S-1/A 1 d211007ds1a.htm AMENDMENT NO. 4 TO FORM S-1 Amendment No. 4 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on October 26, 2011

Registration No. 333-176065

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

AMENDMENT NO. 4

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

Rentech Nitrogen Partners, L.P.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   2870   45-2714747
(State or Other Jurisdiction of Incorporation or Organization)  

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

10877 Wilshire Boulevard, Suite 600

Los Angeles, CA 90024

(310) 571-9800

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

D. Hunt Ramsbottom, Jr.

10877 Wilshire Boulevard, Suite 600

Los Angeles, CA 90024

(310) 571-9800

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

With a copy to:

 

Anthony J. Richmond

Brett E. Braden

David A. Zaheer

Latham & Watkins LLP

717 Texas Avenue, 16th Floor

Houston, TX 77002

(713) 546-5400

 

G. Michael O’Leary

Andrews Kurth LLP

600 Travis, Suite 4200

Houston, TX 77002

(713) 220-4200

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 (the “Securities Act”), check the following box.  ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

 

Large accelerated filer  ¨     Accelerated filer  ¨    Non-accelerated filer  þ   Smaller reporting company  ¨
       (Do not check if a smaller reporting company)  

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Amount to

be Registered(1)

  Proposed Maximum
Offering Price per
Common Unit
(2)
  Proposed Maximum
Aggregate Offering
Price
(1)(2)
  Amount of
Registration  Fee
(3)

Common units representing limited partner interests

 

17,250,000

 

$21.00

  $362,250,000   $41,514

 

 

  (1)   Includes 2,250,000 common units which the underwriters have the option to purchase.
  (2)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) of the Securities Act.
  (3)   Includes $29,025 that was previously paid for the registration of $250,000,000 of the proposed maximum aggregate offering price in connection with the original filing of the Registration Statement.

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued October 26, 2011

15,000,000 Common Units

Representing Limited Partner Interests

 

LOGO

Rentech Nitrogen Partners, L.P.

 

Rentech Nitrogen Partners, L.P. is offering 15,000,000 common units representing limited partner interests. This is the initial public offering of our common units and no public market currently exists for our common units. We anticipate that the initial public offering price for our common units will be between $19.00 and $21.00 per unit.

 

Our common units have been approved for listing on the New York Stock Exchange, subject to official notice of issuance, under the symbol “RNF.”

 

Investing in our common units involves risks. Please see “Risk Factors” beginning on page 26. These risks include the following:

   

We may not have sufficient cash available for distribution to pay any quarterly distributions on our common units. For the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010, on a pro forma basis, our annual distribution would have been $1.54 and $0.44 per unit, respectively, significantly less than the $2.34 per unit distribution we project that we will be able to pay for the fiscal year ending September 30, 2012.

   

The amount of our quarterly cash distributions, if any, will vary significantly both quarterly and annually and will be directly dependent on the performance of our business. Unlike most publicly traded limited partnerships, we will not have a minimum quarterly distribution or employ structures intended to consistently maintain or increase distributions over time.

   

The nitrogen fertilizer business is, and nitrogen fertilizer prices are, seasonal, cyclical and highly volatile and have experienced substantial and sudden downturns in the past. Currently, nitrogen fertilizer demand is at a relative high point and could decrease significantly in the future. Cycles in demand and pricing could potentially expose us to significant fluctuations in our operating and financial results, and expose you to substantial volatility in our quarterly distributions and material reductions in the trading price of our common units.

   

The board of directors and officers of our general partner have fiduciary duties to Rentech, Inc., our ultimate parent, and the interests of Rentech may differ significantly from, or conflict with, the interests of our public common unitholders.

   

Our unitholders have limited voting rights and are not entitled to elect our general partner or our general partner’s directors.

   

Our public unitholders will not have sufficient voting power to remove our general partner without Rentech’s consent.

   

You will incur immediate and substantial dilution in the net tangible book value per common unit.

   

If the IRS contests any of the United States federal income tax positions we take, the market for our common units may be materially and adversely impacted, and the cost of any IRS contest will reduce our cash available for distribution to our unitholders.

   

Unitholders’ share of our income will be taxable for United States federal income tax purposes even if they do not receive any cash distributions from us.

 

PRICE $            PER COMMON UNIT

 

      

Price to
Public

      

Underwriting
Discounts
and
Commissions(1)

      

Proceeds to
Partnership(2)

 

Per Common Unit

       $                       $                       $               

Total

       $                               $                               $                       
  (1)   Consists of a discount of $         per common unit and a structuring fee of 0.75% of the gross proceeds of the offering, or $         per common unit, payable to the underwriters serving as joint book-running lead managers of this offering. Please see “Underwriters.”
  (2)   We intend to use     % of the net proceeds of this offering to repay existing indebtedness and to make distributions to a wholly owned subsidiary of Rentech, and the remaining net proceeds of this offering for certain capital expenditures (    %) and general working capital purposes (    %). For a detailed explanation of our intended use of the net proceeds from this offering, please see “Use of Proceeds” on page 62.

We have granted the underwriters an option to purchase up to an additional 2,250,000 common units from us at the initial public offering price, less underwriting discounts and commissions, within 30 days from the date of this prospectus.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the common units to purchasers on                     , 2011.

 

MORGAN STANLEY   CREDIT SUISSE

 

Citigroup   RBC Capital Markets

 

Imperial Capital

  Brean Murray, Carret & Co.
Dahlman Rose & Company   Chardan Capital Markets, LLC

 

                    , 2011


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1   

Overview

     1   

Industry Overview

     2   

Our Competitive Strengths

     3   

Our Business Strategies

     8   

Recent Developments

     11   

Risk Factors

     13   

The Transactions

     13   

About Rentech Nitrogen Partners, L.P.

     14   

The Offering

     15   

Organizational Structure

     20   

Summary Historical and Pro Forma Financial Information

     21   

RISK FACTORS

     26   

Risks Related to Our Business

     26   

Risks Related to an Investment in Us

     46   

Tax Risks

     54   

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     58   

THE TRANSACTIONS AND OUR STRUCTURE AND ORGANIZATION

     59   

The Transactions

     59   

Management

     60   

Conflicts of Interest and Fiduciary Duties

     60   

Trademarks, Trade Names and Service Marks

     61   

Rentech

     61   

USE OF PROCEEDS

     62   

CAPITALIZATION

     64   

DILUTION

     65   

OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

     67   

General

     67   

Pro Forma Cash Available for Distribution

     69   

Forecasted Cash Available for Distribution

     71   

HOW WE MAKE CASH DISTRIBUTIONS

     79   

General

     79   

Common Units Eligible for Distribution

     79   

Method of Distributions

     79   
     Page  

General Partner Interest

     79   

Adjustments to Capital Accounts Upon Issuance of Additional Common Units

     79   

SELECTED HISTORICAL FINANCIAL INFORMATION

     80   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     85   

Overview

     85   

Factors Affecting Comparability of Financial Information

     86   

Factors Affecting Results of Operations

     89   

Results of Operations

     90   

Critical Accounting Policies

     100   

Liquidity and Capital Resources

     101   

Cash Flows

     104   

Contractual Obligations

     107   

Recent Accounting Pronouncements

     107   

Off-Balance Sheet Arrangements

     108   

Quantitative and Qualitative Disclosures About Market Risk

     108   

INDUSTRY OVERVIEW

     110   

Fertilizer Industry Overview

     110   

Nitrogen Fertilizers

     116   

North American Nitrogen Fertilizer Industry

     118   

Fertilizer Pricing Trends

     120   

BUSINESS

     123   

Overview

     123   

Our Competitive Strengths

     124   

Our Business Strategies

     131   

Our Facility

     134   

Products

     135   

Marketing and Distribution

     135   

Transportation

     136   

Customers

     137   

Seasonality and Volatility

     137   

Raw Materials

     138   

Competition

     139   

Environmental Matters

     140   

Safety, Health and Security Matters

     144   

Employees

     144   

Properties

     144   

Legal Proceedings

     144   
 

 

i


Table of Contents
     Page  

MANAGEMENT

     145   

Management of Rentech Nitrogen Partners, L.P.

     145   

Executive Officers and Directors

     146   

Compensation Discussion and Analysis

     150   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     179   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     182   

Distributions and Payments to Rentech and its Affiliates

     182   

Transactions between REMC and Rentech

     183   

Our Agreements with Rentech

     184   

Indemnification Agreements

    
188
  

Procedures for Review; Approval and Ratification of Related Person Transactions

     188   

CONFLICTS OF INTEREST AND FIDUCIARY DUTIES

     190   

Conflicts of Interest

     190   

Fiduciary Duties

     195   

Related Party Transactions

     198   

DESCRIPTION OF OUR COMMON UNITS

     199   

Our Common Units

     199   

Transfer Agent and Registrar

     199   

Transfer of Common Units

     199   

Listing

     200   

THE PARTNERSHIP AGREEMENT

     201   

Organization and Duration

     201   

Purpose

     201   

Capital Contributions

     201   

Voting Rights

     201   

Applicable Law; Forum, Venue and Jurisdiction

     203   

Limited Liability

     203   

Issuance of Additional Partner Interests

     204   

Amendment of Our Partnership Agreement

     205   

Merger, Sale or Other Disposition of Assets

     207   

Termination and Dissolution

     207   
     Page  

Liquidation and Distribution of Proceeds

     208   

Withdrawal or Removal of Our General Partner

     208   

Transfer of General Partner Interest

     209   

Transfer of Ownership Interests in Our General Partner

     209   

Change of Management Provisions

     209   

Call Right

     209   

Non-Citizen Assignees; Redemption

     210   

Non-Taxpaying Assignees; Redemption

     210   

Meetings; Voting

     211   

Status as Limited Partner or Assignee

     211   

Indemnification

     211   

Reimbursement of Expenses

     212   

Books and Reports

     212   

Right to Inspect Our Books and Records

     213   

Registration Rights

     213   

COMMON UNITS ELIGIBLE FOR FUTURE SALE

     214   

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     215   

Partnership Status

     215   

Limited Partner Status

     217   

Tax Consequences of Unit Ownership

     217   

Tax Treatment of Operations

     223   

Disposition of Common Units

     225   

Uniformity of Units

     228   

Tax-Exempt Organizations and Other Investors

     228   

Administrative Matters

     229   

Recent Legislative Developments

     231   

State, Local, Foreign and Other Tax Considerations

     232   

INVESTMENT IN RENTECH NITROGEN PARTNERS, L.P. BY EMPLOYEE BENEFIT PLANS

     233   

UNDERWRITERS

     235   

Pricing of the Offering

     238   

European Economic Area

     238   

United Kingdom

     238   

Hong Kong

     239   

Singapore

     239   

Japan

     239   

LEGAL MATTERS

     240   

EXPERTS

     240   
 

 

ii


Table of Contents
 

 

 

 

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with additional or different information. If anyone provides you with additional, different or inconsistent information you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume the information appearing in this prospectus is accurate as of the date on the front cover page of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date.

 

For investors outside the United States: We have not, and the underwriters have not, done anything that would permit this offering, or possession or distribution of this prospectus, in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the common units and the distribution of this prospectus outside of the United States.

 

Industry and Market Data

 

The data included in this prospectus regarding the nitrogen fertilizer industry, including trends in the market and our position and the position of our competitors within the nitrogen fertilizer industry, is based on a variety of sources, including independent industry publications, government publications and other published independent sources, information obtained from customers, distributors, suppliers, trade and business organizations and publicly available information (including the reports and other information our competitors file with the Securities and Exchange Commission, or SEC, which we did not participate in preparing and as to which we make no representation regarding accuracy or adequacy), as well as our good faith estimates, which have been derived from management’s knowledge and experience in the areas in which our business operates.

 

iii


Table of Contents

PROSPECTUS SUMMARY

 

This summary highlights selected information contained elsewhere in this prospectus. You should carefully read the entire prospectus, including “Risk Factors” and the historical and unaudited pro forma condensed financial statements and related notes included elsewhere in this prospectus, before making an investment decision. Unless otherwise indicated, the information in this prospectus assumes (i) an initial public offering price of $20.00 per common unit (the mid-point of the price range set forth on the cover page of this prospectus) and (ii) that the underwriters do not exercise their option to purchase additional common units. References in this prospectus to “the Partnership,” “we,” “our,” “us” and like terms refer to Rentech Nitrogen Partners, L.P. and, for all periods prior to the closing of this offering, Rentech Energy Midwest Corporation, or REMC, unless the context otherwise requires or where otherwise indicated. References in this prospectus to “Rentech” refer to Rentech, Inc. and its consolidated subsidiaries other than Rentech Nitrogen Partners, L.P. and REMC, unless the context otherwise requires or where otherwise indicated. References to “RDC” refer to Rentech Development Corporation, which is a wholly owned subsidiary of Rentech, references to “RNHI” refer to Rentech Nitrogen Holdings, Inc., which is a wholly owned subsidiary of RDC, and references to “Rentech Nitrogen GP” and “our general partner” refer to Rentech Nitrogen GP, LLC, which is our general partner and a wholly owned subsidiary of RNHI and an indirect wholly owned subsidiary of Rentech. References to any of our fiscal years mean the fiscal year ending September 30 of that calendar year. The transactions being entered into in connection with this offering are referred to herein as the “Transactions” and are described on page 59 of this prospectus. You should also see the “Glossary of Selected Terms” contained in Appendix B for definitions of some of the terms we use to describe our business and industry and other terms used in this prospectus.

 

Rentech Nitrogen Partners, L.P.

 

Overview

 

We are a Delaware limited partnership formed in July 2011 by Rentech, a publicly traded provider of clean energy solutions and nitrogen fertilizer, to own, operate and grow our nitrogen fertilizer business. Our nitrogen fertilizer facility, which is located in East Dubuque, Illinois, has been in operation since 1965, with infrequent unplanned shutdowns. We produce primarily anhydrous ammonia, or ammonia, and urea ammonium nitrate solution, or UAN, at our facility, using natural gas as our primary feedstock. Substantially all of our products are nitrogen-based.

 

Our facility is located in the center of the Mid Corn Belt, the largest market in the United States for direct application of nitrogen fertilizer products. The Mid Corn Belt includes the States of Illinois, Indiana, Iowa, Missouri, Nebraska and Ohio. The States of Illinois and Iowa have been the top two corn producing states in the United States for the last 20 years according to the National Corn Growers Association. We consider our market to be comprised of the States of Illinois, Iowa and Wisconsin. Based on information provided by Blue, Johnson & Associates, Inc., or Blue Johnson, for the 12 months ended June 30, 2010, the amount of ammonia consumed as fertilizer in the States of Illinois, Iowa and Wisconsin was approximately 4.0 times the amount produced for sale in those states, and the amount of UAN consumed was approximately 1.4 times the amount produced for sale in those states.

 

Our core market consists of the area located within an estimated 200-mile radius of our facility. In most instances, our customers purchase our nitrogen products at our facility and then arrange and pay to transport them to their final destinations by truck. To the extent our products are picked up at our facility, we do not incur shipping costs, in contrast to nitrogen fertilizer producers located outside of our core market that must incur transportation and storage costs to transport their products to, and sell their products in, our core market. In addition, we do not maintain a fleet of trucks and, unlike some of our major competitors, we do not maintain a fleet of rail cars because our customers generally are located close to our facility and prefer to be responsible for transportation. Having no need to maintain a fleet of trucks or rail cars lowers our fixed costs. The combination

 

 

1


Table of Contents

of our proximity to our customers and our storage capacity at our facility also allows for better timing of the pick-up and application of our products, as nitrogen fertilizer product shipments from more distant locations have a greater risk of missing the short periods of favorable weather conditions during which the application of nitrogen fertilizer may occur. As a result of these factors, during each of the last three fiscal years, we realized higher average net sales prices per ton of ammonia than our publicly traded nitrogen fertilizer competitors that have reported this information. Ammonia sales price data for privately held ammonia producers is unavailable. According to Blue Johnson, as of February 28, 2011, we and our publicly traded nitrogen fertilizer competitors comprised approximately 66% of the aggregate ammonia production capacity in the United States, including ammonia produced by publicly traded and privately held companies for agricultural and industrial uses or upgraded to other nitrogen products. Also, based on data from the USDA and Blue Johnson, for the 12 months ended June 30, 2009, we and our publicly traded nitrogen fertilizer competitors accounted for approximately 32% of the aggregate sales of nitrogen products in the United States by international and domestic producers (measured in tons of nitrogen).

 

Our facility can produce up to 830 tons of ammonia per day, with the capacity to upgrade up to 450 tons of ammonia to produce up to 1,100 tons of UAN per day. During the nine months ended June 30, 2011 and the fiscal year ended September 30, 2010, we produced approximately 218,000 tons and 267,000 tons, respectively, of ammonia, and approximately 245,000 tons and 287,000 tons, respectively, of UAN. For the nine months ended June 30, 2011 and the fiscal year ended September 30, 2010, ammonia and UAN combined accounted for approximately 91% and 89%, respectively, of our total gross profit. Our facility has the flexibility to vary our product mix significantly, which permits us to upgrade our ammonia production into varying amounts of UAN, nitric acid and liquid and granular urea each season, depending on market demand, pricing and storage availability.

 

During the nine months ended June 30, 2011 and 2010, we generated revenues of approximately $141.3 million and $96.3 million, respectively, net income of approximately $21.6 million and $2.8 million, respectively, and Adjusted EBITDA of approximately $67.0 million and $21.7 million, respectively. During the fiscal years ended September 30, 2010, 2009 and 2008, we generated revenues of approximately $131.4 million, $186.4 million and $216.6 million, respectively, net income of approximately $5.0 million, $28.2 million and $30.1 million, respectively, and Adjusted EBITDA of approximately $31.0 million, $63.7 million and $60.4 million, respectively. For the fiscal year ending September 30, 2012, subject to certain assumptions, we expect our net income and Adjusted EBITDA to be $88.6 million and $100.6 million, respectively. For a reconciliation of Adjusted EBITDA to net income for each of the periods presented and the assumptions used in our forecast of net income and Adjusted EBITDA for the fiscal year ending September 30, 2012, see “Prospectus Summary—Summary Historical and Pro Forma Financial Information,” “Our Cash Distribution Policy and Restrictions on Distributions—Pro Forma Cash Available for Distribution” and “Our Cash Distribution Policy and Restrictions on Distributions—Forecasted Cash Available for Distribution.”

 

Industry Overview

 

Plants require three essential nutrients, nitrogen, phosphate and potassium, for which there are no known substitutes. Of these essential nutrients, nitrogen is generally the most important determinant of plant growth and crop yield. Nitrogen has the most consistent demand of these three nutrients because it is a key determinant of yield, and because it is the fastest to be depleted from the soil and must be reapplied annually, in contrast to phosphates and potassium, which can remain in the soil for up to three years after application.

 

Global fertilizer demand is driven primarily by grain demand and prices, which, in turn, are driven by population growth, dietary changes in the developing world and increased bio-fuel consumption. Populations in developing countries are shifting to more protein-rich diets as their incomes increase, with such consumption requiring more grain for animal feed. According to the Food and Agricultural Organization, or the FAO, global fertilizer use is projected to increase by 45% and nitrogen fertilizer use is projected to increase by 51% between 2005 and 2030 to meet global food demand.

 

 

2


Table of Contents

The United States is the world’s largest exporter of coarse grains, which include corn, grain sorghum, oats and barley. Based on a 2008 report by the International Fertilizer Industry Association, or the IFA, the United States is also the world’s third largest consumer of nitrogen fertilizer and historically has been the world’s largest importer of nitrogen fertilizer.

 

In the United States, the Corn Belt accounted for approximately 89% of total domestic corn production in 2010. Corn crops consume more nitrogen fertilizer than any other crop domestically, and accordingly, the States of Iowa and Illinois were the largest corn growing and nitrogen fertilizer consuming states in the United States in 2010. Nitrogen fertilizer prices in the Mid Corn Belt are consistently higher than prices in other regions because the region consumes significantly more nitrogen fertilizer than it produces and it is costly to transport nitrogen fertilizer into the region.

 

North American nitrogen fertilizer producers predominantly use natural gas as their primary feedstock. Over the last five years, United States natural gas reserves have increased significantly due to, among other factors, advances in extracting shale gas, which have reduced and stabilized natural gas prices. As a result of lower natural gas prices, North America is now a low-cost region for nitrogen fertilizer production.

 

The table below illustrates significant improvements in United States nitrogen fertilizer fundamentals in the last ten years, including an increase in corn pricing which has resulted in increased nitrogen fertilizer pricing.

Significant Improvements in United States Nitrogen Fertilizer Fundamentals

 

     ~ Ten Years Ago    As of
October 2011
   Change

United States Market Share of Top Five Nitrogen Fertilizer Producers (1)

   56% in 1999    84% in 2010    28%

Corn ($ / Bushel) (2)

   ~$2    ~$6.50    +$4.5 / +3.3x

Mid Corn Belt Ammonia ($ / Ton) (3)

   ~$200    ~$750    +$550 / +3.8x

Mid Corn Belt UAN ($ / Ton) (3)

   ~$110    ~$400    +$290 / +3.6x

Natural Gas Price Difference - Europe (NBP) less United States ($ / MMBtu) (2) (4)

   ~$0    ~$5    +$5

 

(1) Source: Blue Johnson

(2) Source: Bloomberg, as of October 13, 2001 and October 13, 2011

(3) Source: Green Markets, as of October 2001 and October 2011

(4)   Based on an exchange rate of 6.89 GBP/Therm to $1.00/MMBtu as of October 13, 2001 and 6.35 GBP/Therm to $1.00/MMBtu as of  October 13, 2011.

 

Our Competitive Strengths

 

Pure-Play Nitrogen Fertilizer Company. As a pure-play nitrogen fertilizer producer, we derive substantially all of our revenues and cash flows from the production and sale of nitrogen fertilizers. We sold over 90% of our nitrogen products to customers for agricultural uses during each of the nine months ended June 30, 2011 and 2010 and the fiscal years ended September 30, 2010 and 2009. We are primarily engaged in the production of ammonia and UAN. In North America, many of our competitors have diversified business operations, including the production of fertilizer nutrients other than nitrogen. Upon the closing of this offering, we will be one of only three publicly traded pure-play nitrogen fertilizer companies in the Americas and Western Europe, the others being CVR Partners, LP and Terra Nitrogen Company, L.P.

 

   

Increased Nitrogen Fertilizer Margins. Increased grain consumption and pricing over the last five years have increased fertilizer demand, which, in turn, has resulted in increased nitrogen fertilizer pricing. According to Pike & Fischer Green Markets, or Green Markets, ammonia and UAN prices in the Mid Corn Belt averaged $586 per ton and $324 per ton, respectively, during the five years ended

 

 

3


Table of Contents
 

October 13, 2011, 88% and 100% higher than the respective average prices during the preceding five year period. Conversely, in the past two years, the price of natural gas, the primary feedstock for nitrogen fertilizer production, has averaged $4.31 per MMBtu at the Henry Hub pricing point, a 40% decrease over the previous five year period. However, grain, nitrogen fertilizer and natural gas are commodities, the prices of which have historically been volatile and may change adversely in the future.

 

   

Projected Increasing Demand for Nitrogen. Of the three essential nutrients required for plant growth, nitrogen is generally the most important determinant of plant growth and crop yield. Nitrogen has the most consistent demand of these three nutrients because it is a key determinant of yield, and because it is the fastest to be depleted from the soil and must be reapplied annually. According to the FAO, global nitrogen fertilizer use is projected to increase by 51% between 2005 and 2030 to meet global food demand.

 

Strategically Located Asset. Our facility is located in the heart of the Mid Corn Belt in the northwestern corner of Illinois, adjacent to the Iowa and Wisconsin state lines. According to the National Corn Growers Association, Iowa and Illinois are the top two corn producing states in the United States, representing 33% of total domestic corn production in 2010.

 

The following map shows the distribution of corn acreage in the Mid Corn Belt and the location of our facility in the heart of this region:

 

LOGO

 

   

Our Attractive Market. We believe that our market, which is comprised of the States of Illinois, Iowa and Wisconsin, is a highly attractive market because of its strong and growing demand for nitrogen fertilizer. Although there is no guarantee that the demand for nitrogen fertilizer will continue to increase, ammonia usage in our market has increased 18% over the last five years. Based on information provided

 

 

4


Table of Contents
 

by Blue Johnson, for the 12 months ended June 30, 2010, the amount of ammonia consumed as fertilizer in our market was approximately 4.0 times the amount produced for sale in our market, and the amount of UAN consumed was approximately 1.4 times the amount produced for sale in our market. To meet demand, our market must rely on imports from other regions in the United States or from foreign countries. In our core market there is only one other nitrogen fertilizer facility, and we believe that there are high barriers for the construction of new nitrogen fertilizer facilities in our market.

 

   

Significant Transportation Cost Advantage in Our Market. The location of our facility gives us a significant transportation cost advantage for sales in our market compared to our competitors with facilities located outside of our market. Over the last three fiscal years, we sold an average of 93% of our ammonia and 98% of our UAN to customers in Illinois, Iowa and Wisconsin. Our customers typically pick up products from our facility by truck, arrange and pay for all related transportation costs and bear the risk of loss in transport from our facility.

 

We are the northernmost fertilizer producer on the Mississippi River, located 1,527 river miles from the Gulf of Mexico. We estimate that it currently costs between approximately $80 and $120 per ton to store and transport ammonia and between approximately $35 and $50 per ton to store and transport UAN from the United States Gulf Coast, or the Gulf Coast, into our market. Pipeline, barge and rail transportation of ammonia and UAN from the Gulf Coast face constraints that can increase transportation costs and reduce reliability.

 

History of High Average Net Sales Prices. We realized higher average net sales prices per ton of ammonia than our competitors listed in the table below for the periods presented:

 

Average Net Sales Prices Per Ton of Ammonia (1)(2)(3)

 

    Nine Months
Ended
June 30,
    12 Months Ended September 30,     Weighted Average
for Three Years
Ended
September 30,
 
    2011         2010             2009             2008         2010  
    ($/ton)  

REMC

  $ 580      $ 367      $ 722      $ 538      $ 531   

CVR Partners, LP

    534        304        365        514        378   

Terra Nitrogen Company, L.P.

    449        332        472        514        444   

Potash Corporation of Saskatchewan Inc.

    444        316        252        467        348   

 

  Source:   Public Filings
  (1)   This table sets forth the reported average sales prices per ton of ammonia, net of all reported freight, transportation and other related costs, of the listed fertilizer producers for the periods presented. The average net sales prices per ton of ammonia of our competitors included in this table are net of transportation costs reported in revenues. Our average net sales prices included in this table are net of transportation costs reported in revenues and, to the extent not already reported in revenues, any transportation costs reported in costs of sales.
  (2)   CF Industries Holdings, Inc., or CF Industries, and Agrium Inc., or Agrium, only report their respective average gross sales prices per ton of ammonia. For the nine months ended June 30, 2011 and the 12 months ended September 30, 2010, 2009 and 2008, CF Industries reported an average gross sales price per ton of ammonia of $521, $368, $614 and $470, respectively. CF Industries’ reported weighted average gross sales price per ton of ammonia for the three years ended September 30, 2010 was $457. For the nine months ended June 30, 2011 and the 12 months ended September 30, 2010, 2009 and 2008, Agrium reported an average gross sales price per ton of ammonia of $480, $342, $435 and $492, respectively. Agrium’s reported weighted average gross sales price per ton of ammonia for the three years ended September 30, 2010 was $423. Agrium data reflects domestic sales only.

 

 

5


Table of Contents
  (3)   Ammonia sales price data for privately held ammonia producers is unavailable. According to Blue Johnson, as of February 28, 2011, we and our competitors included in this table and in footnote (2) above comprised approximately 66% of the aggregate ammonia production capacity in the United States, including ammonia produced by publicly traded and privately held companies for agricultural and industrial uses or upgraded to other nitrogen products. Also, based on data from the USDA and Blue Johnson, for the 12 months ended June 30, 2009, we and our competitors included in this table and in footnote (2) above accounted for approximately 32% of the aggregate sales of nitrogen products in the United States by international and domestic producers (measured in tons of nitrogen).

 

   

Our location generally allows us to realize higher average net sales prices per ton of ammonia than our publicly traded competitors, because prevailing prices for ammonia in our market factor in the freight and transportation costs of out-of-region producers, and we generally do not have to incur such costs.

 

   

During the 10 years ended December 31, 2010, ammonia and UAN sold for premiums in the Mid Corn Belt compared to other locations such as the Gulf Coast and Tampa, Florida. For example, over the 12 months ended September 30, 2011, the average Mid Corn Belt price for ammonia was $698 per ton as compared to $518, $546 and $613 per ton in the Gulf Coast region, the Tampa, Florida market and the Southern Plains, respectively. During the same period, the average Mid Corn Belt price for UAN was $380 per ton as compared to $325 and $355 per ton in the Gulf Coast region and the Southern Plains, respectively.

