e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
September 30,
2011
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to .
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Commission file number:
001-35120
CVR PARTNERS, LP
(Exact name of registrant as
specified in its charter)
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Delaware
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56-2677689
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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2277 Plaza Drive, Suite 500
Sugar Land, Texas
(Address of principal
executive offices)
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77479
(Zip
Code)
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(Registrants telephone number, including area code)
(281) 207-3200
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act.
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined by
Rule 12b-2
of the Exchange
Act). Yes o No þ
There were 73,021,992 common units outstanding at
November 1, 2011.
CVR
PARTNERS, LP AND SUBSIDIARY
INDEX TO
QUARTERLY REPORT ON
FORM 10-Q
For The
Quarter Ended September 30, 2011
i
GLOSSARY
OF SELECTED TERMS
The following are definitions of certain terms used in this
Quarterly Report on
Form 10-Q.
ammonia Ammonia is a direct application
fertilizer and is primarily used as a building block for other
nitrogen products for industrial applications and finished
fertilizer products.
catalyst A substance that alters,
accelerates, or instigates chemical changes, but is neither
produced, consumed nor altered in the process.
CRLLC Coffeyville Resources, LLC, the
subsidiary of CVR Energy, Inc. which was our sole limited
partner prior to the Offering and now directly owns our general
partner and 50,920,000 common units following the Offering.
common units Common units representing
limited partner interests of CVR Partners, LP.
corn belt The primary corn producing region
of the United States, which includes Illinois, Indiana, Iowa,
Minnesota, Missouri, Nebraska, Ohio and Wisconsin.
CVR Energy CVR Energy, Inc., a publicly
traded company listed on the New York Stock Exchange under the
ticker symbol CVI, together with its subsidiaries,
but excluding CVR Partners, LP and its subsidiary. Subsequent to
the completion of the Offering, CVR Energy indirectly owns our
general partner and 50,920,000 common units.
ethanol A clear, colorless, flammable
oxygenated hydrocarbon. Ethanol is typically produced chemically
from ethylene, or biologically from fermentation of various
sugars from carbohydrates found in agricultural crops and
cellulosic residues from crops or wood. It is used in the United
States as a gasoline octane enhancer and oxygenate.
farm belt Refers to the states of Illinois,
Indiana, Iowa, Kansas, Minnesota, Missouri, Nebraska, North
Dakota, Ohio, Oklahoma, South Dakota, Texas and Wisconsin.
general partner CVR GP, LLC, our general
partner which, following the Offering, is a wholly-owned
subsidiary of CRLLC, and prior to the Offering was our managing
general partner and a wholly-owned subsidiary of Coffeyville
Acquisition III LLC.
MMBtu One million British thermal units or
Btu is a measure of energy. One Btu of heat is required to raise
the temperature of one pound of water one degree Fahrenheit.
offering Initial public offering
(IPO) of CVR Partners, LP common units that closed
on April 13, 2011.
on-stream factor Measurement of the
reliability of the gasification, ammonia and UAN units, defined
as the total number of hours operated by each unit divided by
the total number of hours in the reporting period.
prepaid sales Represents customer payments
under contracts to guarantee a price and supply of fertilizer in
quantities expected to be delivered in the next twelve months.
Revenue is not recorded for such sales until the product is
considered delivered. Prepaid sales are also referred to as
deferred revenue.
turnaround A periodically required standard
procedure to inspect, refurbish, repair and maintain the
nitrogen fertilizer plant assets. This process involves the
shutdown and inspection of major processing units and occurs
every two years for the nitrogen fertilizer plant.
UAN An aqueous solution of urea and ammonium
nitrate used as a fertilizer.
1
PART I.
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements
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CVR
Partners, LP and Subsidiary
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September 30,
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December 31,
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2011
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2010
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(unaudited)
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(dollars in thousands)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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255,514
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$
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42,745
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Accounts receivable, net of allowance for doubtful accounts of
$64 and $43, respectively
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7,597
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5,036
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Inventories
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25,799
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19,830
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Prepaid expenses and other current assets including $353 and
$2,587 from affiliates at September 30, 2011 and
December 31, 2010, respectively
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2,825
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5,557
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Total current assets
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291,735
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73,168
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Property, plant, and equipment, net of accumulated depreciation
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336,071
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337,938
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Intangible assets, net
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38
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46
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Goodwill
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40,969
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40,969
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Deferred financing cost, net
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3,387
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Other long-term assets, including $1,406 and $0 with affiliates
at September 30, 2011 and December 31, 2010,
respectively
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1,579
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44
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Total assets
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$
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673,779
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$
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452,165
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LIABILITIES AND PARTNERS CAPITAL
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Current liabilities:
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Accounts payable, including $2,535 and $3,323 due to affiliates
at September 30, 2011 and December 31, 2010,
respectively
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$
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15,148
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$
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17,758
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Personnel accruals, including $418 and $0 with affiliates at
September 30, 2011 and December 31, 2010, respectively
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2,242
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1,848
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Deferred revenue
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20,550
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18,660
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Accrued expenses and other current liabilities, including $513
and $0 with affiliates at September 30, 2011 and
December 31, 2010, respectively
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19,097
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7,810
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Total current liabilities
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57,037
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46,076
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Long-term liabilities:
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Long-term debt, net of current portion
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125,000
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Other long-term liabilities, including $896 and $0 with
affiliates at September 30, 2011 and December 31,
2010, respectively
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2,484
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3,886
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Total long-term liabilities
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127,484
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3,886
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Commitments and contingencies
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Partners capital:
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Special general partners interest, 30,303,000 units
issued and outstanding at December 31, 2010
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397,951
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Limited partners interest, 30,333 units issued and
outstanding at December 31, 2010
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398
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Managing general partners interest
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3,854
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Common unitholders, 73,002,956 units issued and outstanding
at September 30, 2011
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491,669
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General partners interest
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1
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Accumulated other comprehensive loss
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(2,412
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)
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Total partners capital
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489,258
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402,203
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Total liabilities and partners capital
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$
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673,779
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$
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452,165
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See accompanying notes to the condensed consolidated financial
statements.
2
CVR
Partners, LP and Subsidiary
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Three Months Ended
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Nine Months Ended
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September 30,
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September 30,
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2011
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2010
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2011
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2010
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(unaudited)
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(in thousands, except per unit data)
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Net sales
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$
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77,203
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$
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46,426
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$
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215,253
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$
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141,057
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Operating costs and expenses:
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Cost of product sold (exclusive of depreciation and
amortization) Affiliates
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3,642
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2,940
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7,977
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5,086
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Cost of product sold (exclusive of depreciation and
amortization) Third parties
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7,259
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7,854
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20,161
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22,565
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10,901
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10,794
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28,138
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|
|
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27,651
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|
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|
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Direct operating expenses (exclusive of depreciation and
amortization) Affiliates
|
|
|
165
|
|
|
|
471
|
|
|
|
1,013
|
|
|
|
1,423
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Direct operating expenses (exclusive of depreciation and
amortization) Third parties
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19,918
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16,754
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64,360
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|
|
59,309
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,083
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|
|
|
17,225
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|
|
|
65,373
|
|
|
|
60,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance recovery business interruption
|
|
|
(490
|
)
|
|
|
|
|
|
|
(3,360
|
)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses (exclusive of
depreciation and amortization) Affiliates
|
|
|
3,438
|
|
|
|
2,391
|
|
|
|
13,085
|
|
|
|
6,830
|
|
Selling, general and administrative expenses (exclusive of
depreciation and amortization) Third parties
|
|
|
1,094
|
|
|
|
930
|
|
|
|
4,443
|
|
|
|
1,952
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,532
|
|
|
|
3,321
|
|
|
|
17,528
|
|
|
|
8,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Depreciation and amortization
|
|
|
4,663
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4,526
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|
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13,948
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|
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13,862
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|
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|
|
|
|
|
|
|
|
|
|
|
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|
|
Total operating costs and expenses
|
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|
39,689
|
|
|
|
35,866
|
|
|
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121,627
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111,027
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|
|
|
|
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|
|
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|
Operating income
|
|
|
37,514
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|
|
|
10,560
|
|
|
|
93,626
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|
|
30,030
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|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and other financing costs
|
|
|
(1,378
|
)
|
|
|
|
|
|
|
(2,616
|
)
|
|
|
|
|
Interest income
|
|
|
29
|
|
|
|
3,033
|
|
|
|
58
|
|
|
|
9,619
|
|
Other income, net
|
|
|
132
|
|
|
|
(46
|
)
|
|
|
189
|
|
|
|
(120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(1,217
|
)
|
|
|
2,987
|
|
|
|
(2,369
|
)
|
|
|
9,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
36,297
|
|
|
|
13,547
|
|
|
|
91,257
|
|
|
|
39,529
|
|
Income tax expense
|
|
|
12
|
|
|
|
3
|
|
|
|
27
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
36,285
|
|
|
$
|
13,544
|
|
|
$
|
91,230
|
|
|
$
|
39,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income subsequent to initial public offering
|
|
$
|
36,285
|
|
|
|
|
|
|
$
|
67,134
|
|
|
|
|
|
Net income per common unit basic(1)
|
|
$
|
0.50
|
|
|
|
|
|
|
$
|
0.92
|
|
|
|
|
|
Net income per common unit diluted(1)
|
|
$
|
0.50
|
|
|
|
|
|
|
$
|
0.92
|
|
|
|
|
|
Weighted-average common units outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
73,003
|
|
|
|
|
|
|
|
73,002
|
|
|
|
|
|
Diluted
|
|
|
73,083
|
|
|
|
|
|
|
|
73,065
|
|
|
|
|
|
|
|
|
(1) |
|
Represents net income per common unit since closing the
Partnerships initial public offering on April 13,
2011. See Note 5 to the condensed consolidated financial
statements. |
See accompanying notes to the condensed consolidated financial
statements.
