The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and related notes and with the statistical information and financial data appearing in this Report, as well as the Partnership's Annual Report on Form 10-K for the year ended
December 31, 2013and filed with the Securities and Exchange Commission("SEC") on February 26, 2014(the "2013 Form 10-K"). Results of operations and cash flows for the three months ended March 31, 2014and 2013 are not necessarily indicative of results to be attained for any other period. Forward-Looking Statements This Report, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, contains "forward-looking statements" as defined by the SEC, including statements concerning contemplated transactions and strategic plans, expectations and objectives for future operations. Forward-looking statements include, without limitation:
• statements, other than statements of historical fact, that address
activities, events or developments that we expect, believe or anticipate
will or may occur in the future;
• statements relating to future financial performance, future capital sources
and other matters; and
• any other statements preceded by, followed by or that include the words
"anticipates," "believes," "expects," "plans," "intends," "estimates," "projects," "could," "should," "may," or similar expressions. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Report, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. These statements are based on assumptions made by us based on our experience and perception of historical trends, current conditions, expected future developments and other factors that we believe are appropriate in the circumstances. Such statements are subject to a number of risks and uncertainties, many of which are beyond our control. You are cautioned that any such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in the forward-looking statements as a result of various factors, including but not limited to those set forth under "Risk Factors" in the Partnership's 2013 Form 10-
K. Suchfactors include, among others:
• our ability to make cash distributions on the common units;
• the volatile nature of our business and the variable nature of our
• the ability of our general partner to modify or revoke our distribution
policy at any time;
• the cyclical nature of our business;
• the seasonal nature of our business;
• the dependence of our operations on a few third-party suppliers, including
providers of transportation services and equipment;
• our reliance on pet coke that we purchase from CVR Refining;
• the supply and price levels of essential raw materials;
• the risk of a material decline in production at our nitrogen fertilizer plant;
• potential operating hazards from accidents, fire, severe weather, floods or
other natural disasters;
• the risk associated with governmental policies affecting the agricultural
• competition in the nitrogen fertilizer businesses;
• capital expenditures and potential liabilities arising from environmental
laws and regulations;
• existing and proposed environmental laws and regulations, including those
relating to climate change, alternative energy or fuel sources, and the end-use and application of fertilizers;
• new regulations concerning the transportation of hazardous chemicals, risks
of terrorism and the security of chemical manufacturing facilities;
• our lack of asset diversification;
• our dependence on significant customers;
• the potential loss of our transportation cost advantage over our competitors;
• our potential inability to successfully implement our business strategies,
including the completion of significant capital programs;
• our reliance on
interest they face operating each of
• risks relating to our relationships with
• control of our general partner by
• our ability to continue to license the technology used in our operations;
• restrictions in our debt agreements;
• changes in our treatment as a partnership for U.S. federal income or state
tax purposes; and
• instability and volatility in the capital and credit markets.
All forward-looking statements contained in this Report speak only as of the date of this document. We undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that occur after the date of this Report, or to reflect the occurrence of unanticipated events, except to the extent required by law. Partnership Overview We are a
Delawarelimited partnership formed by CVR Energyto own, operate and grow our nitrogen fertilizer business. Strategically located adjacent to CVR Refining's refinery in Coffeyville, Kansas, our nitrogen fertilizer manufacturing facility is the only operation in North Americathat utilizes a petroleum coke, or pet coke, gasification process to produce nitrogen fertilizer. We produce and distribute nitrogen fertilizer products, which are used primarily by farmers to improve the yield and quality of their crops. Our principal products are UAN and ammonia. These products are manufactured at our facility in Coffeyville, Kansas. Our product sales are heavily weighted toward UAN and all of our products are sold on a wholesale basis. Our facility includes a 1,225 ton-per-day ammonia unit, a 3,000 ton-per-day UAN unit, and a gasifier complex having a capacity of 84 million standard cubic feet per day of hydrogen. Our gasifier is a dual-train facility, with each gasifier able to function independently of the other, thereby providing redundancy and improving our reliability. With the completion of the UAN expansion in February 2013, we now upgrade substantially all of the ammonia we produce to higher margin UAN fertilizer, an aqueous solution of urea and ammonium nitrate which has historically commanded a premium