 

   

Our location among the highest corn producing states allows us to sell a substantial portion of our nitrogen products into the higher-priced agricultural market, whereas several of our competitors sell a significantly higher percentage of their nitrogen products into the lower-priced industrial market. For each of the nine months ended June 30, 2011 and 2010 and the fiscal years ended September 30, 2010 and 2009, we sold over 90% of our nitrogen products to customers for agricultural uses.

 

   

Our location allows us to sell more of our ammonia during application seasons, as opposed to the off-peak fill season, because our customers in the Mid Corn Belt typically experience two application seasons for ammonia every year, one in the spring and one in the fall. Customers are typically willing to pay premium prices for our nitrogen products during application seasons, so we seek to maximize sales during these peak periods. We believe that most other corn-growing regions in the United States typically experience only a spring application season. As a result, these regions experience a longer off-peak fill season during which fertilizer distributors can purchase products at lower prices to build inventory.

 

 

6


Table of Contents
   

We believe that the location of our facility allows us to respond more quickly to our customers’ needs and to capture more sales during the short application seasons. In contrast, transportation constraints may cause our competitors to miss the short, weather-dependent application season sales window. As shown in the graph below, our sales are seasonal, and on average, we sell a greater percentage of our ammonia during the three months ending June 30 and December 31, which generally include the application seasons, than do our publicly traded competitors:

 

LOGO

 

Access to Low Cost Feedstock in North America. Natural gas typically represents approximately 75% to 85% of our cost to produce ammonia, which is the building block for all other nitrogen products. We source all of our natural gas feedstock requirements from sellers in North America, which gives us a significant cost advantage over European nitrogen fertilizer producers, who currently are experiencing higher natural gas costs and must incur high transportation costs to service the North American market. The United States is the third largest market for nitrogen fertilizers globally and is dependent on imports, a significant portion of which comes from European producers, to supply an average of over 50% of its annual nitrogen fertilizer needs between 1999 and 2009 according to the USDA. Natural gas prices in the United States have experienced significant fluctuations over the last few years and could increase in the future. Despite such fluctuations, as natural gas supplies in North America generally increased over the past five years, natural gas prices and price volatility generally have decreased and prices generally have stabilized at the lower levels. Since the beginning of 2010, European natural gas prices have increased because they are more closely linked to the price of oil, which has increased. For example, as of October 13, 2011 the natural gas price per MMBtu at the National Balancing Point, or the NBP, in Europe was $8.60 (based on an exchange rate of 6.35 GBP/Therm to $1.00/MMBtu as of October 13, 2011) compared to the Henry Hub pricing point of $3.42 in the United States. Although we have access to relatively low cost natural gas, if our competitors access cheaper natural gas or other feedstocks it could provide them with a cost advantage that could offset the savings we may experience on transportation and storage costs as a result of our location.

 

 

7


Table of Contents

High Quality Asset with Proven Track Record. Our ammonia plant utilization rate has averaged 92% over the last three fiscal years. Our facility came on stream in 1965 and, since 1998, has endured industry cycles that precipitated the closure of facilities accounting for over 35% of domestic ammonia capacity. We believe that we have been able to endure these industry cycles in part because of our location-based pricing advantage, and because our facility is configured to efficiently and quickly change our product mix and production volumes to respond to evolving market conditions. We regularly seek to improve the productivity of our facility. For example, during each of the three years ended September 30, 2010, our on-stream rates were higher than our average on-stream rates over our previous 10-year period. Our facility is located on a bluff 140 feet above the Mississippi River and is at low risk of flooding from the river, unlike the facilities of two of our competitors that have flooded in recent years. We believe it would be very difficult to build a new facility similar to ours due to high replacement costs and permitting impediments.

 

Significant Generation of Cash Available for Distribution. During the fiscal year ending September 30, 2012, subject to certain assumptions, we expect to generate Adjusted EBITDA of $100.6 million and $89.4 million of cash available for distribution. For more information regarding these amounts and the related assumptions, see “Our Cash Distribution Policy and Restrictions on Distributions—Forecasted Cash Available for Distribution.” Over the three years ended September 30, 2010, we converted an average 80% of our Adjusted EBITDA into cash available for distribution before giving effect to any payments of principal or interest under our outstanding indebtedness. We expect to maintain a high level of cash available for distribution conversion because our maintenance capital expenditures have been low relative to our Adjusted EBITDA, ranging between $7.0 million and $13.0 million per year for the four years ended September 30, 2010. Our low maintenance capital expenditures are in part due to our diligent adherence to our regular maintenance program and our in-depth understanding of our facility, which we believe has allowed us to extend significantly the average useful life of key equipment.

 

Experienced Management Team. We are managed by an experienced and dedicated team of executives with a long history in the fertilizer and chemical industries and in the management of public companies. D. Hunt Ramsbottom, Jr., Chief Executive Officer of our general partner, has over 25 years of management experience with both publicly traded and privately held companies. Dan J. Cohrs, Chief Financial Officer of our general partner, has over 25 years of experience in corporate finance, strategy and planning and mergers and acquisitions. John H. Diesch, President of our general partner, has over 29 years of experience in the fertilizer industry with nine years serving as a plant manager and 11 years serving in executive management of operating fertilizer plants. John A. Ambrose, Chief Operating Officer of our general partner, has 36 years of chemical manufacturing experience in specialty and commodity chemical manufacturing. Wilfred R. Bahl, Jr., Senior Vice President of Finance and Administration of our general partner, has 38 years of finance experience, including 31 years at our facility. Marc E. Wallis, Senior Vice President of Sales and Marketing of our general partner, has over 24 years of experience in the fertilizer industry and with our facility. Messrs. Ramsbottom, Cohrs and Diesch will spend a portion of their time managing Rentech and a portion of their time managing our business, while Messrs. Ambrose, Bahl and Wallis will spend all of their time managing our business.

 

Our Business Strategies

 

Our objective is to maximize quarterly distributions to our unitholders through the following strategies:

 

   

Distribute All of Our Cash Available for Distribution Each Quarter. Upon the closing of this offering, our policy will be to distribute all of the cash available for distribution we generate each quarter to unitholders of record on a pro rata basis. We do not intend to maintain excess distribution coverage or retain funds in order to maintain stable quarterly distributions or fund future distributions. Unlike many publicly traded limited partnerships, our general partner will have a non-economic general partner interest and will have

 

 

8


Table of Contents
 

no incentive distribution rights. Therefore, all of our cash distributions will be made to our unitholders, in contrast to other publicly traded limited partnerships, some of which distribute up to 50% of their quarterly cash distributions in excess of specified levels to their general partner. This structure is designed to maximize distributions to our unitholders and to align Rentech’s interests with those of our other unitholders. See “Our Cash Distribution Policy and Restrictions on Distributions” and “How We Make Cash Distributions.”

 

   

Pursue Organic Growth Opportunities. Since commencing operations in 1965, our facility has undergone various expansion projects that have increased production and product upgrade capabilities. We are pursuing some, and we intend to continue to evaluate additional, opportunities to increase our profitability by expanding our production capabilities and product offerings, including with the following expansion projects:

 

   

Urea Expansion and Diesel Exhaust Fluid Build-Out. We have commenced a project to increase our urea production capacity by approximately 13%, or 50 tons per day. The additional urea could be marketed as liquid urea or upgraded into UAN, both of which sell at a premium to ammonia per nutrient ton. As part of this project, we have commenced the installation of mixing, storage and load-out equipment that would enable us to produce and sell diesel exhaust fluid, or DEF, from the urea produced at our facility. DEF is a urea-based chemical reactant that is intended to reduce nitrogen oxide emissions in the exhaust systems of certain diesel engines of trucks and off-road farm and construction equipment. As an industrial product, DEF would diversify our product mix and our potential customer base. We believe that there is an expanding market for DEF, with the potential for long-term off-take contracts on favorable terms. We expect the urea expansion and DEF build-out project to cost approximately $6 million to complete. We believe the expansion project could be completed by the end of 2012. As described in “Use of Proceeds,” we intend to use a portion of the net proceeds from this offering to fund this expansion project.

 

   

Ammonia Capacity Expansion. We have commenced construction of a project that is designed to increase ammonia production at our facility by approximately 70,000 tons annually, for sale or upgrade to additional products. We have completed a feasibility study, contracted with an engineering firm to perform Front End Engineering and Design, or FEED, obtained the construction permit and commenced construction of certain long lead-time items in order to put the project on a schedule that fits with planned downtime for our 2013 turnaround. We expect FEED to be completed by early 2012, and it will result in more precise cost estimates, based on equipment purchase quotes, than those from the initial feasibility study. Based on the engineering work completed to date, our preliminary estimate is that this project could be completed in 24 to 30 months without adding significant downtime to that already planned for the 2013 turnaround, and we expect that this project could cost approximately $100 million to complete. As we complete engineering and more detailed cost estimates, which could vary substantially from current cost estimates, we will continue to evaluate the ammonia market to determine whether the expected returns on this project remain favorable. We will require additional debt and/or equity financing to complete this project. We currently intend to finance substantially all of the cost of this project with debt financing that we will seek to obtain after the closing of this offering. However, there is no guarantee that we will be able to obtain debt financing on acceptable terms or at all.

 

   

Selectively Pursue Acquisitions. The nitrogen fertilizer industry has undergone significant consolidation over the last decade as a result of mergers and acquisitions and capacity curtailments. The top five domestic nitrogen producers have increased their share of ammonia capacity in North America from 56% in 1999 to 84% in 2010. As a result, we are one of a few remaining independent operators of a nitrogen fertilizer facility that is located in the Mid Corn Belt. We expect industry

 

 

9


Table of Contents
 

consolidation to continue and intend to pursue value-enhancing acquisition opportunities as they arise. We believe that there are nitrogen fertilizer facilities in the United States that could be attractive acquisition targets for us, but whose operations are too small to attract attention from many of our larger competitors. At this time, we do not have any specific acquisition plans. However, if we pursue any of these acquisitions, we likely would need to obtain debt and/or equity financing to consummate the transactions. Acquisitions involve numerous risks and uncertainties, including the potential unavailability of financing, difficulties in completing any transaction on sufficiently favorable terms and the possibility that any expected benefits of the acquisition may not be realized. As a result, there can be no assurance that we will be able to complete any acquisitions on a timely basis or at all.

 

   

Continue to Optimize Product Mix. We believe that our facility has greater production flexibility than nitrogen fertilizer facilities currently operating in North America where all production occurs through a single processing unit, or single train. As a result of the multiple processing unit, or multi-train design of our facility, we can reduce production, if needed, by our ammonia and urea plants to as low as 66% of capacity and our nitric acid plants to as low as 33% of capacity while maintaining the efficiency of our facility, thereby avoiding more costly total plant shutdowns. Facilities with a single train are not designed to gradually reduce capacity in this manner. This design feature of our facility allows us to determine the product mix and direct our upgrade streams based on market conditions, to enhance total return on the sale of our products. This flexibility allows for production of varying amounts of nitric acid, UAN, liquid urea and granular urea each season in response to expected market demand and pricing.

 

   

Continue High Level of Asset Maintenance and Utilization Rates. We maintain and protect our high-value operating equipment at our facility through a multi-faceted maintenance program and reliability process executed by a skilled, experienced and well-trained workforce. Members of our maintenance and operations departments have been employed with our facility for an average of approximately 20 years, with a 23-year average duration for members of the maintenance department and an 18-year average duration for members of our operations department. We believe that our diligent adherence to proactive maintenance programs and the experience of our workforce minimizes unplanned shutdowns and increases our equipment’s longevity and production rates. We also regularly make investments in our facility and our equipment to improve our efficiency and reliability. As a result, during each of the three years ended September 30, 2010, our on-stream rates were higher than our average on-stream rates over our previous 10-year period.

 

   

Continue Proactive Approach to Environmental Issues. We actively monitor the constantly evolving environmental regulatory landscape and focus on proactively adapting our business to comply with anticipated or potential changes. For example, we have taken preemptive measures to reduce certain emissions from our facility because it is difficult to predict what types of governmental environmental regulations will apply to emissions from our facility in the future. For example, we voluntarily installed what we believe is the first tertiary nitrous oxide catalytic converter in the United States on one of our nitric acid plants that is designed to reduce the emissions of nitrous oxide, or N2O, from that plant by 90%. We are also in the process of installing a selective catalytic reduction, or SCR, converter on one of our nitric acid plants as part of a negotiated agreement with the Environmental Protection Agency, or EPA, to resolve alleged violations of the Clean Air Act relating to this plant. The post-installation nitrogen oxide emissions limit represents an 80% decrease from the pre-installation nitrogen oxide emissions limit.

 

   

Continue Focus on Safety. We intend to continue our focus on safety and training in order to minimize accidents and injuries to our employees, which also helps to increase our facility’s reliability and maintain our facility’s high on-stream rates for ammonia and UAN production. For each calendar year from 2005 through 2010, we received an award from the Canadian National Railway Corporation for our safe and responsible handling of dangerous goods. There have been only three federal Occupational

 

 

10


Table of Contents
 

Safety and Health Act, or OSHA, recordable injuries at our facility from the beginning of our fiscal year 2011 through the date of this prospectus.

 

Recent Developments

 

Based on preliminary data, we estimate that our revenues, gross profit and operating income, and ammonia and UAN production volumes, sales volumes and average realized sales prices for the three months and fiscal year ended September 30, 2011, as compared to the actual results for the three months and fiscal year ended September 30, 2010, will fall within the following ranges:

 

     Three Months
Ended
September 30,
2010

(actual)
     Three Months
Ended
September 30,
2011(1)
(estimated range)
     Fiscal Year
Ended
September 30,
2010

(actual)
     Fiscal Year
Ended
September 30,
2011(1)
(estimated range)
 
        Low      High         Low      High  
    

(in thousands, except product pricing)

 

Revenues(2)

   $ 35,079       $ 37,000       $ 39,000       $ 131,396       $ 178,000       $ 180,000   

Gross profit(2)

     8,151         12,000         13,000         25,376         75,500         76,500   

Operating income(2)

     6,409         9,500         10,500         20,389         69,000         70,000   
                 

Products sold (tons)

                 

Ammonia

     35         17         19         153         123         125   

UAN

     100         75         77         294         314         316   
                 

Product pricing (dollars per ton)

                 

Ammonia

   $ 398       $ 630       $ 640       $ 377       $ 580       $ 590   

UAN

     168         290         300         180         260         270   
                 

Production (tons)(3)

                 

Ammonia

     72         53         55         267         271         273   

UAN

     80         65         67         287         310         312   

 

(1)   Estimated ranges based on preliminary, unaudited data; subject to adjustment.
(2)   Revenues, gross profit and operating income include sales of all products, including those that are not presented in the table.
(3)   Ammonia production represents the total tons of ammonia produced, including ammonia produced that was upgraded into other products, such as UAN, liquid urea, granular urea and nitric acid.

 

We estimate that revenues were between $37.0 million and $39.0 million for the three months ended September 30, 2011, compared to approximately $35.1 million for the three months ended September 30, 2010. This increase was primarily due to higher prices paid for our products, resulting from stronger demand for nitrogen fertilizer products during the three months ended September 30, 2011, partially offset by decreased sales volumes of ammonia, UAN and other products during the period. Our ammonia and UAN sales volumes were lower during the three months ended September 30, 2011 because we fulfilled a number of large orders by barge during the three months ended September 30, 2010 but had no similar shipments during the comparable period in 2011. Production was lower during the three months ended September 30, 2011, as compared to the three months ended September 30, 2010, as a result of our 2011 turnaround and decreased production efficiencies leading into the turnaround. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Facility Reliability” for more information regarding our 2011 turnaround.

 

 

11


Table of Contents

We estimate that revenues were between $178.0 million and $180.0 million for the fiscal year ended September 30, 2011, compared to approximately $131.4 million for the fiscal year ended September 30, 2010. This increase was primarily the result of higher prices paid for our products during the fiscal year ended September 30, 2011, resulting from stronger demand for nitrogen fertilizer products during the period. Ammonia sales volumes decreased and UAN sales volumes increased during the fiscal year ended September 30, 2011 as we upgraded more ammonia into UAN to realize higher gross profit margins. Production was higher during the fiscal year ended September 30, 2011, as compared to the fiscal year ended September 30, 2010, as a result of our 2009 turnaround during which our facility underwent a scheduled turnaround and unplanned repairs and maintenance, which resulted in 30 and 26 off stream days for our ammonia and UAN units, respectively, during the first fiscal quarter of 2010.

 

We estimate that gross profit was between $12.0 million and $13.0 million for the three months ended September 30, 2011, compared to approximately $8.2 million for the three months ended September 30, 2010. The increase was primarily the result of higher prices paid for our products during the three months ended September 30, 2011, partially offset by decreased sales volumes of ammonia, UAN and other products during the period and additional costs relating to our 2011 turnaround. We estimate that operating income was between $9.5 million and $10.5 million for the three months ended September 30, 2011, compared to approximately $6.4 million for the three months ended September 30, 2010. The increase was primarily the result of higher prices paid for our products during the three months ended September 30, 2011, partially offset by decreased sales volumes of ammonia, UAN and other products during the period, costs relating to our 2011 turnaround and a loss on disposal relating to the removal of a selective catalyst recovery unit.

 

We estimate that gross profit was between $75.5 million and $76.5 million for the fiscal year ended September 30, 2011, compared to approximately $25.4 million for the fiscal year ended September 30, 2010. The increase was primarily the result of higher prices paid for our products and lower natural gas prices during the fiscal year ended September 30, 2011 and unplanned repairs and maintenance costs during the first fiscal quarter of 2010, partially offset by higher costs relating to our 2011 turnaround. We estimate that operating income was between $69.0 million and $70.0 million for the fiscal year ended September 30, 2011, compared to approximately $20.4 million for the fiscal year ended September 30, 2010. The increase was primarily the result of higher prices paid for our products and lower natural gas prices during the fiscal year ended September 30, 2011 and unplanned repairs and maintenance costs during the first fiscal quarter of 2010, partially offset by higher costs relating to our 2011 turnaround, additional audit and tax fees, administrative agent fees under the 2010 credit agreement, sales-based incentive bonuses and a loss on disposal relating to the removal of a selective catalyst recovery unit.

 

Although the estimates included above reflect our current best estimates, because our audited financial statements for the fiscal year ended September 30, 2011 are not yet available, these estimates are preliminary and unaudited and may be revised as a result of management’s further review of our results and the completion of our year-end audit. During the course of the preparation of our financial statements and related notes, we may identify items that would require us to make material adjustments to the preliminary financial information presented above.

 

The preliminary financial data included in this registration statement has been prepared by and is the responsibility of our management. PricewaterhouseCoopers LLP has not audited, reviewed, compiled or performed any procedures with respect to the above preliminary financial data. Accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto.

 

 

12


Table of Contents

Risk Factors

 

An investment in our common units involves risks associated with our business, our partnership structure and the tax characteristics of our common units.

 

   

We may not have sufficient cash available for distribution to pay any quarterly distributions on our common units.

 

   

The amount of our quarterly cash distributions, if any, will vary significantly both quarterly and annually and will be directly dependent on the performance of our business.

 

   

The nitrogen fertilizer business is, and nitrogen fertilizer prices are, seasonal, cyclical and highly volatile and have experienced substantial and sudden downturns in the past.

 

   

Due to our lack of asset diversification, adverse developments in the market for nitrogen fertilizer products in our region generally or at our facility in particular could adversely affect our results of operations and our ability to make distributions to our unitholders.

 

   

The board of directors and officers of our general partner have fiduciary duties to Rentech, and the interests of Rentech may differ significantly from, or conflict with, the interests of our public common unitholders.

 

   

Our unitholders have limited voting rights and are not entitled to elect our general partner or our general partner’s directors.

 

These and other risks are described further under “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” You should carefully consider these risk factors together with all other information included in this prospectus.

 

In addition, due to our relationship with Rentech, adverse developments or announcements concerning Rentech, its business, operations, financial condition or prospects could materially adversely affect our business.

 

The Transactions

 

The following transactions will take place in connection with this offering:

 

   

RDC will convert into a corporation organized under the laws of the State of Delaware;

 

   

RDC will contribute the capital stock in REMC to RNHI;

 

   

REMC will convert into a limited liability company organized under the laws of the State of Delaware and will change its name to Rentech Nitrogen, LLC;

 

   

our management services agreement with Rentech will terminate in accordance with its terms and REMC will pay Rentech any corporate overhead costs owed by REMC under the agreement, estimated to be approximately $16.6 million, as described under “Certain Relationships and Related Party Transactions—Our Agreements with Rentech—Management Services Agreement”;

 

   

REMC will distribute to RNHI all of REMC’s cash, estimated to be approximately $40.6 million;

 

   

RNHI will contribute the member interests in REMC to us in exchange for (i) 23,250,000 common units, and (ii) the right to receive approximately $39.8 million in cash, in part, as a reimbursement for expenditures made by REMC during the two-year period preceding this offering for the expansion and improvement of our facility; for federal income tax purposes, when REMC converts to a limited liability company (as described above), RNHI is treated as having been the party that made such expenditures with respect to our facility;

 

   

we will offer and sell 15,000,000 common units in this offering (17,250,000 if the underwriters exercise their option to purchase additional common units in full), and will pay related underwriting discounts and commissions and the estimated expenses of this offering;

 

 

13


Table of Contents
   

we will use approximately $198.9 million of the net proceeds of this offering to make a capital contribution to REMC for (i) the repayment in full and termination of REMC’s existing term loan and the payment of related fees and expenses in the amount of approximately $150.8 million, (ii) the payment of expenditures related to our steam methane reformer tube replacement in the amount of approximately $1.8 million, (iii) the payment of expenditures related to our urea expansion and DEF build-out project in the amount of approximately $ 5.7 million, (iv) the payment of expenditures related to FEED for our ammonia capacity expansion project in the amount of approximately $0.6 million and (v) for general working capital purposes of approximately $40.0 million;

 

   

we will distribute approximately $39.8 million of the net proceeds of this offering to RNHI to reimburse it for expenditures made by REMC during the two-year period preceding this offering for the expansion and improvement of our facility, including expenditures for preliminary work relating to our expansion projects;

 

   

we will use the balance of the net proceeds of this offering to make a distribution to RNHI;

 

   

we intend to enter into a new revolving credit facility at or as soon as practicable following the closing of this offering, which we expect to provide for revolving borrowing capacity of $25.0 million; and

 

   

if and to the extent that the underwriters exercise their option to purchase additional common units, we will use the resulting net proceeds, to redeem from RNHI, at the same price per unit as the common units sold to the public in this offering, less underwriting discounts and commissions, a number of common units equal to the number of additional common units purchased by the underwriters pursuant to such exercise.

 

After giving effect to the Transactions described above, on the closing date of this offering, we expect to have approximately $48.0 million of cash. At or as soon as practicable following the closing of this offering, we also expect to enter into our new revolving credit facility, which we expect to provide borrowing capacity of $25 million, although there is no guarantee that we will enter into the new facility on a timely basis or acceptable terms or at all. We believe that this cash, as may be supplemented by the borrowing capacity under our new revolving credit facility, will be sufficient to meet our foreseeable working capital requirements as of the closing date. See “The Transactions and Our Structure and Organization—The Transactions.”

 

About Rentech Nitrogen Partners, L.P.

 

Rentech Nitrogen Partners, L.P. was formed in Delaware in July 2011. Our principal executive offices are located at 10877 Wilshire Boulevard, Suite 600, Los Angeles, California 90024, and our telephone number is (310) 571-9800.

 

 

14


Table of Contents

THE OFFERING

 

Issuer

Rentech Nitrogen Partners, L.P., a Delaware limited partnership.

 

Common Units Offered to the Public

15,000,000 common units.

 

Option to Purchase Additional Common Units from Us

If the underwriters exercise their option to purchase 2,250,000 additional common units in full, we will issue a total of 17,250,000 common units to the public.

 

Units Outstanding after This Offering

38,250,000 common units (excluding a number of common units subject to issuance under our long-term incentive plan equal to 10% of the outstanding common units on the closing date of this offering). If and to the extent that the underwriters exercise their option to purchase additional common units, we will use the resulting net proceeds, to redeem from RNHI, at the same price per unit as the common units sold to the public in this offering, less underwriting discounts and commissions, a number of common units equal to the number of additional common units purchased by the underwriters pursuant to such exercise. Accordingly, the exercise of the underwriters’ option will not affect the total number of common units outstanding after this offering.

 

  In addition, our general partner will own a non-economic general partner interest in us which will not entitle it to receive distributions.

 

Use of Proceeds

We estimate that the net proceeds to us in this offering, after deducting underwriting discounts and commissions and the estimated expenses of this offering, will be approximately $275.0 million (based on an assumed initial public offering price of $20.00 per common unit, the mid-point of the price range set forth on the cover page of this prospectus). We intend to use:

 

   

approximately $150.8 million of the net proceeds of this offering to make a capital contribution to REMC for the repayment in full and termination of REMC’s existing term loan and the payment of related fees and expenses;

 

   

approximately $39.8 million of the net proceeds of this offering to make a distribution to RNHI to reimburse it for expenditures made by REMC during the two-year period preceding this offering for the expansion and improvement of our facility, including expenditures for preliminary work relating to our expansion projects; for federal income tax purposes, when REMC converts to a limited liability company (as described in “The Transactions and Our Structure and Organization—The Transactions”), RNHI is treated as having been the party that made such expenditures with respect to our facility;

 

   

approximately $1.8 million for the payment of expenditures related to the replacement of our steam methane reformer tubes;

 

 

15


Table of Contents
   

approximately $5.7 million for the payment of expenditures related to our urea expansion and DEF build-out project;

 

   

approximately $0.6 million for the payment of expenditures related to FEED for our ammonia capacity expansion project;

 

   

approximately $40.0 million for general working capital purposes; and

 

   

the balance of the net proceeds of this offering will be used to make a distribution to RNHI.

 

  We will require additional debt and/or equity financing to complete our ammonia capacity expansion project, which could cost approximately $100 million to complete based on preliminary estimates. See “Business—Our Business Strategies—Pursue Organic Growth Opportunities—Ammonia Capacity Expansion.”

 

  If the underwriters exercise their option to purchase up to 2,250,000 additional common units in full, the additional net proceeds would be approximately $41.9 million (and the total net proceeds to us would be approximately $316.9 million), in each case assuming an initial public offering price per common unit of $20.00 (the mid-point of the price range set forth on the cover page of this prospectus). The net proceeds from any exercise of such option will be used to redeem from RNHI, at the same price per unit as the common units sold to the public in this offering, less underwriting discounts and commissions, a number of common units equal to the number of additional common units purchased by the underwriters pursuant to such exercise. See “The Transactions and Our Structure and Organization” and “Use of Proceeds.”

 

Cash Distributions

Within 45 days after the end of each quarter, beginning with the first full quarter following the closing date of this offering, we expect to make distributions, as determined by the board of directors of our general partner, to unitholders of record on the applicable record date.

 

 

Upon the closing of this offering, our policy will be to distribute all of the cash available for distribution that we generate each quarter. Our first distribution will take place following the first full quarter after the consummation of this offering and will include cash available for distribution with respect to the period beginning on the closing date of this offering and ending on the last day of the first full quarter ending after the consummation of this offering. Cash available for distribution for each quarter will be determined by the board of directors of our general partner following the end of such quarter. We expect that cash available for distribution for each quarter will generally equal the cash we generate during the quarter, less cash needed for maintenance capital expenditures, debt service and other contractual obligations and reserves for future operating or capital needs that the board of directors of our general partner deems necessary or appropriate. We do not intend to maintain excess

 

 

16


Table of Contents
 

distribution coverage for the purpose of maintaining stability or growth in our quarterly distribution or otherwise to reserve cash for distributions, nor do we intend to incur debt to pay quarterly distributions. We expect to finance substantially all of our growth externally, either by debt issuances or additional issuances of equity.

 

  Because our policy will be to distribute all the cash available for distribution that we generate each quarter, without reserving cash for future distributions or borrowing to pay distributions during periods of low cash flow from operations, our unitholders will have direct exposure to fluctuations in the amount of cash generated by our business. We expect that the amount of our quarterly distributions, if any, will vary based on our cash flow during such quarter. As a result, our cash distributions, if any, will not be stable and will vary from quarter to quarter as a direct result of, among other things, variations in our operating performance and cash flows caused by fluctuations in the prices of our natural gas supply and the demand for and prices of our nitrogen fertilizer products. Such variations in the amount of our quarterly distributions may be significant. Unlike most publicly traded limited partnerships, we will not have a minimum quarterly distribution or employ structures intended to consistently maintain or increase distributions over time. We may change our distribution policy at any time. Our partnership agreement does not require us to pay cash distributions on a quarterly or other basis.