3
CVR
Partners, LP and Subsidiary
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
91,230
|
|
|
$
|
39,494
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
13,948
|
|
|
|
13,862
|
|
Allowance for doubtful accounts
|
|
|
21
|
|
|
|
(5
|
)
|
Amortization of deferred financing costs
|
|
|
458
|
|
|
|
|
|
Loss on disposition of fixed assets
|
|
|
631
|
|
|
|
523
|
|
Share-based compensation Affiliates
|
|
|
6,420
|
|
|
|
1,279
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,582
|
)
|
|
|
(1,258
|
)
|
Inventories
|
|
|
(5,969
|
)
|
|
|
(1,558
|
)
|
Insurance receivable
|
|
|
(5,880
|
)
|
|
|
|
|
Business interruption insurance proceeds
|
|
|
3,360
|
|
|
|
|
|
Other long-term assets
|
|
|
(1,569
|
)
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
2,812
|
|
|
|
457
|
|
Accounts payable
|
|
|
(4,726
|
)
|
|
|
2,616
|
|
Deferred revenue
|
|
|
1,890
|
|
|
|
(2,402
|
)
|
Accrued expenses and other current liabilities
|
|
|
7,184
|
|
|
|
3,730
|
|
Other long-term liabilities
|
|
|
669
|
|
|
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
107,897
|
|
|
|
56,644
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(10,539
|
)
|
|
|
(3,835
|
)
|
Insurance proceeds from UAN reactor rupture
|
|
|
2,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(7,794
|
)
|
|
|
(3,835
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
125,000
|
|
|
|
|
|
Payment of financing costs
|
|
|
(4,825
|
)
|
|
|
|
|
Due from affiliate
|
|
|
|
|
|
|
(29,474
|
)
|
Distributions to affiliates
|
|
|
(297,401
|
)
|
|
|
|
|
Cash distributions to public unitholders
non-affiliates
|
|
|
(8,988
|
)
|
|
|
|
|
Purchase of managing general partner incentive distribution
rights
|
|
|
(26,000
|
)
|
|
|
|
|
Proceeds from issuances of common units, net of offering costs
|
|
|
324,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
112,666
|
|
|
|
(29,474
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
212,769
|
|
|
|
23,335
|
|
Cash and cash equivalents, beginning of period
|
|
|
42,745
|
|
|
|
5,440
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
255,514
|
|
|
$
|
28,775
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
20
|
|
|
$
|
35
|
|
Cash paid for interest, net of capitalized interest of $946 and
$0 in 2011 and 2010, respectively
|
|
$
|
1,630
|
|
|
$
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
Accrual of construction in progress additions
|
|
$
|
2,116
|
|
|
$
|
(467
|
)
|
See accompanying notes to the condensed consolidated financial
statements.
4
CVR
Partners, LP and Subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special
|
|
|
|
|
|
Managing
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
General
|
|
|
Limited
|
|
|
General
|
|
|
|
|
|
General
|
|
|
Other
|
|
|
|
|
|
|
Partners
|
|
|
Partners
|
|
|
Partners
|
|
|
Common
|
|
|
Partner
|
|
|
Comprehensive
|
|
|
|
|
|
|
Interest
|
|
|
Interest
|
|
|
Interest
|
|
|
Unitholders
|
|
|
Interest
|
|
|
Income/(Loss)
|
|
|
Total
|
|
|
|
(unaudited)
|
|
|
|
(In thousands)
|
|
|
Balance at December 31, 2010
|
|
$
|
397,951
|
|
|
$
|
398
|
|
|
$
|
3,854
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
402,203
|
|
Conversion of Special General Partners Interest and
Limited Partners Interest to Common Units
|
|
|
(372,699
|
)
|
|
|
(373
|
)
|
|
|
|
|
|
|
373,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common units to public, net of offering and other
costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
324,206
|
|
|
|
|
|
|
|
|
|
|
|
324,206
|
|
Purchase of Managing General Partner Incentive Distribution
Rights
|
|
|
|
|
|
|
|
|
|
|
(3,854
|
)
|
|
|
(22,147
|
)
|
|
|
1
|
|
|
|
|
|
|
|
(26,000
|
)
|
Cash distributions to affiliates
|
|
|
(53,928
|
)
|
|
|
(54
|
)
|
|
|
|
|
|
|
(243,419
|
)
|
|
|
|
|
|
|
|
|
|
|
(297,401
|
)
|
Cash distributions to public unitholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,988
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,988
|
)
|
Issuance of units under LTIP Affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
Share-based compensation
Affiliates
|
|
|
4,604
|
|
|
|
5
|
|
|
|
|
|
|
|
1,753
|
|
|
|
|
|
|
|
|
|
|
|
6,362
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to the period from January 1, 2011
through April 12, 2011
|
|
|
24,072
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,096
|
|
Net income attributable to the period from April 13, 2011
through September 30, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,134
|
|
|
|
|
|
|
|
|
|
|
|
67,134
|
|
Net unrealized gains (losses) on interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,412
|
)
|
|
|
(2,412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
24,072
|
|
|
|
24
|
|
|
|
|
|
|
|
67,134
|
|
|
|
|
|
|
|
(2,412
|
)
|
|
|
88,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2011
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
491,669
|
|
|
$
|
1
|
|
|
$
|
(2,412
|
)
|
|
$
|
489,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the condensed consolidated financial
statements.
5
CVR
Partners, LP and Subsidiary
(1) Formation
of the Partnership, Organization and Nature of
Business
Organization
CVR Partners, LP (referred to as CVR Partners or the
Partnership) is a Delaware limited partnership,
formed in June 2007 by CVR Energy, Inc. (together with its
subsidiaries, but excluding the Partnership and its subsidiary,
CVR Energy) to own Coffeyville Resources Nitrogen
Fertilizers, LLC (CRNF), previously a wholly-owned
subsidiary of CVR Energy. CRNF is an independent producer and
marketer of upgraded nitrogen fertilizer products sold in North
America. CRNF operates a dual-train coke gasifier plant that
produces high-purity hydrogen, most of which is subsequently
converted to ammonia and upgraded to urea ammonium nitrate
(UAN).
CRNF produces and distributes nitrogen fertilizer products,
which are used primarily by farmers to improve the yield and
quality of their crops. CRNFs principal products are
ammonia and UAN. These products are manufactured at CRNFs
facility in Coffeyville, Kansas. CRNFs product sales are
heavily weighted toward UAN and all of its products are sold on
a wholesale basis.
In October 2007, CVR Energy, through its wholly-owned
subsidiary, Coffeyville Resources, LLC (CRLLC),
transferred CRNF, which operated CRLLCs nitrogen
fertilizer business, to the Partnership. This transfer was not
considered a business combination as it was a transfer of assets
among entities under common control and, accordingly, balances
were transferred at their historical cost. The Partnership
became the sole member of CRNF. In consideration for CRLLC
transferring its nitrogen fertilizer business to the
Partnership, (1) CRLLC directly acquired 30,333 special LP
units, representing a 0.1% limited partner interest in the
Partnership, (2) a wholly-owned subsidiary of CRLLC
acquired 30,303,000 special GP units, representing a 99.9%
general partner interest in the Partnership, and (3) CVR
GP, LLC, then owned by CRLLC, acquired a managing general
partner interest and incentive distribution rights
(IDRs) of the Partnership. Immediately prior to CVR
Energys initial public offering, CVR Energy sold the
managing general partner interest (together with the IDRs) to
Coffeyville Acquisition III LLC (CALLC III), an
entity owned by funds affiliated with Goldman, Sachs &
Co. (the Goldman Sachs Funds) and Kelso &
Company, L.P. (the Kelso Funds) and members of CVR
Energys management team, for its fair market value on the
date of sale. CVR Energy initially indirectly owned all of the
interests in the Partnership (other than the managing general
partner interest and the IDRs) and initially was entitled to all
cash distributed by the Partnership.