price over ammonia. In 2013, we produced 930,643 tons of UAN and 401,971 tons of ammonia. Approximately 95% of our produced ammonia tons and substantially all of the purchased ammonia were upgraded into UAN in 2013. For the three months ended March 31, 2014and 2013, we produced 257,232 tons and 26 -------------------------------------------------------------------------------- 196,157 tons of UAN and 91,025 tons and 111,352 tons of ammonia. For the three months ended March 31, 2014, approximately 92% of our produced and purchased ammonia tons were upgraded into UAN. We will continue to expand our existing asset base and utilize the experience of our and CVR Energy'smanagement teams to execute our growth strategy, which includes expanded production of UAN and acquiring and building additional infrastructure and production assets. A significant two-year plant expansion designed to increase our UAN production capacity by 400,000 tons per year, or approximately 50%, was completed in February 2013. Our expanded facility was operating at full rates at the end of the first quarter of 2013. The primary raw material feedstock utilized in our nitrogen fertilizer production process is pet coke, which is produced during the crude oil refining process. In contrast, substantially all of our nitrogen fertilizer competitors use natural gas as their primary raw material feedstock. Historically, pet coke has been less expensive than natural gas on a per ton of fertilizer produced basis and pet coke prices have been more stable when compared to natural gas prices. By using pet coke as the primary raw material feedstock instead of natural gas, we believe our nitrogen fertilizer business has historically been one of the lower cost producers and marketers of ammonia and UAN fertilizers in North America. We currently purchase most of our pet coke from CVR Refining pursuant to a long-term agreement having an initial term that ends in 2027, subject to renewal. During the past five years, over 70% of the pet coke consumed by our plant was produced and supplied by CVR Refining's Coffeyville, Kansascrude oil refinery. CVR Energy, which indirectly owns our general partner and approximately 53% of our outstanding common units, also indirectly owns the general partner and 71% of the common units of CVR Refining. CVR Refining currently owns and operates a complex full coking medium-sour crude oil refinery with a rated capacity of 115,000 barrels per calendar day (bpcd) in Coffeyville, Kansas, a medium complexity crude oil refinery with a rated capacity of 70,000 bpcd in Wynnewood, Oklahomaand ancillary businesses. Secondary Public Offering On May 28, 2013, Coffeyville Resources, LLC("CRLLC"), a wholly owned subsidiary of CVR Energy, sold 12,000,000 of our common units to the public at a price of $25.15per unit in a registered public offering (the "Secondary Offering"). The net proceeds to CRLLC from the Secondary Offering were approximately $292.6 million, after deducting approximately $9.2 millionin underwriting discounts and commissions. We did not receive any of the proceeds from the sale of common units by CRLLC. In connection with the Secondary Offering, the Partnership incurred approximately $0.3 millionin offering costs during the three months ended March 31, 2013. Following the closing of the Secondary Offering and as of March 31, 2014, public security holders held approximately 47% of all outstanding common units and CRLLC held approximately 53% of all outstanding common units and the general partner interest. Major Influences on Results of Operations Our earnings and cash flows from operations are primarily affected by the relationship between nitrogen fertilizer product prices, on-stream factors and direct operating expenses. Unlike our competitors, we do not use natural gas as a feedstock and use a minimal amount of natural gas as an energy source in our operations. As a result, volatile swings in natural gas prices have a minimal impact on our results of operations. Instead, CVR Refining's adjacent refinery supplies us with most of the pet coke feedstock we need pursuant to a 20 year pet coke supply agreement entered into in October 2007. The price at which our products are ultimately sold depends on numerous factors, including the global supply and demand for nitrogen fertilizer products which, in turn, depends on, among other factors, world grain demand and production levels, changes in world population, the cost and availability of fertilizer transportation infrastructure, weather conditions, the availability of imports, and the extent of government intervention in agriculture markets. Nitrogen fertilizer prices are also affected by local factors, including local market conditions and the operating levels of competing facilities. An expansion or upgrade of competitors' facilities, international political and economic developments and other factors are likely to continue to play an important role in nitrogen fertilizer industry economics. These factors can impact, among other things, the level of inventories in the market, resulting in price volatility and a reduction in product margins. Moreover, the industry typically experiences seasonal fluctuations in demand for nitrogen fertilizer products.
In addition, the demand for fertilizers is affected by the aggregate crop planting decisions and fertilizer application rate decisions of individual farmers. Individual farmers make planting decisions based largely on the prospective profitability of a harvest, while the specific varieties and amounts of fertilizer they apply depend on factors like crop prices, their current liquidity, soil conditions, weather patterns and the types of crops planted.
