CVR Partners, LP — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. CVR Partners produces wholesale nitrogen fertilizer, principally ammonia and UAN, at facilities in Coffeyville, Kansas, and East Dubuque, Illinois. The prior-year comparisons are affected by the East Dubuque acquisition, completed April 1, 2016; Q2 2016 also included the facility’s scheduled turnaround.
Financial and operating performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $97.9 million | $119.8 million | $183.2 million | $192.9 million |
| Operating income | $12.2 million | $3.7 million | $17.5 million | $23.4 million |
| Net income (loss) | $(3.4) million | $(17.0) million | $(13.8) million | $1.0 million |
| Net income (loss) per unit | $(0.03) | $(0.15) | $(0.12) | $0.01 |
| Adjusted EBITDA | $32.3 million | $29.1 million | $53.1 million | $57.0 million |
| Operating cash flow | $(23.0) million | $5.5 million | $6.9 million | $29.2 million |
Q2 operating margin was approximately 12.5%, versus 3.1% a year earlier; net margin was approximately negative 3.5%, versus negative 14.2%. For the six-month periods, operating margin was approximately 9.6% versus 12.1%, and net margin approximately negative 7.5% versus positive 0.5%.
- Q2 sales fell $21.9 million year over year, mainly from lower UAN and ammonia prices and lower UAN volume. Fertilizer net sales at gate were $87.6 million versus $103.3 million.
- Q2 operating income improved by $8.5 million despite lower sales, principally because 2016 included East Dubuque turnaround costs and purchase-accounting effects. Q2 2016 also included $5.1 million of debt-extinguishment loss and $1.2 million of merger costs, contributing to its larger net loss.
- For the six months, consolidated sales comparisons are not fully comparable because East Dubuque contributed for only part of the 2016 period. At Coffeyville, management attributed lower sales chiefly to weaker UAN pricing. Six-month interest expense rose to $31.4 million from $17.2 million, primarily because 2016 had lower debt outstanding in the first quarter.
- Q2 sales volumes were 330,900 tons of UAN and 74,600 tons of ammonia. Gate prices declined year over year: UAN to $174 per ton from $199, and ammonia to $333 from $417.
Cash, debt and distributions
- At June 30, cash was $51.7 million, including $2.9 million of customer advances; working capital was $87.9 million. Cash was $55.6 million at year-end 2016. The company reported $53.4 million of cash at July 25, 2017.
- Six-month capital expenditures were $8.6 million, including $8.4 million of maintenance spending. Cash declined $3.9 million over the six months.
- Debt consisted principally of $645.0 million of 9.25% senior secured notes due 2023, plus $2.2 million of 6.5% notes due 2021. Net debt carrying value was $624.5 million. The $50 million ABL revolver was undrawn and fully available; the company reported compliance with debt covenants.
- The fixed-charge coverage ratio under the 2023 Notes was below 1.75:1.0; $72.7 million remained in the restricted-payment basket. Available cash for distribution was zero in Q2 and $1.8 million for the six months. A $0.02-per-unit distribution related to Q1 was paid; no Q2 distribution was reported.
- Management stated that operating cash, existing cash and potential ABL borrowings should cover anticipated commitments for at least the next 12 months, while cautioning that actual cash needs and operating performance could differ.
Outlook, risks and unusual items
- Management expected the East Dubuque facility’s July 2017 turnaround to last about 14 days and cost approximately $3 million, excluding lost production. Coffeyville’s next full turnaround was planned for 2018. Estimated 2017 maintenance capital expenditures were approximately $15 million.
- The business is seasonal and exposed to fertilizer prices, grain demand, weather, natural-gas and pet-coke costs, plant reliability, transportation and supplier availability. Management noted that significant fill-season orders had not been received as of June 30; below-market pricing could trigger a goodwill impairment test. No impairment trigger was identified in Q2.
- Coffeyville experienced an outage at a third-party air separation unit and subsequent UAN operating issues, causing approximately 11 days of UAN downtime in Q2. East Dubuque’s Q2 2016 comparison included a 28-day turnaround.
- Related-party agreements with CVR Energy and affiliates govern important services and supplies and were not negotiated at arm’s length. A new 20-year hydrogen supply agreement took effect January 1, 2017; CVR Partners also entered a lease for 70 additional railcars, with deliveries and payments expected to begin in the second half of 2017.
- The filing gives no formal earnings or product-price guidance. Management said no material changes had occurred in previously disclosed risk factors, litigation developments or environmental accruals.
Important facts for investors to verify
- Subsequent fertilizer pricing, order levels and whether market conditions require a goodwill impairment assessment.
- Actual turnaround duration, cost and production impact at East Dubuque, as well as facility reliability and third-party supplier performance.
- Cash generation, working-capital movements and maintenance spending, particularly given negative Q2 operating cash flow.
- Debt covenant headroom, distribution restrictions and whether available cash supports future distributions.
- Economics and obligations under related-party supply, service and railcar arrangements.