10-Q 1 rnf-10q_20150930.htm 10-Q rnf-10q_20150930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

Or

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File No. 001-35334

 

RENTECH NITROGEN PARTNERS, L.P.

(Exact name of registrant as specified in its charter)

 

 

Delaware

45-2714747

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

10877 Wilshire Boulevard, 10th Floor

Los Angeles, California 90024

(Address of principal executive offices)

(310) 571-9800

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o

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

o

Accelerated filer

x

 

 

 

 

Non-accelerated filer

o  (Do not check if a smaller reporting company)

Smaller reporting company

o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x

As of October 31, 2015, the registrant had 38,929,731 common units outstanding.

 

 

 

 


 

RENTECH NITROGEN PARTNERS, L.P.

Form 10-Q

Table of Contents

 

Part I — Financial Information

 

 

 

 

Item 1.

Financial Statements (unaudited):

3

 

 

 

 

Consolidated Balance Sheets

3

 

 

 

 

Consolidated Statements of Operations

4

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss)

5

 

 

 

 

Consolidated Statement of Partners’ Capital (Deficit)

6

 

 

 

 

Consolidated Statements of Cash Flows

7

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

37

 

 

 

Item 4.

Controls and Procedures

37

 

Part II — Other Information

 

 

 

Item 1.

Legal Proceedings

38

 

 

 

Item 1A.

Risk Factors

39

 

 

 

Item 6.

Exhibits

40

 

 

Signatures

41

 

 

2


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RENTECH NITROGEN PARTNERS, L.P.

Consolidated Balance Sheets

(Amounts in thousands)

 

 

 

As of

 

 

 

September 30,

2015

 

 

December 31,

2014

 

 

 

(Unaudited)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash

 

$

38,151

 

 

$

28,028

 

Accounts receivable

 

 

12,194

 

 

 

16,714

 

Inventories

 

 

31,911

 

 

 

27,736

 

Prepaid expenses and other current assets

 

 

6,631

 

 

 

4,942

 

Other receivables

 

 

461

 

 

 

357

 

Total current assets

 

 

89,348

 

 

 

77,777

 

Property, plant and equipment, net

 

 

177,585

 

 

 

259,011

 

Construction in progress

 

 

16,731

 

 

 

47,758

 

Other assets

 

 

 

 

 

 

 

 

Intangible assets

 

 

 

 

 

21,114

 

Debt issuance costs

 

 

7,273

 

 

 

8,315

 

Other assets

 

 

121

 

 

 

341

 

Total other assets

 

 

7,394

 

 

 

29,770

 

Total assets

 

$

291,058

 

 

$

414,316

 

LIABILITIES AND PARTNERS' CAPITAL

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

9,316

 

 

$

14,846

 

Payable to general partner

 

 

4,181

 

 

 

3,035

 

Accrued liabilities

 

 

14,939

 

 

 

14,203

 

Deferred revenue

 

 

37,425

 

 

 

26,700

 

Accrued interest

 

 

9,794

 

 

 

4,494

 

Total current liabilities

 

 

75,655

 

 

 

63,278

 

Long-term liabilities

 

 

 

 

 

 

 

 

Debt

 

 

346,500

 

 

 

335,000

 

Asset retirement obligation

 

 

4,420

 

 

 

4,194

 

Other

 

 

2,437

 

 

 

2,953

 

Total long-term liabilities

 

 

353,357

 

 

 

342,147

 

Total liabilities

 

 

429,012

 

 

 

405,425

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Partners' capital (deficit)

 

 

 

 

 

 

 

 

Common unitholders: 38,930 and 38,913 units issued and outstanding at September 30, 2015 and

   December 31, 2014, respectively

 

 

(137,971

)

 

 

8,886

 

Accumulated other comprehensive income

 

 

17

 

 

 

5

 

General partner's interest

 

 

 

 

 

 

Total partners' capital (deficit)

 

 

(137,954

)

 

 

8,891

 

Total liabilities and partners' capital (deficit)

 

$

291,058

 

 

$

414,316

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

 

 

 

3


RENTECH NITROGEN PARTNERS, L.P.

Consolidated Statements of Operations

(Amounts in thousands, except per unit data)

 

 

 

For the Three Months Ended

September 30,

 

 

For the Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Revenues

 

$

84,323

 

 

$

84,163

 

 

$

263,350

 

 

$

254,052

 

Cost of sales

 

 

64,961

 

 

 

77,475

 

 

 

180,479

 

 

 

205,381

 

Gross profit

 

 

19,362

 

 

 

6,688

 

 

 

82,871

 

 

 

48,671

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expense

 

 

6,719

 

 

 

3,819

 

 

 

15,221

 

 

 

13,601

 

Depreciation and amortization

 

 

95

 

 

 

384

 

 

 

948

 

 

 

1,092

 

Pasadena asset impairment

 