Initial
Public Offering of CVR Partners, LP
On April 13, 2011, CVR Partners completed its initial
public offering (the Offering) of 22,080,000 common
units priced at $16.00 per unit (such amount includes common
units issued pursuant to the exercise of the underwriters
over-allotment option). The common units, which are listed on
the New York Stock Exchange, began trading on April 8, 2011
under the symbol UAN.
The net proceeds to CVR Partners from the Offering (including
the net proceeds from the exercise of the underwriters
over-allotment option) were approximately $324.2 million,
after deducting underwriting discounts and commissions and
offering expenses. The net proceeds from the Offering were used
as follows: approximately $18.4 million was used to make a
distribution to CRLLC in satisfaction of the Partnerships
obligation to reimburse CRLLC for certain capital expenditures
CRLLC made with respect to the nitrogen fertilizer business
prior to October 24, 2007; approximately
$117.1 million was used to make a special distribution to
CRLLC in order to, among other things, fund the offer to
purchase CRLLCs senior secured notes required upon
consummation of the Offering; approximately $26.0 million
was used to purchase (and subsequently extinguish) the IDRs
owned by the general partner; approximately $4.8 million
was used to pay financing fees and associated legal and
professional fees resulting from the new credit facility; and
the balance
6
CVR
Partners, LP and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
was used or will be used for general partnership purposes,
including approximately $104.0 million to fund the
continuation of the UAN expansion at the nitrogen fertilizer
plant.
Immediately prior to the closing of the Offering, the
Partnership distributed approximately $54.0 million of cash
on hand to CRLLC. In connection with the Offering, the
Partnerships special LP units were converted into common
units, the Partnerships special GP units were converted
into common units, and the Partnerships special general
partner was merged with and into CRLLC, with CRLLC continuing as
the surviving entity. Additionally, in conjunction with CVR GP,
LLC selling its IDRs to the Partnership, which were then
extinguished, CALLC III sold CVR GP, LLC to CRLLC for a nominal
amount.
Subsequent to the closing of the Offering, common units held by
public security holders represent approximately 30% of all
outstanding limited partner interests. CRLLC holds common units
approximating 70% of all outstanding limited partner interests.
The general partner manages and operates the Partnership. Common
unitholders have only limited voting rights on matters affecting
the Partnership. In addition, common unitholders have no right
to elect the general partners directors on an annual or
continuing basis.
The Partnership is operated by CVR Energys senior
management team pursuant to a services agreement among CVR
Energy, CVR GP, LLC and the Partnership. In October 2007, the
Partnerships partners at that time entered into an amended
and restated limited partnership agreement setting forth their
various rights and responsibilities. The Partnership also
entered into a number of agreements with CVR Energy and CVR GP,
LLC to regulate certain business relations between the
Partnership and the other parties thereto. See Note 16
(Related Party Transactions) for further discussion.
In connection with the Offering, certain of these agreements,
including the amended and restated limited partnership
agreement, were amended
and/or
restated. Additionally, in connection with the Offering, the
Partnership and CRNF were released from their obligations as
guarantors under CRLLCs asset-backed revolving credit
facility (ABL credit facility) and the indentures
which govern CRLLCs senior secured notes, as described
further in Note 15 (Commitments and
Contingencies).
|
|
(2)
|
Basis of
Presentation
|
The accompanying condensed consolidated financial statements of
CVR Partners are comprised of the operations of CRNFs
nitrogen fertilizer business. The accompanying condensed
consolidated financial statements were prepared in accordance
with U.S. generally accepted accounting principles
(GAAP) and in accordance with the rules and
regulations of the SEC, including Article 3 of
Regulation S-X,
General Instructions as to Consolidated Financial
Statements.
The condensed consolidated financial statements include certain
costs of CVR Energy that it incurred on behalf of the
Partnership. These amounts represent certain selling, general
and administrative expenses (exclusive of depreciation and
amortization) and direct operating expenses (exclusive of
depreciation and amortization). These transactions represent
related party transactions and are governed by the amended and
restated services agreement originally entered into in October
2007. See Note 16 (Related Party Transactions)
for additional discussion of the services agreement and billing
and allocation of certain costs. The amounts charged or
allocated to the Partnership are not necessarily indicative of
the cost that the Partnership would have incurred had it
operated as an independent entity for all periods presented.
In the opinion of the Partnerships management, the
accompanying condensed consolidated financial statements and
related notes reflect all adjustments that are necessary to
fairly present the financial position of the Partnership as of
September 30, 2011 and December 31, 2010 and the
results of operations of the Partnership for the three and nine
months ended September 30, 2011 and 2010, and cash flows
for the nine months ended September 30, 2011 and 2010.
7
CVR
Partners, LP and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The preparation of condensed consolidated financial statements
in conformity with GAAP requires management to make estimates
and assumptions that reflect the reported amounts of assets,
liabilities, revenues and expenses, and other discharge of
contingent assets and liabilities. Actual results could differ
from those estimates. Results of operations and cash flows are
not necessarily indicative of the results that will be realized
for the year ended December 31, 2011 or any other interim
period.
The Partnership has omitted net income per unit for all periods
other than the three and nine months ended September 30,
2011, because the Partnership operated under a different capital
structure prior to the closing of the Offering, and, as a
result, the per unit data would not be meaningful to investors.
Per unit data for the nine months ended September 30, 2011
is calculated since the closing of the Partnerships
Offering on April 13, 2011.
The Partnership has evaluated subsequent events that would
require an adjustment to the Partnerships condensed
consolidated financial statements or disclosure in the notes to
the condensed consolidated financial statements through the date
of issuance of the condensed consolidated financial statements.
|
|
(3)
|
Recent
Accounting Pronouncements
|
In May 2011, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update
(ASU)
No. 2011-04,
Fair Value Measurements (Topic 820): Amendments to
Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRS, (ASU
2011-04).
ASU 2011-04
changes the wording used to describe many of the requirements in
U.S. GAAP for measuring fair value and for disclosing
information about fair value measurements to ensure consistency
between U.S. GAAP and International Financial Reporting
Standards (IFRS). ASU
2011-04 also
expands the disclosures for fair value measurements that are
estimated using significant unobservable
(Level 3) inputs. This new guidance is to be applied
prospectively. ASU
2011-04 will
be effective for interim and annual periods beginning after
December 15, 2011. Early adoption is not permitted. The
Partnership believes that the adoption of this standard will not
materially expand its consolidated financial statement footnote
disclosures.
In June 2011, the FASB issued ASU
No. 2011-05,
Comprehensive Income (ASC Topic 220): Presentation of
Comprehensive Income, (ASU
2011-05)
which amends current comprehensive income guidance. This ASU
eliminates the option to present the components of other
comprehensive income as part of the statement of
shareholders equity. Instead, the Partnership must report
comprehensive income in either a single continuous statement of
comprehensive income which contains two sections, net income and
other comprehensive income, or in two separate but consecutive
statements. ASU
2011-05 will
be effective for interim and annual periods beginning after
December 15, 2011, with early adoption permitted. The
Partnership believes that the adoption of ASU
2011-05 will
not have a material impact on the Partnerships condensed
consolidated financial statements.
In September 2011, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update
(ASU)
No. 2011-08,
Intangibles Goodwill and Other (Topic 350):
Testing Goodwill for Impairment, (ASU
2011-08).
ASU 2011-08
permits an entity to make a qualitative assessment of whether it
is more likely than not that a reporting units fair value
is less than its carrying amount before applying the two-step
goodwill impairment test. This new guidance is to be applied
prospectively. ASU
2011-08 will
be effective for interim and annual periods beginning after
December 15, 2011, with early adoption permitted. The
Partnership believes that the adoption of this standard will not
have a material impact on the consolidated financial statements.
|
|
(4)
|
Partners
Capital and Partnership Distributions
|
In connection with the Offering that closed on April 13,
2011, the Partnerships special LP units were converted
into common units, the Partnerships special GP units were
converted into common units, and the
8
CVR
Partners, LP and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Partnerships special general partner was merged with and
into CRLLC, with CRLLC continuing as the surviving entity. In
addition, CVR GP, LLC sold its IDRs to the Partnership and the
IDRs were extinguished, and CALLC III sold CVR GP, LLC to CRLLC.
Following the Offering, the Partnership has two types of
partnership interests outstanding:
|
|
|
|
|
common units; and
|
|
|
|
a general partner interest, which is not entitled to any
distributions, and which is held by CVR GP, LLC, the general
partner.
|
At September 30, 2011, the Partnership had a total of
73,002,956 common units issued and outstanding, of which
50,920,000 common units were owned by CRLLC, representing
approximately 70% of the total Partnership units outstanding.
