Cvr Partners, LP Q4 FY2020 Earnings Call

Greetings, and welcome to the CVR Partners LP Fourth Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Richard Roberts, Senior Manager of Financial Planning and Analysis and Investor Relations. Thank you, sir. You may begin.

Thank you, Christine. Good morning, everyone. We appreciate your participation in today's call. With me today are Mark Pytosh, our Chief Executive Officer; Tracy Jackson, our Chief Financial Officer; and other members of management. Prior to discussing our 2020 full-year results, let me remind you that this conference call may contain forward-looking statements as that term is defined under federal securities laws. For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward-looking statements. You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release. As a result, actual operations or results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent required by law. Let me also remind you that CVR Partners completed a 1-for-10 reverse split of its common units on November 23, 2020. Any per unit references made on this call are on a split-adjusted basis. This call also includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures, including reconciliation to the most directly comparable GAAP financial measures are included in our 2020 full year earnings release that we filed with the SEC yesterday after the close of the market. Let me also remind you that we are a variable distribution MLP. We will review our previously established reserves, current cash usage, evaluate future anticipated cash need and may reserve amounts for other future cash needs as determined by our general partner's 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 products, capital expenditures and cash reserves deemed necessary or appropriate by the Board of Directors of our general partner. With that, I'll turn the call over to Mark Pytosh, our Chief Executive Officer. Mark?

Thank you, Richard. And good morning everyone and thank you for joining us for today's call. To summarize highlights for the full year 2020 included, net sales of $350 million, net loss of $98 million, EBITDA of $41 million, which was reduced by a $41 million non-cash goodwill impairment and we repurchased over 623,000 CVR Partners units for $7 million. Looking more specifically at 2020 fourth quarter, we reported net sales of $90 million, a net loss of $17 million and EBITDA of $18 million. We repurchased nearly 394,000 CVR Partners common units for $5 million, and there is no cash available for distribution this quarter. During the fourth quarter 2020, we had strong at both facilities. The Coffeyville ammonia plant operated at 99% utilization compared to the fourth quarter 2019 at 90%. The East Dubuque ammonia plant operated at 103% utilization compared to 88% in the prior year period adjusted for last year's scheduled turnaround. Our combined operations produced approximately 220,000 gross tons of ammonia of which 75,000 net tons were available for sale for the fourth quarter 2020. This compares to production of 180,000 gross tons of ammonia of which 55,000 net tons were available for sale in the prior period. We produced 335,000 tons of UAN in the fourth quarter of 2020 as compared to 286,000 tons in the prior year period, which was impacted by the planned turnaround at East Dubuque. During the fourth quarter of 2020, we sold approximately 325,000 tons of UAN at an average price of $139 a ton, and approximately 114,000 tons of ammonia at an average price of $267 per ton. Year-over-year pricing softened for UAN and ammonia, which were down 21% and 18% respectively. Although prices for nitrogen fertilizers were soft for most of the year, prices began to increase in the fall as crop prices and farmer economics improved. The combination of improving farmer economics and favorable weather drove a strong fall ammonia application season and that strength is carried over into spring demand as well. The outlook for spring plantings and demand for crop inputs remain strong, with the USDA estimating 92 million planted corn acres this year. This is translating into significantly higher prices for UAN and ammonia for the spring, which I will discuss further in my closing remarks. I will now turn the call over to Tracy to discuss our financial results.

