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-[[Image:terra_logo.gif|left]]Terra Nitrogen Company, owned in majority by [[Terra Industries]], operates the fourth largest nitrogen fertilizer production facility in the U.S.<ref>[http://www.google.com/url?sa=t&source=web&ct=res&cd=1&url=http%3A%2F%2Faede.osu.edu%2Fresources%2Fdocs%2Fpdf%2FKP90MS9C-3H54-C92J-73LB0HTNNCBAF66G.pdf&ei=v-sYSbqKMpy4efiy6a0O&usg=AFQjCNGs2PDFWTAWuFj06jyWa8uiz7C_Rw&sig2=xEwKcf895AffKRG1-wePCA Ohio State University, "A Primer on Ammonia, Nitrogen Fertilizers, and Natural Gas Markets," 2005]</ref>+'''Terra Nitrogen Company''' ([[NYSE]]:TNH), owned in majority by [[Terra Industries]], operates the fourth largest nitrogen fertilizer production facility in the U.S. Revenues are driven by rising [[Food & Beverage|food prices]] and greater demand for [[Corn Prices|corn]], [[Rising Fertilizer Prices|higher nitrogen fertilizer demand and prices]]. Corn prices reached a high of $7 per bushel in the summer of 2008, but they have fallen since November of 2008 as a result of the [[2008 Financial Crisis|slowing global economy]].<ref>[http://www.upi.com/Business_News/2008/11/05/Ethanol_producers_and_corn_prices_fall/UPI-38531225898913/ UPI "Ethanol producers and corn prices fall"]</ref> If corn prices remain low, demand for nitrogen fertilizer will fall.
-Driven by rising [[Food & Beverage|food prices]] and greater demand for [[Corn Prices|corn]], [[Rising Fertilizer Prices|higher nitrogen fertilizer demand and prices]] increased revenue by $210.8 million in 2007 over the previous year. In 2007, Terra Nitrogen sold 3.85 million tons of UAN and 1.1 million tons of ammonia, increases of 27% and 10% over 2006, respectively. Sales prices for the company's products increased by 10% and 45%, reflecting increased demand for nitrogen fertilizer from higher food demand. <ref name=2007AR7>[http://library.corporate-ir.net/library/11/115/115908/items/304947/ar_2007.pdf Terra Nitrogen 2007 Annual Report, page 7]</ref> Corn prices reached a high of $7 per bushel in the summer of 2008 and fell to $4 per bushel in November 2008 as a result of the [[2008 Financial Crisis|slowing global economy]].<ref>[http://www.upi.com/Business_News/2008/11/05/Ethanol_producers_and_corn_prices_fall/UPI-38531225898913/ UPI "Ethanol producers and corn prices fall"]</ref> If corn prices remain low when farmers begin next year's growing season, demand for nitrogen fertilizer will fall.<ref>[http://www.plantmanagementnetwork.org/pub/cm/news/2008/CornSeason/ Plant Management Network]</ref>+The largest cost component of ammonia production is [[Natural Gas Prices|natural gas]]. Natural gas prices fell by more than 50% in 2009 as compared to 2008, thereby helping TNH stay profitable.<ref name=TNH10K2009Pg19>[http://www.wikinvest.com/stock/Terra_Nitrogen_Company_%28TNH%29/Filing/10-K/2010/F47075098#111 TNH 10-K 2009 Item 7 Pg. 19]</ref> A 10 cent per million Btu decrease in [[Natural Gas Prices|natural gas prices]] would result in a reduction of $3.4 million in annual costs for the company, which has significantly helped it post positive earnings.
- +
-The largest cost component of ammonia production is [[Natural Gas Prices|natural gas]]. While natural gas price increases in the first half of 2008 will negatively affect the company's income, looking forward natural gas prices are projected to decline from $10.49 per MMBtu in July 2008<ref>[http://www.forecasts.org/natural-gas.htm US Energy Information Administration]</ref><ref>[http://www.eia.doe.gov/kids/energyfacts/science/energy_calculator.html#natgascalc EIA Natural Gas Conversion Calculator]</ref> to $5.80 per therm in December 2008 as a [[2008 Financial Crisis|slowing global economy]] reduces the demand for [[Energy|energy]].<ref name=dailyjournal>[http://www.daily-journal.com/archives/dj/display.php?id=429653 The Daily Journal "Natural gas prices decline sharply as winter nears"]</ref> A 10 cent per million Btu decrease in [[Natural Gas Prices|natural gas prices]] would result in a reduction of $3.4 million in annual costs for the company.<ref name=2007AR>[http://library.corporate-ir.net/library/11/115/115908/items/304947/ar_2007.pdf TNH 2007 Annual Report page 8]</ref>+
- +
