CVR Partners, LP — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. CVR Partners produces wholesale ammonia and UAN fertilizer at its Coffeyville, Kansas facility. Its UAN expansion was completed in February 2013; CVR Energy affiliate CRLLC owned approximately 53% of units at quarter-end.
Financial and operating results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $88.8 million | $81.4 million | $170.2 million | $159.7 million |
| Operating income | $37.1 million | $36.0 million | $73.9 million | $67.5 million |
| Net income | $35.4 million | $35.1 million | $71.0 million | $65.3 million |
| Diluted net income per unit | $0.48 | $0.48 | $0.97 | $0.89 |
| Adjusted EBITDA | $44.1 million | $44.1 million | $87.9 million | $82.1 million |
| Operating margin, calculated | 41.7% | 44.3% | 43.4% | 42.2% |
Q2 sales rose 9.1%, while operating income increased 2.8% and net income 0.9%. Higher UAN volumes, hydrogen revenue of $4.0 million, and stronger ammonia pricing supported sales; lower ammonia volume and higher product, operating, and depreciation costs tempered earnings. For the first half, sales increased 6.6% and net income 8.7%, reflecting higher UAN volume and ammonia prices, partly offset by lower ammonia volume, lower UAN prices, and reduced hydrogen sales.
- Production and pricing: Q2 UAN production was 225,166 tons versus 180,000; UAN plant-gate price was $331/ton versus $329. Ammonia production was 91,318 tons versus 108,900; ammonia plant-gate price was $688/ton versus $568.
- Cash flow: First-half operating cash flow was $74.6 million versus $79.9 million. Capital expenditures were $31.9 million versus $39.2 million; distributions and other financing uses totaled $58.8 million. Cash declined $16.0 million to $111.9 million.
- Liquidity and debt: June 30 working capital was $123.1 million; long-term debt was $125.0 million. The $25.0 million revolving facility was undrawn, and the partnership reported compliance with debt covenants. The term loan matures in April 2016.
Material changes and significant developments
- The UAN expansion added approximately 400,000 tons of annual capacity, about a 50% increase, and allows substantially all ammonia to be upgraded to UAN when economic. UAN sales volume increased, but Q2 on-stream rates were affected by Linde air-separation-unit outages and a weather-related power outage.
- A Montgomery County property-tax settlement is expected to reduce annual property taxes by about $10.5 million for 2013–2016, based on current mill levy rates. The 2008 reassessment remains under appeal.
- CRLLC sold 12 million units in a May secondary offering at $25.15 per unit, receiving net proceeds of approximately $292.6 million. The partnership received none of those proceeds and incurred about $0.5 million of offering costs.
- Management declared a Q2 distribution of $0.583 per unit, or $42.6 million in aggregate, payable August 14, 2013. The board’s distribution policy is discretionary and may be changed.
Outlook, risks, and contingencies
- Capital spending: 2013 capital expenditures were estimated at $40–$50 million, including $6–$8 million for maintenance and $34–$42 million for growth. The filing gives no numerical earnings or revenue guidance.
- Operating and market exposure: Results depend on fertilizer prices, seasonal agricultural demand, plant reliability, freight access, and feedstock availability and cost. Pet coke is sourced predominantly from affiliates, and the facility has a high fixed-cost base. Unplanned downtime can reduce production and margins.
- Interest rates: Swaps fix rates on $62.5 million of the $125.0 million floating-rate debt; the remaining half remains exposed. A 1% rate increase was estimated to raise annual interest expense by about $625,000.
- Environmental and legal matters: The EPA has investigated prior releases and requested information; it had made no formal claim, and no related liability was accrued. Management states environmental accruals are adequate but notes future EHS matters could have a material adverse effect. The property-tax appeal for 2008 continues.
- Commitments and governance: Contractual obligations totaled $338.4 million, including debt, leases, purchase obligations, and interest. The partnership relies on CVR Energy management and services and has significant affiliate supply, service, and ownership relationships.
Investor verification priorities
- Confirm that expanded UAN capacity is operating reliably and whether the Linde and weather-related interruptions have been resolved.
- Track UAN and ammonia prices, sales mix, volumes, and the cost and availability of pet coke and transportation.
- Review actual 2013 growth and maintenance capital spending against the $40–$50 million estimate and assess remaining project commitments.
- Verify distribution coverage, cash balances, covenant headroom, and the effect of the discretionary distribution policy.
- Monitor the 2008 property-tax appeal, EPA matters, and affiliate arrangements, including the partnership’s dependence on CVR-related entities.