CVR Parnters LP (NYSE:UAN)
Q2 2013 Earnings Conference Call
August 1, 2013/10:00 a.m. ET
Wes Harris – VP IR
Susan Ball – CFO & Treasurer
Byron Kelley – CEO & President
Greetings, and welcome to the CVR Partners second-quarter 2013 conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions). As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Mr. Wes Harris, Vice President Investor Relations. Thank you, Mr. Harris. You may now begin.
Well, thank you, Jessie. We appreciate everyone's participation on the call this morning. With me today are Chief Executive Officer, Byron Kelly; Chief Operating Officer, Stan Rieman; and Chief Financial, Officer Susan Ball.
Before we start to discuss our 2013 second-quarter results, as usual, we're required to make the following Safe Harbor statements. In accordance with federal security law, statements in this earnings call related to matters that are not historical facts are considered forward-looking statements. These forward-looking statements are based on management's beliefs and assumptions using currently available information and expectations as of this day. These forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, including those noted in our filings with the Securities and Exchange Commission.
In addition, today's presentation, includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures, are included in our 2013 second-quarter results release that was put out this morning. Adjusted EBITDA is an example of such non-GAAP measures. Adjusted EBITDA represents net income adjusted for depreciation, amortization, net interest expense, income tax expense, and share-based compensation.
So with that, I'll turn the call over to Byron Kelley, our CEO. Byron?
Thank you, Wes. Excuse me. And good morning to everyone.
I am pleased to report that we posted another quarter of solid financial results for the three months ended June 30th. During the 2013 second quarter, we recorded net income of $35.4 million on $88.8 million of net sales.
And this is compared to net income of $35.1 million on net sales of $81.4 million in the second quarter of 2012. Adjust EBITDA for the 2013 second quarter was $44.1 million which was the same as last year.
Last Friday, we announced a distribution of $0.583 per common unit outstanding for the second quarter of 2013. Combined with our first-quarter distribution of $0.61, this provides us year to date distribution of $1.19 for the first six months of the year.
This compared with $1.12 paid for the first six months of 2012 and that represents about 6.3% increase year over year. Our 2013 second-quarter distribution will be paid on August the 14th to unit holders of record on August the 7th.
Combining the quarter strong net sales contributed to quarter strong net sales with higher product prices for both ammonia and urea ammonia nitrate, or referred to as UAN. Driven by another large planting of corn acreage in the spring, the average net price we received for UAN and ammonia this past quarter was $331 per ton and $688 per ton, respectively. This is compared to an average net back of $329 per ton for UAN and $568 per ton for ammonia in the 2012 second quarter.
The 2013 second quarter was also the first full year – first full quarter of operations of our expanded UAN plant, which was placed in service in late February. Unfortunately, as a result of two externally-driven occurrences that impacted production, we did not get the full benefit of our expansion in this year's second quarter.
In the latter half of May, a shutdown at Linde's air separation plant required us to bring down our entire plant. You may recall that Linde provides oxygen that we utilize in our gasifier. And they provide nitrogen for our ammonia plant, so when they're down, we're down as well. We had expected the Linde plant to be offline for about three days. But the shutdown extended to almost five full days.
A more significant occurrence was on May the 31st when electrical outages resulting from a tornado in Oklahoma forced an immediate shutdown of our entire plant. We were able to bring the facility back on line in approximately five days, but subsequently, placing the plant back in service, we discovered that the hard shutdown had been the catalyst in the shift reactor.
You'll hear us use the term hard shutdown. Let me explain that real quick.
Normally when we take the plant, it's planned and you have an orderly procedure and an orderly processes for taking the plant down and purging various lines.
A hard shutdown is when it's unexpected and you're unable to do the shutdown in an orderly fashion. Hard shutdowns typically lead to more difficulty in restarting your plant versus a planned shutdown. This particular hard shutdown, we realize after we were back in service had damaged, as I mentioned, the catalyst in the shift reactor.
To prevent further damage to that catalyst, we reduced the send-gas flows through the shift reactor to maintain an acceptable pressure drop across the dozzle. This resulted in loss of ammonia production of approximately 50 tons per day from early June through this past Saturday when we shut the plant down to replace the damaged catalyst.
