CVR Partners - Earnings Call - Q1 2019

Transcript

Speaker 0

Thank you, Jay. Good morning, everyone, and thank you for joining us for today's call. To summarize financial highlights for the 2019 included net sales of $92,000,000 a net loss of $6,000,000 adjusted EBITDA of $26,000,000 and the Board of Directors declared a first quarter distribution of $07 per common unit, which will be paid on May 13 to unitholders of record on May 6. During the 2019, we had strong operational reliability at both facilities. At Coffeyville, the ammonia plant operated at 96% utilization for the quarter, consistent with utilization for the 2018.

At East Dubuque, the ammonia plant operated at 69% utilization compared to 90% in the prior year period adjusted for turnarounds. We lowered the ammonia rate at East Dubuque during the first quarter to manage our storage capacity levels at the plant due to the poor fall weather. For the 2019, our combined operations produced approximately 179,000 gross tons of ammonia, 335,000 tons of UAN and 41,000 net tons of ammonia available for sale compared to production of 199,000 gross tons of ammonia, 339,000 tons of UAN and 59,000 net tons of ammonia available for sale in the prior year period. We sold approximately 288,000 tons of UAN during the 2019 at an average price of $222 per ton. UAN pricing for the quarter increased 45% over the prior year period.

In addition, we sold approximately 36,000 tons of ammonia during the 2019 at an average price of $367 per ton. Ammonia pricing for the quarter increased 14% over the prior year period. UAN sales volumes were down 17% year over year in the 2019 due to cold and wet weather throughout the Midwest, which caused spring planting and fertilizer application to be delayed. While spring fertilizer application was slow to get started, farmers are catching up rapidly. We have seen product movements pick up pace in April.

I will discuss this further in my closing remarks and will now turn the call over to Tracy to discuss our financial results.

Speaker 1

Thank you, Mark. Turning to our results for the 2019, we reported net sales for the period of $92,000,000 operating income of $9,000,000 a net loss of $6,000,000 or $05 per common unit and adjusted EBITDA of $26,000,000 This is compared to net sales of $80,000,000 operating losses of $3,000,000 a net loss of $19,000,000 or $0.17 per common unit and adjusted EBITDA of $13,000,000 for the prior year period. These improvements were driven predominantly by improved UAN and ammonia pricing, partially offset by lower UAN sales volumes. The decrease in UAN sales volumes was primarily attributable to weather issues in the Midwest, as Mark just discussed. Direct operating expenses for the 2019 decreased to $35,000,000 from $39,000,000 in the prior year period.

Excluding inventory impacts, direct operating expenses increased slightly by approximately $05,000,000 year over year, primarily related to utility costs. Turning to capital spending. During the 2019, we spent $3,000,000 on capital projects, which was primarily maintenance capital. We continue to estimate total capital spending for 2019 to be approximately 20,000,000 to $25,000,000 excluding turnaround spending. In the fall, we have a planned turnaround at East Dubuque, which we would expect will cost approximately $7,000,000 Looking at the balance sheet, as of March 31, we had approximately $97,000,000 in cash, including approximately $63,000,000 related to customer prepayments for the future delivery of product and full availability under our ABL facility of $50,000,000 We currently believe our total liquidity position of approximately $122,000,000 at the end of the quarter is sufficient going forward.

Our long term gross debt of $647,000,000 including current portion remains unchanged. As a reminder, the majority of our gross debt position is comprised of our 9.25% senior notes due 2023. These notes become callable in June at 104.6% of par. Available cash for distribution of $8,000,000 is derived from our positive adjusted EBITDA for the quarter after consideration of reserves of $15,000,000 for debt service and $3,000,000 for environmental and maintenance capital expenditures. We are variable distribution MLP.

We will review our previously established reserves, evaluate future anticipated cash needs and may reserve amounts for other future cash needs as determined by our General Partners Board. As a result, our distributions, if any, will vary from quarter to quarter due to several factors, including, but not limited to, operating performance, fluctuations in the prices received for finished product, maintenance capital expenditures and cash reserves deemed necessary appropriate by the Board of Directors of our general partner. With that, I will turn the call back over to Mark.

Speaker 0

Thanks, Tracy. Weather continued to impact the business in the first quarter. Conditions were both wetter and colder than normal throughout the Midwest as spring has been late to arrive. We believe customers were already carrying higher than normal levels of inventory after the difficult fall application conditions. In the first quarter, demand for nitrogen was lower until the spring application began.