The board of directors of the general partner has adopted a
policy pursuant to which the Partnership will distribute all of
the available cash it generates each quarter. Cash distributions
will be made to the common unitholders of record on the
applicable record date, generally within 45 days after the
end of each quarter. See Note 20 (Subsequent
Events) for additional discussion of the cash
distributions. Available cash for each quarter will be
determined by the board of directors of the general partner
following the end of such quarter. Available cash for each
quarter will generally equal the Partnerships cash flow
from operations for the quarter, less cash needed for
maintenance capital expenditures, debt service and other
contractual obligations, and reserves for future operating or
capital needs that the board of directors of our general partner
deems necessary or appropriate. The Partnership also retains the
cash on hand associated with prepaid sales at each quarter end
for future distributions to common unitholders based upon the
recognition into income of the prepaid sales.
In August 2011, the Partnership paid out a cash distribution to
the Partnerships unitholders for the second quarter of
2011 (calculated for the period beginning April 13, 2011
through June 30, 2011) in the amount of $0.407 per
unit or $29.7 million in aggregate.
|
|
(5)
|
Net
Income Per Common Unitholder
|
The net income per unit figures on the condensed consolidated
Statement of Operations are based on the net income of the
Partnership after the closing of the Offering on April 13,
2011 through September 30, 2011, since this is the amount
of net income that is attributable to the common units.
The Partnerships net income is allocated wholly to the
common unitholders as the general partner does not have an
economic interest.
Basic and diluted net income per common unitholder is calculated
by dividing net income by the weighted-average number of common
units outstanding during the period and, when applicable, gives
effect to phantom units and unvested common units granted under
the CVR Partners, LP Long-Term Incentive Plan (CVR
Partners LTIP). The common units issued during the period
are included on a weighted-average basis for the days in which
they were outstanding.
9
CVR
Partners, LP and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table illustrates the Partnerships
calculation of net income per common unitholder (in thousands,
except per unit information):
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
April 13, 2011
|
|
|
|
Ended
|
|
|
to
|
|
|
|
September 30, 2011
|
|
|
September 30, 2011
|
|
|
Net income (from close of the Offering on April 13, 2011 to
September 30, 2011
|
|
$
|
36,285
|
|
|
$
|
67,134
|
|
|
|
|
|
|
|
|
|
|
Net income per common unit, basic
|
|
$
|
0.50
|
|
|
$
|
0.92
|
|
|
|
|
|
|
|
|
|
|
Net income per common unit, diluted
|
|
$
|
0.50
|
|
|
$
|
0.92
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common units outstanding, basic
|
|
|
73,003
|
|
|
|
73,002
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common units outstanding, diluted
|
|
|
73,083
|
|
|
|
73,065
|
|
|
|
|
|
|
|
|
|
|
Cost of product sold (exclusive of depreciation and
amortization) includes cost of pet coke expense and freight and
distribution expenses. For each of the three and nine months
ended September 30, 2011, there was $26,000 in depreciation
expense incurred related to the cost of product sold. There were
no amounts in depreciation expense incurred for the three and
nine months ended September 30, 2010.
Direct operating expenses (exclusive of depreciation and
amortization) includes direct costs of labor, maintenance and
services, energy and utility costs, property taxes, and
environmental compliance costs as well as chemical and catalyst
and other direct operating expenses. Direct operating expenses
also include allocated non-cash share-based compensation expense
from CVR Energy and CALLC III, as discussed in Note 14
(Share-Based Compensation). Direct operating
expenses exclude depreciation and amortization of approximately
$4.7 million and $4.5 million for the three months
ended September 30, 2011 and 2010, respectively. For the
nine months ended September 30, 2011 and 2010, direct
operating expenses exclude depreciation and amortization of
approximately $13.9 million and approximately
$13.9 million, respectively.
Selling, general and administrative expenses (exclusive of
depreciation and amortization) consist primarily of direct and
allocated legal, treasury, accounting, marketing, human
resources and the cost of maintaining the corporate offices in
Texas and Kansas. Selling, general and administrative expenses
also include allocated non-cash share-based compensation expense
from CVR Energy and CALLC III, as discussed in Note 14
(Share-Based Compensation). Selling, general and
administrative expenses exclude depreciation and amortization of
$2,000 and $2,000 for the three months ended September 30,
2011 and 2010, respectively. Selling, general and administrative
expenses exclude depreciation and amortization of $15,000 and
$8,000 for the nine months ended September 30, 2011 and
2010, respectively.
Inventories consist of fertilizer products which are valued at
the lower of
first-in,
first-out (FIFO) cost, or market. Inventories also
include raw materials, catalysts, parts and supplies, which are
valued at the lower of moving-average cost, which approximates
FIFO, or market. The cost of inventories includes inbound
freight costs.
10
CVR
Partners, LP and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands)
|
|
|
Finished goods
|
|
$
|
8,099
|
|
|
$
|
3,645
|
|
Raw materials and precious metals
|
|
|
5,393
|
|
|
|
4,077
|
|
Parts and supplies
|
|
|
12,307
|
|
|
|
12,108
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,799
|
|
|
$
|
19,830
|
|
|
|
|
|
|
|
|
|
|
(8) Prepaid
Expenses and Other Current Assets
Prepaid expenses and other current assets consist of
prepayments, non-trade accounts receivable, affiliates
receivables and other general current assets. Prepaid expenses
and other current assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands)
|
|
|
Accrued interest receivable(1)
|
|
$
|
|
|
|
$
|
2,318
|
|
Deferred financing cost
|
|
|
980
|
|
|
|
2,089
|
|
Other
|
|
|
1,845
|
|
|
|
1,150
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,825
|
|
|
$
|
5,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Accrued interest receivable represents amounts
due from CRLLC, a related party, in connection with the due from
affiliate balance. As of December 31, 2010, the due from
affiliate balance of $160.0 million was distributed to
CRLLC and the special general partner in accordance with their
respective percentage interests. Additionally, included in the
table above are amounts owed to the Partnership related to
activities associated with the feedstock and shared services
agreement. See Note 16 (Related Party
Transactions) for additional discussion of amounts owed to
the Partnership related to the due from affiliate balance and
detail of amounts owed to the Partnership related to the
feedstock and shared services agreement. |
|
|
(9)
|
Property,
Plant, and Equipment
|
A summary of costs for property, plant, and equipment is as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands)
|
|
|
Land and improvements
|
|
$
|
2,553
|
|
|
$
|
2,492
|
|
Buildings
|
|
|
815
|
|
|
|
724
|
|
Machinery and equipment
|
|
|
396,818
|
|
|
|
397,236
|
|
Automotive equipment
|
|
|
2,887
|
|
|
|
391
|
|
Furniture and fixtures
|
|
|
261
|
|
|
|
245
|
|
Construction in progress
|
|
|
41,756
|
|
|
|
32,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
445,090
|
|
|
|
433,864
|
|
Accumulated depreciation
|
|
|
(109,019
|
)
|
|
|
(95,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
336,071
|
|
|
$
|
337,938
|
|
|
|
|
|
|
|
|
|
|
Capitalized interest recognized as a reduction of interest
expense for the three months ended September 30, 2011 and
2010 totaled approximately $0.6 million and $0,
respectively. Capitalized interest recognized as a reduction of
interest expense for the nine months ended September 30,
2011 and 2010 totaled approximately $0.9 million and $0,
respectively.
11
CVR
Partners, LP and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(10)
|
Accrued
Expenses and Other Current Liabilities
|
Accrued expenses and other current liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(in thousands)
|
|
|
Property taxes
|
|
$
|
10,588
|
|
|
$
|
7,025
|
|
Capital asset and dismantling obligation
|
|
|
5,247
|
|
|
|
250
|
|
Other current liabilities (interest rate swap)
|
|
|
868
|
|
|
|
|
|
Accrued interest
|
|
|
720
|
|
|
|
|
|
Other accrued expenses and liabilities(1)
|
|
|
1,674
|
|
|
|
535
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,097
|
|
|
$
|
7,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other accrued expenses and liabilities include amounts owed by
the Partnership to Coffeyville Resources Refining &
Marketing, LLC (CRRM), a related party, under the
feedstock and shared services agreement. See Note 16
(Related Party Transactions) for additional
discussion of amounts the Partnership owes related to the
feedstock and shared services agreement. |
|
|
(11)
|
Nitrogen
Fertilizer Incident
|
On September 30, 2010, the nitrogen fertilizer plant
experienced an interruption in operations due to a rupture of a
high-pressure UAN vessel. All operations at the nitrogen
fertilizer facility were immediately shut down. No one was
injured in the incident. Repairs to the facility as a result of
the rupture were substantially complete as of December 31,
2010.
Total gross costs recorded as of September 30, 2011 due to
the incident were approximately $11.2 million for repairs
and maintenance and other associated costs. Approximately
$0.1 million of these costs was recognized during the three
months ended September 30, 2011. Approximately
$0.8 million of these costs was recognized during the nine
months ended September 30, 2011. The repairs and
maintenance costs incurred are included in direct operating
expenses (exclusive of depreciation and amortization). Of the
gross costs incurred, approximately $4.6 million was
capitalized.