During the period where we had the lost production, to try to offset its full impact, beginning in early June, we purchased ammonia on the open market to allow us to operate the UAN plant at normal rates. Now while this process was profitable, obviously the added expense of purchasing ammonia for this purpose did result in lower margins for this portion of our UAN production.
The combination of these two occurrences led to lower on-stream rates and reduced ammonia production in 2013 second quarter, as compared to 2012. As a result, our gas fire ran at 91.6% compared to 99.2% in 2012.
The ammonia synthesis loop operated at a rate of 89.1% versus 98% last year. And the UAN plant operated at 86.5%, compared to 96.7% in the 2012 second quarter.
If you exclude the nine days of downtime, our on-stream rates were 99.6% for the gasifier, 99.1% for the ammonia synthesis loop, and 97% for the UAN plant. So really what you have absent those two externally-driven shutdowns we had, our plant ran quite well during that period.
During the 2013 second quarter, we produced 91,300 tons of ammonia and purchased approximately 4,000 tons of ammonia from third parties. And during the period, 2,200 net tons were available for sale, while the rest upgraded to record amount of 225,200 tons of UAN.
And in the 2012 second quarter, the plant produced 108,900 tons of ammonia and 34, 900 net tons of available sell with the remainder upgraded to 180,000 tons of UAN, so you can say our UAN production was up from 180,000 tons to just below a little over 225,000 tons.
As I mentioned, this past Saturday, we elected to bring the full plant down to change out the damaged catalyst in the shift reactor. This process is progressing smoothly and we're targeting the ammonia plant to be back on line sometime late tomorrow. The UAN plant is targeted to start up sometime late on Saturday.
Now while the shutdowns and related issues over the past weeks have been unfortunate, I am pleased that the impact was mitigated by the strong technical knowledge of our operations team. And I certainly appreciate their hard work under some very challenging circumstances.
So with that, I will now turn the call of to Susan Ball, our Chief Financial Officer, to discuss our financial results in more detail.
Thank you, Byron, and good morning, everyone.
As Byron discussed, second-quarter 2013 net sales were $88.8 million, as compared to $81.4 million in 2012 contributing to the increase was higher UAN sales volumes and related freight revenue due to the plant expansion.
In addition, an increase in sales prices for ammonia and UAN, as well as the net impact of our hydrogen sales to the adjacent refinery positively impacted our year-over-year quarterly comparisons.
Partially offsetting the overall increase in net sales was lower ammonia sales volumes due to the increase conversion of ammonia afforded by the expanded UAN plant. To a lesser extent, ammonia sales volumes for the 2013 second quarter were also impacted by the production issues that Byron mentioned in his opening comments.
Cost of products sold for the 2013 second quarter was $15.6 million, as compared to $10.7 million in the second quarter of 2012. This increase was primarily associated with the ammonia purchases previously mentioned and higher freight expense in this year's second quarter.
As a reminder, freight costs – as freight costs are reimbursed to us by our customers, freight expense recognized in our cost of products sold is offset by a similar amount in revenues during the same period.
Partially offsetting the overall increase in cost of products sold was reduced consumption of pet coke in the 2013 second quarter due to the plant down time, as well as a lower blended price per ton for pet coke consumed. During the 2013 second quarter, our average cost for consumer pet coke was $29 per ton. This is compared to $31 per ton for the second quarter of 2012.
We typically purchase over 70% of our pet coke from the adjacent refinery. The remaining 30% of our pet coke requirement is purchased from a third-party supplier under a contract that began in March of 2012 and runs through the end of the year.
Direct operating expenses were $24.4 million for the second quarter of 2013, as compared to $22.4 million in the prior-year period. This increase was primarily attributable to higher repairs and maintenance expense related to the plant outages, as well as an increased insurance cost and higher utilities, which are due to the expanded UAN plant.
Also contributing to the increase was accelerated amortization of the cost of the damaged catalyst that is being replaced in the shift reactor. Partially offsetting the increase in direct operating expenses were lower property taxes from the partial settlement with Montgomery County that we entered into in late February of this year.
