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CVR Partners LP (NYSE:UAN)
Q3 2020 Earnings Call
Nov 3, 2020, 11:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Greetings, and welcome to the CVR Partners Third Quarter 2020 Conference Call. [Operator Instructions] 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, Richard Roberts, Senior Manager of FB&A and Investor Relations. Thank you, sir. You may begin.

Richard Roberts -- Investor Relations

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 third 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.

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 third quarter 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 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, I'll turn the call over to Mark Pytosh, our Chief Executive Officer. Mark?

Mark A. Pytosh -- Chief Executive Officer and President

Thank you, Richard. Good morning everyone and thank you for joining us for today's call. The summarized financial highlights for the third quarter 2020 included net sales of $79 million, a net loss of $19 million, and EBITDA of $15 million. We repurchased 1.4 million CVR Partners common units for $1.3 million and there is no cash available for distribution this quarter.

During the third quarter of 2020, we had strong utilization at both facilities. At Coffeyville, the ammonia plant operated at 97% utilization compared to the third quarter of 2019 at 98%. At East Dubuque, the ammonia plant operated at 99% utilization compared to 97% in the prior year period adjusted for last year's scheduled turnaround. Our combined operations produced approximately 215,000 gross tons of ammonia of which 71,000 net tons were available for sale for the third quarter 2020. This compares to production of 196,000 gross tons of ammonia of which 56,000 net tons were available for sale in the prior year period. We produced 330,000 tons of UAN in the third quarter 2020 as compared to 318,000 tons in the prior year period.

During the third quarter 2020, we sold approximately 365,000 tons of UAN at an average price of $140 per ton and approximately 54,000 tons of ammonia at an average price of $242 per ton. Year-over-year pricing softened for UAN and ammonia, which are down 23% and 28% respectively. Natural gas pricing was lower as well helping offset some of the UAN and ammonia price weakness. Although prices for nitrogen fertilizers have been softer this year recently we've seen improvements in crop prices and farm economics that make us cautiously optimistic about an uptick in fertilizer pricing from these levels. The supply and demand balance for corn is looking more favorable and market conditions are improving which I will discuss further in my closing remarks.

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 third quarter of 2020, we reported net sales of $79 million and an operating loss of $3 million compared to net sales of $89 million and an operating loss of $8 million in the third quarter of 2019. Net losses for the third quarter of 2020 were $19 million or $0.17 per common unit and EBITDA was $15 million. This compares to a net loss of $23 million or $0.20 per common unit and EBITDA of $11 million for the prior year period. The year-over-year increase in EBITDA was driven by higher sales volumes and lower operating expenses offset somewhat by lower prices for ammonia and UAN.

Direct operating expenses for the third quarter of 2020 decreased to $39 million from $48 million in the prior year period. Excluding inventory and turnaround impacts direct operating expenses decreased by approximately $3 million or 7% compared to the same period last year as we made progress on our cost reduction effort.

Turning to capital. During the third quarter of 2020, we spent $6 million on capital projects which was primarily maintenance capital. We estimate total capital spending for 2020 to be approximately $18 million to $21 million of which $13 million to $15 million is expected to be maintenance capital. Turnaround expenses year-to-date were less than $1 million and we do not currently expect any significant turnaround expenditures for the remainder of 2020.

Turning to the balance sheet. At the end of September, we amended our ABL facility to extend the maturity out to September 30, 2022, while also reducing the total commitment to $35 million and improving the borrowing base including the elimination of cash and increasing the advance rate on certain eligible inventory receivables. As of September 30, we had approximately $74 million of liquidity, an improvement of $21 million over June 30, which was comprised of approximately $48 million in cash and availability under the ABL facility of approximately $25 million. Within our cash balance of $48 million, we had approximately $10 million related to customer prepayment 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. In assessing our cash available for distribution, we generated EBITDA of $15 million and current cash needs of $15 million for debt service and $3 million for maintenance capital expenditures. During the quarter, we repurchased just over 1.4 million common units for total cash consideration of $1.3 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.

Looking ahead to the fourth quarter of 2020, we estimate our ammonia utilization rate to be between 95% and 100%. We expect direct operating expenses to range between $37 million and $42 million excluding inventory impacts and total capital spending to be between $5 million and $8 million.

