed using the straight-line method over the lives of the assets. The lives used in computing depreciation expense are based on estimates of the period over which the assets will be of economic benefit to us. Estimated lives are based on historical experience, manufacturers' estimates, engineering or appraisal estimates and future business plans. We review the depreciable lives assigned to our property, plant and equipment on a periodic basis, and change our estimates to reflect the results of those reviews.
Scheduled inspections, replacements and overhauls of plant machinery and equipment at our continuous process manufacturing facility are referred to as plant turnarounds. Plant turnarounds are accounted for under the deferral method, as opposed to the direct expense or built-in overhaul methods. Under the deferral method, expenditures related to turnarounds are capitalized when incurred and amortized to production costs on a straight-line basis over the period benefited, which is until the next scheduled turnaround in up to 5 years. If the direct expense method were used, all turnaround costs would be expensed as incurred. Scheduled replacements and overhauls of plant and equipment include the dismantling, repair or replacement and installation of various components including piping, valves, motors, turbines, pumps, compressors, heat exchangers and the replacement of catalyst when a full plant shutdown occurs. Scheduled inspections are also conducted during full plant shutdowns, including required safety inspections which entail the disassembly of various components such as steam boilers, pressure vessels and other equipment requiring safety certifications. Internal employee costs and overhead are not considered turnaround costs and are not capitalized. Turnaround costs are classified as investing activities in the consolidated statements of cash flows.
Derivative Financial Instruments
Natural gas is the principal raw material used to produce nitrogen fertilizers. We use natural gas both as a chemical feedstock and as a fuel to produce ammonia and UAN. We manage the risk of changes in natural gas prices primarily through the use of derivative financial instruments. The derivative instruments that we currently use are fixed price swaps and options traded in over-the-counter markets. These derivatives reference NYMEX futures contract prices, which represent the basis for fair value at any given time. The derivatives are traded in months forward and settlements are scheduled to coincide with anticipated gas purchases during those future periods. We do not use derivatives for trading purposes and are not a party to any leveraged derivatives.
Derivatives are recognized in the consolidated balance sheet at fair value. Cash flows related to natural gas derivatives are reported as operating activities.
Asset Retirement Obligations
Asset retirement obligations (AROs) are legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal operation of such assets. AROs are recognized as liabilities when sufficient information exists to estimate fair value. We have unrecorded AROs at our Verdigris facility that are conditional upon cessation of operations. These AROs include certain decommissioning and pond closure activities as well as the removal and disposition of certain chemicals, waste materials, structures, equipment, vessels, piping and storage tanks. The estimated cost of these AROs expressed in 2013 dollars is $5.9 million. We have not recorded a liability for these conditional AROs at December 31, 2013, because currently we do not believe there is a reasonable basis for estimating a date or range of dates of cessation of operations at this facility, which is necessary in order to estimate fair value. In reaching this conclusion, we considered the historical performance of the facility and have taken into account factors such as
TERRA NITROGEN COMPANY, L.P.
planned maintenance, asset replacements and upgrades of plant and equipment, which if conducted as in the past, can extend the physical lives of the facility indefinitely. We also considered the possibility of changes in technology, risk of obsolescence, and availability of raw materials in arriving at our conclusion.
Recoverability of Long-Lived Assets
We review the carrying values of our property, plant and equipment and other long-lived assets in accordance with GAAP in order to assess recoverability. Factors that we must estimate when performing impairment tests include sales volume, selling prices, raw material costs, operating expenses, inflation, discount rates, exchange rates and capital spending. Significant judgment is involved in estimating each of these factors, which include inherent uncertainties. The factors we use are consistent with those used in our internal planning process. The recoverability of the values associated with our long-lived assets is dependent upon future operating performance of the specific businesses to which they are attributed. Certain of the operating assumptions are particularly sensitive to the cyclical nature of the fertilizer business. Adverse changes in demand for our products and the availability and costs of key raw materials could significantly affect the results of our review. The recoverability and impairment tests of long-lived assets are required only when conditions exist that indicate the carrying value may not be recoverable.
Revenue Recognition
The basic criteria necessary for revenue recognition are: 1) evidence that an arrangement exists, 2) delivery of goods has occurred, 3) the seller's price to the buyer is fixed or determinable, and 4) collectability is reasonably assured. We recognize revenue when these criteria have been met and when title and risk of loss have been transferred to an affiliate of the General Partner.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 3 of our audited consolidated financial statements included in this Form 10-K for a discussion of recent accounting pronouncements.
TERRA NITROGEN COMPANY, L.P.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Management and Financial Instruments
We are exposed to the impact of changes in the price of natural gas which we use in the manufacture of our nitrogen fertilizer products. Because natural gas prices are volatile, we manage the risk of changes in natural gas prices through the use of derivative financial instruments.
The derivative instruments that we currently use are fixed price swaps and options traded in over-the-counter markets. These contracts settle using NYMEX futures prices, which represent the basis for fair value at any given time. The derivatives are traded in months forward and settlements are scheduled to coincide with anticipated natural gas purchases during those future periods.
As of December 31, 2013 and 2012, we had open derivative contracts for 13.2 million MMBtus and 9.9 million MMBtus, respectively, of natural gas. A $1.00 per MMBtu increase in the forward curve prices of natural gas would change the unrealized mark-to-market gain/loss on our December 31, 2013 derivative positions by $10.4 million, and a $1.00 per MMBtu decrease would change the unrealized mark-to-market gain/loss by $10.4 million.
TERRA NITROGEN COMPANY, L.P.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Partners of Terra Nitrogen Company, L.P.
We have audited the accompanying consolidated balance sheets of Terra Nitrogen Company, L.P. (a Limited Partnership) (the Partnership) as of December 31, 2013 and 2012, and the related consolidated statements of operations, partners' capital, and cash flows for each of the years in the three-year period ended December 31, 2013. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Terra Nitrogen Company, L.P. as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Terra Nitrogen Company, L.P.'s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 27, 2014 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
/s/ KPMG LLP
Chicago, Illinois
February 27, 2014
TERRA NITROGEN COMPANY, L.P.
Consolidated Balance Sheets
See accompanying Notes to the Consolidated Financial Statements
TERRA NITROGEN COMPANY, L.P.
Consolidated Statements of Operations
See accompanying Notes to the Consolidated Financial Statements
TERRA NITROGEN COMPANY, L.P.
Consolidated Statements of Partners' Capital
See accompanying Notes to the Consolidated Financial Statements
TERRA NITROGEN COMPANY, L.P.
Consolidated Statements of Cash Flows
See accompanying Notes to the Consolidated Financial Statements
TERRA NITROGEN COMPANY, L.P.
Notes to the Consolidated Financial Statements
1. Background and Basis of Presentation
Terra Nitrogen Company, L.P. (TNCLP, we, our or us) 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.
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 percent 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. Ownership of TNCLP is comprised of the General Partner interests and the Limited Partner interests. Limited Partner interests consist of common units, which are listed for trading on the New York Stock Exchange under the symbol "TNH" and Class B common units. As of December 31, 2013, we had 18,501,576 common units and 184,072 Class B common units issued and outstanding. CF Industries through its subsidiaries owned 13,889,014 common units (representing approximately 75% of the total outstanding common units) and all of the Class B common units as of December 31, 2013.
Throughout this document, the terms "General Partner Affiliates," "Affiliates of the General Partner" or similar terms refer to CF Industries and consolidated subsidiaries of CF Industries, including TNGP. CF Industries acquired Terra Industries, Inc. (Terra) in April 2010, and acquired the General Partner and Terra's ownership in the Partnership at that time.
In our Consolidated Balance Sheet as of December 31, 2012, we have reclassified certain balances related to catalysts used in our manufacturing process which previously had been presented in "Inventories" to "Property, plant and equipment, net" to be consistent with the current year's presentation. The total amount reclassified from "Inventories" as of December 31, 2012 was $11.1 million. As a result of this reclassification, we have also reclassified certain amounts on our Consolidated Statement of Cash Flows for the years ended 2012 and 2011, among "Depreciation and amortization" and "Inventories" in operating activities and "Additions to property, plant and equipment, net" in investing activities. The net reclassification between operating and investing activities for the years ended December 31, 2012 and 2011 was $1.1 million and $6.3 million, respectively.
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP).
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements of TNCLP and the accompanying notes include the accounts of the Partnership. All intercompany transactions and balances have been eliminated. Income is allocated to the General Partner and the limited partners in accordance with the provisions of the TNCLP agreement of limited partnership that provides for allocations of income between the limited partners and the General Partner in the same proportion as cash distributions declared during the year.
TERRA NITROGEN COMPANY, L.P.
Revenue Recognition
The basic criteria necessary for revenue recognition are: 1) evidence that a sales arrangement exists, 2) delivery of goods has occurred, 3) the seller's price to the buyer is fixed or determinable, and 4) collectability is reasonably assured. The title and risk of loss passes to an affiliate of the General Partner as the product is shipped from the plant gate. We recognize revenue when these criteria have been met and when title and risk of loss have been transferred to an affiliate of the General Partner.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less. The carrying value of cash and cash equivalents approximates fair value.
Due to/from Affiliates of General Partner
We receive cash and make expenditures directly from our cash accounts. 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 debtors and creditors to us.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at face amounts less an allowance for doubtful accounts. The allowance is an estimate based on historical collection experience, current economic and market conditions, and a review of the current status of each customer's trade accounts receivable. A receivable is past due if payments have not been received within the agreed upon invoice terms. Account balances are charged-off against the allowance when management determines that it is probable the receivable will not be recovered.