The Partnership maintains property damage insurance under CVR
Energys insurance policies which have an associated
deductible of $2.5 million. The Partnership anticipates
that substantially all of the repair costs in excess of the
$2.5 million deductible should be covered by insurance. As
of September 30, 2011, approximately $7.0 million of
insurance proceeds have been received under the property damage
insurance related to this incident. Approximately
$2.5 million of these proceeds were received during the
three months ended September 30, 2011. Approximately
$2.7 million of these proceeds were received during the
nine months ended September 30, 2011. The remaining
$4.3 million was received during December 2010. The
recording of the insurance proceeds resulted in a reduction of
direct operating expenses (exclusive of depreciation and
amortization).
The insurance policies also provide coverage for interruption to
the business, including lost profits, and reimbursement for
other expenses and costs the Partnership has incurred relating
to the damage and losses suffered for business interruption.
This coverage, however, only applies to losses incurred after a
business interruption of 45 days. A partial business
interruption claim was filed during 2011 resulting in receipt of
proceeds totaling $3.4 million for the nine months ended
September 30, 2011. Approximately $0.5 million was
received during the three months ended September 30, 2011,
while the remaining $2.9 million was received in March and
April, 2011. The proceeds associated with the business
interruption claim are included on the Condensed Consolidated
Statements of Operations under Insurance recovery
business interruption.
12
CVR
Partners, LP and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CVR Partners is treated as a partnership for U.S. federal
income tax purposes. Generally, each common unitholder is
required to take into account its respective share of CVR
Partners income, gains, loss and deductions. The
Partnership is not subject to income taxes, except for a
franchise tax in the state of Texas. The income tax liability of
the common unitholders is not reflected in the condensed
consolidated financial statements of the Partnership.
CRLLC sponsors and administers a defined-contribution 401(k)
plan (the Plan) for the employees of CRNF.
Participants in the Plan may elect to contribute up to 50% of
their annual salaries and up to 100% of their annual bonus
received pursuant to CVR Energys income sharing plan. CRNF
matches up to 75% of the first 6% of the participants
contribution. Participants in the Plan are immediately vested in
their individual contributions. The Plan has a three year
vesting schedule for CRNFs matching funds and contains a
provision to count service with any predecessor organization.
For the three months ended September 30, 2011 and 2010,
CRNFs contributions under the Plan were approximately
$0.1 million and $0.1 million, respectively. For the
nine months ended September 30, 2011 and 2010, CRNFs
contributions under the Plan were approximately
$0.3 million and $0.3 million, respectively.
|
|
(14)
|
Share-Based
Compensation
|
Certain employees of CRNF and employees of CVR Energy who
perform services for the Partnership under the services
agreement with CVR Energy are participants in equity
compensation plans of CVR Partners affiliates.
Accordingly, CVR Partners has recorded compensation expense for
these plans in accordance with Staff Accounting Bulletin, or
SAB Topic 1-B Allocations of Expenses and Related
Disclosures in Financial Statements of Subsidiaries, Divisions
or Lesser Business Components of Another Entity and in
accordance with guidance regarding the accounting for
share-based compensation granted to employees of an equity
method investee. All compensation expense related to these plans
for full-time employees of CVR Partners has been allocated 100%
to CVR Partners. For employees covered by the services agreement
with CVR Energy, the Partnership records share-based
compensation relative to the percentage of time spent by each
employee providing services to the Partnership as compared to
the total calculated share-based compensation by CVR Energy. The
Partnership is not responsible for payment of CVR Energys
share-based compensation and all expense amounts are reflected
as an increase or decrease to Partners Capital.
Prior to its initial public offering, CVR Energy was owned by
Coffeyville Acquisition LLC (CALLC), which was
principally owned by the Goldman Sachs Funds, the Kelso Funds
and members of CVR Energys management team. In connection
with CVR Energys initial public offering, CALLC was split
into two entities: CALLC and Coffeyville Acquisition II LLC
(CALLC II). In connection with this split,
managements equity interest in CALLC, including both their
common units and non-voting override units, were split so that
half of managements equity interest was in CALLC and half
was in CALLC II.
In February 2011, CALLC and CALLC II sold into the public market
11,759,023 shares and 15,113,254 shares, respectively,
of CVR Energys common stock, pursuant to a registered
public offering. As a result of the offering, CALLC II was no
longer a stockholder of CVR Energy. Subsequent to CALLC
IIs divestiture of its ownership interest in CVR Energy,
no additional share-based compensation expense will be incurred
with respect to override units of CALLC II.
In May 2011, CALLC sold its remaining shares of CVR Energy,
pursuant to a registered public offering. As a result of this
offering, CALLC was no longer a stockholder of CVR Energy.
Subsequent to CALLCs divestiture of its ownership interest
in CVR Energy, no additional share-based compensation expense
will be incurred with respect to override units of CALLC. The
final fair value of the CALLC override units was
13
CVR
Partners, LP and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
derived based upon the value resulting from the proceeds
received associated with CALLCs divestitures of its
remaining shares of CVR Energy and attributable to the unvested
units on that date.
The final fair value of the CALLC III override units was derived
based upon the value resulting from the proceeds received by the
managing GP upon the purchase of the IDRs by the
Partnership. These proceeds were subsequently distributed to the
owners of CALLC III which includes the override unitholders.
This value was utilized to determine the related compensation
expense for the unvested units. Subsequent to June 30,
2011, no additional share-based compensation will be incurred
with respect to override units of CALLC III due to the complete
distribution of the value prior to July 1, 2011. For the
three and nine months ended September 30, 2010, the
estimated fair value of the override units of CALLC III was
determined using a probability-weighted expected return method
which utilized CALLC IIIs cash flow projections, which
were considered representative of the nature of interests held
by CALLC III in the Partnership.
The following table provides key information for the share-based
compensation plans related to the override units of CALLC, CALLC
II, and CALLC III.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation Expense Increase
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) for the
|
|
|
(Decrease) for the
|
|
|
|
Benchmark
|
|
|
Original
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
Value
|
|
|
Awards
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
Award Type
|
|
(per Unit)
|
|
|
Issued
|
|
|
Grant Date
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
Override Operating Units
|
|
$
|
11.31
|
|
|
|
919,630
|
|
|
|
June 2005
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
56
|
|
Override Operating Units
|
|
$
|
34.72
|
|
|
|
72,492
|
|
|
|
December 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Override Value Units(a)
|
|
$
|
11.31
|
|
|
|
1,839,265
|
|
|
|
June 2005
|
|
|
|
|
|
|
|
309
|
|
|
|
1,495
|
|
|
|
640
|
|
Override Value Units(b)
|
|
$
|
34.72
|
|
|
|
144,966
|
|
|
|
December 2006
|
|
|
|
|
|
|
|
2
|
|
|
|
225
|
|
|
|
9
|
|
Override Units(c)
|
|
$
|
10.00
|
|
|
|
138,281
|
|
|
|
October 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Override Units(d)
|
|
$
|
10.00
|
|
|
|
642,219
|
|
|
|
February 2008
|
|
|
|
|
|
|
|
|
|
|
|
143
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Override Operating Units
|
|
$
|
11.31
|
|
|
|
919,630
|
|
|
|
Total
|
|
|
$
|
|
|
|
$
|
311
|
|
|
$
|
1,863
|
|
|
$
|
707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to the divestiture of all ownership in CVR Energy by CALLC
and CALLC II and due to the purchase of the IDRs from CVR GP,
LLC and the distribution to CALLC III, there is no associated
unrecognized compensation expense as of September 30, 2011.
Valuation
Assumptions
As of September 30, 2010, all recipients of these override
operating units were fully vested.
Significant assumptions used in the valuation of the Override
Value Units (a) and (b) were as follows:
|
|
|
|
|
|
|
|
|
|
|
(a) Override Value Units
|
|
(b) Override Value Units
|
|
|
September 30, 2010
|
|
September 30, 2010
|
|
Estimated forfeiture rate
|
|
|
None
|
|
|
|
None
|
|
Derived service period
|
|
|
6 years
|
|
|
|
6 years
|
|
CVR Energys closing stock price
|
|
$
|
8.25
|
|
|
$
|
8.25
|
|
Estimated weighted-average fair value (per unit)
|
|
$
|
8.53
|
|
|
$
|
2.04
|
|
Marketability and minority interest discounts
|
|
|
20.0
|
%
|
|
|
20.0
|
%
|
Volatility
|
|
|
45.4
|
%
|
|
|
45.4
|
%
|
14
CVR
Partners, LP and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(c) Override Units Using a binomial and
a probability-weighted expected return method that utilized
CALLC IIIs cash flow projections which includes expected
future earnings and the anticipated timing of IDRs, the
estimated grant date fair value of the override units was
approximately $3,000. As a non-contributing investor, CVR Energy
also recognized income equal to the amount that its interest in
the investees net book value has increased (that is its
percentage share of the contributed capital recognized by the
investee) as a result of the disproportionate funding of the
compensation cost. These units were fully vested at the date of
grant.