-75% of Terra Nitrogen is owned by [[Terra Industries (TRA)]], in an arrangement that clearly benefits the parent company TRA. <ref name=seekingalpha /> Terra Industries is entitled a minimum dividend of 60.5 cents per share per quarter, and, as a result, Terra Nitrogen built up a deficit in owed dividends to TRA. <ref name=VS /> Recently, however, the deficit has been payed off, which will allow for stronger returns to non-TRA shareholders. <ref name=seekingalpha1 />+
 +75% of Terra Nitrogen is owned by [[Terra Industries (TRA)]], in an arrangement that clearly benefits the parent company TRA. Terra Industries is entitled a minimum dividend of 60.5 cents per share per quarter, and, as a result, Terra Nitrogen built up a deficit in owed dividends to TRA. Recently, however, the deficit has been payed off, which will allow for stronger returns to non-TRA shareholders.
== Business Overview == == Business Overview ==
 +=== Background on Nitrogen Industry ===
 +The three primary nutrients required for plant growth are phosphorous, potassium, and nitrogen. Nitrogen is an essential element element for most organic compounds in plants, especially proteins and chlorophyll. There are no known substitutes for nitrogen fertilizers in cultivating high-yield crops today. Nitrogen must be reapplied each year after intense agricultural use since nitrogen is quickly absorbed by crops and tends to evaporate from the soil over time. Thus, demand for nitrogen fertilizer tends to be consistent on a year-by-year basis.
-{| {{table}}+===Business Financials===
-| align="center" style="background:#f0f0f0;"|''' '''+For the year 2009, [[net income]] was $144.3 million, based off of revenues of $507.7 million.<ref name=TNH10K2009Pg15>[http://www.wikinvest.com/stock/Terra_Nitrogen_Company_%28TNH%29/Filing/10-K/2010/F47075098#111 TNH 10-K 2009 Item 6 Pg. 15]</ref> The decrease in net sales was primarily attributable to a significant decline in nitrogen prices across all products and a moderate decrease in sales volumes as compared to 2008. Specifically, 2009 ammonia and UAN pricing were 39 percent and 42 percent, respectively, below 2008 price levels. Compared to the previous year, TNH's performance declined significantly, as its revenues fell by 43% and its net income fell by 66%.
-| align="center" style="background:#f0f0f0;"|'''2007'''+
-| align="center" style="background:#f0f0f0;"|'''2006'''+
-| align="center" style="background:#f0f0f0;"|'''2005'''+
-| align="center" style="background:#f0f0f0;"|'''2004'''+
-| align="center" style="background:#f0f0f0;"|'''2003'''+
-|-+
-| Revenue ($M)||635.5||424.7||454.8||419.2||403.6+
-|-+
-| Net income ($M) <ref name=10k30>[http://ccbn.10kwizard.com/xml/download.php?format=PDF&ipage=5500246 TNH 2007 10-K, Item 8 "Financial Statement," page 30]</ref> <ref name=10k2005>[http://ccbn.10kwizard.com/xml/download.php?format=PDF&ipage=4024575 TNH 2005 10-K, Item 8 "Financial Statement," page 26]</ref> ||205.8||46.2||55.9||45.8||-35.3+
-|-+
-| +
-|}+
-Terra Nitrogen operates a single nitrogen processing plant in Verdigris, Oklahoma. The plant runs at 100% capacity to produce a million tons of ammonia annually, most of which is upgraded to produce 2.2 million tons of UAN annually.<ref name=2007AR /> <ref name=seekingalpha>[http://seekingalpha.com/article/87212-terra-industries-an-interesting-fertilizer-play Seeking Alpha, "Terra Industries: An Interesting Fertilizer Play"]</ref> The plant was inspected and refurbished extensively in a $22 million three week renovation in August 2007, when failed equipment and leaks were repaired and energy-saving technologies were installed.<ref name=10k21>[http://ccbn.10kwizard.com/xml/download.php?format=PDF&ipage=5500246 TNH 2007 10-K, Item 7 "Management's Discussion," page 21]</ref><ref name=2007AR8>[http://library.corporate-ir.net/library/11/115/115908/items/304947/ar_2007.pdf Terra Nitrogen 2007 Annual Report, page 8]</ref> The Department of Energy estimates the new technologies will save the company $3.5 annually in energy costs. <ref name=2007AR8 /> 
- 