 

32,510

 

 

 

 

 

 

134,282

 

 

 

 

Pasadena goodwill impairment

 

 

 

 

 

 

 

 

 

 

 

27,202

 

Other (income ) expense

 

 

(13

)

 

 

304

 

 

 

414

 

 

 

526

 

Total operating expenses

 

 

39,311

 

 

 

4,507

 

 

 

150,865

 

 

 

42,421

 

Operating income (loss)

 

 

(19,949

)

 

 

2,181

 

 

 

(67,994

)

 

 

6,250

 

Other expense, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(5,570

)

 

 

(4,624

)

 

 

(16,144

)

 

 

(14,437

)

Loss on debt extinguishment

 

 

 

 

 

(635

)

 

 

 

 

 

(635

)

Other income (expense), net

 

 

(14

)

 

 

 

 

 

1,394

 

 

 

 

Total other expenses, net

 

 

(5,584

)

 

 

(5,259

)

 

 

(14,750

)

 

 

(15,072

)

Loss before income taxes

 

 

(25,533

)

 

 

(3,078

)

 

 

(82,744

)

 

 

(8,822

)

Income tax (benefit) expense

 

 

(19

)

 

 

27

 

 

 

28

 

 

 

82

 

Net loss

 

$

(25,514

)

 

$

(3,105

)

 

$

(82,772

)

 

$

(8,904

)

Net loss per common unit allocated to common

   unitholders - Basic

 

$

(0.66

)

 

$

(0.08

)

 

$

(2.14

)

 

$

(0.23

)

Net loss per common unit allocated to common

   unitholders - Diluted

 

$

(0.66

)

 

$

(0.08

)

 

$

(2.14

)

 

$

(0.23

)

Weighted-average units used to compute net loss

   per common unit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

38,928

 

 

 

38,905

 

 

 

38,919

 

 

 

38,895

 

Diluted

 

 

38,928

 

 

 

38,905

 

 

 

38,919

 

 

 

38,895

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

 

 

 

4


RENTECH NITROGEN PARTNERS, L.P.

Consolidated Statements of Comprehensive Income (Loss)

(Amounts in thousands)

 

 

 

For the Three Months Ended

September 30,

 

 

For the Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

(Unaudited)

 

Net loss

 

$

(25,514

)

 

$

(3,105

)

 

$

(82,772

)

 

$

(8,904

)

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and postretirement plan adjustments

 

 

4

 

 

 

(11

)

 

 

12

 

 

 

(36

)

Other comprehensive income (loss)

 

 

4

 

 

 

(11

)

 

 

12

 

 

 

(36

)

Comprehensive loss

 

$

(25,510

)

 

$

(3,116

)

 

$

(82,760

)

 

$

(8,940

)

 

See Accompanying Notes to Consolidated Financial Statements.

 

 

 

 

5


RENTECH NITROGEN PARTNERS, L.P.

Consolidated Statement of Partners’ Capital (Deficit)

(Amounts in thousands)

 

 

 

Number of

Common

Units

 

 

Common Unitholders

 

 

Accumulated

Other Comprehensive Income

 

 

General

Partner

 

 

Total Partners' Capital (Deficit)

 

 

 

(Unaudited)

 

Balance, December 31, 2014

 

 

38,913

 

 

$

8,886

 

 

$

5

 

 

$

 

 

$

8,891

 

Common units

 

 

17

 

 

 

(11

)

 

 

 

 

 

 

 

 

(11

)

Distributions to common unitholders - affiliates

 

 

 

 

 

(38,595

)

 

 

 

 

 

 

 

 

(38,595

)

Distributions to common unitholders - non-affiliates

 

 

 

 

 

(26,361

)

 

 

 

 

 

 

 

 

(26,361

)

Unit-based compensation expense

 

 

 

 

 

882

 

 

 

 

 

 

 

 

 

882

 

Net loss

 

 

 

 

 

(82,772

)

 

 

 

 

 

 

 

 

(82,772

)

Other comprehensive income

 

 

 

 

 

 

 

 

12

 

 

 

 

 

 

12

 

Balance, September 30, 2015

 

 

38,930

 

 

$

(137,971

)

 

$

17

 

 

$

 

 

$

(137,954

)

 

See Accompanying Notes to Consolidated Financial Statements.

 

 

 

 

6


 

RENTECH NITROGEN PARTNERS, L.P.

