CVR Partners, LP — Q1 2017 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2017. CVR Partners produces and wholesales ammonia and UAN fertilizer from facilities in Coffeyville, Kansas, and East Dubuque, Illinois. The East Dubuque facility was acquired on April 1, 2016, so Q1 2017 includes a full quarter of its operations while Q1 2016 does not.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $85.3 million | $73.1 million |
| Operating income | $5.3 million | $19.7 million |
| Net income (loss) | $(10.3) million | $18.0 million |
| Net income (loss) per common unit | $(0.09) | $0.25 |
| Operating cash flow | $30.1 million | $23.6 million |
| Capital expenditures | $4.1 million | $1.7 million |
- Operating margin was approximately 6.3%, compared with 26.9% a year earlier; net margin was approximately negative 12.1%, compared with 24.7%.
- Adjusted EBITDA, a non-GAAP measure, was $20.8 million, down from $27.9 million. Available cash for distribution, also non-GAAP, was $1.8 million, or $0.02 per unit, versus $30.6 million, or $0.27 per unit.
- Cash and cash equivalents were $81.5 million at quarter-end, including $31.9 million of customer advances. Working capital was $77.9 million.
- Long-term debt, net of discount and issuance costs, was $623.8 million; principal debt was $647.2 million, primarily $645 million of 9.25% senior secured notes due 2023. The $50 million ABL revolver was undrawn and fully available. The Partnership reported compliance with debt covenants.
Changes versus the prior comparable period
- Sales rose $12.2 million, primarily because Q1 2017 included a full quarter from East Dubuque, which contributed $26.8 million in sales. Excluding that acquisition, sales decreased $14.6 million.
- At Coffeyville, lower market pricing reduced UAN sales by an estimated $14.0 million and ammonia sales by $0.7 million. Consolidated gate prices fell to $160 per ton for UAN from $209 and $308 per ton for ammonia from $367.
- Operating income declined $14.4 million. Higher direct operating costs, depreciation, materials costs and SG&A—much of the increase reflecting East Dubuque—more than offset higher reported sales.
- Interest expense increased to $15.7 million from $1.7 million, principally following the 2016 debt refinancing and issuance of the 2023 Notes; the Partnership reported a net loss instead of prior-year net income.
- Operating cash flow included a $19.3 million increase in deferred revenue, mainly customer prepayments for expected Q2 deliveries. The cash increase should therefore be considered alongside these advances and other working-capital movements.
Outlook, risks and notable items
- Management said cash from operations, existing cash and potential ABL borrowings should be sufficient for anticipated commitments for at least 12 months, while noting future cash needs and operating performance remain uncertain. The filing provides no specific earnings or revenue guidance.
- Estimated 2017 maintenance capital spending was approximately $15 million. East Dubuque’s next major turnaround was planned for Q3 2017 and expected to last 10–12 days; Coffeyville’s next turnaround was planned for 2018.
- On April 26, 2017, the board declared a Q1 distribution of $0.02 per unit, approximately $2.3 million in total, payable May 15. Distributions are discretionary, depend on available cash and are subject to debt covenant restrictions. The 2023 Notes covenant coverage ratio was below 1.75:1; the filing said a $75 million restricted-payment basket remained fully available and no restricted payments had been made as of quarter-end.
- Key exposures include fertilizer and natural-gas price volatility, seasonal demand, production interruptions, supplier and transportation dependence, environmental requirements, and the Partnership’s related-party arrangements with CVR Energy affiliates. A new hydrogen supply agreement with an affiliate began January 1, 2017, with a 20-year initial term and committed monthly volumes.
- Management reported no new material litigation or environmental developments, no material changes to previously disclosed risk factors, and effective disclosure controls as of March 31, 2017.
Important facts for investors to verify
- How much of reported operating cash flow and quarter-end liquidity reflects customer advances and seasonal working-capital timing.
- Whether fertilizer pricing, especially UAN pricing, recovers enough to offset operating costs and the higher interest burden.
- East Dubuque’s operating contribution and the production and financial impact of its planned Q3 turnaround.
- Distribution capacity under the indenture and the board’s discretionary distribution policy, including future covenant headroom.
- The costs, terms and operational dependence associated with affiliate supply, services and railcar agreements.