-Terra Nitrogen's customers are dealers, national farm retail chains, distributors, and other fertilizer producers. In 2007, the majority of nitrogen fertilizer was sold to dealers, but no single customer accounted for more than 10% of the company's sales. <ref name=10k2>[http://ccbn.10kwizard.com/xml/download.php?format=PDF&ipage=5500246 TNH 2007 10-K, Item 1 "Business," page 2]</ref> Terra Nitrogen does not sell its products internationally. <ref name=10k1>[http://ccbn.10kwizard.com/xml/download.php?format=PDF&ipage=5500246 TNH 2007 10-K, Item 1 "Business," page 1]</ref> 
- 
-75% of Terra Nitrogen is owned by its general partner, [[Terra Industries (TRA)]]. <ref name=seekingalpha /> 
- 
-=== Background on Nitrogen Industry === 
-The three primary nutrients required for plant growth are phosphorous, potassium, and nitrogen. Nitrogen is an essential element element for most organic compounds in plants, especially proteins and chlorophyll. There are no known substitutes for nitrogen fertilizers in cultivating high-yield crops today. Nitrogen must be reapplied each year after intense agricultural use since nitrogen is quickly absorbed by crops and tends to evaporate from the soil over time. Thus, demand for nitrogen fertilizer tends to be consistent on a year-by-year basis. <ref name=10k3>[http://ccbn.10kwizard.com/xml/download.php?format=PDF&ipage=5500246 TNH 2007 10-K, Item 1 "Business," page 3]</ref> The single largest nitrogen consumer crop in North America is [[Corn Prices|corn]]. <ref name=10k3 /> 
 +Terra Nitrogen operates a single nitrogen processing plant in Verdigris, Oklahoma. The plant runs at 100% capacity to produce a million tons of ammonia annually, most of which is upgraded to produce 2.2 million tons of [[Urea Ammonium Nitrate (UAN)|UAN]] annually.
=== Products === === Products ===
-====Urea Ammonium Nitrate Solutions (UAN)====+====[[Urea Ammonium Nitrate (UAN)]] ====
-Marketed under the name TerraSol, UAN is a clean, odorless, and non-hazardous liquid fertilizer.<ref name=claremore>[http://www.istockanalyst.com/article/viewiStockNews+articleid_2440079&title=Terra_Nitrogen_Reducing.html Claremore Daily Progress, "Terra Nitrogen Reducing Greenhouse Gas Emissions"]</ref> Terra Industries is the largest producer of UAN in the United States, producing 3.85 million tons of UAN annually. <ref name=claremore /> UAN is used mostly in North America and only recently has been traded in international markets. <ref name=10k1 /> Terra Nitrogen's sole production facility is located in Verdigris, Oklahoma, providing a competitive advantage in serving agricultural customers in the Great Plains and Corn Belt regions. <ref name=10k1 /> Because of its high water content, UAN is expensive to transport, limiting its distribution to local regions. <ref name=10k2 />+Marketed under the name TerraSol, UAN is a clean, odorless, and non-hazardous liquid fertilizer.<ref name=claremore>[http://www.istockanalyst.com/article/viewiStockNews+articleid_2440079&title=Terra_Nitrogen_Reducing.html Claremore Daily Progress, "Terra Nitrogen Reducing Greenhouse Gas Emissions"]</ref> Terra Industries is the largest producer of UAN in the United States, producing 3.85 million tons of UAN annually. <ref name=claremore /> UAN is used mostly in North America and only recently has been traded in international markets. Terra Nitrogen's sole production facility is located in Verdigris, Oklahoma, providing a competitive advantage in serving agricultural customers in the Great Plains and Corn Belt regions. Because of its high water content, UAN is expensive to transport, limiting its distribution to local regions.
- +
-{| border=0 align=center width=600+
-|-+
-|[[Image:terrasol.jpg|thumb|270px|center|TerraSol (UAN) Prices <ref name=2007AR8 />]]+
-| [[Image:ammonia_prices.jpg|thumb|270px|center|Ammonia Prices realized by TNH <ref name=2007AR7 />]]+
-|}+
====Anhydrous Ammonia==== ====Anhydrous Ammonia====
-Ammonia is the simplest nitrogen fertilizer and is used in the production of other nitrogen fertilizers, including UAN. Although generally the least expensive source of nitrogen fertilizer available to agricultural customers, ammonia may be less attractive since it requires specialized equipment and has limited application flexibility. In 2007, Terra Nitrogen produced 1.1 million tons of ammonia, 0.8 million of which was used internally to produce UAN. <ref name=10k2 />+Ammonia is the simplest nitrogen fertilizer and is used in the production of other nitrogen fertilizers, including UAN. Although generally the least expensive source of nitrogen fertilizer available to agricultural customers, ammonia may be less attractive since it requires specialized equipment and has limited application flexibility.