Selling, general and administrative expenses were $5.5 million for the 2013 second quarter, as compared to $7 million in the second quarter of 2012. Contributing to the decrease was lower cost for third-party services and affiliate transactions. The decrease in affiliate transactions was due to lower share rate compensation expense partially offset by higher management services expense.
Depreciation and amortization expense rose from $5.2 million in the 2012 second quarter to $6.2 million in the second quarter of 2013. This increase was substantially due to the UAN expansion assets being placed into service during the first quarter of this year.
The increase in interest expense from $1 million in the 2012 second quarter to $1.7 million for this year was primarily associated with decreased capitalized interest expense associated with the completion of the UAN plant expansion.
Net income for the second quarter was $35.4 million or $0.48 per common unit, compared to $35.1 million or $0.48 per common unit in the second quarter of 2012.
During the 2013 second quarter, we spend $13.8 million on capital projects, which includes $600,000 for maintenance CapEx. The substantial majority of our capital spending during the period was associated with the completion of the UAN expansion project.
Capital expenditures for the six months, ended June 30, were approximately $32 million with approximately $1 million associated with maintenance CapEx. The substantial majority of the remaining $31 million of capital spending was for the expansion of the UAN plant.
For the full year 2013, we expect to spend approximately $40 million to $50 million on capital projects, excluding capitalized interest. This amount includes $6 million to $8 million for maintenance CapEx and $34 million to $42 million for growth projects, which this does include approximately $25 million on the UAN expansion project.
As I have discussed on previous calls, all of our planned spending will be fully financed by cash on hand that originated from our IPO in April of 2011.
Finally, our solid balance sheet places us in a great position to grow our business. As of June 30, we had $112 million in cash and cash equivalents, and $25 million available under our revolving credit facility. In addition, our long-term debt remained at $125 million.
With that, I'll turn the call back over Byron.
Well, thank you, Susan. I'd like to now turn our attention to the market environment and to our expectations for the remainder of the year.
As many of you know, as we move out the spring planting season, the full industry's attention then turns to what we refer to as the fill season. This is basically a period when dealers and distributors focus on purchases to refill their storage tanks so that product is available for application by farmers next spring.
Contractual commitments between producers and customers for the fill season typically take place in late June or during July with product deliveries occurring over the following seven months. But, basically, the product pricing that occurs during this fill season period is the single largest driver for things that impact Q3 and Q4 results.
A couple of things around the market environment.
This year, the USDA's aggressive forecast for acreage planted, harvested, and yields for this year's planting have significantly driven down the forward prices for corn. The current price for December 2013 corn deliveries is approximately $4.75 per bushel, as compared to a year ago of almost $8 per bushel for December 2012 deliveries.
Current prices also are lower than the trading five-year average of approximately $5.50 per bushel. So the current market environment for future corn prices did, I believe, significantly impact the price dealers and distributors were willing to pay US nitrogen producers for the full – for the fill season this year.
Also impacting fill season prices has been China's aggressive export of urea into the world market. Higher production levels from producers in China has led to a surplus of urea available for this year's export window, and this has resulted in more urea tons moving US market and that has certainly I think had its impact on fill season prices as well.
What has happened in China if you really look at their increased production is normally, they run their urea plants at about 75% production. This year as a result of the decline in the housing market demand in China – much really driven by Chinese government policy – you've seen – with the reduction in housing market, you've seen the price of coal, which is a fuel utilized in homes for both – for all fuel sources – you've seen the price of coal in China decline significantly.
And what this has allowed the urea producers in China utilize coal for their – to capture nitrous they need for production. And so, with a lower seed stock price, they've actually ramped their production up from 75% to about 90% this year. And so as I said, this has put more urea tons available into the world market. And that has indirectly resulted in urea tons moving into the US market that impacted this year's fill season.
So how do these factors impact our fill season prices? Well, for competitive reasons, you know it's our policy to only publicly divulge sales prices on a retroactive basis, so I'm not going to tell you what our prices are for the second half of the year.
However, I can tell you that our fill prices for UAN, for the second half of the year, are approximately $30 per ton lower than our previous expectations, and will be slightly less – certainly less than what we saw last year.