Consolidated Statements of Cash Flows

(Amounts in thousands)

 

 

 

For the Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(82,772

)

 

$

(8,904

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

19,569

 

 

 

17,803

 

Pasadena asset impairment

 

 

134,282

 

 

 

 

Pasadena goodwill impairment

 

 

 

 

 

27,202

 

Gain on sale of easement

 

 

(1,425

)

 

 

 

Utilization of spare parts

 

 

3,073

 

 

 

4,360

 

Write-down of inventory

 

 

1,520

 

 

 

4,557

 

Non-cash interest expense

 

 

973

 

 

 

788

 

Unit-based compensation

 

 

882

 

 

 

1,159

 

Unrealized (gain) loss on natural gas derivatives

 

 

(3,679

)

 

 

811

 

Other

 

 

652

 

 

 

1,159

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

4,520

 

 

 

(9,053

)

Inventories

 

 

(5,347

)

 

 

1,772

 

Prepaid expenses and other current assets

 

 

(1,507

)

 

 

(2,546

)

Other receivables

 

 

(104

)

 

 

866

 

Other assets

 

 

(143

)

 

 

205

 

Accounts payable

 

 

(4,534

)

 

 

4,423

 

Accrued liabilities, accrued payroll and other

 

 

5,010

 

 

 

192

 

Deferred revenue

 

 

10,725

 

 

 

27,724

 

Accrued interest

 

 

5,077

 

 

 

5,638

 

Net cash provided by operating activities

 

 

86,772

 

 

 

78,156

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(25,077

)

 

 

(56,106

)

Proceeds from easement

 

 

1,425

 

 

 

 

Receipt from Insurance

 

 

257

 

 

 

 

Other items

 

 

202

 

 

 

(899

)

Net cash used in investing activities

 

 

(23,193

)

 

 

(57,005

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from credit facilities

 

 

11,500

 

 

 

 

Distributions to common unitholders - affiliates

 

 

(38,595

)

 

 

(6,045

)

Distributions to common unitholders - non-affiliates

 

 

(26,361

)

 

 

(4,118

)

Other

 

 

 

 

 

(987

)

Net cash used in financing activities

 

 

(53,456

)

 

 

(11,150

)

Increase in cash

 

 

10,123

 

 

 

10,001

 

Cash, beginning of period

 

 

28,028

 

 

 

34,060

 

Cash, end of period

 

$

38,151

 

 

$

44,061

 

 

Excluded from the consolidated statements of cash flows were the effects of certain non-cash investing and financing activities as follows:

 

 

 

For the Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

Purchase of property, plant, equipment and construction in progress

   in accounts payable and accrued liabilities

 

$

4,989

 

 

$

6,862

 

See Accompanying Notes to Consolidated Financial Statements.

 

 

 

 

7


 

RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

Note 1 — Basis of Presentation

The accompanying unaudited consolidated financial statements of Rentech Nitrogen Partners, L.P. (the “Partnership”) and its consolidated subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in compliance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Neither authority requires all of the information and footnotes required by GAAP for complete financial statements. Accordingly, the accompanying financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair statement of the Partnership’s financial position as of September 30, 2015, and the results of operations and cash flows for the periods presented. The accompanying consolidated financial statements include the accounts of the Partnership and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015 or any other reporting period. The information included in this Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2015 (the “Annual Report”).

The Partnership’s assets consist primarily of all of the equity interests, directly or indirectly held by it, of Rentech Nitrogen, LLC (“RNLLC”), which owns a fertilizer facility in East Dubuque, Illinois (the “East Dubuque Facility”), and Rentech Nitrogen Pasadena, LLC (“RNPLLC”), which owns a fertilizer facility in Pasadena, Texas (the “Pasadena Facility”).

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Proposed Merger

On August 9, 2015, the Partnership entered into an Agreement and Plan of Merger (the “Merger Agreement”) under which the Partnership and Rentech Nitrogen GP, LLC (the “General Partner”) will merge with affiliates of CVR Partners, L.P. (“CVR Partners”), and the Partnership will cease to be a public company and will become a wholly owned subsidiary of CVR Partners (the “Merger”). Upon closing of the Merger, each outstanding unit of the Partnership will be exchanged for 1.04 common units of CVR Partners and $2.57 of cash. The Merger Agreement requires the Partnership to either sell its Pasadena Facility to a third party or spin-out ownership of the Pasadena Facility to the Partnership unitholders prior to the closing of the Merger. The merger consideration therefore does not include any consideration attributable to the Pasadena Facility. Consummation of the Merger is subject to certain conditions, including approval from the Partnership’s unitholders, the effectiveness of a registration statement on Form S-4 relating to the unit component of the merger consideration and the sale or spin-off of the Pasadena Facility. The Merger Agreement includes customary termination provisions, including a provision allowing RNP to terminate the Merger Agreement in order to accept a superior proposal, as defined in the Merger Agreement, upon payment of a large termination fee. Rentech, Inc. (“Rentech”) has agreed, subject to certain terms and conditions, to vote its Partnership common units, constituting 59.7% of the outstanding common units of the Partnership in favor of the transaction. Subject to satisfaction of the closing conditions and receipt of the required approvals, the Partnership expects that the Merger will close in the first quarter of 2016.

