CVR Partners, LP — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. CVR Partners produces wholesale ammonia and UAN fertilizer at its Coffeyville, Kansas plant, using petroleum coke supplied largely under a long-term agreement with affiliated CVR Energy entities. Figures below are unaudited unless noted.
Financial and operating performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $75.0 million | $77.2 million | $234.7 million | $215.3 million |
| Operating income | $32.3 million | $37.5 million | $99.8 million | $93.6 million |
| Net income | $31.6 million | $36.3 million | $96.9 million | $91.2 million |
| Net income per unit, basic and diluted | $0.43 | $0.50 | $1.32 | $0.92 |
| Adjusted EBITDA | $39.0 million | $43.3 million | $121.1 million | $114.0 million |
| Operating cash flow | $44.9 million | $57.7 million | $124.8 million | $107.9 million |
| Capital expenditures | $18.2 million | $4.5 million | $57.4 million | $10.5 million |
Q3 operating margin was approximately 43.1%, compared with 48.6% a year earlier; nine-month operating margin was approximately 42.5%, versus 43.5%. Q3 sales fell 2.8% as lower hydrogen sales and lower UAN volume and pricing outweighed higher ammonia sales. Nine-month sales rose 9.0%, primarily on stronger ammonia and UAN prices, partly offset by lower UAN volumes and hydrogen sales. Nine-month earnings growth also reflected fertilizer pricing; comparisons were affected by $3.4 million of business-interruption insurance recovery recorded in 2011.
Q3 ammonia and UAN production was 104,161 and 181,861 tons, respectively. Nine-month production was 302,339 and 516,465 tons. Nine-month on-stream rates declined year over year for gasification, ammonia and UAN units, with management attributing the lower rates to repair-related downtime. Q3 rates remained approximately 97%–99%.
Balance sheet, liquidity and distributions
- At September 30, cash and cash equivalents were $180.3 million, including $10.4 million in customer advances; working capital was $160.9 million. At December 31, 2011, cash was $237.0 million and working capital was $229.4 million. Cash at October 31, 2012 was $172.0 million.
- Total debt was $125.0 million, unchanged from year-end, consisting of a term loan due April 2016. The $25.0 million revolving facility was undrawn; up to a further $50.0 million incremental facility is uncommitted. The partnership reported compliance with its debt covenants.
- Nine-month cash from operations of $124.8 million was more than offset by $56.4 million of investing outflow and $125.1 million of financing outflow, principally distributions. Cash declined $56.7 million over the period.
- Cash distributions paid for the first three 2012 distribution periods totaled $125.0 million, or $1.711 per unit. A third-quarter distribution of $0.496 per unit was declared October 26, payable November 14 to holders of record November 7.
Outlook, material developments and risks
- Management expected 2012 capital expenditures of $90 million–$105 million, including $75 million–$80 million for the UAN expansion. The expansion was expected to add 400,000 tons of annual UAN capacity, cost approximately $125 million in total, and be completed by January 1, 2013. Approximately $92.8 million had been spent through September 30.
- The scheduled plant turnaround began October 3; ammonia production resumed October 23 and UAN production October 25. Management estimated approximately $4.9 million in turnaround expense, including $0.2 million recognized through September 30, and warned of lost revenue and expense impact in Q4.
- Management said operating cash and remaining IPO proceeds and credit availability were expected to fund anticipated commitments and planned capital spending for the next 12 months, while cautioning that cash needs could exceed estimates. The distribution policy is discretionary, subject to available cash, reserves and debt covenants; it may be changed or discontinued.
- Material exposures include seasonal and volatile fertilizer pricing and demand, weather and crop economics, plant reliability, dependence on CVR Energy for much of the pet coke supply, transportation and other suppliers, and high fixed operating costs. The partnership does not use derivatives to hedge fertilizer or pet coke prices. Half of the $125 million term debt remained exposed to floating rates; management estimated a 1% rate increase would add about $625,000 to annual interest cost.
- CRNF continued to dispute Kansas property-tax classification and valuation. Taxes had been accrued and paid at elevated rates; success in appeals could result in refunds, while an unfavorable outcome could sustain higher taxes. EPA inquiries relating to prior releases had not resulted in formal claims, and no related liability was accrued; management believes environmental accruals are adequate but notes potential future adverse effects.
- CVR Energy’s majority ownership changed in May 2012 after Icahn-related parties acquired control; those parties owned approximately 82% of CVR Energy at quarter-end. CVR Energy affiliates owned approximately 70% of CVR Partners’ units. Related-party services, feedstock and other arrangements are significant. CRLLC’s effective shelf registration permits it to offer up to 50.92 million units.
- Contractual obligations disclosed in the MD&A totaled approximately $481.4 million, including $125.0 million of debt, $28.4 million of operating leases, $311.1 million of purchase obligations and $16.9 million of estimated interest payments. A substantial portion of purchase commitments is with affiliates and extends beyond 2016.
Important facts for investors to verify
- Whether the UAN expansion was completed on schedule and within the stated cost estimate, and its effect on production and cash generation.
- Post-turnaround operating reliability, sales volumes and the extent of Q4 revenue and expense effects.
- Fertilizer pricing and margins, including whether higher product prices can offset feedstock, freight, operating and property-tax costs.
- Cash available for distribution after capital spending, reserves and covenant requirements; distributions are not guaranteed.
- Progress and potential financial impact of the property-tax appeals and any developments in EPA inquiries.
- Related-party supply, service and governance arrangements, and the effect of CVR Energy’s change in control or any unit sales by CRLLC.