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CVR Partners LP  (NYSE:UAN)
Q1 2019 Earnings Call
April 25, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator --

Greetings, and welcome to the CVR Partners, LP First Quarter 2019 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. Jay Finks, Vice President of Finance and Treasurer. Thank you. You may begin.

Jay Finks -- Vice President of Finance and Treasurer

Thank you, Michelle. 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 2019 first 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. Without limiting the foregoing, the words outlook, believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You're 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. 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 2019 first quarter earnings release that we filed with the SEC yesterday after the close of the market.

With that said, I'll turn the call over to Mark Pytosh, our Chief Executive Officer. Mark?

Mark A. Pytosh -- Chief Executive Officer and President

Thank you, Jay. Good morning, everyone and thank you for joining us for today's call. To summarize financial highlights for the first quarter of 2019 included net sales of $92 million and net loss of $6 million, adjusted EBITDA of $26 million. And the Board of Directors declared a first quarter distribution of $0.07 per common unit, which will be paid on May 13 to unitholders of record on May 6.

During the first quarter of 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 first quarter of 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 first quarter of 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 ton -- 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 first quarter of 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 first quarter of 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 first quarter of 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 I will now turn the call over to Tracy to discuss our financial results.

Tracy D. Jackson -- Executive Vice President and Chief Financial Officer

Thank you, Mark. Turning to our results for the first quarter of 2019, we reported net sales for the period of $92 million, operating income of $9 million, a net loss of $6 million, or $0.05 per common unit, and adjusted EBITDA of $26 million. This is compared to net sales of $80 million, operating losses of $3 million, a net loss of $19 million or $0.17 per common unit and adjusted EBITDA of $13 million for the prior year period. These improvements were driven predominantly by improved UAN and ammonia pricing partially offset by the 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 first quarter 2019 decreased to $35 million from $39 million in the prior year period. Excluding inventory impacts, direct operating expenses increased slightly by approximately $0.5 million year-over-year, primarily related to utility costs.

Turning to capital spending, during the first quarter of 2019, we spent $3 million on capital projects, which was primarily maintenance capital. We continue to estimate total capital spending for 2019 to be approximate $20 million to $25 million excluding turnaround spending. In the fall, we have a planned turnaround at East Dubuque, which we would expect will cost approximately $7 million.

Looking at the balance sheet, as of March 31, we had approximately $97 million in cash, including approximately $63 million related to customer prepayments for the future delivery of product and full availability under our ABL facility of $50 million. We currently believe our total liquidity position of approximately $122 million at the end of the quarter is sufficient going forward. Our long term gross debt of $647 million 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 of this year at 104.6% at par.

Available cash for distribution of $8 million is derived from our positive adjusted EBITDA for the quarter after consideration of reserves of $15 million for debt service and $3 million for environmental and maintenance capital expenditures. We are a 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 partners.

With that, I will turn the call back over to Mark.

Mark A. Pytosh -- Chief Executive Officer and President

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 in duties on the UAN exports from the US, 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 million to $94 million 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 cost, 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.

Questions and Answers:

Operator --

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

Adam Samuelson -- Goldman Sachs -- Analyst

Yes. Thanks. Good morning, everyone.

Mark A. Pytosh -- Chief Executive Officer and President

Good morning, Adam.

Adam Samuelson -- Goldman Sachs -- Analyst

So I just wanted to dig a little bit more into the spring and how -- just to understand the impact on your business and the opportunities it has presented. And maybe first, Mark, if you could talk about 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 has presented to you and especially for East Dubuque, if that might actually help your realized pricing as we think about the second quarter.

Mark A. Pytosh -- Chief Executive Officer and President

Sure. Let's start with rail first because rail is probably the easiest one. It's -- they're 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 of UAN, but it does affect the timing, so we got to kind of rerack our rail schedule to fit a later delivery into certain points in Nebraska, that -- there are a number of those things that are alleviating pretty quickly here. So we changed our rail schedule, and that was really affecting product movement into Nebraska. 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 we were seeing some difficult conditions for farmers in certain parts, particularly in the Eastern 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 barges 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. That's a later season, but the earlier stages will -- should be an opportunity for us to move some UAN up there. We won't see as barge movement. And that's -- that -- 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 were looking for product up there. So that's really my answer for those two, Adam.

Adam Samuelson -- Goldman Sachs -- Analyst

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?

Mark A. Pytosh -- Chief Executive Officer and President

No. It was really just the timing of when it would go in there and they wouldn't be applying. I'd be putting some things in tanks in the 1Q to be prepared for 2Q, but it's more of when is that kind of and I so called 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 products -- some product in tanks in Nebraska, but there's always a replenishment, so that's going to be delayed this year.

Adam Samuelson -- Goldman Sachs -- Analyst

Okay. And then just as we think about the impact to the broader market declines on -- you've seen in at least NOLA UAN prices in the last couple of months. Your pricing kind of held in quite strongly, is that just sums up that was presold 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?

Mark A. Pytosh -- Chief Executive Officer and President

Well, it's -- Adam, it's a little bit of both. We sold forward in January and February a big chunk in the first quarter and pricing was good then. And there's usually a dip, usually in the March time frame before the season and so we tend 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 starting to come now. And so this is typically when we will be looking to participate when there's a replenishment after the first run. So our -- it looks like the market is firming here, and we've been sort of patiently waiting for that to occur.

