CVR PARTNERS, LP quarterly report, Q3 FY2020

CVR Partners, LP — Q3 2020 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2020. CVR Partners produces and sells wholesale nitrogen fertilizer, principally ammonia and UAN, from facilities in Coffeyville, Kansas, and East Dubuque, Illinois.

Financial performance

Metric	Q3 2020	Q3 2019	Nine months 2020	Nine months 2019
Net sales	$79.5 million	$88.6 million	$259.7 million	$318.1 million
Operating income (loss)	$(3.1) million	$(7.5) million	$(33.8) million	$36.5 million
Net income (loss)	$(19.0) million	$(23.0) million	$(81.3) million	$(10.1) million
Loss per common unit	$(0.17)	$(0.20)	$(0.72)	$(0.09)
Operating cash flow	$22.4 million	$34.0 million	$29.2 million	$68.7 million

Q3 cost of sales was $78.3 million, implying gross profit of approximately $1.2 million, or about 1.5% of sales. Nine-month gross profit was $21.3 million, or about 8.2% of sales.
Q3 non-GAAP EBITDA was $15.0 million, versus $11.1 million a year earlier; nine-month EBITDA was $23.3 million, versus $96.7 million. The partnership stopped presenting Adjusted EBITDA in 2020.
For the nine months, investing cash outflow was $15.1 million, including $15.2 million of capital expenditures; financing cash outflow was $2.8 million. Cash increased by $11.3 million to $48.3 million.
At September 30, cash was $48.3 million and stated available ABL capacity was $25.5 million, for total liquidity of $73.8 million. Cash included $9.8 million from customer advances.
Total debt, including the current portion, was $635.2 million: $645.0 million of 9.25% senior secured notes due June 2023, plus $2.2 million of 6.50% notes classified as current and unamortized discounts and issuance costs. No ABL borrowings were outstanding; the partnership reported compliance with debt covenants.

Changes and operating drivers

Q3 sales fell $9.1 million year over year. Lower product pricing reduced revenue by $20.6 million, partly offset by $11.6 million from higher volumes. Management attributed weaker pricing principally to competitive pressure, market and trade-flow shifts, and lower natural gas and corn prices.
Nine-month sales fell $58.4 million: unfavorable pricing reduced revenue by $76.8 million, partly offset by $20.1 million from higher volumes. UAN and ammonia prices were weaker.
Q3 operating and net losses improved by $4.4 million and $4.0 million, respectively, as lower operating and allocated costs more than offset lower sales. The nine-month comparison deteriorated sharply, including a $41.0 million non-cash goodwill impairment recorded in Q2 2020.
Production volumes were higher for Q3: gross ammonia production was 215,000 tons versus 196,000; UAN production was 330,000 tons versus 318,000. Management reported a combined facility utilization rate of 98% for Q3.
Direct operating expenses declined year over year, partly because East Dubuque had a major turnaround in 2019 but not in 2020, and because personnel and utility costs were lower. SG&A and other costs also declined.
No distributions were declared for Q3 2020; none were declared or paid for the fourth quarter of 2019 or first two quarters of 2020. Available cash for distribution was negative $5.9 million for Q3 and negative $11.8 million year to date.

Outlook, risks and unusual items

Management expected volatile conditions through the remainder of 2020 and into 2021, citing COVID-19 uncertainty, fertilizer prices, feedstock availability and cost, and demand. It said the duration and financial impact were not predictable.
Management anticipated strong fall ammonia application demand and good spring 2021 fertilizer demand based on crop conditions, higher crop prices, and farmer economics, while warning that higher natural gas prices could raise production costs.
Management said cash from operations, existing cash, and potential ABL borrowings were expected to cover anticipated operating cash needs for at least 12 months. This outlook depends on operating performance and market conditions.
Management estimated full-year 2020 capital expenditures of $18 million to $21 million, including $13 million to $15 million for maintenance. Coffeyville’s turnaround was deferred from fall 2020 to summer 2021; East Dubuque’s was deferred from 2021 to 2022.
The ABL agreement was amended in September 2020, reducing commitments to $35 million and extending maturity to September 2022. The Messer supply agreement provides for a dedicated oxygen storage vessel; the partnership expected a financing lease of $20 million to $25 million when it enters service.
The common units remained below the NYSE’s $1 minimum average-price requirement as of September 30, with a January 1, 2021 deadline to regain compliance. After quarter-end, the partnership announced a 1-for-10 reverse unit split effective November 23, 2020. It expected the split to help restore compliance, but gave no assurance of success.
Other key risks include seasonal and commodity-driven demand and pricing, potential supply-chain and workforce disruption, dependence on third-party inputs and transportation, operational outages, and possible impairment of long-lived assets. The filing reported no material financial impact from COVID-related contractual nonperformance as of September 30 and no material change in disclosed contingencies.

Investor verification points

Verify realized ammonia and UAN prices, customer demand, and feedstock costs as market conditions evolve.
Monitor liquidity, customer prepayments, operating cash flow, debt service, and covenant compliance against the $635.2 million total debt load.
Confirm execution and costs of the deferred turnarounds and whether capital spending remains within management’s estimates.
Track the reverse split’s effect on NYSE listing compliance, unit trading, and access to capital.
Assess whether distributions can resume; the filing reports no 2020 distributions and negative available cash for distribution through Q3.
Review the assumptions behind the $41.0 million goodwill impairment and monitor for further asset impairment indicators.