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

Mark A. Pytosh -- Chief Executive Officer and President

Thanks, Tracy. Since our last earnings call there has been a marked improvement in crop prices and farm economics. USDA estimates for planted corn acres were lowered in September to 91 million acres from the initial estimate of 97 million. During the summer there were drought conditions in parts of the Midwest and the unusual Derecho storm that struck Iowa and other parts of the Midwest damaged over 10 million acres of corn. On the demand side, ethanol blending remains at lower levels than last year due to lower gasoline consumption but this has largely been offset by an increase in other domestic and Chinese demand for corn.

Eventually, as the vaccine or therapeutics are developed for COVID-19, we expect to see an uptick in gasoline consumption and ethanol blending and in turn an increase in corn demand for that usage. Soybean demand from China has been far greater than expected as well. As a result of drought conditions and Derecho storm, the USDA is currently forecasting lower expected yields and harvested acres and therefore much lower expected corn inventory levels. All of these factors have led to a rally in crop prices. Since the July low prices corn has rallied from $3.08 cents per bushel to over $3.95 per bushel and soybeans have rallied from $8.70 per bushel to over $10.50 per bushel. Weather conditions have also been favorable in September and October and the harvest is largely complete leaving the fields ready for ammonia application.

We expect solid demand for ammonia this fall and have already seen the ammonia run begin in the upper Midwest. We consider healthy farm economics to be one of the most important factors for fertilizer demand in the coming years and market conditions have improved substantially in that regard. While urea prices have exhibited strength since July especially with multiple India tenders, ammonia and UAN prices have been largely flat for the past three months. As we enter the fall among the application, we could see growing interest in these two inputs relative to urea. We think the markets may gravitate toward the traditional pricing relationships among ammonia, urea and UAN where today ammonia and UAN are favorable on a price per pound of nitrogen.

Since the last earnings call, natural gas prices have risen over a dollar per MMBTU and the curve shows natural gas prices rising further for the rest of the year and into the winter. Higher natural gas prices will lower the incremental incentive for producers to run at full capacity. I also want to highlight a press release we issued on October 5, about CVR's efforts to reduce its carbon footprint. Recently our Coffeyville facility certified its first carbon offset credits for reducing nitrous oxide emissions in one of our acid plants. Previously we installed similar units at both of our acid plants at East Dubuque and have been on average obtaining the vast majority of our nitrous oxide emissions over the past five years.

Coupling these efforts with our ongoing process for carbon sequestration through enhanced oil recovery at our Coffeyville facility, we are now able to reduce our carbon dioxide equivalent emissions by over 1 million metric tons per year between the two plants. With the reduced carbon footprint at Coffeyville we could seek to certify our ammonia production as blue and we believe that as part of the energy transition new customers going forward will be seeking blue ammonia as a potential energy source that is produced with a low carbon footprint.

Finally, on our first quarter earnings call, we discussed the continued listing notice that we received from the New York Stock Exchange in April as a result of our average closing unit price falling below $1. We have until January 1 of 2021 to regain compliance. As such the Board of Directors of our general partner has authorized a 1 for 10 reverse split of our common units effective after the close of the market on November 23. Unit holders will receive one unit for every 10 units owned at the close of business on November 23, with fractions rounded to the nearest whole unit. We continue to believe our units are undervalued. However, we consider the reverse split a necessary step toward regaining compliance with the New York Stock Exchange listing standards.

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 but selectively investing in reliability projects and incremental additions to production capacity and maximizing our marketing and logistics activities.

In closing, I want to thank our employees for their commitment to being healthy, safe and flexible and helping the company execute at a high level during the third quarter while managing the impact to COVID-19. We're all looking forward to returning to more normalized conditions.

With that we're ready to take questions.

Questions and Answers:


Thank you. We will now be conducting 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

Hi. So, I guess Mark, first I wanted to maybe fill a little bit on the marketing strategy given kind of where the UAN market is persistent. Did some of the volumes in the third quarter kind of still capture any of the spring pricing? I guess I am trying to wrap my head around the third quarter marking kind of new quarterly record on UAN sales. But that's a low point of the year from a pricing perspective and I just want to know if that included some of the spring pricing tonnage?

