CVR Partners, LP — Q1 2016 Form 10-Q
Business context and period: Unaudited results cover the three months ended March 31, 2016, compared with Q1 2015. Before the April 1, 2016 merger, the Partnership operated the Coffeyville, Kansas nitrogen fertilizer facility; Q1 results do not include East Dubuque operations. The merger expanded the business to a second facility using natural gas feedstock.
Financial and operating performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $73.1 million | $93.1 million |
| Operating income | $19.7 million | $31.5 million |
| Net income | $18.0 million | $29.8 million |
| Diluted net income per common unit | $0.25 | $0.41 |
| Operating cash flow | $23.6 million | $25.4 million |
| Capital expenditures | $1.7 million | $2.7 million |
| Adjusted EBITDA (non-GAAP) | $27.9 million | $38.4 million |
Net sales fell $20.0 million, primarily from lower UAN prices ($14.2 million), lower hydrogen sales ($4.8 million), and lower ammonia prices ($4.6 million), partly offset by higher ammonia sales volumes. Product pricing at gate declined 20.5% for UAN and 33.6% for ammonia. Lower product costs, down $9.5 million, and direct operating costs, down $0.7 million, partly cushioned the revenue decline. SG&A rose $1.8 million, including $1.2 million of merger expenses. Operating margin was approximately 26.9% of sales, versus 33.8% in Q1 2015.
Production included 248.2 thousand tons of UAN and 113.7 thousand gross tons of ammonia, compared with 252.1 thousand and 96.0 thousand tons, respectively. UAN and ammonia on-stream factors were 91.4% and 97.2%.
Financial position, liquidity and distributions
At March 31, cash was $52.0 million, working capital was $76.5 million, and long-term debt net of financing fees was $125.0 million; no revolver borrowings were outstanding. Cash increased $2.0 million during the quarter. Operating cash flow exceeded the $1.7 million of capital expenditures and $19.7 million of cash distributions paid during the quarter. Current assets were $96.7 million and current liabilities $20.3 million.
After quarter-end, the Partnership borrowed $300.0 million under a two-year related-party term loan from CRLLC at 12% annual interest, used in part to repay the existing $125 million facility and finance merger-related uses. It also entered a $320.0 million two-year AEPC facility at 12% to fund a possible offer for East Dubuque’s $320 million 6.5% second-lien notes; the filing describes the facility’s permitted uses but does not clearly state that it was drawn. The notes are subject to a change-of-control purchase offer at 101% of principal plus accrued interest. Management said it was considering third-party refinancing.
On April 27, the board declared a Q1 distribution of $0.27 per unit, approximately $30.6 million in aggregate, payable May 16. The Partnership reported $30.6 million of available cash for distribution, a non-GAAP measure, including $6.3 million attributed to East Dubuque’s Q1. Per-unit available cash was $0.27 versus $0.45 in Q1 2015; the 2016 calculation uses post-merger units.
Outlook, risks and unusual items
- Management expected cash from operations and available AEPC borrowing, together with potential refinancing, to cover anticipated commitments and planned capital expenditures for the next 12 months, while warning that future cash requirements could be higher and financing is not assured.
- East Dubuque’s planned Q2 2016 turnaround was expected to last 25–30 days and cost $5–$7 million, with reduced production and sales. Coffeyville’s next turnaround was planned for the second half of 2017.
- Estimated 2016 maintenance capital spending was $7–$10 million at Coffeyville and $10–$12 million at East Dubuque for the post-merger period. An East Dubuque ammonia converter project was expected to cost $8–$11 million after the merger.
- Key exposures include volatile fertilizer prices, seasonal demand, high fixed operating costs, feedstock and utility supply, transportation and plant reliability, environmental compliance, and customer concentration. East Dubuque adds natural-gas price and supply exposure; its gas-supply arrangement with Nicor extends through October 31, 2016, subject to extension provisions.
- Merger financing increases leverage and interest expense, and the high-cost loans are related-party arrangements. CVR Energy’s ownership fell to approximately 34% after unit issuance; the filing says associated non-compete provisions lapsed, permitting CVR Energy affiliates to compete. Management reported no new material litigation or environmental developments compared with the prior 10-K.
Important facts for investors to verify
- Whether the $320 million AEPC facility was drawn, how the Second Lien Notes change-of-control offer was resolved, and the timing and terms of third-party refinancing.
- Post-merger debt, interest expense, covenant headroom, and the effect of 12% related-party financing on cash available for distributions.
- East Dubuque’s turnaround and converter-project costs, production performance, and natural-gas supply arrangements.
- Sustainability of the $0.27 distribution given fertilizer pricing, seasonal working-capital needs, capital spending, debt service, and the board’s discretion to change or suspend distributions.
- Integration performance and acquisition accounting: the filing states that purchase-price allocation was incomplete at quarter-end and would be further disclosed in the Q2 filing.