CVR Partners, LP — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; filed May 2, 2014. CVR Partners produces and wholesales UAN and ammonia fertilizer at its Coffeyville, Kansas facility. CVR Energy indirectly owns the general partner and approximately 53% of the common units.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Net sales | $80.3 million | $81.4 million |
| Operating income | $23.1 million; 28.8% margin | $36.8 million; 45.2% margin |
| Net income | $21.5 million; $0.29 per unit | $35.6 million; $0.49 per unit |
| Adjusted EBITDA | $29.9 million | $43.8 million |
| Operating cash flow | $35.6 million | $57.5 million |
| Capital expenditures | $3.4 million | $18.1 million |
| Cash and cash equivalents | $85.9 million | $85.1 million at Dec. 31, 2013 |
| Working capital | $102.3 million | $108.4 million at Dec. 31, 2013 |
| Total debt | $125.0 million | $125.0 million at Dec. 31, 2013 |
Net cash used in financing was $31.4 million, primarily distributions; cash increased by $0.8 million during the quarter. Cash included $10.0 million of customer advances. The $125 million term loan matures in April 2016; the $25 million revolving facility was undrawn. The partnership reported compliance with debt covenants. Its $62.5 million interest-rate swap notional hedged half the term debt; reported effective borrowing rate was approximately 4.56%.
Material changes and operating drivers
- Net income declined $14.1 million year over year, and operating income fell $13.7 million. Total sales were nearly flat, but product mix, lower fertilizer prices and higher costs pressured results.
- UAN sales volume rose to 254,700 tons from 194,100, reflecting the expanded plant operating for the full quarter. UAN plant-gate price fell 14.2% to $253 per ton; ammonia plant-gate price fell 27.8% to $479 per ton.
- Ammonia sales volume dropped to 5,400 tons from 27,600, as more ammonia was upgraded into UAN. The partnership also purchased approximately 22,900 tons of ammonia, contributing to higher third-party product costs.
- Cost of product sold increased $11.1 million, mainly from purchased ammonia, railcar repairs and inspections, and freight. Direct operating expenses rose $1.6 million, primarily from utilities and higher amortization. SG&A declined $1.0 million.
- Operating cash flow was lower than the prior-year quarter, partly because deferred-revenue growth was $9.3 million versus $27.6 million. The 2014 increase in deferred revenue represented customer prepayments for future product deliveries.
Outlook, risks and other notable items
- Management stated that cash from operations, remaining IPO proceeds and revolving-credit availability were expected to be adequate for anticipated commitments and planned capital expenditures over the next 12 months; actual cash generation and spending may differ.
- 2014 maintenance capital spending was estimated at $9–$11 million. A second-quarter shutdown was planned for a waste-heat boiler installation and pressure-swing-adsorption upgrade, estimated to cost $5–$7 million and potentially add 7,000–9,000 annual ammonia tons. The next full turnaround was planned for 2015.
- The board declared a Q1 2014 distribution of $0.38 per unit, or $27.8 million, payable May 19, 2014. The prior-quarter distribution of $0.43 per unit was paid in March. Distributions depend on available cash, board determination and compliance with debt covenants.
- Key exposures include fertilizer price and seasonal demand volatility, weather and crop economics, plant reliability and downtime, reliance on pet coke and related-party arrangements with CVR affiliates, customer and supplier concentration, environmental regulation, and distribution variability. The partnership does not hedge commodity prices.
- Long-term commitments included $166.8 million of unconditional purchase obligations and $23.5 million of operating lease payments. The filing reported no material new litigation developments or material changes to previously disclosed risk factors; management noted environmental compliance could increase costs.
- Revenue included $5.9 million of hydrogen sales to an affiliate, compared with approximately $29,000 in Q1 2013. Management cautioned that affiliate-allocated costs may not represent costs as an independent entity.
Most important facts for investors to verify
- Whether higher UAN volumes can offset continued weakness in fertilizer prices and lower ammonia sales.
- Whether operating cash flow and customer advances support distributions after capital spending and debt service.
- Execution, cost and production benefits of the planned 2014 plant upgrades and timing of the 2015 turnaround.
- Terms and economics of related-party feedstock, services and hydrogen transactions, including ongoing reliance on CVR Refining for pet coke.
- Debt-covenant headroom, April 2016 maturity and the effect of interest-rate changes on the unhedged portion of borrowings.