- +
-[[Image:Product.jpg|thumb|500px|center|Terra Nitrogen 2007 Production <ref name=claremore />]]+
== Trends and Forces == == Trends and Forces ==
=== Decreasing natural gas prices lower operating costs === === Decreasing natural gas prices lower operating costs ===
- +[[Natural gas]] is the most important raw material in the production of UAN and other nitrogen-based fertilizers. Terra Nitrogen acquires natural gas through both spot and term purchases, and purchases [[derivatives]] instruments to hedge against some price volatility. <ref name=10k5 /> A 10 cent per million Btu decrease in natural gas prices would result in a reduction of $3.4 million in annual costs for the company, thereby showing how small changes in the price of natural gas can have a large impact on the earnings of TNH.
-[[Natural gas]] is the most important raw material in the production of UAN and other nitrogen-based fertilizers. Terra Nitrogen acquires natural gas through both spot and term purchases, and purchases [[derivatives]] instruments to hedge against some price volatility. <ref name=10k5 /> In 2007, natural gas purchases accounted for 64% of Terra Nitrogen's total expenses. <ref name=10k8>[http://ccbn.10kwizard.com/xml/download.php?format=PDF&ipage=5500246 TNH 2007 10-K, Item 1A "Risk Factors," page 8]</ref> The decrease in natural gas prices in 2007 reduced total costs by $7.4 million.<ref name=10k20>[http://ccbn.10kwizard.com/xml/download.php?format=PDF&ipage=5500246 TNH 2007 10-K, Item 7 "Management's Discussion," page 20]</ref> In the first half of 2008, natural gas prices rose with the increasing cost of oil, leading to additional costs for Terra Nitrogen. However, as of October 2008, the price per therm of natural gas had dropped to $0.81 from its high of $1.45 over the summer. According to [[Nicor]] Gas, the cost of natural gas is projected to decline further to $0.77 per therm in November, leading to decreases in costs with the potential to more than offset cost increases in the first half of the year. <ref name=dailyjournal /> A 10 cent per million Btu decrease in natural gas prices would result in a reduction of $3.4 million in annual costs for the company.<ref name=2007AR />+
=== [[Rising Fertilizer Prices | Rising Worldwide Demand for Food Increases Fertilizer Profit Margins]] === === [[Rising Fertilizer Prices | Rising Worldwide Demand for Food Increases Fertilizer Profit Margins]] ===
- +Higher global grain demand continue to keep crop prices elevated, leading to additional demand for fertilizer. The grain market is expected to continue to be tight for at least the next few years, though tempered in the near term by the [[2008 Financial Crisis|global economic downturn]]. Grain stocks are low worldwide and it will take an extended period of strong production to bring inventories up to satisfy demand. Fertecon forecasts that global nitrogen fertilizer demand will rise around 2% per year from 2005 to 2015, increasing by 21 million tons. In North America, nitrogen fertilizer consumption is expected to increase from 13.9 million tons to 16 million tons, a 15% increase, from 2005 to 2015.<ref name=10k4>[http://ccbn.10kwizard.com/xml/download.php?format=PDF&ipage=5500246 TNH 2007 10-K, Item 1 "Business," page 4]</ref>
-Higher global grain demand continue to keep crop prices elevated in 2008, leading to additional demand for fertilizer. For example, the US Department of Agriculture forecasts U.S. [[corn]] exports to be a record 2.5 billion bushels in the 2008 marketing year, while world grain consumption is forecasted to increase by over three percent. The grain market is expected to continue to be tight for at least the next few years, though tempered in the near term by the [[2008 Financial Crisis|global economic downturn]]. Grain stocks are low worldwide and it will take an extended period of strong production to bring inventories up to satisfy demand.<ref>[http://www.agrium.com/uploads/08-019_Agrium_delivers_record_first_quarter_net_earnings.pdf Agrium Q1 2008 Conference Call Transcript]</ref> Fertecon forecasts that global nitrogen fertilizer demand will rise around 2% per year from 2005 to 2015, increasing by 21 million tons. In North America, nitrogen fertilizer consumption is expected to increase from 13.9 million tons to 16 million tons, a 15% increase, from 2005 to 2015.<ref name=10k4>[http://ccbn.10kwizard.com/xml/download.php?format=PDF&ipage=5500246 TNH 2007 10-K, Item 1 "Business," page 4]</ref>+