Barge and rail logistics have also been impacted by the flooding in Nebraska and on the Mississippi River. This has caused urea imports to back up in NOLA and put pressure on nitrogen prices. As products started to move in the past few weeks, the price of urea has recovered. Because of the shortfall in ammonia application in the fall and the delayed start to spring application, we expect most customers to purchase more urea and UAN as the spring progresses to reach targeted levels of nitrogen. We believe UAN prices are also being impacted by the European Union's imposition of duties exports from The U.

S, Russia and Trinidad into the EU. This has caused a resetting of trade flows from these three markets at a time when UAN application has not ramped up to full spring levels. We believe that over time the trade flows should reset for UAN with the likely result being higher UAN prices for European farmers. The spring fertilizer application season is now in full swing and we have seen strong demand during the past few weeks. At East Dubuque in particular, we have had several days of record ammonia shipments in the past two weeks.

Even with the wet and cold conditions during the first quarter, we still expect planted corn acres for the 2019 planting season to be in the 92,000,000 to $94,000,000 range and the seasonal demand for nitrogen to be strong through the rest of the second quarter. We also believe that the market is still gradually recovering from the lows in 2017 and nitrogen pricing should continue to improve over the next one to two years. I want to reiterate that the partnership will continue to focus on maximizing free cash flow by safely operating our plants reliably and at high utilization rates, prudently managing our costs, being judicious with our capital and maximizing our marketing and logistics activities. In closing, I would like to thank all of our employees for their contributions in the first quarter to help us navigate challenging weather conditions and prepare for the spring planting season. With that, we are ready to answer any questions.

Speaker 2

Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Adam Samuelson with Goldman Sachs. Please proceed with your question.

Speaker 3

Yes, thanks. Good morning, everyone.

Speaker 4

Good morning, Adam.

Speaker 3

So I just wanted to dig a little bit more into the spring and how just understand the impact on your business and the opportunities that's presented. Maybe first, Mark, if you could talk about the logistics, both the rail disruptions that you saw given some of the flooding in the Western Corn Belt and more recently some of the challenges along the river from a barge perspective and the challenges and opportunities each of those have presented to you and especially for East Dubuque, if that might actually help your realized pricing as we think about the second quarter?

Speaker 0

Sure. Well, let's start with rail first because rail is probably the easiest one. Are going to be some points in Nebraska in particular where we're probably going to be delivering product a little later. It's not going to affect the ultimate application at UAN, but it does affect the timing. So we had to kind of rerack our rail schedule to fit a later delivery into certain points in Nebraska.

There are a number of those things that are alleviating pretty quickly here. So we've changed our rail schedule and that was really affecting product movement into Nebraska. If you in the other areas like Iowa, Kansas, Oklahoma, Texas, California, Pacific Northwest, there weren't any issues there. It was just the Nebraska market that had really severe flooding and then we were seeing some difficult conditions for farmers in certain parts, particularly in the East Of Nebraska. On the Riverside, that's probably more of an opportunity for us given the location of East Dubuque being at the up at the top there.

It's most of the view of the market is that barge is probably won't be able to get to Minneapolis until mid May. And so there's going to be a little bit of a scramble for product up there in the earlier stages, not to later season, but the earlier stages will should be an opportunity for us to move some UAN up there. We won't see as much barge movement. And that's as I've said in my comments, that created a backup in New Orleans and affected pricing there. But we really haven't seen that kind of impact on the pricing up at East Dubuque because customers are looking for product up there.

So that's really my answer for those two, Adam.

Speaker 3

That's really helpful. And just on the just to be clear on the rail side for Nebraska, did that actually push any shipments out of 1Q into 2Q or not just more timing in 2Q?

Speaker 0

No, it was really just the timing of when it would go in there and they wouldn't be applying might be putting some things in tanks in the first Q to be prepared for 2Q, but it's more of when is that kind of I'd call it the refill cycle going to go in. It's going to go in probably a few weeks later than normal there to replenish what they apply. There's already product some product in tanks in Nebraska, but there's always a replenishment. So that's going to be delayed this year.

Speaker 3

Okay. And then just as we think about the impact of the broader market declines on you've seen in at least Nulla UAN prices in the last couple of months, Your pricing kind of held in quite strongly. Is that just some of stuff that was pre sold is from 4Q? Or is just really just the Midwest premium just holding that strongly that you feel like you're in a good place of pricing into the second quarter?