27 -------------------------------------------------------------------------------- Natural gas is the most significant raw material required in our competitors' production of nitrogen fertilizers. Over the past several years, natural gas prices have experienced high levels of price volatility. However, calendar year 2012 and 2013 were two of the lowest priced years for natural gas prices as compared to the last 10 years. This pricing and volatility has a direct impact on our competitors' cost of producing nitrogen fertilizer. In order to assess our operating performance, we calculate plant gate price to determine our operating margin. Plant gate price refers to the unit price of fertilizer, in dollars per ton, offered on a delivered basis from the ship point, excluding final shipment costs. We and other competitors in the U.S. farm belt share a significant transportation cost advantage when compared to our out-of-region competitors in serving the U.S. farm belt agricultural market. In 2013, approximately 53% of the corn planted in
the United Stateswas grown within a $45per UAN ton freight train rate of our nitrogen fertilizer plant. We are therefore able to cost-effectively sell substantially all of our products in the higher margin agricultural market, whereas a significant portion of our competitors' revenues is derived from the lower margin industrial market. Our products leave the plant either in trucks for direct shipment to customers or in railcars for destinations located principally on the Union Pacific Railroad. We do not currently incur significant intermediate transfer, storage, barge freight or pipeline freight charges. We estimate that our plant enjoys a transportation cost advantage of approximately $15per UAN ton for transportation of UAN over competitors located in the U.S. Gulf Coast. Selling products to customers within economic rail transportation limits of our nitrogen fertilizer plant and keeping transportation costs low are keys to maintaining profitability. Going forward, as a result of the UAN expansion project completion, we expect to upgrade substantially all of our ammonia production into UAN for as long as it makes economic sense to do so. The value of nitrogen fertilizer products is also an important consideration in understanding our results. The high fixed cost of our direct operating expense structure also directly affects our profitability. Our facility's pet coke gasification process results in a significantly higher percentage of fixed costs than a natural gas-based fertilizer plant. Major fixed operating expenses include electrical energy, employee labor, maintenance, including contract labor, and outside services. These fixed costs averaged approximately 83% of direct operating expenses over the 24 months ended March 31, 2014. Our largest raw material expense is pet coke, which we purchase from CRRM and third parties. For the three months ended March 31, 2014and 2013, we spent approximately $3.6 millionand $4.0 million, respectively, for pet coke, which equaled an average cost per ton of $29and $31, respectively. Consistent, safe, and reliable operations at our nitrogen fertilizer plant are critical to our financial performance and results of operations. Unplanned downtime of the plant may result in lost margin opportunity, increased maintenance expense and a temporary increase in working capital investment and related inventory position. The financial impact of planned downtime, such as major turnaround maintenance, is mitigated through a diligent planning process that takes into account margin environment, the availability of resources to perform the needed maintenance, feedstock logistics and other factors. Historically, the nitrogen fertilizer plant has undergone a facility turnaround every two to three years. The turnaround typically lasts 13-15 days each turnaround year and costs approximately $3.0 millionto $5.0 millionper turnaround. The nitrogen fertilizer plant underwent a turnaround in the fourth quarter of 2012, at a cost of approximately $4.8 million. The Partnership is planning to defer the next full facility turnaround to 2015. It is anticipated that a less involved facility shutdown will be performed during the second quarter of 2014 to both install a waste heat boiler and upgrade the pressure swing absorption unit, which is projected to increase hydrogen recovery enough to allow us to produce approximately 7,000 to 9,000 tons of additional ammonia fertilizer annually. 28
-------------------------------------------------------------------------------- Results of Operations The following tables summarize the financial data and key operating statistics for
CVR Partnersand our operating subsidiary for the three months ended March 31, 2014and 2013. The following data should be read in conjunction with our condensed consolidated financial statements and the notes thereto included elsewhere in this Report. All information in "Management's Discussion and Analysis of Financial Condition and Results of Operations," except for the balance sheet data as of December 31, 2013, is unaudited. To supplement our actual results calculated in accordance with GAAP for the applicable periods, the Partnership also uses certain non-GAAP financial measures, which are reconciled to our GAAP-based results below. These non-GAAP financial measures should not be considered as an alternative to GAAP results. Three Months Ended March 31, 2014 2013 (in millions) Consolidated Statements of Operations Data: Net sales $ 80.3 $ 81.4 Cost of product sold - Affiliates 2.2
Cost of product sold - Third Parties(1) 19.5
Direct operating expenses - Affiliates(2) 0.8
Direct operating expenses - Third Parties(1) 23.4
Selling, general and administrative expenses - Affiliates(1)(2) 3.5
Selling, general and administrative expenses - Third Parties(1)
Depreciation and amortization(1) 6.7
Operating income 23.1
Interest expense and other financing costs (1.6 ) (1.2) Interest income - - Other income (expense), net - - Total other income (expense) (1.6 ) (1.2 ) Income before income tax expense 21.5 35.6 Income tax expense - - Net income $ 21.5 $ 35.6 EBITDA(3) $ 29.8 $ 42.6 Adjusted EBITDA(3) $ 29.9 $ 43.8 Available cash for distribution(4) $ 27.8 $ 44.6 Reconciliation of net sales: Sales net plant gate $ 67.0 $ 75.6 Freight in revenue 6.9 5.7 Hydrogen revenue 5.9 0.1 Other 0.5 - Total net sales $ 80.3 $ 81.4 29
-------------------------------------------------------------------------------- As of As of March 31, December 31, 2014 2013 (audited) (in millions) Balance Sheet Data: Cash and cash equivalents
$ 85.9$ 85.1 Working capital 102.3 108.4 Total assets 592.6 593.5 Total debt 125.0 125.0 Total partners' capital 430.3 439.9 Three Months Ended March 31, 2014 2013 (in millions) Cash Flowand Other Data: Net cash flow provided by (used in): Operating activities $ 35.6 $ 57.5Investing activities (3.4 ) (18.1 ) Financing activities (31.4 ) (14.0 ) Net increase (decrease) in cash and cash equivalents $ 0.8 $ 25.4Capital expenditures for property, plant and equipment $ 3.4 $ 18.1______________
(1) Amounts are shown exclusive of depreciation and amortization. Depreciation
and amortization is comprised of the following components: Three Months Ended
March 31, 20142013 (in millions)
Depreciation and amortization excluded from direct operating expenses $ 6.6 $ 5.7 Depreciation and amortization excluded from cost of product sold 0.1 - Total depreciation and amortization $ 6.7 $ 5.7
(2) Our direct operating expenses and selling, general and administrative
expenses for the three months ended
for share-based compensation, including charges related to
share-based compensation expense allocated to us by
reporting purposes in accordance with ASC 718. See Note 3 ("ShareBased
Compensation") to the consolidated financial statements for further discuss
of allocated share-based compensation. The charges for share-based
compensation in selling, general and administrative expenses were
respectively, and only nominal charges were included in direct operating
(3) EBITDA is defined as net income before (i) net interest (income) expense,
(ii) income tax expense, and (iii) depreciation and amortization expense,
which are items management believes affect the comparability of operating
Adjusted EBITDA is defined as EBITDA further adjusted for the impact of share-based compensation, non-cash, and, when applicable, major scheduled turnaround expenses and loss on disposition of assets. We present Adjusted EBITDA because it is a key measure used in material covenants in our credit facility and because it is the starting point for calculating our available cash for distribution.