 

  Subject to certain assumptions and assuming the board of directors of our general partner declares distributions in accordance with our cash distribution policy, we expect that our cash available for distribution for the fiscal year ending September 30, 2012 will be approximately $89.4 million, or $2.34 per common unit. However, the investors in this offering will not receive any cash available for distribution attributable to the period beginning October 1, 2011 through the closing date of this offering. Assuming a closing date of November 1, 2011, we estimate such amount to be de minimis, but the actual amount may be significant depending on the actual closing date of this offering. See “Our Cash Distribution Policy and Restrictions on Distributions—Forecasted Cash Available for Distribution.” Unanticipated events may occur, which could materially adversely affect the actual results we achieve during the forecast period. Consequently, our actual results of operations, cash flows, need for reserves and financial condition during the forecast period may vary from the forecast, and such variations may be material. Prospective investors are cautioned not to place undue reliance on our forecast and should make their own independent assessment of our future results of operations, cash flows and financial condition. In addition, the board of directors of our general partner may be required to or elect to eliminate our distributions at any time during periods of reduced prices or demand for our products, among other reasons. See “Risk Factors.”

 

 

17


Table of Contents
  From time to time, we make product sales pursuant to product prepayment contracts, whereby we receive cash during one quarter in respect of product to be produced and sold in a future quarter, but we do not record revenue in respect of the related product sales until the quarter when product is delivered. All cash on our balance sheet in respect of product prepayments on the date of the closing of this offering will be reserved by us for general purposes and will not be distributed to RNHI at the closing of this offering.

 

  For a calculation of our ability to make distributions to unitholders based on our pro forma results of operations for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010, see “Our Cash Distribution Policy and Restrictions on Distributions—Pro Forma Cash Available for Distribution” on page 69. Our pro forma cash available for distribution generated during the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010 would have been $59.0 million and $16.9 million, respectively. However, the pro forma cash available for distribution information for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010 that we include in this prospectus does not necessarily reflect the actual cash that would have been available for distribution with respect to each of these periods.

 

Incentive Distribution Rights

None.

 

Subordination Period

None.

 

Issuance of Additional Units

Our partnership agreement authorizes us to issue an unlimited number of additional units and rights to buy units for the consideration and on the terms and conditions determined by the board of directors of our general partner without the approval of our unitholders. See “The Partnership Agreement—Issuance of Additional Partner Interests” and “Common Units Eligible for Future Sale.”

 

Limited Voting Rights

Our general partner manages us and our operations. Unlike the holders of common stock in a corporation, you will have only limited voting rights on matters affecting our business. You will have no right to elect our general partner or our general partner’s directors on an annual or other continuing basis. Our general partner may be removed by a vote of the holders of at least 662/3% of our outstanding common units, including any common units held by our general partner and its affiliates (including Rentech), voting together as a single class. Upon the closing of this offering, our general partner and its affiliates will own an aggregate of approximately 60.8% of our outstanding common units (approximately 54.9% if the underwriters exercise their option to purchase additional common units in full). See “The Partnership Agreement—Voting Rights.”

 

 

18


Table of Contents

Call Right

If at any time our general partner and its affiliates (including Rentech), own more than 80% of our common units, our general partner will have the right, but not the obligation, to purchase all, but not less than all, of the common units held by public unitholders at a price not less than their then-current market price, as calculated pursuant to the terms of our partnership agreement. There is no restriction in our partnership agreement that prevents our general partner from causing us to issue additional common units and exercising its call right. See “The Partnership Agreement—Call Right.”

 

Estimated Ratio of Taxable Income to Distributions

We estimate that if you own the common units you purchase in this offering from the date of closing of this offering through the record date for distributions for the period ending December 31, 2013 you will be allocated, on a cumulative basis, an amount of U.S. federal taxable income for that period that will be approximately 40% of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $2.34 per common unit, we estimate that your average allocable U.S. federal taxable income per year will be no more than $0.94 per common unit. See “Material U.S. Federal Income Tax Consequences—Tax Consequences of Common Unit Ownership—Ratio of Taxable Income to Distributions.”

 

Material U.S. Federal Income Tax Consequences

For a discussion of material U.S. federal income tax consequences that may be relevant to prospective unitholders, see “Material U.S. Federal Income Tax Consequences.”

 

Exchange Listing and Trading Symbol

Our common units have been approved for listing on the New York Stock Exchange, subject to official notice of issuance, under the symbol “RNF.”

 

Risk Factors

See “Risk Factors” beginning on page 26 of this prospectus for a discussion of factors that you should carefully consider before deciding to invest in our common units.

 

 

19


Table of Contents

ORGANIZATIONAL STRUCTURE

 

The following chart provides a simplified overview of our organizational structure after giving effect to the completion of the Transactions, as defined under “The Transactions and Our Structure and Organization” on page 59:

 

LOGO

 

  (1)   Assumes the underwriters do not exercise their option to purchase additional common units. If and to the extent that the underwriters exercise their option to purchase additional common units, we will use the resulting net proceeds, to redeem from RNHI, at the same price per unit as the common units sold to the public in this offering, less underwriting discounts and commissions, a number of common units equal to the number of additional common units purchased by the underwriters pursuant to such exercise. Accordingly, the exercise of the underwriters’ option will not affect the total number of common units outstanding after this offering.

 

  (2)   Does not include a number of common units subject to issuance under our long-term incentive plan equal to 10% of the outstanding common units on the closing date of this offering.

 

  (3)   In connection with the Transactions, REMC will convert into a limited liability company organized under the laws of the State of Delaware and will change its name to Rentech Nitrogen, LLC.

 

 

20


Table of Contents

SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION

 

The summary financial information presented below under the caption “Statement of Operations Data” for the fiscal years ended September 30, 2010, 2009 and 2008 and the summary financial information presented below under the caption “Balance Sheet Data” as of September 30, 2010 and 2009, have been derived from REMC’s audited financial statements included elsewhere in this prospectus. REMC’s financial statements for the fiscal years ended September 30, 2010 and 2009 have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm. REMC’s financial statements for the fiscal year ended September 30, 2008 have been audited by Ehrhardt Keefe Steiner & Hottman PC, an independent registered public accounting firm. The summary financial information presented below under the caption “Balance Sheet Data” as of September 30, 2008, have been derived from REMC’s audited financial statements that are not included in this prospectus.

 

The summary financial information presented below under the caption “Statement of Operations Data” for the nine months ended June 30, 2011 and 2010, and the summary financial information presented below under the caption “Balance Sheet Data” as of June 30, 2011, have been derived from REMC’s unaudited condensed financial statements included elsewhere in this prospectus which, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair statement of REMC’s financial position at June 30, 2011, and the results of operations for the interim periods presented. Operating results for the nine months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2011. The summary financial information presented below under the caption “Balance Sheet Data” as of June 30, 2010, have been derived from REMC’s unaudited financial statements that are not included in this prospectus.

 

REMC’s financial statements included elsewhere in this prospectus include certain costs of Rentech that were incurred on REMC’s behalf. The financial statements include an allocation of costs and certain other amounts in order to account for a reasonable share of expenses, so that the accompanying consolidated financial statements reflect substantially all of our historical costs of doing business. The amounts charged or allocated to REMC are not necessarily indicative of the costs that REMC would have incurred had REMC operated as a stand-alone company for all periods presented. These financial statements do not include estimates of the incremental general and administrative expenses attributable to operating as a publicly traded limited partnership.

 

The summary pro forma financial information presented below under the caption “Statement of Operations Data” for the nine months ended June 30, 2011 and for the fiscal year ended September 30, 2010 and the summary pro forma financial information presented below under the caption “Balance Sheet Data” as of June 30, 2011, have been derived from REMC’s unaudited pro forma condensed financial statements included elsewhere in this prospectus. The pro forma statement of operations data for the nine months ended June 30, 2011 and for the fiscal year ended September 30, 2010 assumes that the Transactions (as defined on page 59 of this prospectus) occurred on October 1, 2009. The unaudited pro forma balance sheet data as of June 30, 2011 assumes that the Transactions occurred on June 30, 2011. The pro forma financial data is not comparable to our historical financial data. A more complete explanation of the pro forma financial data can be found in our unaudited pro forma condensed financial statements and accompanying notes included elsewhere in this prospectus. Neither the pro forma statement of operations data nor the pro forma balance sheet data include estimates of the incremental costs of operating as a publicly traded limited partnership.

 

 

21


Table of Contents

The data below should be read in conjunction with, and is qualified in its entirety by reference to, the historical and pro forma financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

     Historical           Pro Forma  
     Nine Months
Ended
June 30,
    Fiscal Year
Ended
September 30,
          Nine Months
Ended

June 30,
    Fiscal Year
Ended
September 30,
 
     2011     2010     2010     2009     2008           2011     2010  
    

(in thousands, except product pricing and per unit data)

          (in thousands)  

STATEMENT OF OPERATIONS DATA

                   

Revenues(1)

   $ 141,291      $ 96,317      $ 131,396      $ 186,449      $ 216,615           $ 141,291      $ 131,396   

Cost of sales(2)

     77,535        79,092        106,020        125,888        160,633             77,535        106,020   

Gross profit

     63,756        17,225        25,376        60,561        55,982             63,756        25,376   

Operating income

     59,478        13,980        20,389        55,313        51,752             58,552        19,528   

Other expenses, net(3)

     (23,002     (9,349     (12,036     (8,578     (1,779          (248     (301

Income before income taxes

     36,476        4,631        8,353        46,735        49,973             58,304        19,227   

Income tax expense

     14,909        1,840        3,344        18,576        19,875                      

Net income

     21,567        2,791        5,009        28,159        30,098             58,304        19,227   

Financial and Other Data:

                   

Cash flows provided by operating activities

     44,484        2,817        18,397        24,309        61,962            

Cash flows used in investing activities

     (12,382     (9,074     (9,836     (12,701     (8,260         

Cash flows provided by (used in) financing activities

     (45,592     1,288        (10,288     (31,215     (24,814         

Adjusted EBITDA(4)

     66,989        21,748        30,967        63,709        60,381             66,391        30,543   

Capital expenditures for property, plant and equipment

     12,398        9,088        9,850        12,701        8,260             12,398        9,850   

Key Operating Data:

                   

Products sold (tons):

                   

Ammonia

     106        118        153        126        173            

UAN

     238        195        294        267        313            

Product pricing (dollars per ton)(5):

                   

Ammonia

   $ 580      $ 371      $ 377      $ 726      $ 539            

UAN

     259        185        180        267        308            

Production (tons)(6):

                   

Ammonia

     218        194        267        267        299            

UAN

     245        207        287        274        311            

On-stream factors(7):

                   

Ammonia

     100.0     89.0     91.8     98.1     99.5         

UAN

     100.0     90.8     92.9     96.7     98.4         

 

     Nine Months
Ended

June  30,
2011
     Fiscal Year
Ended
September 30,
2010
 

Pro forma earnings per common unit(8):

     

Basic and Diluted

   $ 1.52       $ 0.50   

Pro forma weighted average common units outstanding(8):

     

Basic

     38,250         38,250   

Diluted

     38,266         38,272   

 

 

22


Table of Contents
     Historical           Pro Forma  
     As of
June 30,
     As of
September 30,
          As of
June 30,
 
     2011     2010      2010      2009     2008           2011  
     (in thousands)                 (in thousands)  

BALANCE SHEET DATA

                   

Cash and cash equivalents

   $ 21,444      $ 31,692       $ 34,934       $ 36,661      $ 56,268           $ 48,000   

Working capital

     (15,961     12,264         22,565         (2,860     31,251             17,195   

Construction in progress

     10,753        5,219         2,474         6,882        3,490             10,753   

Total assets

     111,278        110,954         108,837         115,769        159,552             129,860   

Total long-term liabilities

     125,242        36,020         54,549         7,642        59,045             260   

Total stockholder’s equity (deficit) / partners’ capital

     (79,492     31,603         20,334         42,433        26,118             111,090   

 

(1)   Revenues reflect prices charged to customers, including freight and transportation costs, if any, and sales of natural gas of excess inventory, if any. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.”
(2)   Cost of sales is comprised of product shipments costs (including costs for natural gas, labor, electricity, upgrading, storage and loading, barging, sales commissions to Agrium and depreciation and amortization), turnaround expenses and cost of sales of natural gas of excess inventory and cost of sales of natural gas with simultaneous purchase, as shown below:

 

    Historical          Pro Forma  
    Nine Months
Ended
June 30,
     Fiscal Year
Ended
September 30,
         Nine Months
Ended
June 30,
    Fiscal Year
Ended
September 30,
 
    2011      2010      2010      2009      2008    

 

  2011     2010  
   

(in thousands)

         (in thousands)  

Cost of sales:

                     

Product shipments(a)

  $ 77,510       $ 72,781       $ 99,749       $ 98,968       $ 153,862          $ 77,510      $ 99,749   

Turnaround expenses

    25         3,995         3,955         149                    25        3,955   

Sales of excess inventory of natural gas

            2,259         2,259         3,996         3,731                   2,259   

Simultaneous sale and purchase of natural gas

            57         57         22,775         3,040                   57   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

   

 

 

 

Total

  $ 77,535       $ 79,092       $ 106,020       $ 125,888       $ 160,633          $ 77,535      $ 106,020   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

   

 

 

 

 

(a)   Cost of product shipments include sales commissions and the portion of depreciation and amortization included in cost of sales. For the nine months ended June 30, 2011 and 2010, sales commissions were approximately $4.8 million and $3.2 million, respectively, and depreciation and amortization (in cost of sales) was approximately $7.2 million and $7.3 million, respectively. For the fiscal year ended September 30, 2010, 2009 and 2008, sales commissions were approximately $4.4 million, $3.7 million and $6.3 million, respectively, and depreciation and amortization (in cost of sales) was approximately $10.1 million, $8.3 million and $8.4 million, respectively.

 

 

23


Table of Contents
(3)   Other expenses, net is comprised of the following components:

 

    Historical          Pro Forma  
    Nine Months
Ended
June 30,
    Fiscal Year
Ended
September 30,
         Nine Months
Ended
June 30,
    Fiscal Year
Ended
September 30,
 
    2011     2010     2010     2009     2008          2011     2010  
   

(in thousands)

        

(in thousands)

 

Other income (expenses), net:

                 

Interest income

  $ 40      $ 46      $ 57      $ 190      $ 891          $ 40      $ 57   

Interest expense

    (9,230     (7,278     (9,859     (8,481     (2,747         (292     (392

Loss on debt extinguishment

    (13,816     (2,268     (2,268                                

Other income (expense), net

    4        151        34        (287     77            4        34   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   

 

 

 

Total

  $ (23,002   $ (9,349   $ (12,036   $ (8,578   $ (1,779       $ (248   $ (301
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

 

(4)   Adjusted EBITDA is defined as net income plus interest expense and other financing costs, income tax expense, non-cash compensation expense and depreciation and amortization, net of interest income. In calculating historical Adjusted EBITDA, no adjustment has been made for non-cash compensation expense, which was de minimis in each of the periods presented.

 

Adjusted EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors and commercial banks, to assess:

 

   

The financial performance of our assets without regard to financing methods, capital structure or historical cost basis; and

 

   

Our operating performance and return on invested capital compared to those of other publicly traded limited partnerships, without regard to financing methods and capital structure.

 

Adjusted EBITDA should not be considered an alternative to net income, operating income, net cash provided by operating activities or any other measure of financial performance or liquidity presented in accordance with United States generally accepted accounting principles, or GAAP. Adjusted EBITDA may have material limitations as a performance measure because it excludes items that are necessary elements of our costs and operations. In addition, Adjusted EBITDA presented by other companies may not be comparable to our presentation, since each company may define these terms differently.

 

    Historical          Pro Forma  
    Nine Months
Ended
June 30,
    Fiscal Year
Ended
September 30,
         Nine Months
Ended
June 30,
    Fiscal Year
Ended
September 30,
 
    2011     2010     2010     2009     2008          2011     2010  
   

(in thousands)

         (in thousands)  

Net income

  $ 21,567      $ 2,791      $ 5,009      $ 28,159      $ 30,098          $ 58,304      $ 19,227   

Add:

                 

Interest income

    (40     (46     (57     (190     (891         (40     (57

Interest expense

    9,230        7,278        9,859        8,481        2,747            292        392   

Loss on debt extinguishment

    13,816        2,268        2,268                                   

Income tax expense

    14,909        1,840        3,344        18,576        19,875                     

Non-cash compensation expense

                                           328        437   

Depreciation and amortization

    7,507        7,617        10,544        8,683        8,552            7,507        10,544   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   

 

 

 

Adjusted EBITDA

  $ 66,989      $ 21,748      $ 30,967      $ 63,709      $ 60,381          $ 66,391      $ 30,543   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

 

(5)   Product pricing for ammonia and UAN is inclusive of any amounts of freight and transportation costs charged to customers.
(6)   Ammonia production represents the total tons of ammonia produced, including ammonia produced that was upgraded into other products, such as UAN, liquid urea, granular urea and nitric acid.
(7)   The respective on-stream factors for the ammonia and UAN plants equal the total days the applicable plant operated in any given period, divided by the total days in that period.

 

 

24


Table of Contents
(8)   Pro forma earnings per common unit is presented for the nine months ended June 30, 2011 and the fiscal year ended September 30, 2010 to (i) give effect to the repayment in full of REMC’s existing term loan; (ii) add back to net income (a) the interest expense recorded in REMC’s statement of operations related to its existing term loan and previous term loans, (b) loss on debt extinguishment and, (c) fees and loan modification costs related to various term loans; and (iii) give effect to the issuance of common units in this offering. The number of common units issued assumes an initial public offering price of $20.00 per common unit (the mid-point of the price range set forth on the cover page of this prospectus) and a closing date of November 1, 2011.

 

 

25


Table of Contents

RISK FACTORS

 

You should carefully consider each of the following risks and all of the information set forth in this prospectus before deciding to invest in our common units. If any of the following risks and uncertainties develops into an actual event, our business, financial condition, cash flow or results of operations could be materially adversely affected. In that case, we might not be able to pay distributions on our common units, the trading price of our common units could decline, and you could lose all or part of your investment. Although many of our business risks are comparable to those faced by a corporation engaged in a similar business, limited partner interests are inherently different from the capital stock of a corporation and involve additional risks described below.

 

Risks Related to Our Business

 

We may not have sufficient cash available for distribution to pay any quarterly distributions on our common units. For the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010, on a pro forma basis, our annual distribution would have been $1.54 and $0.44 per unit, respectively, significantly less than the $2.34 per unit distribution we project that we will be able to pay for the fiscal year ending September 30, 2012.

 

We may not have sufficient cash available for distribution each quarter to enable us to pay any distributions to our common unitholders. Furthermore, our partnership agreement does not require us to pay distributions on a quarterly basis or otherwise. For the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010, on a pro forma basis, our annual distribution would have been $1.54 and $0.44 per unit, respectively, significantly less than the $2.34 per unit distribution we project that we will be able to pay for the fiscal year ending September 30, 2012. Our expected aggregate annual distribution amount for the fiscal year ending September 30, 2012 is based on the assumptions set forth in “Our Cash Distribution Policy and Restrictions on Distributions—Forecasted Cash Available for Distribution—Assumptions and Considerations.” If these assumptions prove to be inaccurate, our actual distribution for the fiscal year ending September 30, 2012 will be significantly lower than our forecasted distribution, or we may not be able to pay a distribution at all. The amount of cash we will be able to distribute on our common units principally depends on the amount of cash we generate from our operations, which is directly dependent upon the operating margins we generate, which have been volatile historically, and cash collections under product prepayment contracts for our products. Our operating margins are significantly affected by the price and availability of natural gas, market-driven product prices we are able to charge our customers and our production costs, as well as seasonality, weather conditions, governmental regulation, unplanned maintenance or shutdowns at our facility and global and domestic demand for nitrogen fertilizer products, among other factors. In addition:

 

   

Our partnership agreement will not provide for any minimum quarterly distribution and our quarterly distributions, if any, will be subject to significant fluctuations directly related to the cash we generate after payment of our expenses due to the nature of our business.

 

   

The amount of distributions we make, if any, and the decision to make any distribution at all will be determined by the board of directors of our general partner, whose interests may differ from those of our common unitholders. Our general partner has limited fiduciary and contractual duties, which may permit it to favor its own interests or the interests of Rentech to the detriment of our common unitholders.

 

   

Our new revolving credit facility, and any credit facility or other debt instruments we enter into in the future, may limit the distributions that we can make. Our new revolving credit facility or any future credit facility or debt instruments we enter into may contain financial tests and covenants that we must satisfy. Any failure to comply with these tests and covenants could result in the applicable lenders prohibiting distributions by us.

 

   

The amount of cash available to pay any quarterly distribution to our unitholders depends primarily on our cash flow, and not solely on our profitability, which is affected by non-cash items that may be large

 

26


Table of Contents
 

relative to our reported net income. As a result, we may make distributions during periods when we record losses and may not make distributions during periods when we record net income.

 

   

The actual amount of cash available for distribution will depend on numerous factors, some of which are beyond our control, including the availability and price of natural gas, ammonia and UAN prices, our operating costs, global and domestic demand for nitrogen fertilizer products, fluctuations in our capital expenditures and working capital needs, our product pre-sale and cash collection cycle and the amount of fees and expenses we incur.

 

   

Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, or Delaware Act, we are prohibited from making a distribution to our limited partners if the distribution would cause our liabilities to exceed the fair value of our assets.

 

For a description of additional restrictions and factors that may affect our ability to make cash distributions, see “Our Cash Distribution Policy and Restrictions on Distributions.”

 

The amount of our quarterly cash distributions, if any, will vary significantly both quarterly and annually and will be directly dependent on the performance of our business. Unlike most publicly traded limited partnerships, we will not have a minimum quarterly distribution or employ structures intended to consistently maintain or increase distributions over time.

 

Investors who are looking for an investment that will pay regular and predictable quarterly distributions should not invest in our common units. We expect our business performance will be more seasonal and volatile, and our cash flow will be less stable, than the business performance and cash flow of most publicly traded limited partnerships. As a result, our quarterly cash distributions will be volatile and are expected to vary quarterly and annually. Unlike most publicly traded limited partnerships, we will not have a minimum quarterly distribution or employ structures intended to consistently maintain or increase distributions over time. The amount of our quarterly cash distributions will be directly dependent on the performance of our business, which has been volatile historically as a result of volatile nitrogen fertilizer and natural gas prices, unplanned outages, seasonal and global fluctuations in demand for nitrogen fertilizer products and the timing of our product pre-sale and cash collections. Because our quarterly distributions will be subject to significant fluctuations directly related to the cash we generate after payment of our fixed and variable expenses, future quarterly distributions paid to our unitholders will vary significantly from quarter to quarter and may be zero. Given the seasonal nature of our business, we expect that our unitholders will have direct exposure to fluctuations in the margins we realize on sales of nitrogen fertilizers and other products that we produce. In addition, we frequently make product sales pursuant to product prepayment contracts, whereby we receive cash in respect of product to be picked up by or delivered to a customer at a later date, but do not record revenue in respect of such sales until product is picked up or delivered. The cash received from product prepayments increases our operating cash flow in the quarter in which the cash is received, but may effectively reduce our operating cash flow in a subsequent quarter if the cash was received in a quarter prior to the one in which the revenue is recorded.

 

We may modify or revoke our cash distribution policy at any time at our discretion. Our partnership agreement does not require us to make any distributions at all.

 

Our initial cash distribution policy will be to distribute all of the cash available for distribution we generate each quarter to unitholders of record on a pro rata basis. However, we may change such policy at any time at its discretion and could elect not to make distributions for one or more quarters. Our partnership agreement does not require us to make any distributions at all. Accordingly, investors are cautioned not to place undue reliance on the permanence of such a policy in making an investment decision. Any modification or revocation of our cash distribution policy could substantially reduce or eliminate the amounts of distributions to our unitholders.

 

27


Table of Contents

The assumptions underlying the forecast of cash available for distribution that we include in “Our Cash Distribution Policy and Restrictions on Distributions—Forecasted Cash Available for Distribution ” are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those forecasted.

 

Our forecast of cash available for distribution set forth in “Our Cash Distribution Policy and Restrictions on Distributions—Forecasted Cash Available for Distribution ” includes our forecast of results of operations and cash available for distribution for the fiscal year ending September 30, 2012. The forecast included in this prospectus has been prepared by, and is the responsibility of, our management. Neither PricewaterhouseCoopers LLP nor Ehrhardt Keefe Steiner & Hottman PC has examined, compiled or performed any procedures with respect to the forecast, and accordingly, PricewaterhouseCoopers LLP and Ehrhardt Keefe Steiner & Hottman PC do not express an opinion or any other form of assurance with respect thereto. The PricewaterhouseCoopers LLP report and the Ehrhardt Keefe Steiner & Hottman PC report included in this prospectus relate to our historical financial information. The reports do not extend to the forecast and should not be read to do so. The assumptions underlying the forecast are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks and uncertainties, including those discussed in this section, which could cause actual results to differ materially from those forecasted. If we do not achieve the forecasted results, we would not be able to pay the forecasted annual distribution, in which event the market price of the common units may decline materially. Our actual results may differ materially from the forecasted results presented in this prospectus. In addition, based on our historical results of operations, which have been seasonal and volatile, our annual distribution for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010, on a pro forma basis, would have been significantly less than the distribution we forecast that we will be able to pay for the fiscal year ending September 30, 2012. Investors should review the forecast of our results of operations for the fiscal year ending September 30, 2012 together with the other information included elsewhere in this prospectus, including “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

The pro forma cash available for distribution information for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010 that we include in this prospectus does not necessarily reflect the actual cash that would have been available.

 

We have included in this prospectus pro forma cash available for distribution information for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010, which indicates the amount of cash that we would have had available for distribution during those periods on a pro forma basis. This pro forma information is based on numerous estimates and assumptions. Our financial performance, had the Transactions (as defined on page 59 of this prospectus) actually occurred at the beginning of such 12-month periods, could have been materially different from the pro forma results. Accordingly, investors should review the unaudited pro forma information, including the related footnotes, together with the other information included elsewhere in this prospectus, including “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our actual results may differ, possibly materially, from those presented in the pro forma cash available for distribution information.

 

Our operations may become unprofitable and may require substantial working capital financing.

 

During each of the four fiscal years ended September 30, 2010, 2009, 2008 and 2007, we generated positive income from operations and positive cash flow from operations. However, during the fiscal year ended September 30, 2006, we operated at a net loss despite the fact that we generated positive cash flow from operations. In prior fiscal years, we sustained losses and negative cash flow from operations. Our profits and cash flow are subject to changes in the prices for our products and our main input, natural gas, which are commodities, and, as such, the prices can be volatile in response to numerous factors outside of our control. Our profits depend on maintaining high rates of production of our products, and interruptions in operations at our facility could materially adversely affect our profitability. In addition, at or as soon as practicable following the closing of this

 

28


Table of Contents

offering, we intend to enter into our new revolving credit facility, which we expect to provide for revolving borrowing capacity of $25 million. We cannot assure you that we will be able to enter into our new revolving credit facility on a timely basis or acceptable terms or at all. If we are not able to operate our facility at a profit or if we are not able to retain cash or access a sufficient amount of additional financing for working capital, our business, financial condition, cash flow, results of operations and ability to pay cash distributions could be materially adversely affected, which could adversely affect the trading price of our common units.

 

The nitrogen fertilizer business is, and nitrogen fertilizer prices are, seasonal, cyclical and highly volatile and have experienced substantial and sudden downturns in the past. Currently, nitrogen fertilizer demand is at a relative high point and could decrease significantly in the future. Cycles in demand and pricing could potentially expose us to significant fluctuations in our operating and financial results, and expose you to substantial volatility in our quarterly distributions and material reductions in the trading price of our common units.

 

We are exposed to fluctuations in nitrogen fertilizer demand and prices in the agricultural industry. These fluctuations historically have had, and could in the future have, significant effects on prices across all nitrogen fertilizer products and, in turn, our financial condition, cash flow and results of operations, which could result in significant volatility or material reductions in the price of our common units or an inability to make cash distributions on our common units.