Inventories, net
Fertilizer inventories are reported at the lower of cost or net realizable value and are determined on a first-in, first-out or average cost basis. Inventories include the cost of materials, production labor and production overhead. Net realizable value is reviewed quarterly. Fixed production costs related to idle capacity are not included in the cost of inventories but are charged directly to cost of sales.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method. Depreciable lives range from 10 to 45 years for buildings and 10 to 30 years for production facilities and related assets. We periodically review the depreciable lives assigned to production facilities and related assets and we change the estimates to reflect the results of those reviews.
Scheduled inspections, replacements and overhauls of plant machinery and equipment at our continuous process manufacturing facility are referred to as plant turnarounds. Plant turnarounds are accounted for under the deferral method, as opposed to the direct expense or built-in overhaul methods. Under the deferral method, expenditures related to turnarounds are capitalized when incurred and amortized to production costs on a straight-line basis over the period benefited, which is until the next scheduled turnaround in up to 5 years. If the direct expense method were used, all turnaround costs would be expensed as incurred. Internal employee costs and overhead amounts are not considered turnaround costs and are not capitalized. Turnaround costs are classified as investing
TERRA NITROGEN COMPANY, L.P.
activities in the consolidated statements of cash flows. For additional information, see Note 9-Property, Plant and Equipment, Net.
Recoverability of Long-Lived Assets
We review property, plant and equipment and other long-lived assets in order to assess recoverability based on expected future undiscounted cash flows whenever events or circumstances indicate that the carrying value may not be recoverable. If the sum of the expected future net cash flows is less than the carrying value, an impairment loss is recognized. The impairment loss is measured as the amount by which the carrying value exceeds the fair value of the asset.
Leases
Leases are classified as either operating leases or capital leases. Assets acquired under capital leases are depreciated on the same basis as property, plant and equipment. We currently do not have any capital leases. Rental payments, including rent holidays, leasehold incentives, and scheduled rent increases are expensed on a straight-line basis. Leasehold improvements are amortized over the shorter of the depreciable lives of the corresponding fixed assets or the lease term including any applicable renewals.
Income Taxes
As a partnership, we are not subject to income taxes. The income tax liability of the individual partners is not reflected in our consolidated financial statements.
Derivative Financial Instruments
Natural gas is the principal raw material used to produce nitrogen fertilizers. We use natural gas both as a chemical feedstock and as a fuel to produce ammonia and UAN. We manage the risk of changes in natural gas prices primarily through the use of derivative financial instruments. The derivative instruments that we currently use are fixed price swaps and options traded in over-the-counter markets. These derivatives reference NYMEX futures contract prices, which represent the basis for fair value at any given time. The derivatives are traded in months forward and settlements are scheduled to coincide with anticipated gas purchases during those future periods. We do not use derivatives for trading purposes and are not a party to any leveraged derivatives.
Derivatives are recognized on the consolidated balance sheet at fair value. Cash flows related to natural gas derivatives are reported as operating activities.
Asset Retirement Obligations
Asset retirement obligations (AROs) are legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal operation of such assets. AROs are initially recognized as liabilities as incurred when sufficient information exists to estimate fair value. When initially recognized, the fair value based on discounted future cash flows is recorded both as a liability and an increase in the carrying amount of the related long-lived asset. In subsequent periods, depreciation of the asset and accretion of the liability are recorded. For additional information on AROs, see Note 11-Asset Retirement Obligations.
TERRA NITROGEN COMPANY, L.P.
Environmental
Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations are expensed. Expenditures that increase the capacity or extend the useful life of an asset, improve the safety or efficiency of the operations, or mitigate or prevent future environmental contamination are capitalized. Liabilities are recorded when it is probable that a liability has been incurred and the costs can be reasonably estimated. Environmental liabilities are not discounted.
Litigation
From time to time, the Partnership is subject to ordinary, routine legal proceedings related to the usual conduct of its business. The Partnership also is involved in legal proceedings regarding public utility and transportation rates, environmental matters, taxes and permits relating to the operations of its plant and facilities. Accruals for such contingencies are recorded to the extent management concludes their occurrence is probable and the financial impact of an adverse outcome is reasonably estimable. Disclosure for specific legal contingencies is provided if the likelihood of occurrence is at least reasonably possible and the exposure is considered material to the consolidated financial statements. In making determinations of likely outcomes of litigation matters, many factors are considered. These factors include, but are not limited to, past history, scientific and other evidence, and the specifics and status of each matter. If the assessment of various factors changes, the estimates may change. Predicting the outcome of claims and litigation, and estimating related costs and exposure involves substantial uncertainties that could cause actual costs to vary materially from estimates and accruals.
3. New Accounting Standards
Following are summaries of accounting pronouncements that either were adopted recently or may become applicable to our consolidated financial statements. It should be noted that the accounting standards references provided below reflect the FASB Accounting Standards Codification, and related Accounting Standards Updates (ASU).
Recently Adopted Pronouncements
In December 2011, the FASB issued a standard pertaining to disclosures about offsetting assets and liabilities (ASU No. 2011-11). This standard requires an entity to disclose information about offsetting and related arrangements, including financial instruments and derivative instruments, and the effect these arrangements have on the entity's financial position. In January 2013, the FASB issued an amendment to ASU No. 2011-11 (ASU No. 2013-01) clarifying that its scope applies to derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. These standards were effective for disclosures in interim and annual reporting periods beginning on or after January 1, 2013. We adopted this standard in the first quarter of 2013 and its adoption did not have a significant impact on our consolidated financial statements.
4. Agreement of Limited Partnership
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
TERRA NITROGEN COMPANY, L.P.
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. We paid distributions of $465.2 million, $558.3 million and $448.7 million to our partners in 2013, 2012 and 2011, respectively.
We receive 99 percent of the Available Cash from the Operating Partnership and 1 percent 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 percent to common and Class B common unitholders and 0.025 percent 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.
On February 10, 2014, we announced a $2.10 cash distribution per common unit, payable on February 28, 2014 to holders of record as of February 21, 2014. In the fourth quarter of 2013, we exceeded the cumulative MQD amounts and will distribute Available Cash as summarized in the following table:
The General Partner is required to remit the majority of cash distributions it receives from the Partnership, in excess of its 1 percent Partnership equity interest, to an affiliated company.
The quarterly cash distributions paid to the unitholders and the General Partner in 2013 and 2012 follow:
TERRA NITROGEN COMPANY, L.P.
At December 31, 2013, the General Partner and its affiliates owned 75.3% of our outstanding units. When not more than 25% of our issued and outstanding units are held by non-affiliates of the General Partner, 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.
5. Net Earnings per Common Unit
Net earnings per common unit is based on the weighted-average number of common units outstanding during the period. The following table provides a calculation for net earnings per common unit for the years ended December 31, 2013, 2012 and 2011:
There were no dilutive TNCLP units outstanding for the years ended December 31, 2013, 2012 and 2011.
6. Inventories, net
Inventories, net consisted of the following:
7. Derivative Financial Instruments
We purchase natural gas at market prices to meet production requirements at our manufacturing facility. Natural gas market prices are volatile, and we hedge a portion of our natural gas requirements through the use of financial derivative contracts that reference physical natural gas prices or approximate NYMEX futures contract prices. The derivatives that we currently use are natural gas swaps and options. The contract prices are based on prices at the Henry Hub in Louisiana, the most common and financially liquid location of reference for financial derivatives related to natural gas.
TERRA NITROGEN COMPANY, L.P.
However, we purchase natural gas for our manufacturing facility at locations other than Henry Hub, which 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 changes in the market price of physical gas. The contracts are traded in months forward and settlement dates are scheduled to coincide with gas purchases during those future periods.
We report derivatives on our consolidated balance sheet at fair value. The gross fair values at December 31, 2013 and 2012 are shown below. All balance sheet amounts from derivatives arose from commodity derivatives that are not designated as hedging instruments. For additional information on derivative fair values, see Note 8-Fair Value Measurements.
The effect of derivatives in our consolidated statements of operations is shown below. All amounts arise from natural gas derivatives that are not designated as hedging instruments and are recorded in cost of goods sold.
As of December 31, 2013 and 2012, we had open derivative contracts for 13.2 million MMBtus and 9.9 million MMBtus, respectively, of natural gas. For the year ended December 31, 2013, we used derivatives to cover approximately 91% of our natural gas consumption.
The counterparties to our derivatives are large financial institutions and large oil and gas companies. The derivatives are executed with several counterparties, generally under International Swaps and Derivatives Association (ISDA) agreements. The ISDA agreements are master netting arrangements commonly used for over-the-counter (OTC) derivatives that mitigate exposure to counterparty credit risk, in part, by creating contractual rights of netting and setoff, the specifics of which vary from agreement to agreement. These rights are described further below:
•Settlement netting generally allows the parties to net, into a single net payable or receivable, ordinary settlement obligations arising under the ISDA agreement on the same day, in the same currency, for the same types of derivative instruments, and through the same pairing of offices.
•Close-out netting rights are provided in the event of a default or other termination event (as defined in the ISDA agreements), including bankruptcy. Depending on the cause of early termination, the non-defaulting party may elect to accelerate and terminate all or some transactions outstanding under the ISDA agreement. The values of all terminated transactions and certain other payments under the ISDA agreement are netted, resulting in a single net close-out amount payable to or by the non-defaulting party. Termination values may be determined using a mark-to-market approach or based on a party's good faith estimate of its
TERRA NITROGEN COMPANY, L.P.
loss. If the final net close-out amount is payable by the non-defaulting party, that party's obligation to make the payment may be conditioned on factors such as the termination of all derivative transactions between the parties or payment in full of all of the defaulting party's obligations to the non-defaulting party, in each case regardless of whether arising under the ISDA agreement or otherwise.
