CVR Partners, LP — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a quarterly filing; fourth-quarter figures are noted separately. CVR Partners produces wholesale ammonia and UAN fertilizer at facilities in Coffeyville, Kansas, and East Dubuque, Illinois. The East Dubuque facility was acquired April 1, 2016, so consolidated comparisons with 2016 are not fully like-for-like.
Key financial and operating metrics
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $330.8 million | $356.3 million |
| Operating income (loss) | ($9.2 million) | $26.7 million |
| Net income (loss) | ($72.8 million) | ($26.9 million) |
| Net loss per common unit | ($0.64) | ($0.26) |
| EBITDA / Adjusted EBITDA | $64.3 million / $65.8 million | $80.2 million / $92.7 million |
| Operating cash flow | $10.4 million | $45.0 million |
| Capital expenditures | $14.5 million | $23.2 million |
| Cash and cash equivalents, year-end | $49.2 million | $55.6 million |
| Working capital, year-end | $62.8 million | $71.5 million |
| Long-term debt, net of current portion | $625.9 million | $623.1 million |
| Available cash for distribution (non-GAAP) | ($9.7 million) | $48.6 million |
At December 31, 2017, the Partnership also had $43.8 million available under its asset-based revolving credit facility, with no borrowings outstanding. The facility’s availability was subject to borrowing-base limitations.
- Average product pricing at gate fell: UAN to $152 per ton from $177; ammonia to $280 per ton from $376.
- Sales volumes were 1.255 million tons of UAN and 286,100 tons of ammonia. Production was 1.268 million tons of UAN and 814,700 gross tons of ammonia.
- Interest expense and other financing costs rose to $62.9 million from $48.6 million. The principal debt is $645 million of 9.25% senior secured notes due 2023; $2.2 million of 6.5% notes due 2021 also remained outstanding.
- Fourth-quarter 2017 net sales were $78.2 million and net loss was $27.4 million, compared with sales of $84.9 million and net loss of $14.5 million in fourth-quarter 2016.
Material changes versus prior periods
- Consolidated sales declined $25.5 million year over year. For Coffeyville, excluding East Dubuque, sales declined $32.5 million, principally from lower UAN prices and volumes and lower ammonia prices.
- Management attributed weak pricing to additional U.S. nitrogen production, seasonal demand declines, and delayed customer purchases; fertilizer prices reached multi-year lows in the second half of 2017.
- Net loss widened by $45.9 million. Lower selling prices and higher interest expense were important factors; depreciation and amortization also increased to $74.0 million from $58.2 million.
- Operating cash flow fell by $34.6 million. The 2017 total was supported by noncash depreciation and amortization despite the net loss.
- Distributions fell sharply: $0.02 per unit was declared for 2017, versus $0.44 in 2016. No fourth-quarter 2017 distribution was declared. The partnership agreement does not require distributions.
Outlook, risks, and unusual items
- Capital and maintenance: Management estimated 2018 maintenance and growth capital expenditures of approximately $18 million and $3 million, respectively. Coffeyville’s scheduled turnaround was planned for the second quarter of 2018, expected to last about 15 days and cost approximately $7 million, excluding lost production.
- Operations: Coffeyville experienced a Linde air-separation-unit outage and related UAN downtime; East Dubuque had an exchanger outage, a refractory-related outage, and a scheduled turnaround. East Dubuque also experienced a 12-day boiler-feed-water leak outage after year-end; repair costs were described as not material.
- Commodity and seasonal exposure: Results depend on volatile fertilizer prices, natural gas and pet coke costs, agricultural demand, weather, and seasonal purchasing. Coffeyville’s relatively high fixed-cost structure can magnify the impact of lower prices or downtime.
- Supply and concentration: Coffeyville depends on Linde for air-separation products and on CVR Refining for most of its pet coke; East Dubuque relies on natural-gas pipeline access. The top five customers represented 31% of 2017 sales, and the largest represented about 11%.
- Debt and distributions: The 2023 notes bear a high coupon and restrict distributions. The fixed-charge coverage ratio was below 1.75-to-1.0 at year-end; $72.7 million remained in the distribution basket. The Partnership reported covenant compliance.
- Related parties and governance: CVR Energy indirectly owns approximately 34% of the units and controls the general partner. The Partnership incurred about $16.0 million under the services agreement in 2017; related-party agreements were not negotiated at arm’s length.
- Other exposures: Environmental, health and safety rules, potential contamination and remediation, hazardous-ammonia handling, transportation disruption, labor relations, and limited insurance coverage may result in costs or interruptions. Management stated pending litigation was not expected to have a material adverse effect; environmental accruals were considered adequate based on current information.
- Goodwill: No impairment was recorded. An August 2017 interim test found Coffeyville’s estimated fair value approximately 12% above carrying value; fertilizer pricing was the most significant valuation assumption.
Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor concluded internal controls were effective as of December 31, 2017.
Important facts for investors to verify
- Whether fertilizer pricing, volumes, and margins recover following new U.S. production capacity and weak second-half 2017 demand.
- Actual outcome, duration, and costs of the planned Coffeyville 2018 turnaround, alongside subsequent operating reliability at both facilities.
- Liquidity, borrowing-base availability, debt covenant headroom, and the distribution basket under the 2023 notes.
- 2018 maintenance and growth capital spending versus estimates, and the effect of high interest costs on cash generation.
- Continuity and terms of critical supply arrangements, including the HollyFrontier pet coke agreement ending in December 2018 and East Dubuque natural-gas access.
- Whether environmental or other contingencies, related-party charges, or customer concentration create exposures beyond amounts described in the filing.