EBITDA and Adjusted EBITDA are not recognized terms under GAAP and should not be substituted for net income or cash flows from operations. Management believes that EBITDA and Adjusted EBITDA enable investors and analysts to better understand our ability to make distributions to our common unitholders and our compliance with the covenants contained in 30 -------------------------------------------------------------------------------- our credit facility. EBITDA and Adjusted EBITDA presented by other companies may not be comparable to our presentation, since each company may define these terms differently. A reconciliation of our Net Income to EBITDA and Adjusted EBITDA is as follows: Three Months Ended March 31, 2014 2013 (in millions) Net income
$ 21.5 $ 35.6Add: Interest expense, net 1.6 1.2 Depreciation and amortization 6.7 5.8 EBITDA 29.8 42.6 Share-based compensation, non-cash 0.1 1.2 Adjusted EBITDA $ 29.9 $ 43.8
(4) The board of directors of our general partner has adopted an amended policy
to calculate available cash for distribution starting with Adjusted EBITDA.
For the three months ended
distribution equaled our Adjusted EBITDA reduced for cash needed for (i) net
interest expense (excluding capitalized interest) and debt service and other
contractual obligations; (ii) maintenance capital expenditures; and (iii) to
the extent applicable, major scheduled turnaround expenses incurred and
reserves for future operating or capital needs that the board of directors of
the general partner deems necessary or appropriate, if any. Available cash
for distribution may be increased by the release of previously established
cash reserves, if any, at the discretion of the board of directors of our
general partner. Available cash for distribution is not a recognized term under GAAP. Available cash for distribution should not be considered in isolation or as an alternative to net income or operating income, or as any other measure of financial performance or operating performance. In addition, available cash for distribution is not presented as, and should not be considered an alternative, to cash flows from operations or as a measure of liquidity. Available cash for distribution as reported by the Partnership may not be comparable to similarly titled measures of other entities; thereby limiting its usefulness as a comparative measure. Below is a table reconciling Adjusted EBITDA to available cash for distribution: Three Months Ended March 31, 2014 (in millions, except units and per unit data) Reconciliation of Adjusted EBITDA to Available cash for distribution Adjusted EBITDA $ 29.9 Adjustments: Less: Net cash interest expense (excluding capitalized (1.4 ) interest) and debt service Maintenance capital expenditures (1.0 ) Plus: Distribution of previously established cash reserves, net
Available cash for distribution $
Available cash for distribution, per common unit $
Common units outstanding (in thousands) 73,113 31
The following tables show selected information about key operating statistics and market indicators for our business:
Three Months Ended March 31, 2014 2013 Key Operating Statistics Production (thousand tons): Ammonia (gross produced)(1) 91.0 111.4 Ammonia (net available for sale)(1)(2) 8.9
Pet coke consumed (thousand tons) 124.8 129.8 Pet coke (cost per ton)(3)
$ 29 $ 31Sales (thousand tons): Ammonia 5.4 27.6 UAN 254.7 194.1 Product pricing (plant gate) (dollars per ton)(4): Ammonia $ 479 $ 663UAN $ 253 $ 295On-stream factors(5): Gasification 98.8 % 99.5 % Ammonia 92.1 % 98.8 % UAN 97.0 % 92.8 % Three Months Ended March 31, 2014 2013 Market Indicators Natural gas NYMEX (dollars per MMBtu) $ 4.72 $ 3.48Ammonia - Southern Plains (dollars per ton) $ 441 $ 696UAN - Corn belt (dollars per ton) $ 332 $ 378
(1) Gross tons produced for ammonia represent total ammonia produced, including
ammonia that was upgraded into UAN. As a result of the completion of the UAN
expansion project in 2013, we expect to upgrade substantially all of the
ammonia we produce into UAN. Net tons available for sale represent ammonia
available for sale that was not upgraded into UAN.
(2) In addition to the produced ammonia, the Partnership acquired approximately
22,900 tons of ammonia during the three months ended
(3) Our pet coke cost per ton purchased from CVR Refining averaged
for the three months ended
pet coke prices averaged
2014 and 2013, respectively.