Thank you, Mark. Turning to our results for the full year 2020, we reported net sales of $350 million and an operating loss of $35 million, compared to net sales of $404 million and operating income of $27 million for the full year 2019. Net losses for the full year 2020 were $98 million or $8.77 for common unit, and EBITDA was $41 million. This compares to a net loss of $35 million or $3.09 per common unit and EBITDA of $107 million for the full year 2019. As a reminder, our full year 2020 results were reduced by a $41 million non cash goodwill impairment related to the Coffeyville facility taken in the second quarter. The year-over-year decline in EBITDA was driven primarily by the goodwill impairment and lower prices for UAN and ammonia. For the fourth quarter of 2020, we reported net sales of $90 million and an operating loss of $1 million, compared to net sales of $86 million and an operating loss of $9 million in the fourth quarter of 2019. Net losses for the fourth quarter of 2020 were $17 million or $1.53 per common unit and EBITDA was $18 million. This compares to a net loss of $25 million or $2.20 per common unit and EBITDA of $11 million for the fourth quarter of 2019. The increase in EBITDA was driven primarily by higher sales volumes offset somewhat by lower pricing for UAN and ammonia. Direct operating expenses for the fourth quarter of 2020 decreased to $44 million from $46 million in the prior year period. Excluding inventory impacts, direct operating expenses declined by approximately $4 million year-over-year, primarily related to turnaround and associated expenses incurred in the fourth quarter 2019. For the full year 2020, we reduced operating expenses and SG&A costs by over $23 million compared to the full year 2019, a direct result of our cost savings initiatives. Turning to capital spending. During the fourth quarter of 2020, we spent $3 million primarily on maintenance capital. For the full year 2020, we spent approximately $16 million, of which $12 million was for maintenance capital. Total capital spending for the year came in below our expected range of $18 million to $21 million as a result of a shift in timing of certain capital projects into subsequent years. They currently estimate total capital spending for 2021 to be $23 million to $26 million, of which $18 million to $20 million is expected to be maintenance capital. This excludes turnaround spending, which we expect will be approximately $8 million. Looking at the balance sheet as of December 31, we had approximately $51 million of liquidity, which was comprised of $31 million in cash and availability under our ABL Facility of $20 million. Within our cash balance of $31 million, we had approximately $8 million related to customer pre-payments for the future delivery of product. Total debt on the balance sheet remains at $647 million, which is comprised of $645 million of senior notes due in 2023 and $2 million of senior notes due in April of 2021. As we have discussed in recent earnings calls, refinancing the 2023 notes remains one of our top priorities. Continued strength in the debt capital markets may provide an opportunity to pursue a refinancing at favorable rates in the next few months. We are currently considering options that would allow us to delever the partnership along with refinancing existing notes. One scenario could be to refinance the majority of the 2023 notes but leave a stub amount outstanding that we will be able to pay down over the next few years. We are currently in the process of evaluating structures that could allow us to generate and monetize 45Q tax credits from the CO2 we capture at the Coffeyville facility. We are still relatively early in the process, but we would expect to be able to get something done in 2021 that can provide additional cash to be used to reduce our total debt outstanding. And assessing our cash available for distribution, we generated an EBITDA of $18 million for the quarter at current cash needs of $15 million for debt service, and $2 million for environmental and maintenance capital expenditures. During the quarter, we repurchased nearly 394,000 common units for total cash consideration of $4.8 million. In addition, the Board of Directors of our general partner established reserves of $1.5 million for the planned turnaround at Coffeyville in 2021. As a result, there was no cash available for distribution. During the quarter, we regained compliance with the New York Stock Exchange continued listing standards through the completion of a 1-for-10 reverse split on November 23. Looking ahead to the first quarter of 2021, despite reducing operating rates of East Dubuque last week due to the extreme weather conditions, we estimate our ammonia utilization rate to be greater than 90% for the quarter. We expect direct operating expenses to be $35 million to $40 million excluding inventory impacts, and total capital spending to be between $4 million and $7 million.