Now have said that, I would note that the average price we expect to realize for UAN sales in the second half of 2013 is higher than the average for the previous five years. So I think you see a lot of concern about UAN prices moving down, which they have. But quite frankly, they're still pretty darn good UAN prices that the producers are receiving this year.
The other full factor that's impacting our full-year expectation is related, as I mentioned, the unexpected downtime and the reduced productions that I've already discussed. We look forward, quite frankly, very much to having our entire plant back up and running at full rates, as I mentioned, over this weekend and certainly look back to having our full production in service.
Based on our revised expectations, however, for the full-year production and based on the pricing for the second half of the year, we are adjusting our 2013 full-year outlook for cash flow available for distribution to between $1.80 per unit and $2 per unit. Now, obviously, while we're disappointed with the reduction, I would note that with this range, we continue to expect to payout a record distribution to our unit holders for 2013.
Now, as I manage looking at next year, if I'm correct in my thinking about the aggressive USDA forecast, and also in my thinking that I believe stock-to-use ratios will come out of this year probably around 10% versus the government's forecast of 15%, I really think we'll go into next year's spring planting season with strong demand for our products.
Also benefiting, I think 2014 and beyond, is the execution of a number of initiatives designed to grow our partnership. To optimize prices we receive for our products and increase future cash flows, we are continuing to expand our offsite storage capacity by building and leasing distribution terminals in the market area.
Last year's construction of our Phillipsburg, Kansas facility, along with the additional lease storage in our market area beginning this year, is allowing us to do a further sale of a significant number of UAN tons to be produced later this year into the spring when we expect to see prices at are higher than we would have received in the fill season this year.
I’d also note that we have a distribution facility under construction – and this is the second one in two years – at a location in Dartmouth, Kansas. We are continuing to grow our presence in the DEF market and we look – and continue to look at additional opportunities to expand our sales mix into other higher-margin products.
Another part of our growth strategy involves ongoing efforts to enhance our existing plant assets. On our last earnings call, we discussed several projects that were under review that together could materially increase our production of ammonia.
As you may recall, at that time, I told you there was a small project and several large projects that we were reviewing. On the smaller project where we've made that decision, we're moving forward with it. We've already approved the capital. It's approximately $6 million of capital. And it's designed to expand our current pressure swing absorption unit and allow us to recover sufficient hydrogen to produce in an incremental 20 tons to 25 tons per day of ammonia.
We expect to have this project completed by the beginning of next year's third quarter. Payback on that project is estimated at 2.5 years and should add approximately, on an annual basis, $0.03 per unit in cash distributions.
So it's got a quick payback, a good return, lot of, lot of money. But I'll tell you, it's a nice little project that can add to our cash pay – well, distribution beginning in the – we hope – in the fourth quarter of next year.
The second project that are currently looking at, and it's one much larger in scope, could significantly increase our production of ammonia beginning in 2016. We are currently in a pre-frontend engineering and design analysis stage that we expect to be completed over the next 60 to 90 days, and are very hopeful to make a final decision regarding this project in the fourth quarter this year. And once we get that pinned down, I'll certainly come back and share with you more details about that project as well.
And finally, we remain interested in expanding our business through the acquisitions of assets. And we're continually evaluating opportunities out of the M&A sector.
So in conclusion, we continue to target a record distribution for 2013. We believe – still remain and believe strongly in the long-term fundamentals of this business. We also have a number of initiatives underway designed to further increase production to maximize the price we receive for our product, and expand our sales mix into higher-margin products.
Combined with our strong balance sheet and substantial financial flexibility, we believe we are well and continue to remain positioned for long-term success of this business.
So with that, operator, we will open the floor for questions.
Thank you. (Operator instructions). One moment please while we poll for questions.
Thank you. And it appears we have no questions at this time. I would like to turn the floor back over to Mr. Wes Harris for any concluding remarks.
Well, we thank everyone for participating today. Given we pre-released our estimates last Friday, I think that's probably a direct reflection on the number of questions.
So again, thanks for everyone's time this morning. And we look forward to speaking with you in November when we discuss our third-quarter results. Thank you.
Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation.
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