 

Nitrogen fertilizer products are commodities, the prices of which can be highly volatile. The price of nitrogen fertilizer products depends on a number of factors, including general economic conditions, cyclical trends in end-user markets, supply and demand imbalances, the prices of natural gas and other raw materials, and weather conditions, all of which have a greater relevance because of the seasonal nature of fertilizer application. If seasonal demand exceeds the projections on which we base production, our customers may acquire nitrogen fertilizer products from our competitors, and our profitability will be negatively impacted. If seasonal demand is less than we expect, we will be left with excess inventory that will have to be stored or liquidated, the costs of which could adversely affect our operating margins and our ability to pay cash distributions.

 

Demand for nitrogen fertilizer products is dependent on demand for crop nutrients by the global agricultural industry. Nitrogen fertilizer products are currently in high demand, driven by a growing world population, changes in dietary habits and an expanded production of corn. Supply is affected by available capacity and operating rates of nitrogen producers, raw material costs, government policies and global trade. A significant or prolonged decrease in nitrogen fertilizer prices would have a material adverse effect on our business, cash flow and ability to make distributions.

 

Any decline in United States agricultural production or crop prices or limitations on the use of nitrogen fertilizer for agricultural purposes could have a material adverse effect on the market for nitrogen fertilizer, and on our results of operations, financial condition and ability to make cash distributions.

 

Conditions in the United States agricultural industry significantly impact our operating results. This is particularly the case in the production of corn, which is a major driver of the demand for nitrogen fertilizer products in the United States. The United States agricultural industry in general, and the production and prices of corn in particular, can be affected by a number of factors, including weather patterns and soil conditions, current and projected grain inventories and prices, domestic and international supply of and demand for United States agricultural products and United States and foreign policies regarding trade in agricultural products. Prices for these agricultural products can decrease suddenly and significantly. For example, in June 2011, an unexpectedly large corn crop estimate resulted in an approximately 20% decrease in corn prices from their peak levels earlier in the month, the largest monthly decrease since June 2009.

 

State and federal governmental regulations and policies, including farm and biofuel subsidies and commodity support programs, as well as the prices of fertilizer products, may also directly or indirectly influence

 

29


Table of Contents

the number of acres planted, the mix of crops planted and the use of fertilizers for particular agricultural applications. 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 nitrogen fertilizer. 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. The adoption or enforcement of such regulations could adversely affect the demand for and prices of nitrogen fertilizers, which could adversely affect our results of operations, cash flows and ability to make cash distributions to our unitholders.

 

A major factor underlying the current high level of demand for our nitrogen-based fertilizer products is the expanding production of ethanol. A decrease in ethanol production, an increase in ethanol imports or a shift away from corn as a principal raw material used to produce ethanol could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.

 

A major factor underlying the current level of demand for corn and the use of nitrogen fertilizer products is the current production level of ethanol in the United States. Ethanol production in the United States is dependent in part upon a myriad of federal and state incentives. Such incentive programs may not be renewed, or if renewed, they may be renewed on terms significantly less favorable to ethanol producers than current incentive programs. Studies showing that expanded ethanol production may increase the level of greenhouse gases, or GHGs, in the environment, or other factors, may reduce political support for ethanol production. For example, on June 16, 2011, the United States Senate voted to eliminate the Volumetric Ethanol Excise Tax Credit, or VEETC, which provides for a 45 cents per gallon tax credit to blenders and refiners for gasoline that has been blended with ethanol. Even if the VEETC is not ultimately repealed, it is scheduled to expire on December 31, 2011, and we cannot guarantee that it will be renewed or that any other ethanol-related subsidy will be implemented in its place. Furthermore, the current trend in ethanol production research is to develop an efficient method of producing ethanol from cellulose-based biomass. If the VEETC is eliminated or an efficient method of producing ethanol from cellulose-based biomass is developed and commercially deployed at scale, the demand for corn may decrease significantly. Any reduction in the demand for corn and, in turn, for nitrogen fertilizer products could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions to our unitholders.

 

Nitrogen fertilizer products are global commodities. Any decrease in the price of nitrogen fertilizer products from foreign countries could harm us.

 

Fertilizers are global commodities, with little or no product differentiation, and customers make their purchasing decisions principally on the basis of delivered price and availability of the product. In recent years, the price of nitrogen fertilizer in the United States has been substantially driven by pricing in the global fertilizer market and favorable prices for natural gas in the United States as compared to those in foreign countries. If foreign natural gas prices become lower than natural gas prices in the United States, competition from foreign businesses will likely increase and this could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions to our unitholders.

 

We face intense competition from other nitrogen fertilizer producers.

 

We have a number of competitors in the United States and in other countries, including state-owned and government-subsidized entities. Our principal competitors include domestic and foreign fertilizer producers, major grain companies and independent distributors and brokers, including Koch Industries, Inc., or Koch, CF Industries, Agrium, Gavilon, LLC, CHS Inc., Transammonia, Inc. and Helm Fertilizer Corp. Some competitors have greater total resources, or better name recognition, 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. For example, certain of our competitors have announced that they currently have expansions planned or underway to increase production capacity of their nitrogen fertilizer products. Furthermore, there are a few dormant nitrogen production facilities located outside of the States of

 

30


Table of Contents

Illinois, Indiana and Iowa that are scheduled to resume operations in the near future. We may face additional competition due to the expansion of facilities that are currently operating and the reopening of currently dormant facilities. In addition, competitors utilizing different corporate structures may be better able to withstand lower cash flow than we can as a limited partnership. Our competitive position could suffer to the extent we are not able to adapt our product mix to meet the needs of our customers or expand our own resources either through investments in new or existing operations or through acquisitions, joint ventures or partnerships. An inability to compete successfully could result in the loss of customers, which could adversely affect our sales and profitability, and our ability to make cash distributions to our unitholders. In addition, as a result of increased pricing pressures caused by competition, we may in the future experience reductions in our profit margins on sales, or may be unable to pass future input price increases on to our customers, which would reduce our cash flows and the cash available for distribution to our unitholders.

 

Our business is seasonal, which may result in our carrying significant amounts of inventory and seasonal variations in working capital. Our inability to predict future seasonal nitrogen fertilizer demand accurately may result in excess inventory or product shortages.

 

Our business is highly seasonal. Historically, most of the annual deliveries of our products have occurred during the quarters ending June 30 and December 31 of each year due to the condensed nature of the spring planting season and the fall harvest. Farmers in our market tend to apply nitrogen fertilizer during two short application periods, one in the spring and the other in the fall. Since interim period operating results reflect the seasonal nature of our business, they are not indicative of results expected for the full fiscal year. In addition, results for comparable quarters can vary significantly from one year to the next due primarily to weather-related shifts in planting schedules and purchase patterns of our customers. We expect to incur substantial expenditures for fixed costs throughout the year and substantial expenditures for inventory in advance of the spring planting season and fall harvest season. Seasonality also relates to the limited windows of opportunity that nitrogen fertilizer customers have to complete required tasks at each stage of crop cultivation. Should events such as adverse weather or production or transportation interruptions occur during these seasonal windows, we would face the possibility of reduced revenue without the opportunity to recover until the following season. In addition, an adverse weather pattern affecting our core market could have a material adverse effect on the demand for our products and our revenues, and we may not have sufficient geographic diversity in our customer base to mitigate such effects. Because of the seasonality of agriculture, we also expect to face the risk of significant inventory carrying costs should our customers’ activities be curtailed during their normal seasons. The seasonality can negatively impact accounts receivable collections and increase bad debts. In addition, variations in the proportion of product sold through forward sales and variances in the terms and timing of product prepayment contracts can affect working capital requirements and increase the seasonal and year-to-year volatility of our cash flow and on cash available for distribution to our unitholders.

 

If seasonal demand exceeds our projections, we will not have enough product and our customers may acquire products from our competitors, which would negatively impact our profitability. If seasonal demand is less than we expect, we will be left with excess inventory and higher working capital and liquidity requirements.

 

The degree of seasonality of our business can change significantly from year to year due to conditions in the agricultural industry and other factors. As a consequence of our seasonality, we expect that our distributions will be volatile and will vary quarterly and annually.

 

Any operational disruption at our facility as a result of equipment failure, an accident, adverse weather, a natural disaster or another interruption could result in a reduction of sales volumes and could cause us to incur substantial expenditures. A prolonged disruption could materially affect the cash flow we expect from our facility, or lead to a default under our new revolving credit facility.

 

The equipment at our facility could fail and could be difficult to replace. Our facility may be subject to significant interruption if it were to experience a major accident or equipment failure or if it were damaged by

 

31


Table of Contents

severe weather or natural disaster. Significant shutdowns at our facility could significantly reduce the amount of product available for sale, which could reduce or eliminate profits and cash flow from our operations. Repairs to our facility in such circumstances could be expensive, and could be so extensive that our facility could not economically be placed back into service. It has become increasingly difficult to obtain replacement parts for equipment and the unavailability of replacement parts could impede our ability to make repairs to our facility when needed. We currently maintain property insurance, including business interruption insurance, but we may not have sufficient coverage, or may be unable in the future to obtain sufficient coverage at reasonable costs. A prolonged disruption at our facility could materially affect the cash flow we expect from our facility, or lead to a default under our new revolving credit facility. In addition, operations at our facility are subject to hazards inherent in chemical processing. Some of those hazards may cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties. As a result, operational disruptions at our facility could materially adversely impact our business, financial condition, results of operations and cash flow.

 

The market for natural gas has been volatile. Natural gas prices are currently at a relative low point. If prices for natural gas increase significantly, we may not be able to economically operate our facility.

 

The operation of our facility with natural gas as the primary feedstock exposes us to market risk due to increases in natural gas prices, particularly if the price of natural gas in the United States were to become higher than the price of natural gas outside the United States. During 2008, natural gas prices spiked to near-record high prices. This was due to various supply and demand factors, including the increasing overall demand for natural gas from industrial users, which is affected, in part, by the general conditions of the United States and global economies, and other factors. The profitability of operating our facility is significantly dependent on the cost of natural gas, and our facility has operated in the past, and may operate in the future, at a net loss. Since we expect to purchase a substantial portion of our natural gas for use in our facility on the spot market we remain susceptible to fluctuations in the price of natural gas. We also expect to use short-term, fixed supply, fixed price forward purchase contracts to lock in pricing for a portion of our natural gas requirements. Our ability to enter into forward purchase contracts is dependent upon our creditworthiness and, in the event of a deterioration in our credit, counterparties could refuse to enter into forward purchase contracts on acceptable terms. If we are unable to enter into forward purchase contracts for the supply of natural gas, we would need to purchase natural gas on the spot market, which would impair our ability to hedge our exposure to risk from fluctuations in natural gas prices. Moreover, forward purchase contracts may not protect us from increases in natural gas prices. A hypothetical increase of $0.10 per MMBtu of natural gas would increase our cost to produce one ton of ammonia by approximately $3.50. Higher than anticipated costs for the catalyst and other materials used at our facility could also adversely affect operating results. These increased costs could materially and adversely affect our results of operations, financial condition and ability to make cash distributions.

 

An increase in natural gas prices could impact our relative competitive position when compared to other foreign and domestic nitrogen fertilizer producers.

 

We rely on natural gas as our primary feedstock, and the cost of natural gas is a large component of the total production cost for our nitrogen fertilizer. The dramatic increase in nitrogen fertilizer prices in recent years was not the direct result of an increase in natural gas prices, but rather the result of increased demand for nitrogen-based fertilizers due to historically low stocks of global grains and a surge in the prices of corn and wheat, the primary crops in the Mid Corn Belt region. This increase in demand for nitrogen fertilizers has created an environment in which nitrogen fertilizer prices have diverged from their traditional correlation with natural gas prices. An increase in natural gas prices would impact our operations by making us less competitive with competitors who do not use natural gas as their primary feedstock, and would therefore have a material adverse impact on the trading price of our common units. In addition, if natural gas prices in the United States were to increase to a level where foreign nitrogen fertilizer producers were able improve their competitive position on a price-basis, this would negatively affect our competitive position in the Mid Corn Belt region and thus have a material adverse effect on our results of operations, financial condition, cash flows, and ability to make cash distributions.

 

32


Table of Contents

Due to our lack of asset diversification, adverse developments in the nitrogen fertilizer industry could adversely affect our results of operations and our ability to make distributions to our unitholders.

 

We rely exclusively on the revenues generated from our facility. An adverse development in the market for nitrogen fertilizer products in our region generally or at our facility in particular would have a significantly greater impact on our operations and cash available for distribution to our unitholders than it would on other companies that are more diversified geographically or that have a more diverse asset and product base. The largest publicly traded companies with which we compete sell a more diverse range of fertilizer products to broader markets.

 

Any interruption in the supply of natural gas to our facility through Nicor Inc. could have a material adverse effect on our results of operations, financial condition and our ability to make cash distributions.

 

Our operations depend on the availability of natural gas. We have an agreement with Nicor Inc. pursuant to which we access natural gas from the Northern Natural Gas Pipeline. Our access to satisfactory supplies of natural gas through Nicor Inc. could be disrupted due to a number of causes, including volume limitations under the agreement, pipeline malfunctions, service interruptions, mechanical failures or other reasons. The agreement extends for five consecutive periods of 12 months each, with the first period having commenced on November 1, 2010 and the last period ending October 31, 2015. For each period, Nicor Inc. may establish a bidding period during which we may match the best bid received by Nicor Inc. for the natural gas capacity provided under the agreement. We could be out-bid for any of the remaining periods under the agreement. In addition, upon expiration of the last period, we may be unable to renew the agreement on satisfactory terms, or at all. Any disruption in the supply of natural gas to our facility could restrict our ability to continue to make our products. In the event we needed to obtain natural gas from another source, we would need to build a new connection from that source to our facility and negotiate related easement rights, which would be costly, disruptive and/or unfeasible. As a result, any interruption in the supply of natural gas through Nicor Inc. could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.

 

Our facility faces operating hazards and interruptions, including unplanned maintenance or shutdowns. We could face potentially significant costs to the extent these hazards or interruptions cause a material decline in production and are not fully covered by our existing insurance coverage. Insurance companies that currently insure companies in our industry may cease to do so, may change the coverage provided or may substantially increase premiums in the future.

 

Our operations, located at a single location, are subject to significant operating hazards and interruptions. Any significant curtailing of production at our facility or individual units within our facility could result in materially lower levels of revenues and cash flow for the duration of any shutdown and materially adversely impact our ability to make cash distributions to our unitholders. Operations at our 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:

 

   

unplanned maintenance or catastrophic events such as a major accident or fire, damage by severe weather, flooding or other natural disaster;

 

   

labor difficulties that result in a work stoppage or slowdown;

 

   

environmental proceedings or other litigation that compel the cessation of all or a portion of the operations at our facility;

 

   

increasingly stringent environmental and emission regulations;

 

   

a disruption in the supply of natural gas or electricity to our facility; and

 

   

a governmental ban or other limitation on the use of nitrogen fertilizer products, either generally or specifically those manufactured at our facility.

 

33


Table of Contents

The magnitude of the effect on us of any unplanned shutdown will depend on the length of the shutdown and the extent of the operations affected by the shutdown.

 

Our facility also requires a planned maintenance turnaround every two years, which generally lasts between 18 and 25 days. Upon completion of a facility turnaround, we may face delays and difficulties restarting production at our facility. For example, in October 2009, our ammonia facility underwent a 15-day maintenance turnaround and a subsequent 15-day unplanned shutdown due to equipment failures. The duration of our turnarounds or other shutdowns, and the impact they have on our operations, could materially adversely affect our cash flow and ability to make cash distributions in the quarter or quarters in which the turnarounds occur.

 

A major accident, fire, explosion, flood, severe weather event, terrorist attack or other event also could damage our facility or the environment and the surrounding community or result in injuries or loss of life. Scheduled and unplanned maintenance could reduce our cash flow and ability to make cash distributions to our unitholders during or for the period of time that any portion of our facility is not operating. Any unplanned future shutdowns could have a material adverse effect on our ability to make cash distributions to our unitholders.

 

If we experience significant property damage, business interruption, environmental claims, fines, penalties or other liabilities, our business could be materially adversely affected to the extent the damages or claims exceed the amount of valid and collectible insurance available to us. We are currently insured under Rentech’s casualty, environmental, property and business interruption insurance policies. The property and business interruption insurance policies currently in place have a $300.0 million limit with respect to all occurrences at our and Rentech’s facilities within a 72-hour period, with a $1.0 million deductible for physical damage and a 30 day waiting period before losses resulting from business interruptions are recoverable. The policies also contain exclusions and conditions that could have a materially adverse impact on our ability to receive indemnification thereunder, as well as customary sub-limits for particular types of losses. For example, the current property policy contains a specific sub-limit of approximately $160 million for losses resulting from business interruptions and $5.0 million for damage caused by covered flooding. We are fully exposed to all losses in excess of the applicable limits and sub-limits and for losses due to business interruptions of fewer than 30 days.

 

Market factors, including but not limited to catastrophic perils that impact our industry, significant changes in the investment returns of insurance companies, insurance company solvency trends and industry loss ratios and loss trends, can negatively impact the future cost and availability of insurance. There can be no assurance that we will be able to buy and maintain insurance with adequate limits, reasonable pricing terms and conditions or collect from insurance claims that we make.

 

There is no assurance that the transportation costs of our competitors will not decline. Any significant decline in our competitors’ transportation costs could have a material adverse effect on our results of operations, financial condition and our ability to make cash distributions.

 

Many of our competitors incur greater costs than we and our customers do in transporting their products over longer distances via rail, ships, barges and pipelines. There can be no assurance that our competitors’ transportation costs will not decline or that additional pipelines will not be built in the future, lowering the price at which our competitors can sell their products, which could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.

 

Our results of operations are highly dependent upon and fluctuate based upon business and economic conditions and governmental policies affecting the agricultural industry. These factors are outside of our control and may significantly affect our profitability.

 

Our results of operations are highly dependent upon business and economic conditions and governmental policies affecting the agricultural industry, which we cannot control. The agricultural products business can be affected by a number of factors. The most important of these factors, for United States markets, are:

 

   

weather patterns and field conditions (particularly during periods of traditionally high nitrogen fertilizer consumption);

 

34


Table of Contents
   

quantities of nitrogen fertilizers imported to and exported from North America;

 

   

current and projected grain inventories and prices, which are heavily influenced by United States exports and world-wide grain markets; and

 

   

United States governmental policies, including farm and biofuel policies, which may directly or indirectly influence the number of acres planted, the level of grain inventories, the mix of crops planted or crop prices.

 

International market conditions, which are also outside of our control, may also significantly influence our operating results. The international market for nitrogen fertilizers is influenced by such factors as the relative value of the United States dollar and its impact upon the cost of importing nitrogen fertilizers, foreign agricultural policies, the existence of, or changes in, import or foreign currency exchange barriers in certain foreign markets, changes in the hard currency demands of certain countries and other regulatory policies of foreign governments, as well as the laws and policies of the United States affecting foreign trade and investment.

 

Ammonia can be very volatile and extremely hazardous. Any liability for accidents involving ammonia that cause severe damage to property or injury to the environment and human health could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions. In addition, the costs of transporting ammonia could increase significantly in the future.

 

We produce, process, store, handle, distribute and transport ammonia, which can be very volatile and extremely hazardous. Major accidents or releases involving ammonia could cause severe damage or injury to property, the environment and human health, as well as a possible disruption of supplies and markets. Such an event could result in civil lawsuits, fines, penalties and regulatory enforcement proceedings, all of which could lead to significant liabilities. Any damage to persons, equipment or property or other disruption of our ability to produce or distribute our products could result in a significant decrease in operating revenues and significant additional cost to replace or repair and insure our assets, which could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions. We periodically experience minor releases of ammonia related to leaks from our equipment or error in operation and use of equipment at our facility. Similar events may occur in the future.

 

In some cases, we transport ammonia by railcar. We may incur significant losses or costs relating to the transportation of our products on railcars. Due to the dangerous and potentially toxic nature of the cargo, in particular ammonia, on board railcars, a railcar accident may result in fires, explosions and pollution. These circumstances may result in sudden, severe damage or injury to property, the environment and human health. In the event of pollution, we may be held responsible even if we are not at fault and even if we complied with the laws and regulations in effect at the time of the accident. Litigation arising from accidents involving ammonia may result in our being named as a defendant in lawsuits asserting claims for large amounts of damages, which could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions. Given the risks inherent in transporting ammonia, the costs of transporting ammonia could increase significantly in the future. A number of initiatives are underway in the railroad and chemical industries that may result in changes to railcar design in order to minimize railway accidents involving hazardous materials. If any such design changes are implemented, or if accidents involving hazardous freight increase the insurance and other costs of railcars, our transportation costs could increase significantly. In addition, we believe that railroads are taking other actions, such as requiring indemnification from their customers for liabilities relating to TIH chemicals, to shift the risks they face from shipping TIH chemicals to their customers, which may make transportation of ammonia by rail more costly or less feasible.

 

We are subject to risks and uncertainties related to transportation and equipment that are beyond our control and that may have a material adverse effect on our results of operations, financial condition and ability to make distributions.

 

Although our customers generally pick up our products at our facility, we occasionally rely on barge and railroad companies to ship products to our customers. The availability of these transportation services and related

 

35


Table of Contents

equipment is subject to various hazards, including extreme weather conditions, work stoppages, delays, spills, derailments and other accidents and other operating hazards. For example, barge transport can be impacted by lock closures on the Upper Mississippi River resulting from inclement weather or surface conditions, including fog, rain, snow, wind, ice, strong currents, floods, droughts and other unplanned natural phenomena, lock malfunction, tow conditions and other conditions. In addition, we believe that railroads are taking other actions, such as requiring indemnification from their customers for liabilities relating to toxic inhalation hazard, or TIH, chemicals, to shift the risks they face from shipping TIH chemicals to their customers, which may make transportation of ammonia by rail more costly. These transportation services and equipment are also subject to environmental, safety and other regulatory oversight. Due to concerns related to terrorism or accidents, local, state and federal governments could implement new regulations affecting the transportation of our products. In addition, new regulations could be implemented affecting the equipment used to ship our products. Any delay in our ability to ship our products as a result of transportation companies’ failure to operate properly, the implementation of new and more stringent regulatory requirements affecting transportation operations or equipment, or significant increases in the cost of these services or equipment could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.

 

Our business is subject to extensive and frequently changing environmental laws and regulations. We expect that the cost of compliance with these laws and regulations will increase over time, and we could become subject to material environmental liabilities.

 

Our business is subject to extensive and frequently changing federal, state and local environmental, health and safety regulations governing the emission and release of hazardous substances into the environment, the treatment and discharge of waste water and the storage, handling, use and transportation of our nitrogen fertilizer products. These laws include the Clean Air Act, or the CAA, the federal Water Pollution Control Act, or the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, the Toxic Substances Control Act, and various other federal, state and local laws and regulations. Violations of these laws and regulations could result in substantial penalties, injunctive orders compelling installation of additional controls, civil and criminal sanctions, permit revocations or facility shutdowns. In addition, new environmental laws and regulations, new interpretations of existing laws and regulations, increased governmental enforcement of laws and regulations or other developments could require us to make additional expenditures. Many of these laws and regulations are becoming increasingly stringent, and we expect the cost of compliance with these requirements to increase over time. The ultimate impact on our business of complying with existing laws and regulations is not always clearly known or determinable due in part to the fact that our operations may change over time and certain implementing regulations for laws, such as the CAA, have not yet been finalized, are under governmental or judicial review or are being revised. These expenditures or costs for environmental compliance could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.

 

Our operations require numerous permits and authorizations. Failure to comply with these permits or environmental laws generally could result in substantial fines, penalties or other sanctions, court orders to install pollution-control equipment, permit revocations and facility shutdowns. We may experience delays in obtaining or be unable to obtain required permits, which may delay or interrupt our operations and limit our growth and revenue.

 

Our business also is subject to accidental spills, discharges or other releases of hazardous substances into the environment. Past or future spills related to our facility or transportation of products or hazardous substances from our facility may give rise to liability (including strict liability, or liability without fault, and potential cleanup responsibility) to governmental entities or private parties under federal, state or local environmental laws, as well as under common law. For example, we could be held strictly liable under CERCLA, for past or future spills without regard to fault or whether our actions were in compliance with the law at the time of the spills. Pursuant to CERCLA and similar state statutes, we could be held liable for contamination associated with our facility, facilities we formerly owned or operated (if any) and facilities to which we transported or arranged for the transportation of wastes or byproducts containing hazardous substances for treatment, storage or disposal.

 

36


Table of Contents

The potential penalties and cleanup costs for past or future releases or spills, liability to third parties for damage to their property or exposure to hazardous substances, or the need to address newly discovered information or conditions that may require response actions could be significant and could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.

 

We may incur future costs relating to the off-site disposal of hazardous wastes. Companies that dispose of, or arrange for the transportation or disposal of, hazardous substances at off-site locations may be held jointly and severally liable for the costs of investigation and remediation of contamination at those off-site locations, regardless of fault. We could become involved in litigation or other proceedings involving off-site waste disposal and the damages or costs in any such proceedings could be material.

 

We may be unable to obtain or renew permits necessary for our operations, which could inhibit our ability to do business.

 

We hold numerous environmental and other governmental permits and approvals authorizing operations at our facility. Expansion of our operations is also predicated upon securing the 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 and on our business, financial condition, results of operations and ability to make cash distributions.

 

Environmental laws and regulations on fertilizer end-use and application and numeric nutrient water quality criteria could have a material adverse impact on fertilizer demand in the future.

 

Future environmental laws and regulations on the end-use and application of fertilizers could cause changes in demand for our products. In addition, future environmental laws and regulations, or new interpretations of existing laws or regulations, could limit our ability to market and sell our products to end users. From time to time, various state legislatures have proposed bans or other limitations on fertilizer products. In addition, a number of states have adopted or proposed numeric nutrient water quality criteria that could result in decreased demand for our fertilizer products in those states. Similarly, a new final EPA rule establishing numeric nutrient criteria for certain Florida water bodies may require farmers to implement best management practices, including the reduction of fertilizer use, to reduce the impact of fertilizer on water quality. Any such laws, regulations or interpretations could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.

 

Climate change laws and regulations could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.

 

Currently, various legislative and regulatory measures to address GHG emissions (including CO2, methane and nitrous oxides) are in various phases of discussion or implementation. At the federal legislative level, Congress has previously considered legislation requiring a mandatory reduction of GHG emissions. Although Congressional passage of such legislation does not appear likely at this time, it could be adopted at a future date. It is also possible that Congress may pass alternative climate change bills that do not mandate a nationwide cap-and-trade program and instead focus on promoting renewable energy and energy efficiency.

 

In the absence of congressional legislation curbing GHG emissions, the EPA is moving ahead administratively under its CAA authority. In October 2009, the EPA finalized a rule requiring certain large emitters of GHGs to inventory and report their GHG emissions to the EPA. In accordance with the rule, we monitor our GHG emissions from our facility and will report the emissions to the EPA annually beginning in September 2011. On December 7, 2009, the EPA finalized its “endangerment finding” that GHG emissions, including CO2, pose a threat to human health and welfare. The finding allows the EPA to regulate GHG emissions as air pollutants under the CAA. In May 2010, the EPA finalized the “Greenhouse Gas Tailoring

 

37


Table of Contents

Rule,” which establishes new GHG emissions thresholds that determine when stationary sources, such as our facility, must obtain permits under the Prevention of Significant Deterioration, or PSD, and Title V programs of the CAA. The permitting requirements of the PSD program apply only to newly constructed or modified major sources. Obtaining a PSD permit requires a source to install the best available control technology, or BACT, for those regulated pollutants that are emitted in certain quantities. Phase I of the Greenhouse Gas Tailoring Rule, which became effective on January 2, 2011, requires projects already triggering PSD permitting that are also increasing GHG emissions by more than 75,000 tons per year to comply with BACT rules for their GHG emissions. Phase II of the Greenhouse Gas Tailoring Rule, which became effective on July 1, 2011, requires preconstruction permits using BACT for new projects that emit 100,000 tons of GHG emissions per year or existing facilities that make major modifications increasing GHG emissions by more than 75,000 tons per year. The ongoing ammonia capacity expansion project at our facility described in “Business—Our Business Strategies—Pursue Organic Growth Opportunities—Ammonia Capacity Expansion” did not trigger the need to install BACT because actual construction was commenced prior to July 1, 2011 and is not considered a major modification with respect to criteria pollutants. However, a future major modification to our facility may require us to install BACT and potentially require us to obtain other CAA permits for our greenhouse gas emissions at our facility. The EPA’s endangerment finding, the Greenhouse Gas Tailoring Rule and certain other GHG emission rules have been challenged and will likely be subject to extensive litigation. In addition, a number of Congressional bills to overturn the endangerment finding and bar the EPA from regulating GHG emissions, or at least to defer such action by the EPA under the CAA, have been proposed, although President Obama has announced his intention to veto any such bills if passed.