 

 

 

 

8


RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

Note 2 — Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board (the “FASB”) issued guidance that provides a narrower definition of discontinued operations than under previous guidance. It requires that only disposals of components of an entity (or groups of components) that represent a strategic shift that has or will have a major effect on the reporting entity’s operations are to be reported in the financial statements as discontinued operations. It also provides guidance on the financial statement presentations and disclosures of discontinued operations. This guidance is effective prospectively for disposals of (or classifications of held-for-sale) components of an entity that occur in annual or interim periods beginning after December 15, 2014. The impact of this guidance is dependent on whether or not future disposals occur.

In May 2014, the FASB issued guidance that will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. In August 2015, the FASB approved a one-year deferral of the effective date making the guidance effective for interim and annual reporting periods beginning after December 15, 2017. In addition, the FASB will continue to permit entities to early adopt the guidance for annual periods beginning on or after December 15, 2016. The Partnership is evaluating the provisions of this guidance and the potential impact, if any, on its consolidated financial position, results of operations and disclosures.

In June 2014, the FASB issued guidance on accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The Partnership is evaluating the provisions of this guidance and the potential impact, if any, on its consolidated financial position, results of operations and disclosures.

In August 2014, the FASB issued guidance on presentation of financial statements – going concern, which applies to all companies. It requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. This guidance is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Partnership is evaluating the provisions of this guidance and the potential impact, if any, on its consolidated financial position, results of operations and disclosures.

In January 2015, the FASB issued guidance that eliminates the concept of extraordinary items. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Partnership has not historically reported any extraordinary items. The Partnership does not expect the adoption of this guidance to have any impact on its consolidated financial position, results of operations or disclosures.

In April 2015, the FASB issued guidance, which would require that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.As of September 30, 2015, the Partnership had $7.3 million of debt issuance costs that would have been reclassified from assets to liabilities under this guidance. The Partnership does not expect the adoption of this guidance to have a material impact on its consolidated financial position, results of operations or disclosures.

In April 2015, the FASB issued guidance that will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The Partnership is evaluating the provisions of this guidance and the potential impact, if any, on its consolidated financial position, results of operations and disclosures.

In July 2015, the FASB issued guidance that replaces the current lower of cost or market method of measurement for inventory with a lower of cost and net realizable value measurement. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Partnership does not expect the adoption of this guidance to have a material impact on its consolidated financial position, results of operations or disclosures.

 

 

9


RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

 

Note 3 — Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants and is classified in one of the following three categories:

 

·

Level 1 — Consists of unadjusted quoted prices in active markets for identical assets or liabilities that the Partnership has the ability to access as of the reporting date.

 

·

Level 2 — Consists of inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.

 

·

Level 3 — Consists of unobservable inputs for assets or liabilities whose fair value is estimated based on internally developed models or methodologies using inputs that are generally less readily observable and supported by little, if any, market activity at the measurement date. Unobservable inputs are developed based on the best available information and subject to cost-benefit constraints.

Fair values of cash, receivables, deposits, other current assets, accounts payable, accrued liabilities and other current liabilities were assumed to approximate carrying value since they are short term and can be settled on demand.

The following table presents the fair value and carrying value of the Partnership’s borrowings as of September 30, 2015.

 

 

 

Fair Value

 

 

Carrying

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Value

 

 

 

(in thousands)

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes

 

$

324,000

 

 

$

 

 

$

 

 

$

320,000

 

GE Credit Agreement

 

 

 

 

 

26,500

 

 

 

 

 

 

26,500

 

 

The following table presents the fair value and carrying value of the Partnership’s borrowings as of December 31, 2014.

 

 

 

Fair Value

 

 

Carrying

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Value

 

 

 

(in thousands)

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes

 

$

310,202

 

 

$

 

 

$

 

 

$

320,000

 

GE Credit Agreement

 

 

 

 

 

15,000

 

 

 

 

 

 

15,000

 

 

Notes

The $320.0 million of 6.5% second lien senior secured notes due 2021 (the “Notes”) are deemed to be Level 1 financial instruments because there is an active market for such debt. The fair value of such debt was determined based on market prices.

GE Credit Agreement

The credit agreement with General Electric Capital Corporation (the “GE Credit Agreement”) is deemed to be a Level 2 financial instrument because the measurement is based on observable market data. It is concluded that the carrying value of the GE Credit Agreement approximates the fair value of such loan as of September 30, 2015 and December 31, 2014 based on its floating interest rate and the Company’s assessment that the fixed-rate margin is still at market.

The levels within the fair value hierarchy at which the Partnership’s financial instruments have been evaluated have not changed for any of the Partnership’s financial instruments during the three and nine months ended September 30, 2015 and 2014.

