CVR Partners, LP — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed February 23, 2012. The partnership operates a single nitrogen fertilizer facility in Coffeyville, Kansas, producing ammonia and UAN from petroleum coke. Its 2011 results include periods before and after its April 2011 IPO, so comparisons and per-unit results require care.
Financial and operating performance
| Metric | 2011 | 2010 |
|---|---|---|
| Net sales | $302.9 million | $180.5 million |
| Operating income | $136.2 million | $20.4 million |
| Net income | $132.4 million | $33.3 million |
| Adjusted EBITDA (non-GAAP) | $162.6 million | $52.6 million |
| Cash from operating activities | $139.9 million | $75.9 million |
| Capital expenditures | $19.1 million | $10.1 million |
| Cash and cash equivalents at year-end | $237.0 million | $42.7 million |
| Total debt at year-end | $125.0 million | None reported |
Operating margin was approximately 45.0% in 2011 versus 11.3% in 2010; net margin was approximately 43.7% versus 18.5%. Year-end working capital was $229.4 million, compared with $27.1 million in 2010. The partnership had $25.0 million available under its revolver, which was undrawn at year-end.
For fourth quarter 2011, net sales were $87.6 million, operating income $42.6 million and net income $41.2 million. Fourth quarter 2010 net sales were $39.4 million and net loss was $6.2 million.
Ammonia and UAN plant-gate prices rose to $579 and $284 per ton, respectively, from $361 and $179 in 2010. UAN sales volume increased 22.1% to 709,300 tons, while ammonia sales volume fell 31.5% to 112,800 tons. Full-year production was 411,200 tons of ammonia and 714,100 tons of UAN; approximately 72% of ammonia production was upgraded to UAN.
Material changes versus prior periods
- Sales increased $122.4 million year over year, mainly from higher fertilizer prices and UAN volumes. The 2010 comparison was depressed by a scheduled turnaround and a UAN vessel rupture that disrupted production.
- Higher prices and stronger operating reliability drove the increase in operating income. 2011 gasifier, ammonia and UAN on-stream factors were 99.0%, 97.7% and 95.5%, respectively, versus 89.0%, 87.7% and 80.8% in 2010.
- Pet coke cost averaged $33 per ton in 2011 versus $17 in 2010. Direct operating expenses were broadly flat, while cost of product sold increased with volume, freight and feedstock costs.
- Unlike 2010, 2011 included $4.0 million of interest and financing costs, while 2010 included $13.1 million of interest income from an affiliate balance that was distributed in December 2010.
- The April 2011 IPO raised approximately $324.2 million net. Proceeds supported distributions to the former parent, extinguishment of incentive distribution rights, repayment of offering-related costs and planned expansion funding. The partnership also initiated a $125 million term loan.
Outlook, risks and unusual items
- Expansion and spending: A two-year UAN expansion is intended to add 400,000 tons of annual capacity, about 50%, at an estimated total cost of $135 million. Completion was expected in first-quarter 2013. Estimated 2012 spending was $114.8 million, including $85.0 million for the expansion and $5.0 million for a scheduled turnaround; estimates may change.
- Distributions: Management’s stated policy is to distribute available cash, but the partnership agreement does not require distributions and the board may change the policy. The fourth-quarter 2011 distribution was $0.588 per unit, paid February 14, 2012. Distributions are exposed to commodity prices, seasonality, working-capital needs, capital spending and debt covenants.
- Concentration and related parties: CVR Energy indirectly owned about 70% of units and the general partner, supplied most pet coke, and provided management and corporate services. The services agreement could be terminated on notice beginning April 2012. CVR Energy announced an intention to sell part of its unit holdings; the amount and timing were uncertain. The filing also disclosed a tender offer and proxy contest involving CVR Energy.
- Operating and market risks: The business depends on one facility, agricultural demand and weather, volatile global fertilizer prices, third-party utilities and transportation, and a largely fixed-cost operating base. The partnership did not use commodity derivatives to hedge fertilizer or pet coke prices.
- Property tax dispute: Kansas property taxes increased after an abatement expired. The 2011 expense was $11.4 million. A January 2012 ruling upheld the county’s classification of the plant; the partnership planned to appeal and had separate valuation protests pending. An unfavorable outcome could leave taxes at elevated levels; a favorable reclassification could produce refunds.
- Other unusual items: The 2010 vessel rupture generated approximately $11.4 million of gross repair and related costs; $7.0 million of property-damage insurance proceeds had been received by year-end 2011, and $3.4 million of business-interruption proceeds was recognized in 2011. Environmental investigations had not resulted in formal EPA claims as disclosed; the filing states no material pending legal proceeding was expected to adversely affect the business.
- Debt and tax structure: The $125 million term loan matures in April 2016, with no scheduled amortization, and is subject to leverage and interest-coverage covenants. Swaps fixed the LIBOR component on $62.5 million of debt at approximately 1.96% through February 2016, plus the applicable loan margin. Partnership tax treatment and possible state-level entity taxes remain risks.
Important facts for investors to verify
- Whether fertilizer prices, margins and cash generation remain strong after the exceptional 2011 price and operating recovery.
- Expansion progress, final cost, timing, expected incremental UAN output and the economics of UAN relative to ammonia.
- Resolution of the Kansas property-tax appeal and valuation protests, including potential refunds or continued elevated expense.
- Distribution capacity after maintenance needs, the 2012 turnaround, expansion spending and compliance with credit-facility covenants.
- Terms and effects of any CVR Energy unit sale, ownership changes, tender offer or proxy contest, and continuity of management and pet coke supply arrangements.
- Customer concentration, supplier reliability, environmental exposures and whether insurance coverage remains adequate and is renewed on acceptable terms.
- Comparability of reported results: pre-IPO results, affiliate allocations and non-GAAP Adjusted EBITDA are not directly equivalent to standalone post-IPO results or GAAP net income.