CVR Partners LP (UAN) 2020 Q4 法說會逐字稿

Greetings, and welcome to the CVR Partners, LP Fourth Quarter 2020 Conference Call. (Operator Instructions) 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 publicly -- 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 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 reserve 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, and good morning, everyone, and thank you for joining us for today's call. To summarize financial highlights for the full year 2020 included net sales of $350 million, a net loss of $98 million, EBITDA of $41 million, which was reduced by a $41 million noncash goodwill impairment, and we repurchased over 623,000 CVR Partners common units for $7 million.

Looking more specifically at the 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 of 2020, we had strong utilization at both facilities. At Coffeyville, the ammonia plant operated at 99% utilization compared to the fourth quarter of 2019 at 90%. At East Dubuque, the 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 of 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 year period.

We produced 335,000 tons of UAN in the fourth quarter in 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 per 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 noncash capable 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 shift in timing of certain capital projects into subsequent years. We 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 prepayments 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 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 the 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 for the next few years. We're 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 EBITDA of $18 million for the quarter at current cash fees 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 this 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 at 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.

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

Thanks, Tracy. Since the last earnings call, there has been continued improvement in crop prices and farmer economics. For the 2020 planning season, the USDA estimates that planted corn acres were 90 million and yield per acre was 172 million. 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. carryout inventories of 1.55 billion bushels or 11% of domestic production, that is down over 50% from the summer 2020 estimates.

The crop forecast 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 $5.50 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 spring. Fall demand for ammonia was the best 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 follow-on demand for money 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 in advance of spring application. After lower pricing in the second half of 2020, UAN prices of follow-on urea, and 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 a limited increase 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.

Lower domestic natural gas prices, given U.S. nitrogen fertilizer producers a cost advantage compared to international producers and reduces 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. The loss of production -- 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 that 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 a CO2 of Coffeyville, combined with the nitrous oxide abatement at both of our plants, has reduced our carbon footprint by over 1 million metric tons per year. With these reductions, we could certify our ammonia production in 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 a 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 delever. We have patiently waited for the right opportunity and want to take advantage of the improving fertilizer market in attractive debt markets.

As I mentioned earlier, we continued 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 unit since November, we continue to feel they are 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 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 cost 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 2 weeks.

With that, operator, we will take questions.

(Operator Instructions) Our first question comes from the line of Roger Spitz with Bank of America.

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 like an ongoing cash receipt as opposed to a onetime, but maybe you can just try to tell us how to think about that?

I'll take the first stab at it, Mark can 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, and we're not prepared to disclose those yet.

Yes. I would just add that we're still in early phases of -- the regulations have just been final for a month. So we're still in a pretty early phase of exploring the structures and what the value potential. The theory is, in our case, we've been operating our facility for 7 years. So we've already been sequestering CO2 for 7 years, and so we're grandfathered under the regulations.

The regulations also are there to incentivize future projects for sequestration, but we will be grandfathered in, but we have a long tail on the ability to claim those credits. And so we're looking at different avenues for how do we maximize the value.

But I mean, does the regulation allow you to look back and get crystallize some tax credits for the past 7 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 mean the reason I'm asking is you've suggested the way to address your 9.25 is perhaps depending on the market situation, of course, you're refiling them, but you've said a majority of the -- in the prepared remarks, and then use the CO2 tax credits for the rest. I'm just trying to figure out within this year, how big -- how much cash you could get crystallized from that to address some minority part of that $645 million?

Well, it is a possibility. It's one scenario that we would leave as 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 the 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 1 potential outcome. And as soon as we establish our structure around the 45Qs, we'll have a better idea of timing on which if we chose to leave a stub out, we would start to pay that down. So I know it's a nonanswer, but we're trying to give you as much information as we can, very early in the process.

I 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 needs to be turnaround schedule over 2021, 2022?

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

Our next question comes from the line of Richard Kus with Jefferies.

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 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 at Coffeyville because that's pretty simple. We didn't have any major disruptions at Coffeyville because the plant uses petroleum coke as a feedstock for making hydrogen. And so the plant operated during the week. We navigated around gas availability and electricity availability in Kansas, so that was a factor for all the plants in Oklahoma and Kansas last week.

At East Dubuque, that was more opportunistic. We had prepurchased gas there at the plant and decided that it would make more sense to take the plant down. And sell the gas into the marketplace rather than operate. So we -- that was more of an economic decision. It wasn't an operational decision at East Dubuque.

Got you. Interesting. And I guess, what is the potential EBITDA impact as a result of that? It seems -- I mean 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 were.