Speaker 0

Well, it's Adam, it's a little bit of both. We sold forward in January and February, a big chunk of the first quarter and pricing was good then. And there's usually a dip usually in the March timeframe before the season. And so we to try to sell and kind of get at least part of our production lined out for January, February. And we were sort of patient during March.

We sold some tonnage, but we've been patient to wait because we've been expecting we expected a dip. It was bigger than we thought. And then the recovery is starting to come now. And so this is typically when we would be looking to participate when there's a replenishment after the first run. So that our it looks like the market is firming here and we've been sort of patiently waiting for that to occur.

Speaker 3

Okay. And then I just want to clarify some of the comments you made about, the utilization rates at East Dubuque. It sounded like where I mean, the utilization rates were good in the quarter, but it sounded like you consciously had to to to slow things down for a few days here and there because of tank space. So you felt that the utilization theory could actually could have been a couple points better if not for things in just storage constraints otherwise.

Speaker 0

It would have been much yes, would have been much we basically ran at about 80% most of the quarter because if you recall from last quarter, we were already carrying significant inventory because of the poor fall conditions. And so we just we backed rate off there. The plant's running well. We're in good shape. It allowed us to do a little bit of work on the plant during the first quarter, but we're back to full rate and we intend to run full rate until we get to the turnaround.

Speaker 3

Great. That's all super helpful. I'll pass it on. Thanks.

Speaker 2

Thank you. Our next question comes from the line of Roger Spitz with Bank of America. Please proceed with your question.

Speaker 5

Thank you and good morning. Could you say what you were thinking about the refinancing of the 9.25% bonds? I perhaps missed what you said in your prepared remarks.

Speaker 1

They do become callable in June at 104.6% and we are evaluating the markets. They are available to us and open and we'll continue to watch the Fed movements and consider if we call those sometime after the call date passes.

Speaker 5

Okay. So you're just going to be opportunistic, with market conditions. Is that the takeaway we should take?

Speaker 2

Yes.

Speaker 5

All right. Thank you very much.

Speaker 2

Thank you. Our next question comes from the line of Charles Niebuhr with Cowen. Please proceed with your question.

Speaker 4

Good morning, guys. A bunch of things I got to ask. One, if we're looking at 2Q, the way it sounds like you haven't sold a lot into 2Q yet, so you're sort of going to allow for the pricing to rise and then play into it. So you're not going to be you haven't pre sold a lot at sort of the lowest levels of the first quarter into the second quarter. Is that did I read that right?

Speaker 0

That's correct.

Speaker 4

So we should looking at and is that going to be looked at as sort of normal behavior from here on forward? Is that the way you'll play? I mean, this is such a was such a terrible sort of fall into early spring, I'm assuming that things would be a little bit different. But I mean, is that the way you would tend to play this going forward as well?

Speaker 0

Well, typically, Charlie, the normal cycle is there is a big push in January and February for people to fill tanks and be ready. And then after that first run occurs, then they come back. That's typical. This year was exaggerated because the they came in, in January and February, but then the spring was late and the tanks were already full. And so it pushed out when they would come back for the replenishment.

And we our expectations were that they would come back and we decided to be more patient this year maybe than normal and wait for the inevitable the second wave of that. And so that's coming now. It's just a little bit later than normal and we waited it out. Other thing about product pricing in the second quarter, we'd already pre priced most of our ammonia coming into the season at good pricing. That started back in December and carried into January, February.

So that was priced at a good time in the marketplace and that was all prepaid. Tracy mentioned we had a bunch of prepaid dollars sitting on our balance sheet. So the ammonia was priced earlier and that all just is in the process of being delivered now, but the pricing occurred in December and January.

Speaker 4

Okay. When I look at the East Dubuque operations, was it it's basically you ran, I mean, it looked like the UAN portion was running fairly full, but you only ran as much ammonia because you didn't want to build up an ammonia storage. So is that the way you looked at it as you could run as pretty much normal for UAN, but you had to cut back because you didn't have storage for the ammonia piece of this?

Speaker 0

Yes, exactly. We ran full UAN rate, full upgrade and 80% of ammonia was kind of where we were running.