Mark A. Pytosh -- Chief Executive Officer and President

I would say not really much effect from the spring pricing. The fill occurred earlier this year, so we came into the third quarter basically with the fill book. So the third quarter pricing is really the fill pricing particularly for UAN. But even ammonia, the summer fills is done early this year. So the third quarter does not have any spring pricing in it fundamentally. Yes, it's a rounding error.

Adam Samuelson -- Goldman Sachs -- Analyst

Okay. And so, in that context I mean is that typically when you guys enter the summer to fill and do it for the whole second half or have you given yourself more kind of open space as you move in kind of into the later part of this year and then the next potentially capture rising market or are you trying to think about kind of -- for earnings leverages -- should deploy for nitrogen about there at some point?

Mark A. Pytosh -- Chief Executive Officer and President

Sure. Yeah. We know we haven't really been selling the whole second half and we always have the ability to -- I would say move tons around from a delivery timing perspective. So we can capture pricing opportunities and so where we typically would sell end of the fourth quarter, but -- and wait and see for the market to lift. It hasn't -- in the last couple of years it didn't really lift until we got closer to the end of the year and into the first quarter. So that's been the pattern in the last couple of years.

Historically, if you go back further and there is the fill price and then there was a lift by September, October, it's been little slower to lift these last couple of years in the September, October, and then in December, January, typically, the price increased around that time. So we have opportunities to take orders and we can jump in and take advantage of market opportunities and we are kind of waiting to see, I think with the fall of ammonia application, we will have a better idea of where demand is going to be and pricing.

But we feel a lot more optimistic about kind of where things are headed than we did say on the last earnings call. Conditions have improved, I'd say significantly in terms of farm level economics and I don't really know any business that does well, their customers aren't healthy financially and doing well and that's really changed. That's the big change since the last call.

Adam Samuelson -- Goldman Sachs -- Analyst

Okay. And then, final one for me just looking at the capital structure of the business, I mean you've got about $80 million -- you've got about $80 million of fixed charges between the interest on the bonds and the sustaining kind of capital run rate that's kind of the EBITDA, kind of level you got to clear before you're generating any cash. Do you think that the business has the wherewithal to weather through this or how are you evaluating or thinking about different kind of capitalization opportunities at some point, you're going to have to deal with those bonds when they come due but before then, I'm just trying to think about kind of different options as you evaluate them?

Mark A. Pytosh -- Chief Executive Officer and President

Well, I just tell you that we haven't -- even in the sort of 2017, we used a little bit of cash, but we typically haven't been using any cash. So I'm very comfortable with our structure and quite frankly, we're not in a rush to refinance until the market is at a good price for us. But I think from a cash flow perspective either this year or next year, we feel very comfortable with our cash position, cash flow position and it's really about being opportunistic with the refinancing of that piece of paper. So I don't see any dramatic changes in our cap structure or anything like that. We're not nervous about anything. We feel very comfortable with where we are.

We weathered, I think the worst part of this storm was really the -- I'd say the tail end of the first quarter end or the second quarter when it was very unclear what the demand profile and I'd say we've recovered faster than we thought we would in a little different way than we thought we would and I'd say we're pretty lined up for -- we're not going to, we're not doing any cheering or no rainbows here but I think we feel pretty good about 2021. So we're going to be opportunistic about whether the debt markets are going to offer us a chance to refi the bonds that we have.

Adam Samuelson -- Goldman Sachs -- Analyst

All right. Great. I really appreciate the color. Thank you.

Mark A. Pytosh -- Chief Executive Officer and President

Thanks Adam.


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.

Mark A. Pytosh -- Chief Executive Officer and President

Well, I just want to thank everybody for being on the call today and hope that you're safe and healthy and we look forward to talking to you in February for our fourth quarter call. Thank you very much.


[Operator Closing Remarks]

Duration: 19 minutes

Call participants:

Richard Roberts -- Investor Relations

Mark A. Pytosh -- Chief Executive Officer and President

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

Adam Samuelson -- Goldman Sachs -- Analyst

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