CVR Partners, LP — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. CVR Partners produces wholesale UAN and ammonia at its Coffeyville, Kansas facility using petroleum coke gasification. The annual filing also reports fourth-quarter results.
Financial and operating results
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $289.2 million | $298.7 million |
| Operating income | $68.7 million | $82.8 million |
| Net income | $62.0 million | $76.1 million |
| Diluted net income per unit | $0.85 | $1.04 |
| Operating cash flow | $78.4 million | $118.9 million |
| Capital expenditures | $17.0 million | $21.1 million |
| Available cash for distribution | $81.0 million | $102.0 million |
| Cash at year-end | $50.0 million | $79.9 million |
| Debt at year-end | $125.0 million | $125.0 million |
| Working capital at year-end | $72.9 million | $89.9 million |
Net margin was approximately 21.4% in 2015 versus 25.5% in 2014; operating margin was approximately 23.8% versus 27.7%. These percentages are calculated from reported sales and income figures.
Production included 928,600 tons of UAN and 385,400 tons of gross ammonia. UAN netback was $247 per ton, down from $259; ammonia netback was $521 per ton, up from $518. Gasification, ammonia and UAN on-stream factors were 90.2%, 87.5% and 87.3%, respectively, compared with 96.8%, 92.6% and 92.0% in 2014.
Fourth-quarter 2015 net sales were $66.0 million and net income was $18.7 million, compared with $74.4 million and $24.8 million, respectively, in fourth-quarter 2014.
Changes versus prior year
- Sales declined $9.5 million, principally from lower UAN prices ($11.6 million) and lower UAN volume ($3.3 million); higher ammonia and hydrogen sales partly offset the decline.
- Net income decreased $14.1 million. Operating income fell $14.1 million as lower sales and higher operating costs outweighed lower cost of product sold.
- Operating cash flow fell $40.5 million, including a $10.5 million decrease in deferred revenue associated with lower demand for prepaid contracts.
- Results were affected by a third-quarter scheduled turnaround, costing approximately $7.0 million and taking units offline for 17–20 days, plus additional Linde air-separation-unit downtime. The 2015 turnaround and Linde outages reduced annual operating factors.
- UAN sales volume decreased 1.2%; ammonia sales volume increased 32.6%. UAN market prices and the company’s UAN netback declined.
Liquidity, distributions and outlook
- The $125.0 million term loan and $25.0 million revolving facility mature in April 2016; no revolver borrowings were outstanding at year-end. The Partnership was covenant-compliant at December 31, 2015 and reported $25.0 million of revolver availability.
- On February 9, 2016, majority owner Coffeyville Resources agreed to guarantee outstanding credit-facility debt if it became due before refinancing. Management was evaluating refinancing and capital-structure alternatives and stated it expected liquidity to cover anticipated needs, including the proposed merger; refinancing was not assured.
- Interest-rate swaps covering $62.5 million of debt expired February 12, 2016, leaving all $125.0 million exposed to floating rates. The filing estimates a 1-percentage-point rate increase would add about $1.25 million to annual interest expense.
- Cash distributions paid during calendar 2015 totaled $1.25 per unit, reflecting distributions for earlier quarters. The fourth-quarter 2015 distribution of $0.27 per unit was declared February 17, 2016, payable March 7; total distributions attributable to 2015 were $1.11 per unit. Distributions are discretionary, subject to available cash, debt covenants and merger-agreement limits.
- Management estimated 2016 maintenance capital spending of $7–$10 million and planned the next full facility turnaround for the second half of 2017. No specific 2016 earnings or distribution guidance was provided.
- Management expected additional North American fertilizer capacity to begin coming online in 2016, potentially pressuring pricing, while citing longer-term demand fundamentals as supportive.
Merger, risks and other notable matters
- The proposed acquisition of Rentech Nitrogen was announced in August 2015. Consideration is 1.04 CVR Partners units plus $2.57 cash per eligible Rentech unit; approximately 40.7 million new CVR units were expected to be issued. Rentech unitholders approved the merger on February 15, 2016, but other conditions remained, including sale or spin-off of Rentech’s Pasadena facility and regulatory and other approvals.
- Rentech had $320 million of 6.5% notes due 2021 subject to a change-of-control offer at 101% of principal plus accrued interest after closing. CVR Partners said it did not then have funds available for that offer and was considering financing alternatives. A separate sponsor commitment of up to $150 million was contemplated for specified merger funding needs.
- Merger litigation had challenged the transaction and disclosures. The parties signed a proposed settlement memorandum in February 2016, subject to documentation and court approval; no liability was accrued for the lawsuits.
- Key operating risks include volatile fertilizer prices, seasonality and weather, predominantly fixed operating costs, a single manufacturing site, dependence on Linde and electricity suppliers, and reliance on CVR Refining for most pet coke. The top five UAN customers represented 40% of fertilizer sales in 2015; two customers represented approximately 14% and 10% of net sales.
- Environmental, safety, hazardous-materials, transportation and potential plant-interruption exposures could require significant costs. The filing states management believed environmental accruals were adequate and that pending proceedings were not expected to have a material adverse effect; outcomes remain uncertain.
- CVR Energy affiliates own approximately 53% of units, control the general partner and provide management and other services. Affiliate arrangements were not negotiated at arm’s length, and the filing describes potential conflicts of interest.
- Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Investor verification priorities
- Confirm the status and final terms of the Rentech merger, including Pasadena disposition, required approvals, litigation settlement and resulting unit dilution.
- Verify refinancing of the April 2016 debt maturity, the terms and duration of any sponsor-backed borrowing, and funding for the Rentech notes’ change-of-control offer.
- Track fertilizer pricing, new industry capacity, UAN netbacks, customer concentration and the implications of lower natural-gas prices for competitors.
- Assess plant reliability after the 2015 turnaround and Linde outages, upcoming maintenance needs, and 2016 capital spending against the stated estimate.
- Reconcile available cash for distribution with GAAP operating cash flow and confirm future distributions, which are discretionary and may vary or be suspended.