CVR Partners, LP — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited. CVR Partners produces wholesale ammonia and UAN fertilizer at its Coffeyville, Kansas facility. CVR Energy indirectly owns approximately 70% of its common units and controls its general partner.
Financial and operating results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $81.4 million | $78.3 million | Up 4.0% |
| Operating income | $36.8 million | $31.4 million | Up 17.2% |
| Net income | $35.6 million | $30.2 million | Up 17.9% |
| Net income per common unit, basic and diluted | $0.49 | $0.41 | Up $0.08 |
| Operating margin, calculated as operating income divided by sales | Approximately 45.2% | Approximately 40.2% | Up approximately 5.0 percentage points |
| Net cash from operating activities | $57.5 million | $53.8 million | Up $3.7 million |
| Capital expenditures | $18.1 million | $22.3 million | Down $4.2 million |
| Cash distributions paid during quarter | $14.0 million | $42.9 million | Down $28.9 million |
- Cash and cash equivalents were $153.2 million at March 31, up from $127.8 million at year-end; working capital was $135.5 million. Cash included $28.6 million of customer advances recorded as deferred revenue. Cash was $171.6 million at April 30.
- Total debt was $125.0 million, unchanged from year-end. No borrowings were outstanding under the $25.0 million revolving facility; the term loan matures in April 2016. The Partnership reported compliance with debt covenants.
- Adjusted EBITDA, a non-GAAP measure, was $43.8 million versus $38.0 million. Management reported available cash for distribution of $44.6 million, or $0.610 per unit.
Changes versus prior year and business developments
- Net sales rose $3.1 million. Higher UAN sales volume contributed $12.2 million and higher ammonia pricing $1.4 million; lower hydrogen sales reduced revenue by $5.7 million, while lower UAN pricing and lower ammonia volume reduced it by $3.4 million and $1.4 million, respectively.
- UAN sales volume increased to 194,141 tons from 158,293 tons, reflecting the expansion coming online. UAN plant-gate price declined to $295 per ton from $313; ammonia plant-gate price increased to $663 from $613.
- The two-year UAN expansion was completed in February and reached full operating rates by quarter-end. It adds approximately 400,000 tons of annual UAN capacity, around 50%, and is intended to allow substantially all ammonia production to be upgraded to UAN. Total project spending was expected to be approximately $130 million, excluding capitalized interest; $120.2 million had been spent by March 31.
- Cost of product sold declined $2.0 million, primarily due to lower pet coke costs. Direct operating expenses fell $0.3 million, with lower property taxes partly offset by higher utilities, labor and insurance. Operating income increased $5.4 million.
- Operating cash flow benefited substantially from a $27.6 million increase in deferred revenue from customer prepayments. Higher receivables and inventories and lower payables together reduced cash flow by $11.4 million.
Outlook, distributions, risks and contingencies
- Management expected 2013 capital expenditures of $43 million to $53 million: $7 million to $9 million for maintenance and $36 million to $44 million for growth projects, including approximately $23 million for the UAN expansion. Spending estimates could change.
- The general partner declared a Q1 distribution of $0.610 per unit, $44.6 million aggregate, payable May 15, 2013. The board may change or revoke the distribution policy; distributions are subject to available cash, reserves and debt covenant conditions.
- A February 2013 settlement with Montgomery County is expected to reduce property taxes by approximately $10.5 million annually for tax years 2013–2016, based on current mill levy rates. The county also agreed to support an application for a 10-year exemption for the UAN expansion. CRNF continues its appeal concerning the 2008 property-tax reassessment.
- EPA inspections and information requests concerning past ammonia and regulated-substance releases remained unresolved; the EPA had made no formal claim and no liability was accrued for those matters. Management said environmental accruals were adequate but warned future EHS matters could adversely affect the business.
- Contractual obligations totaled $341.8 million, including $137.1 million of affiliate purchase obligations, primarily for pet coke, and $125.0 million of term debt due in 2016. The Partnership relies heavily on CVR Refining for pet coke and has significant related-party arrangements.
- Key risks include fertilizer price and demand volatility, seasonality and weather, plant downtime, dependence on suppliers and transportation, fixed operating costs, environmental regulation, related-party and control considerations, and distribution variability. Half of the $125 million floating-rate debt was not covered by swaps; management estimated a 1% rate increase would raise annual interest cost by about $625,000. The Partnership does not hedge fertilizer or pet coke commodity prices.
Important facts for investors to verify
- Whether the UAN expansion sustains expected production, reliability and sales volumes after reaching full rates.
- How much of reported operating cash flow reflects recurring operations versus customer prepayments and other working-capital movements.
- Whether fertilizer prices, especially UAN pricing, and pet coke costs support margins as expanded capacity is utilized.
- The basis and continuing effect of the property-tax settlement, including the pending 2008 appeal and UAN expansion exemption application.
- Distribution sustainability after planned capital spending, debt service, contractual commitments and any required reserves.
- Developments in EPA matters and other environmental, property-tax or litigation contingencies, for which ultimate outcomes remain uncertain.