Thanks Tracy. Since the last earnings call, there's been continued improvement in crop prices and farmer economics. For the 2020 planting season the USDA estimates that planted corn acres were 90 million and yield per acre was 172. On the demand side, ethanol blending remains at lower levels than last year due to lower gasoline demand. However, lower ethanol-related corn demand in the U.S. has been more than offset by Chinese and other demand for corn. The USDA is now estimating U.S. carry-out inventories of 1.55 billion bushels or 11% of domestic production. That is down over 50% from the summer 2020 estimates. Crop forecasts for Argentina and Brazil are also lower than previous estimates, and soybean demand from China has been much greater than expected. This change in fundamentals led to a rally in grain prices, with corn recently trading at around $550 a bushel and soybeans at $14 a bushel. Stronger farmer economics led to a robust fall ammonia application and accelerating demand for all crop inputs for spraying. Fall demand for ammonia was the best that it has been in several years. We believe that industry-wide ammonia inventories were very low after the fall and prices have remained firm through the winter. We have also seen strong fall demand for ammonia for spring application and have a good order book for the season. Since the beginning of 2021, urea prices have rallied significantly across the globe. Prices rose to a peak of $370 per ton in February, with robust demand for advanced spring application. After lower pricing in the second half of 2020, UAN prices have fallen while demand has been robust for spring application even at much higher prices. For producers, natural gas prices have risen approximately $0.50 per MMBtu. But international natural gas prices have doubled or tripled due to strong demand and limited increases in supply. The spread between domestic and international natural gas nearly reached parity in the summer of 2020, but it's now over $5 per MMBtu higher on average in international markets compared to domestic pricing. Lowered domestic natural gas prices give U.S. nitrogen fertilizer producers a cost advantage compared to international producers and reduce the incentive to run at high marginal operating rates of production. The recent severe weather across the Midwest caused many nitrogen fertilizer production facilities to be temporarily shut down due to limited natural gas availability and/or extremely high regional natural gas prices. This loss of production should further tighten nitrogen fertilizer inventories in advance of spring. As Tracy mentioned, the recently issued 45Q tax credit regulations may provide an attractive opportunity for CVR Partners. We currently sell a significant amount of the CO2 generated at Coffeyville to an independent oil company for sequestering through enhanced oil recovery. We also use a portion of the CO2 generated for the production of urea, which is then further upgraded to UAN. Both of these processes should qualify for the generation of 45Q tax credits based on the final IRS regulations published in January. We're currently in the process of evaluating different structures that can allow us to maximize the value to the partnership from these tax credits. I look forward to providing additional information as we get further along in the process. This sequestering and CO2 at Coffeyville combined with the nitrous oxide abatement at both of our plants has reduced our carbon footprint by over a million metric tons per year. With these reductions, we could certify our ammonia production at Coffeyville as blue ammonia and position CVR as one of the lowest carbon footprint nitrogen fertilizer producers in the U.S. We're continuing to evaluate other methods of reducing our carbon footprint in both plants, and we'll provide updates when we're prepared to implement changes. Any proceeds generated from 45Q tax credits would likely be directed towards reducing our total debt outstanding. We also anticipate refinancing of our debt structure at lower rates. The combination of lowering our debt service costs and reducing outstanding debt would lower our annual cash burn rate for debt service and improve the partnership's ability to consistently generate free cash flow and continue to deliver. We have patiently waited for the right opportunity and want to take advantage of the improving fertilizer market and attractive debt markets. As I mentioned earlier, we continue to repurchase our units during the fourth quarter of 2020. In total, we repurchased over 623,000 CVR Partners common units for $7 million during the year leaving approximately $3 million available on the original authorization at year-end. Despite the strong performance of the units since November, we continue to feel they're significantly undervalued, and the Board of Directors has approved an additional $10 million unit repurchase authorization, which would enable the partnership to repurchase common units should it elect to do so in its discretion. 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 while focusing on the health and safety of our employees, contractors, and communities. We will continue to prudently manage our costs and be judicious with our capital, but selectively invest in reliability projects, and incremental additions to production capacity, and we will maximize our marketing and logistics activities. In closing, I would like to thank our employees for their commitment to being healthy, safe and flexible, and helping the company execute at a high level while managing the impact of COVID-19 and the extreme weather these past two weeks. With that, operator, we will take questions.

Thank you. We will now be conducting a question and answer session. Our first question comes from a line of Roger Spitz with Bank of America. Please proceed with your question.

Thank you, and good morning.

Good morning.

Regarding the CO2 tax credits, perhaps you can tell how we should think about that. How much cash could you potentially generate? When would you receive it? And it sounds like it's more of an ongoing cash receipt as opposed to a one-time. But maybe you can just try to tell us how to think about that?

I'll take the first stab and then Mark could add to it. It is a tax credit program that will pay or reduce taxes potentially by whatever structure we end up going with over a 10-year period of time. And we have initial estimates, but they're very preliminary, we're not prepared to disclose those yet.