Speaker 4

Okay. And then is there any thought I mean, given this situation and it's likelihood that over time, it will probably repeat itself a few more times. Is there any thought to adding storage there to deal with that? I mean, not having more ammonia available for sale even if it's sort of delayed would likely be a better situation, especially considering you're a little isolated from the Gulf Coast. So when situations arise, you guys are in a good position to sell it.

Is there some thought to that at some point, adding

Speaker 0

debate that, but this was a we've only had this severe like once in the last twenty years. So I'm not sure we would go out and spend the capital to plan for the one and twenty year cycle. I think that one of the things that we're considering there is looking at what the upgrade capacity is at that plant long term and there might be an avenue to do something a little different with the production slate down the road. That's we think that's probably a better avenue than just putting another storage tank for ammonia there.

Speaker 4

Got it. And then we're looking at the natural gas differential between East Dubuque and NYMEX. It seemed a little large. Is there is that what was the reason for that? Or is it just sort of not it occurred this year because of cold weather?

I mean, is there something can you bring that down? Or is it coming down?

Speaker 0

It's come way down. And it usually there's a spread in the winter and actually trades at a discount to the NYMEX in the summer usually. If you recall, and this is part of the reason why the planning conditions, we have polar vortex up in East Dubuque in January late January and February. And that the consumption of gas in that market all the way to Chicago was pretty big draw in the system. So that's a pretty unusual event.

It was expensive in the quarter, but by March, it had dropped back to $270 $280 there. We're trading it trades in and around NYMEX at this stage. It only trades at a premium in the winter.

Speaker 4

Yes. I mean, but then this premium was unusually large. So obviously, that's not the expected. Lastly, on the pet coke side, with HollyFrontier supply coming back, is there any going to be any benefit to you guys from that? Are you guys still not really that much?

Speaker 0

No, we're that's obviously, it's one of our big sources there. We've been we're in the process of we've been trying to replenish our inventory there with pet coke. And so our costs are up some. And the deal with the refinery on our pet coke is it has the pricing mechanism has a UAN component. So it's the price of pet coke is a little higher.

So we do pay a little bit more for pet coke in a rising UAN market, but it doesn't change the economics that much in a rising UAN market.

Speaker 4

Okay. And as you said, the operations in East Dubuque now, the ammonia is now running basically full out?

Speaker 0

Full out.

Speaker 4

Because you can sell ammonia. Expect to go into the spring with empty basically empty everything out by, let's say, end of 2Q?

Speaker 0

Our goal is always to try to be as close to the bottom by June 30. We've gone through the tank in April. So we've consumed what we had sitting there for a few months. So we're down there and we're going to keep moving into May and we're just going to try to move as much as we can. We and the same with UAN, we're trying to we're always trying to get to the end of the planting season with as little as possible.

We've been pretty successful in the last two years. I feel good about this year because I think that the season is going to extend further and hopefully draw into our inventories going into June 30. So we go into summer with pretty light plants like we did last year with light too.

Speaker 4

Yes. I guess the late shipments up into the Minneapolis area play into your hands a bit?

Speaker 0

It does. It will help us because it will one, there will be more people looking for product. And I think generally, that market probably goes longer this year into side dress, top dress than it does typically because there's going to be need for nitrogen later. So we feel pretty good about the northern stretch of the market this year.

Speaker 4

Okay. I mean, if we're looking at 2Q for, let's say, UAN pricing and you did what you did this quarter, are we should we be looking at a similar level or somewhat 5%, 10% lower? I mean, again, obviously, during the course of the first quarter, prices dropped. You guys avoided some of the worst of it. But where what are you guys looking at for 2Q?

Any ideas about where it might be?

Speaker 0

Well, we don't give forecast on pricing. And quite honestly, Charlie, the market is still playing out. I don't think I'm smart enough to guess for you right now what May and June the market's coming back up. And so I don't really know where we're going to settle, but it's definitely come the other it's starting to come back towards us now. So we'll have a better idea of another month.

Speaker 4

Okay. All right. Well, does it for me guys. Thanks very much.

Speaker 2

Thank you. We have reached the end of our question and answer session. I would like to turn the call back over to management for any closing remarks.

Speaker 0

Well, again, I'd like to thank all of you for your interest in CVR Partners and our employees for their hard work and commitment towards safe, reliable and environmentally responsible operations. We look forward to reviewing our second quarter twenty nineteen results with you in July. Thank you very much for attending the call today.

Speaker 2

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.