•Setoff rights are provided by certain of the ISDA agreements and generally allow a non-defaulting party to elect to setoff, against the final net close-out payment, other matured and contingent amounts payable between the parties under the ISDA agreement or otherwise. Typically, these setoff rights arise upon the early termination of all transactions outstanding under an ISDA agreement following a default or specified termination event.
Most of the ISDA agreements contain credit risk related contingent features with sliding-scale credit support thresholds that are dependent upon credit ratings assigned to certain debt of the General Partner affiliate by certain credit rating agencies. Downgrades in the credit ratings would cause the applicable threshold levels to decrease and improvements in those ratings could cause the threshold levels to increase. If our net liability positions exceed the threshold amounts, the counterparties could require cash collateral, some other form of credit support or daily cash settlement of unrealized losses. As of December 31, 2013 and 2012, the aggregate fair values of the derivative instruments with credit-risk-related contingent features in a net liability position were zero and $0.8 million, respectively, which also approximates the fair value of the maximum amount of additional collateral that would need to be posted or assets needed to settle the obligations if the credit-risk-related contingent features were triggered at the reporting dates. At December 31, 2013 and 2012, we had no cash collateral on deposit for derivative contracts. The credit support documents executed in connection with ISDA agreements generally provide the right to setoff collateral against amounts owing under the ISDA agreements upon the occurrence of a default or a specified termination event.
The following table presents amounts relevant to offsetting of our derivative assets and liabilities as of December 31, 2013 and 2012.
(1)We report the fair values of our derivative assets and liabilities on a gross basis on our consolidated balance sheet. As a result, amounts recognized and net amounts presented are the same.
TERRA NITROGEN COMPANY, L.P.
8. Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents assets and liabilities included on our Consolidated Balance Sheets that are recognized at fair value on a recurring basis, and indicates the fair value hierarchy utilized to determine such fair value as of December 31, 2013 and 2012.
Following is a summary of the valuation techniques for assets and liabilities recorded in our Consolidated Balance Sheets at fair value on a recurring basis:
Cash and Cash Equivalents
As of December 31, 2013 and 2012, our cash and cash equivalents consisted primarily of U.S. Treasury Bills with original maturities of three months or less and money market mutual funds that invest in U.S. government obligations.
Natural Gas Derivatives
The derivative instruments that we use are primarily natural gas fixed price swaps and call options traded in the over-the-counter markets with either large oil and gas companies or large financial institutions. The derivatives are traded in months forward and settlements are scheduled to coincide with anticipated gas purchases during those future periods. These contracts settle using NYMEX futures prices and accordingly, to determine the fair value of these instruments, we use quoted market prices from NYMEX and standard pricing models with inputs derived from or corroborated by observable market data such as forward curves supplied by an industry recognized unrelated third party. See Note 7-Derivative Financial Instruments for additional information.
TERRA NITROGEN COMPANY, L.P.
9. Property, Plant and Equipment, Net
Property, plant and equipment, net consisted of the following:
Plant turnarounds-Scheduled inspections, replacements and overhauls of plant machinery and equipment at our continuous process manufacturing facility are referred to as plant turnarounds. The expenditures related to turnarounds are capitalized when incurred and are included in the line "Plant and equipment" in the table above. The following is a summary of plant turnaround activity for the years ended December 31, 2013 and 2012.
Scheduled replacements and overhauls of plant and equipment include the dismantling, repair or replacement and installation of various components including piping, valves, motors, turbines, pumps, compressors, heat exchangers and the replacement of catalyst when a full plant shutdown occurs. Scheduled inspections are also conducted during full plant shutdowns, including required safety inspections which entail the disassembly of various components such as steam boilers, pressure vessels and other equipment requiring safety certifications. Internal employee costs and overhead are not considered turnaround costs and are not capitalized.
10. Related Party Transactions
TNCLP and TNGP have no employees. We have entered into several agreements with a subsidiary of CF Industries relating to the operation of our business and the sale of the fertilizer products produced at our Verdigris facility. We believe that each of these agreements is on terms that are fair and reasonable to us.
General Administrative Services and Product Offtake Agreement
Pursuant to the Amendment to the General and Administrative Services and Product Offtake Agreement (the Services and Offtake Agreement), the Partnership sells all of its fertilizer products to
TERRA NITROGEN COMPANY, L.P.
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. When the product offtake component of the Services and Offtake Agreement became effective on January 1, 2011, we recognized revenue of $15.3 million from the sale of product inventory outside the plant gate to an affiliate of the General Partner. The Services and Offtake Agreement was effective for a one-year term starting as of January 1, 2011 and is extended automatically for successive one-year terms unless terminated by one of the parties prior to renewal.
Directly Incurred Charges
Since we have no employees, we rely on employees from an affiliate of the General Partner to operate our Verdigris facility. As a result, the payroll, payroll-related expenses and benefits, such as health insurance and pension, incurred by an affiliate of the General Partner, are directly charged to us. Payroll, payroll-related expenses and other employee related benefits directly charged to us were $24.7 million, $21.9 million and $20.6 million, for the years ended December 31, 2013, 2012 and 2011, respectively. We report these expenses as services provided by the General Partner and Affiliates in cost of goods sold.
Allocated Charges
CF Industries, together with its affiliates, also provides certain services to us under the Services and Offtake Agreement. These services include production planning, manufacturing management, logistics, accounting, legal, risk management, investor relations and other general and administrative functions. Allocated expenses charged to us for the years ended December 31, 2013, 2012 and 2011 were $15.3 million, $15.0 million and $14.5 million, respectively. We report these expenses as selling, general and administrative services provided by the affiliates of the General Partner.
Demand Deposits with and Amounts Due to/from Affiliates of the General Partner
Prior to January 1, 2013, our cash was collected and our expenditures were made by an affiliate of the General Partner. Cash receipts, net of cash payments made on our behalf were transferred to us weekly. Because of this cash collection and disbursement arrangement, an affiliate of the General Partner was both a debtor and creditor to us. At December 31, 2012, we had a demand deposit balance with CF Industries of $5.4 million.
Effective January 1, 2013, we receive cash and make expenditures directly from our cash accounts. 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 debtors and creditors to us. At December 31, 2013, we had a net balance due from affiliates of the General Partner of $25.3 million.
Spare Parts Sharing Agreement
Affiliates of CF Industries own and operate nitrogen fertilizer complexes that utilize some equipment that is similar to equipment at our Verdigris Nitrogen Complex. Each of the various manufacturing complexes maintain spare parts for use in their facilities. In the event that an unplanned need arises and to help prevent manufacturing downtime, we have entered into a spare parts sharing agreement that permits spare parts to be shared among the manufacturing complexes from time to time. Parts that are borrowed from another complex under the agreement are either refurbished and returned to the lender or replaced.
TERRA NITROGEN COMPANY, L.P.
Leases
Effective January 1, 2011, we leased our two terminals (one located near Blair, Nebraska, and the other located near Pekin, Illinois) to an affiliate of the General Partner for a base quarterly rent of $109,000 and additional rent equal to all costs, expenses, and obligations incurred by such affiliate of the General Partner related to the use, occupancy and operation of the facilities. The Pekin terminal stored UAN and the Blair terminal stores both ammonia and UAN. The UAN storage tanks at both Pekin and Blair were taken out of service during 2011. This lease expired on December 31, 2012.
Effective January 1, 2013, we entered into an amended and restated lease with an affiliate of the General Partner under which the ammonia assets at our Blair terminal are leased by the affiliate. The lease is effective for a five-year term starting on January 1, 2013, and an affiliate of the General Partner has three options to renew for additional five-year terms. The quarterly lease payment is $100,000, subject to an annual inflation adjustment, and additional rent will be paid equal to all costs, expenses, and obligations incurred by the affiliate of the General Partner related to the use, occupancy and operation of the facilities.
Since January 1, 2011, we have leased certain of our rail cars to an affiliate of the General Partner for quarterly market-based rental payments of $3,600 per car. This lease also was effective initially for a one-year term and is extended automatically for successive one-year terms unless terminated by either party thereto prior to renewal.
We received rental income for the years ended December 31, 2013, 2012 and 2011 of $0.6 million.
11. Asset Retirement Obligations
AROs are legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal operation of such assets. AROs are recognized as liabilities when sufficient information exists to estimate fair value. We have unrecorded AROs at our Verdigris facility that are conditional upon cessation of operations. These AROs include certain decommissioning and pond closure activities, and the removal and disposition of certain chemicals, waste materials, structures, equipment, vessels, piping, and storage tanks. The estimated cost of these AROs expressed in 2013 dollars is $5.9 million. We have not recorded a liability for these conditional AROs at December 31, 2013, because currently we do not believe there is a reasonable basis for estimating a date or range of dates of cessation of operations at this facility, which is necessary in order to estimate fair value. In reaching this conclusion, we considered the historical performance of the facility and have taken into account factors such as planned maintenance, asset replacements and upgrades of plant and equipment, which if conducted as in the past, can extend the physical lives of the facility indefinitely. We also considered the possibility of changes in technology, risk of obsolescence, and availability of raw materials in arriving at our conclusion.
