CVR Partners, LP — Q2 2014 Form 10-Q
Business and period: Unaudited results for the quarter and six months ended June 30, 2014, compared with the same 2013 periods. CVR Partners produces wholesale UAN and ammonia at its Coffeyville, Kansas facility, using petroleum coke feedstock. CVR Energy indirectly controlled the general partner and approximately 53% of the common units.
Financial and operating performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $77.2 million | $88.8 million | $157.5 million | $170.2 million |
| Operating income | $18.8 million | $37.1 million | $41.9 million | $73.9 million |
| Net income | $17.1 million | $35.4 million | $38.6 million | $71.0 million |
| Basic and diluted earnings per unit | $0.23 | $0.48 | $0.53 | $0.97 |
| Adjusted EBITDA (non-GAAP) | $25.7 million | $44.1 million | $55.7 million | $87.9 million |
| Cash from operating activities | $24.4 million | $17.1 million | $59.9 million | $74.6 million |
Q2 sales fell about 13% and net income about 52% year over year. First-half sales declined about 7% and net income about 46%. Operating margin was approximately 24% in Q2 versus 42% a year earlier, and 27% for the first half versus 43%. Margins contracted despite higher UAN sales volumes, principally because fertilizer prices were lower and operating and product costs increased.
- Pricing and volume: Q2 UAN sales volume increased to 239,200 tons from 217,300, but average gate price fell 14.5%. First-half UAN volume rose to 493,900 tons from 411,400, while its average gate price fell 15.0%. Ammonia gate prices also declined: 24.3% in Q2 and 26.2% for the first half.
- Costs and production: First-half cost of product sold rose $14.9 million, reflecting third-party ammonia purchases and railcar repairs and inspections. Direct operating costs rose $4.1 million, including higher utilities. Q2 production was affected by planned equipment work; UAN on-stream factor was 85.9%, versus 86.5% a year earlier.
- Cash and investment: First-half operating cash flow was $59.9 million; capital expenditures were $7.5 million, and distributions used $59.2 million. Cash declined to $78.5 million from $85.1 million at year-end. Working capital was $93.9 million, down from $108.4 million.
- Debt and liquidity: Debt was $125.0 million, with no revolving borrowings against the $25.0 million revolver. The facility matures in April 2016, has no scheduled amortization, and was in covenant compliance. The company reported $86.2 million cash as of July 28, 2014.
- Distribution: The board declared a Q2 distribution of $0.33 per unit, approximately $24.1 million in total, payable August 18, 2014. First-half distributions paid were $0.81 per unit. Available cash for distribution is a non-GAAP measure and is not the same as operating cash flow.
Outlook, commentary, and risks
- Management said cash from operations and available credit were expected to cover anticipated commitments and planned capital expenditures for the next 12 months, while cautioning that future cash needs and operating performance could vary.
- 2014 capital expenditure estimates were $9–11 million for maintenance and approximately $15 million for growth, including the PSA upgrade and railcar purchases. The PSA upgrade, costing approximately $4.9 million, was expected to support an additional 7,000–9,000 tons of annual ammonia production. The next full plant turnaround was planned for 2015.
- A planned 5–7 day shutdown of units during Q2 for a waste heat boiler installation and PSA upgrade reduced production and added approximately $0.5 million of repair, maintenance, and related costs. The filing provides no formal earnings or revenue guidance.
- Key exposures include volatile fertilizer prices, seasonal and weather-driven demand, reliance on a single production facility and third-party transportation and suppliers, and dependence on CVR Refining for most pet coke. The company does not hedge fertilizer or pet coke prices. Interest-rate swaps covered $62.5 million of floating-rate debt; management estimated a 1% rate increase would add about $625,000 to annual interest cost.
- Environmental and other legal contingencies were discussed; management reported no material change in environmental accruals or expected compliance capital spending from the 2013 Form 10-K, while noting that evolving regulation could increase costs. Management stated it believed the facility was in substantial compliance.
- Related-party arrangements are significant, including feedstock, services, and shared management with CVR affiliates. CVR Energy and its affiliates also control the general partner; unitholders have limited voting rights. The filing reports no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether fertilizer prices and product margins recover, and whether increased UAN volumes can offset price pressure.
- Plant reliability after the Q2 shutdown and PSA upgrade, including actual production benefits and remaining maintenance requirements.
- Cash generation, distribution coverage, and covenant headroom as distributions and capital spending continue.
- Terms and economics of related-party pet coke supply, services, and railcar purchases, as well as the company’s dependence on CVR affiliates.
- Debt refinancing or repayment plans before the April 2016 maturity, and sensitivity to interest rates on the unhedged portion.