CVR Partners, LP — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. CVR Partners produces and sells wholesale nitrogen fertilizer, principally ammonia and UAN, from facilities in Kansas and Illinois. Financial statements are unaudited.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $130.6m | $156.5m | $539.9m | $623.4m |
| Operating income (loss) | $8.1m | $(11.9)m | $184.2m | $217.9m |
| Net income (loss) | $0.7m | $(19.8)m | $162.5m | $191.4m |
| Basic and diluted earnings (loss) per unit | $0.07 | $(1.87) | $15.37 | $18.06 |
| EBITDA (non-GAAP) | $32.4m | $10.2m | $243.2m | $280.9m |
Operating margin, calculated as operating income divided by net sales, was approximately 6.2% in Q3 2023 versus (7.6)% in Q3 2022, and 34.1% for the first nine months of 2023 versus 35.0% in 2022.
Cash flow, debt and liquidity
- Net cash provided by operating activities for the first nine months was $261.4m, down from $304.2m. Investing activities provided $6.9m, including $20.7m of distributions from the 45Q-related equity-method investment; financing activities used $265.5m. Cash increased $2.8m to $89.2m.
- At September 30, cash was $89.2m and available ABL borrowing capacity was $47.9m, for reported total liquidity of $137.1m. The $50m ABL facility had no borrowings outstanding and matures September 2028.
- Long-term debt was $547.2m net of discount and issuance costs, comprising $550m of 6.125% senior secured notes due June 2028. The Partnership reported compliance with its debt covenants.
- Capital expenditures were $18.1m for the first nine months. Full-year 2023 estimates were $29m–$32m: $26m–$28m maintenance and $3m–$4m growth.
Material changes and operating drivers
- Q3 sales fell $25.9m year over year; nine-month sales fell $83.5m. Lower product pricing was the main drag, partly offset by higher volumes. Management attributed lower ammonia and UAN prices primarily to lower natural-gas prices.
- Ammonia and UAN prices declined 56% and 48%, respectively, in Q3 year over year; for the nine-month period, they declined 40% and 33%. Higher production and sales volumes reflected improved reliability after 2022 turnarounds and equipment outages.
- Consolidated ammonia utilization was 99% in Q3 and 101% for the first nine months, versus 52% and 76% in the comparable 2022 periods. The 2022 periods included planned turnarounds and unplanned downtime.
- Nine-month net income declined $29.0m year over year despite the Q3 return to profitability. Direct operating expenses fell, principally because prior-year turnaround costs were much higher; materials costs were slightly higher, reflecting increased third-party pet-coke costs partly offset by lower natural-gas costs.
- Distributions paid during the first nine months totaled $25.07 per unit. A $1.55-per-unit Q3 distribution, or approximately $16.4m, was declared October 30 and scheduled for payment November 20, 2023.
Outlook, risks and unusual items
- Management believes cash, operating cash flow and available borrowing capacity should cover anticipated needs for at least 12 months, while noting that inflation and other factors could increase capital and cash requirements. The filing gives no earnings or product-price guidance.
- The board determines distributions and may change the distribution policy, amount or timing at its discretion. Available Cash for Distribution is a non-GAAP measure and depends on board-determined reserves.
- The January 2023 45Q transaction created a 50%-owned equity-method investment and included $46m of noncash consideration, recognized as revenue over the carbon-oxide contract term as performance obligations are met. The Partnership also guarantees certain obligations; failure to meet minimum carbon-oxide supply quantities may trigger fees of up to $15m per year, subject to a $45m aggregate cap.
- An oxygen storage vessel lease at Coffeyville is expected to commence in Q1 2024 and be classified as a finance lease, with an estimated $20m–$25m capitalized when placed in service.
- About 90 East Dubuque employees represented by the UAW went on strike on October 18, 2023. The facility continued operating, and management expected normal operations during the strike.
- Key exposures include fertilizer and feedstock price volatility, weather and seasonality, plant outages and supplier dependence, labor disruption, geopolitical and trade developments, environmental and regulatory requirements, and the ability to meet 45Q requirements. Management reported no material change in previously disclosed risk factors or contingencies; it also said it had not experienced a material financial impact from current geopolitical or economic conditions through September 30.
Investor verification priorities
- Track realized ammonia and UAN prices, volumes, feedstock costs and facility reliability to assess whether higher output can offset weaker pricing.
- Monitor East Dubuque strike developments and any effect on production, shipments or labor costs.
- Verify 45Q carbon-oxide delivery milestones, cash distributions from the joint venture, and any revenue recognition or guarantee exposure.
- Assess liquidity, capital spending and the sustainability of variable distributions, including the board’s reserves and cash available for distribution.
- Confirm the timing and final cost of the Coffeyville oxygen vessel lease and the planned 2025 and 2026 facility turnarounds.