 

In addition to federal regulations, a number of states have adopted regional GHG initiatives to reduce CO2 and other GHG emissions. In 2007, a group of Midwest states formed the Midwestern Greenhouse Gas Reduction Accord, which calls for the development of a cap-and-trade system to control GHG emissions and for the inventory of such emissions. However, the individual states that have signed on to the accord must adopt laws or regulations implementing the trading scheme before it becomes effective, and the timing and specific requirements of any such laws or regulations in Illinois are uncertain at this time.

 

The implementation of additional EPA regulations and/or the passage of federal or state climate change legislation will likely increase the costs we incur to (i) operate and maintain our facilities, (ii) install new emission controls on our facilities and (iii) administer and manage any GHG emissions program. Increased costs associated with compliance with any future legislation or regulation of GHG emissions, if it occurs, may have a material adverse effect on our results of operations, financial condition and ability to make cash distributions. In addition, climate change legislation and regulations may result in increased costs not only for our business but also for agricultural producers that utilize our fertilizer products, thereby potentially decreasing demand for our nitrogen fertilizer products. Decreased demand for our fertilizer products may have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.

 

Agrium is a distributor and customer of a significant portion of our nitrogen fertilizer products, and we have the right to store products at Agrium’s terminal in Niota, Illinois. Any loss of Agrium as our distributor or customer, loss of our storage rights or decline in sales of products through or to Agrium could materially adversely affect our results of operations, financial condition and ability to make cash distributions.

 

We use Agrium as a distributor of a significant portion of our nitrogen fertilizer products pursuant to a distribution agreement between Agrium and us. For the last three fiscal years, between 79% and 85% of our total product sales were made through Agrium. Under the distribution agreement, if we are unable to reach an agreement with Agrium for the purchase and sale of our products, Agrium is under no obligation to make such purchase and sale. Agrium sells products that compete with ours, and may be incentivized to prioritize the sale of its products over ours. In the event of any decline in sales of our products through Agrium as distributor, we may not be able to find buyers for our products.

 

38


Table of Contents

The distribution agreement has a term that ends in April 2016, but automatically renews for subsequent one-year periods (unless either party delivers a termination notice to the other party at least three months prior to an automatic renewal). The distribution agreement may be terminated prior to its stated term for specified causes. Under the distribution agreement, Agrium bears the credit risk on products sold through Agrium pursuant to the agreement. Agrium also is largely responsible for marketing our products to customers and the associated expense. As a result, if our distribution agreement with Agrium terminates for any reason, Agrium would no longer bear the credit risk on the sale of any of our products and we would become responsible for all of the marketing costs for our products.

 

Under the distribution agreement, we have the right to store up to 15,000 tons of ammonia at Agrium’s terminal in Niota, Illinois, and we sell a portion of our ammonia at that terminal. Our right to store ammonia at the terminal expires on June 30, 2016, but automatically renews for successive one year periods, unless we deliver a termination notice to Agrium with respect to such storage rights at least three months prior to an automatic renewal. Our right to use the storage space immediately terminates if the distribution agreement terminates in accordance with its terms. Ammonia storage sites and terminals served by barge on the Mississippi River are controlled primarily by CF Industries, Koch and Agrium, each of which is one of our competitors. If we lose the right to store ammonia at the Niota, Illinois terminal, we may not be able to find suitable replacement storage on acceptable terms, or at all, and we may be forced to reduce production. We also may lose sales to customers that purchase products at the terminal.

 

In addition to distributing our products, Agrium is also one of our significant customers. For each of the nine months ended June 30, 2011 and 2010, approximately 2% of our total product sales were to Agrium as a direct customer (rather than a distributor), and approximately 15% and 9%, respectively, of our total product sales during these periods were to Crop Production Services, Inc., or CPS, a controlled affiliate of Agrium. For the fiscal years ended September 30, 2010 and 2009, approximately 7% and 0%, respectively, of our total product sales were to Agrium as a direct customer (rather than a distributor) and approximately 11% and 5%, respectively, of our total product sales were to CPS. Agrium or CPS could elect to reduce or cease purchasing our products for a number of reasons, especially if our relationship with Agrium as a distributor were to end. If our sales to Agrium as a direct customer or CPS decline, we may not be able to find other customers to purchase the excess supply of our products.

 

Sales of our products through or to Agrium could decline or the distribution agreement or our rights to storage could terminate as a result of a number of causes which are outside of our control. Any loss of Agrium as our distributor or customer, loss of our storage rights or decline in sales of products through Agrium could materially adversely affect our results of operations, financial condition and ability to make cash distributions.

 

New regulations concerning the transportation of hazardous chemicals, risks of terrorism and the security of chemical manufacturing facilities could result in higher operating costs.

 

The costs of complying with regulations relating to the transportation of hazardous chemicals and security associated with our facility may have a material adverse effect on our results of operations, financial condition and ability to make cash distributions to our unitholders. Targets such as chemical manufacturing facilities may be at greater risk of future terrorist attacks than other targets in the United States. The chemical industry has responded to the issues that arose in response to the terrorist attacks on September 11, 2001 by starting new initiatives relating to the security of chemical industry facilities and the transportation of hazardous chemicals in the United States. Future terrorist attacks could lead to even stronger, more costly initiatives. Simultaneously, local, state and federal governments have begun a regulatory process that could lead to new regulations impacting the security of chemical facility locations and the transportation of hazardous chemicals. Our business could be materially adversely affected by the cost of complying with new regulations.

 

39


Table of Contents

We are largely dependent on our customers to transport purchased goods from our facility because we do not maintain a fleet of trucks or rail cars.

 

We do not maintain a fleet of trucks and, unlike some of our major competitors, we do not maintain a fleet of rail cars because our customers generally are located close to our facility and have been willing and able to transport purchased goods from our facility. In most instances, our customers purchase our nitrogen products freight on board, or FOB, delivered basis at our facility and then arrange and pay to transport them to their final destinations by truck according to customary practice in our market. However, in the future, our customers’ transportation needs and preferences may change and our customers may no longer be willing or able to transport purchased goods from our facility. In the event that our competitors are able to transport their products more efficiently or cost effectively than our customers, those customers may reduce or cease purchases of our products. If this were to occur, we could be forced to make a substantial investment in a fleet of trucks and/or rail cars to meet our customers’ delivery needs, and this would be expensive and time consuming. We may not be able to obtain transportation capabilities on a timely basis or at all, and our inability to provide transportation for products could have a material adverse effect on our business, cash flow and ability to make distributions.

 

Due to our dependence on significant customers, the loss of one or more of our significant customers could adversely affect our results of operations and our ability to make distributions to our unitholders.

 

Our business depends on significant customers, and the loss of one or several significant customers may have a material adverse effect on our results of operations, financial condition and ability to make cash distributions to our unitholders. In the aggregate, our top five ammonia customers represented approximately 48% and 49%, respectively, of our ammonia sales, and our top five UAN customers represented approximately 52% and 59%, respectively, of our UAN sales, for the nine months ended June 30, 2011 and 2010. In the aggregate, our top five ammonia customers represented approximately 52% and 49%, respectively, of our ammonia sales for the fiscal years ended September 30, 2010 and 2009, and our top five UAN customers represented approximately 60% of our UAN sales for each of these fiscal years. In addition, Twin State, Inc., or Twin State, accounted for 6% and 10%, respectively, of our total product sales for the nine months ended June 30, 2011 and 2010, and approximately 10% and 11%, respectively, of our total product sales for the fiscal years ended September 30, 2010 and 2009. Growmark, Inc., or Growmark, accounted for approximately 6% and 8%, respectively, of our total product sales for the nine months ended June 30, 2011 and 2010, and approximately 8% and 11%, respectively, of our total product sales for the fiscal years ended September 30, 2010 and 2009. For each of the nine months ended June 30, 2011 and 2010, approximately 2% of our total product sales were to Agrium as a direct customer (rather than a distributor), and approximately 15% and 9%, respectively, of our total product sales during these periods were to CPS, a controlled affiliate of Agrium. For the fiscal years ended September 30, 2010 and 2009, approximately 7% and 0%, respectively, of our total product sales were to Agrium as a direct customer (rather than a distributor) and approximately 11% and 5%, respectively, of our total product sales were to CPS. Given the nature of our business, and consistent with industry practice, we do not have long-term minimum purchase contracts with any of our customers. If our sales to any of our significant customers were to decline, we may not be able to find other customers to purchase the excess supply of our products. The loss of one or several of our significant customers, or a significant reduction in purchase volume by any of them, could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.

 

We are subject to strict laws and regulations regarding employee and process safety, and failure to comply with these laws and regulations could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.

 

We are subject to a number of federal and state laws and regulations related to safety, including OSHA and comparable state statutes, the purpose of which are to protect the health and safety of workers. In addition, OSHA requires that we maintain information about hazardous materials used or produced in our operations and that we provide this information to employees, state and local governmental authorities, and local residents. Failure to comply with OSHA requirements and other related state regulations, including general industry

 

40


Table of Contents

standards, record keeping requirements and monitoring and control of occupational exposure to regulated substances, could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions if we are subjected to significant penalties, fines or compliance costs.

 

Our acquisition strategy involves significant risks.

 

One of our business strategies is to pursue acquisitions. However, acquisitions involve numerous risks and uncertainties, including intense competition for suitable acquisition targets, the potential unavailability of financial resources necessary to consummate acquisitions, difficulties in identifying suitable acquisition targets or in completing any transactions identified on sufficiently favorable terms; and the need to obtain regulatory or other governmental approvals that may be necessary to complete acquisitions. In addition, any future acquisitions may entail significant transaction costs, tax consequences and risks associated with entry into new markets and lines of business.

 

In addition to the risks involved in identifying and completing acquisitions described above, even when acquisitions are completed, integration of acquired entities can involve significant difficulties, such as:

 

   

unforeseen difficulties in the acquired operations and disruption of the ongoing operations of our business;

 

   

failure to achieve cost savings or other financial or operating objectives with respect to an acquisition;

 

   

strain on the operational and managerial controls and procedures of our business, and the need to modify systems or to add management resources;

 

   

difficulties in the integration and retention of customers or personnel and the integration and effective deployment of operations or technologies;

 

   

assumption of unknown material liabilities or regulatory non-compliance issues;

 

   

amortization of acquired assets, which would reduce future reported earnings;

 

   

possible adverse short-term effects on our cash flows or operating results; and

 

   

diversion of management’s attention from the ongoing operations of our business.

 

In addition, in connection with any potential acquisition, we will need to consider whether the business we intend to acquire could affect our tax treatment as a partnership for United States federal income tax purposes. See “—Tax Risks—Our tax treatment depends on our status as a partnership for United States federal income tax purposes, as well as our not being subject to a material amount of entity-level taxation by individual states. If the Internal Revenue Service were to treat us as a corporation for United States federal income tax purposes or if we were to become subject to additional amounts of entity-level taxation for state tax purposes, then our cash available for distribution to our unitholders would be substantially reduced” and “Material U.S. Federal Income Tax Consequences—Partnership Status.”

 

Failure to manage acquisition growth risks could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions. There can be no assurance that we will be able to consummate any acquisitions, successfully integrate acquired entities, or generate positive cash flow at any acquired company.

 

There are significant risks associated with expansion projects that may prevent completion of those projects on budget, on schedule or at all.

 

We have commenced expansion projects at our facility. See “Business—Our Business Strategies—Pursue Organic Growth Opportunities.” Expansion projects of the scope and scale we are undertaking or may undertake in the future entail significant risks, including:

 

   

unforeseen engineering or environmental problems;

 

41


Table of Contents
   

work stoppages;

 

   

weather interference;

 

   

unanticipated cost increases;

 

   

unavailability of necessary equipment; and

 

   

unavailability of financing on acceptable terms.

 

Construction, equipment or staffing problems or difficulties in obtaining any of the requisite licenses, permits and authorizations from regulatory authorities could increase the total cost, delay or prevent the construction or completion of an expansion project.

 

In addition, we cannot assure you that we will have adequate sources of funding to undertake or complete major expansion projects, such as our ammonia capacity expansion project. If we enter into our currently contemplated $25 million revolving credit facility, we would not have sufficient borrowing capacity under that facility to finance the entire project and that new revolving credit facility would be designed to provide for seasonal working capital needs only, not construction financing. As a result, we will need to obtain additional debt and/or equity financing to complete this project. There is no guarantee that we will enter into our new revolving credit facility or obtain other debt or equity financing on acceptable terms or at all.

 

As a result of these factors, we cannot assure you that our expansion projects will commence operations on schedule or at all or that the costs for the expansion projects will not exceed budgeted amounts. Failure to complete an expansion project on budget, on schedule or at all may adversely impact our ability to grow our business.

 

Expansion of our production capacity may reduce the overall demand for our existing products, and our new products may not achieve market acceptance.

 

To the extent we proceed with our expansion projects, we expect to increase our capacity to produce ammonia, urea and UAN and to install the equipment necessary to enable us to produce and sell diesel exhaust fluid, or DEF. Increased production of our existing products may reduce the overall demand for those products as a result of market saturation. We may be required to sell these products at lower prices, or may not be able to sell all of the products we produce. In addition, there can be no assurance that our new products will be well-received or that we will achieve revenues or profitability levels we expect. If we cannot sell our products or are forced to reduce the prices at which we sell them, this would have a material adverse effect on our results of operations, financial condition and the ability to make cash distributions to our unitholders.

 

We depend on key personnel for the success of our business.

 

We depend on the services of the executive officers of our general partner. The loss of the services of any member of our executive officer team could have an adverse effect on our business and reduce our ability to make cash distributions to our unitholders. We may not be able to locate or employ on acceptable terms qualified replacements for senior management or other key employees if our existing senior management’s or key employees’ services become unavailable.

 

Certain members of our executive management team on whom we rely to manage important aspects of our business face conflicts regarding the allocation of their time.

 

We will rely on the executive officers and employees of our general partner to manage our operations and activities. Certain of these executive officers and employees of our general partner will perform services for Rentech in addition to us. These shared executive officers and employees include our chief executive officer, chief financial officer, president and general counsel. Because the shared officers and employees allocate time among us and Rentech, they may face conflicts regarding the allocation of their time, which may adversely affect our business, results of operations and financial condition.

 

42


Table of Contents

A shortage of skilled labor, together with rising labor costs, could adversely affect our results of operations and cash available for distribution to our unitholders.

 

Efficient production of nitrogen fertilizer using modern techniques and equipment requires skilled employees. To the extent that the services of skilled labor becomes unavailable to us for any reason, including the retirement of experienced employees from our aging work force, we would be required to hire other personnel. We face hiring competition from our competitors, our customers and other companies operating in our industry, and we may not be able to locate or employ qualified replacements on acceptable terms or at all. If our current skilled employees retire and we are unable to locate or hire qualified replacements, or if the cost to locate and hire qualified replacements for retired employees increases materially, our results of operations and cash available for distribution to our unitholders could be adversely affected.

 

Our new revolving credit facility may contain significant limitations on our business operations, including our ability to make distributions and other payments.

 

At or as soon as practicable following the closing of this offering, we intend to enter into our new revolving credit facility, which we expect to provide for revolving borrowing capacity of $25.0 million. If we enter into the new revolving credit facility, it would permit us to incur significant indebtedness in the future, subject to the satisfaction of its conditions to borrowing. Our ability to make cash distributions to our unitholders and our ability to borrow under our new revolving credit facility to fund distributions (if we elected to do so) will be subject to covenant restrictions under the agreements governing our new revolving credit facility. If we were unable to comply with any such covenant restrictions in any quarter, our ability to make cash distributions to our unitholders would be curtailed.

 

In addition, we will be subject to covenants contained in our new revolving credit facility and any agreement governing other future indebtedness. These covenants may restrict our ability to, among other things, incur, assume or permit to exist additional indebtedness, guarantees and other contingent obligations, incur liens, make negative pledges, pay dividends or make other distributions, make payments to our subsidiaries, make certain loans and investments, consolidate, merge or sell all or substantially all of our assets, enter into sale-leaseback transactions and enter into transactions with our affiliates. Any failure to comply with these covenants could result in a default under our new revolving credit facility. Upon a default, unless waived, the lenders under our new revolving credit facility could have all remedies available to a secured lender, and could elect to terminate their commitments, cease making further loans, cause their loans to become due and payable in full, institute foreclosure proceedings against our assets, and force us into bankruptcy or liquidation.

 

We are a holding company and depend upon our subsidiary for our cash flow.

 

We are a holding company. Upon the closing of this offering, all of our operations will be conducted and all of our assets will be owned by REMC, which will be our wholly owned subsidiary, and we intend to continue to conduct our operations at REMC and any of our future subsidiaries. Consequently, our cash flow and our ability to meet our obligations or to make cash distributions will depend upon the cash flow of REMC and any of our future subsidiaries and the payment of funds by REMC and any of our future subsidiaries to us in the form of dividends or otherwise. The ability of REMC and any of our future subsidiaries to make any payments to us will depend on their earnings, the terms of their indebtedness, including the terms of any credit facilities and legal restrictions. In particular, our new revolving credit facility and future credit facilities entered into by REMC or any of our future subsidiaries may impose significant limitations on the ability of our subsidiaries to make distributions to us and consequently our ability to make distributions to our unitholders. See also “—We may not have sufficient cash available for distribution to pay any quarterly distribution on our common units. For the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010, on a pro forma basis, our annual distribution would have been $1.54 and $0.44 per unit, respectively, significantly less than the $2.34 per unit distribution we project that we will be able to pay for the fiscal year ending September 30, 2012.”

 

43


Table of Contents

We have never operated as a stand-alone company.

 

Because we have never operated as a stand-alone company, it is difficult for you to evaluate our business and results of operations to date and to assess our future prospects and viability. Our facility commenced operations in 1965. Since 1987, we have been operated as part of a larger company. The financial information reflecting our business contained in this prospectus, including our historical financial information as well as the pro forma financial information included herein, do not necessarily reflect what our operating performance would have been had we been a stand-alone company during the periods presented.

 

We will incur increased costs as a result of being a publicly traded limited partnership.

 

As a publicly traded limited partnership, we will incur significant legal, accounting and other expenses that we did not incur prior to this offering. In addition, the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010, as well as rules implemented by the SEC and the New York Stock Exchange, require, or will require, publicly traded entities to adopt various corporate governance practices that will further increase our costs. Before we are able to make distributions to our unitholders, we must first pay our expenses, including the costs of being a public company and other operating expenses. As a result, the amount of cash we have available for distribution to our unitholders will be affected by our expenses, including the costs associated with being a publicly traded limited partnership. We estimate that we will incur approximately $3.6 million of estimated incremental costs per year, some of which will be direct charges associated with being a publicly traded limited partnership, and some of which will be allocated to us by Rentech; however, it is possible that our actual incremental costs of being a publicly traded limited partnership will be higher than we currently estimate. In addition, we estimate that Shared NEOs (as defined under “Management—Compensation Discussion and Analysis”) cash compensation allocated to the Partnership will be approximately $0.8 million per year.

 

Prior to this offering, we have not filed reports with the SEC. Following this offering, we will become subject to the public reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We expect these requirements will increase our legal and financial compliance costs and make compliance activities more time-consuming and costly. For example, as a result of becoming a publicly traded limited partnership, we are required to have at least three independent directors and adopt policies regarding internal controls and disclosure controls and procedures, including the preparation of reports on internal control over financial reporting. In addition, we will incur additional costs associated with our publicly traded company reporting requirements.

 

As a publicly traded limited partnership we qualify for, and will rely on, certain exemptions from the New York Stock Exchange’s corporate governance requirements. Accordingly, unitholders will not have the same protections afforded to equityholders of companies subject to such corporate governance requirements.

 

As a publicly traded limited partnership, we qualify for, and will rely on, certain exemptions from the New York Stock Exchange’s corporate governance requirements, including:

 

   

the requirement that a majority of the board of directors of our general partner consist of independent directors;

 

   

the requirement that the board of directors of our general partner have a nominating/corporate governance committee that is composed entirely of independent directors; and

 

   

the requirement that the board of directors of our general partner have a compensation committee that is composed entirely of independent directors.

 

As a result of these exemptions, our general partner’s board of directors will not be comprised of a majority of independent directors and our general partner’s board of directors does not currently intend to establish a nominating/corporate governance committee or compensation committee. Accordingly, unitholders will not have the same protections afforded to equityholders of companies that are subject to all of the corporate governance requirements of the New York Stock Exchange. See “Management.”

 

44


Table of Contents

We will be exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act.

 

We are in the process of evaluating our internal controls systems to allow management to report on, and our independent auditors to audit, our internal control over financial reporting. We will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, and under current rules will be required to comply with Section 404 by no later than the time we file our annual report for the fiscal year ending September 30, 2012. Furthermore, upon completion of this process, we may identify control deficiencies of varying degrees of severity under applicable SEC and Public Company Accounting Oversight Board, or PCAOB, rules and regulations that remain unremediated. Although we produce our financial statements in accordance with GAAP, our internal accounting controls may not currently meet all standards applicable to companies with publicly traded securities. As a publicly traded limited partnership, we will be required to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal controls that, or that are reasonably likely to, materially affect internal control over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

 

If we fail to implement the requirements of Section 404 in a timely manner, we might be subject to sanctions or investigation by regulatory authorities such as the SEC. If we do not implement improvements to our disclosure controls and procedures or to our internal controls in a timely manner, our independent registered public accounting firm may not be able to certify as to the effectiveness of our internal control over financial reporting pursuant to an audit of our internal control over financial reporting. This may subject us to adverse regulatory consequences or a loss of investor confidence in the reliability of our financial statements. We could also suffer a loss of confidence in the reliability of our financial statements if our independent registered public accounting firm reports a material weakness or significant deficiency in our internal control, if we do not develop and maintain effective controls and procedures or if we are otherwise unable to deliver timely and reliable financial information. Any loss of confidence in the reliability of our financial statements or other negative reaction to our failure to develop timely or adequate disclosure controls and procedures or internal controls could result in a decline in the price of our common units. In addition, if we fail to remedy any material weakness, our financial statements may be inaccurate, we may face restricted access to the capital markets and the price of our common units may be materially adversely affected.

 

Our relationship with Rentech and its business, results of operations, financial condition and prospects subjects us to potential risks that are beyond our control.

 

Due to our relationship with Rentech, adverse developments or announcements concerning Rentech, its business, results of operations, financial condition or prospects could materially adversely affect our financial condition, even if we have not suffered any similar development. In addition, the credit and business risk profiles of Rentech may be factors considered in credit evaluations of us. Another factor that may be considered is the financial condition of Rentech, including the degree of its financial leverage and its dependence on cash flow from us to further its business strategy and continue its operations. Rentech is in the business of developing energy projects expected to produce certified synthetic fuels and electric power from carbon-containing materials such as biomass, waste and fossil resources. Rentech owns technologies that enable the production of such fuels and power when integrated with certain other technologies that it licenses or purchases. Rentech has a history of operating losses and has never operated at a profit. If Rentech does not achieve significant amounts of revenues and operate at a profit on an ongoing basis in the future, Rentech may be unable to continue its operations at its current level. Ultimately, Rentech’s ability to remain in business will depend upon earning a profit from commercialization of its technologies. Rentech has not been able to achieve sustained commercial use of these technologies as of this time. The credit and risk profile of Rentech could adversely affect our credit ratings and risk profile, which could increase our borrowing costs or hinder our ability to raise capital. Furthermore, financial

 

45


Table of Contents

constraints at Rentech may cause Rentech to make business decisions, including decisions to liquidate the common units that it holds in us or its interest in our general partner, which may adversely affect our business and the market price of our common units.

 

Risks Related to an Investment in Us

 

We intend to distribute all of the cash available for distribution we generate each quarter, which could limit our ability to grow and make acquisitions.

 

Upon the closing of this offering, our policy will be to distribute all of the cash available for distribution we generate each quarter to our unitholders. Our first distribution will take place following the first full quarter after the consummation of this offering and will include cash available for distribution with respect to the period beginning on the closing date of this offering and ending on the last day of the first full quarter ending after the consummation of this offering. Cash available for distribution for each quarter will be determined by the board of directors of our general partner following the end of such quarter. As a result, our general partner will rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities by us, to fund our expansion capital expenditures, and accordingly, to the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow.

 

In addition, because we intend to distribute all of the cash available for distribution that we generate each quarter, our growth may not be as fast as that of businesses that reinvest their cash available for distribution to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units will decrease the amount we distribute on each outstanding unit. There are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which, in turn, would reduce the cash available for distribution that we have to distribute to our unitholders.

 

The board of directors and officers of our general partner have fiduciary duties to Rentech, and the interests of Rentech may differ significantly from, or conflict with, the interests of our public common unitholders.

 

Our general partner is responsible for managing us. Although our general partner has fiduciary duties to manage us in a manner that is in, or not opposed to, our best interests, the fiduciary duties are specifically limited by the express terms of our partnership agreement, and the directors and officers of our general partner also have fiduciary duties to manage our general partner in a manner beneficial to Rentech and its shareholders. The interests of Rentech and its shareholders may differ from, or conflict with, the interests of our common unitholders. In resolving these conflicts, our general partner may favor its own interests or the interests of holders of Rentech’s common stock over our interests and those of our common unitholders.

 

The potential conflicts of interest include, among others, the following:

 

   

Neither our partnership agreement nor any other agreement will require the owners of our general partner to pursue a business strategy that favors us. The affiliates of our general partner have fiduciary duties to make decisions in their own best interests and in the best interest of holders of Rentech’s common stock, which may be contrary to our interests. In addition, our general partner is allowed to take into account the interests of parties other than us or our unitholders in resolving conflicts of interest, which has the effect of limiting its fiduciary duty to our unitholders.

 

   

Our general partner has limited its liability and reduced its fiduciary duties under our partnership agreement and has also restricted the remedies available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty. As a result of purchasing common units, unitholders consent to some actions and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under applicable state law.

 

46


Table of Contents
   

The board of directors of our general partner will determine the amount and timing of asset purchases and sales, capital expenditures, borrowings, repayment of indebtedness and issuances of additional partner interests, each of which can affect the amount of cash that is available for distribution to our common unitholders.

 

   

Our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf. There is no limitation on the amounts our general partner can cause us to pay it or its affiliates.

 

   

Our general partner may exercise its rights to call and purchase all of our common units if at any time it and its affiliates own more than 80% of our common units.

 

   

Our general partner will control the enforcement of obligations owed to us by it and its affiliates. In addition, our general partner will decide whether to retain separate counsel or others to perform services for us.

 

   

Our general partner determines which costs incurred by it and its affiliates are reimbursable by us.

 

   

Certain of the executive officers of our general partner, and the majority of the directors of our general partner, also serve as directors and/or executive officers of Rentech. The executive officers who work for both Rentech and our general partner, including our chief executive officer, chief financial officer, president and general counsel, divide their time between our business and the business of Rentech. These executive officers will face conflicts of interest from time to time in making decisions which may benefit either us or Rentech.

 

See “Conflicts of Interest and Fiduciary Duties.”

 

Our partnership agreement limits the liability and reduces the fiduciary duties of our general partner and restricts the remedies available to us and our common unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.

 

Our partnership agreement limits the liability and reduces the fiduciary duties of our general partner, while also restricting the remedies available to our common unitholders for actions that, without these limitations and reductions, might constitute breaches of fiduciary duty. Delaware partnership law permits such contractual reductions of fiduciary duty. By purchasing common units, common unitholders consent to some actions that might otherwise constitute a breach of fiduciary or other duties applicable under state law. Our partnership agreement contains provisions that reduce the standards to which our general partner would otherwise be held by state fiduciary duty law. For example:

 

   

Our partnership agreement provides that our general partner will not have any liability to us or our unitholders for decisions made in its capacity as general partner so long as it acted in good faith, meaning it subjectively believed that the decisions were in, or not opposed to, our best interests.

 

   

Our partnership agreement provides that the doctrine of corporate opportunity, or any analogous doctrine, shall not apply to our general partner. The owners of our general partner are permitted to engage in separate businesses which directly compete with us and are not required to share or communicate or offer any potential business opportunities to us even if the opportunity is one that we might reasonably have pursued. The partnership agreement provides that the owners of our general partner will not be liable to us or any unitholder for breach of any duty or obligation by reason of the fact that such person pursued or acquired for itself any business opportunity.

 

   

Our partnership agreement provides that our general partner and the officers and directors of our general partner will not be liable for monetary damages to us for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or those persons acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that such person’s conduct was criminal.

