Business context and reporting period
CVR Partners, LP is a nitrogen fertilizer producer operating a pet-coke gasification plant in Coffeyville, Kansas, with ammonia and UAN as its principal products. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2011. The Partnership completed its IPO on April 13, 2011, so results include a change in ownership and capital structure; per-unit earnings are reported only for the post-IPO period.
Financial and operating performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $80.7 million | $56.3 million | $138.1 million | $94.6 million |
| Operating income | $39.3 million | $16.5 million | $56.1 million | $19.5 million |
| Net income | $38.2 million | $19.9 million | $54.9 million | $26.0 million |
| Adjusted EBITDA | $45.0 million | $20.6 million | $70.9 million | $29.3 million |
For the post-IPO period, April 13 through June 30, net income attributable to common units was $30.8 million, or $0.42 per basic and diluted unit. Q2 operating margin was approximately 48.8%, versus 29.3% a year earlier; six-month operating margin was approximately 40.6%, versus 20.6%. These comparisons reflect higher fertilizer prices and different financing and ownership circumstances.
Q2 sales rose 43% year over year, primarily on higher plant-gate prices and $6.1 million of hydrogen sales to the affiliated refinery, despite lower fertilizer sales volumes. Ammonia and UAN plant-gate prices increased 84% and 46%, respectively. Six-month sales increased 46%; UAN volume rose while ammonia volume fell. Plant reliability improved: Q2 on-stream factors were 99.3% for gasification, 98.5% for ammonia and 97.6% for UAN.
Six-month operating cash flow was $50.2 million, versus $29.6 million in 2010; investing cash outflow was $5.8 million, principally capital expenditure. Cash at June 30 was $229.8 million, working capital was $231.6 million, and total assets were $640.7 million. The cash balance included $3.0 million of customer advances. Net cash increased by $187.0 million over the six months, substantially reflecting IPO and debt proceeds, partly offset by distributions and other financing uses.
Debt at June 30 consisted of a $125 million term loan, due April 2016, with no scheduled amortization; the $25 million revolver was undrawn. The Partnership reported compliance with its debt covenants. It entered into interest-rate swaps covering $62.5 million of term debt, scheduled to commence August 12, 2011. No debt was outstanding at December 31, 2010, although the Partnership then guaranteed certain affiliate debt obligations; the IPO released it from those guarantees.
Material changes versus prior period
- Higher ammonia and UAN prices drove the principal improvement in sales and fertilizer margins. In Q2, fertilizer sales tonnage was lower year over year.
- Q2 2011 included $1.2 million of interest expense, while Q2 2010 included $3.5 million of interest income; six-month interest income fell from $6.6 million to negligible levels after the affiliate receivable was distributed in 2010.
- Six-month SG&A increased to $13.0 million from $5.5 million, including higher share-based compensation, outside services and costs associated with the public partnership. Management estimated incremental annual public-company administrative costs of approximately $3.5 million, excluding initial Sarbanes-Oxley implementation costs.
- Six-month results included a $2.9 million business-interruption insurance recovery related to the September 2010 UAN vessel rupture. The outage and recovery timing affect period comparability.
Outlook, risks and contingencies
Management expected 2011 capital expenditures of approximately $47.6 million, including $10.2 million for maintenance and $37.4 million for growth projects. The UAN expansion was expected to cost approximately $135 million in total, with about $104 million remaining at the IPO; management anticipated completion in the first quarter of 2013. The Partnership stated that cash from operations, IPO proceeds and credit-facility borrowings were expected to fund planned needs for the next twelve months, but noted that project costs and cash requirements could rise.
The general partner adopted a policy to distribute available cash, but can modify or revoke it; distributions remain subject to board determination, reserves and debt-covenant restrictions. A $0.407-per-unit distribution was declared July 25, 2011, prorated from the IPO closing through June 30, and scheduled for payment August 12 to holders of record August 5.
Key exposures include fertilizer-price and seasonal demand volatility, operating outages, pet-coke costs and reliance on CVR Energy and other suppliers, as well as related-party arrangements and management services. The Partnership’s pet-coke supply is primarily from the affiliated refinery. A Kansas property-tax classification dispute could result in refunds if successful; otherwise elevated tax expense is expected to continue. The EPA had inspected the facility and requested information following reported releases and the vessel rupture, but had made no formal claims as of the filing; no liability for these investigations or releases was accrued. The filing also reports operating and purchase commitments, including $76.6 million of affiliate purchase obligations, primarily pet coke.
Important facts for investors to verify
- Whether fertilizer pricing, sales volumes and strong plant on-stream rates persist, and how seasonal conditions affect demand and margins.
- Progress, remaining cost and schedule for the UAN expansion, including whether the expected 2013 completion and 2011 capital budget remain achievable.
- Cash available for distributions after maintenance spending, debt service, contractual commitments and board-determined reserves; distributions are not guaranteed.
- Outcome and timing of the Kansas property-tax appeal and any subsequent EPA action or environmental costs.
- Effects of related-party supply, services and governance arrangements, including the affiliated pet-coke supply and CVR Energy’s control of the general partner.
- Debt-covenant headroom, floating-rate exposure and the actual effect of the interest-rate swaps once they commence.