12. Commitments
The Operating Partnership is committed to various non-cancelable operating leases for land, buildings and equipment. Total minimum rental payments for operating leases are insignificant for 2014.
Rent expense under non-cancelable operating leases for years ended December 31, 2013, 2012 and 2011 was insignificant.
As of December 31, 2013, we had commitments of approximately $53.4 million related to firm quantities of gas and open purchase orders. The natural gas commitments are based on a firm quantity of natural gas at market prices. These natural gas commitments are priced at the beginning of the
TERRA NITROGEN COMPANY, L.P.
month of the scheduled activity. We have the option to receive and use the natural gas in our manufacturing operations or we can sell the committed natural gas at current market prices, which may be different than the price that we pay for the natural gas.
13. Quarterly Financial Data (Unaudited)
Summarized quarterly financial data are as follows:
TERRA NITROGEN COMPANY, L.P.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures. TNGP's management, with the participation of TNGP's Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the Partnership's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, TNGP's Principal Executive Officer and Principal Financial Officer have concluded that, as of the end of such period, the Partnership's disclosure controls and procedures are effective in (i) recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Partnership in the reports that it files or submits under the Exchange Act and (ii) ensuring that information required to be disclosed by the Partnership in the reports that it files or submits under the Exchange Act is accumulated and communicated to TNGP's management, including TNGP's Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management's Report on Internal Control over Financial Reporting
TNGP's management is responsible for establishing and maintaining adequate internal control over the Partnership's financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Under the supervision and with the participation of TNGP's senior management, including TNGP's Principal Executive Officer and Principal Financial Officer, we assessed the effectiveness of our internal control over financial reporting as of December 31, 2013, using the criteria set forth in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 1992. Based on this assessment, management has concluded that our internal control over financial reporting is effective as of December 31, 2013. KPMG LLP, the independent registered public accounting firm that audited the Partnership's consolidated financial statements, has issued an attestation report on the Partnership's internal control over financial reporting as of December 31, 2013, a copy of which appears on the following page.
(b) Internal Control over Financial Reporting. There have not been any changes in the Partnership's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, the Partnership's internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None
TERRA NITROGEN COMPANY, L.P.
Report of Independent Registered Public Accounting Firm
The Partners of Terra Nitrogen Company, L.P.
We have audited Terra Nitrogen Company, L.P.'s (a Limited Partnership) (the Partnership) internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Partnership's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Partnership's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Terra Nitrogen Company, L.P. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Terra Nitrogen Company, L.P. as of December 31, 2013 and 2012, and the related consolidated statements of operations, partners' capital, and cash flows for each of the years in the three-year period ended December 31, 2013, and our report dated February 27, 2014 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Chicago, Illinois
February 27, 2014
TERRA NITROGEN COMPANY, L.P.
Part III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The General Partner acts as the manager of TNCLP and the Operating Partnership. Unitholders do not direct or participate in the management or control of either TNCLP or the Operating Partnership. The General Partner does not intend to establish an advisory board or similar body to which the unitholders would be entitled to elect representatives.
We have no directors or executive officers. Set forth below is certain information concerning the directors and executive officers of TNGP, the General Partner. The sole stockholder of the General Partner elects the directors of the General Partner. All directors hold office until their successors are duly elected and qualified or their resignation or removal. All officers of the General Partner serve at the discretion of the directors.
The board's independence determination described below under the headings "Audit Committee" and "Nominating and Corporate Governance Committee" and "Corporate Governance Matters" was based on information provided by the General Partner's directors and discussions among the General Partner's officers and directors. The Nominating and Corporate Governance Committee reviews and designates director-nominees in accordance with the policies and principles of its charter and the Corporate Governance Guidelines.
Directors
W. Anthony Will
(age 48)
Mr. Will has been a director of TNGP since June 2010 and Chairman of the Board of TNGP since January 2014. He has served as President and Chief Executive Officer and a director of CF Industries since January 2014. He was previously CF Industries' senior vice president, manufacturing and distribution, from January 2012 to January 2014, CF Industries' vice president, manufacturing and distribution, from March 2009 to December 2011 and CF Industries' vice president, corporate development, from April 2007 to March 2009. Before joining CF Industries, Mr. Will was a partner at Accenture Ltd., a global management consulting, technology services, and outsourcing company. Earlier in his career, he held positions as vice president, business development at Sears, Roebuck and Company and vice president, strategy and corporate development at Fort James Corporation. Prior to that, Mr. Will was a manager with the Boston Consulting Group, a global management consulting firm. Mr. Will holds a B.S. degree in electrical engineering from Iowa State University and an M.M. degree (M.B.A.) from the Kellogg Graduate School of Management at Northwestern University. The Board of Directors selected Mr. Will as a director, among other reasons, because of his knowledge of the nitrogen fertilizer industry and his extensive experience in fertilizer manufacturing and distribution.
TERRA NITROGEN COMPANY, L.P.
Coleman L. Bailey
(age 63)
Mr. Bailey has been a director of TNGP (or its predecessor TNC) since July 2005. He was Chairman of the Board of Mississippi Chemical Corporation from 1988 to 2004 and Chief Executive Officer of Mississippi Chemical Corporation in 2004. On May 15, 2003, Mississippi Chemical Corporation filed a voluntary petition in the United States Bankruptcy Court for the Southern District of Mississippi seeking reorganization relief under the provisions of Chapter 11 of the United States Bankruptcy Code. The Board of Directors selected Mr. Bailey as a director, among other reasons, because of the extensive industry experience he gained while serving as the Chief Executive Officer and Chairman of the Board of Directors of Mississippi Chemical Corporation, a company which was acquired by Terra in 2004, and because of his extensive agricultural industry experience.
Douglas C. Barnard
(age 55)
Mr. Barnard has been a director of TNGP since June 2010. He has served as CF Industries' Senior Vice President, General Counsel and Secretary since January 2012 and was previously CF Industries' Vice President, General Counsel, and Secretary from January 2004 to December 2011. Prior to joining CF Industries in January 2004, Mr. Barnard had been an Executive Vice President and General Counsel of Bcom3 Group, Inc., an advertising and marketing communication services group. Earlier in his career Mr. Barnard was a partner in the law firm of Kirkland and Ellis and, prior to that, a Vice President, General Counsel, and Secretary of LifeStyle Furnishings International Ltd., a manufacturer and distributor of residential furniture and decorative fabrics. He holds a B.S. degree from the Massachusetts Institute of Technology, a J.D. degree from the University of Minnesota, and an M.B.A. degree from the University of Chicago. The Board of Directors selected Mr. Barnard as a director, among other reasons, because of his knowledge of the nitrogen fertilizer industry, his extensive legal and corporate governance experience, and his expertise with public company reporting..
TERRA NITROGEN COMPANY, L.P.
Richard A. Hoker
(age 49)
Mr. Hoker has been a director of TNGP since January 2014. He previously served as a director of TNGP from September 2010 until August 2011. Mr. Hoker has served as CF Industries' Vice President and Corporate Controller since November 2007. Before joining CF Industries, Mr. Hoker spent over 11 years with Sara Lee Corporation, where he served most recently as Vice President and Controller from January 2007 to November 2007 and Principal Accounting Officer from July 2007 to November 2007. Prior to being named Controller, Mr. Hoker held other financial management positions of increasing responsibility at Sara Lee. Prior to joining Sara Lee, Mr. Hoker was a member of the financial advisory services consulting group at Coopers & Lybrand LLP in Chicago (now PricewaterhouseCoopers) and previously led teams in the firm's audit practice. Mr. Hoker holds a B.S. degree in accounting from DePaul University and an M.B.A. degree in finance and accounting from the University of Chicago. He is also a certified public accountant. The Board of Directors selected Mr. Hoker as a director, among other reasons, because of his knowledge of the nitrogen fertilizer industry, his expertise with public company financial reporting and his extensive financial and accounting expertise.
Dennis P. Kelleher
(age 50)
Mr. Kelleher has been a director of TNGP since August 2011. He has served as CF Industries' Senior Vice President and Chief Financial Officer since August 2011. Before joining CF Industries, Mr. Kelleher served as Vice President, Portfolio Strategy for BP PLC's upstream business. From 2007 to 2010, Mr. Kelleher served as Chief Financial Officer for Pan American Energy LLC. From 2005 to 2007, Mr. Kelleher served as Vice President, Planning and Performance Management for BP PLC's upstream business. Mr. Kelleher was employed as a senior accountant at Arthur Andersen & Co. early in his career. He holds a B.S. degree in accountancy from the University of Illinois and an M.M. degree (M.B.A.) from the Kellogg Graduate School of Management at Northwestern University. He is a certified public accountant. The Board of Directors selected Mr. Kelleher as a director, among other reasons, because of his knowledge of the nitrogen fertilizer industry and his extensive financial and accounting expertise.
TERRA NITROGEN COMPANY, L.P.
Michael A. Jackson
(age 59)
Mr. Jackson has been a director of TNGP (or its predecessor TNC) since February 2002. He has served as Chief Marketing and Strategy Officer of Trupointe Cooperative since September 2011. Prior to joining Trupointe Cooperative, Mr. Jackson served as the Chief Executive Officer and President of Adayana, Inc. from April 2008 to May 2011 and served as Chief Operating Officer of Adayana, Inc. from February 2006 to April 2008. Mr. Jackson was Chief Executive Officer and President of Agri Business Group, Inc., which he founded in 1979, until its merger with Adayana, Inc. in October 2005. The Board of Directors selected Mr. Jackson as a director, among other reasons, because of his extensive knowledge of and experience in the agricultural industry, gained while serving as the Chief Marketing and Strategy Officer of Trupointe Cooperative and as President and Chief Executive Officer of Agri Business Group, Inc. and Adayana, Inc. Mr. Jackson is also a director of Renewable Energy Group, Inc.