Yes. I would just add that we're still in the early phases of the regulations, which have just been finalized for a month. So we're still in a pretty early phase of exploring the structures and what the value potential theory is. In our case, we've been operating our facility for seven years. So we've already been sequestering CO2 for seven years. Therefore, we're grandfathered under the regulations. The regulations also incentivize future projects for sequestration. But we will be grandfathered in. We have a long tail on the ability to claim those credits. We're looking at different avenues for how do we maximize the value.

But I mean, there are regulations to look back and crystallize some tax credits for the past seven years?

No, it doesn't really do that. The starting point of the regulation will be 2018 if you had a plant in service. So the start date would be 2018. And you have to reach a threshold for how much sequestering you do, so we could go back further in time than that.

I'm asking because you've mentioned that addressing your nine in the quarters might depend on the market situation. You indicated that you would be refiling them, and you've also mentioned the majority of those in your prepared remarks. Then you plan to use the CO2 tax credits for the remainder. I'm trying to understand how much cash you could realize from that this year to cover some part of the 645.

Well, it is a possibility; it is one scenario that we will leave a stub portion out. But if we approach the market and we get an exceptional rate, we may opt to leave all of the outstanding debt on the balance sheet at that advantageous lower rate and not pull this stub out to pay down. So we're in the preliminary stages of evaluating whether we're going to do that or not. It's just one potential outcome. As soon as we establish our structure around the 45Qs, we'll have a better idea of timing on which if we choose to leave a stub out, we would start to pay that down. I know it's a non-answer, but we're trying to give you as much information as we can very early in the process.

Appreciate that. One last thing separately. You said the CapEx for 2021 is I think $23 million to $26 million, but that does not include an additional $8 million of turnaround CapEx. Did I hear that right? And what is your Coffeyville and East Dubuque turnaround schedule over 2021/2022?

So first of all, the $8 million is turnaround expense and not CapEx. And so that runs through the P&L. Our schedule right now is we're targeting a fall 2021 turnaround for Coffeyville. And similarly and probably it's early, but fall 2022 turnaround at East Dubuque.

Thank you very much.

Our next question comes from a line of Richard Kus with Jefferies. Please proceed with your question.

Hey, guys. Thanks for taking my questions. So you mentioned it a little bit, East Dubuque down last week due to some of the weather situation. Was there any issue in Coffeyville? And then my follow-up on East Dubuque would be, was that operationally driven? Was it a function of natural gas pricing? And what have you guys or what are your expectations around the input for Q1 as a result of some of these issues?

I'll start with Coffeyville, which was straightforward. We had no significant disruptions there because the plant utilizes petroleum coke to produce hydrogen. The plant operated during the week, as we managed the availability of gas and electricity in Kansas. This was a consideration for all facilities in Oklahoma and Kansas last week. In East Dubuque, the situation was more opportunistic. We had pre-purchased gas at that plant, and we determined it would be more advantageous to shut down the plant and sell the gas in the market rather than continue operations. This decision was driven by economics, not operations at East Dubuque.

Got you. Interesting. What is the potential EBITDA impact as a result of that? You obviously wouldn't have done that if it was going to be negative for you?

Yes. We're not in a position to quantify that. But obviously, we thought it was a better idea to take the plant down than it was to run with conditions.

Got you. And then lastly, for me, obviously, we've seen a pretty significant run up in nitrogen fertilizer prices. Can you guys maybe give a sense of how much book you had sold forward at lower prices? And then how much you expect to be able to benefit over the next quarter or two from the higher pricing that we're seeing?

We're always selling forward. In our fourth quarter, we sold during a lower point in the marketplace. However, as we began the first quarter, we were selling while some prices were increasing. We're noticing a slight rise in the first quarter, and the full impact of the increase in fertilizer pricing will be evident in the second quarter, where prices from January 1 onward have risen substantially. Most of that increase will be observed in the second quarter. We believe this spring will be very beneficial, depending on the weather. If the weather is favorable and we achieve good application rates, it could be a strong season. Inventory levels are currently the lowest they've been in several years, which should positively influence the spring and extend into the summer, benefiting the latter half of the year due to low inventory levels at the start of the year. The recent production outage of almost all nitrogen plants in the United States has further tightened inventory levels. Overall, we are confident about the supply and demand balance. Coupled with favorable farmer economics and strong crop prices, we are optimistic about the spring. However, the full impact of the pricing changes will be reflected in the second quarter this year.

