CVR Partners, LP — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 19, 2015. This is an annual report, not a standalone fourth-quarter filing. CVR Partners produces wholesale UAN and ammonia at its Coffeyville, Kansas facility, using petroleum coke as its primary feedstock. The 2013 UAN expansion increased capacity by about 50% and was operating at full rates by the end of that year’s first quarter.
Key financial and operating metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $298.7 million | $323.7 million |
| Operating income | $82.8 million | $124.9 million |
| Operating margin | 27.7% | 38.6% |
| Net income | $76.1 million | $118.6 million |
| Net margin | 25.5% | 36.6% |
| Adjusted EBITDA | $110.3 million | $152.8 million |
| Operating cash flow | $118.9 million | $129.0 million |
| Capital expenditures | $21.1 million | $43.8 million |
| Cash and cash equivalents, year-end | $79.9 million | $85.1 million |
| Working capital, year-end | $89.9 million | $108.4 million |
| Debt, year-end | $125.0 million | $125.0 million |
| UAN production / sales | 963.7 / 951.0 thousand tons | 930.6 / 904.6 thousand tons |
| UAN gate pricing | $259 per ton | $282 per ton |
| Ammonia gate pricing | $518 per ton | $643 per ton |
Operating and net margins are calculated from reported sales and income. Year-end cash included $13.6 million of customer advances. The $25 million revolving facility was undrawn at year-end, providing $25 million of availability; the $125 million term loan matures in April 2016.
Material changes versus 2013
- Sales fell $25.0 million, or about 8%, and net income declined $42.5 million, or about 36%. Lower UAN pricing reduced sales by $25.8 million; lower ammonia volumes and pricing reduced them by a further $13.7 million, partly offset by higher UAN volume.
- UAN sales volume increased about 5%, but UAN gate pricing fell about 8%. Ammonia sales volume fell about 40%, and gate pricing fell about 19%, reflecting the strategy of upgrading more ammonia into UAN.
- Cost of product sold rose $13.9 million, primarily from higher railcar distribution inspections and repairs and increased purchased-ammonia costs. Direct operating expenses rose $4.8 million. SG&A declined $3.3 million.
- Operating cash flow decreased $10.1 million. Investing cash outflow narrowed as expansion spending subsided; financing outflow largely reflected distributions.
- Available cash for distribution was $102.0 million, or $1.39 per unit, compared with $145.2 million in 2013. The partnership declared a $0.41-per-unit fourth-quarter 2014 distribution in February 2015, payable March 9, 2015. Cash distributions paid during calendar 2014 totaled $1.41 per unit, including a distribution attributable to the prior-year fourth quarter.
Fourth-quarter results and unusual items
Fourth-quarter 2014 net sales were $74.4 million and net income was $24.8 million, compared with $84.2 million and $27.9 million, respectively, in fourth-quarter 2013. Fourth-quarter 2014 results included a non-recurring $3.4 million utility-cost reimbursement recorded as a reduction in direct operating expenses. In the second quarter, planned work to install a waste-heat boiler and upgrade the pressure swing adsorption unit required several days of downtime; the upgrades are intended to improve hydrogen recovery and support additional ammonia production.
Outlook, risks and contingencies
- Management expected 2015 maintenance capital spending of approximately $10–$12 million and planned a full plant turnaround in the third quarter of 2015. Estimates may change. No full turnaround occurred in 2014 or 2013.
- The partnership’s distribution policy is discretionary, not guaranteed, and distributions may fluctuate or be eliminated. Cash generation is exposed to seasonal fertilizer demand, weather, commodity prices, plant reliability and working-capital needs. The partnership does not hedge fertilizer or pet-coke prices.
- Pet coke is mostly sourced under a long-term agreement with an affiliate of CVR Refining; more than 70% of recent requirements came from the adjacent refinery. The partnership also depends on third parties for oxygen and other inputs, electricity, and rail and truck transportation.
- Customer concentration is material: the top five UAN customers represented 42% of 2014 sales, and the two largest consolidated customers represented 17% and 10% of net sales. One customer represented 28% of year-end trade receivables.
- Risks include competition from natural-gas-based producers, lower natural-gas prices that may improve competitors’ cost positions, potential environmental or fertilizer-use regulation, hazardous-material incidents, and the single-site nature of operations. The 2015 expiration of certain pollution and casualty insurance policies was expected to be addressed through renewal or replacement.
- Related-party dependence and governance are important: CVR Energy indirectly owned about 53% of the common units and controls the general partner; CVR Energy and affiliates provide management and services and are significant counterparties. The filing notes that related-party agreements were not negotiated at arm’s length.
- A property-tax settlement reduces annual property taxes by about $10.7 million versus 2012 levels for tax years 2013–2016; the appeal concerning 2008 classification remained ongoing. Management stated that pending litigation was not expected to have a material adverse effect. The filing does not quantify a clear aggregate exposure for potential future environmental claims.
The financial-statement auditor issued an unqualified opinion, and management and the auditor reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- Whether fertilizer prices and margins recover or continue to pressure earnings, cash flow and distributions; distinguish realized prices from market indicators and forward sales.
- Completion, cost and production impact of the planned third-quarter 2015 turnaround and the benefits, if any, from the PSA and waste-heat-boiler work.
- Refinancing plans and covenant capacity before the $125 million term loan matures in April 2016, including any restrictions on distributions.
- Whether the $10–$12 million 2015 maintenance-capex estimate and other capital plans remain current.
- Developments in the property-tax appeal, environmental compliance and insurance renewals, and the adequacy of coverage for a shared-site or plant interruption event.
- Terms and economics of related-party supply, service and railcar transactions, and any changes in CVR Energy’s ownership or control.