CVR Partners, LP — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2012; filed August 2, 2012. Financial statements are unaudited. CVR Partners produces ammonia and UAN fertilizer at its Coffeyville, Kansas facility using petroleum coke. CVR Energy indirectly owned about 70% of the Partnership’s common units at period-end.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $81.4m | $80.7m | $159.7m | $138.1m |
| Operating income | $36.0m | $39.3m | $67.5m | $56.1m |
| Net income | $35.1m | $38.2m | $65.3m | $54.9m |
| Net income per common unit | $0.48 | $0.42 | $0.89 | $0.42 |
| Adjusted EBITDA | $44.1m | $45.0m | $82.1m | $70.9m |
| Cash from operating activities | $26.0m | $18.0m | $79.8m | $50.2m |
| Capital expenditures | $16.9m | $4.0m | $39.2m | $6.0m |
Q2 operating margin was approximately 44% of sales, versus 49% in the prior-year quarter; six-month operating margin was approximately 42%, versus 41%. Six-month net income and per-unit comparisons are affected by the April 2011 IPO and different pre-IPO capital structure; 2011 per-unit data reflects only the post-IPO period.
At June 30, cash and cash equivalents were $196.4m, working capital was $191.8m, and total debt was $125.0m. The $25m revolving facility was undrawn; debt matures in April 2016. The Partnership reported compliance with its credit covenants. Six-month cash declined $40.6m, principally reflecting $39.2m of capital spending and $81.1m of distributions, partly offset by operating cash generation.
Material changes and operating performance
- Six-month sales rose 15.6%, operating income 20.3%, and net income 18.9%. Higher fertilizer prices—especially UAN—were the main earnings driver. Six-month UAN plant-gate price increased 27.7% and ammonia increased 3.7% year over year.
- Q2 sales were nearly flat, while operating income fell $3.2m and net income fell $3.1m. Higher UAN pricing and volume were offset by no comparable hydrogen sales to the refinery, lower ammonia volumes, increased product costs, and higher SG&A.
- Six-month production was lower: ammonia 198.2 thousand tons versus 207.6 thousand; UAN 334.6 thousand versus 350.0 thousand. Repair-related downtime reduced first-half on-stream factors, including UAN to 90.1% from 95.4%.
- Cost of product sold increased $6.1m for the first half, reflecting higher pet-coke prices and third-party costs. Average pet-coke cost was $36/ton versus $23/ton a year earlier.
- Cash distributions paid during the first half totaled approximately $81.1m. A $0.60-per-unit second-quarter distribution was declared July 26, payable August 14, 2012.
Outlook, risks, and unusual items
- Management expected the approximately $125m UAN expansion to be completed by January 1, 2013. About $77.6m had been spent through June 30. The expansion is intended to add roughly 400,000 tons of annual UAN capacity, or about 50%.
- 2012 capital spending was projected at $100m–$110m, including $70m–$75m for the UAN expansion. Management expected $10m–$11.5m for maintenance projects.
- A fourth-quarter 2012 plant turnaround was planned for 16–18 days, with estimated expense of about $5m and an expected unfavorable effect on fourth-quarter revenue.
- Management stated cash from operations and remaining IPO proceeds were expected to cover anticipated commitments and planned capital expenditures for the next 12 months, while cautioning that capital needs and operating performance could vary.
- Key business exposures include fertilizer price and seasonal demand volatility, weather, plant reliability, transportation and supplier dependence, pet-coke costs, and the facility’s concentrated asset base. The company does not hedge fertilizer or pet-coke commodity prices.
- Two swaps fixed the rate on $62.5m of the $125m floating-rate term debt; the remaining half remains exposed to rate changes. Swap liabilities were $2.9m at June 30.
- Property-tax classification and valuation disputes in Kansas remain pending after an adverse 2008 classification ruling. Taxes were accrued and paid; an unsuccessful appeal could leave elevated property taxes in place, while success could result in refunds.
- The EPA had investigated prior ammonia releases and the 2010 UAN-vessel rupture but had made no formal claims; no related liability was accrued. The 2010 rupture generated approximately $11.5m of gross costs and $7.0m of property-damage insurance proceeds received.
- Icahn-related entities acquired control of CVR Energy; the Offeror held about 82% of CVR Energy at June 30. The filing highlights potential conflicts of interest and the controlling owner’s influence over Partnership governance and distributions.
Important facts for investors to verify
- Whether the UAN expansion reached completion on schedule and within the projected cost range, and whether increased capacity translated into sales and cash flow.
- Actual downtime, turnaround timing and cost, and subsequent plant on-stream rates.
- UAN and ammonia pricing, pet-coke costs, and the effect of fertilizer market and seasonal conditions on margins.
- Progress and potential financial impact of the Kansas property-tax appeals and any EPA follow-up.
- Distribution capacity after capital spending, debt service, covenant requirements, and reserves; distributions are discretionary and may be changed.
- Related-party arrangements and governance following the change in control of CVR Energy.