CVR Partners, LP — 2012 Form 10-K Summary
Business context and reporting period
CVR Partners is a nitrogen-fertilizer limited partnership operating a single plant in Coffeyville, Kansas. It makes ammonia and UAN using petroleum coke gasification; most ammonia is upgraded to UAN. This annual report covers the year ended December 31, 2012, with quarterly results also reported. CVR Energy indirectly owned about 70% of the Partnership’s common units.
Financial and operating performance
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $302.3 million | $302.9 million |
| Operating income | $115.8 million | $136.2 million |
| Net income | $112.2 million | $132.4 million |
| Basic / diluted earnings per unit | $1.54 / $1.53 | $1.48 / $1.48* |
| EBITDA / Adjusted EBITDA | $136.6 million / $148.2 million | $155.3 million / $162.6 million |
| Cash from operations | $133.5 million | $139.8 million |
| Capital expenditures | $82.2 million | $19.1 million |
| Cash and cash equivalents at year-end | $127.8 million | $237.0 million |
| Working capital at year-end | $116.6 million | $229.4 million |
| Total debt at year-end | $125.0 million | $125.0 million |
*2011 per-unit figures cover only the period following the April 2011 IPO. Approximate operating margin was 38.3% in 2012 versus 45.0% in 2011; net margin was 37.1% versus 43.7%.
- 2012 production was 390,017 tons of ammonia and 643,813 tons of UAN. Sales totaled 771,300 tons, down from 822,100 tons in 2011.
- Plant-gate prices rose: ammonia to $613 per ton from $579, and UAN to $303 from $284. UAN sales volume fell 9.3%; ammonia sales volume increased 13.4%.
- Gasifier, ammonia, and UAN on-stream rates were 92.6%, 91.1%, and 86.4%, respectively, versus 99.0%, 97.7%, and 95.5% in 2011.
- The $109.1 million net cash decline reflected $82.2 million of capital expenditures and $161.2 million of distributions, partly offset by operating cash generation.
Material changes versus the prior comparable period
- Net income fell $20.2 million, while operating income fell $20.4 million. Higher fertilizer prices and ammonia sales partly offset lower UAN and hydrogen volumes and higher costs.
- Operating expenses increased, including $4.8 million for the 2012 scheduled turnaround, higher labor and utilities, and lower insurance reimbursements. 2011 also included a $3.4 million business-interruption insurance recovery.
- Capital spending rose sharply, primarily for the UAN expansion. The expansion was completed in February 2013 and is expected to reach full operating rates in March 2013, adding 400,000 tons of annual UAN capacity—about 50%.
- Cash and working capital declined substantially from year-end 2011, while term debt remained unchanged.
- Montgomery County and the Partnership settled property-tax disputes for 2009–2012 in February 2013. The settlement sets a $35 million plant appraisal for 2013–2016, expected to reduce property taxes by about $10.5 million annually at current mill rates; treatment of the 2008 appeal remains unresolved.
Outlook, risks, contingencies and unusual items
- Management expected cash from operations and available credit to cover anticipated commitments and planned capital spending over the next 12 months. Estimated 2013 capital spending was $49.3 million, including $7.8 million of maintenance spending. These are estimates, not guidance on earnings or distributions.
- The $125 million term loan matures in April 2016; the $25 million revolver was undrawn at year-end. The Partnership reported covenant compliance at December 31, 2012. Distributions depend on covenant compliance and board decisions; the partnership agreement does not require distributions.
- The distribution policy was amended beginning in first-quarter 2013: available cash is calculated from Adjusted EBITDA, less specified spending, debt service, turnaround expense and reserves. The fourth-quarter 2012 distribution was $0.192 per unit, paid in February 2013. Reported total distributions paid during 2012 were $2.207 per unit, including the distribution for fourth-quarter 2011; distributions based on 2012 available cash were $1.81 per unit.
- Key exposures include volatile global fertilizer prices, seasonal demand and weather, a single production site, fixed operating costs, equipment downtime, dependence on CVR Refining for most pet coke and on third parties for utilities and transportation, and concentration among customers. Natural gas prices were low, which may improve competitors’ relative costs.
- Environmental and safety regulation, hazardous-material releases, climate rules, and permitting could increase costs or constrain operations. EPA inspections and information requests followed prior releases; the filing states that no formal EPA claims had been made and no liability had been accrued for those investigations.
- The Partnership relies on related-party supply, service and other agreements with CVR affiliates. Affiliate-related services and allocations, governance conflicts, CVR Energy’s controlling ownership, and potential changes in affiliate credit or performance warrant attention.
- The 2010 UAN vessel rupture generated about $11.7 million of gross repair and related costs; approximately $8.0 million of property-damage proceeds and $3.4 million of business-interruption proceeds were received. Claims were closed by year-end 2012. The 2012 turnaround cost about $4.8 million; the next was scheduled for fourth-quarter 2014.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective as of year-end.
Important facts for investors to verify
- Whether the UAN expansion achieves planned full operating rates, incremental output, margins and returns, and whether remaining 2013 expansion spending stays within estimates.
- How the property-tax settlement is implemented, including the expected savings, tax exemption application for the expansion, and outcome of the 2008 appeal.
- Current distribution capacity under the amended Adjusted EBITDA policy, credit-facility covenants and seasonal working-capital needs.
- Actual operating reliability, turnaround impacts, product prices and volumes, and the effect of low natural-gas prices on competitive fertilizer supply.
- Continuity and terms of affiliate pet-coke supply and shared services, customer concentration, and any material regulatory, environmental or litigation developments.