(d) Override Units Using a
probability-weighted expected return method that utilized CALLC
IIIs cash flow projections which includes expected future
earnings and the anticipated timing of IDRs, the estimated grant
date fair value of the override units was approximately $3,000.
As a non-contributing investor, CVR Energy also recognized
income equal to the amount that its interest in the
investees net book value has increased (that is its
percentage share of the contributed capital recognized by the
investee) as a result of the disproportionate funding of the
compensation cost. Of the 642,219 units issued, 109,720
were immediately vested upon issuance and the remaining units
were subject to a forfeiture schedule. Significant assumptions
used in the valuation were as follows:
|
|
|
|
|
September 30, 2010
|
|
Estimated forfeiture rate
|
|
None
|
Derived Service Period
|
|
Based on forfeiture schedule
|
Estimated fair value (per unit)
|
|
$0.08
|
Marketability and minority interest discount
|
|
20.0%
|
Volatility
|
|
59.7%
|
Phantom
Unit Plans
CVR Energy, through CRLLC, has two Phantom Unit Appreciation
Plans (the Phantom Unit Plans) whereby directors,
employees and service providers were awarded phantom points at
the discretion of the board of directors or the compensation
committee. Holders of service phantom points had rights to
receive distributions when holders of override operating units
receive distributions. Holders of performance phantom points had
rights to receive distributions when CALLC and CALLC II holders
of override value units received distributions.
Compensation expense for the three months ended
September 30, 2011 and 2010 related to the Phantom Unit
Plans was approximately $0.0 and $0.3 million,
respectively. Compensation expense for the nine months ended
September 30, 2011 and 2010, related to the Phantom Unit
Plans was approximately $2.0 million and $0.4 million,
respectively.
Due to the divestiture of all ownership of CVR Energy by CALLC
and CALLC II, there is no unrecognized compensation expense
associated with the Phantom Units Plans at September 30,
2011.
Long-Term
Incentive Plan CVR Energy
CVR Energy has a Long-Term Incentive Plan (CVR Energy
LTIP) that permits the grant of options, stock
appreciation rights, restricted shares, restricted share units,
dividend equivalent rights, share awards and performance awards
(including performance share units, performance units and
performance based restricted stock). As of September 30,
2011, only restricted shares of CVR Energy common stock and
stock options had been granted under the CVR Energy LTIP.
Individuals who are eligible to receive awards and grants under
the CVR Energy LTIP include CVR Energys or its
subsidiaries (including CRNF) employees, officers,
consultants and directors.
15
CVR
Partners, LP and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restricted
Shares
Through the CVR Energy LTIP, shares of restricted common stock
have been granted to employees of CVR Energy and CRNF.
Restricted shares, when granted, are valued at the closing
market price of CVR Energys common stock on the date of
issuance and amortized to compensation expense on a
straight-line basis over the vesting period of the common stock.
These shares generally vest over a three-year period. Assuming
the allocation of costs from CVR Energy remains consistent with
the allocation percentages in place at September 30, 2011,
there was approximately $1.4 million of total unrecognized
compensation cost related to restricted shares to be recognized
over a weighted-average period of approximately two years.
Inclusion of the vesting table is not considered meaningful due
to changes in allocation percentages that occur from time to
time. The unrecognized compensation expense has been determined
by the number of restricted shares and respective allocation
percentage for individuals whom, as of September 30, 2011,
compensation expense has been allocated to the Partnership.
Compensation expense recorded for the three months ended
September 30, 2011 and 2010, related to the restricted
shares, was approximately $0.4 million and
$0.1 million, respectively. Compensation expense recorded
for the nine months ended September 30, 2011 and 2010,
related to the restricted shares, was approximately
$1.7 million and $0.1 million, respectively.
Long-Term
Incentive Plan CVR Partners
In connection with the Offering, the board of directors of the
general partner adopted the CVR Partners LTIP. Individuals
who are eligible to receive awards under the CVR Partners
LTIP include CVR Partners, its subsidiaries and its
parents employees, officers, consultants and directors.
The CVR Partners LTIP provides for the grant of options,
unit appreciation rights, distribution equivalent rights,
restricted units, phantom units and other unit-based awards,
each in respect of common units. The maximum number of common
units issuable under the CVR Partners LTIP is 5,000,000.
In connection with the Offering, 23,448 phantom units were
granted to certain board members of the Partnerships
general partner. These phantom unit awards granted to the
directors of the general partner are considered non-employee
equity-based awards since the directors are not elected by
unitholders. These phantom unit director awards were required to
be
marked-to-market
each reporting period until they vested on October 12, 2011.
In June 2011, 50,659 phantom units were granted to an employee
of the general partner. These phantom units are expected to vest
over three years on the basis of one-third of the award each
year. As these phantom awards were made to an employee of the
general partner, they are considered non-employee equity-based
awards and are required to be
marked-to-market
each reporting period until they vest.
In June 2011, 2,956 fully vested common units were granted to
certain board members of the general partner. The fair value of
these awards was calculated using the closing price of the
Partnerships common units on the date of grant. This
amount was fully expensed at the time of grant.
In August 2011, 12,815 phantom units were granted to an employee
of the general partner. These phantom units are expected to vest
over three years on the basis of one-third of the award each
year. As these phantom awards were made to an employee of the
general partner, they are considered non-employee equity-based
awards and are required to be
marked-to-market
each reporting period until they vest.
Compensation expense recorded for the three months ended
September 30, 2011 and 2010, related to the awards under
the CVR Partners LTIP was approximately $0.5 million
and $0.0, respectively. Compensation expense recorded for the
nine months ended September 30, 2011 and 2010, related to
the awards under the CVR Partners LTIP was approximately
$0.8 million and $0.0, respectively. Compensation expense
associated with the awards under the CVR Partners LTIP has
been recorded in selling, general and administrative
16
CVR
Partners, LP and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expenses (exclusive of depreciation and
amortization) affiliates as the expense has been
incurred for the benefit of directors or employees of the
general partner.
As of September 30, 2011, there were 4,910,122 common units
available for issuance under the CVR Partners LTIP.
Unrecognized compensation expense associated with the unvested
phantom units at September 30, 2011 was approximately
$1.3 million.
|
|
(15)
|
Commitments
and Contingencies
|
Leases
and Unconditional Purchase Obligations
The minimum required payments for the operating leases and
unconditional purchase obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconditional
|
|
|
|
Operating
|
|
|
Purchase
|
|
|
|
Leases
|
|
|
Obligations(1)
|
|
|
|
(in thousands)
|
|
|
Three months ending December 31, 2011
|
|
$
|
1,166
|
|
|
$
|
4,967
|
|
Year ending December 31, 2012
|
|
|
5,438
|
|
|
|
20,942
|
|
Year ending December 31, 2013
|
|
|
6,012
|
|
|
|
21,716
|
|
Year ending December 31, 2014
|
|
|
4,343
|
|
|
|
21,796
|
|
Year ending December 31, 2015
|
|
|
3,408
|
|
|
|
20,399
|
|
Thereafter
|
|
|
10,554
|
|
|
|
194,038
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,921
|
|
|
$
|
283,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Partnerships purchase obligation for pet coke from CVR
Energy has been derived from a calculation of the average pet
coke price paid to CVR Energy over the preceding two year period. |
CRNF leases railcars and facilities under long-term operating
leases. Lease expense for the three months ended
September 30, 2011 and 2010, totaled approximately
$1.0 million and $1.1 million, respectively. Lease
expense for the nine months ended September 30, 2011 and
2010, totaled approximately $2.9 million and
$3.2 million, respectively. The lease agreements have
various remaining terms. Some agreements are renewable, at
CRNFs option, for additional periods. It is expected, in
the ordinary course of business, that leases will be renewed or
replaced as they expire. CRNF entered into a lease agreement, in
September 2011, for 150 UAN railcars that will be used in
conjunction with the UAN expansion. This agreement is effective
November 2012.
CRNF has an agreement with the City of Coffeyville (the
City) pursuant to which it must make a series of
future payments for the supply, generation and transmission of
electricity and City margin based upon agreed upon rates. This
agreement expires on July 1, 2019. Effective August 2008
and through July 2010, the City began charging a higher rate for
electricity than what had been agreed to in the contract. CRNF
filed a lawsuit to have the contract enforced as written and to
recover other damages. CRNF paid the higher rates under protest
and subject to the lawsuit in order to obtain the electricity.