(4) Plant gate price per ton represents net sales less freight revenue divided by
product sales volume in tons, and is shown in order to provide a pricing
measure that is comparable across the fertilizer industry.
(5) On-stream factor is the total number of hours operated divided by the total
number of hours in the reporting period and is included as a measure of
operating efficiency. Excluding the impact of the UAN expansion coming
on-line, the on-stream factors for the three months ended
would have been 99.5% for gasifier, 98.8% for ammonia and 98.3% for UAN.
Three Months Ended
Net Sales. Net sales were
$80.3 millionfor the three months ended March 31, 2014compared to $81.4 millionfor the three months ended March 31, 2013. The decrease of $1.1 millionwas primarily the result of lower ammonia sales volumes ( $15.0 million), lower UAN sales prices ( $11.0 million) and lower ammonia sales prices ( $1.0 million), partially offset by higher UAN sales volumes ( $19.5 million) combined with higher hydrogen sales volumes ( $6.2 million). For the three months ended March 31, 2014, UAN and ammonia made up $71.2 millionand $2.7 millionof our net sales, respectively. This compared to UAN and ammonia net sales of $62.7 millionand $18.7 million, respectively, for the three months ended March 31, 2013. The following table demonstrates the impact of sales volumes and pricing for UAN, ammonia and hydrogen for the three months ended March 31, 2014and 2013: Three Months Ended March 31, 2014 Three Months Ended March 31, 2013 Total Variance Price Volume Volume(1) $ per ton(2) Sales $(3)Volume(1) $ per
UAN 254,671 $ 280
$ 71.2194,141 $ 323 $ 62.760,530 $ 8.5 $ (11.0 ) $ 19.5Ammonia 5,446 $ 495 $ 2.7 27,572 $ 679 $ 18.7(22,126 ) $ (16.0 ) $ (1.0 ) $ (15.0 )Hydrogen 578,464 $ 10 $ 5.9 2,713 $ 11 $ - 575,751 $ 5.9 $ (0.3 ) $ 6.2____________
(1) UAN and ammonia sales volumes are in tons. Hydrogen sales volumes are in MSCF.
(2) Includes freight charges (3) Sales dollars in millions The increase in UAN sales volume for the three months ended
March 31, 2014compared to the three months ended March 31, 2013was primarily attributable to the UAN expansion being in operation for the full first quarter of 2014. On-stream factors (total number of hours operated divided by total hours in the reporting period) for the gasification, ammonia and UAN units were 98.8%, 92.1% and 97.0%, respectively, for the three months ended March 31, 2014. Plant gate prices are prices at the designated delivery point less the final shipment cost we absorb to deliver the product. We believe plant gate price is meaningful because we sell products both at our plant gate (sold plant) and delivered to the customer's designated delivery site (sold delivered) and the percentage of sold plant versus sold delivered can change month-to-month or quarter-to-quarter. The plant gate price provides a measure that is consistently comparable period to period. Average plant gate prices for the three months ended March 31, 2014compared to the three months ended March 31, 2013decreased 14.2% for UAN and decreased 27.8% for ammonia, respectively. Cost of Product Sold (Exclusive of Depreciation and Amortization). Cost of product sold (exclusive of depreciation and amortization) is primarily comprised of pet coke expense and freight and distribution expenses. Cost of product sold (exclusive of depreciation and amortization) for the three months ended March 31, 2014was $21.7 million, compared to $10.6 millionfor the three months ended March 31, 2013. The $11.1 millionincrease resulted from $12.0 millionin higher costs from transactions with third parties, partially offset by lower costs from transactions with affiliates of $0.9 million. The higher third-party costs incurred during the three months ended March 31, 2014were primarily the result of ammonia purchases (approximately 22,900 tons for the three months ended March 31, 2014and none in the three months ended March 31, 2013), increased railcar repairs and inspections and increased freight costs. Direct Operating Expenses (Exclusive of Depreciation and Amortization). Direct operating expenses (exclusive of depreciation and amortization) include costs associated with the actual operations of our plant, such as repairs and maintenance, energy and utility costs, property taxes, catalyst and chemical costs, outside services, labor and environmental compliance costs. Direct operating expenses (exclusive of depreciation and amortization) for the three months ended March 31, 2014were $24.2 millionas compared to $22.6 millionfor the three months ended March 31, 2013. The $1.6 millionincrease resulted primarily from higher utilities ( $1.6 million), refractory brick amortization ( $0.5 million) and catalyst amortization ( $0.4 million), partially offset by lower personnel costs ( $0.5 million), and insurance ( $0.4 million). The increased utility costs were largely due to the UAN expansion, which came on-line in February 2013. The lower labor costs are the result of the higher labor incurred during the UAN expansion project. 33 -------------------------------------------------------------------------------- Selling, General and Administrative Expenses (Exclusive of Depreciation and Amortization). Selling, general and administrative expenses include the direct selling, general and administrative expenses of our business as well as certain expenses incurred by our affiliates, CVR Energyand Coffeyville Resources, on our behalf and billed or allocated to us in accordance with the applicable agreements. We also reimburse our general partner in accordance with the partnership agreement for expenses it incurs on our behalf. Reimbursed expenses to our general partner are included as selling, general & administrative expenses from affiliates. Certain of our expenses are subject to the services agreement with CVR Energyand our general partner. Selling, general and administrative expenses (exclusive of depreciation and amortization) were $4.6 millionfor