=== [[Global Climate Change|Environmental Regulation]] Poses Additional Costs in Near Future === === [[Global Climate Change|Environmental Regulation]] Poses Additional Costs in Near Future ===
 +Terra Nitrogen announced in July 2008 that it will reduce greenhouse gas emissions by 20% using special ceramic filter technology at two of its plants. The installation of the technology at one plant will cost $1.6 million in its first year and $1.2 million every year thereafter.<ref name=claremore />
-Terra Nitrogen announced in July 2008 that it will reduce greenhouse gas emissions by 20% using special ceramic filter technology at two of its plants. <ref name=claremore /> The installation of the technology at one plant will cost $1.6 million in its first year and $1.2 million every year thereafter. <ref name=claremore /> In 2007, the company's capital expenditures on environmental control amounted to $0.5 million. <ref name=10k6>[http://ccbn.10kwizard.com/xml/download.php?format=PDF&ipage=5500246 TNH 2007 10-K, Item 1 "Business," page 6]</ref> Over the past 20 years, Terra Nitrogen has reduced its EPA Toxic Release Inventory (TRI) regulated substances by more than 70%. <ref name=2007AR />+Terra is a "Founding Reporter" member of The Climate Registry, a non-profit organization committed to "standards for the measurement, verification, and public reporting of greenhouse gas emissions throughout North America."<ref name=claremore /> Terra officials say they support the objective of lowering GHG emissions. The director of Environmental, Health and Safety for Terra Industries has stated that the company believes [[Global Climate Change|global warming]] policy should be reasonable, supported by fact, and implemented in a way amenable to American industry.<ref name=claremore />
- +
-Terra is a "Founding Reporter" member of The Climate Registry, a non-profit organization committed to "standards for the measurement, verification, and public reporting of greenhouse gas emissions throughout North America." <ref name=claremore /> Terra officials say they support the objective of lowering GHG emissions. The director of Environmental, Health and Safety for Terra Industries has stated that the company believes [[Global Climate Change|global warming]] policy should be reasonable, supported by fact, and implemented in a way amenable to American industry.<ref name=claremore />+
- +
-=== Terra Nitrogen's Subsidiary Status Limits Dividends to Shareholders ===+
- +
-75% of Terra Nitrogen is owned by [[Terra Industries (TRA)]], a much larger company that sells nitrogen products and methanol and has assets across the US, Canada, and the UK. <ref>[http://timplaehn.com/2008/04/28/terra-nitrogen-vs-terra-industries/ Investing Thoughts, "Terra Nitrogen vs. Terra Industries"]</ref> <ref name=VS>[http://ccbn.10kwizard.com/xml/download.php?format=PDF&ipage=5500295 TRA 2007 10-K, Item 1 "Business," page 2]</ref> Since Terra Nitrogen consists of only one nitrogen fertilizer processing plant, an increase in demand or prices for nitrogen products would translate more directly into higher returns for Terra Nitrogen. This has allowed Terra Nitrogen to increase revenue from $425 million in 2006 to $636 million in 2007. <ref name=10k30 />+
- +
-On the other hand, the partnership agreement between Terra Nitrogen and [[Terra Industries (TRA)]] limits the dividends payable to common (non-TRA) stockholders. The agreement stipulates that Terra Industries receives a larger proportion of the distributable cash if dividends per share exceed 60.5¢ in a quarter. In addition, the agreement states the cumulative distributions must exceed 60.5¢ per quarter. <ref name=VS /> Since the per share dividends were below 60.5 cents for several years, TNH built up a deficit of owed dividends to Terra Industries.<ref name=seekingalpha1>[http://seekingalpha.com/article/87212-terra-industries-an-interesting-fertilizer-play Seeking Alpha, "Terra Industries: An Interesting Fertilizer Play"]</ref> As of July 2008, however, the deficit had been paid off. <ref name=seekingalpha1 />+
