CVR Partners, LP — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. CVR Partners produces and sells wholesale nitrogen fertilizers, principally UAN and ammonia, from facilities in Coffeyville, Kansas, and East Dubuque, Illinois.
Financial and operating performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $69.4 million | $78.5 million | $252.6 million | $271.4 million |
| Operating income (loss) | $(15.9) million | $2.4 million | $1.6 million | $25.7 million |
| Net income (loss) | $(31.6) million | $(13.4) million | $(45.4) million | $(12.4) million |
| Adjusted EBITDA | $5.0 million | $17.4 million | $58.1 million | $74.4 million |
| Available cash for distribution | $(1.2) million | $0.4 million | $0.6 million | $50.8 million |
Adjusted EBITDA and available cash for distribution are non-GAAP measures. Q3 sales fell $9.1 million year over year, mainly because of lower ammonia and UAN prices; increased ammonia sales volume partly offset the decline. Product pricing at gate was $138 per ton for UAN versus $154, and $214 per ton for ammonia versus $345.
For the nine-month comparison, results are not fully comparable: East Dubuque was acquired April 1, 2016, so 2016 includes that facility for only part of the period. The filing attributes lower Coffeyville sales largely to weaker UAN and ammonia pricing.
- Cash flow: Nine-month operating cash flow was $28.1 million, down from $47.5 million. Investing used $11.4 million, principally capital expenditures; financing used $2.3 million, primarily distributions. Cash increased $14.4 million to $70.0 million.
- Liquidity: Working capital was $73.3 million. Cash included $19.4 million of customer advances. The $50 million ABL facility had $47.6 million available and no borrowings outstanding.
- Debt and interest: Long-term debt was $647.2 million principal, or $625.2 million net of discount and issuance costs, principally $645 million of 9.25% secured notes due 2023. Nine-month interest expense was $47.1 million, versus $32.8 million.
- Distributions: $2.3 million, or $0.02 per unit, was paid in 2017 through September. No distribution was declared for the June 2017 quarter in the filing’s distribution table.
Material changes, outlook, and risks
- The East Dubuque facility’s scheduled 14-day Q3 turnaround reduced production and sales; approximately $2.5 million of turnaround expense was recorded in the quarter. It also experienced eight additional days of unplanned exchanger-related downtime. Coffeyville had earlier UAN downtime following a supplier air-separation-unit outage.
- After quarter-end, East Dubuque had a piping outage caused by refractory failure. Repair work was ongoing at filing, with a 12-day total outage expected and repair costs estimated to be immaterial.
- Management expected cash, operating cash flow, and available ABL borrowings to cover anticipated operating commitments for at least 12 months. Estimated 2017 maintenance capital expenditures were approximately $15 million; the next Coffeyville full turnaround was planned for 2018.
- The partnership reported compliance with debt covenants. Its fixed-charge coverage ratio was below 1.75:1, limiting restricted payments under the notes indenture; $72.7 million of the stated distribution basket remained available. Distributions are not guaranteed and may be changed or suspended.
- Weaker fertilizer prices triggered an interim goodwill impairment test for Coffeyville. No impairment was recorded, but estimated fair value exceeded carrying value by only about 12%; management identified fertilizer-price forecasts as the most significant valuation assumption.
- Key exposures include volatile fertilizer and natural-gas prices, seasonal demand, plant reliability and downtime, supplier and transportation dependence, environmental and safety requirements, and related-party arrangements. Management stated that related-party agreements were not negotiated at arm’s length. No new material litigation or environmental developments were reported; the filing notes future EHS matters could still adversely affect results.
Important facts for investors to verify
- Whether fertilizer prices, realized product pricing, and sales volumes recover, and how they affect margins and distributions.
- Actual duration, production impact, and costs of East Dubuque’s post-quarter outage, plus operating reliability at both facilities.
- Distribution capacity under cash generation, maintenance needs, debt service, and indenture restrictions.
- Whether Coffeyville’s goodwill valuation remains supportable if fertilizer-price forecasts weaken further.
- The effects of related-party input, service, and railcar agreements and the high coupon on the 2023 notes.