CVR Partners, LP (UAN) Q2 2022 Earnings Report, Transcript and Summary

Greetings, and welcome to the CVR Partners, LP Second Quarter 2022 Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Richard Roberts, Vice President of FP&A and IR for CVR Partners, LP. Please go ahead, sir.

Thank you, Melissa. Good morning, everyone. We appreciate your participation in today's call. With me today are Mark Pytosh, our Chief Executive Officer; Dane Neumann, our Chief Financial Officer; and other members of management. Prior to discussing our 2022 second quarter 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 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 2022 second quarter earnings release that we filed with the SEC for the period. 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 needs 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 said, I'll turn the call over to Mark Pytosh, our Chief Executive Officer. Mark?

Thank you, Richard. Good morning, everyone, and thank you for joining us for today's call. The summarized financial highlights for the second quarter of 2022 include net sales of $244 million, net income of $118 million, EBITDA of $147 million. And the Board of Directors declared a second quarter distribution of $10.05 per common unit, which will be paid on August 22 to unitholders of record at the close of the market on August 12. During the second quarter of 2022, we operated the plant safely with consolidated ammonia plant utilization of 89%. We experienced approximately 5 days of downtime at Coffeyville due to a power outage and approximately 3 days of downtime due to an outage at the third-party air separation facility. At East Dubuque, we experienced approximately 6 days of downtime during the quarter due to a number of different outages. As I mentioned on the last few earnings calls, a major part of the plan for the upcoming turnaround at East Dubuque should address a number of the issues that resulted in the downtime over the last few quarters. In addition, while the Coffeyville facility is down for turnaround, the operator of the third-party air separation facility is completing a significant investment intended to improve its reliability. Our combined operations produced approximately 193,000 tons -- gross tons of ammonia, of which 50,000 net tons were available for sale for the second quarter of 2022. This compares to production at 217,000 gross tons of ammonia, of which 70,000 net tons were available for sale in the prior year period. We produced 331,000 tons of UAN in the second quarter of 2022 as compared to 334,000 tons in the prior year period. During the second quarter of 2022, we sold approximately 287,000 tons of UAN at an average price of $555 per ton, and approximately 52,000 tons of ammonia at an average price of $1,182 per ton. Relative to the second quarter of 2021, UAN and ammonia sales volumes were lower primarily due to the late start to spring application due to cold and wet weather, along with some demand disruption due to the high fertilizer price environment. Year-over-year average pricing for the quarter was 134% higher for UAN and 193% higher for ammonia. Despite the poor weather and the spring impacting sales volumes, we posted another quarter of record earnings as the elevated price environment in the spring more than offset the decline in sales volumes. Fertilizer inventory levels coming out of spring were higher for producers across the industry than anticipated, but we expect this will get cleaned up over the summer. During this time, we will be completing turnarounds at both our facilities. Looking ahead to the fall, we continue to see tight market conditions globally. And we believe the structurally higher energy costs in Europe and around the world will cause prices to remain elevated, which I will discuss further in my closing remarks. I will now turn the call over to Dane to discuss our financial results.

Thank you, Mark. For the second quarter of 2022, we reported net sales of $244 million and operating income of $126 million compared to net sales of $138 million and operating income of $30 million in the second quarter of 2021. Net income for the second quarter of 2022 was $118 million or $11.12 per common unit, and EBITDA was $147 million. This compares to net income of $7 million or $0.66 per common unit, and EBITDA of $51 million for the prior year period. There were no adjustments to EBITDA in either period. The year-over-year increase in EBITDA was driven by higher UAN and ammonia sales prices, offset slightly by lower sales volumes and higher feedstock costs. Direct operating expenses for the second quarter of 2022 were $49 million compared to $53 million in the prior year period. Excluding inventory and turnaround impacts, direct operating expenses increased by approximately $8 million primarily related to increased repair and maintenance expenses and higher electricity and natural gas costs. Turning to capital spending. During the second quarter of 2022, we spent $8 million on capital projects, which was primarily maintenance capital. We estimate total capital spending for 2022 to be approximately $44 million to $47 million, of which $43 million to $45 million is expected to be maintenance capital. This includes turnaround spending, which we expect will be approximately $30 million to $35 million of expense. Looking at the balance sheet. As of June 30, we had approximately $191 million of liquidity, which was comprised of approximately $156 million in cash availability under the ABL facility of $35 million. Within our cash balance of $156 million, we had approximately $4 million related to customer prepayments for the future delivery of product. Following the completion of our debt repayment plan in the first quarter, total debt on the balance sheet consists of only $550 million, 6/8 % senior notes due 2028. In assessing our cash available for distribution, we generated EBITDA of $147 million and had net cash needs of $41 million for interest costs, maintenance CapEx and other reserves. Within that total is a cash reserve of $15 million for expected working capital needs that could be released in the future if appropriate. As a result, there was $106 million of cash available for distribution, and the Board of Directors of our general partner declared a distribution of $10.05 per common unit. Looking ahead to the third quarter of 2022, we estimate our ammonia utilization rate to be between 60% and 65% as a result of the 2 planned turnarounds this summer. We expect direct operating expenses to range between $60 million and $65 million, excluding inventory and turnaround impacts, and total capital spending to be between $22 million and $27 million. Turnaround spending is expected to be $30 million to $35 million of expense. With that, I will turn the call back over to Mark.

