CVR Partners, LP — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. CVR Partners produces ammonia and UAN fertilizer at its Coffeyville, Kansas facility. It completed its IPO on April 13, 2011; public holders owned about 30% of units at quarter-end, with affiliate CRLLC holding about 70%. Pre-IPO comparisons are affected by a different capital structure and affiliate balances.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $77.2 million | $46.4 million | $215.3 million | $141.1 million |
| Operating income | $37.5 million | $10.6 million | $93.6 million | $30.0 million |
| Net income | $36.3 million | $13.5 million | $91.2 million | $39.5 million |
| Adjusted EBITDA | $43.3 million | $15.7 million | $114.0 million | $45.1 million |
Operating margin was approximately 48.6% in Q3 2011 versus 22.7% in Q3 2010, and 43.5% for the first nine months versus 21.3%. Net margin was approximately 47.0% and 29.2% for the respective quarters, and 42.4% and 28.0% for the nine-month periods. Net income per unit was $0.50 for Q3 and $0.92 from the IPO close through September 30; comparable pre-IPO per-unit data is not presented.
- Cash flow: Nine-month operating cash flow was $107.9 million, versus $56.6 million. Investing cash outflow was $7.8 million, including $10.5 million in capital expenditures. Financing provided $112.7 million; cash increased $212.8 million to $255.5 million.
- Liquidity: Quarter-end working capital was $234.7 million, versus $27.1 million at December 31, 2010. Cash included $20.5 million of customer advances/deferred revenue. Cash at November 1 was $265.8 million.
- Debt: $125 million term loan outstanding; $25 million revolver undrawn. The facility matures April 2016, and the Partnership reported covenant compliance. The $62.5 million interest-rate swap hedges part of the floating-rate debt; effective borrowing rate was about 4.86% at quarter-end.
- Capital and distributions: The IPO generated approximately $324.2 million net proceeds. The Partnership paid $0.407 per unit for Q2 and subsequently declared $0.572 per unit for Q3, payable November 14, 2011. The distribution policy targets available cash but may be modified and does not guarantee distributions.
Changes versus comparable periods
- Q3 sales rose 66% and nine-month sales rose 53%, primarily due to higher fertilizer prices and hydrogen sales to the affiliate refinery. Plant-gate prices increased 78.9% for ammonia and 75.3% for UAN in Q3; nine-month increases were 86.5% and 47.9%.
- Q3 operating income increased $26.9 million; nine-month operating income increased $63.6 million. Stronger fertilizer margins drove the gains, partly offset by higher operating and SG&A costs.
- UAN sales volume increased 3.5% for the nine months, while ammonia sales volume declined. Hydrogen sales to the refinery diverted hydrogen from ammonia production. Plant on-stream factors remained high; nine-month gasification, ammonia and UAN factors were 99.5%, 98.0% and 95.9%.
- Pet coke average cost rose to $43 per ton in Q3 from $26 and to $30 for the nine months from $19. SG&A rose to $17.5 million for the nine months from $8.8 million, including higher share-based compensation, outside services and affiliate service costs.
- Prior-year interest income included $9.6 million for the nine-month period from affiliate receivables; that balance was distributed in December 2010. The 2011 period instead includes interest expense on newly incurred debt.
Outlook, risks and unusual items
- Management expected cash from operations to cover anticipated commitments over the following 12 months and IPO proceeds and credit availability to support planned capital spending. This is not earnings or distribution guidance.
- The UAN expansion was expected to cost approximately $135 million in total and be completed in Q1 2013; $35.7 million had been spent through September 30. A new UAN terminal project was approved in October at an estimated $2 million. The filing’s 2011 capital-spending estimate is approximately $45.4 million, but its stated category breakdown appears inconsistent with that total and should be checked against the filing.
- The September 2010 UAN vessel rupture generated approximately $11.2 million in gross costs; $7.0 million of property-damage insurance proceeds had been received, and $3.4 million of business-interruption proceeds was recognized in 2011.
- Property taxes remain under dispute before the Kansas Court of Tax Appeals. The company accrued and paid the disputed amounts; an unfavorable outcome could leave elevated taxes in place, while a favorable ruling could result in refunds. The timing and outcome were uncertain.
- The EPA had inspected the facility and requested information after reported ammonia releases and the vessel rupture, but had made no formal claims; no related liability was accrued. The filing also cites fertilizer price cyclicality, weather and seasonality, operating interruptions, raw-material and supplier dependence, environmental regulation, affiliate relationships, and debt covenants as risks.
- Contractual commitments include $125 million of term debt, $30.9 million of operating leases and substantial purchase obligations, including $232.2 million with affiliates, primarily for pet coke. The Partnership reported no off-balance-sheet arrangements.
Investor verification priorities
- Verify fertilizer pricing, sales mix and volumes, especially the effect of hydrogen transfers on ammonia production and affiliate sales.
- Assess sustainability of margins given rising pet coke, utility, maintenance and SG&A costs, and seasonal fertilizer demand.
- Review available cash calculations, customer advances, distribution coverage and the board’s discretion to reserve cash or change distribution policy.
- Track UAN expansion spending, schedule and financing, and reconcile the filing’s 2011 capital-expenditure breakdown to its stated total.
- Monitor debt covenant headroom, floating-rate exposure and the hedge’s fair-value loss, as well as property-tax and environmental proceedings.
- Evaluate affiliate dependence and governance: CVR Energy affiliates supply pet coke and services, and CRLLC controls the general partner and majority of units.