CVR Partners, LP — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; filing dated November 1, 2013. Amounts are in U.S. dollars. The partnership produces wholesale UAN and ammonia fertilizer at its Coffeyville, Kansas facility.
Financial and operating performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $69.2 million | $75.0 million | $239.4 million | $234.7 million |
| Operating income | $21.3 million | $32.3 million | $95.2 million | $99.8 million |
| Net income | $19.7 million | $31.6 million | $90.7 million | $96.9 million |
| Net income per unit, diluted | $0.27 | $0.43 | $1.24 | $1.32 |
| Adjusted EBITDA | $28.2 million | $39.0 million | $116.1 million | $121.1 million |
| Available cash for distribution | $26.5 million | $36.2 million | $113.7 million | $118.3 million |
Operating margin was approximately 30.8% in Q3 2013 versus 43.1% in Q3 2012, and 39.8% for the first nine months versus 42.5% a year earlier. These percentages are calculated from reported sales and operating income.
- Revenue drivers: Q3 sales declined $5.8 million, as lower ammonia volumes and lower ammonia and UAN prices outweighed higher UAN volumes. For the nine-month period, sales rose $4.7 million, mainly from higher UAN volumes following the expansion, partly offset by lower ammonia volumes and UAN prices.
- Production and pricing: Nine-month UAN sales volume increased to 638,100 tons from 510,500; UAN plant-gate price averaged $295 per ton versus $311. Q3 UAN plant-gate price averaged $259 per ton versus $290. The partnership upgraded 90% of ammonia production to UAN in the first nine months.
- Cash flow: Nine-month operating cash flow was $96.5 million, down from $124.8 million. Capital expenditures were $35.8 million, compared with $56.4 million. Cash distributions were $101.2 million; cash declined $40.7 million to $87.2 million.
- Liquidity and debt: Working capital was $104.3 million at September 30, versus $116.6 million at year-end 2012. Debt was $125.0 million, with no revolver borrowings and $25.0 million of revolving capacity. The term loan matures in April 2016; the partnership reported covenant compliance.
Material changes and management commentary
- The UAN expansion was completed in February 2013, increasing annual UAN capacity by approximately 400,000 tons (about 50%). Management reported the expanded facility was running at full rates by the end of Q1 and expects to upgrade substantially all ammonia to UAN when economic.
- Q3 operating income fell $11.0 million. Higher direct operating costs, product costs and depreciation, together with lower sales, outweighed lower SG&A. For the nine months, operating income fell $4.6 million as increased operating and product costs and depreciation exceeded sales growth and lower SG&A.
- The gasifier, ammonia and UAN facilities were shut down for seven days in July to replace damaged catalyst. Related costs were approximately $1.6 million, including $1.0 million of accelerated catalyst amortization and $0.6 million of repairs; approximately $1.1 million was recognized in Q3. Management also cited unplanned air separation unit outages and weather-related downtime during the year.
- Property-tax settlement terms lower taxes by about $10.5 million annually for 2013–2016, based on current mill levy rates. The separate appeal concerning 2008 property classification remained pending before the Kansas Supreme Court.
Outlook, distributions, risks and contingencies
- Management expected 2013 capital expenditures of $40–$48 million, including $5 million for maintenance and $35–$43 million for growth projects. The estimate included approximately $25 million already spent on the UAN expansion. A UAN terminal project was expected to cost about $2 million and be operational by year-end.
- The next full plant turnaround was planned for 2015. A less extensive mid-2014 shutdown was planned to upgrade the pressure swing absorption unit, with expected additional annual ammonia production of approximately 7,000–8,000 tons.
- On October 31, the board declared a Q3 distribution of $0.36 per unit, or $26.3 million in total, payable November 18 to holders of record November 11. Distributions are discretionary, subject to available cash, board decisions and debt covenants.
- Key exposures include fertilizer price and seasonal demand volatility, plant reliability, dependence on suppliers and transportation, reliance on CVR Refining for most pet coke, customer concentration, environmental regulation, and affiliate relationships and control. The filing reported no material changes to previously disclosed risk factors.
- The EPA had made no formal claims relating to prior inspections and releases; no liability was accrued for those matters. Management considered environmental accruals adequate, but noted outcomes and future regulatory requirements remain uncertain. The filing states other litigation was not expected to materially affect results or financial condition, while acknowledging uncertainty.
- Interest-rate swaps cover $62.5 million of the $125.0 million floating-rate term debt; the partnership remains exposed on the unhedged half. Management estimated a 1% rate increase would add about $625,000 of annual interest cost.
Most important facts for investors to verify
- Whether higher UAN volumes and expansion benefits can offset weaker fertilizer prices, lower ammonia sales and operating-cost inflation.
- Actual plant reliability and the financial effects of catalyst work, air separation unit interruptions, weather downtime and planned shutdowns.
- Cash generation, working-capital needs and capital spending relative to discretionary distributions; the declared $0.36 distribution is not guaranteed to recur.
- Debt covenant headroom, refinancing plans ahead of the April 2016 maturity, and exposure to floating interest rates.
- Progress and potential financial effect of the pending 2008 property-tax appeal, and any material developments in environmental matters.
- Terms and ongoing economics of related-party arrangements, particularly pet coke supply, shared services and the partnership’s dependence on CVR-affiliated entities.