 

47


Table of Contents
   

Our partnership agreement generally provides that affiliate transactions and resolutions of conflicts of interest not approved by the conflicts committee of the board of directors of our general partner and not involving a vote of unitholders must be on terms no less favorable to us than those generally provided to or available from unrelated third parties or be “fair and reasonable.” In determining whether a transaction or resolution is “fair and reasonable,” our general partner may consider the totality of the relationship between the parties involved, including other transactions that may be particularly advantageous or beneficial to us.

 

   

Our partnership agreement provides that in resolving conflicts of interest, it will be conclusively deemed that in making its decision, the conflicts committee acted in good faith.

 

By purchasing a common unit, a unitholder will become bound by the provisions of our partnership agreement, including the provisions described above. See “Description of Our Common Units—Transfer of Common Units.”

 

Our partnership agreement permits our general partner to make a number of decisions in its individual capacity or in its sole discretion and, as such, our general partner has no duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our common unitholders in making these decisions.

 

Our partnership agreement contains provisions that permit our general partner to make a number of decisions in its individual capacity, as opposed to its capacity as our general partner, or in its sole discretion. This entitles our general partner to consider only the interests and factors that it desires, and it has no duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our common unitholders. Decisions made by our general partner in its individual capacity or in its sole discretion will be made by RNHI as the sole member of our general partner, and not by the board of directors of our general partner. Examples include the exercise of the general partner’s call right, its voting rights with respect to any common units it may own, its registration rights and its determination whether or not to consent to any merger or consolidation or amendment to our partnership agreement. In effect, the standards to which our general partner would otherwise be held by state fiduciary duty law are reduced. By purchasing a common unit, a unitholder will become bound by the provisions of our partnership agreement, including the provisions described above. See “Description of Our Common Units—Transfer of Common Units.”

 

RNHI has the power to appoint and remove our general partner’s directors.

 

RNHI has the power to appoint and remove all of the members of the board of directors of our general partner. Our general partner has control over all decisions related to our operations. See “Management—Management of Rentech Nitrogen Partners, L.P.” Our public unitholders do not have an ability to influence any operating decisions and will not be able to prevent us from entering into any transactions. Furthermore, the goals and objectives of Rentech, as the indirect owner of our general partner, may not be consistent with those of our public unitholders.

 

Common units are subject to our general partner’s call right.

 

If at any time our general partner and its affiliates own more than 80% of our common units, our general partner will have the right, which it may assign to any of its affiliates or to us, but not the obligation, to purchase all, but not less than all, of the common units held by public unitholders at a price not less than their then-current market price, as calculated pursuant to the terms of our partnership agreement. As a result, you may be required to sell your common units at an undesirable 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. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon exercise of the call right. There is no restriction in our partnership agreement that prevents our general partner from issuing additional common units and then exercising its call right. Our general partner may use its own discretion, free of fiduciary duty restrictions, in determining whether to exercise this right. See “The Partnership Agreement—Call Right.”

 

48


Table of Contents

Our unitholders have limited voting rights and are not entitled to elect our general partner or our 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 will have no right to elect our general partner or our general partner’s board of directors on an annual or other continuing basis. The board of directors of our general partner, including the independent directors, will be chosen entirely by Rentech as the indirect owner of the general partner and not by our common unitholders. Unlike publicly traded corporations, we will 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 our general partner, they will have no practical ability to remove our general partner. As a result of these limitations, the price at which the common units will trade could be diminished.

 

Our public unitholders will not have sufficient voting power to remove our general partner without Rentech’s consent.

 

Upon the closing of this offering, Rentech will indirectly own approximately 60.8% of our common units (approximately 54.9% of our common units if the underwriters exercise their option to purchase additional common units in full). Our general partner may be removed by a vote of the holders of at least 662/3% of our outstanding common units, including any common units held by our general partner and its affiliates (including Rentech), voting together as a single class. As a result, holders of common units purchased in this offering will not be able to remove the general partner, under any circumstances, unless Rentech sells some of the common units that it owns or we sell additional units to the public.

 

Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units (other than our general partner and its affiliates and permitted transferees).

 

Our partnership agreement restricts unitholders’ voting rights by providing that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, may not vote on any matter. Our partnership agreement also contains provisions limiting the ability of common unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the ability of our common unitholders to influence the manner or direction of management.

 

Cost reimbursements due to our general partner and its affiliates will reduce cash available for distribution to you.

 

Prior to making any distribution on our outstanding units, we will reimburse our general partner for all expenses it incurs on our behalf including, without limitation, our pro rata portion of management compensation and overhead charged by Rentech in accordance with our services agreement. The services agreement does not contain any cap on the amount we may be required to pay pursuant to this agreement. The payment of these amounts, including allocated overhead, to our general partner and its affiliates could adversely affect our ability to make distributions to you. See “Our Cash Distribution Policy and Restrictions on Distributions,” “Certain Relationships and Related Party Transactions” and “Conflicts of Interest and Fiduciary Duties—Conflicts of Interest.”

 

Limited partners may not have limited liability if a court finds that unitholder action constitutes control of our business.

 

A general partner of a 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. Our partnership is organized under Delaware law and REMC, which will be our operating subsidiary

 

49


Table of Contents

upon the closing of this offering, conducts business in Illinois. 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 our general partner, to approve some amendments to our partnership agreement or to take other actions under our partnership agreement constituted “control” of our business.

 

See “The Partnership Agreement—Limited Liability” for a discussion of the implications of the limitations of liability on a limited partner.

 

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 Act.

 

Likewise, upon the winding up of the Partnership, 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 our partnership agreement; (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 17-807 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 the Partnership 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 our partnership agreement.

 

Our unitholders who fail to furnish certain information requested by our general partner or who our general partner, upon receipt of such information, determines are not eligible citizens may not be entitled to receive distributions in kind upon our liquidation and their common units will be subject to redemption.

 

Our general partner may require each limited partner to furnish information about his nationality, citizenship or related status. If a limited partner fails to furnish information about his nationality, citizenship or other related status within a reasonable period after a request for the information or our general partner determines after receipt of the information that the limited partner is not an eligible citizen, the limited partner may be treated as an ineligible holder. An ineligible holder does not have the right to direct the voting of his common units and may not receive distributions in kind upon our liquidation. Furthermore, we have the right to redeem all of the common units of any holder that is an ineligible holder. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner. See “The Partnership Agreement—Non-Citizen Assignees; Redemption” on page 210.

 

Common units held by persons who are non-taxpaying assignees will be subject to the possibility of redemption.

 

To avoid any adverse effect on the maximum applicable rates chargeable to customers by us under certain laws or regulations that may be applicable to our future business or operations, or in order to reverse an adverse determination that has occurred regarding such maximum rate, our partnership agreement gives our general

 

50


Table of Contents

partner the power to amend the agreement. If our general partner determines that our not being treated as an association taxable as a corporation or otherwise taxable as an entity for U.S. federal income tax purposes, coupled with the tax status (or lack of proof thereof) of one or more of our limited partners, has, or is reasonably likely to have, a material adverse effect on the maximum applicable rates chargeable to customers by us, then our general partner may adopt such amendments to our partnership agreement as it determines are necessary or advisable to obtain proof of the U.S. federal income tax status of our limited partners (and their owners, to the extent relevant) and permit us to redeem the common units held by any person whose tax status has or is reasonably likely to have a material adverse effect on the maximum applicable rates or who fails to comply with the procedures instituted by our general partner to obtain proof of the U.S. federal income tax status. See “The Partnership Agreement—Non-Taxpaying Assignees; Redemption” beginning on page 210.

 

Our general partner’s interest in us and the control of our general partner may be transferred to a third party without unitholder consent.

 

Our general partner may transfer its general partner interest in us to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. Furthermore, there is no restriction in our partnership agreement on the ability of RNHI to transfer its equity interest in our general partner to a third party. The new equity owner of our general partner would then be in a position to replace the board of directors and the officers of our general partner with its own choices and to influence the decisions taken by the board of directors and officers of our general partner.

 

Increases in interest rates could adversely impact our unit price and our ability to issue additional equity to make acquisitions, incur debt or for other purposes.

 

We cannot predict how interest rates will react to changing market conditions. Interest rates on our new revolving credit facility and future credit facilities and debt securities could be higher than current levels, causing our financing costs to increase accordingly. Additionally, as with other yield-oriented securities, we expect that our unit price will be impacted by the level of our quarterly cash distributions and implied distribution yield. The distribution yield is often used by investors to compare and rank related yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates may affect the yield requirements of investors who invest in our common units, and a rising interest rate environment could have a material adverse impact on our unit price and our ability to issue additional equity to make acquisitions or to incur debt as well as increasing our interest costs.

 

There is no existing market for our common units, and we do not know if one will develop to provide you with adequate liquidity. If our unit price fluctuates after this offering, you could lose a significant part of your investment.

 

Prior to this offering, there has not been a public market for our common units. If an active trading market does not develop, you may have difficulty selling any of our common units that you buy. The initial public offering price for the common units will be determined by negotiations between us and the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell our common units at prices equal to or greater than the price paid by you in this offering. The market price of our common units may be influenced by many factors including:

 

   

the level of our distributions and our earnings or those of other companies in our industry or other publicly traded limited partnerships;

 

   

the failure of securities analysts to cover our common units after this offering or changes in financial estimates by analysts;

 

   

announcements by us or our competitors of significant contracts or acquisitions;

 

   

variations in quarterly results of operations;

 

   

loss of a large customer or supplier;

 

51


Table of Contents
   

market prices of natural gas and nitrogen fertilizers;

 

   

general economic conditions;

 

   

terrorist acts;

 

   

changes in the applicable environmental regulations;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

future sales of our common units; and

 

   

investor perceptions of us and the industries in which our products are used.

 

As a result of these factors, investors in our common units may not be able to resell their common units at or above the initial offering price. In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies like us. These broad market and industry factors may materially reduce the market price of our common units, regardless of our operating performance.

 

You will incur immediate and substantial dilution in net tangible book value per common unit.

 

The assumed initial public offering price of our common units is substantially higher than the pro forma net tangible book value of our outstanding units. As a result, if you purchase common units in this offering, you will incur immediate and substantial dilution in the amount of $17.10 per common unit. This dilution results primarily because we will record the assets to be contributed to us by Rentech and its affiliates at or prior to the closing of this offering at their historical costs, and not their fair value, in accordance with GAAP. See “Dilution.”

 

We may issue additional common units and other equity interests without your approval, which would dilute your existing ownership interests.

 

Under our partnership agreement, 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;

 

   

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.

 

In addition, our partnership agreement does not prohibit the issuance by our subsidiaries of equity interests, which may effectively rank senior to the common units.

 

Units eligible for future sale may cause the price of our common units to decline.

 

Sales of substantial amounts of our common units in the public market, or the perception that these sales may occur, could cause the market price of our common units to decline. This could also impair our ability to raise additional capital through the sale of our equity interests.

 

There will be 38,250,000 common units outstanding following this offering. 15,000,000 common units are being sold to the public in this offering (17,250,000 common units if the underwriters exercise their option to purchase 2,250,000 additional common units in full) and 23,250,000 common units will be owned by RNHI following this offering (21,000,000 common units if the underwriters exercise their option to purchase additional common units in full). The common units sold in this offering will be freely transferable without restriction or further registration under the Securities Act of 1933, or the Securities Act, by persons other than “affiliates,” as

 

52


Table of Contents

that term is defined in Rule 144 under the Securities Act. In addition, under our partnership agreement, our general partner and its affiliates have the right to cause us to register their units under the Securities Act and applicable state securities laws.

 

In connection with this offering, we, our general partner, our general partner’s directors and executive officers, Rentech and RNHI will enter into lock-up agreements, pursuant to which they will agree, subject to certain exceptions, not to sell or transfer, directly or indirectly, any of our common units until 180 days from the date of this prospectus, subject to extension in certain circumstances. Following termination of these lockup agreements, all units held by our general partner and their affiliates will be freely tradable under Rule 144, subject to the volume and other limitations of Rule 144. See “Common Units Eligible for Future Sale.”

 

The level of indebtedness we could incur in the future could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from meeting our obligations.

 

At or as soon as practicable following the closing of this offering, we intend to enter into our new revolving credit facility, which we expect to provide for revolving borrowing capacity of $25.0 million. In addition, we currently intend to finance substantially all of the cost of our ammonia capacity expansion project with debt financing that we will seek to obtain after the closing of this offering. The level of indebtedness we could incur in the future could have important consequences, including:

 

   

increasing our vulnerability to general economic and industry conditions;

 

   

requiring all or a substantial portion of our cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore restricting or reducing our ability to use our cash flow to make distributions or to fund our operations, capital expenditures and future business opportunities;

 

   

limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions and general corporate or other purposes;

 

   

incurring higher interest expense in the event of increases in our new revolving credit facility’s variable interest rates;

 

   

limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who have greater capital resources;

 

   

limiting our ability to make investments, dispose of assets, pay cash distributions or repurchase common units; and

 

   

subjecting us to financial and other restrictive covenants in our indebtedness, which may restrict our activities, and the failure to comply with which could result in an event of default.

 

Our ability to make scheduled debt payments, to refinance our obligations with respect to our indebtedness and to fund capital and non-capital expenditures necessary to maintain the condition of our operating assets and properties, as well as to provide capacity for the growth of our business, depends on our financial and operating performance, which, in turn, is subject to prevailing economic conditions and financial, business, competitive, legal and other factors.

 

If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce distributions, reduce or delay capital expenditures, acquisitions, investments or other business activities, sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. Failure to pay our indebtedness on time would constitute an event of default under the agreements governing our indebtedness, which would give rise to our lenders’ ability to accelerate the obligations and seek other remedies against us.

 

53


Table of Contents

Tax Risks

 

In addition to reading the following risk factors, please read “Material U.S. Federal Income Tax Consequences” for a more complete discussion of the expected material United States federal income tax consequences of owning and disposing of our common units.

 

Our tax treatment depends on our status as a partnership for United States federal income tax purposes, as well as our not being subject to a material amount of entity-level taxation by individual states. If the Internal Revenue Service were to treat us as a corporation for United States federal income tax purposes or if we were to become subject to additional amounts of entity-level taxation for state tax purposes, then our cash available for distribution to our unitholders would be substantially reduced.

 

The anticipated after-tax economic benefit of an investment in our common units depends largely on our being treated as a partnership for United States federal income tax purposes. We have not requested, and do not plan to request, a ruling from the Internal Revenue Service, or the IRS, on that or any other tax matter affecting us.

 

Despite the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for United States federal income tax purposes. A change in our current business or a change in current law could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.

 

If we were treated as a corporation for United States federal income tax purposes, we would pay United States federal income tax on all of our taxable income at the corporate tax rate, which is currently a maximum of 35%, and would likely pay additional state and local income tax at varying rates. Distributions to our unitholders would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to our unitholders. Because a tax would be imposed upon us as a corporation, our cash available for distribution to our unitholders would be substantially reduced. Therefore, treatment of us as a corporation for United States federal income tax purposes would result in a material reduction in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common units.

 

Changes in current state law may subject us to additional entity-level taxation by individual states. Several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise or other forms of taxation. Imposition of such a tax by any state in which we do business will reduce our cash available for distribution to our unitholders.

 

The tax treatment of publicly traded limited partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.

 

The present United States federal income tax treatment of publicly traded limited partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time. Current law may change to cause us to be treated as a corporation for United States federal income tax purposes or otherwise subject us to entity-level taxation. For example, members of Congress have considered substantive changes to the existing United States federal income tax laws that affect publicly traded limited partnerships. Any modification to the United States federal income tax laws and interpretations thereof may or may not be applied retroactively. We are unable to predict whether any of these changes or other proposals will ultimately be enacted. Any such changes could cause a substantial reduction in the value of our common units.

 

54


Table of Contents

If the IRS contests any of the United States federal income tax positions we take, the market for our common units may be materially and adversely impacted, and the cost of any IRS contest will reduce our cash available for distribution to our unitholders.

 

We have not requested, and do not plan to request, a ruling from the IRS with respect to our treatment as a partnership for United States federal income tax purposes or any other matter affecting us. The IRS may adopt positions that differ from the conclusions of our counsel expressed in this prospectus or from the positions we take, and the IRS’s positions may ultimately be sustained. It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel’s conclusions or positions we take. A court may not agree with some or all of our counsel’s conclusions or positions we take. Any contest with the IRS may materially and adversely impact the market for our common units and the price at which they trade. In addition, our costs of any contest with the IRS will be borne indirectly by our unitholders because the costs will reduce our cash available for distribution.

 

Unitholders’ share of our income will be taxable for United States federal income tax purposes even if they do not receive any cash distributions from us.

 

Because our unitholders will be treated as partners to whom we will allocate taxable income that could be different in amount than the cash we distribute, a unitholder’s allocable share of our taxable income will be taxable to him, which may require the payment of United States federal income taxes and, in some cases, state and local income taxes on his share of our taxable income, even if he receives no cash distributions from us. Unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from that income.

 

Tax gain or loss on the disposition of our common units could be more or less than expected.

 

If our unitholders sell common units, they will recognize a gain or loss for United States federal income tax purposes equal to the difference between the amount realized and their tax basis in those common units. Because distributions in excess of their allocable share of our net taxable income decrease their tax basis in their common units, the amount, if any, of such prior excess distributions with respect to the common units our unitholders sell will, in effect, become taxable income to our unitholders if they sell such common units at a price greater than their tax basis in those common units, even if the price they receive is less than their original cost. Furthermore, a substantial portion of the amount realized on any sale of a unitholder’s common units, 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 includes a unitholder’s share of our nonrecourse liabilities, if our unitholders sell common units, they may incur a tax liability in excess of the amount of cash the unitholders receive from the sale. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Common Units—Recognition of Gain or Loss” for a further discussion of the foregoing.

 

Tax-exempt entities and non-U.S. persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.

 

Investment in our common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (known as IRAs), and non-U.S. persons, raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from United States federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file United States federal income tax returns and pay tax on their share of our taxable income. Unitholders that are tax-exempt entities or non-U.S. persons should consult their tax advisors before investing in our common units.

 

55


Table of Contents

We will treat each purchaser of our common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of our common units.

 

Due to our inability to match transferors and transferees of common units and for other reasons, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations promulgated under the Internal Revenue Code, referred to as “Treasury Regulations.” A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to our unitholders. It also could affect the timing of these tax benefits or the amount of gain from a unitholder’s sale of common units and could cause a substantial reduction in the value of our common units or result in audit adjustments to our unitholders’ tax returns. Please read “Material U.S. Federal Income Tax Consequences—Tax Consequences of Unit Ownership—Section 754 Election” for a further discussion of the effect of the depreciation and amortization positions we will adopt.

 

We will prorate our items of income, gain, loss and deduction, for United States federal income tax purposes, between transferors and transferees of our common units each month based upon the ownership of our common units on the first day of each month, instead of on the basis of the date a particular common unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.

 

We will prorate our items of income, gain, loss and deduction between transferors and transferees of our common units each month based upon the ownership of our common units on the first day of each month, instead of on the basis of the date a particular common unit is transferred. The use of this proration method may not be permitted under existing Treasury Regulations. If the IRS were to challenge our proration method or new Treasury Regulations were issued requiring a change, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders. Latham & Watkins LLP has not rendered an opinion with respect to whether our monthly convention for allocating taxable income and losses is permitted by existing Treasury Regulations. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Common Units—Allocations Between Transferors and Transferees.”

 

A unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of those common units. If so, the unitholder would no longer be treated for United States federal income tax purposes as a partner with respect to those common units during the period of the loan and may recognize gain or loss from the disposition.

 

Because a unitholder whose common units are loaned to a “short seller” to effect a short sale of common units may be considered as having disposed of the loaned common units, he may no longer be treated for United States federal income tax purposes as a partner with respect to those common units during the period of the loan to the short seller 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 common units may not be reportable by the unitholder and any cash distributions received by the common unitholder as to those common units could be fully taxable as ordinary income. Latham & Watkins LLP has not rendered an opinion regarding the treatment of a unitholder where common units are loaned to a short seller to effect a short sale of common units, due to a lack of controlling authority; therefore, unitholders desiring to assure their status as partners for United States federal income tax purposes and avoid the risk of gain recognition from a loan to a short seller are urged to consult a tax advisor to discuss whether it is advisable to modify any applicable brokerage account agreements to prohibit their brokers from loaning their common units.

 

The sale or exchange of 50% or more of our capital and profits interests during any 12-month period will result in the termination of the Partnership for United States federal income tax purposes.

 

We will be considered to have technically terminated the Partnership for United States federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a 12-month period. For purposes of determining whether the 50% threshold has been met, multiple sales of the

 

56


Table of Contents

same common unit will be counted only once. While we would continue our existence as a Delaware limited partnership, our technical termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns (and our unitholders could receive two Schedules K-1 if relief was not available, as described below) for one fiscal year and could result in a significant deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may also result in more than 12 months of our taxable income or loss being includable in his taxable income for the year of termination. A technical termination currently would not affect our classification as a partnership for United States federal income tax purposes, but instead, we would be treated as a new partnership for such tax purposes. If treated as a new partnership, we must make new tax elections and could be subject to penalties if we are unable to determine that a technical termination occurred. The IRS has recently announced a publicly traded limited partnership relief procedure whereby a publicly traded limited partnership that has technically terminated may request special relief that, if granted, would, among other things, permit the Partnership to provide only a single Schedule K-1 to unitholders for the tax year notwithstanding two partnership tax years. Please read “Material U.S. Federal Income Tax Consequences—Disposition of Common Units—Constructive Termination” for a discussion of the consequences of our technical termination for United States federal income tax purposes.

 

Unitholders will likely be subject to state and local taxes and return filing requirements in jurisdictions where they do not live as a result of investing in our common units.

 

In addition to United States federal income taxes, unitholders will likely be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we do business or control property now or in the future, even if they do not live in any of those jurisdictions. Unitholders will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, unitholders may be subject to penalties for failure to comply with those requirements. We will initially own assets and conduct business in the State of Illinois, and the State of Illinois currently imposes a personal income tax on individuals. The State of Illinois also imposes an income tax on corporations and other entities. As we make acquisitions or expand our business, we may own or control assets or conduct business in additional states that impose a personal income tax. It is the responsibility of each unitholder to file all United States federal, state, local and non-U.S. tax returns. Our counsel has not rendered an opinion on the state, local or non-U.S. tax consequences of an investment in our common units.

 

57


Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include the words “will,” “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. Our forward-looking statements include statements about our business strategy, our industry, our future profitability, our expected capital expenditures (including for maintenance or expansion projects and environmental expenditures) and the impact of such expenditures on our performance, and the costs of operating as a public company. All statements herein about our forecast of cash available for distribution and our forecasted results for the fiscal year ending September 30, 2012 constitute forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, including the factors described under “Risk Factors,” that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. Such risks and uncertainties include, among other things:

 

   

our ability to make cash distributions on our common units;

 

   

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

 

   

a decline in demand for corn or corn prices or the use of nitrogen fertilizer for agricultural purposes;

 

   

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

 

   

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

 

   

our lack of asset or geographic diversification;

 

   

intense competition from other nitrogen fertilizer producers;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

the risk associated with governmental policies affecting the agricultural industry;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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

 

58


Table of Contents

THE TRANSACTIONS AND OUR STRUCTURE AND ORGANIZATION

 

The Transactions

 

The following transactions will take place in connection with this offering. We refer to these transactions collectively as the “Transactions”:

 

   

RDC will convert into a corporation organized under the laws of the State of Delaware;

 

   

RDC will contribute the capital stock in REMC to RNHI;

 

   

our general partner and RNHI, an indirect wholly owned subsidiary of Rentech, will enter into an amended and restated agreement of limited partnership, the form of which is attached hereto as Appendix A;

 

   

our management services agreement with Rentech will terminate in accordance with its terms and REMC will pay Rentech any corporate overhead costs owed by REMC under the agreement, estimated to be approximately $16.6 million, as described under “Certain Relationships and Related Party Transactions—Our Agreements with Rentech—Management Services Agreement”;

 

   

we, our general partner and Rentech will enter into a services agreement as described under “Certain Relationships and Related Party Transactions—Our Agreements with Rentech—Services Agreement”;

 

   

REMC will convert into a limited liability company organized under the laws of the State of Delaware and will change its name to Rentech Nitrogen, LLC;

 

   

REMC will distribute to RNHI all of REMC’s cash, estimated to be approximately $40.6 million;

 

   

RNHI will contribute the member interests in REMC to us in exchange for (i) 23,250,000 common units, and (ii) the right to receive approximately $39.8 million in cash, in part, as a reimbursement for expenditures made by REMC during the two-year period preceding this offering for the expansion and improvement of our facility; for federal income tax purposes, when REMC converts to a limited liability company (as described above), RNHI is treated as having been the party that made such expenditures with respect to our facility;

 

   

we will offer and sell 15,000,000 common units in this offering (17,250,000 if the underwriters exercise their option to purchase additional common units in full), and will pay related underwriting discounts and commissions and the estimated expenses of this offering;

 

   

we will use approximately $198.9 million of the net proceeds of this offering to make a capital contribution to REMC for (i) the repayment in full and termination of REMC’s existing term loan and the payment of related fees and expenses in the amount of approximately $150.8 million, (ii) the payment of expenditures related to our steam methane reformer tube replacement in the amount of approximately $1.8 million, (iii) the payment of expenditures related to our urea expansion and DEF build-out project in the amount of approximately $5.7 million, (iv) the payment of expenditures related to FEED for our ammonia capacity expansion project in the amount of approximately $0.6 million and (v) for general working capital purposes of approximately $40.0 million;

 

   

we will distribute approximately $39.8 million of the net proceeds of this offering to RNHI to reimburse it for expenditures made by REMC during the two-year period preceding this offering for the expansion and improvement of our facility, including expenditures for preliminary work relating to our expansion projects;

 

   

we will use the balance of the net proceeds to make a distribution to RNHI;

 

   

we intend to enter into our new revolving credit facility at or as soon as practicable following the closing of this offering, which we expect to provide for revolving borrowing capacity of $25.0 million;

 

   

if and to the extent that the underwriters exercise their option to purchase additional common units, we will use the resulting net proceeds, to redeem from RNHI, at the same price per unit as the common units sold to the public in this offering, less underwriting discounts and commissions, a number of common units equal to the number of additional common units purchased by the underwriters pursuant to such exercise; and

 

59


Table of Contents
   

we will redeem the limited partner interest we issued to RNHI upon our formation in July 2011 for a de minimis amount in cash.

 

After giving effect to the Transactions described above, on the closing date of this offering, we expect to have approximately $48.0 million of cash. At or as soon as practicable following the closing of this offering, we also expect to enter into our new revolving credit facility, which we expect to provide borrowing capacity of $25 million, although there is no guarantee that we will enter into the new facility on a timely basis or acceptable terms or at all. We believe that this cash, as may be supplemented by the borrowing capacity under our new revolving credit facility, will be sufficient to meet our foreseeable working capital requirements as of the closing date.

 

Management

 

Our general partner will manage our operations and activities. Following the Transactions, our general partner will be indirectly owned by Rentech. For information about the executive officers and directors of our general partner, see “Management—Executive Officers and Directors.” Our general partner will not receive any management fee or other compensation in connection with the management of our business but will be entitled to reimbursement for all direct and indirect expenses incurred on our behalf, including management compensation and overhead allocated to us by Rentech in accordance with our services agreement. Upon the closing of this offering, our general partner will own a non-economic general partner interest and, therefore, will not be entitled to receive cash distributions. However, it may acquire common units in the future and will be entitled to receive pro rata distributions therefrom.

 

Unlike stockholders in a corporation, our common unitholders are not entitled to elect our general partner or the board of directors of our general partner. See “Management—Management of Rentech Nitrogen Partners, L.P.”

 

Conflicts of Interest and Fiduciary Duties

 

Our general partner has legal duties to manage us in a manner that is in, or not opposed to, our best interests. These legal duties are commonly referred to as “fiduciary duties.” Because our general partner is indirectly owned by Rentech, the officers and directors of our general partner and the officers and directors of Rentech also have fiduciary duties to manage the business of our general partner in a manner beneficial to Rentech. As a result of these relationships, conflicts of interest may arise in the future between us and our unitholders, on the one hand, and our general partner and its affiliates, on the other hand. For a more detailed description of the conflicts of interest and fiduciary duties of our general partner, see “Risk Factors—Risks Related to an Investment in Us” and “Conflicts of Interest and Fiduciary Duties.”

