CVR Partners, LP — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. CVR Partners produces and sells wholesale nitrogen fertilizer, principally UAN and ammonia. Results include the East Dubuque facility from April 1, 2016, following its acquisition; comparisons with 2015 are therefore not fully like-for-like.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $78.5 million | $49.3 million | $271.4 million | $223.2 million |
| Operating income (loss) | $2.4 million | $(11.8) million | $25.7 million | $48.4 million |
| Net income (loss) | $(13.4) million | $(13.5) million | $(12.4) million | $43.3 million |
| Adjusted EBITDA | $17.4 million | $3.8 million | $74.4 million | $78.3 million |
| Operating cash flow | Not separately presented here | Not separately presented here | $47.5 million | $57.1 million |
| Available cash for distribution | $0.4 million | $(3.0) million | $50.8 million | $58.0 million |
The filing does not present operating or net margins as headline metrics. Q3 interest expense and other financing costs were $15.6 million, versus $1.7 million a year earlier; nine-month expense was $32.8 million versus $5.1 million. The partnership reported a $5.1 million nine-month loss on extinguishment of debt.
At September 30, cash was $65.3 million, working capital was $78.2 million, and total assets were $1.327 billion. Debt principal was $649.2 million ($624.5 million net of discount and issuance costs). The $50 million ABL revolver had $48 million available and no borrowings outstanding. Management said cash, operating cash flow and potential ABL borrowings were expected to cover anticipated commitments for at least 12 months.
Nine-month capital expenditures were $18.3 million: $8.3 million maintenance and $10.0 million growth. Full-year 2016 capital spending was estimated at $25.3 million. Cash distributions paid during 2016 through the June-quarter distribution totaled $69.6 million, or $0.71 per unit; the board retains discretion to change or suspend distributions.
Material changes versus prior periods
- Revenue rose in Q3 and year to date largely because East Dubuque was consolidated, not because pricing strengthened. Excluding the acquisition, management said net sales declined $3.1 million in Q3 and $44.2 million for nine months.
- Product pricing at gate fell: Q3 UAN was $154 per ton versus $227, and ammonia was $345 versus $478. Nine-month UAN was $187 versus $256, and ammonia was $385 versus $529. Lower market prices weighed on results; higher volumes and the acquired facility partly offset the effect.
- Q3 operating results improved from a prior-year operating loss, which included Coffeyville turnaround and Linde air-separation-unit downtime. Nine-month operating income declined, while net income shifted to a loss, in part because of higher depreciation and sharply higher financing costs.
- The April 1 East Dubuque merger added a second fertilizer facility and materially changed the balance sheet. The partnership issued approximately 40.2 million common units and paid approximately $99.2 million cash consideration; total purchase-price allocation was $439.5 million, including assumed debt. Common units outstanding increased to 113.3 million from 73.1 million at year-end 2015.
Outlook, risks and unusual items
- In June, the partnership issued $645 million of 9.25% senior secured notes due 2023 and used proceeds to refinance debt and repurchase most of the 6.50% 2021 notes. $4.2 million principal of the 2021 notes remained. The notes and ABL facility impose covenants, including restrictions affecting distributions; the partnership reported compliance at quarter-end.
- Management highlighted volatile and seasonal fertilizer prices, supply and transportation dependencies, feedstock and utility costs, operating reliability, environmental obligations, and risks to distributions. The company does not use commodity derivatives to hedge fertilizer or natural-gas price risk.
- The East Dubuque facility completed a 28-day major turnaround in Q2 2016, with approximately $6.6 million of expense. The next Coffeyville turnaround was planned for the second half of 2017, expected to last about 15 days; East Dubuque’s next was planned for 2018.
- Weak fertilizer pricing and lower cash-flow forecasts triggered an interim Coffeyville goodwill test. No impairment was recorded; estimated fair value exceeded carrying value by about 17%. Further declines in forecast fertilizer prices could reduce that cushion and lead to impairment.
- Other notable items include $3.1 million of nine-month merger expenses and a $2.1 million Q3 business-interruption insurance recovery included in Adjusted EBITDA reconciliation. The merger-related class actions were settled, subject to a pending attorneys’ fee petition; management did not expect a material adverse effect. No material new environmental developments were reported.
- On October 17, 2016, the partnership and the East Dubuque union representing about 60% of facility employees agreed to a new three-year collective bargaining agreement. No formal earnings or distribution guidance was provided.
Important facts for investors to verify
- Whether fertilizer prices, especially UAN pricing, and facility production and sales volumes recover or weaken further.
- Whether operating cash generation can support debt service, planned capital spending, turnaround costs and future distributions under the debt covenants.
- The sensitivity of the Coffeyville goodwill valuation to fertilizer-price assumptions, given the 17% estimated fair-value cushion.
- Integration and internal-control progress for East Dubuque; management had not completed its assessment of the acquired business’s internal controls, and the facility represented 62% of consolidated assets at quarter-end.
- Exposure to related-party arrangements, including pet-coke supply, shared services and railcar leases, and the terms and availability of third-party inputs and transportation.