In August 2010, the lawsuit was settled and CRNF received a
return of funds totaling approximately $4.8 million. This
return of funds was recorded in direct operating expenses
(exclusive of depreciation and amortization) in the Consolidated
Statements of Operations during the third quarter of 2010. In
connection with the settlement, the electrical services
agreement was amended. As a result of the amendment, the annual
committed contractual payments are estimated to be approximately
$1.9 million. As of September 30, 2011 and
December 31, 2010, the estimated remaining obligation of
CRNF totaled approximately $15.3 million and
$16.5 million, respectively, through July 1, 2019.
These estimates are subject to change based upon CRNFs
actual usage.
During 2005, CRNF entered into the Amended and Restated
On-Site
Product Supply Agreement with Linde, Inc. Pursuant to the
agreement, which expires in 2020, CRNF is required to take as
available and pay
17
CVR
Partners, LP and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
approximately $300,000 per month, which amount is subject to
annual inflation adjustments, for the supply of oxygen and
nitrogen to the fertilizer operation. Expenses associated with
this agreement are included in direct operating expenses
(exclusive of depreciation and amortization) and for the three
months ended September 30, 2011 and 2010, totaled
approximately $1.0 million and $1.0 million,
respectively. Expenses associated with this agreement for the
nine months ended September 30, 2011 and 2010, totaled
approximately $3.0 million and $3.6 million,
respectively.
CRNF entered into a sales agreement with Cominco Fertilizer
Partnership on November 20, 2007 to purchase equipment and
materials which comprise a nitric acid plant. CRNFs
obligation related to the execution of the agreement in 2007 for
the purchase of the assets was $3.5 million. On
May 25, 2009, CRNF and Cominco amended the contract
increasing the liability to approximately $4.3 million. In
consideration of the increased liability, the timeline for
removal of the equipment and payment schedule was extended. The
amendment sets forth payment milestones based upon the timing of
removal of identified assets. The balance of the assets
purchased is now anticipated to be removed by February 28,
2012, with final payment due at that time. As of
September 30, 2011, approximately $2.3 million had
been paid. Additionally, as of September 30, 2011,
approximately $4.0 million was accrued related to the
obligation to dismantle the unit. As of September 30, 2011,
the Partnership had accrued a total of approximately
$5.9 million with respect to the nitric acid plant and the
related dismantling obligation and was included in accrued
expenses and other current liabilities. The related asset
amounts are included in
construction-in-progress
at September 30, 2011.
CRNF entered into a lease agreement effective October 25,
2007 with CVR Energy under which certain office and laboratory
space is leased. This lease agreement was amended and restated
in connection with the Offering and extended through October
2017. The agreement requires CRNF to pay approximately $8,400 on
the first day of each calendar month during the term of the
agreement. See Note 16 (Related Party
Transactions) for further discussion.
On February 22, 2011, CRLLC entered into a
$250.0 million ABL credit facility scheduled to mature in
August 2015 that replaced its first priority credit facility
which was terminated. At April 13, 2011, CRLLCs
senior secured notes had an aggregate principal balance of
$472.5 million. $247.5 million of the senior secured
notes mature on April 1, 2015 and the remaining
$225.0 million of senior secured notes mature on
April 1, 2017. The Partnership and CRNF were each released
from their obligation as a guarantor or obligor, as applicable,
under CRLLCs ABL credit facility, 9.0% First Lien Senior
Secured Notes due 2015 and 10.875% Second Lien Senior Secured
Notes due 2017, as a result of the closing of the Offering.
Litigation
From time to time, the Partnership is involved in various
lawsuits arising in the normal course of business, including
matters such as those described below under Environmental,
Health, and Safety (EHS) Matters. Liabilities
related to such litigation are recognized when the related costs
are probable and can be reasonably estimated. Management
believes the Partnership has accrued for losses for which it may
ultimately be responsible. It is possible that managements
estimates of the outcomes will change within the next year due
to uncertainties inherent in litigation and settlement
negotiations. In the opinion of management, the ultimate
resolution of any other litigation matters is not expected to
have a material adverse effect on the accompanying condensed
consolidated financial statements. There can be no assurance
that managements beliefs or opinions with respect to
liability for potential litigation matters are accurate.
CRNF received a ten year property tax abatement from Montgomery
County, Kansas in connection with the construction of the
nitrogen fertilizer plant that expired on December 31,
2007. In connection with the expiration of the abatement, the
county reassessed CRNFs nitrogen fertilizer plant and
classified the nitrogen fertilizer plant as almost entirely real
property instead of almost entirely personal property. The
reassessment has resulted in an increase to annual property tax
expense for CRNF by an average of approximately
$10.7 million per year for the years ended
December 31, 2008 and December 31, 2009, and
approximately
18
CVR
Partners, LP and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$11.7 million for the year ended December 31, 2010.
CRNF does not agree with the countys classification of the
nitrogen fertilizer plant and is currently disputing it before
the Kansas Court of Tax Appeals (COTA). However,
CRNF has fully accrued and paid for the property taxes the
county claims are owed for the years ended December 31,
2010, 2009 and 2008 and has estimated and accrued for property
taxes for the first nine months of 2011. These amounts are
reflected as a direct operating expense on the Condensed
Consolidated Statements of Operations. An evidentiary hearing
before COTA occurred during the first quarter of 2011 regarding
the property tax claims for the year ended December 31,
2008. CRNF believes that it is possible that COTA may issue a
ruling sometime during 2011. However, the timing of a ruling in
the case is uncertain, and there can be no assurance that CRNF
will receive a ruling in 2011. If CRNF is successful in having
the nitrogen fertilizer plant reclassified as personal property,
in whole or in part, a portion of the accrued and paid expenses
would be refunded to CRNF, which could have a material positive
effect on the results of operations. If CRNF is not successful
in having the nitrogen fertilizer plant reclassified as personal
property, in whole or in part, CRNF expects that it will
continue to pay property taxes at elevated rates.
Environmental,
Health, and Safety (EHS) Matters
CRNF is subject to various stringent federal, state, and local
EHS rules and regulations. Liabilities related to EHS matters
are recognized when the related costs are probable and can be
reasonably estimated. Estimates of these costs are based upon
currently available facts, existing technology, site-specific
costs, and currently enacted laws and regulations. In reporting
EHS liabilities, no offset is made for potential recoveries. All
liabilities are monitored and adjusted regularly as new facts
emerge or changes in law or technology occur.
CRNF owns and operates a facility utilized for the manufacture
of nitrogen fertilizers. Therefore, CRNF has exposure to
potential EHS liabilities related to past and present EHS
conditions at this location.
From time to time, the United States Environmental Protection
Agency (EPA) has conducted inspections and issued
information requests to CRNF with respect to CRNFs
compliance with the Clean Air Acts Risk Management
Program and the release reporting requirements under the
Comprehensive Environmental Response, Compensation, and
Liability Act and the Emergency Planning and Community
Right-to-Know
Act. These previous investigations have resulted in the issuance
of preliminary findings regarding CRNFs compliance status.
In the fourth quarter of 2010, following CRNFs reported
release of ammonia from its cooling water system and the rupture
of its UAN vessel (which released ammonia and other regulated
substances) the EPA conducted its most recent inspection and
issued an additional request for information to CRNF. The EPA
has not made any formal claims against CRNF and CRNF has not
accrued for any liability associated with the investigations or
releases.
Management periodically reviews and, as appropriate, revises its
environmental accruals. Based on current information and
regulatory requirements, management believes that the accruals
established for environmental expenditures are adequate.
Environmental expenditures are capitalized when such
expenditures are expected to result in future economic benefits.
Capital expenditures for the three months ended
September 30, 2011 and 2010 were approximately $12,000 and
$0.2 million, respectively. Capital expenditures for the
nine months ended September 30, 2011 and 2010, were
approximately $0.2 million and approximately
$0.4 million, respectively. These expenditures were
incurred to improve the environmental compliance and efficiency
of the operations. CRNF believes it is in substantial compliance
with existing EHS rules and regulations. There can be no
assurance that the EHS matters described above or other EHS
matters which may develop in the future will not have a material
adverse effect on the business, financial condition, or results
of operations.
19
CVR
Partners, LP and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
(16)
|
Related
Party Transactions
|
Related
Party Agreements
In connection with the formation of CVR Partners and the initial
public offering of CVR Energy in October 2007, CVR Partners and
CRNF entered into several agreements with CVR Energy and its
subsidiaries to govern the business relationship among CVR
Partners, CVR GP, LLC, CRNF, CVR Energy and its subsidiaries.
Certain of the agreements described below were amended and
restated on April 13, 2011 in connection with the Offering.
Amounts owed to CVR Partners and CRNF from CVR Energy and its
subsidiaries with respect to these agreements are included in
prepaid expenses and other current assets, and other long-term
assets on the Condensed Consolidated Balance Sheets. Conversely,
amounts owed to CVR Energy and its subsidiaries by CVR Partners
and CRNF with respect to these agreements are included in
accounts payable, accrued expenses and other current
liabilities, and other long-term liabilities on the Condensed
Consolidated Balance Sheets.