 

Our partnership agreement limits the liability of, and reduces the fiduciary duties owed by, our general partner and its directors and officers to our unitholders. Our partnership agreement also restricts the remedies available to unitholders for actions that might otherwise constitute breaches of our general partner’s fiduciary duties. By purchasing a common unit, you are consenting to various limitations on fiduciary duties contemplated in our partnership agreement and conflicts of interest that might otherwise be considered a breach of fiduciary or other duties under applicable law. See “Conflicts of Interest and Fiduciary Duties—Fiduciary Duties” for a description of the fiduciary duties imposed on our general partner by Delaware law, the material modifications of these duties contained in our partnership agreement and certain legal rights and remedies available to unitholders. In addition, our general partner will have the right to call, under specified circumstances, all of our outstanding common units without regard to whether it is in the interest of our common unitholders. For a description of such call right, see “The Partnership Agreement—Call Right.”

 

For a description of our other relationships with our affiliates, see “Certain Relationships and Related Party Transactions.”

 

60


Table of Contents

Trademarks, Trade Names and Service Marks

 

This prospectus includes references to “Rentech,” a trademark belonging to Rentech. This prospectus may also contain trademarks, service marks, copyrights and trade names of other companies.

 

Rentech

 

Rentech is a provider of clean energy solutions and nitrogen fertilizer products. Rentech’s common stock is listed for trading on the NYSE Amex under the symbol “RTK.” Following this offering, Rentech will own indirectly our general partner and approximately 60.8% of our outstanding common units (54.9% of our outstanding common units if the underwriters exercise their option to purchase additional common units in full).

 

61


Table of Contents

USE OF PROCEEDS

 

We estimate that the net proceeds to us in this offering, after deducting underwriting discounts and commissions and the estimated expenses of this offering, will be approximately $275.0 million (based on an assumed initial public offering price of $20.00 per common unit, the mid-point of the price range set forth on the cover page of this prospectus). We intend to use:

 

   

approximately $150.8 million of the net proceeds of this offering to make a capital contribution to REMC for the repayment in full and termination of REMC’s existing term loan and the payment of related fees and expenses;

 

   

approximately $39.8 million of the net proceeds of this offering to make a distribution to RNHI to reimburse it for expenditures made by REMC during the two-year period preceding this offering for the expansion and improvement of our facility, including expenditures for preliminary work relating to our expansion projects; for federal income tax purposes, when REMC converts to a limited liability company (as described in “The Transactions and Our Structure and Organization—The Transactions”), RNHI is treated as having been the party that made such expenditures with respect to our facility;

 

   

approximately $1.8 million for the payment of expenditures related to the replacement of our steam methane reformer tubes;

 

   

approximately $5.7 million for the payment of expenditures related to our urea expansion and DEF build-out project;

 

   

approximately $0.6 million for the payment of expenditures related to FEED for our ammonia capacity expansion project;

 

   

approximately $40.0 million for general working capital purposes; and

 

   

the balance of the net proceeds of this offering to make a distribution to RNHI.

 

We will require additional debt and/or equity financing to complete our ammonia capacity expansion project, which could cost approximately $100 million to complete based on preliminary estimates. See “Business—Our Business Strategies—Pursue Organic Growth Opportunities—Ammonia Capacity Expansion.”

 

Borrowings under the existing term loan bear interest at a variable rate based upon either LIBOR with a 1.5% minimum or the lenders’ alternative base rate with a 2.5% minimum, plus in each case an applicable margin. As of June 30, 2011, we had $150.0 million outstanding under our current term loan and the applicable interest rate was 10.0% per annum. The maturity date of the existing term loan is June 10, 2016. REMC used the proceeds of the existing term loan plus approximately $20.4 million of cash on hand to repay the outstanding obligations and prepayment penalties under REMC’s previous credit agreement in an amount of approximately $95.7 million, to pay a dividend to Rentech of approximately $67.0 million and to pay related fees and expenses of approximately $7.7 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation—Liquidity and Capital Resources—Credit Facilities.”

 

If the underwriters exercise their option to purchase up to 2,250,000 additional common units in full, the additional net proceeds would be approximately $41.9 million (and the total net proceeds to us would be approximately $316.9 million), in each case assuming an initial public offering price per common unit of $20.00 (the mid-point of the price range set forth on the cover page of this prospectus). The net proceeds from any exercise of such option will be used to redeem from RNHI, at the same price per unit as the common units sold to the public in this offering, less underwriting discounts and commissions, a number of common units equal to the number of additional common units purchased by the underwriters pursuant to such exercise.

 

62


Table of Contents

A $1.00 increase (or decrease) in the assumed initial public offering price of $20.00 per common unit would increase (decrease) the net proceeds to us from this offering by $14.0 million, assuming the number of common units offered by us, as set forth on the cover page of this prospectus, remains the same and assuming the underwriters do not exercise their option to purchase additional common units, and after deducting the underwriting discounts and commissions. Any increase or decrease in the initial public offering price will result in a corresponding adjustment to the second distribution to RNHI described above. The actual initial public offering price is subject to market conditions and negotiations between us and the underwriters.

 

Depending on market conditions at the time of pricing of this offering and other considerations, we may sell fewer or more common units than the number set forth on the cover page of this prospectus.

 

63


Table of Contents

CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2011 on:

 

   

an actual basis; and

 

   

a pro forma basis to reflect the Transactions, including the issuance of common units in this offering and the application of the net proceeds from this offering as described in “Use of Proceeds.”

 

The table assumes (1) an initial public offering price of $20.00 per unit (the mid-point of the price range set forth on the cover page of this prospectus), and (2) no exercise by the underwriters of their option to purchase additional common units.

 

You should read this table in conjunction with “Use of Proceeds,” “Selected Historical Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Condensed Financial Statements,” and the financial statements and related notes included elsewhere in this prospectus.

 

     As of June 30, 2011  
     Actual     Pro Forma  
     (unaudited)  
     (in thousands)  

Cash and cash equivalents

   $ 21,444      $ 48,000   
  

 

 

   

 

 

 

Term loan(1)

     150,000          

New revolving credit facility(2)

              

Stockholder’s equity (deficit)

     (79,492       
  

 

 

   

 

 

 

Partners’ capital:

    

Equity held by public:

    

Common units: none issued and outstanding actual; 15,000,000 issued and outstanding pro forma

            275,000   

Equity held by Rentech and its affiliates:

    

Common units: none issued and outstanding actual; 23,250,000 issued and outstanding pro forma

            (163,910
  

 

 

   

 

 

 

Total partners’ capital

            111,090   
  

 

 

   

 

 

 

Total capitalization

   $ 70,508      $ 111,090   
  

 

 

   

 

 

 

 

(1)   As of August 31, 2011, the amount outstanding under the term loan was $150.0 million.
(2)   At or as soon as practicable following the closing of this offering, we intend to enter into our new revolving credit facility, which we expect to have $25.0 million of available capacity.

 

64


Table of Contents

DILUTION

 

Purchasers of common units offered by this prospectus will suffer immediate and substantial dilution in net tangible book value per unit. Our net tangible book value as of June 30, 2011 was approximately $(79.5) million. Our pro forma net tangible book value per unit was $(3.42). Pro forma net tangible book value per unit represents the amount of tangible assets less total liabilities, divided by the pro forma number of common units issued to Rentech and its affiliates.

 

Dilution in net tangible book value per unit represents the difference between the amount per unit paid by purchasers of our common units in this offering and the pro forma net tangible book value per unit immediately after this offering. After giving effect to the sale of 15,000,000 common units in this offering at an assumed initial public offering price of $20.00 per common unit (the mid-point of the price range set forth on the cover page of this prospectus), and after deduction of the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of June 30, 2011 would have been approximately $111.1 million, or $2.90 per unit. This represents an immediate increase in net tangible book value of $6.32 per unit to Rentech and its affiliates with respect to the 23,250,000 common units to be issued to them and an immediate pro forma dilution of $17.10 per unit to purchasers of common units in this offering. The following table illustrates this dilution on a per unit basis:

 

Assumed initial public offering price per common unit

     $ 20.00   

Pro forma net tangible book value per unit before this offering(1)

   $ (3.42  

Increase in net tangible book value per unit attributable to purchasers in this offering and use of proceeds

   $ 6.32     

Less: Pro forma net tangible book value per unit after this offering(2)

     $ 2.90   
    

 

 

 

Immediate dilution in net tangible book value per common unit to purchasers in this offering

     $ 17.10   
    

 

 

 

 

(1)   Determined by dividing the net tangible book value of our assets less total liabilities by the 23,250,000 common units to be issued to Rentech and its affiliates.
(2)   Determined by dividing our pro forma net tangible book value, after giving effect to the application of the net proceeds of this offering, by the total number of units to be outstanding after this offering.

 

A $1.00 increase (decrease) in the assumed initial public offering price of $20.00 per common unit (the mid-point of the price range set forth on the cover page of this prospectus) would increase (decrease) our pro forma net tangible book value by $13,950,000, the pro forma net tangible book value per unit by $0.36 and the dilution per common unit to new investors by $0.36, assuming the number of common units offered by us, as set forth on the cover page of this prospectus, remains the same and the underwriters do not exercise their option to purchase additional common units, and after deducting the underwriting discounts and estimated offering expenses payable by us. Depending on market conditions at the time of pricing of this offering and other considerations, we may sell fewer or more common units than the number set forth on the cover page of this prospectus.

 

65


Table of Contents

The following table sets forth the total value contributed by Rentech and its affiliates in respect of the units held by them and the total amount of consideration contributed to us by the purchasers of common units in this offering upon the completion of the Transactions.

 

     Units Acquired     Total Consideration  
     Number      Percent     Amount     Percent  

Rentech

     23,250,000         60.8   $ (163,910     (120.4 )% 

New investors

     15,000,000         39.2   $ 300,000        220.4
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

     38,250,000         100.0   $ 136,090        100.0
  

 

 

    

 

 

   

 

 

   

 

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $20.00 per common unit (the mid-point of the price range set forth on the cover page of this prospectus) would increase (decrease) total consideration paid by new investors and total consideration paid by all unitholders by $14.0 million, assuming the number of common units offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and estimated offering expenses payable by us.

 

If the underwriters exercise their option to purchase 2,250,000 common units in full, then the pro forma increase per unit attributable to new investors would be $7.42, the net tangible book value per unit after this offering would be $4.00 and the dilution per unit to new investors would be $16.00. In addition, new investors would purchase 17,250,000 common units, or approximately 45.1% of units outstanding, and the total consideration contributed to us by new investors would increase to $345.0 million, or 247.8% of the total consideration contributed (based on an assumed initial public offering price of $20.00 per common unit, the mid-point of the price range set forth on the cover page of this prospectus).

 

66


Table of Contents

OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS

 

You should read the following discussion of our cash distribution policy and restrictions on distributions in conjunction with the specific assumptions upon which our cash distribution policy is based. See “— Assumptions and Considerations” below. For additional information regarding our historical and pro forma operating results, you should refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our audited historical financial statements, our unaudited historical financial statements and our unaudited pro forma condensed financial statements included elsewhere in this prospectus. In addition, you should read “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” for information regarding statements that do not relate strictly to historical or current facts and certain risks inherent in our business.

 

General

 

Our Cash Distribution Policy

 

Upon the closing of this offering, our policy will be to distribute all of the cash available for distribution we generate each quarter. Our first distribution will take place following the first full quarter after the consummation of this offering and will include cash available for distribution with respect to the period beginning on the closing date of this offering and ending on the last day of the first full quarter ending after the consummation of this offering. Cash available for distribution for each quarter will be determined by the board of directors of our general partner following the end of such quarter. We expect that cash available for distribution for each quarter will generally equal the cash we generate during the quarter, less cash needed for maintenance capital expenditures, debt service and other contractual obligations, and reserves for future operating or capital needs that the board of directors of our general partner deems necessary or appropriate. We do not intend to maintain excess distribution coverage for the purpose of maintaining stability or growth in our quarterly distribution or otherwise to reserve cash for distributions, nor do we intend to incur debt to pay quarterly distributions. We expect to finance substantially all of our growth externally, either by debt issuances or additional issuances of equity.

 

Because our policy will be to distribute all cash available for distribution each quarter, without reserving cash for future distributions or borrowing to pay distributions during periods of low cash flow from operations, our unitholders will have direct exposure to fluctuations in the amount of cash generated by our business. We expect that the amount of our quarterly distributions, if any, will vary based on our operating cash flow during each quarter. Our cash distributions, if any, will not be stable and will vary from quarter to quarter as a direct result of, among other things, variations in our operating performance and cash flow caused by fluctuations in the price of nitrogen fertilizers and natural gas, as well as the amount of forward and product sales pursuant to prepayment contracts that we make; see “Business—Marketing and Distribution.” These variations may be significant. We may change our distribution policy at any time and from time to time. Our partnership agreement does not require us to pay cash distributions on a quarterly or other basis.

 

From time to time we make product sales pursuant to prepayment contracts, whereby we receive cash during one quarter in respect of product to be produced and sold in a future quarter, but we do not record revenue in respect of the cash received until the quarter when product is delivered. All cash on our balance sheet in respect of product prepayments on the date of the closing of this offering will be retained by us for general purposes and will not be distributed to RNHI at the closing of this offering. This cash may be distributed to unitholders in accordance with our cash distribution policy as described above.

 

Limitations on Cash Distributions; Our Ability to Change Our Cash Distribution Policy

 

There is no guarantee that unitholders will receive cash distributions from us. Our distribution policy may be changed at any time and is subject to certain restrictions, including:

 

   

Our unitholders have no contractual or other legal right to receive cash distributions from us on a quarterly or other basis. Our policy will be to distribute to our unitholders each quarter all of the cash

 

67


Table of Contents
 

available for distribution we generate each quarter, as determined quarterly by the board of directors of our general partner, but it may change this policy at any time.

 

   

Our business performance is expected to be more seasonal and volatile, and our cash flows are expected to be less stable, than the business performance and cash flows of most publicly traded partnerships. As a result, our cash distributions will be volatile and are expected to vary quarterly and annually. Unlike most publicly traded limited partnerships, we will not have a minimum quarterly distribution or employ structures intended to consistently maintain or increase quarterly distributions over time. Furthermore, none of our limited partner interests, including those held by RNHI, will be subordinate in right of distribution payment to the common units sold in this offering.

 

   

The amount of cash available for distribution, the distributions we pay under our cash distribution policy and the decision to make any distribution will be determined by the board of directors of our general partner. Our partnership agreement will not provide for any minimum quarterly distributions.

 

   

Under Section 17-607 of the Delaware Act, we may not make a distribution to our limited partners if the distribution would cause our liabilities to exceed the fair value of our assets.

 

   

We expect that our distribution policy will be subject to restrictions on distributions under our new revolving credit facility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facilities.” Should we be unable to satisfy these restrictions under our new revolving credit facility, we would be prohibited from making cash distributions to you.

 

   

We may lack sufficient cash to make distributions to our unitholders due to a number of factors that would adversely affect us, including but not limited to decreases in revenues or increases in operating expenses, principal and interest payments on debt, working capital requirements, capital expenditures or anticipated cash needs. See “Risk Factors” for information regarding these factors.

 

We do not have any operating history as an independent company upon which to rely in evaluating whether we will have sufficient cash to allow us to pay distributions on our common units. While we believe, based on our financial forecast and related assumptions, that we should have sufficient cash to enable us to pay the forecasted aggregate distribution on all of our common units for the fiscal year ending September 30, 2012, we may be unable to pay the forecasted distribution or any amount on our common units.

 

We intend to pay our distributions on or about the 15th day of each February, May, August and November to holders of record on or about the 1st day of each such month. Our first distribution will take place following the first full quarter after the consummation of this offering and will include cash available for distribution with respect to the period beginning on the closing date of this offering and ending on the last day of the first full quarter ending after the consummation of this offering.

 

In the sections that follow, we present the following two tables:

 

   

“Rentech Nitrogen Partners, L.P. Unaudited Pro Forma Cash Available for Distribution for the 12 Months Ended June 30, 2011 and the Fiscal Year Ended September 30, 2010,” in which we present our estimate of the amount of pro forma cash available for distribution we would have had for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010, based on our unaudited pro forma condensed financial statements included elsewhere in this prospectus. See “Unaudited Pro Forma Condensed Financial Statements” beginning on page F-2 of this prospectus; and

 

   

“Rentech Nitrogen Partners, L.P. Forecasted Cash Available for Distribution for the Fiscal Year Ending September 30, 2012,” in which we present our unaudited forecast of cash available for distribution for the fiscal year ending September 30, 2012.

 

We do not as a matter of course make or intend to make projections as to future sales, earnings, or other results. However, our management has prepared the prospective financial information set forth under

“—Forecasted Cash Available for Distribution” below to supplement the historical and pro forma financials

 

68


Table of Contents

included elsewhere in this prospectus. To management’s knowledge and belief, the accompanying prospective financial information was prepared on a reasonable basis, reflects currently available estimates and judgments, and presents our expected course of action and our expected future financial performance. However, this information is not fact and should not be relied upon as being indicative of future results, and readers of this prospectus are cautioned not to place undue reliance on the prospective financial information. The forecast included in this prospectus has been prepared by, and is the responsibility of, our management. Neither PricewaterhouseCoopers LLP nor Ehrhardt Keefe Steiner & Hottman PC has examined, compiled or performed any procedures with respect to the forecast, and accordingly, PricewaterhouseCoopers LLP and Ehrhardt Keefe Steiner & Hottman PC do not express an opinion or any other form of assurance with respect thereto. The PricewaterhouseCoopers LLP report and the Ehrhardt Keefe Steiner & Hottman PC report included in this prospectus relate to our historical financial information. The reports do not extend to the forecast and should not be read to do so. See “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.”

 

Pro Forma Cash Available for Distribution

 

We believe that our pro forma cash available for distribution generated during the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010 would have been approximately $59.0 million and $16.9 million, respectively. Based on our initial cash distribution policy, this amount would have resulted in an aggregate annual distribution equal to $1.54 and $0.44 per common unit for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010, respectively.

 

The pro forma cash available for distribution calculations set forth below take into account the assumption that incremental general and administrative expense related to being a publicly traded limited partnership were paid during the applicable periods in which they are included. The incremental general and administrative expense is an estimate of the incremental expense that we expect to incur as a publicly traded limited partnership, including costs associated with SEC reporting requirements, such as annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, independent auditor fees, internal audit costs, directors and officers insurance, investor relations activities and registrar and transfer agent fees. We estimate that this incremental general and administrative expense will be approximately $3.6 million per year. The estimated incremental general and administrative expense is reflected in our pro forma cash available for distribution but are not reflected in our unaudited pro forma condensed financial statements included elsewhere in this prospectus.

 

The unaudited pro forma condensed financial statements, from which pro forma cash available for distribution is derived, do not purport to present our results of operations had the transactions contemplated below actually been completed as of the date indicated. Furthermore, cash available for distribution is a cash concept, while our unaudited pro forma condensed financial statements have been prepared on an accrual basis. We derived the amounts of pro forma cash available for distribution stated above in the manner described in the table below. As a result, the amount of pro forma cash available for distribution should only be viewed as a general indication of the amount of cash available for distribution that we might have generated had we been formed and completed the transactions contemplated below in earlier periods.

 

69


Table of Contents

The following tables illustrate, on a pro forma basis for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010, the amount of cash that would have been available for distributions to our unitholders, assuming that the Transactions (as defined on page 59 of this prospectus) had occurred at the beginning of such period:

 

Rentech Nitrogen Partners, L.P.

Unaudited Pro Forma Cash Available For Distribution

 

     Pro Forma 12 Months
Ended

June 30, 2011
     Pro Forma Fiscal Year
Ended
September 30, 2010
 
    

(unaudited)

(in millions, except per unit data)

 

Net income

   $ 64.7       $ 19.3   

Add:

     

Interest expense and other financing costs(1)

     0.3         0.3   

Non-cash compensation expense

     0.4         0.4   

Depreciation and amortization(2)

     10.4         10.5   
  

 

 

    

 

 

 

Adjusted EBITDA(3)

   $ 75.8       $ 30.5   

Subtract:

     

Net debt service costs(4)

     0.1         0.1   

Estimated incremental general and administrative expense(5)

     3.6         3.6   

Maintenance capital expenditures(6)

     13.1         9.9   
  

 

 

    

 

 

 

Cash Available for Distribution

   $ 59.0       $ 16.9  
  

 

 

    

 

 

 

Aggregate distributions per common unit

   $ 1.54       $ 0.44  

 

(1)   Interest expense and other financing costs represent the interest expense and fees, net of interest income, related to our borrowings, assuming that we entered into our new revolving credit facility on October 1, 2009. For purposes of the pro forma calculations, we assume that we did not draw down on the new revolving credit facility. Our pro forma interest expense is based on an assumed 0.5% commitment fee on unused funds and amortization of deferred financing costs.

 

(2)   Reflects depreciation and amortization included in cost of sales and selling, general and administrative expense.

 

(3)   Adjusted EBITDA is defined as net income plus interest expense and other financing costs, income tax expense, non-cash compensation expense and depreciation and amortization, net of interest income. We calculate cash available for distribution as used in this table as Adjusted EBITDA less net interest expense and other financing costs paid, estimated incremental general and administrative expense associated with being a public company and maintenance capital expenditures.

 

We present Adjusted EBITDA because it is a material component in our calculation of cash available for distribution. Adjusted EBITDA and cash available for distribution are used as supplemental financial measures by management and by external users of our financial statements, such as investors and commercial banks, to assess:

 

   

the financial performance of our assets without regard to financing methods, capital structure or historical cost basis; and

 

   

our operating performance and return on invested capital compared to those of other publicly traded limited partnerships, without regard to financing methods and capital structure.

 

Adjusted EBITDA and cash available for distribution should not be considered alternatives to net income, operating income, net cash provided by operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted EBITDA and cash available for distribution may have material limitations as performance measures because they exclude items that are necessary elements of our costs and operations. In addition, Adjusted EBITDA and cash available for distribution presented by other companies may not be comparable to our presentation, since each company may define these terms differently.

 

(4)   Debt service is defined as net interest expense and other financing costs paid, which excludes amortization of financing costs.

 

(5)   Reflects an adjustment for estimated incremental general and administrative expense we expect that we will incur as a publicly traded limited partnership, such as costs associated with SEC reporting requirements, including annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, independent auditor fees, internal audit costs, directors and officers insurance, investor relations activities, and registrar and transfer agent fees.

 

(6)   Reflects actual maintenance capital expenditures during the period.

 

70


Table of Contents

Forecasted Cash Available for Distribution

 

Subject to certain assumptions and assuming the board of directors of our general partner declares distributions in accordance with our cash distribution policy, we expect that our cash available for distribution for the fiscal year ending September 30, 2012 will be approximately $89.4 million, or $2.34 per common unit. However, the investors in this offering will not receive any cash available for distribution attributable to the period beginning October 1, 2011 through the closing date of this offering. Assuming a closing date of November 1, 2011, we estimate such amount to be de minimis, but the actual amount may be significant depending on the actual closing date of this offering. In “—Assumptions and Considerations” below, we discuss the material assumptions underlying our forecast of cash available for distribution for the fiscal year ending September 30, 2012. The forecasted cash available for distribution discussed in the forecast should not be viewed as management’s projection of the actual cash available for distribution that we will generate during the fiscal year ending September 30, 2012. We can give you no assurance that our assumptions will be realized or that we will generate any cash available for distribution during the 12-month forecast period or otherwise, in which event we will not be able to pay cash distributions on our common units.

 

We do not, as a matter of course, make public projections as to our future sales, earnings or other results. However, our management has prepared the prospective financial information set forth below in the table entitled “Rentech Nitrogen Partners, L.P. Forecasted Cash Available for Distribution for the Fiscal Year Ending September 30, 2012” to present our expectations regarding our ability to generate $89.4 million of cash available for distribution for the fiscal year ending September 30, 2012. The accompanying prospective financial information was not prepared with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in the view of our management, was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of management’s knowledge and belief, our expected course of action and our expected future financial performance. However, this information is not fact and should not be relied upon as being necessarily indicative of future results, and therefore, readers of this prospectus are cautioned not to place undue reliance on this prospective financial information.

 

The assumptions and estimates underlying the prospective financial information are inherently uncertain and, although our management considers them reasonable as of the date of its preparation, are subject to a wide variety of risks and uncertainties, including significant business, economic, and competitive risks and uncertainties described under the headings “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” elsewhere in this prospectus, that could cause our actual results to differ materially from those contained in the prospective financial information. Accordingly, there can be no assurance that the prospective results are indicative of our future performance or that our actual results will not differ materially from those presented in the prospective financial information. Irrespective, investors in our common units should not regard inclusion of the prospective financial information in this prospectus as a representation by any person that the results contained in the prospective financial information will be achieved.

 

We do not undertake any obligation to release publicly the results of any future revisions we may make to our financial forecast or to update this financial forecast to reflect events or circumstances after the date of this prospectus. In light of the above, the statement that we believe that we will have sufficient cash available for distribution to allow us to pay the forecasted distributions on all of our outstanding common units for the fiscal year ending September 30, 2012 should not be regarded as a representation by us, the underwriters or any other person that we will generate such amount of cash available for distribution or make such distributions. Therefore, you are cautioned not to place undue reliance on this information.

 

The following table shows how we calculate forecasted cash available for distribution for the fiscal year ending September 30, 2012. The assumptions that we believe are relevant to particular line items in the table below are explained in “—Assumptions and Considerations.”

 

71


Table of Contents

The forecast included in this prospectus has been prepared by, and is the responsibility of, our management. Neither PricewaterhouseCoopers LLP nor Ehrhardt Keefe Steiner & Hottman PC has examined, compiled or performed any procedures with respect to the forecast, and accordingly, PricewaterhouseCoopers LLP and Ehrhardt Keefe Steiner & Hottman PC do not express an opinion or any other form of assurance with respect thereto. The PricewaterhouseCoopers LLP report and the Ehrhardt Keefe Steiner & Hottman PC report included in this prospectus relate to our historical financial information. The reports do not extend to the forecast and should not be read to do so.

 

Rentech Nitrogen Partners, L.P.

Forecasted Cash Available for Distribution for the

Fiscal Year Ending September 30, 2012

 

The following table illustrates the amount of cash that we estimate that we will generate for the fiscal year ending September 30, 2012 that would be available for distribution to our unitholders. All of the amounts for the fiscal year ending September 30, 2012 in the table below are estimates.

 

    Fiscal Year
Ending
September 30,
2012
 
    ($ in millions,
except per
unit data)
 

Revenues

  $ 203.8   

Cost of sales

    106.9   

Selling, general and administrative expense

    8.1   

Debt service(1)

    0.3   

Interest income

    (0.1
 

 

 

 

Net Income

  $ 88.6   
 

 

 

 

Adjustments to reconcile Net Income to Adjusted EBITDA:

 

Add:

 

Depreciation and amortization

    11.8   

Debt service(1)

    0.3   

Subtract:

 

Interest income

    0.1   
 

 

 

 

Adjusted EBITDA

  $ 100.6   
 

 

 

 

Adjustments to reconcile Adjusted EBITDA to cash available for distribution:

 

Subtract:

 

Estimated incremental general and administrative expenses

    3.6   

Maintenance capital expenditures (inclusive of $1.8 million for the replacement of steam methane reformer tubes)

    10.3   

Expansion capital expenditures

    5.9   

Debt service cost excluding amortization of financing fees

    0.1   

Add:

 

Non-cash compensation expense

    1.0   

Capital funding from a portion of the net proceeds of this offering ($1.8 million for the replacement of steam methane reformer tubes and $5.9 million for expansion capital expenditures)

    7.7   
 

 

 

 

Cash Available for Distribution

  $ 89.4   
 

 

 

 

Aggregate Annual Distributions per Common Unit, Basic and Diluted

  $ 2.34   
 

 

 

 

Number of Common Units:

 

Basic

    38,250,000   

Diluted

    38,272,000   

 

(1)   Does not include any additional interest expense under a credit facility that we will seek to enter into after the closing of this offering to fund our ammonia capacity expansion project. See “—Summary of Significant Forecast Assumptions—Debt Service” below.

 

72


Table of Contents

Assumptions and Considerations

 

Based upon the specific assumptions outlined below with respect to the fiscal year ending September 30, 2012, we estimate that we would generate Adjusted EBITDA and cash available for distribution in an amount sufficient to allow us to distribute an aggregate of $2.34 per unit on all of our outstanding common units for the fiscal year ending September 30, 2012. Our first distribution will take place following the first full quarter after the consummation of this offering and will include cash available for distribution with respect to the period beginning on the closing date of this offering and ending on the last day of the first full quarter ending after the consummation of this offering. Accordingly, the investors in this offering will not receive any cash available for distribution attributable to the period beginning October 1, 2011 through the closing date of this offering. Assuming a closing date of November 1, 2011, we estimate such amount to be de minimis, but the actual amount may be significant depending on the actual closing date of this offering.