the three months ended March 31, 2014, as compared to $5.6 millionfor the three months ended March 31, 2013. The decrease of $1.0 millionfor the three months ended March 31, 2014as compared to the three months ended March 31, 2013resulted from a decrease in costs of transactions with affiliates ( $0.7 million) and a decrease in costs of transactions with third parties ( $0.3 million). The overall variance was primarily the result of a decrease in reimbursements of our general partner ( $0.7 million), a decrease in outside services ( $0.5 million) and a decrease in share-based compensation ( $0.4 million), partially offset by increases in expenses related to the services agreement ( $0.5 million). Operating Income. Operating income was $23.1 millionfor the three months ended March 31, 2014, as compared to operating income of $36.8 millionfor the three months ended March 31, 2013. The decrease of $13.7 millionfor the three months ended March 31, 2014as compared to the three months ended March 31, 2013was the result of the increases in cost of product sold ( $11.1 million), increase to direct operating expenses ( $1.6 million), depreciation and amortization ( $0.9 million) and a decrease in sales ( $1.1 million), partially offset by a decrease in selling, general, and administrative expense ( $1.0 million). Interest Expense and Other Financing Costs. Interest expense for the three months ended March 31, 2014was approximately $1.6 millionas compared to $1.2 millionfor the three months ended March 31, 2013. Interest expense for the three months ended March 31, 2014was attributable to bank interest expense of $1.2 millionon the term loan facility, $0.3 millionof interest expense related to the interest rate swap and $0.2 millionof deferred financing amortization, partially offset by capitalized interest. The increase in expense as compared to the three months ended March 31, 2013is primarily due to a decrease in capitalized interest associated with the UAN expansion being completed in the first quarter of 2013.
Net Income. For the three months ended
Liquidity and Capital Resources Our principal source of liquidity has historically been cash from operations, which includes cash advances from customers resulting from forward sales. Our principal uses of cash are funding our operations, distributions to common unitholders, capital expenditures and funding our debt service obligations. We believe that our cash from operations, remaining proceeds from the Initial Public Offering, and available borrowings under our revolving credit facility will be adequate to satisfy anticipated commitments and planned capital expenditures for the next twelve months. However, our future capital expenditures and other cash requirements could be higher than we currently expect as a result of various factors. Additionally, our ability to generate sufficient cash from our operating activities depends on our future performance, which is subject to general economic, political, financial, competitive, and other factors beyond our control. Depending on the needs of our business, contractual limitations and market conditions, we may from time to time seek to issue equity securities, incur additional debt, modify the terms of our existing debt, issue debt securities, or otherwise refinance our existing debt. There can be no assurance that we will seek to do any of the foregoing or that we will be able to do any of the foregoing on terms acceptable to us or at all.
Cash Balance and Other Liquidity
March 31, 2014, we had cash and cash equivalents of $85.9 million, including $10.0 millionof customer advances. Working capital at March 31, 2014was $102.3 million, consisting of $138.8 millionin current assets and approximately $36.5 millionin current liabilities. Working capital at December 31, 2013was $108.4 million, consisting of $135.8 millionin current assets and $27.4 millionin current liabilities. As of April 30, 2014, we had cash and cash equivalents of $99.5 million.
April 13, 2011in conjunction with the completion of our Initial Public Offering, we entered into a credit facility with a group of lenders including Goldman Sachs Lending Partners LLC, as administrative and collateral agent. The credit facility includes a term loan facility of $125.0 millionand a revolving credit facility of $25.0 millionwith an uncommitted incremental facility of up to $50.034 -------------------------------------------------------------------------------- million. There is no scheduled amortization and the credit facility matures in April 2016. The credit facility is used to finance on-going working capital, capital projects, letter of credit issuances and general needs of the Partnership. Borrowings under the credit facility bear interest based on a pricing grid determined by a trailing four quarter leverage ratio. Pricing for borrowings under the credit facility is currently based on the Eurodollar rate plus a margin of 3.50%, or, for base rate loans, the prime rate plus 2.50%. Under its terms, the lenders under the credit facility were granted a first priority security interest (subject to certain customary exceptions) in substantially all of the assets of CVR Partnersand CRNF and all of the capital stock of CRNF and each domestic subsidiary owned by CVR Partnersor CRNF. CRNF is the borrower under the credit facility. All obligations under the credit facility are unconditionally guaranteed by CVR Partnersand substantially all of our future, direct and indirect, domestic subsidiaries.
Mandatory Prepayments We are required to prepay outstanding amounts under our term facility in an amount equal to the net proceeds from the sale of assets or from insurance or condemnation awards related to collateral, in each case subject to certain reinvestment rights. In addition, we are required to prepay outstanding amounts under our term facility with the net proceeds from certain issuances of debt (other than debt permitted to be incurred under our credit facility).