 

 

 

10


RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

Note 4 — Derivative Instruments

Accounting guidance establishes accounting and reporting requirements for derivative instruments and hedging activities. This guidance requires recognition of all derivative instruments as assets or liabilities on the Partnership’s consolidated balance sheets and measurement of those instruments at fair value. The accounting treatment of changes in fair value is dependent upon whether or not a derivative instrument is designated as a hedge and if so, the type of hedge. The Partnership currently does not designate any of its derivatives as hedges for financial accounting purposes. Gains and losses on derivative instruments not designated as hedges are currently included in earnings and reported under cash flows from operating activities.

Forward Natural Gas Contracts

The Partnership uses commodity-based derivatives to minimize its exposure to the fluctuations in natural gas prices. The Partnership recognizes the unrealized gains or losses related to the commodity-based derivative instruments in its consolidated financial statements. The Partnership does not have any master netting agreements or collateral relating to these derivatives.

Our East Dubuque Facility enters into forward natural gas purchase contracts to reduce its exposure to the fluctuations in natural gas prices. The forward natural gas contracts are deemed to be Level 2 financial instruments because the measurement is based on observable market data. The fair value of such contracts had been determined based on market prices. Gain or loss associated with forward natural gas contracts is recorded in cost of sales on the consolidated statements of operations. The amount of unrealized loss recorded was $0.6 million for the three months ended September 30, 2015. The amount of unrealized gain recorded was $3.7 million for the nine months ended September 30, 2015. For the three and nine months ended September 30, 2014, the amount of unrealized loss recorded was $0.3 million and $0.8 million, respectively. These forward natural gas contracts are recorded either in prepaid expenses and other current assets or in accrued liabilities on the consolidated balance sheets.

 

 

 

As of

 

 

 

September 30,

2015

 

 

December 31,

2014

 

 

 

Current

Assets

 

 

Current

Liabilities

 

 

Current

Liabilities

 

 

 

(in thousands)

 

Forward natural gas contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Gross amounts recognized

 

$

91

 

 

$

(367

)

 

$

(3,955

)

Gross amounts offset in consolidated balance sheets

 

 

 

 

 

 

 

 

 

Net amounts presented in the consolidated balance sheets

 

$

91

 

 

$

(367

)

 

$

(3,955

)

 

The following table presents the financial instruments that were accounted for at fair value by level as of September 30, 2015 and December 31, 2014.

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(in thousands)

 

Assets (Liabilities)

 

 

 

 

 

 

 

 

 

 

 

 

Forward natural gas contracts - September 30, 2015

 

$

 

 

$

(276

)

 

$

 

Forward natural gas contracts - December 31, 2014

 

 

 

 

 

(3,955

)

 

 

 

 

 

 

11


RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

Note 5 — Inventories

Inventories consisted of the following:

 

 

 

As of

 

 

 

September 30,

2015

 

 

December 31,

2014

 

 

 

(in thousands)

 

Finished goods

 

$

29,019

 

 

$

24,097

 

Raw materials

 

 

2,714

 

 

 

3,493

 

Other

 

 

178

 

 

 

146

 

Total inventory

 

$

31,911

 

 

$

27,736

 

 

During the three months ended September 30, 2015, the Partnership wrote down the value of the Pasadena Facility’s ammonium sulfate inventory by $0.5 million to estimated net realizable value. During the nine months ended September 30, 2015, the Partnership wrote down the value of the Pasadena Facility’s ammonium sulfate inventory by $1.5 million to estimated net realizable value. During the three and nine months ended September 30, 2014, the Partnership wrote down the value of the Pasadena Facility’s ammonium sulfate inventory by $1.8 million and $4.6 million, respectively, to estimated net realizable value. The various write-downs were reflected in cost of goods sold for the applicable periods.

 

 

Note 6 — Property, Plant and Equipment

Property, plant and equipment consisted of the following:

 

 

 

As of

 

 

 

September 30,

2015

 

 

December 31,

2014

 

 

 

(in thousands)

 

Land and land improvements

 

$

5,270

 

 

$

23,184

 

Buildings and building improvements

 

 

14,218

 

 

 

29,747

 

Machinery and equipment

 

 

245,173

 

 

 

290,140

 

Furniture, fixtures and office equipment

 

 

155

 

 

 

316

 

Computer equipment and computer software

 

 

3,045

 

 

 

3,312

 

Vehicles

 

 

181

 

 

 

186

 

Other

 

 

351

 

 

 

1,476

 

 

 

 

268,393

 

 

 

348,361

 

Less: Accumulated depreciation

 

 

(90,808

)

 

 

(89,350

)

Total property, plant and equipment, net

 

$

177,585

 

 

$

259,011

 

 