Anne H. Lloyd
(age 52)
Ms. Lloyd has been a director of TNGP since May 2009. She has been Executive Vice President, Chief Financial Officer of Martin Marietta Materials, Inc. since May 2013; Excutive Vice President, Chief Financial Officer and Treasurer from 2009 to 2013; Senior Vice President, Chief Financial Officer and Treasurer from 2006 to 2009; Senior Vice President and Chief Financial Officer from 2005 to 2006; Chief Accounting Officer from 1999 to 2005; and Vice President and Controller from 1998 to 1999. The Board of Directors selected Ms. Lloyd as a director, among other reasons, because of her significant experience gained in a variety of positions with a public company, particularly her expertise with public company financial reporting, enabling her to qualify as an "audit committee financial expert" as that term has been defined by the SEC.
TERRA NITROGEN COMPANY, L.P.
TERRA NITROGEN COMPANY, L.P.
Douglas C. Barnard
(age 55)
Mr. Barnard has been Senior Vice President, General Counsel, and Secretary of TNGP since January 2012 and was previously Vice President, General Counsel, and Secretary of TNGP from April 2010 to January 2012. He has served as Senior Vice President, General Counsel and Secretary since January 2012 and was previously CF Industries' Vice President, General Counsel, and Secretary from January 2004 to December 2011. Prior to joining CF Industries in January 2004, Mr. Barnard had been an Executive Vice President and General Counsel of Bcom3 Group, Inc., an advertising and marketing communication services group. Earlier in his career, Mr. Barnard was a partner in the law firm of Kirkland and Ellis and, prior to that, a was Vice President, General Counsel, and Secretary of LifeStyle Furnishings International Ltd., a manufacturer and distributor of residential furniture and decorative fabrics. He holds a B.S. degree from the Massachusetts Institute of Technology, a J.D. degree from the University of Minnesota, and an M.B.A. degree from the University of Chicago.
Christopher D. Bohn
(age 46)
Mr. Bohn has been Vice President, Supply Chain, of TNGP since January 2014 and was previously Vice President, Corporate Planning, of TNGP from October 2010 to January 2014. He has served as CF Industries' Vice President, Supply Chain, since January 2014 and was previously CF Industries' Vice President, Corporate Planning, from October 2010 to January 2014 and CF Industries' Director, Corporate Planning and Analysis, from September 2009 to October 2010. Prior to joining CF Industries, Mr. Bohn served as chief financial officer for Hess Print Solutions from August 2007 to September 2009. Earlier in his career, Mr. Bohn was vice president global financial planning and analysis for Merisant Worldwide, Inc. He holds a B.S. degree in finance from Indiana University and an M.M. degree (M.B.A.) from the Kellogg Graduate School of Management at Northwestern University
TERRA NITROGEN COMPANY, L.P.
Bert A. Frost
(age 49)
Mr. Frost has been Senior Vice President, Sales and Market Development of TNGP since January 2012 and was previously Vice President, Sales and Market Development of TNGP from April 2010 to January 2012. He has served as CF Industries' Senior Vice President, Sales and Market Development since January 2012 and was previously CF Industries' Vice President, Sales and Market Development from January 2009 to December 2011. Before joining CF Industries in November 2008, Mr. Frost spent over 13 years with Archer Daniels Midland Company, where he served most recently as Managing Director-International Fertilizer/Inputs from June 2008 to November 2008 and Director-Fertilizer, Logistics and Ports Divisions, ADM-Brazil from April 2000 to June 2008. Earlier in his career, Mr. Frost held positions of increasing responsibility at Archer Daniels Midland and Koch Industries, Inc. He holds a B.S. degree from Kansas State University and is a graduate of Harvard Business School's Advance Management Program.
Adam Hall
(age 39)
Mr. Hall has been Vice President, Corporate Development, of TNGP since June 2013. He has also served as CF Industries' Vice President, Corporate Development, since June 2013. Before joining CF Industries, Mr. Hall spent 4 years with Bunge Limited, where he served as executive director, corporate strategy and development, from August 2010 to May 2013, where he led global strategy, mergers and acquisitions and the development of new growth initiatives, and director of global strategy and business development, sugar and bioenergy, from August 2009 to August 2010. Prior to his most recent role with Bunge, he worked in a number of countries in positions with several international companies, including, as a manager at Bain & Company, a global management consulting firm, from January 2008 to August 2009, and as a consultant at LEK Consulting, a global strategy consulting firm, from February 1999 to May 2002. Mr. Hall began his career as a corporate attorney with the law firm of Clayton Utz in Perth, Australia. He earned undergraduate degrees in law and commerce from the University of Western Australia and an M.B.A. degree from Harvard Business School.
TERRA NITROGEN COMPANY, L.P.
Richard A. Hoker
(age 49)
Mr. Hoker has been Vice President and Corporate Controller of TNGP since April 2010. He has served as CF Industries' Vice President and Corporate Controller since November 2007. Before joining CF Industries, Mr. Hoker spent over 11 years with Sara Lee Corporation, where he served most recently as Vice President and Controller from January 2007 to November 2007 and Principal Accounting Officer from July 2007 to November 2007. Prior to being named Controller, Mr. Hoker held other financial management positions of increasing responsibility at Sara Lee. Prior to joining Sara Lee, Mr. Hoker was a member of the financial advisory services consulting group at Coopers & Lybrand LLP in Chicago (now PricewaterhouseCoopers) and previously led teams in the firm's audit practice. Mr. Hoker holds a B.S. degree in accounting from DePaul University and an M.B.A. degree in finance and accounting from the University of Chicago. He is also a certified public accountant.
Wendy S. Jablow Spertus
(age 51)
Ms. Jablow Spertus has been Senior Vice President, Human Resources, of TNGP since January 2012 and was previously Vice President, Human Resources, of TNGP from April 2010 to January 2012. She has served as CF Industries' Senior Vice President, Human Resources, since January 2012 and was previously CF Industries' Vice President, Human Resources, from August 2007 to December 2011. Prior to joining CF Industries, Ms. Jablow Spertus served as the Chief Human Resources Officer of Fenwal, Inc., a medical device manufacturer. Earlier in her career, Ms. Jablow Spertus spent eight years with Ideal Industries, Inc., an electrical equipment manufacturer and technology design company, where she served as Vice President, Human Resources and Administration. During much of her time at Ideal Industries, Ms. Jablow Spertus held a concurrent position as Vice president and General Manager of Ideal Industries' DataComm business unit. Ms. Jablow Spertus holds a B.S. in economics from the Wharton School at the University of Pennsylvania and an M.B.A. degree from the University of Michigan. She is also a certified public accountant.
Philipp P. Koch
(age 62)
Mr. Koch has been Senior Vice President, Manufacturing, of TNGP since January 2014 and was previously Senior Vice President, Supply Chain, of TNGP from January 2012 to January 2014 and Vice President, Supply Chain, of TNGP from April 2010 to January 2012. He has served as CF Industries' Senior Vice President, Manufacturing, since January 2014. He was previously CF Industries' Senior Vice President, Supply Chain, from January 2012 to January 2014 and Vice President, Supply Chain, from January 2008 to January 2012 and CF Industries' Vice President, Raw Materials Procurement, from July 2003 to January 2008. Before joining CF Industries, Mr. Koch spent nearly 25 years in the energy industry with Amoco Corporation and BP PLC from January 1980 to July 2003. Mr. Koch has a B.A. degree from Greenville College and an M.B.A. degree from DePaul University.
TERRA NITROGEN COMPANY, L.P.
Except for any employment described above with CF Industries, of which TNGP is an indirect, wholly-owned subsidiary, no occupation carried on by any director or executive officer of TNGP during the past five years was carried on with any corporation or organization that is a parent, subsidiary or other affiliate of TNGP. There are no family relationships among any of the directors and any executive officer of TNGP, nor is there any arrangement or understanding between any director, executive officer and any other person pursuant to which that director or executive officer was selected as a director or executive officer of TNGP, as the case may be.
Meetings of the Board
The Board of Directors held four regular meetings in 2013. Each director attended 100 percent of the total meetings of the board and board committees of which he or she was a member.
Audit Committee
In 2013, the Audit Committee of the Board of Directors of TNGP met eight times. It is currently composed of Ms. Lloyd (Chairman) and Messrs. Jackson and Bailey. Each audit committee member is a non-employee director and meets the independence requirements as set forth in the NYSE listing standards. The Audit Committee has authority to review policies and practices of TNGP dealing with various matters relating to the financial condition and auditing procedures of the Partnership. The Board of Directors has further determined that Ms. Lloyd meets the requirements to be named "audit committee financial expert" as the term has been defined by the SEC rules implementing Section 407 of the Sarbanes-Oxley Act of 2002. The current Audit Committee Charter was adopted by the General Partner's Board of Directors on October 24, 2011, and is reviewed annually by the Audit Committee. A copy of the charter can be viewed on CF Industries' Web site at www.cfindustries.com by selecting "Terra Nitrogen (TNH) Investors" and "Governance." The charter is also available in print to unitholders upon request. All such requests should be made in accordance with directions contained in Item 1, Business-Overview, of this Annual Report on Form 10-K.
