Terra Nitrogen: I Stand Corrected

Yesterday, I wrote a post on how the dividend payout of Terra Nitrogen Co. LP (TNH) will change going forward. To recap, the partnership agreement between Terra Industries (TRA) and Terra Nitrogen gives Terra Industries, as the owner of the general partner, increasing percentages of TNH’s distributable cash when said cash exceeds 71.5¢ per share, maxing out at 50% of distributable cash when the amount per share exceed $1.045.

I did my rough calculations for the recent distribution, giving 50% of the entire distribution to the GP, thus reducing the dividend from the paid $4.20 to a projected $2.10. I received a couple of comments “correcting” my calculation. Jack Sturm stated the new dividend would be $3.07 and an unnamed commentor at Seeking Alpha believes the dividend would be $2.60. After taking another look at my hasty calculation it is apparent the tiers need to be honored, otherwise, as an example, if the distributable cash was $1.10 per share and the GP took 50%, the dividend would be 55¢, below the “minimum” 60.5¢.

Let me give a little detail about the tiered cash split structure. If distributable cash is up to 71.5¢ per share the common shareholders will get 99% of the money. From 71.5¢ to 82.5¢ the common shareholders get 86% of the cash, 82.5¢ to $1.045: 76% and above $1.045 the distributable cash is basically split 50/50 between the common shareholders and the general partner. Here is a copy of the information I extracted from the 2007 10-K. partnership-distributions

Applying the tier percentages to last quarter's $4.20 dividend leaves the common shareholders with $2.57 per share. I stand corrected! However, the bottom line is that unsuspecting, uninformed shareholders are going to get a nasty surprise when the next dividend is declared.

If the dividend change conversation is confusing read my previous article then come back to this one.-- Seeking Alpha