== Competition == == Competition ==
-Terra Nitrogen competes with domestic and foreign producers of nitrogen products, including some that are government subsidized. <ref name=10k5>[http://ccbn.10kwizard.com/xml/download.php?format=PDF&ipage=5500246 TNH 2007 10-K, Item 1 "Business," page 5]</ref> Since natural gas is a raw material needed for the production of ammonia, competitors that have better access to natural gas are at an advantage. In the UAN market, Terra Nitrogen primarily competes with local companies due to the high cost of transporting UAN. <ref name=10k2 /> According to the company's website, TNH's primary competitors are [[Agrium (AGU)]], Koch Industries, [[CF Industries Holdings (CF)]], [[Mosaic Company (MOS)]] and PCS Nitrogen.<ref>[http://www.terraindustries.com/Investors/Terra-Industries-(TRA)/FAQ.aspx Terra FAQ]</ref>+Terra Nitrogen competes with domestic and foreign producers of nitrogen products, including some that are government subsidized. <ref name=10k5>[http://ccbn.10kwizard.com/xml/download.php?format=PDF&ipage=5500246 TNH 2007 10-K, Item 1 "Business," page 5]</ref> Since natural gas is a raw material needed for the production of ammonia, competitors that have better access to natural gas are at an advantage. In the [[Urea Ammonium Nitrate (UAN)]] market, Terra Nitrogen primarily competes with local companies due to the high cost of transporting UAN. According to the company's website, TNH's primary competitors are [[Agrium (AGU)]], Koch Industries, [[CF Industries Holdings (CF)]], [[Mosaic Company (MOS)]] and PCS Nitrogen.<ref>[http://www.terraindustries.com/Investors/Terra-Industries-(TRA)/FAQ.aspx Terra FAQ]</ref>
- +
-<center>+
-{| {{table}}+
-| align="center" style="background:#f0f0f0;"|''' '''+
-| align="center" style="background:#f0f0f0;"|'''Terra Nitrogen'''+
-| align="center" style="background:#f0f0f0;"|'''[[CF Industries Holdings (CF)| CF Industries]]'''+
-| align="center" style="background:#f0f0f0;"|'''[[Agrium (AGU)]]'''+
-| align="center" style="background:#f0f0f0;"|'''[[Potash Corporation of Saskatchewan (POT) |Potash Corp (POT)]]'''+
-|-+
-| 2007 Revenue ($M)||636.31<ref>[http://finance.google.com/finance?q=NYSE%3ATNH Google Finance TNH]</ref>||2757.7<ref>[http://finance.google.com/finance?q=cf Google Finance CF]</ref>||5270<ref name=agriumfacts>[http://www.agrium.com/uploads/Agrium_Fact_Sheet.pdf Agrium Fact Sheet]</ref>||5234.2<ref>[http://finance.google.com/finance?q=NYSE:POT Google Finance POT]</ref>+
-|-+
-| Net profit margin||32.34%||13.49%||8.37%||21.08%+
-|-+
-| Nitrogen fertilizer production volume (millions of tons)||1.1<ref name=10k2 />||6.9<ref>[http://ccbn.10kwizard.com/xml/download.php?repo=tenk&ipage=5495042&format=PDF CF 2007 10-K, Item 1 "Business," page 8]</ref>||5<ref name=agriumfacts />||3.218<ref>[http://www.sec.gov/Archives/edgar/data/855931/000113031908000163/o39398e10vk.htm#106 POT 2007 10-K, Item 1 "Business," page 9]</ref>+
-|-+
-| UAN % of total production||67.60%||31.60%||-||-+
-|}+
-</center>+
- +
- +
-<center>+
-{|+
-'''Table of US Nitrogen Fertilizer Production Facility Capacities 2005 <ref>[http://www.google.com/url?sa=t&source=web&ct=res&cd=1&url=http%3A%2F%2Faede.osu.edu%2Fresources%2Fdocs%2Fpdf%2FKP90MS9C-3H54-C92J-73LB0HTNNCBAF66G.pdf&ei=v-sYSbqKMpy4efiy6a0O&usg=AFQjCNGs2PDFWTAWuFj06jyWa8uiz7C_Rw&sig2=xEwKcf895AffKRG1-wePCA Ohio State University, "A Primer on Ammonia, Nitrogen Fertilizers, and Natural Gas Markets," 2005]</ref>'''+
-|}+
-</center>+
- +
-[[Image:Capacity_table.jpg|center]]+
- +
-<autowikidata/>+
==References== ==References==
Line 109: Line 43:
[[category:Agriculture]] [[category:Agriculture]]
[[category:Agricultural Chemicals*]] [[category:Agricultural Chemicals*]]
-[[Category:Fertilizer*]]+[[Category:Fertilizer Companies*]]
[[category:mature]] [[category:mature]]
 +[[Category:Fertilizer_Companies*]]