Nominating and Corporate Governance Committee
In 2013, the Nominating and Corporate Governance Committee of the Board of Directors of TNGP met three times and is currently composed of Messrs. Bailey (Chairman), Jackson, and Ms. Lloyd. Each of these committee members is a non-employee director and meets the independence requirements as set forth in the NYSE listing standards. The purpose of the Nominating and Corporate Governance Committee is to assist the Board in fulfilling its responsibilities to unitholders by shaping the corporate governance of the Partnership and enhancing the quality and independence of the nominees to the Board. The Corporate Governance Guidelines of the Board of Directors establishes that potential director candidates shall be selected on the basis of broad experience; wisdom; integrity; ability to make independent analytical inquiries; understanding of TNGP's business environment and willingness to devote adequate time and energy to the Board of Directors' duties. The Corporate Governance Guidelines also establishes that the Board of Directors will consider directors of diverse backgrounds, in terms of both the individuals involved and their various experiences and areas of expertise.
The Board of Directors has determined that the above mentioned policy has been implemented appropriately when, and has been effective in, determining the qualifications of potential director candidates to the Board of Directors.
The current Nominating and Corporate Governance Committee Charter was adopted by the General Partner's Board of Directors on October 24, 2011, and is reviewed annually by the Nominating
TERRA NITROGEN COMPANY, L.P.
and Corporate Governance Committee. A copy can be viewed on CF Industries' Web site at www.cfindustries.com by selecting "Terra Nitrogen (TNH) Investors" and "Governance." The charter is also available in print to unitholders upon request as described in Item 1, Business-Overview of this Annual Report on Form 10-K.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Partnership's executive officers, directors and greater than 10 percent of beneficial owners to file initial reports of ownership and reports of changes in beneficial ownership with the Securities and Exchange Commission (SEC) and the New York Stock Exchange (NYSE). TNCLP and the Operating Partnership have no executive officers, directors, or employees. Therefore, the executive officers and directors of TNGP are required by SEC regulations to furnish the Partnership with copies of reports of ownership and changes in ownership of our common units they file. Based solely on a review of the copies of such forms furnished to the Partnership and written representations from TNGP's executive officers and directors, all of the Partnership's officers, directors and greater than 10 percent beneficial owners made all required filings during and with respect to 2013 in a timely manner.
Corporate Governance Matters
TNGP has adopted Corporate Governance Guidelines which meet the requirements of the NYSE and apply to TNGP's directors, executive officers (including its principal executive officer and principal financial officer) and other employees. Because TNGP is a wholly-owned subsidiary of CF Industries whose officers are all officers of CF Industries, the CF Industries' Code of Business Conduct applies to TNGP's executive officers (including its principal executive officer and principal financial officer) and other employees. In addition, the CF Industries Code of Business Conduct applies to TNGP's non-management directors in the same fashion as it applies to CF Industries' non-management directors. The CF Industries Code of Business Conduct also meets the requirements of the NYSE. A copy of the Corporate Governance Guidelines and CF Industries' Code of Business Conduct can be viewed on CF Industries' web site at www.cfindustries.com by selecting "Terra Nitrogen (TNH) Investors" and "Governance". A copy of each is also available in print upon request by following the directions contained in Item 1, Business-Overview, of this Annual Report on Form 10-K.
The Board of Directors of TNGP has affirmatively determined that Messrs. Bailey and Jackson, and Ms. Lloyd each meet the criteria for independence required by the NYSE listing standards. Following its evaluation, the board concluded that none of these directors were involved in any transaction, relationship or arrangement not otherwise disclosed that would impair his or her independence.
During 2013, in accordance with the Corporate Governance Guidelines, the independent directors met at regularly scheduled executive sessions of the board without management or management directors. The executive sessions are held at board meetings and the independent directors choose one of the independent directors to lead the discussion and preside at each such meeting.
Communication
Interested parties who wish to communicate a message to the board, the independent directors, or any committee may do so by contacting Ms. Anne H. Lloyd, Chairman of the Audit Committee, Terra Nitrogen GP Inc., 4 Parkway North, Suite 400, Deerfield, IL 60015-2590.
TERRA NITROGEN COMPANY, L.P.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
We do not have any executive officers or employees. Instead, we are managed by our General Partner, TNGP, the executive officers of which are officers of CF Industries or its subsidiaries. CF Industries owns approximately 75 percent of the outstanding common units representing our limited partnership interests and CF Industries is also the indirect 100 percent owner of TNGP. The executive officers of TNGP are provided compensation and benefits directly from CF Industries. The compensation committee of the Board of Directors of CF Industries is responsible for the compensation decisions relating to the executive officers of TNGP. The Board of Directors of TNGP does not have a compensation committee and does not make any decisions with respect to the compensation of TNGP's executive officers. For more discussion regarding the compensation provided to the executive officers of TNGP by CF Industries, see the Schedule 14A definitive proxy statement of CF Industries Holdings, Inc., which will be filed with the Securities and Exchange Commission (SEC) when available.
Since neither TNCLP nor TNGP provides any compensation directly to TNGP's executive officers and neither has any involvement in determining their compensation, we have concluded that a discussion of the compensation awarded to, earned by and paid to TNGP's named executive officers, as contemplated by Item 402(b) of Regulation S-K, would not be meaningful. Therefore, our Compensation Discussion and Analysis does not resemble that of most public companies. Instead, we think it is more meaningful to describe the arrangement pursuant to which we receive services from CF Industries.
Since we have no executive officers or employees, all employment-related functions, including production planning, manufacturing management, logistics, accounting, legal, risk management, investor relations and other general and administrative functions are provided to us by employees of subsidiaries of CF Industries.
We reimburse subsidiaries of CF Industries for a portion of the compensation expenses incurred with respect to TNGP's executive officers and other employees of CF Industries and its affiliates who provide services to us. Compensation expenses for production and manufacturing services are charged directly to us based on actual costs. Compensation expenses for selling and general and administrative related functions, including the compensation of the TNGP's executive officers, are reimbursed based on a quarterly fixed fee arrangement.
Further discussion of our arrangements with subsidiaries of CF Industries can be found in Note 10, Related Party Transactions, of the Notes to the Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
TERRA NITROGEN COMPANY, L.P.
Compensation Committee Report
TNCLP has no directors or executive officers and the Board of Directors of the General Partner serves as TNCLP's governing body. TNGP does not have a compensation committee. Therefore, its full Board of Directors reviewed and discussed the Compensation Discussion and Analysis with TNGP's management. Based on such review and discussions, it recommended that the Compensation Discussion and Analysis be included in TNCLP's Annual Report on Form 10-K.
Respectfully submitted,
W. Anthony Will, Chairman
Coleman L. Bailey
Douglas C. Barnard
Richard A. Hoker
Michael A. Jackson
Dennis P. Kelleher
Anne H. Lloyd
TERRA NITROGEN COMPANY, L.P.
SUMMARY COMPENSATION TABLE
Pursuant to the SEC's executive compensation disclosure rules, a required table may be omitted if there has been no compensation awarded to, earned by or paid to any named executive officer that is required to be reported in that table. Therefore, we have not included a Summary Compensation Table or any other table regarding compensation paid to named executive officers, because we have no employees, and, as such, no compensation was paid by either TNGP or us during 2013.
DIRECTOR COMPENSATION
TNCLP has no directors. The following table summarizes the compensation of each non-employee director of the TNGP Board of Directors (the "TNGP Board") for the fiscal year ended December 31, 2013.
(1)For information about the nature of fees earned during the fiscal year, see the narrative accompanying this table.
(2)This column represents the fair value under ASC 718 (pre-codification FAS 123R) with respect to TNCLP phantom units granted to each director in 2013, including additional units received as dividends during the year on units held by the director. The phantom unit awards granted to directors in 2013 will settle in cash based upon closing price per common unit for the 20-trading-day period that immediately precedes the vesting date (unless deferred pursuant to the terms of the 2009 Phantom Unit Program). Additional information with respect to the 2009 Phantom Unit Program is set forth below under "Director Phantom Unit Awards."
Director Fees Paid in Cash
In 2013, each non-employee director of the TNGP Board received an annual retainer of $40,000 (paid quarterly) and board and committee meeting fees of $1,400 per meeting attended. Ms. Lloyd received an additional annual cash retainer of $10,000 (paid quarterly) for serving as Chairman of the Audit Committee. Mr. Bailey received an additional annual cash retainer of $2,500 (paid quarterly) for serving as Chairman of the Nominating and Corporate Governance Committee. In 2013, Messrs. Wilson, Barnard, Kelleher and Will served on the TNGP Board and were employees of CF Industries, and therefore receive no additional compensation for serving on the TNGP Board.
Director Ownership Guidelines
The TNGP Board has established a minimum ownership guideline for non-employee directors of 2,000 common units (the "Ownership Guide"). Newly elected directors have a period of five (5) years to satisfy the Ownership Guide. The Ownership Guide may be satisfied by ownership of common units, accrual of phantom units under TNGP Board-approved compensation programs or any combination of the two.
TERRA NITROGEN COMPANY, L.P.
Director Phantom Unit Awards
Non-employee directors of the TNGP Board receive compensation in the form of TNCLP phantom units. A phantom unit entitles the holder to a cash payment equal to the value of a TNCLP common unit at the time of vesting. In addition, each phantom unit entitles the holder to additional phantom units when quarterly cash distributions are made to TNCLP common unitholders. Non-employee directors receive an annual award of a number of phantom units determined by dividing a value fixed by the TNGP Board by the average month-end closing price of TNCLP common units for the six-month period preceding the date of grant. Starting in 2012, the grant date value of the annual award was fixed at $90,000. The annual awards are granted upon the first meeting of the TNGP Board each year.