After the Partnership launched and pursued its process to evaluate strategic alternatives, management determined in the second quarter of 2015 that it was more likely than not that the Pasadena Facility would be sold or otherwise disposed of before the end of its previously estimated economic useful life. Although it is more likely than not the Pasadena Facility will be sold, held-for-sale accounting criteria have not been met as management does not have the authority to commit to, and has not committed to, a plan of sale. Because the Pasadena Facility will more likely than not be sold or otherwise disposed of before the end of its previously estimated useful life the Partnership performed an impairment test in the second quarter. Based on the results of the impairment test, management concluded the Pasadena Facility’s carrying value was no longer recoverable and wrote the associated assets down by $101.8 million to their estimated fair values in the second quarter of 2015. The impairment reduced property, plant and equipment by $81.3 million and intangible assets, consisting of technology acquired in the acquisition of the Pasadena Facility, by $20.5 million. Fair value was based on probability weighting various cash flow scenarios using Level 3 inputs, under the applicable accounting guidance. The cash flow scenarios were based on market participant assumptions and indications of value from potential buyers of the Pasadena Facility.

During the third quarter of 2015 the Partnership updated forecasts of operating cash flows, assessed indications of interest from potential buyers, and updated its estimates of the probabilities of each scenario for the Pasadena Facility. As a result, the carrying value was further reduced by recording an asset impairment charge of $32.5 million. For the nine months ended September 30, 2015,

 

12


RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

impairment charges relating to the Pasadena Facility totaled $134.3 million. Because of changing market conditions, it is reasonably possible that the cash flows ultimately received upon sale could change significantly from our estimate of fair value. There is also no guarantee that the Partnership will ultimately commit to or be able to sell the Pasadena Facility to a third party.

During the nine months ended September 30, 2015, the Partnership received a one-time easement payment of $1.4 million to allow an adjacent property owner to construct some pipelines under the Pasadena Facility.

The construction in progress balance at September 30, 2015 was $16.7 million, which includes $0.4 million of capitalized interest costs. The construction in progress balance represents primarily the costs associated with the ammonia synthesis converter project at the East Dubuque Facility. The construction in progress balance at December 31, 2014 was $47.8 million, which includes $1.7 million of capitalized interest costs, and represents primarily the costs associated with the power generation project at the Pasadena Facility.

 

 

Note 7 — Debt

The Partnership’s debt obligations at September 30, 2015 consist of $320.0 million of Notes and $26.5 million in outstanding advances under the GE Credit Agreement. The Partnership’s debt obligations at December 31, 2014 consist of $320.0 million of Notes and $15.0 million in outstanding advances under the GE Credit Agreement. Debt premium, discount and issuance expenses incurred in connection with financing are deferred and amortized on a straight-line basis.

As of September 30, 2015, the Partnership was in compliance with its covenants under the Notes and the GE Credit Agreement.

 

 

Note 8 — Commitments and Contingencies

Natural Gas Forward Purchase Contracts

The Partnership’s policy and practice are to enter into fixed-price forward purchase contracts for natural gas in conjunction with contracted nitrogen fertilizer product sales in order to substantially fix gross margin on those product sales contracts. The Partnership may also enter into a limited amount of additional fixed-price forward purchase contracts for natural gas in order to reduce monthly and seasonal natural gas price volatility. The Partnership occasionally enters into index-price contracts for the purchase of natural gas. The Partnership has entered into multiple natural gas forward purchase contracts for various delivery dates through December 31, 2015. Commitments for natural gas purchases consist of the following:

 

 

 

As of

 

 

 

September 30,

2015

 

 

December 31,

2014

 

 

 

(in thousands, except weighted

average rate)

 

MMBtus under fixed-price contracts

 

 

4,120

 

 

 

3,188

 

MMBtus under index-price contracts

 

 

155

 

 

 

540

 

Total MMBtus under contracts

 

 

4,275

 

 

 

3,728

 

Commitments to purchase natural gas

 

$

13,138

 

 

$

15,568

 

Weighted average rate per MMBtu based on the fixed rates

   and the indexes applicable to each contract

 

$

3.07

 

 

$

4.18

 

 

During October 2015, the Partnership entered into additional fixed-quantity forward purchase contracts at fixed and indexed prices for various delivery dates through May 31, 2016. The total MMBtus associated with these additional forward purchase contracts are 1.2 million and the total amount of the purchase commitments is $3.1 million, resulting in a weighted average rate per MMBtu of $2.65 in these new commitments. The Partnership is required to make additional prepayments under these forward purchase contracts in the event that market prices fall below the purchase prices in the contracts.

 

13


RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

Litigation

The Partnership is party to litigation from time to time in the normal course of business. The Partnership accrues liabilities related to litigation only when it concludes that it is probable that it will incur costs related to such litigation, and can reasonably estimate the amount of such costs. In cases where the Partnership determines that it is not probable, but reasonably possible that it has a material obligation, it discloses such obligations and the possible loss or range of loss, if such estimate can be made. The outcome of the Partnership’s current material litigation matters is not estimable or probable. The Partnership maintains insurance to cover certain actions and believes that resolution of its current litigation matters will not have a material adverse effect on the Partnership’s financial statements.

