CVR Partners, LP — FY2016 Form 10-K Summary
Business context and reporting period
For the fiscal year ended December 31, 2016. CVR Partners produces and wholesales nitrogen fertilizers, principally UAN and ammonia, at facilities in Coffeyville, Kansas, and East Dubuque, Illinois. The East Dubuque facility was acquired April 1, 2016; 2016 results include it for nine months, so year-over-year comparisons are not like-for-like.
Financial and operating metrics
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $356.3 million | $289.2 million |
| Operating income | $26.8 million | $68.7 million |
| Operating margin | 7.5% | 23.8% |
| Net income (loss) | $(26.9) million | $62.0 million |
| Net margin | (7.6)% | 21.5% |
| Cash from operating activities | $45.0 million | $78.4 million |
| Capital expenditures | $23.2 million | $17.0 million |
| Cash and cash equivalents at year-end | $55.6 million | $50.0 million |
| Working capital at year-end | $71.5 million | $72.7 million |
FY2016 EBITDA was $80.2 million and Adjusted EBITDA was $92.7 million; both are non-GAAP measures. Available cash for distribution, also non-GAAP, was $48.6 million, or $0.43 per unit. The Partnership paid $0.71 per unit during 2016; no distribution was paid for the quarter ended December 31, 2016. Fourth-quarter net sales were $84.9 million and net loss was $14.5 million.
Gross debt at year-end was $647.2 million: $645.0 million of 9.25% senior secured notes due 2023 and $2.24 million of 6.5% notes due 2021. Net carrying value of long-term debt was $623.1 million after discount and issuance costs. The ABL facility had $49.3 million available and no borrowings outstanding. The Partnership reported compliance with debt covenants.
Material changes versus prior period
- Sales increased $67.1 million, primarily because East Dubuque contributed $128.0 million after acquisition. Excluding the acquisition, sales declined $60.9 million.
- At Coffeyville, lower fertilizer prices reduced sales: UAN gate pricing fell to $177 per ton from $247, and ammonia to $376 from $521. Consolidated product sales volumes increased with the acquired facility and recovery from Coffeyville’s 2015 turnaround.
- Operating income declined $41.9 million and the Partnership moved to a net loss. Interest expense rose to $48.6 million from $7.0 million following acquisition-related and refinancing transactions, including issuance of the 2023 Notes.
- Operating cash flow fell $33.4 million. Investing cash use increased to $87.1 million, including $63.9 million of net cash acquisition consideration.
- In 2016, the Partnership acquired East Dubuque, issued $645.0 million of 2023 Notes, repaid the $300.0 million CRLLC loan and most of the 2021 Notes, and entered into a $50.0 million ABL facility.
Outlook, commentary, risks and unusual items
- Management expected substantial new U.S. nitrogen fertilizer capacity to come online in 2017, potentially adding near-term pricing volatility. It cited longer-term demand drivers including population growth, dietary shifts and fertilizer use, while acknowledging commodity-cycle risk.
- Estimated 2017 maintenance capital expenditures were approximately $15 million. Coffeyville’s next major turnaround was planned for the second half of 2017 and expected to last about 15 days.
- East Dubuque completed a roughly 28-day turnaround in the second quarter of 2016, with approximately $6.6 million of direct turnaround expense. The 2023 Notes refinancing contributed to a $4.9 million reported loss on extinguishment of debt; the merger also generated $3.1 million of 2016 merger-related expenses.
- Liquidity is exposed to volatile fertilizer prices, seasonality, weather, fixed operating costs, natural gas prices and plant downtime. Coffeyville depends on third parties for air-separation services and electricity and on CVR Refining for much of its pet coke; East Dubuque depends on natural-gas supply and pipeline access.
- Debt service and covenant restrictions may constrain distributions. The 2023 Notes generally restrict distributions if specified conditions are not met. The board may change or suspend distributions, and the partnership agreement does not require distributions.
- Environmental, process-safety, hazardous-material, insurance and remediation exposures could lead to substantial costs. The filing describes property-tax litigation and historical contamination considerations; management stated it did not expect currently pending litigation to materially adversely affect the Partnership.
- Related-party arrangements with CVR Energy and affiliates—including services, feedstock, pet coke and railcar agreements—were not negotiated at arm’s length. CVR Energy indirectly owned approximately 34% of common units and controlled the general partner.
- Management and Grant Thornton reported effective internal control over financial reporting; Grant Thornton issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Separate acquired East Dubuque contributions from Coffeyville’s underlying sales, margins and operating performance.
- Track fertilizer prices and planned 2017 capacity additions, as well as actual turnaround timing, cost and production recovery.
- Assess debt service, refinancing flexibility, covenant headroom and the effect of the 9.25% notes on cash available for distributions.
- Confirm liquidity after seasonal working-capital needs, customer advances, maintenance spending and turnaround costs.
- Review dependence on CVR Energy and CVR Refining, related-party pricing and supplier continuity, including the new hydrogen agreement effective January 2017.
- Monitor environmental and safety liabilities, insurance renewal and the outcome of the Coffeyville property-tax appeal.