The annual awards are governed by the 2009 Non-Employee Director Phantom Unit and Deferred Compensation Plan (the "2009 Phantom Unit Program"). Each phantom unit granted pursuant to the 2009 Phantom Unit Program is unvested on the date of grant and vests automatically on the first anniversary of the grant date, provided that the director continues to serve on the TNGP Board through such date. Unless a director elected to defer phantom units (as described below), upon vesting, the director will receive to a cash payment in respect of the phantom units (including any additional phantom units received in connection with quarterly distributions to TNCLP common unitholders following the date of grant). The amount paid with respect to each such phantom unit will be equal to the average closing price of common units for the 20-trading-day period immediately preceding the vesting date.
Under to the 2009 Phantom Unit Program, directors may elect to defer receipt of phantom units granted pursuant to the plan. Each non-employee director may elect in writing, prior to December 31 of any year, to defer receipt of payment with respect to all or a portion (but not less than 25 percent) of phantom units that may be awarded during the following year. Phantom units (including any additional phantom units received in connection with quarterly distributions to TNCLP common unit holders following the date of the grant) that a non-employee director elects to defer are credited to an unfunded deferred compensation account. Deferred phantom units are generally required to be held in an unfunded deferred compensation account until the date of the director's departure from the TNGP Board. Upon departure, the phantom unit value is paid out in cash based on the average closing price of TNCLP common units for the 20-trading-day period immediately following departure. However, in the event of a sale of TNCLP (including by merger or other corporate transaction) or a sale of substantially all of TNCLP's assets, the value of the phantom units will be paid in a lump sum upon consummation of the transaction.
In 2005, the TNGP Board adopted a phantom unit program (the "2005 Phantom Unit Program") which entitled each non-employee director of TNGP to an annual grant of 1,250 TNLP phantom units. All phantom unit awards granted pursuant to the 2005 Phantom Unit Program are generally required to be held until the date of the director's departure from the TNGP Board. Upon departure, the phantom unit value is paid out in cash based on the average closing price of TNCLP common units for the 20-trading-day period immediately following departure. However, in the event of a sale of TNCLP (including by merger or other corporate transaction) or a sale of substantially all of TNCLP's assets, the value of the phantom units will be paid in a lump sum upon consummation of the transaction.
TERRA NITROGEN COMPANY, L.P.
The following table sets forth the number of phantom units held by each non-employee director as of the date of this report and awards vested in 2013.
Other Director Compensation
TNGP reimburses all directors for reasonable travel and other necessary business expenses incurred in the performance of their services for TNGP and TNCLP. Non-employee directors do not receive any additional payments or perquisites.
Compensation Committee Interlocks and Insider Participation
TNGP does not have a compensation committee. The Compensation Committee of the Board of Directors of CF Industries has made executive officer compensation decisions with respect to those TNGP executive officers who are also key employees of CF Industries. The Compensation Committee of CF Industries is composed of the directors named as signatories to the "Report on Executive Compensation" as set forth in CF Industries' 2013 proxy statement. No such director has any direct or indirect material interest in or relationship with TNGP other than stockholdings as discussed in Item 12, Security Ownership of Certain Beneficial Owners and Management, and as related to his or her position as a director, except as described under the caption "Certain Relationships and Related Transactions." During 2013, no officer of TNGP (or its predecessor) served on the Board of Directors of any other entity, where any officer or director of such other entity also served on TNGP's (or its predecessor) Board or CF Industries' Compensation Committee. None of the members of CF Industries' Compensation Committee are employees of CF Industries or its subsidiaries.
TERRA NITROGEN COMPANY, L.P.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
TNGP owns the entire general partner interest in both TNCLP and the Operating Partnership. TNGP's principal executive offices are located at 4 Parkway North, Suite 400, Deerfield, Illinois 60015-2590. CF Industries Enterprises, Inc. owns all the outstanding capital stock of TNGP, and is an indirect, wholly-owned subsidiary of CF Industries. Terra LP Holdings LLC (also an indirect wholly-owned subsidiary of CF Industries) owned directly, as of February 17, 2014, 13,889,014 common units of TNCLP. CF Industries and its subsidiaries are engaged in certain transactions with the Partnership described under the caption "Certain Relationships and Related Transactions" below.
The following table shows the ownership of TNCLP common units and CF Industries common stock as of February 17, 2014 by (a) each person known to TNGP to be a beneficial owner of more than 5 percent of the TNCLP common units (based on information reported to the SEC by or on behalf of such persons) (b) each director of TNGP and (c) each executive officer of TNGP. Unless otherwise stated below, the address of each of the following persons is 4 Parkway North, Suite 400, Deerfield, Illinois 60015-2590.
*Represents less than 1% of class.
(1)Each person has sole voting and investment power of all the CF Industries common shares indicated.
(2)The shares indicated for Messrs. Wilson, Barnard, Bohn, Frost, Hall, Hoker, Kelleher, Koch and Will and Ms. Spertus include shares underlying stock options granted under CF Industries' Equity
TERRA NITROGEN COMPANY, L.P.
and Incentive Plans that have already vested or that will vest within 60 days. The shares underlying these stock options cannot be voted.
(3)By virtue of its ownership of all the outstanding equity of Terra LP Holdings LLC, CF Industries Sales, LLC may be deemed to possess indirect beneficial ownership of the common units beneficially owned by Terra LP Holdings LLC. By virtue of its ownership of all the outstanding common stock of CF Industries Sales, LLC, CF Industries Enterprises, Inc. may be deemed to possess indirect beneficial ownership of the common units beneficially owned by Terra LP Holdings LLC and CF Industries Sales, LLC. By virtue of its ownership of all the outstanding common stock of CF Industries Enterprises, Inc., CF Industries, Inc. may be deemed to possess indirect beneficial ownership of the common units beneficially owned by Terra LP Holdings LLC, CF Industries Sales, LLC and CF Industries Enterprises, Inc. By virtue of its ownership of all the outstanding common stock of CF Industries, Inc., CF Industries Holdings, Inc. may be deemed to possess indirect beneficial ownership of the common units beneficially owned by Terra LP Holdings LLC, CF Industries Sales, LLC, CF Industries Enterprises, Inc. and CF Industries, Inc.
(4)Terra Nitrogen GP Inc., the General Partner, owns the entire general partner interests in the Partnership.
Equity Compensation Plan Information
The Partnership maintains no separate equity compensation plans. All equity compensation benefits awarded to TNGP executive officers who are also key employees of CF Industries are awarded through CF Industries' equity compensation plans, all of which are described in CF Industries' filings with the SEC.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Our agreement of limited partnership generally provides that whenever a potential conflict of interest exists or arises between the General Partner or any of its affiliates, on the one hand, and the Partnership or any partner or assignee, on the other hand, any resolution or course of action in respect of such conflict of interest shall be permitted and deemed approved by all partners, and shall not constitute a breach of the agreement of limited partnership, of any agreement contemplated therein, or of any duty stated or implied by law or equity, if the resolution or course of action is, or by operation of the agreement of limited partnership is deemed to be, fair and reasonable to TNCLP.
In connection with its resolution of any conflict of interest, the General Partner may consider:
•the relative interests of any party involved in such conflict or affected by such action, agreement, transaction or situation and the benefits and burdens relating to such interest;
•any customary or accepted General Partner and industry practices;
•any applicable generally accepted accounting practices or principles; and
•such additional factors as the General Partner determines in its sole discretion to be relevant, reasonable or appropriate under the circumstances.
Under our agreement of limited partnership, in the absence of bad faith by the General Partner, the resolution, action or terms so made, taken or provided by the General Partner with respect to any conflict of interest will not constitute a breach of the agreement of limited partnership or any agreement contemplated thereby or any standard of care or duty imposed in the agreement of limited partnership or such other agreements or under any law, rule or regulation.
TERRA NITROGEN COMPANY, L.P.
Finally, our agreement of limited partnership provides that TNCLP may not lend funds to the General Partner or any of its affiliates (other than the Operating Partnership), except for short-term funds for management purposes.
Information with respect to certain relationships and related transactions is contained in Notes to the Consolidated Financial Statements, Note 10, Related Party Transactions and is incorporated herein by reference. Information with respect to director independence is set forth in Item 10, Directors and Executive Officers of the Registrant, and is incorporated herein by reference.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Principal Accountant Audit Fees and Services Fees
The following table describes fees for professional audit services rendered by KPMG LLP (KPMG) for the audit of the Partnership's annual financial statements for the years ended December 31, 2013 and 2012 and fees billed for other services rendered by KPMG during those periods.
(1)Audit Fees include the aggregate fees paid by the Partnership during the fiscal year indicated for professional services rendered by KPMG for the audit of the Partnership's annual financial statements and review of financial statements included in the Partnership's Form 10-Qs.
Audit Committee Pre-Approval of Policies and Procedures
Pursuant to its charter, the Audit Committee is responsible for reviewing and approving, in advance, any audit and any permissible non-audit engagement or relationship between TNGP and its independent auditors. KPMG's engagement to conduct the audit of the Partnership's financial statements included herein was approved by the Audit Committee on January 31, 2013. Additionally, each permissible non-audit engagement or service performed by KPMG is required to be reviewed and approved in advance by the Audit Committee, as provided in its charter.