Litigation Relating to the CVR Transaction

On August 29, 2015, Mike Mustard, a purported unitholder of the Partnership, filed a class action complaint on behalf of the public unitholders of the Partnership against the Partnership, the General Partner, Rentech Nitrogen Holdings, Inc., Rentech, CVR Partners, DSHC, LLC, Lux Merger Sub 1 LLC (“Merger Sub 1”) and Lux Merger Sub 2 LLC (“Merger Sub 2”), and the members of the General Partner’s board of directors, in the Court of Chancery of the State of Delaware (the “Mustard Lawsuit”). On October 6, 2015, Jesse Sloan, a purported unitholder of the Partnership, filed a class action complaint on behalf of the public unitholders of the Partnership against the Partnership, the General Partner, CVR Partners, Merger Sub 1, Merger Sub 2 and members of the General Partner’s board of directors in the U.S. District Court for the Northern District of California (the “Sloan Lawsuit” and together with the Mustard Lawsuit, the “Lawsuits”).

The Lawsuits allege, among other things, that the consideration offered by CVR Partners is unfair and inadequate and that, by pursuing the proposed transaction with CVR Partners, the Partnership’s directors have breached their contractual and fiduciary duties to the Partnership’s unitholders.  The Lawsuits also allege that the non-director defendants aided and abetted the director defendants in their purported breach of contractual and fiduciary duties. Furthermore, the Sloan Lawsuit alleges that the registration statement filed with the SEC with respect to the transaction fails to disclose material information leading up to the Merger, fails to disclose or contains misleading disclosures concerning Morgan Stanley & Co. LLC’s financial analyses and fails to disclose or contains misleading disclosure concerning financial projections. The Lawsuits seek to enjoin the Merger.

The Lawsuits are at a preliminary stage. The Partnership cannot predict the outcome of the Lawsuits or any other lawsuit that might be filed with respect to the Merger, nor can it predict the amount of time and expense that will be required to resolve these or other lawsuits. The Partnership believes the Lawsuits are without merit and intend to defend against them vigorously.

Regulation

The Partnership’s business is subject to extensive and frequently changing federal, state and local, environmental, health and safety regulations governing a wide range of matters, including the emission of air pollutants, the release of hazardous substances into the environment, the treatment and discharge of waste water and the storage, handling, use and transportation of the Partnership’s fertilizer products, raw materials, and other substances that are part of our operations. These laws include the Clean Air Act (the “CAA”), the federal Water Pollution Control Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Toxic Substances Control Act, and various other federal, state and local laws and regulations. The laws and regulations to which the Partnership is subject are complex, change frequently and have tended to become more stringent over time. The ultimate impact on the Partnership’s business of complying with existing laws and regulations is not always clearly known or determinable due in part to the fact that the Partnership’s 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 laws and regulations could result in increased capital, operating and compliance costs.

The Partnership entered into a settlement agreement with the Illinois Environmental Protection Agency in August 2013 requiring it to connect a device at the East Dubuque Facility to an ammonia safety flare by December 1, 2015. The Partnership estimates the cost of the project required by the settlement agreement as being $0.4 million.

The Partnership negotiated a settlement agreement with Region 6 of the Environmental Protection Agency relating to an ammonia release that occurred at the Pasadena Facility on April 20, 2014. The penalty required by the settlement agreement was $0.1 million.

 

14


RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

Loss Contingencies

Abeinsa Abener Teyma General Partnership (“Abeinsa”), the engineering, procurement and construction (“EPC”) contractor for the power generation facility at the Pasadena Facility, submitted to RNPLLC in March 2015 approximately $10.0 million of change orders for approval and payment. Under the terms of the EPC contract between RNPLLC and Abeinsa (the “EPC Contract”), RNPLLC must agree to any change order for it to be effective so RNPLLC contested the validity of these change orders and presented its own claims for damages under the EPC Contract to Abeinsa. Through a mediation in late October, the parties agreed in principle to resolve the entire contractual dispute with RNPLLC agreeing to pay Abeinsa $3.5 million by November 30, 2015. The specific terms and conditions of a mutual release and settlement agreement are being negotiated by the parties and the agreement is expected to be signed in the coming days.

 

 

Note 9 — Partners’ Capital and Partnership Distributions

The Partnership’s policy is to distribute to its unitholders all of the cash available for distribution that it generates each quarter, subject to a determination by the board of directors (the “Board”) of the Partnership’s general partner (the “General Partner”) that the Partnership’s projected liquidity is adequate to provide for its forecasted operating and working capital needs. Cash available for distribution for each quarter will be determined by the Board of the General Partner following the end of each quarter. The Partnership expects that cash available for distribution for each quarter will generally be calculated as the cash it generates during the quarter, less cash needed for maintenance capital expenditures not funded by capital proceeds, debt service and other contractual obligations, and any increases in cash reserves for future operating or capital needs that the Board of the General Partner deems necessary or appropriate. Increases or decreases in such reserves may be determined at any time by the Board of the General Partner as it considers, among other things, the cash flows or cash needs expected in approaching periods. The Partnership does not intend to maintain excess distribution coverage for the purpose of maintaining stability or growth in its quarterly distribution, nor does it intend to incur debt to pay quarterly distributions. The Partnership has no legal obligation to pay distributions. Distributions are not required by the Partnership’s partnership agreement and the Partnership’s distribution policy is subject to change at any time at the discretion of the Board of the General Partner. Any distributions made by the Partnership to its unitholders will be done on a pro rata basis.

