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Terra Nitrogen (NYSE: TNH) produces ammonia and nitrates
used in agricultural crop fertilizers. Its assets consist of a
nitrogen plant in Oklahoma and storage terminals in Nebraska and
Illinois. Products are sold wholesale to chemical firms, farm
dealers, and national retail chains in the central and southern
US. Structured as a master limited partnership, TNH is managed
and capitalized by global fertilizer-maker Terra Industries
(NYSE: TRA), which owns 75.3% of the units (MLP shares).
As an MLP, Terra Nitrogen is legally required to pass along at
least 90% of its taxable income to partners (MLP shareholders)
to avoid paying corporate income taxes. In addition, the
partnership agreement with the general partner requires the
company to distribute 100% of available cash to partners. The
amount of income and cash varies from quarter to quarter, and so
do total payouts. Still, over the past five years, payouts have
grown a remarkable +762% from $1.75 a unit in 2004 to $15.08 a
unit in 2008.
In the last four quarters, TNH's distribution varied from $4.20
per unit, to $3.63, to $2.80, back up to $2.97. That equates to
$13.60 per unit annually and gives an historical yield of 10.3%.
Annualizing the last payment of $2.97 gives almost as rich a
current yield of 9.0%.
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Most of the payout consists of cash flow, which counts as
tax deferred return of capital. The income portion as
taxable at your ordinary income tax rate and so is the cash
portion but not until you sell the units. However, MLPs are
best held outside a tax-deferred IRA type of account due to
certain tax complexities. There's no dividend reinvestment
plan for TNH.
The company has profited from low natural gas prices and
high nitrogen fertilizer prices. In 2007, the price of
natural gas, used in making TNH's nitrogen fertilizer
products, accounted for some 64% of total expenses. The
selling price of the company's nitrogen fertilizer products,
which is influenced by global supply/demand balance, also
affects profits. Full-year 2008 earnings rose +37% over the
previous year to $14.90 per unit, mainly on higher selling
prices.
In the coming year, we expect
the trends that emerged over the past year to remain largely
in place but the global economic slowdown may prove a mixed
blessing. It will likely create some weakness in nitrogen
demand that could pressure sales volumes and selling prices
while also keeping a lid on natural gas costs.
A more immediate headwind, however, relates to the three-way
battle between parent Terra Industries and rival fertilizer
makers CF Industries (NYSE: CF) and Agrium (NYSE: AGU). In
January, CF made a hostile all-stock take-over bid for Terra
valued at around $20 per share. Terra directors unanimously
voted against the deal and urged investors to reject the
offer. Reportedly, under Iowa laws, CF can't close an
acquisition of Iowa-based Terra without approval from
Terra's board.
A month later, rival fertilizer maker Agrium (NYSE: AGU)
made a competing bid for CF Industries. CF's board rejected
the bid and on March 9th, CF upped the ante for Terra,
offering between $25.42 and $27.94 per Terra share, based on
Terra's closing share prices. The final outcome may or may
not be favorable for Terra Nitrogen, but so far investors
appear unfazed. The units have more than doubled in value,
rising from their October low of $65.20 to today's price of
$132.04
Good Investing!
--Carla Pasternak
Editor
High-Yield Investing
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