TERRA NITROGEN COMPANY, L.P.
Part IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
TERRA NITROGEN COMPANY, L.P.
(b) Exhibits
3.1
Certificate of Amendment to Certificate of Limited Partnership of Terra Nitrogen Company, L.P. ("TNCLP") dated September 1, 2005, filed as Exhibit 3.5 to the Terra Industries Inc. Form 10-Q for the quarterly period ended September 30, 2005, is incorporated herein by reference.
3.2
First Amended and Restated Agreement of Limited Partnership of TNCLP, dated September 1, 2005, filed as Exhibit 3.1 to TNCLP's Form 8-K filed on September 7, 2005, is incorporated herein by reference.
3.3
Amendment No.1 to First Amended and Restated Agreement of Limited Partnership of Terra Nitrogen Company, L.P., dated as of April 26, 2012, filed as Exhibit 3.1 to TNCLP's Form 8-K filed on May 2, 2012, is incorporated herein by reference.
3.4
Certificate of Incorporation of Terra Nitrogen GP Inc., dated as of August 29, 2005, filed as Exhibit 3.2 to TNCLP's Form 8-K filed on September 7, 2005, is incorporated herein by reference.
3.5
By-Laws of Terra Nitrogen GP Inc. dated September 1, 2005, filed as Exhibit 3.3 to TNCLP's Form 8-K filed on September 7, 2005, are incorporated herein by reference.
3.6
Certificate of Amendment to Certificate of Limited Partnership of Terra Nitrogen, Limited Partnership, dated September 1, 2005, filed as Exhibit 3.6 to the Terra Industries Inc. Form 10-Q for the quarterly period ended September 30, 2005, is incorporated herein by reference.
3.7
First Amended and Restated Agreement of Limited Partnership of Terra Nitrogen, Limited Partnership, dated September 1, 2005, filed as Exhibit 10.3 to TNCLP's Form 8-K filed on September 7, 2005, is incorporated herein by reference.
3.8
Amendment No.1 to First Amended and Restated Agreement of Limited Partnership of Terra Nitrogen L.P., dated April 26, 2012, filed as Exhibit 3.8 to the TNCLP Form 10-K for the year ended December 31, 2012, is incorporated herein by reference.
4.1
Deposit Agreement among TNCLP, the Depositary and Unitholders, filed as Exhibit 4.1 to the TNCLP Form 10-K for the year ended December 31, 1991, is incorporated herein by reference.
4.2
Form of Depositary Receipt for Common Units (included as Exhibit B to the Deposit Agreement filed as Exhibit 4.1 hereto), filed as Exhibit 4.3 to the TNCLP Form 10-K for the year ended December 31, 1991, is incorporated herein by reference.
4.3
Form of Transfer Application (included in Exhibit A to the Deposit Agreement filed as Exhibit 4.1 hereto), filed as Exhibit 4.4 to the TNCLP Form 10-K for the year ended December 31, 1991, is incorporated herein by reference.
10.1**
Master Agreement dated October 11, 1989, among ONEOK Inc., Oklahoma Natural Gas Company, ONG Western Inc., ONG Red Oak Transmission Company, ONG Transmission Company, Agrico Chemical Company and Freeport-McMoRan Resource Partners, Limited Partnership.
TERRA NITROGEN COMPANY, L.P.
10.2**
Lease Agreement dated October 11, 1989, among ONEOK Inc., Oklahoma Natural Gas Company, ONG Western Inc., ONG Red Oak Transmission Company, ONG Transmission Company, Agrico Chemical Company and Freeport-McMoRan Resource Partners, Limited Partnership.
10.3
Gas Service Agreement dated October 11, 1989, between Oklahoma Natural Gas Company and Agrico Chemical Company, filed as Exhibit 10.4 to the TNCLP Registration Statement No. 33-43007, dated September 27, 1991, is incorporated herein by reference.
10.4**
Transportation Service Agreement dated as of September 1, 1988, among Reliant Energy Gas Transmission Company and Agrico Chemical Company, as supplemented by Letter Agreements dated September 2, 1988, and November 1, 1990, and Consent to Assignment dated March 9, 1990
10.5
Transportation Service Agreement effective January 1, 1990, between MAPCO Ammonia Pipeline, Inc. and Agrico Chemical Company, and Consent to Assignment dated January 22, 1991, filed as Exhibit 10.6 to the TNCLP Registration Statement No. 33-43007, dated September 27, 1991, is incorporated herein by reference
10.6
Lease Agreement dated as of December 22, 1988, between PLM Investment Management, Inc. and Agrico Chemical Company, and Consent to Assignment dated February 23, 1990, and Assignment and Assumption effective as of March 1, 1990, filed as Exhibit 10.9 to the TNCLP Registration Statement No. 33-43007, dated September 27, 1991, is incorporated herein by reference.
10.7
Lease dated September 6, 1977, between Tulsa-Rogers County Port Authority and Agrico Chemical Company, as supplemented, filed as Exhibit 10.12 to the TNCLP Registration Statement No. 33-43007, dated September 27, 1991, is incorporated herein by reference.
10.8
Amended and Restated Terminal Lease agreement dated December 28, 2012, by and between Terra Nitrogen Company, L.P., a Delaware limited partnership and CF Industries, Inc., a Delaware corporation, filed as Exhibit 10.1 to TNCLP's Form 8-K dated December 28, 2012, is incorporated herein by reference.
10.9
Amendment to the General and Administrative Services and Product Offtake Agreement between CF Industries, Inc., a Delaware corporation, Terra Industries Inc., a Maryland corporation, Terra Nitrogen GP Inc., a Delaware corporation and Terra Nitrogen Company, L.P., a Delaware limited partnership, dated September 28, 2010, filed as Exhibit 10.1 to TNCLP's Form 8-K dated September 7, 2010, is incorporated herein by reference.
10.10
Tank Car Lease Agreement dated December 29, 2010, by and between Terra Nitrogen Company, L.P., a Delaware limited partnership and CF Industries, Inc., a Delaware corporation, filed as Exhibit 10.2 to TNCLP's Form 8-K dated December 29, 2010, is incorporated herein by reference.
10.11
Form of Phantom Unit Award of Terra Nitrogen Company, L.P., filed as Exhibit 10.41 of the TNCLP Form 10-Q for the quarter ended June 30, 2005, is incorporated herein by reference.
10.12
Form of Terra Nitrogen GP Inc. (TNGP) Non-Employee Director Phantom Unit Agreement approved by the TNGP Board of Directors, dated October 22, 2007, filed as Exhibit 10.17 to the TNCLP Form 10-K for the year ended December 31, 2007, is incorporated herein by reference.
TERRA NITROGEN COMPANY, L.P.
10.13
Form of Terra Nitrogen GP Inc. (TNGP) Non-Employee Director Phantom Unit and Deferred Compensation Plan approved by the TNGP Board of Directors, dated December 17, 2009, filed as Exhibit 10.13 to the TNCLP Form 10-K for the year ended December 31, 2009, is incorporated herein by reference.
10.14
Form of Award Agreement under the TNGP Non-Employee Director Phantom Unit and Deferred Compensation Plan, filed as Exhibit 10.14 to the TNCLP Form 10-K for the year ended December 31, 2010, is incorporated herein by reference.
10.15
Spare Parts Sharing Agreement, dated May 6, 2013, by and among CF Industries Nitrogen, LLC, a Delaware Limited Liability Company, Terra Nitrogen, Limited Partnership, a Delaware Limited Partnership and Canadian Fertilizers Limited an Alberta Corporation, incorporated by reference to the TNCLP Form 10-Q for the quarterly period ended March 31, 2013, is incorporated herein by reference.
31.1*
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The following financial information from Terra Nitrogen Company, L.P.'s Quarterly Report on Form 10-K for the year ended December 31, 2013, formatted in XBRL (Extensible Business Reporting Language) includes: (1) Consolidated Statements of Operations, (2) Consolidated Balance Sheets, (3) Consolidated Statements of Cash Flows, (4) Consolidated Statements of Partners' Capital and (6) the Notes to Consolidated Financial Statements*
*Filed herewith.
**Confidential treatment has been granted for portions of the exhibit.
TERRA NITROGEN COMPANY, L.P.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 GP Inc.,
as General Partner
Date:
February 27, 2014
By:
/s/ W. ANTHONY WILL
W. Anthony Will
President and Chief Executive
Officer, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant as of February 27, 2014 and in the capacities indicated.
Signature
Title
/s/ W. ANTHONY WILL
W. Anthony Will
President and Chief Executive Officer, Chairman of the Board of Terra Nitrogen GP Inc. (Principal Executive Officer)
/s/ DENNIS P. KELLEHER
Dennis P. Kelleher
Director, Senior Vice President and Chief Financial Officer of Terra Nitrogen GP Inc. (Principal Financial Officer)
/s/ RICHARD A. HOKER
Richard A. Hoker
Director, Vice President and Corporate Controller of Terra Nitrogen GP Inc. (Principal Accounting Officer)
/s/ COLEMAN L. BAILEY
Coleman L. Bailey
Director of Terra Nitrogen GP Inc.
/s/ DOUGLAS C. BARNARD
Douglas C. Barnard
Director, Senior Vice President, General Counsel and Secretary of Terra Nitrogen GP Inc.
/s/ MICHAEL A. JACKSON
Michael A. Jackson
Director of Terra Nitrogen GP Inc.
/s/ ANNE H. LLOYD
Anne H. Lloyd
Director of Terra Nitrogen GP Inc.