Got it? Alright, I really appreciate it. Good luck, guys.

Our next question comes from line of Brian DiRubbio with Robert W. Baird. Please proceed with your question.

Good morning. As we think about debt leverage reduction, what are you targeting as a sort of debt leverage going forward?

We haven't specifically discussed our targets in this area. We acknowledge that our debt burden and service costs each quarter significantly reduce the available EBITDA for us to distribute as recurring cash. When it comes to lowering to a specific leverage ratio, it varies too much with EBITDA to be a relevant target. Comparatively, we are considerably more leveraged than our peers, so we aim to bring it down from current levels to achieve a more manageable debt service cost.

Okay. That's fair given the volatility. Just the capital allocation parties, I mean, you've been buying back some shares, you had the opportunity to buy back some debt at a discount a few months ago. Is it really now just focused on this refinance? And then you're going to be spending more money towards shareholder returns?

I would just say that we want to get through the next step first and see how the market behaves. If prices are consistently increasing, then the board will need to reassess how they allocate capital. The initial focus will be on achieving our results this year and completing a refinancing, after which we will evaluate the cash flow profile and the board will determine the next steps. Therefore, I think it's premature to predict our long-term actions; we need to observe market trends and assess the refinancing process.

Okay. Regarding the refinancing, can you share how urgent it is for you moving forward? Your bonds will mature in about four months. Are you prepared to wait, or do you feel a pressing need to complete the refinancing sooner rather than later?

No, the rates certainly don't justify doing it just now. I mean, if there's something that happens where rates fall through the floor, then we may. But at this point, we are anticipating aligning with that fall to par.

That's fair. And then just finally, a nice little surprise was the drop in Pet coke prices in the quarter; it fell sequentially year-over-year. Any dynamics that you can share with us on the reason for that decline? I think you had your contract for Pet coke expire in December of last year. Any thoughts on sort of the new pricing dynamics that we should expect going forward?

Sure. There are two different types of Pet coke. In relation to the Coffeyville refinery, which is our sister company, we have a contract that ties us to the price of UAN. Since UAN prices are currently low, Pet coke prices have also been low, which has lowered our average for the year. Generally, Pet coke prices have remained stable with contractual prices. Spot pricing varies and can become quite expensive at times. This year, compared to last year, we have formed contracts with a group of refineries. We have expanded our sourcing more than before, moving from two to three, and now to four refineries. This change provides us with greater flexibility in case of fluctuations in crude prices, production levels, or if any refinery in our portfolio undergoes changes. We have diversified our suppliers around Coffeyville to reduce the impact of any one refinery on our operations.

Great. And I apologize. I do have one more. Are you seeing any shifts right now in freight flows with respect to UAN in particular? I know the EU tariffs sort of distorted historical freight flows and bought a lot of imports at UAN into the U.S. Any comments or thoughts on current dynamics of what you're seeing in the market today?

So, a couple of things there. One, the low prices in the second half of 2020 discouraged, which has discouraged in the first quarter of 2021, imports of UAN. The numbers I saw recently were that the forecast for the first quarter is that UAN imports will be down around 500,000 tons, which is a pretty meaningful amount. The low prices did the trick in the marketplace by reducing the incentive. Prices were rising faster elsewhere, so UAN found a home either in Latin America or in Europe. We've seen the trade flows adjust. The interesting thing about UAN this year will be, depending on the availability of ammonia and the weather, there may be a push at the end of the season for Topdress & Sidedress for UAN, because we don't get enough ammonia on the ground usually in the April timeframe in the core of the Midwest. There may be an additional draw on UAN this year just because of the physical ability to deliver ammonia, which usually ammonia and UAN go together. Urea is still priced at a premium, so it sort of favors UAN right now, but UAN has caught up a lot in the marketplace; however, the imports are well down from last year.

Great. Appreciate the call. Thank you so much.

Thank you. We have reached the end of the question and answer session. I would now like to turn the floor back over to management for closing comments.

Well, we appreciate everybody attending today and we look forward to discussing our first quarter results here in a couple of months. Thank you very much for your time.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.