Voluntary Prepayments/Commitment Reductions
At any time, we may voluntarily reduce the unutilized portion of the revolving commitment amount, or prepay, in whole or in part, outstanding amounts under our credit facility without premium or penalty other than customary "breakage" costs with respect to Eurodollar rate loans.
Amortization and Final Maturity
There is no scheduled amortization under our credit facility. All outstanding amounts under our credit facility are due and payable in full in
Restrictive Covenants and Other Matters
Our credit facility requires us to maintain (i) a minimum interest coverage ratio (ratio of Consolidated Adjusted EBITDA to interest) as of the end of any fiscal quarter of 3.0 to 1.0 and (ii) a maximum leverage ratio (ratio of debt to Consolidated Adjusted EBITDA) as of the end of any fiscal quarter of 3.0 to 1.0, in both cases calculated on a trailing four quarter basis. In addition, the credit facility includes negative covenants that, subject to significant exceptions, limit our ability to, among other things:
• incur, assume or permit to exist additional indebtedness, guarantees and
other contingent obligations;
• incur liens; • make negative pledges;
• pay dividends or make other distributions;
• make payments to our subsidiary;
• make certain loans and investments;
• consolidate, merge or sell all or substantially all of our assets;
• enter into sale-leaseback transactions; and
• enter into transactions with affiliates.
35 -------------------------------------------------------------------------------- The credit facility provides that we can make distributions to holders of our common units, but only if we are in compliance with our leverage ratio and interest coverage ratio covenants on a pro forma basis after giving effect to any distribution and there is no default or event of default under the facility. The credit facility contains certain customary representations and warranties, affirmative covenants and events of default, including, among other things, payment defaults, breach of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy, certain events under ERISA, material judgments, actual or asserted failure of any guaranty or security document supporting the credit facility to be in force and effect, and change of control. An event of default will also be triggered if
CVR Energy, CVR Refining or any of their subsidiaries (other than us and CRNF) terminates or violates any of its covenants in any of the intercompany agreements between us and CVR Energy, CVR Refining and their subsidiaries (other than us and CRNF) and such action has resulted or could reasonably be expected to result in a material adverse effect on us. If an event of default occurs, the administrative agent under the credit facility would be entitled to take various actions, including the acceleration of amounts due under the credit facility and all actions permitted to be taken by a secured creditor.
Interest Rate Swaps Our profitability and cash flows are affected by changes in interest rates on our credit facility borrowings, specifically
LIBORand prime rates. The primary purpose of our interest rate risk management activities is to hedge our exposure to changes in interest rates by using interest rate derivatives to convert some or all of the interest rates we pay on our borrowings from a floating rate to a fixed interest rate. On June 30and July 1, 2011, CRNF entered into two Interest Rate Swap agreements. We have determined that the Interest Rate Swaps qualify for hedge accounting treatment. The impact recorded for both the three months ended March 31, 2014and 2013 was $0.3 million, respectively, in interest expense. For the three months ended March 31, 2014and 2013, the Partnership recorded losses of $0.1 millionand $46,000, respectively, in the fair market value on the interest rate swaps. The combined fair market value of the interest rate swaps recorded in current and non-current liabilities at March 31, 2014is $1.7 million. This amount is unrealized and included in accumulated other comprehensive income (loss).
Our total capital expenditures for the three months ended
March 31, 2014were approximately $3.4 million. We divide our capital spending needs into two categories: maintenance and growth. Maintenance capital spending includes only non-discretionary maintenance projects and projects required to comply with environmental, health and safety regulations. We also treat maintenance capital spending as a reduction of cash available for distribution to unitholders. Growth capital projects generally involve an expansion of existing capacity, improvement in product yields, and/or a reduction in direct operating expenses. Of the $3.4 millionspent for the three months ended March 31, 2014, approximately $1.0 millionwas related to maintenance capital projects and the remainder was related to growth capital projects. Major scheduled turnaround expenses are expensed when incurred. Our growth strategy includes expanding production of UAN and acquiring additional infrastructure and production assets. In 2013 we completed a significant two-year plant expansion designed to increase our UAN production capacity by 400,000 tons, or approximately 50% per year. Total capital expenditures associated with the UAN expansion were approximately $130.0 million, excluding capitalized interest, of which approximately $14.1 millionwas spent during the three months ended March 31, 2013, . The UAN expansion construction was completed in February 2013and our expanded facility was running at full operating rates prior to the end of the first quarter of 2013. Our future capital spending will be determined by the board of directors of our general partner. Future capital spending estimates may change as a result of unforeseen circumstances and a change in our plans and may be revised from time to time or amounts may not be spent in the manner discussed below. Our maintenance capital expenditures are expected to be approximately $9.0 millionto $11.0 millionfor the year ending December 31, 2014. A less involved facility shutdown is expected to be performed during the second quarter of 2014 to both install a waste heat boiler and upgrade the pressure swing adsorption ("PSA") unit. The upgraded PSA unit is projected to increase hydrogen recovery enough to allow us to produce approximately 7,000 to 9,000 tons of additional ammonia fertilizer annually, for which we expect the total cost to be approximately $5.0 millionto $7.0 million. 36
-------------------------------------------------------------------------------- Planned capital expenditures for 2014 are subject to change due to unanticipated increases in the cost, scope and completion time for our capital projects. For example, we may experience increases in labor or equipment costs necessary to comply with government regulations or to complete projects that sustain or improve the profitability of our nitrogen fertilizer plant. Capital spending for our business has been and will be determined by our general partner.