Thanks, Dane. In summary, we are pleased with the strong results for the second quarter and are happy to be returning $10.05 per unit to our unitholders. Spring planting was challenging in 2022 as wet and cold weather delayed planting in many parts of the Northern and Eastern Midwest. Timing was delayed by several weeks in some areas. And the delays compressed side-dress and top-dress applications later in the season. We believe that the large ammonia application in the fall of 2021 also reduced the amount of additional nitrogen needed in the spring. Higher nitrogen prices led to slightly lower application rates as well, particularly on less productive land, which we believe will ultimately result in lower grain yields for this harvest season. The USDA's most recent spring 2022 planting report for June estimated planted corn acres for 89.9 million, down nearly 4% from 93.4 million in 2021. The soybean acres are estimated at 88.3 million, up a little over 1% from 87.2 million acres in 2021, but down from intended acres of 91 million. We believe estimated yields by the USDA are likely optimistic with the late planning start, lower fertilizer application in certain areas and recent drought conditions. Inventory carryout levels are estimated to be below 10% for both corn and soybeans, keeping them at the lower end of the 10-year range. Inventory levels for corn and wheat may be drawn further than these estimates due to potential grain export shortages from the Ukraine and Russia. Overall, grain market conditions currently bode well for nitrogen fertilizers in 2023 due to the likely need for additional corn and wheat planted acres. Russia's attack of Ukraine continues to have a major impact on global agriculture markets. Grain and fertilizer shipments in the Black Sea ports remain restricted. Since our last earnings call, the natural gas shortages in Europe have grown more acute as Russia has reduced its natural gas pipeline flow to Europe. This has caused natural gas prices in Europe to spike to $50 to $60 an MMBtu and cause fertilizer production curtailments as production costs rose to the highest in the world. Europe has been drawing ammonia and urea from U.S. markets to supplement their needs. We expect these conditions to continue through the winter at a minimum. Longer term, given Europe's stated shift from using Russian natural gas to imported LNG, baseline nitrogen fertilizer production costs will likely stay higher in Western Europe and favor U.S. production where gas costs should be lower. On July 18, the U.S. International Trade Commission made a negative final injury determination concerning its investigation of imports from Russia and Trinidad and Tobago despite the U.S. Department of Commerce final determination in June that UAN is subsidized and dumped in the U.S. market by producers of both countries. As a result of this decision, we expect world trade flows at UAN to return to pre-investigation patterns, but imports will likely be negatively impacted by the doubling of freight rates for UAN shipping over the past year. The summer fill season is complete for ammonia and UAN. And while pricing was lower than peak prices in the spring, fill prices were in the same range as our reported prices for the fourth quarter 2021, first quarter of 2022. We continue to experience some downtime at both of our plants in the second quarter, and we expect to address a number of these issues and the turnarounds planned for both plants this summer. The Coffeyville turnaround is nearing completion and is currently on time and on budget. East Dubuque should begin its turnaround in a couple of weeks, which would last for about 30 days. The turnarounds are focused on reliability improvements, equipment repair and replacements. Also at Coffeyville, the owner of the third-party air separation plant is completing a significant real-life investment intended to improve its reliability as part of this turnaround. We are not currently planning for any turnaround activity at either plant until the fall of 2024. On 45Q tax credits for the Coffeyville facility, we have signed a term sheet with a tax equity investor and are completing detailed due diligence and structuring. We're focused on completing the documentation and closing the transaction in the coming months. We currently expect to receive initial net cash proceeds of approximately $15 million at the closing of the transaction, with additional annual payments to follow over the next 7 years. As we have said on our last earnings call, we completed our targeted debt paydown by retiring the remaining $65 million of the 2023 senior notes in February. Our total debt now stands at $550 million. And with an interest rate of 6/8%, we are comfortable with our debt level and interest costs through a full market cycle. We are not currently planning to pay down any additional debt in the near term. We're continuing to evaluate some lower-cost brownfield development projects at both plants that could be attractive targeted capacity increases to our existing footprint. If approved, these products would take several years to complete. We are not currently contemplating any greenfield development projects. While fertilizer market conditions remain strong, we are continuing to focus on maximizing cash flow generation by safely and reliably operating our plants with a keen focus on the health and safety of our employees, contractors and communities, prudently managing costs, being judicious with capital, but targeting select investments in reliability projects and incremental additions to production capacity, maximizing and marketing logistics capabilities, and targeting opportunities to reduce our carbon footprint. In closing, I would like to thank our employees for their excellent execution during the second quarter and upcoming workload during our turnarounds in the third quarter while continuing to be healthy and safe in everything we do. With that, we're ready to take any questions.