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 how much you expect to be able to benefit over the next quarter or 2 from the higher pricing that we're seeing?

Sure. So we're always selling forward. So we -- if you look at our fourth quarter, and that was sold forward during the, I'd say, the lower point in the marketplace. But in the first quarter, we were selling as we entered the year into the first quarter, and so prices were rising. And so you'll -- we're kind of seeing a gentle rise in the first.

The full effect of the rising fertilizer pricing will be seen in the second quarter, where that -- the prices from January 1 forward have risen quite a bit. But we'll see more of that rise in the second quarter. I think that the -- probably the most interesting opportunity is the spring is going to -- we think the spring will be very good, depending on the weather if the weather holds up and get good application. But we think inventory levels have been as low as they've been in several years, a number of years, and that should carry through to the spring and into the summer, which would help the second half of the year, we believe because inventory levels came into the year low.

And with the production outage last week of virtually all the -- a lot of the nitrogen plants in the United States, that further tightens the inventory level. So we feel very good about the overall supply-demand balance plus with farmer economics and crop prices the way they are, we feel very good about the spring. But you'll see the full effect of the pricing impact in the second quarter this year.

Our next question comes from the line of Brian DiRubbio with Robert W. Baird.

As we think about net leverage reduction, what are you targeting as sort of a leverage going forward?

We don't really -- we have not talked about it in terms of what we are targeting. We just recognize that our debt burden or our service costs on a quarterly basis take a meaningful amount of available EBITDA off the table for us to have a recurring cash available for distribution number. And so in terms of reducing to a specific leverage ratio, that changes so much with EBITDA. It's really not a meaningful target. I think on a comparative basis with the peer group, you can see that we're substantially more levered than they are. So lower than it is now with a more sustainable debt service cost profile.

Okay. That's fair given the volatility. Just in capital allocation priorities, 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. A lot of it's going to depend on the market. If prices are headed durably higher, then the Board will have to consider all of that in sort of how they allocate capital. And -- but the first step would be to deliver on our results this year and execute and get a refinancing done and then look at the cash flow profile and decide the Board will decide how to move forward from there. So I'd say it's too early to call what we will do very long into the future. We want to see how this -- how the market's turning and then how the refinancing will go.

Okay. And then just on the refinancing, give me a sense of what the sense of urgency is with you and the Board? Your bonds do step down with par in about 4 months, is that something you're willing to wait on? Or is there a greater sense of urgency to get this refinancing done sooner than later?

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, nice little surprise was the drop in pet coke prices in the quarter, both sequentially and year-over-year. Any dynamics that you can share with us on the reason for that decline? And 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. So there's 2 different buckets of pet coke with the refinery, the Coffeyville refinery, which is our sister company, we have a contractual formula there that is tied to the price of UAN. And with UAN prices being low, the price of pet coke was low. And so that helped pull the average down for the year. I would say pet coke prices generally were -- contractual prices were pretty steady. Spot pricing is really dependent on the time, and sometimes that can get expensive.

What we did this year compared to last year for 2021 was we actually have contracted with, I call it, a family of refineries. So we're not really -- we've spread around our sourcing further than we did in the past. We used to be 2, and then we kind of went to 3, and so we're up to 4 now. And that gives us more flexibility if the crude slate changes, if the production levels down, if there's a turnaround, we're drawing from a portfolio. There's a group of refineries within striking distance of Coffeyville, and so we've broadened our portfolio to lessen the impact of any particular refinery in that mix.

Apologize. One -- I do have one more. Just are you seeing any shifts right now in trade flows with respect to UAN in particular? I know the EU tariffs sort of distorted historical freight flows and bought a lot of imported UAN into the U.S. Any comments or thoughts on current dynamics of what you're seeing in the market today?

So a couple things there. One, the low prices in the second half of 2020 discouraged -- has discouraged in the first quarter of 2021, the imports of UAN. So the numbers I saw here 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. And so the low prices did their -- did the trick on the marketplace by reducing the incentive, and then prices were rising faster elsewhere. So that UAN found a home either in Latin America or in Europe. So we've seen that kind of the trade flows adjust.

The interesting thing about UAN this year will be -- depending on what the availability of ammonia and the weather there may be a push at the end of the season for topdress and sidedress for UAN because we don't get enough ammonia on the ground in usually the April time frame in the core of the Midwest. So there may be an additional draw on UAN this year just because of the physical ability to deliver ammonia, usually among and UAN go together. And urea is still priced at a premium. So it sort of favors UAN right now, but UAN is catching up. It's caught up a lot in the marketplace. But the imports are well down from last year.

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.