CVR Partners, LP — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are with Q1 2011 unless stated otherwise. CVR Partners produces ammonia and UAN fertilizer at its Coffeyville, Kansas facility. The statements are unaudited. Per-unit earnings are not comparable with Q1 2011 because the partnership’s capital structure changed with its April 2011 IPO.
Financial and operating performance
| Metric | Q1 2012 | Q1 2011 / comparator |
|---|---|---|
| Net sales | $78.3 million | $57.4 million; up 36.4% |
| Operating income | $31.4 million | $16.8 million; up 86.9% |
| Operating margin | 40.1% | 29.2% (calculated) |
| Net income | $30.2 million | $16.7 million; up 80.8% |
| Net margin | 38.6% | 29.2% (calculated) |
| EBITDA / Adjusted EBITDA | $36.8 million / $38.0 million | $21.3 million / $25.9 million |
| Operating cash flow | $53.8 million | $32.1 million |
| Capital expenditures | $22.3 million | $2.0 million |
| Cash and cash equivalents | $225.6 million at March 31 | $237.0 million at December 31, 2011 |
| Working capital | $204.1 million at March 31 | $229.4 million at December 31, 2011 |
| Debt | $125.0 million | Unchanged from December 31; $25 million revolver undrawn |
- Revenue growth reflected higher plant-gate prices for ammonia and UAN and $5.7 million of hydrogen sales to the affiliated refinery; lower UAN sales volume partly offset the increase.
- Average plant-gate prices rose 8.6% for ammonia and 51.1% for UAN. Sales volumes were 29.9 thousand tons of ammonia and 158.3 thousand tons of UAN, versus 27.3 thousand and 179.3 thousand tons, respectively, in Q1 2011.
- Production was lower: ammonia output was 89.3 thousand tons versus 105.3 thousand, and UAN output was 154.6 thousand versus 170.6 thousand. Unit downtime reduced on-stream rates; gasification, ammonia and UAN on-stream factors were 93.3%, 91.5% and 83.6%, respectively.
- Pet coke cost averaged $42 per ton versus $15, increasing product costs. Direct operating expenses were broadly flat at $22.9 million. SG&A fell to $6.0 million from $8.3 million, principally due to lower share-based compensation.
- Q1 net cash increased from earnings and working-capital sources, including a $7.0 million increase in deferred customer revenue. Investing cash outflow was $22.3 million, primarily expansion spending; financing outflow of $42.9 million primarily reflected distributions. Cash declined $11.4 million during the quarter.
Outlook, risks and notable items
- Capital program: Management expected 2012 capital expenditures of $95–$100 million, including $10–$11 million for maintenance and $85–$90 million for growth. The UAN expansion was expected to cost approximately $125 million in total, with completion anticipated in Q1 2013. Approximately $62.7 million had been spent through March 31.
- Turnaround: A plant turnaround was planned for Q4 2012, expected to last 16–18 days and cost approximately $5 million; substantially all expense was expected in Q4.
- Liquidity and distributions: Management said cash from operations and available IPO proceeds and credit capacity should cover anticipated commitments and planned capital spending for the next 12 months. The partnership declared a post-quarter Q1 distribution of $0.523 per unit, payable May 15, 2012. Distributions are discretionary, depend on available cash and reserves, and are subject to debt covenant compliance.
- Debt and interest risk: The $125 million term loan matures in April 2016 and has no scheduled amortization. A swap hedges $62.5 million of principal; the reported effective rate was approximately 4.60% at quarter-end. The partnership reported covenant compliance at March 31.
- Contingencies: Kansas property-tax classification and valuation disputes remain unresolved. A January 2012 administrative ruling upheld the county’s 2008 classification; the partnership appealed. Success could result in refunds; failure may mean continued elevated property taxes. The filing also describes EPA information requests and investigations following prior releases; no formal EPA claim had been made and no related liability was accrued.
- Control and related-party exposure: CVR Energy indirectly controlled the general partner and held about 70% of common units. A proposed Icahn tender offer and potential change of control could affect governance, shared services and intercompany arrangements. The change of control alone was not a credit-facility default, but specified breaches or termination of intercompany agreements could trigger default provisions. Most pet coke historically came from CVR Energy under a long-term agreement.
- The September 2010 UAN vessel rupture generated approximately $11.5 million of gross costs; approximately $7.0 million of property-damage insurance proceeds had been received. The filing does not provide specific forward fertilizer-price or earnings guidance.
Key facts investors should verify
- Whether planned UAN expansion spending, cost and Q1 2013 completion expectations remain on track.
- Whether 2012 turnaround timing, duration and estimated cost change, and the effect of downtime on production.
- Fertilizer prices, pet coke costs, unit reliability and the sustainability of the quarter’s margin improvement.
- Progress and potential financial impact of the Kansas property-tax appeals and any EPA matters.
- Outcome of the CVR Energy tender offer and any resulting changes to control, shared services or related-party supply arrangements.
- Cash available for distributions after capital spending, customer prepayments, debt service and reserves; distributions are not guaranteed.