CVR Partners, LP — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. CVR Partners produces wholesale nitrogen fertilizer, principally UAN and ammonia, at its Coffeyville, Kansas facility. Figures below are unaudited unless otherwise noted.
Financial and operating performance
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $49.3 million | $66.7 million | $223.2 million | $224.3 million |
| Operating income (loss) | $(11.8) million | $14.4 million | $48.4 million | $56.3 million |
| Net income (loss) | $(13.5) million | $12.7 million | $43.3 million | $51.3 million |
| Diluted earnings (loss) per unit | $(0.18) | $0.17 | $0.59 | $0.70 |
| Adjusted EBITDA | $3.8 million | $21.1 million | $78.3 million | $76.8 million |
| Available cash for distribution | $(3.0) million | $20.1 million | $58.0 million | $72.0 million |
| Operating cash flow | $1.1 million | $19.7 million | $57.1 million | $79.6 million |
Margins: Operating margin was approximately -23.9% in Q3 2015 versus 21.6% in Q3 2014, and 21.7% for the first nine months of 2015 versus 25.1% in 2014. Net margin was approximately -27.3% versus 19.1% in Q3 and 19.4% versus 22.9% for the nine-month periods.
Operating conditions: Q3 production and sales were sharply affected by a major scheduled turnaround and additional downtime at the Linde air separation unit. Q3 2015 on-stream factors were 62.2% for gasification, 57.8% for ammonia and 56.7% for UAN, compared with 94.6%, 92.0% and 89.2%, respectively, a year earlier. Management said that excluding those outages, Q3 factors would have been 100.0%, 97.3% and 96.2%.
Cash, debt and liquidity: Cash was $33.3 million at September 30, 2015, down from $79.9 million at year-end 2014. The $125 million term loan was classified as current because the credit facility matures in April 2016; no revolver borrowings were outstanding. Working capital was negative $76.5 million, including the current debt, but $48.5 million excluding that debt. The partnership was in compliance with credit-facility covenants. Nine-month capital expenditures were $12.4 million ($7.4 million maintenance); management estimated 2015 maintenance capital spending of $10–$12 million.
Material changes versus the comparable period
- Q3 sales fell $17.4 million, primarily from lower UAN sales volume ($13.1 million) and price ($5.0 million). Nine-month sales were down only $1.1 million, as higher ammonia and hydrogen sales partly offset lower UAN sales.
- Q3 operating results swung to a loss. The turnaround cost $6.6 million in Q3 and $7.0 million year to date; additional Linde-related outages further reduced production and sales. Direct operating expenses rose $7.1 million in Q3 and $5.5 million for the nine-month period.
- Nine-month net income declined $8.0 million and operating income declined $7.9 million year over year. Operating cash flow decreased $22.6 million, affected in part by an $11.2 million decrease in deferred revenue.
- Cash distributions paid during the first nine months totaled $91.4 million, or $1.25 per unit. Available cash for distribution was negative $3.0 million in Q3; no Q3 distribution was declared in the filing’s comparison table.
Outlook, transactions and risks
- Pending Rentech Nitrogen acquisition: Announced August 9, 2015. Eligible Rentech unitholders were to receive 1.04 CVR Partners units plus $2.57 cash per unit; approximately 40.7 million CVR Partners units were expected to be issued. Closing depended on specified conditions, including Rentech unitholder approval and sale or spin-off of Rentech’s Pasadena facility.
- CVR Partners had a commitment from its affiliate CRLLC for up to $150 million of one-year financing, at three-month LIBOR plus 3%, for specified merger costs and repayment of Rentech’s $50 million credit facility. Separately, Rentech had $320 million of 6.5% second-lien notes; a merger would trigger an offer to repurchase them at 101% plus accrued interest. The partnership said it was evaluating financing alternatives and did not then have available funds to fund that offer.
- Two lawsuits challenged the proposed mergers and sought, among other remedies, to enjoin them. The outcome was uncertain; no liability was recorded. Either litigation or unmet closing conditions could delay or prevent the transaction.
- The merger agreement limits distributions to available cash while the transaction is pending. It also anticipates CRLLC’s ownership falling below 50% after closing, which would end specified non-compete protections and could allow CVR Energy affiliates to compete with the partnership.
- Management expected cash from operations, available borrowing capacity and financing options under consideration to cover anticipated commitments, planned capital spending and merger-related needs over the next 12 months. This expectation is subject to operating performance, market and financing conditions. The next full facility turnaround was planned for the second half of 2017.
- Key business risks include fertilizer price and seasonal demand volatility, production interruptions, reliance on pet coke from an affiliate and other suppliers, transportation and customer concentration, environmental and regulatory requirements, affiliate conflicts, and the April 2016 debt maturity. The partnership does not hedge fertilizer or pet coke prices.
Important facts for investors to verify
- Whether the Rentech transaction closed, whether Pasadena was sold or spun off, and the final unit issuance, cash consideration and financing structure.
- How the $125 million April 2016 maturity and any Rentech change-of-control note offer were ultimately refinanced or funded.
- Whether operating reliability recovered after the turnaround and Linde outages, and how production, sales volumes and fertilizer prices developed.
- Whether and at what level distributions resumed; distributions are discretionary, and the merger agreement capped them at available cash while pending.
- The outcome of merger litigation and any subsequent changes in the partnership’s risks, liquidity or affiliate relationships.