Current revision

Terra Nitrogen Company (NYSE:TNH), owned in majority by Terra Industries, operates the fourth largest nitrogen fertilizer production facility in the U.S. Revenues are driven by rising food prices and greater demand for corn, higher nitrogen fertilizer demand and prices. Corn prices reached a high of $7 per bushel in the summer of 2008, but they have fallen since November of 2008 as a result of the slowing global economy.[1] If corn prices remain low, demand for nitrogen fertilizer will fall.

The largest cost component of ammonia production is natural gas. Natural gas prices fell by more than 50% in 2009 as compared to 2008, thereby helping TNH stay profitable.[2] A 10 cent per million Btu decrease in natural gas prices would result in a reduction of $3.4 million in annual costs for the company, which has significantly helped it post positive earnings.

75% of Terra Nitrogen is owned by Terra Industries (TRA), in an arrangement that clearly benefits the parent company TRA. Terra Industries is entitled a minimum dividend of 60.5 cents per share per quarter, and, as a result, Terra Nitrogen built up a deficit in owed dividends to TRA. Recently, however, the deficit has been payed off, which will allow for stronger returns to non-TRA shareholders.

Business Overview

Background on Nitrogen Industry

The three primary nutrients required for plant growth are phosphorous, potassium, and nitrogen. Nitrogen is an essential element element for most organic compounds in plants, especially proteins and chlorophyll. There are no known substitutes for nitrogen fertilizers in cultivating high-yield crops today. Nitrogen must be reapplied each year after intense agricultural use since nitrogen is quickly absorbed by crops and tends to evaporate from the soil over time. Thus, demand for nitrogen fertilizer tends to be consistent on a year-by-year basis.

Business Financials

For the year 2009, net income was $144.3 million, based off of revenues of $507.7 million.[3] The decrease in net sales was primarily attributable to a significant decline in nitrogen prices across all products and a moderate decrease in sales volumes as compared to 2008. Specifically, 2009 ammonia and UAN pricing were 39 percent and 42 percent, respectively, below 2008 price levels. Compared to the previous year, TNH's performance declined significantly, as its revenues fell by 43% and its net income fell by 66%.