Distributions to Unitholders
The board of directors of the Partnership's general partner has adopted a policy for the Partnership to distribute all available cash generated on a quarterly basis. Our policy is disclosed in Note 6 ("Partners' Capital and Partnership Distributions") to Part I, Item I of this report. On
March 10, 2014, the Partnership paid out a cash distribution to the Partnership's unitholders of record on the close of business on March 3, 2014for the fourth quarter of 2013 in the amount of $0.43per common unit, or $31.4 millionin aggregate. On April 30, 2014, the Board of Directors of the general partner of the Partnership declared a cash distribution for the first quarter of 2014 in the amount of $0.38per common unit, or $27.8 millionin aggregate. The cash distribution will be paid on May 19, 2014to the Partnership's unitholders of record at the close of business on May 12, 2014. Cash Flows The following table sets forth our cash flows for the periods indicated below: Three Months Ended March 31, 2014 2013 (in millions) Net cash provided by (used in): Operating activities $ 35.6 $ 57.5Investing activities (3.4 ) (18.1 ) Financing activities (31.4 )
(14.0 ) Net increase (decrease) in cash and cash equivalents
Cash Flows Provided by Operating Activities
For purposes of this cash flow discussion, we define trade working capital as accounts receivable, inventory and accounts payable. Other working capital is defined as all other current assets and liabilities except trade working capital. Net cash flows provided by operating activities for the three months ended
March 31, 2014were $35.6 million. The positive cash flow from operating activities generated over this period was attributable to net income of $21.5 million, which was primarily driven by strong UAN and hydrogen product volumes, partially offset by a decline in production volumes and higher costs associated with purchases of third party ammonia. With respect to other working capital for the three months ended March 31, 2014, the primary sources of cash were due to changes in other working capital of $14.0 million, primarily due to an increase to deferred revenue of $9.3 millionand an increase to accrued expenses and other current liabilities of $3.4 million. For the three months ended March 31, 2014, fluctuations in trade working capital decreased our operating cash flow by $7.4 milliondue to a decrease in accounts payable of $3.9 million, an increase in accounts receivable of $3.1 millionand an increase in inventory of $0.5 million. Net cash flows provided by operating activities for the three months ended March 31, 2013were $57.5 million. The positive cash flow from operating activities generated over this period was primarily attributable to net income of $35.6 millionand an increase to other working capital, partially offset by unfavorable impacts to trade working capital. The increase to net income was driven by higher UAN sales volumes associated with the UAN expansion, which was partially offset by a slight decline in overall UAN prices. With respect to other working capital for the three months ended March 31, 2013, the primary sources of cash were a $27.6 millionincrease in deferred revenue, partially offset by the decrease to accrued expenses and other current liabilities of $1.2 million. Deferred revenue represents customer prepaid deposits for the future delivery of our nitrogen fertilizer products. 37 -------------------------------------------------------------------------------- For the three months ended March 31, 2013, trade working capital decreased our operating cash flow by $11.4 millionand was primarily attributable to an increase in accounts receivable of $4.6 million, an increase in inventory of $3.3 millionand a decrease in accounts payable of $3.5 million.
Cash Flows Used in Investing Activities
Net cash used in investing activities for the three months ended
March 31, 2014was $3.4 millioncompared to $18.1 millionfor the three months ended March 31, 2013. For the three months ended March 31, 2014and 2013, net cash used in investing activities is primarily the result of capital expenditures. The decrease in capital expenditures during the three months ended March 31, 2014compared against 2013 is primarily the result of the UAN expansion project.
Cash Flows Used in Financing Activities
Net cash flows used in financing activities for the three months ended
March 31, 2014were $31.4 million, compared to net cash flows used in financing activities for the three months ended March 31, 2013of $14.0 million. The net cash used in financing activities for three months ended March 31, 2014and 2013 was primarily attributable to quarterly cash distributions. Contractual Obligations As of March 31, 2014, our contractual obligations included long-term debt, operating leases, unconditional purchase obligations, other specified capital and commercial commitments and interest payments. There were no material changes outside the ordinary course of our business with respect to our contractual obligations during the three months ended March 31, 2014, from those disclosed in our 2013 Form 10-K. Off-Balance Sheet Arrangements
We do not have any "off-balance sheet arrangements" as such term is defined within the rules and regulations of the
Critical Accounting Policies
Our critical accounting policies are disclosed in the "Critical Accounting Policies" section of our 2013 Form 10-K. No modifications have been made to our critical accounting policies.