CVR Partners, LP — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. CVR Partners produces and wholesales nitrogen fertilizer, principally ammonia and UAN, at facilities in Coffeyville, Kansas, and East Dubuque, Illinois.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $79.9m | $69.4m | $253.0m | $252.6m |
| Operating income (loss) | $2.5m | ($15.9m) | ($1.7m) | $1.6m |
| Net loss | ($13.1m) | ($31.6m) | ($48.7m) | ($45.4m) |
| Net loss per common unit | ($0.12) | ($0.28) | ($0.43) | ($0.40) |
| Adjusted EBITDA | $18.6m | $5.0m | $57.7m | $58.1m |
| Available cash for distribution | ($0.1m) | ($1.3m) | ($4.3m) | $0.6m |
Q3 gross margin, calculated as sales less cost of sales, was approximately 11.2%, versus negative 14.2% a year earlier; nine-month gross margin was approximately 6.9%, versus 8.1%. Operating margin was approximately 3.2% in Q3 and negative 0.7% for the nine-month period. Interest expense was $15.7m for Q3 and $47.1m for the nine months.
For the nine months, operating cash flow was $27.1m (prior year $28.1m); capital expenditures were $15.0m (prior year $11.5m); and cash increased $12.3m to $61.4m. No distributions were paid in 2018; $0.02 per unit was declared in the prior-year nine-month period.
At September 30, 2018, total assets were $1.219bn, current assets $143.7m, current liabilities $86.2m, and partners’ capital $501.2m. Long-term debt, net of discount and issuance costs, was $628.2m; stated debt before those deductions was $647.2m. The $50m asset-based credit facility had no borrowings and $50m available. Management reported total liquidity of $86.4m, comprising cash and the available facility; cash included $24.8m from customer advances. The Partnership reported compliance with debt covenants.
Changes and operating drivers
- Q3 sales rose 15% year over year, primarily reflecting higher fertilizer prices. UAN pricing at the gate rose to $170 per ton from $138; ammonia pricing rose to $297 from $214. Ammonia sales volume declined to 38 thousand tons from 65 thousand tons, partly due to lower beginning inventory.
- Nine-month sales were nearly unchanged. Higher prices were offset by lower sales volumes, which management attributed primarily to planned and unplanned downtime and lower starting inventory.
- Q3 operating results improved substantially from the prior-year loss, helped by lower direct operating expenses and the absence of the East Dubuque turnaround costs incurred in Q3 2017. Nine-month direct operating expenses increased by $7.6m, including higher turnaround, personnel, and repair costs.
- The Coffeyville facility completed a scheduled 15-day turnaround in Q2 2018. East Dubuque experienced a reformer repair in Q2 and a boiler-feed-water coil leak in Q1; Coffeyville had gasifier repairs in Q2. Q3 on-stream factors were generally higher than in the prior-year quarter.
Outlook, risks, and contingencies
- Management said cash, operating cash flow, and potential asset-based facility borrowings were expected to cover anticipated operating commitments for at least the next 12 months. Estimated 2018 capital spending was $17m–$20m for maintenance and $3m–$5m for growth.
- No specific earnings or distribution guidance was provided. Available cash for distribution was negative for the nine months, and management’s distribution measure reflects debt service, maintenance spending, turnaround costs, and reserves.
- Results are exposed to fertilizer prices and demand, weather and seasonality, plant reliability and downtime, feedstock prices and availability, and reliance on third-party suppliers and transportation. Coffeyville also depends on pet coke sourced primarily from CVR Refining; East Dubuque uses natural gas.
- The Partnership submitted a business-interruption insurance claim related to production impacts in late 2017 and early 2018; it could not estimate the outcome or timing of recovery. The Kansas Court of Appeals upheld prior property-tax determinations in September 2018; the Partnership said it continued to monitor the matter. Management reported no material change in other disclosed commitments and contingencies.
- Adoption of the new revenue standard increased both accounts receivable and deferred revenue presentation; management said it did not affect nine-month operations or cash flows. For the January 2019 lease-standard adoption, the preliminary estimate of right-of-use assets and lease liabilities was $13m–$17m.
Important facts for investors to verify
- Whether stronger fertilizer pricing can persist and translate into improved operating earnings and positive distributable cash.
- Whether facility reliability and production volumes recover after 2018 planned and unplanned downtime.
- Liquidity quality and cash availability, including the role of customer prepayments, accrued liabilities, and the undrawn credit facility.
- Debt-service burden, refinancing terms, and the effect of the $645m 9.25% senior secured notes due 2023.
- Outcome and timing of the insurance claim, and any further developments in the property-tax matter.