Terra Nitrogen operates a single nitrogen processing plant in Verdigris, Oklahoma. The plant runs at 100% capacity to produce a million tons of ammonia annually, most of which is upgraded to produce 2.2 million tons of UAN annually.

Products

Urea Ammonium Nitrate (UAN)

Marketed under the name TerraSol, UAN is a clean, odorless, and non-hazardous liquid fertilizer.[4] Terra Industries is the largest producer of UAN in the United States, producing 3.85 million tons of UAN annually. [4] UAN is used mostly in North America and only recently has been traded in international markets. Terra Nitrogen's sole production facility is located in Verdigris, Oklahoma, providing a competitive advantage in serving agricultural customers in the Great Plains and Corn Belt regions. Because of its high water content, UAN is expensive to transport, limiting its distribution to local regions.

Anhydrous Ammonia

Ammonia is the simplest nitrogen fertilizer and is used in the production of other nitrogen fertilizers, including UAN. Although generally the least expensive source of nitrogen fertilizer available to agricultural customers, ammonia may be less attractive since it requires specialized equipment and has limited application flexibility.

Trends and Forces

Decreasing natural gas prices lower operating costs

Natural gas is the most important raw material in the production of UAN and other nitrogen-based fertilizers. Terra Nitrogen acquires natural gas through both spot and term purchases, and purchases derivatives instruments to hedge against some price volatility. [5] A 10 cent per million Btu decrease in natural gas prices would result in a reduction of $3.4 million in annual costs for the company, thereby showing how small changes in the price of natural gas can have a large impact on the earnings of TNH.

Rising Worldwide Demand for Food Increases Fertilizer Profit Margins

Higher global grain demand continue to keep crop prices elevated, leading to additional demand for fertilizer. The grain market is expected to continue to be tight for at least the next few years, though tempered in the near term by the global economic downturn. Grain stocks are low worldwide and it will take an extended period of strong production to bring inventories up to satisfy demand. Fertecon forecasts that global nitrogen fertilizer demand will rise around 2% per year from 2005 to 2015, increasing by 21 million tons. In North America, nitrogen fertilizer consumption is expected to increase from 13.9 million tons to 16 million tons, a 15% increase, from 2005 to 2015.[6]

Environmental Regulation Poses Additional Costs in Near Future

Terra Nitrogen announced in July 2008 that it will reduce greenhouse gas emissions by 20% using special ceramic filter technology at two of its plants. The installation of the technology at one plant will cost $1.6 million in its first year and $1.2 million every year thereafter.[4]

Terra is a "Founding Reporter" member of The Climate Registry, a non-profit organization committed to "standards for the measurement, verification, and public reporting of greenhouse gas emissions throughout North America."[4] Terra officials say they support the objective of lowering GHG emissions. The director of Environmental, Health and Safety for Terra Industries has stated that the company believes global warming policy should be reasonable, supported by fact, and implemented in a way amenable to American industry.[4]

Competition

Terra Nitrogen competes with domestic and foreign producers of nitrogen products, including some that are government subsidized. [5] Since natural gas is a raw material needed for the production of ammonia, competitors that have better access to natural gas are at an advantage. In the Urea Ammonium Nitrate (UAN) market, Terra Nitrogen primarily competes with local companies due to the high cost of transporting UAN. According to the company's website, TNH's primary competitors are Agrium (AGU), Koch Industries, CF Industries Holdings (CF), Mosaic Company (MOS) and PCS Nitrogen.[7]

References

  1. UPI "Ethanol producers and corn prices fall"
  2. TNH 10-K 2009 Item 7 Pg. 19
  3. TNH 10-K 2009 Item 6 Pg. 15
  4. 4.0 4.1 4.2 4.3 4.4 Claremore Daily Progress, "Terra Nitrogen Reducing Greenhouse Gas Emissions"
  5. 5.0 5.1 TNH 2007 10-K, Item 1 "Business," page 5
  6. TNH 2007 10-K, Item 1 "Business," page 4
  7. Terra FAQ
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