 

Basis of Presentation

 

The accompanying financial forecast and summary of significant forecast assumptions of Rentech Nitrogen Partners, L.P. present the forecasted results of operations of Rentech Nitrogen Partners, L.P. for the fiscal year ending September 30, 2012, assuming that the Transactions (as defined on page 59 of this prospectus) had occurred at the beginning of such period.

 

Summary of Significant Forecast Assumptions

 

On-Stream Factors. For the fiscal year ending September 30, 2012, we estimate average on-stream factors of 94% for both our ammonia and UAN production, which would result in our ammonia and UAN units being in operation for 344 days, during the forecast period. These factors assume that our ammonia and UAN units will be off stream for a total of 22 days during the forecast period for a scheduled turnaround for the replacement of the steam methane reformer tubes and other purposes.

 

During the 12 months ended June 30, 2011, our ammonia and UAN units were in operation for 365 days, each having an on-stream factor of 100%.

 

During the fiscal year ended September 30, 2010, our ammonia and UAN units were in operation for 335 days and 339 days, respectively, with the ammonia and UAN units having an on-stream factor of 92% and 93%, respectively. Our operating units’ on-stream factors in fiscal year 2010 were adversely affected by downtime associated with the scheduled turnaround and unplanned repairs and maintenance, which resulted in 30 and 26 off stream days for our ammonia and UAN units, respectively.

 

Revenues. We estimate revenues based on a forecast of future ammonia, UAN, liquid urea, granular urea and nitric acid prices (assuming that the purchaser will pay shipping costs), multiplied by the number of tons we estimate we will sell during the forecast period. In some cases, our products are shipped on a delivered basis, in which case our revenues estimate includes the delivery cost for ammonia and UAN sold on a FOB delivered basis. An amount equal to the delivery cost is included in cost of sales assuming that all delivery costs are paid by the customer. For the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010, approximately 9% and 17%, respectively, of our sales were made on an FOB basis. Additionally, we produce CO2 as a by-product and sell it into the food and beverage market at negotiated contract prices. CO2 is not subject to the distribution agreement with Agrium.

 

Based on these assumptions, we estimate our revenues for the fiscal year ending September 30, 2012 will be approximately $203.8 million. Our revenues for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010 were $176.4 million and $131.4 million, respectively. We estimate that we will sell 140,534 tons of ammonia during the forecast period at an average price of $663.09 per ton, for revenues of $93.2 million. As of September 30, 2011, we had entered into product prepayment contracts to sell approximately 73,000 tons of ammonia for approximately $51.4 million during the forecast period, or approximately 55% of our estimated revenues from sales of ammonia during the forecast period. We sold

 

73


Table of Contents

141,532 tons and 153,528 tons of ammonia at an average price of $534.75 per ton and $377.18 per ton, respectively, for revenues of $75.7 million and $57.9 million, for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010, respectively. We expect that sales volumes for ammonia during the forecast period will be lower than for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010 primarily as a result of downtime resulting from our 2011 turnaround completed in October 2011. In addition, sales volumes during the fiscal year ended September 30, 2010 were higher as a result of sales from inventory. The average price estimate for ammonia during the forecast period was determined by management based on our current committed orders, price discovery generated through the selling efforts of our fertilizer marketing group and price projections data received from Blue Johnson, a leading consultant in the fertilizer industry.

 

We estimate that we will sell 273,806 tons of UAN during the forecast period at an average price of $328.37 per ton, for revenues of $89.9 million. As of September 30, 2011, we had entered into product prepayment contracts to sell approximately 116,000 tons of UAN for approximately $40.1 million during the forecast period, or approximately 45% of our estimated revenues from sales of UAN during the forecast period. We sold 338,092 tons and 294,607 tons of UAN at an average price of $232.29 per ton and $179.60 per ton, respectively, for revenues of $78.5 million and $52.9 million, for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010, respectively. We expect that sales volumes for UAN during the forecast period will be lower than for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010 primarily as a result of downtime resulting from our 2011 turnaround completed in October 2011 and increasing UAN inventory levels during the forecast period. Similar to our estimates for ammonia described above, the average price estimate for UAN during the forecast period was determined by management based on our current committed orders, price discovery generated through the selling efforts of our fertilizer marketing group and price projections data received from Blue Johnson.

 

We estimate that we will sell 17,661 tons of granular urea during the forecast period at an average price of $499.99 per ton, for revenues of $8.8 million. We sold 19,664 tons and 21,242 tons of granular urea at an average price of $469.30 per ton and $426.03 per ton, respectively, for revenues of $9.2 million and $9.0 million, for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010, respectively. We expect that sales volumes for granular urea during the forecast period will be lower than for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010 primarily as a result of downtime resulting from our 2011 turnaround completed in October 2011 and the increased utilization of urea to produce UAN for inventory. The average price estimate for granular urea during the forecast period was determined by management based on current committed orders, price discovery through the selling efforts of our fertilizer marketing group and price projections data received from Blue Johnson.

 

We estimate that we will sell 11,266 tons of liquid urea during the forecast period at an average price of $480.06 per ton, for revenues of $5.4 million. We sold 12,801 tons and 10,559 tons of liquid urea at an average price of $422.97 per ton and $342.26 per ton, respectively, for revenues of $5.4 million and $3.6 million, for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010, respectively. We expect sales volumes for liquid urea in the forecast period to vary from sales volumes for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010 primarily as a result of comparative on-stream factors and projected demand in the market. The average price estimate for liquid urea during the forecast period was determined by management based on current committed orders, price discovery through the selling efforts of our fertilizer marketing group and price projections data received from Blue Johnson.

 

We estimate that we will sell 11,983 tons of nitric acid during the forecast period at an average price of $326.20 per ton, for revenues of $3.9 million. We sold 13,958 tons and 10,734 tons of nitric acid at an average price of $314.09 per ton and $291.49 per ton, respectively, for revenues of $4.4 million and $3.1 million, for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010, respectively. We expect sales volumes for nitric acid in the forecast period to vary from sales volumes for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010 primarily as a result of comparative on-stream factors and projected demand in the market. The average price estimate for nitric acid during the forecast period was

 

74


Table of Contents

determined by management based on our current committed orders and price discovery generated through the selling efforts of our fertilizer marketing group.

 

We estimate that we will sell 82,020 tons of CO2 during the forecast period at an average price of $31.22 per ton, for revenues of $2.6 million. We sold 123,000 tons and 106,807 tons of CO2 at an average price of $25.40 per ton and $26.02 per ton, respectively, for revenues of $3.1 million and $2.8 million, for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010, respectively. We expect that sales volumes for CO2 during the forecast period will be lower than for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010 primarily as a result of the reduction in our contracted volumes. The average price estimate for CO2 sold into the food and beverage market during the forecast period was determined by management based on historical contract pricing.

 

Holding all other variables constant, we expect that a 10% change in the forecasted price per ton of ammonia, not already sold under product prepayment contracts, would change our forecasted cash available for distribution by approximately $4.2 million for the fiscal year ending September 30, 2012. For the month of June 2011, the average realized price of ammonia was $643.35 per ton. Holding all other variables constant, we estimate that a 10% change in the forecasted price per ton of UAN, not already sold under product prepayment contracts, would change our forecasted cash available for distribution by approximately $5.0 million for the fiscal year ending September 30, 2012. The average realized price of UAN for the month of June 2011 was $334.80 per ton. Holding all other variables constant, we estimate that a 10% change in the forecasted price per ton of granular urea would change our forecasted cash available for distribution by approximately $0.9 million for the fiscal year ending September 30, 2012. The average realized price of granular urea for the month of June 2011 was $500.42 per ton. Holding all other variables constant, we estimate that a 10% change in the forecasted price per ton of liquid urea would change our forecasted cash available for distribution by approximately $0.5 million for the fiscal year ending September 30, 2012. The average realized price of liquid urea for the month of June 2011 was $467.39 per ton.

 

Cost of Sales (Inclusive of Depreciation and Amortization). Cost of sales includes natural gas, electricity, upgrading, sales commissions to Agrium, storage and loading and barging associated with our contracted capacity at Agrium’s Niota, Illinois terminal, as well as depreciation and amortization, if any. Cost of upgrading includes all costs associated with upgrading ammonia and urea into premium fertilizer products. Sales commission expense of 5.0%, limited to $5.0 million during each contract year, is payable to Agrium pursuant to our distribution agreement. Storage and loading expense consists of our outbound freight costs, which are passed through to our customers. Barge and storage expense associated with our contracted capacity at Agrium’s Niota terminal is our actual expense to acquire, maintain and lease storage space at the Niota terminal as well as our expense to ship inventory to the Niota terminal by river barge. Based on our forecasted revenues, as well as the other assumptions discussed below, we estimate that our cost of sales for the fiscal year ending September 30, 2012 will be approximately $106.9 million. Our cost of sales for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010 were $104.5 million and $106.0 million, respectively.

 

We estimate that our total natural gas expense for the fiscal year ending September 30, 2012 will be approximately $50.6 million, based on an average price of $4.95 per MMBtu during the forecast period. Our estimate, in part, is based on forward purchase contracts we have entered into for a portion of our facility’s natural gas requirements for the fiscal year ending September 30, 2012. As of September 30, 2011, we had entered into forward purchase contracts for approximately 3.5 million MMBtu of natural gas at an average natural gas price of approximately $4.51 per MMBtu, not including gas transportation costs, with various delivery dates during the forecast period. We believe that the natural gas under these forward purchase contracts and the natural gas available in our inventory will be sufficient to manufacture the products we have sold under the product prepayment contracts we had entered into as of September 30, 2011. Our total natural gas costs included in cost of sales for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010 were $52.6 million and $51.7 million, respectively, based on average natural gas prices of $4.73 per MMBtu and $4.69 per MMBtu, respectively. We use approximately 35 MMBtu and 16 MMBtu of natural gas to produce 1.0 ton of ammonia and 1.0 ton of UAN, respectively. Holding all other variables constant, we estimate that a 10%

 

75


Table of Contents

change per MMBtu in the forecasted price of natural gas, not already purchased under forward purchase contracts, would change our forecasted cash available for distribution by approximately $2.7 million for the fiscal year ending September 30, 2012.

 

We estimate that our total electricity cost included in cost of sales for the fiscal year ending September 30, 2012 will be approximately $7.5 million based on an average price of $70.66 per MWH during the forecast period. Our total electricity cost included in cost of sales for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010 were $7.9 million and $6.8 million, respectively, based on average prices of $69.41 per MWH and $64.13 per MWH, respectively. On average, we use 135 KWH of electricity to produce 1.0 ton of ammonia. Holding all other variables constant, we estimate that a 10% change in the forecasted price per MWH of electricity would change our forecasted cash available for distribution by approximately $0.8 million for the fiscal year ending September 30, 2012.

 

Selling, General and Administrative Expense (Inclusive of Depreciation and Amortization). Selling, general and administrative expense consists primarily of direct and allocated compensation, non-cash compensation, legal, treasury, accounting, marketing and human resources expenses and expenses related to maintaining our corporate offices in Illinois, as well as a portion of depreciation and amortization, if any. We estimate that our selling, general and administrative expense will be approximately $8.1 million for the fiscal year ending September 30, 2012. Selling, general and administrative expense, calculated on a pro forma basis, for the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010 were $6.2 million and $5.2 million, respectively.

 

Upon the closing of this offering, we, our general partner and Rentech will enter into a services agreement, pursuant to which Rentech will agree to provide us and our general partner with certain administrative services. See “Certain Relationships and Related Party Transactions—Our Agreements with Rentech—Services Agreement.”

 

Depreciation and Amortization. We estimate that depreciation and amortization for the forecast period will be approximately $11.8 million, as compared to $10.4 million and $10.5 million during the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010, respectively. Of these amounts, we estimate that the amount of depreciation and amortization included in selling, general and administrative expense will be approximately $0.1 million for the forecast period, as compared to $0.4 million during each of the fiscal year ended September 30, 2010 and the 12 months ended June 30, 2011.

 

Debt Service. Debt service includes interest expense, other financing costs and debt amortization payments. As part of the Transactions, we will repay all of our term loan debt. At or as soon as practicable following the closing of this offering, we expect to enter into our new revolving credit facility, which we expect would provide for revolving commitments of $25.0 million. Our forecasted interest expense of $0.1 million is based on an assumed 0.5% commitment fee on unused funds during the fiscal year ending September 30, 2012. At this time, we do not anticipate drawing on our new revolving credit facility during the forecast period. The forecasted interest expense does not include the amortization of deferred financing costs related to our new revolving credit facility, which would have no impact on Adjusted EBITDA.

 

In addition, if our ammonia capacity expansion project proceeds, we intend to finance the entire remaining cost of the project through borrowings. If we enter into our new $25 million revolving credit facility at or as soon as practicable following the closing of this offering as we currently contemplate, we would not have sufficient borrowing capacity under that facility to finance the entire project. The new revolving credit facility would be designed to provide for seasonal working capital needs only, not construction financing. As a result, we would require an additional credit facility with sufficient capacity and on acceptable terms to fund our ammonia capacity expansion project. Assuming we were able to put in place such a credit facility, we assume that the average monthly balance for the fiscal year ending September 30, 2012, under the credit facility would be approximately $35.4 million. Based on these assumptions, at average interest rates ranging from 4.0% to 6.5% per annum, we would expect to incur between approximately $1.6 million and $2.4 million in additional interest

 

76


Table of Contents

expense during the fiscal year ending September 30, 2012 as a result of these borrowings. Assuming the average outstanding monthly balance remained the same, an increase or decrease of 50 basis points in the average interest rate applicable to the credit facility would result in an increase or decrease, respectively, of approximately $175,000 of interest expense during the fiscal year ending September 30, 2012. Assuming the same range of interest rates applied to the credit facility, an increase or decrease of $1 million in the average monthly balance outstanding under the credit facility would result in an increase or decrease, respectively, of between approximately $40,000 and $65,000 in interest expense during the fiscal year ending September 30, 2012. The foregoing assumes that the terms of this additional credit facility would not require any repayment of principal during the fiscal year ending September 30, 2012. If such principal repayments were required, our total debt service expense over the fiscal year ending September 30, 2012 would increase by a corresponding amount. If such a credit facility were not available, and if the ammonia capacity expansion project proceeds, we would consider financing the project with equity financing. We are in the process of completing engineering and detailed cost estimates for the ammonia capacity expansion project, and the actual costs for the project and associated debt service expense could vary substantially from our current estimates.

 

Interest Income. Our forecasted interest income of $0.1 million is based on a projected 0.3% return on our projected average cash balances during the fiscal year ending September 30, 2012. Our earnings for each of the 12 months ended June 30, 2011 and the fiscal year ended September 30, 2010 include interest income of $0.1 million generated on our average cash balances during that period.

 

Income Taxes. As a limited partnership, we estimate that we will pay no income tax during the forecast period.

 

Net Income. Our forecasted net income for the fiscal year ending September 30, 2012 of $88.6 million includes income that will be recorded during the fiscal year ending September 30, 2012 in connection with the delivery of product sold pursuant to product prepayment contracts in prior periods, as we receive cash for product prepayments when the sales are made but do not record revenue in respect of such sales until product is delivered. Net income, calculated on a pro forma basis, was $64.7 million and $19.3 million during the 12 months ended June 30, 2011 and during the fiscal year ended September 30, 2010, respectively. All cash on our balance sheet in respect of product prepayments on the date of the closing of this offering will be reserved by us for general purposes and will not be distributed to RNHI at the closing of this offering.

 

Non-cash Compensation Expense. Non-cash compensation expense includes unit-based compensation to eligible employees. We estimate that we will incur $1.0 million in non-cash compensation expense for the fiscal year ending September 30, 2012. Non-cash compensation expense recorded in the prior periods was de minimis.

 

Estimated Incremental General and Administrative Expense. Incremental general and administrative expense consists of all incremental expense attributable to our administration as a publicly traded limited partnership. This expense includes, but is not limited to, costs associated with SEC reporting requirements, such as annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, independent auditor fees, internal audit costs, directors and officers insurance, investor relations activities, registrar and transfer agent. We estimate that we will incur a total of $3.6 million in incremental general and administrative expense for the fiscal year ending September 30, 2012.

 

Maintenance Capital Expenditures. Maintenance capital expenditures are capital expenditures (including expenditures for the addition or improvement to, or the replacement of, our capital assets or for the acquisition of existing, or the construction or development of new capital assets) made to maintain, including over the long term, our operating capacity or operating income, or to comply with environmental, health, safety or other regulations. Maintenance capital expenditures that are required to comply with regulations may also improve the output, efficiency or reliability of our facility. We estimate that we will incur a total of $10.3 million in maintenance capital expenditures for the fiscal year ending September 30, 2012, including $1.8 million for replacement of the steam methane reformer tubes. We incurred maintenance capital expenditures of $13.1 million and $9.9 million during the 12 months ended June 30, 2011 and during the fiscal year ended September 30, 2010, respectively.

 

77


Table of Contents

Steam Methane Reformer Tubes Replacement Expenditures. The steam methane reformer tube replacement expenditures include all capital costs associated with replacement of the steam methane reformer tubes, the replacement of which is necessary to maintain current levels of nitrogen fertilizer production and to extend the service period of our facility. The replacement of the steam methane reformer tubes took place during our 2011 turnaround completed in October 2011. Replacement of the tubes was a non-recurring capital expenditure that will be funded with a portion of the net proceeds of this offering and thus is excluded from our calculation of forecasted cash available for distribution. We estimate that the total cost for the replacement of the steam methane reformer tubes will be $9.0 million. We estimate that we will incur a total of $1.8 million of the $9.0 million during the fiscal year ending September 30, 2012.

 

Expansion Capital Expenditures. Expansion capital expenditures are capital expenditures incurred for acquisitions or capital improvements that we expect will increase our operating capacity or operating income over the long term. We currently estimate that we will incur a total of $5.9 million in expansion capital expenditures for fiscal year ending September 30, 2012, comprising expenditures related to our urea expansion and DEF build-out project and FEED for our ammonia capacity expansion project. We expect to fund these expenditures with a portion of the net proceeds of this offering. We expect our urea expansion and DEF build-out project could be completed by the end of 2012 and FEED for our ammonia capacity expansion project to be completed by early 2012. As discussed in “Business—Our Business Strategies—Pursue Organic Growth Opportunities—Ammonia Capacity Expansion,” assuming we continue construction of our ammonia capacity expansion project, we expect to incur significant additional expenditures for that expansion project during the fiscal year ending September 30, 2012, and intend to finance those costs and the entire remaining cost of that project through borrowings. For a discussion of certain risks associated with our expansion projects in general, and our ammonia capacity expansion project in particular, please read “Risk Factors—There are significant risks associated with expansion projects that may prevent completion of these projects on budget, on schedule or at all.”

 

Regulatory, Industry and Economic Factors. Our forecast for the fiscal year ending September 30, 2012 is based on the following assumptions related to regulatory, industry and economic factors:

 

   

no material nonperformance or credit-related defaults by suppliers, customers or vendors;

 

   

no new regulation or interpretation of existing regulations that, in either case, would be materially adverse to our business;

 

   

no material accidents, weather-related incidents, floods, unscheduled turnarounds or other downtime or similar unanticipated events;

 

   

no material adverse change in the markets in which we operate resulting from substantially higher natural gas or electricity prices or reduced demand for nitrogen fertilizer products;

 

   

no material decreases in the prices we receive for our nitrogen fertilizer products;

 

   

no material changes in domestic or global agricultural markets or overall domestic or global economic conditions; and

 

   

an annual inflation rate of 2.0% to 3.0%.

 

Actual regulatory, industry and economic conditions may differ materially from those anticipated in this section as a result of a number of factors, including, but not limited to, those set forth under “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”

 

Compliance with Debt Covenants. Our ability to make distributions could be affected if we do not remain in compliance with the financial and other covenants that we expect to be included in our new revolving credit facility. We have assumed we will be in compliance with such covenants.

 

78


Table of Contents

HOW WE MAKE CASH DISTRIBUTIONS

 

General

 

Within 45 days after the end of each quarter, beginning with the first full quarter following the closing date of this offering, we expect to make distributions, as determined by the board of directors of our general partner, to unitholders of record on the applicable record date.

 

Common Units Eligible for Distribution

 

Upon the closing of this offering, we will have 38,250,000 common units outstanding. Each common unit will be allocated a portion of our income, gain, loss, deduction and credit on a pro-rata basis, and each common unit will be entitled to receive distributions (including upon liquidation) in the same manner as each other unit.

 

Method of Distributions

 

We intend to make distributions pursuant to our general partner’s determination of the amount of cash available for distribution for the applicable quarter, which we will then distribute to our unitholders, pro rata; provided, however, that we may change this policy at any time and our partnership agreement allows us to issue an unlimited number of additional equity interests of equal or senior rank as to distributions. Our partnership agreement permits us to borrow to make distributions, but we are not required and do not intend to borrow to pay quarterly distributions. Accordingly, there is no guarantee that we will pay any distribution on the units in any quarter. We do not have a legal obligation to pay distributions, and the amount of distributions paid and the decision to make any distribution is determined by the board of directors of our general partner. We expect that our new revolving credit facility would restrict our ability to make distributions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facilities” for a discussion of our new revolving credit facility.

 

General Partner Interest

 

Upon the closing of this offering, our general partner will own a non-economic general partner interest and therefore will not be entitled to receive cash distributions. However, RNHI, which owns all of the outstanding member interests in our general partner, will own 23,250,000 common units upon the closing of this offering (or 21,000,000 common units if the underwriters exercise their option to purchase additional common units in full) and may acquire additional common units and other equity interests in the future and will be entitled to receive pro rata distributions therefrom.

 

Adjustments to Capital Accounts Upon Issuance of Additional Common Units

 

We will make adjustments to capital accounts upon the issuance of additional common units. In doing so, we will generally allocate any unrealized and, for tax purposes, unrecognized gain or loss resulting from the adjustments to our unitholders prior to such issuance on a pro rata basis, so that after such issuance, the capital account balances attributable to all common units are equal.

 

79


Table of Contents

SELECTED HISTORICAL FINANCIAL INFORMATION

 

The selected financial information presented below under the caption “Statement of Operations Data” for the fiscal years ended September 30, 2010, 2009 and 2008 and the selected financial information presented below under the caption “Balance Sheet” Data as of September 30, 2010 and 2009, have been derived from REMC’s audited financial statements included elsewhere in this prospectus. REMC’s financial statements for the fiscal years ended September 30, 2010 and 2009 have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm. REMC’s financial statements for the fiscal year ended September 30, 2008 have been audited by Ehrhardt Keefe Steiner & Hottman PC, an independent registered public accounting firm. The selected financial information presented below under the caption “Balance Sheet Data” as of September 30, 2008, have been derived from REMC’s audited financial statements that are not included in this prospectus. The selected financial information presented below under the caption “Statement of Operations Data” for the fiscal year ended September 30, 2007, the 158 days ended September 30, 2006 and the 115 days ended April 15, 2006 and the selected financial information presented below under the caption “Balance Sheet Data” as of September 30, 2007 and 2006 have been derived from REMC’s unaudited condensed financial statements that are not included in this prospectus.

 

The selected financial information presented below under the caption “Statement of Operations Data” for the nine months ended June 30, 2011 and 2010 and the selected financial information presented below under the caption “Balance Sheet Data” as of June 30, 2011 have been derived from REMC’s unaudited condensed financial statements included elsewhere in this prospectus which, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair statement of REMC’s financial position at June 30, 2011, and the results of operations for the interim periods presented. Operating results for the nine months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2011. The selected financial information presented below under the caption “Balance Sheet Data” as of June 30, 2010, have been derived from REMC’s unaudited financial statements that are not included in this prospectus.

 

REMC’s financial statements included elsewhere in this prospectus include certain costs of Rentech that were incurred on REMC’s behalf. The financial statements include an allocation of costs and certain other amounts in order to account for a reasonable share of expenses, so that the accompanying consolidated financial statements reflect substantially all of our historical costs of doing business other than the estimated incremental costs of operating as a public company. The amounts charged or allocated to REMC are not necessarily indicative of the costs that REMC would have incurred had REMC operated as a stand-alone company for all periods presented. These financial statements do not include estimates of the incremental general and administrative expense attributable to operating as a publicly traded limited partnership.

 

The selected pro forma financial information presented below under the caption “Statement of Operations Data” for the nine months ended June 30, 2011 and for the fiscal year ended September 30, 2010 and the selected pro forma financial information presented below under the caption “Balance Sheet Data” as of June 30, 2011, have been derived from REMC’s unaudited pro forma condensed financial statements included elsewhere in this prospectus. The pro forma statement of operations data for the nine months ended June 30, 2011 and for the fiscal year ended September 30, 2010 assumes that the Transactions (as defined on page 59 of this prospectus) occurred on October 1, 2009. The unaudited pro forma balance sheet data as of June 30, 2011 assumes that the Transactions occurred on June 30, 2011. The pro forma financial data is not comparable to our historical financial data. A more complete explanation of the pro forma financial data can be found in our unaudited pro forma condensed financial statements and accompanying notes included elsewhere in this prospectus. Neither the pro forma statement of operations data nor the pro forma balance sheet data include estimates of the incremental costs of operating as a publicly traded limited partnership.

 

On April 26, 2006, Rentech acquired all of the outstanding capital stock of Royster-Clark Nitrogen, Inc., or RCN, which subsequently changed its name to Rentech Energy Midwest Corporation. We refer to RCN as the

 

80


Table of Contents

Predecessor, and we refer to REMC as the Successor. As a result of certain adjustments made in connection with the acquisition, a new basis of accounting was established on April 26, 2006. Included in the selected financial data below is a period of time when our business was operated by the Predecessor for the 115 day period ended April 25, 2006. Since the assets and liabilities of the Successor were presented on a new basis of accounting, the financial information for the Successor is not comparable to the financial information of the Predecessor.

 

The data below should be read in conjunction with, and is qualified in its entirety by reference to, the historical and pro forma financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

    Successor     Predecessor          Pro Forma  
    Nine Months
Ended June 30,
    Fiscal Years Ended September 30,     158
Days

Ended
Sept.
30,
    115 Days
Ended
April 25,
         Nine Months
Ended
June 30,
    Fiscal Year
Ended
September 30,
 
    2011     2010     2010     2009     2008     2007     2006     2006          2011     2010  
    (in thousands except product pricing and per unit data)          (in thousands)  

STATEMENT OF OPERATIONS DATA

                       

Revenues(1)

  $ 141,291      $ 96,317      $ 131,396      $ 186,449      $ 216,615      $ 134,419      $ 45,268      $ 37,059            141,291      $ 131,396   

Cost of sales(2)

    77,535        79,092        106,020        125,888        160,633        118,510        44,947        40,487            77,535        106,020   

Gross profit (loss)

    63,756        17,225        25,376        60,561        55,982        15,909        321        (3,428         63,756        25,376   

Operating income (loss)

    59,478        13,980        20,389        55,313        51,752        10,219        (1,331     (3,981         58,552        19,528   

Other expenses, net(3)

    (23,002     (9,349     (12,036     (8,578     (1,779     753        (162     (2,653         (248     (301

Income (loss) before income taxes

    36,476        4,631        8,353        46,735        49,973        10,972        (1,493     (6,634         58,304        19,227   

Income tax expense (benefit)

    14,909        1,840        3,344        18,576        19,875        4,367                                   

Net income (loss)

    21,567        2,791        5,009        28,159        30,098        6,605        (1,493     (6,634         58,304        19,227   

Financial and Other Data:

                       

Cash flows provided by (used in) operating activities

    44,484        2,817        18,397        24,309        61,962        31,185        7,475        (13,174        

Cash flows used in investing activities

    (12,382     (9,074     (9,836     (12,701     (8,260     (8,464     (1,607     (1,126        

Cash flows provided by (used in) financing activities

    (45,592     1,288        (10,288     (31,215     (24,814     (943     (268     14,284           

Adjusted EBITDA(4)

    66,989        21,748        30,967        63,709        60,381        18,041        1,131        (954         66,391        30,543   

Capital expenditures for property, plant and equipment

    12,398        9,088        9,850        12,701        8,260        8,464        1,607        231            12,398        9,850   

Key Operating Data:

                       

Products sold (tons):

                       

Ammonia

    106        118        153        126        173        145        43        59           

UAN

    238        195        294        267        313        275        153        36           

Product pricing (dollars per ton)(5):

                       

Ammonia

  $ 580      $ 371      $ 377      $ 726      $ 539      $ 351      $ 301      $ 383           

UAN

    259        185        180        267        308        209        162        172           

Production (tons)(6):

                       

Ammonia

    218        194        267        267        299        270        129        83           

UAN

    245        207        287        274        311        269        107        73           

On-stream factors(7):

                       

Ammonia

    100.0     89.0     91.8     98.1     99.5     94.2     100.0