Adam Samuelson -- Goldman Sachs -- Analyst

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 slow things down for a few days here and there because of tank space. So you felt -- the utilization theory could actually -- could have been a couple of points better if not for things in just storage constraints otherwise. Is that right?

Mark A. Pytosh -- Chief Executive Officer and President

It would have been much -- yes, it 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 a significant inventory because of the poor fall conditions and so we just -- we backed the rate off there. The plants running well. They were in good shape and 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 till we get to the turnaround.

Okay, great. That's all super helpful. I'll pass it on. Thanks.

Operator --

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

Roger Spitz -- Bank of America -- Analyst

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.

Tracy D. Jackson -- Executive Vice President and Chief Financial Officer

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

Roger Spitz -- Bank of America -- Analyst

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

Tracy D. Jackson -- Executive Vice President and Chief Financial Officer

Yes.

Roger Spitz -- Bank of America -- Analyst

All right. Thank you very much.

Operator --

Thank you. (Operator Instructions) Our next question comes from the line of Charles Neivert with Cowen. Please proceed with your question.

Charles Neivert -- Cowen -- Analyst

Good morning, guys.

Mark A. Pytosh -- Chief Executive Officer and President

Good morning, Charles.

Charles Neivert -- Cowen -- Analyst

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 the pricing to rise and then play into it. So you're not going to be -- you haven't presold a lot at sort of the lowest levels of the first quarter into the second quarter, is that -- did I read that right?

Mark A. Pytosh -- Chief Executive Officer and President

That's correct.

Charles Neivert -- Cowen -- Analyst

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 of? I mean, I assume this is as 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 intend to play this going forward as well?

Mark A. Pytosh -- Chief Executive Officer and President

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.

The other thing about product pricing in the second quarter, we had already pre-priced most of our ammonia coming into the season at good pricing. That's started back in December and carried into January and 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 -- has been in the process fee and delivered now, but the pricing occurred in December and January.

Charles Neivert -- Cowen -- Analyst

Okay. When I look at the East Dubuque operations, whether 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 is 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?

Mark A. Pytosh -- Chief Executive Officer and President

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

Charles Neivert -- Cowen -- Analyst

Okay. And then is there any thought -- I mean given this situation and its -- the likelihood that over time, it'll 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 sort of delayed would likely be a better situation, especially considering you're little isolated from the Gulf Coast, so when situations arise, you guys are in a good position to sell. Is there some thought to that at some point, adding storage capacity?

Mark A. Pytosh -- Chief Executive Officer and President

We debate that, but this was -- we've only had this about -- this severe like once in the last 20 years, so I'm not sure we would go out and spend the capital to plan for the one in 20-year cycle. I think that one thing 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 -- with production slate down the road. That's -- we think that's probably a better avenue than just putting another storage tank for ammonia there.

Charles Neivert -- Cowen -- Analyst

Got it. And then when looking at the nat -- the natural gas differential between East Dubuque and NYMEX is -- it seemed a little larger there, is that -- what was the reason for that or is it just sort of occurred this year because of cold weather? I mean is there something -- can you bring that down or is it coming down?

Mark A. Pytosh -- Chief Executive Officer and President

It's come way down. And it usually there is 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 planting conditions -- we have the 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 $2.70, $2.80. They were trading -- we're trading in and around NYMEX at this stage. It only trades at a premium in the winter.

Charles Neivert -- Cowen -- Analyst

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 or are you guys still not really that much?

Mark A. Pytosh -- Chief Executive Officer and President

Now, we're -- that's -- obviously, it's one of our big sources there. We've been -- we're in the process of 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 hasn't -- the pricing mechanism has a UAN component, so it's the price of pet cokes 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.

Charles Neivert -- Cowen -- Analyst

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

Mark A. Pytosh -- Chief Executive Officer and President

Full out.

Charles Neivert -- Cowen -- Analyst

...because you can sell ammonia. Do you expect to go into the spring with empty tank -- basically empty everything out by, let's say, end of Q2, is that the objective?

Mark A. Pytosh -- Chief Executive Officer and President

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 consumed what we had sitting there for a few months. So we're down there, and we're going to keep moving into May, then we're just going to try to move as much as we can. In 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, and so we go into summer with pretty light plants like we did, last year was light too.

Charles Neivert -- Cowen -- Analyst

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

Mark A. Pytosh -- Chief Executive Officer and President

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

Charles Neivert -- Cowen -- Analyst

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

Mark A. Pytosh -- Chief Executive Officer and President

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 markets coming back up and so I don't really know where we're going to settle, but it's definitely come -- it's started to come back toward us now. So we'll have a better idea after another month.

Charles Neivert -- Cowen -- Analyst

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

Operator --

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.

Mark A. Pytosh -- Chief Executive Officer and President

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 toward safe, reliable and environmental responsible operations. We look forward to reviewing our second quarter 2019 results with you in July. Thank you very much for attending the call today.

Operator --

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.

Duration: 26 minutes

Call participants:

Jay Finks -- Vice President of Finance and Treasurer

Mark A. Pytosh -- Chief Executive Officer and President

Tracy D. Jackson -- Executive Vice President and Chief Financial Officer

Adam Samuelson -- Goldman Sachs -- Analyst

Roger Spitz -- Bank of America -- Analyst

Charles Neivert -- Cowen -- Analyst

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