Terra Nitrogen Company, L.P. (TNCLP, we, our or us) is a Delaware Limited Partnership that produces and distributes 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 (“Verdigris”).
Ownership of TNCLP is represented by the General Partner interest and the Limited Partner interest. The Limited Partner interest consists of 18,501,576 Common Units and 184,072 Class B Common Units. Terra Industries Inc. (Terra), a Maryland corporation, and its subsidiaries owned 13,889,014 Common Units and all of the Class B Common Units as of December 31, 2009. The balance of Common Units is traded on the New York Stock Exchange under the symbol “TNH”.
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 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 Terra, a leading North American producer and marketer of nitrogen products, serving agricultural, industrial and environmental customers. In the event of a change in control of Terra, the acquiring company would assume Terra’s role relative to our ownership and operation.
On February 12, 2010, Terra entered into an Agreement and Plan of Merger (the Yara Merger Agreement) with Yara International ASA (Yara) and Yukon Merger Sub, Inc. (Merger Sub), an indirect, wholly owned subsidiary of Yara. If the transactions contemplated by the Yara Merger Agreement are consummated, Merger Sub will merge with and into Terra (the Yara Merger), with the result that Terra and our General Partner will become indirect, wholly owned subsidiaries of Yara and Yara would assume Terra’s role relative to our ownership and operation.
On March 2, 2010, Terra received a proposal from CF Industries Holdings, Inc. (CF Industries) to acquire all of the outstanding common stock of Terra for $37.15 in cash and 0.0953 of a share of CF Industries common stock for each Terra share. The proposal from CF Industries is subject to the termination of the Yara Merger Agreement, the execution of a definitive agreement with CF Industries and other customary conditions.
2009 Overview
For the year 2009, we reported net income of $144.3 million on revenues of $507.7 million, compared to net income of $422.4 million on revenues of $903.0 million for the year 2008. Net income allocable to Common Units was $100.0 million ($5.40 per Common Unit) and $275.7 million ($14.90 per Common Unit) for the 2009 and 2008 full years, respectively.
We delivered this strong performance against a backdrop of lackluster nitrogen demand resulting from the global economic crisis and the psychological effect on buyers of having managed through high-priced inventory from the previous year. The sluggish nitrogen demand resulted in depressed selling prices and weaker sales volumes, which were partially offset by natural gas price reductions.
Business Overview
We produce and distribute nitrogen products, which are used primarily by farmers to improve the yield and quality of their crops. Our product sales are heavily weighted toward UAN, and all of our products are sold on a wholesale basis. 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 Products
One of the principal forms of globally traded nitrogen fertilizer is ammonia. UAN is used principally in North America and has only recently been traded in other countries. UAN’s high water content and need for transportation in tankers can cause transportation costs per unit of nitrogen to be higher than for other forms of internationally traded nitrogen products. The location of our sole production facility in Verdigris provides us an advantage in serving agricultural customers in the Central and Southern Plains and the Corn Belt regions of the U.S. We do not sell our products internationally. Our nitrogen products and 2009 product production are described in greater detail below.
Urea Ammonium Nitrate Solutions (UAN)
UAN is a liquid fertilizer and, unlike ammonia, is odorless and does not require refrigeration or pressurization for transportation or storage. UAN is produced by combining liquid urea, liquid ammonium nitrate (AN) and water. The nitrogen content of UAN ranges from 28 percent to 32 percent by weight (unless we state otherwise, all references to UAN assume a 32 percent nitrogen content). Because of its high water content, UAN is relatively expensive to transport, making it largely a regionally distributed product.
UAN can be applied to crops directly or mixed with crop protection products, permitting the application of several materials simultaneously, reducing energy and labor costs and accelerating field preparation for planting. UAN may be applied from ordinary tanks and trucks and sprayed or injected into the soil, or applied through irrigation systems. In addition, UAN may be applied throughout the growing season providing significant application flexibility. Due to its stability, UAN may be used for no-till row crops where fertilizer is spread on the surface of the soil.
In 2009 we produced and sold approximately 1.8 million tons of UAN, which was sold primarily to U.S. fertilizer dealers and distributors.
Anhydrous Ammonia
Ammonia is the simplest form of nitrogen fertilizer and the feedstock for the production of other nitrogen fertilizers, including urea, AN and UAN. Ammonia is produced when natural gas reacts with steam and air at high temperatures and pressures in the presence of catalysts. Ammonia has a nitrogen content of 82 percent by weight and is generally the least expensive form of fertilizer on a per-pound-of-contained-nitrogen basis. Although generally the cheapest source of nitrogen available to agricultural customers, ammonia can be less desirable to end-users than urea, AN and UAN because of its need for specialized application equipment and its limited application flexibility.
In 2009, we produced approximately 1.0 million tons of ammonia. We sold a total of 0.3 million tons of ammonia and consumed approximately 0.7 million tons of ammonia as a raw material to manufacture our other nitrogen products.
Marketing and Distribution
We sell our products primarily in the Central and Southern Plains and Corn Belt regions of the U.S. Our sole production facility in Verdigris is located near the major crop producing and consuming areas of the U.S., and has ready access to barge, truck and rail transportation. In addition, the Verdigris facility has an ammonia pipeline to transport product to high demand regions. Our products are marketed and distributed by Terra based in Sioux City, Iowa, which provides services to the Partnership.
All of our sales are at the wholesale level. Our customers for fertilizer products are dealers, national farm retail chains, distributors and other fertilizer producers and traders. National farm retail chains have both distribution and application capabilities. Distributors operate as wholesalers and sell directly to dealers and national farm retail chains, which, in turn, sell directly to farmers. Many dealers maintain year-round storage capacity for inventory as well as application equipment. We sell a majority of our nitrogen fertilizer products to dealers. Our top five customers make up approximately 27 percent of our nitrogen sales, with Crop Production Services, Inc. being our largest customer with approximately 12 percent of our nitrogen sales.
Transportation
We use several modes of transportation to ship product to customers, including railcars, common carrier trucks, barges and common carrier pipelines. Railcars are the primary mode of transportation for shipments from our Verdigris facilities. We utilize railcars that are currently leased by Terra for all of its businesses. Terra currently leases approximately 3,000 railcars. We also use approximately 40 liquid and ammonia fertilizer terminal storage facilities in numerous states.
Employees
TNGP, the General Partner, is responsible for managing our business. As of December 31, 2009, the General Partner had no employees. Terra Nitrogen Corporation (TNC), a Terra subsidiary and the prior general partner had 164 employees, who, along with Terra, provide services to us under the October 2007 Amended and Restated General and Administrative Services Agreement. TNCLP had no employees as of December 31, 2009. Upon consummation of the transactions contemplated by the Yara Merger Agreement, our General Partner will become an indirect, wholly owned subsidiary of Yara and Yara would assume Terra’s role relative to our ownership and operation.