[Operator Instructions]. Our first question comes from the line of Rob McGuire with Granite Research.

It appears you produced 330,000 tons or 331,000 tons of UAN in the quarter, but you only sold 287,000 tons, creating a carryover of about 44,000 tons. Can you just clarify if that's the case? And perhaps did you sell into that in July? And if not, do you perceive that -- how do you see that carryover selling in the future?

Sure. So there were two issues there. As I mentioned in my prepared remarks, the -- towards the year, we typically would see a lot of demand for side-dress and top-dress for UAN. That was lower this year and partly due to the compressed window of application. And so we just didn't sell as many tons at the end of the season. The other is that we were holding back some tons to be able to continue to ship to customers during turnaround. So those tons were -- have been sold, and we're shipping -- even though the plant is down, we're shipping tons from the plant to customers in July and here in early August. So we wanted to maintain that while -- even while the plant is not in production at this point.

I appreciate the color. Separately, on the 45Q tax credits, can you provide an update on those, when we might see an announcement from CVR?

Yes. As I said in the prepared remarks, we've signed a term sheet with a party with a tax equity investor. And now, it's just completing legal documentation. And so we expect that over the next 2 to 3 months, we'll be able to complete that documentation and close, and there'll be an upfront payment to us net of expenses of $15 million and -- roughly, and then payments over the following 7 years.

I appreciate that. What kind of turnaround schedule do you anticipate going forward? Every 2 years, every 30 months, every 3 years? And are you going to try to spread those turnarounds out, or try to do maybe a couple of plants at the same time?

Yes. We generally don't like doing the 2 plants in the same time frame. It just so happened with COVID and with some of the maintenance activities we conducted, that the plants ended up coming into the same year. I think right now, we're looking at generally probably 3-year schedule, although I think at Coffeyville, because of some reliability projects we have on the horizon, we'll probably do a turnaround in 2024. Then East Dubuque would be later in 2025. We think a 3-year schedule makes sense, but there'll be times when there'll be projects where we're doing vessel replacements or catalyst replacements. And we might need to do a 2-year turnaround. But with the 2 that are going back to back here this year, we won't need a turnaround until the fall of 2024. So nothing -- there won't be any turnaround activity next year.

Appreciate that. And then last question. Are you going to do a summer fill program for UAN this year? How does that -- how do you see this year differing perhaps to other years?

That has been completed in the last 2 weeks. And the difference this year, that -- depending on the year, I wouldn't say that there's any sort of commonality there. It varies depending on market conditions. But this year actually was a shorter sales. So we only -- the market -- this is kind of where the market, was about a 3-month sale product. That could -- that's been as much as 6 months in a given year. This year, it was 3 months, and we're -- and so that was completed already. We participated. Obviously, we're kind of navigating around our turnaround where we're not going to have production for about a month of the quarter for each plant. But we expect customers will be back in the fall for another round. But prices are already firming off of the levels of the fill. And so we think market conditions are just going to be very solid going into the fall this year because of all the factors with European natural gas and global energy and coal and natural gas in other markets.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to management for any final comments.

Well, thanks, everybody, for being on the call today, and we look forward to reviewing our third quarter results in early November. Thank you very much.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.