At September 30, 2015, the Partnership had outstanding 203,844 unit-settled phantom units. Each phantom unit entitles the holder to payments in amounts equal to the amounts of any distributions made to an outstanding unit by the Partnership. Payments to outstanding phantom units are not subtracted from operating cash flow in the calculation of cash available for distribution, but the payments made to phantom unitholders are recorded as distributions for accounting purposes. For information on the announcement of cash distributions refer to “Note 14 — Subsequent Events — Distributions”.

The following is a summary of cash distributions paid to common unitholders and holders of phantom units during the nine months ended September 30, 2015 for the respective quarter to which the distributions relate:

 

 

 

December 31,

2014

 

 

March 31,

2015

 

 

June 30,

2015

 

 

Total Cash Distributions

Paid in 2015

 

 

 

(in thousands, except for per unit amounts)

 

Distribution to common unitholders - affiliates

 

$

6,975

 

 

$

8,370

 

 

$

23,250

 

 

$

38,595

 

Distribution to common unitholders - non-affiliates

 

 

4,763

 

 

 

5,714

 

 

 

15,884

 

 

 

26,361

 

Total amount paid

 

$

11,738

 

 

$

14,084

 

 

$

39,134

 

 

$

64,956

 

Per common unit

 

$

0.30

 

 

$

0.36

 

 

$

1.00

 

 

$

1.66

 

Common and phantom units outstanding

 

 

39,127

 

 

 

39,121

 

 

 

39,134

 

 

 

 

 

 

 

Note 10 — Income Taxes

The Partnership and its subsidiaries are not directly subject to federal and state income taxes. Instead, their taxable income or loss is allocated to their individual partners or members. However, the Partnership and its subsidiaries are subject to an Illinois replacement tax, Texas margin tax and California annual minimum franchise tax. For the three months ended September 30, 2015, a Texas margin tax benefit of approximately $19,000 was recorded. For the nine months ended September 30, 2015, a Texas margin tax of approximately $27,000 and a California annual minimum franchise tax expense of $1,000 were recorded. For the three months

 

15


RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

ended September 30, 2014, a Texas margin tax expense of $27,000 was recorded. For the nine months ended September 30, 2014, California annual minimum franchise tax expense of $1,000 and Texas margin tax expense of $81,000 were recorded.

 

 

Note 11 — Segment Information

The Partnership operates in two business segments, as described below:

 

·

East Dubuque – The operations of the East Dubuque Facility, which produces primarily ammonia and urea ammonium nitrate solution (“UAN”).

 

·

Pasadena – The operations of the Pasadena Facility, which produces primarily ammonium sulfate.

 

16


RENTECH NITROGEN PARTNERS, L.P.

Notes to Consolidated Financial Statements—Continued

(Unaudited)

 

The Partnership’s reportable operating segments have been determined in accordance with the Partnership’s internal management structure, which is organized based on operating activities. The Partnership evaluates performance based upon several factors, of which the primary financial measure is segment-operating income (loss).

 

 

 

For the Three Months

Ended September 30,

 

 

For the Nine Months

Ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(in thousands)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

East Dubuque

 

$

46,804

 

 

$

46,021

 

 

$

155,616

 

 

$

148,455

 

Pasadena

 

 

37,519

 

 

 

38,142

 

 

 

107,734

 

 

 

105,597

 

Total revenues

 

$

84,323

 

 

$

84,163

 

 

$

263,350

 

 

$

254,052

 

Gross profit (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

East Dubuque

 

$

18,898

 

 

$

15,466

 

 

$

79,019

 

 

$

60,816

 

Pasadena

 

 

464

 

 

 

(8,778

)

 

 

3,852

 

 

 

(12,145

)

Total gross profit

 

$

19,362

 

 

$

6,688

 

 

$

82,871

 

 

$

48,671

 

Selling, general and administrative expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

East Dubuque

 

$

1,088

 

 

$

956

 

 

$

3,434

 

 

$

3,177

 

Pasadena

 

 

1,133

 

 

 

1,071

 

 

 

2,773

 

 

 

4,147

 

Total segment selling, general and administrative expenses

 

$

2,221

 

 

$

2,027

 

 

$

6,207

 

 

$

7,324