CVR Partners, LP — Q2 2016 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2016. CVR Partners produces wholesale nitrogen fertilizer, principally UAN and ammonia. On April 1, it acquired CVR Nitrogen and the East Dubuque facility; 2016 results include that facility only from the acquisition date, so comparisons with 2015 are not like-for-like. The acquired facility contributed $59.7 million of Q2 sales and an $8.2 million operating loss.
Financial and operating results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $119.8 million | $80.8 million | $192.9 million | $173.9 million |
| Operating income | $3.7 million | $28.7 million | $23.4 million | $60.2 million |
| Net income (loss) | $(17.0) million | $27.0 million | $1.0 million | $56.8 million |
| Operating margin, approximate | 3.1% | 35.5% | 12.1% | 34.6% |
| Adjusted EBITDA | $29.1 million | $36.1 million | $57.0 million | $74.5 million |
| Available cash for distribution | $19.7 million | $28.4 million | $50.4 million | $61.0 million |
Q2 sales increased $39.0 million, primarily from the acquired facility, but excluding the acquisition they declined $20.7 million. Lower fertilizer selling prices weighed on Coffeyville: Q2 UAN gate pricing was $199/ton versus $269, and ammonia was $417/ton versus $546. The six-month sales increase also reflects East Dubuque, while sales excluding the acquisition declined $40.7 million. Q2 net loss included $15.6 million of interest expense and other financing costs and a $5.1 million debt-extinguishment loss.
Operating cash flow was $29.2 million for the first half, down from $56.0 million; investing cash outflow was $75.7 million, including $63.9 million net cash consideration for the acquisition and $11.9 million of capital expenditures. Financing provided $72.9 million. Cash was $76.3 million at June 30; working capital was $97.8 million.
Debt at June 30 was $649.2 million face value ($625.3 million net of discount and issuance costs), mainly $645.0 million of 9.25% senior secured notes due 2023; $4.2 million of 6.5% notes due 2021 remained. The 2023 notes have restrictive covenants, including limits on distributions; the Partnership reported covenant compliance and a fixed-charge coverage ratio meeting the 1.75-to-1.0 threshold. Q2 distributions of $0.17 per unit, approximately $19.3 million, were declared July 27 for payment August 15.
Material changes, outlook, and risks
- The East Dubuque facility completed a scheduled turnaround in Q2; units were down about 28 days and turnaround costs of $6.6 million were expensed. Management reported that, excluding turnaround downtime, its Q2 ammonia and UAN on-stream factors would have been 100.0% and 99.6%.
- In June, the Partnership issued $645.0 million of 2023 notes and used proceeds to repay the $300.0 million affiliate CRLLC loan and repurchase most of the 2021 notes. The refinancing raised borrowing costs; Q2 and first-half interest expense increased substantially year over year.
- Management estimated 2016 capital spending of $33 million ($19 million maintenance and $14 million growth). Remaining spending for the East Dubuque ammonia converter project was estimated at $3–$5 million. Coffeyville’s next turnaround was planned for the second half of 2017; East Dubuque’s for 2018. The filing provides no earnings or sales guidance.
- Available cash for distribution is a non-GAAP measure, not operating cash flow. Its first-half calculation included $13 million of purchase-accounting adjustments, $4 million of business-interruption insurance proceeds, and $6.3 million of East Dubuque first-quarter available cash. Distributions are discretionary and may be limited by debt covenants.
- Key exposures include volatile fertilizer prices and seasonal demand, natural gas and other input costs, plant outages, weather, transportation and supplier dependence, environmental obligations, leverage and covenant restrictions, and related-party relationships with CVR Energy and affiliates. Management reported no new material litigation or environmental developments. Disclosure controls were deemed effective, but management had not completed an assessment of the acquired business’s internal controls; East Dubuque represented 62% of consolidated assets at quarter-end.
Important facts for investors to verify
- How East Dubuque performs after the turnaround and integrates into operations; assess comparisons on a pro forma basis given the acquisition date.
- Whether fertilizer prices, sales volumes, and operating reliability support cash generation after the acquired facility’s turnaround and purchase-accounting effects.
- Debt service capacity, the 2023 notes’ distribution restrictions, and the sustainability of the $0.17-per-unit distribution.
- Actual 2016 capital spending and remaining converter-project costs, as well as the timing and cost of future turnarounds.
- Related-party costs and supply arrangements, and progress in assessing and integrating East Dubuque’s internal controls.