Feedstock
and Shared Services Agreement
CRNF entered into a feedstock and shared services agreement with
Coffeyville Resources Refining & Marketing
(CRRM) under which the two parties provide feedstock
and other services to one another. These feedstocks and services
are utilized in the respective production processes of
CRRMs refinery and CRNFs nitrogen fertilizer plant.
Pursuant to the feedstock agreement, CRNF and CRRM have the
right to transfer excess hydrogen to one another. Sales of
hydrogen to CRRM have been reflected as net sales for CVR
Partners. Receipts of hydrogen from CRRM have been reflected in
cost of product sold (exclusive of depreciation and
amortization) for CVR Partners. For the three months ended
September 30, 2011 and 2010, there were net sales of
approximately $5.7 million and $0.0 generated from the sale
of hydrogen to CRRM. For the nine months ended
September 30, 2011 and 2010, there were net sales of
approximately $11.8 million and $0.0 generated from the
sale of hydrogen to CRRM. CVR Partners recognized approximately
$0.3 million and $0.6 million of cost of product sold
related to the transfer of excess hydrogen from CRRMs
refinery for the three months ended September 30, 2011 and
2010, respectively. CVR Partners also recognized approximately
$1.0 million and $1.8 million of cost of product sold
related to the transfer of excess hydrogen from CRRMs
refinery for the nine months ended September 30, 2011 and
2010, respectively. At September 30, 2011 and
December 31, 2010, there were no amounts included in
prepaid expenses and other current assets on the Condensed
Consolidated Balance Sheets associated with unpaid balances
related to hydrogen sales, respectively. At September 30,
2011 and December 31, 2010, there was approximately
$0.2 million and $0.0 included in the accounts payable on
the Condensed Consolidated Balance Sheets related to the
purchase of hydrogen from CRRM.
The agreement provides that both parties must deliver
high-pressure steam to one another under certain circumstances.
Net reimbursed or (paid) direct operating expenses recorded
during the three months ended September 30, 2011 and 2010
were approximately $(25,000) and $(25,000), respectively,
related to high-pressure steam. Net reimbursed or (paid) direct
operating expenses recorded during the nine months ended
September 30, 2011 and 2010 were approximately
$(0.2) million and $(8,000), respectively, related to
high-pressure steam. Reimbursement or paid amounts for each
period on a gross basis were nominal.
CRNF is also obligated to make available to CRRM any nitrogen
produced by the Linde air separation plant that is not required
for the operation of the nitrogen fertilizer plant, as
determined by CRNF in a commercially reasonable manner.
Reimbursed direct operating expenses associated with nitrogen
for the three months ended September 30, 2011 and 2010,
were approximately $0.3 million and $0.1 million,
respectively. Reimbursed direct operating expenses associated
with nitrogen for the nine months ended September 30, 2011
and 2010, were approximately $1.0 million and
$0.5 million, respectively.
20
CVR
Partners, LP and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The agreement also provides that both CRNF and CRRM must deliver
instrument air to one another in some circumstances. CRNF must
make instrument air available for purchase by CRRM at a minimum
flow rate, to the extent produced by the Linde air separation
plant and available to CRNF. There were no amounts paid or
reimbursed for the three or nine months ended September 30,
2011 and 2010.
At September 30, 2011 and December 31, 2010,
receivables of approximately $0.2 million and
$0.3 million, respectively, were included in prepaid
expenses and other current assets on the Condensed Consolidated
Balance Sheets associated with amounts yet to be received
related to components of the feedstock and shared services
agreement except amounts related to hydrogen sales and pet coke
purchases. At September 30, 2011 and December 31,
2010, payables of approximately $0.3 million and
$0.6 million, respectively, were included in accounts
payable on the Condensed Consolidated Balance Sheets associated
with unpaid balances related to components of the feedstock and
shared services agreement, except amounts related to hydrogen
sales and pet coke purchases.
The agreement also provides a mechanism pursuant to which CRNF
transfers a tail gas stream to CRRM. CRNF receives the benefit
of eliminating a waste gas stream and recovers the fuel value of
the tail gas system. For the three months ended
September 30, 2011 and 2010, there were net sales of
approximately $5,000 and $0.0 generated from the sale of tail
gas to CRRM. For the nine months ended September 30, 2011
and 2010, there were net sales of approximately $45,000 and $0,
respectively, generated from the sale of tail gas to CRRM.
In April 2011, in connection with the tail gas stream, CRRM
installed a pipe between the refinery and the nitrogen
fertilizer plant to transfer the tail gas. CRNF has agreed to
pay CRRM the cost of installing the pipe over the next three
years and in the fourth year provide an additional 15% to cover
the cost of capital. At September 30, 2011, an asset of
approximately $0.2 million was included in other current
assets and approximately $1.4 million was included in other
non-current assets with an offset liability of approximately
$0.5 million in other current liabilities and approximately
$0.9 million other non-current liabilities in the Condensed
Consolidated Balance Sheet.
The agreement has an initial term of 20 years, which will
be automatically extended for successive five year renewal
periods. Either party may terminate the agreement, effective
upon the last day of a term, by giving notice no later than
three years prior to a renewal date. The agreement will also be
terminable by mutual consent of the parties or if one party
breaches the agreement and does not cure within applicable cure
periods and the breach materially and adversely affects the
ability of the terminating party to operate its facility.
Additionally, the agreement may be terminated in some
circumstances if substantially all of the operations at the
nitrogen fertilizer plant or the refinery are permanently
terminated, or if either party is subject to a bankruptcy
proceeding or otherwise becomes insolvent.
CRNF also provided finished product tank capacity to CRRM under
the agreement. Approximately $0.1 million was reimbursed by
CRRM for the use of tank capacity for the three months ended
September 30, 2011 and $0.2 million for the nine
months ended September 30, 2011. This reimbursement was
recorded as a reduction to direct operating expenses. No amounts
were received in prior periods.
Coke
Supply Agreement
CRNF entered into a coke supply agreement with CRRM pursuant to
which CRRM supplies CRNF with pet coke. This agreement provides
that CRRM must deliver to the Partnership, during each calendar
year, an annual required amount of pet coke equal to the lesser
of (i) 100% of the pet coke produced at CRRMs
petroleum refinery or (ii) 500,000 tons of pet coke. CRNF
is also obligated to purchase this annual required amount. If
during a calendar month CRRM produces more than 41,667 tons of
pet coke, then CRNF will have the option to purchase the excess
at the purchase price provided for in the agreement. If CRNF
declines to exercise this option, CRRM may sell the excess to a
third party.
21
CVR
Partners, LP and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CRNF obtains most (over 70% on average during the last five
years) of the pet coke it needs from CRRMs adjacent crude
oil refinery pursuant to the pet coke supply agreement and
procures the remainder on the open market. The price CRNF pays
pursuant to the pet coke supply agreement is based on the lesser
of a pet coke price derived from the price received for UAN, or
the UAN-based price, and a pet coke price index. The UAN-based
price begins with a pet coke price of $25 per ton based on a
price per ton for UAN (exclusive of transportation cost), or
netback price, of $205 per ton, and adjusts up or down $0.50 per
ton for every $1.00 change in the netback price. The UAN-based
price has a ceiling of $40 per ton and a floor of $5 per ton.
Pursuant to the agreement, CRNF will also pay any taxes
associated with the sale, purchase, transportation, delivery,
storage or consumption of the pet coke. CRNF will be entitled to
offset any amount payable for the pet coke against any amount
due from CRRM under the feedstock and shared services agreement
between the parties.
The agreement has an initial term of 20 years, which will
be automatically extended for successive five-year renewal
periods. Either party may terminate the agreement by giving
notice no later than three years prior to a renewal date. The
agreement is also terminable by mutual consent of the parties or
if a party breaches the agreement and does not cure within
applicable cure periods. Additionally, the agreement may be
terminated in some circumstances if substantially all of the
operations at the nitrogen fertilizer plant or the refinery are
permanently terminated, or if either party is subject to a
bankruptcy proceeding or otherwise becomes insolvent.
Costs of pet coke associated with the transfer of pet coke from
CRRM to CRNF were approximately $3.4 million and
$2.3 million for the three months ended September 30,
2011 and 2010, respectively. For the nine months ended
September 30, 2011 and 2010, costs of pet coke associated
with the transfer of pet coke from CRRM to CRNF were
approximately $7.0 million and $3.3 million,
respectively. Payables of approximately $0.9 million and
$0.3 million related to the coke supply agreement were
included in accounts payable on the Condensed Consolidated
Balance Sheets at September 30, 2011 and December 31,
2010, respectively.
Lease
Agreement
CRNF entered into a lease agreement with CRRM under which CRNF
leases certain office and laboratory space. For the three months
ended September 30, 2011 and 2010, expense incurred related
to the use of the office and laboratory space totaled
approximately $25,000 and $24,000, respectively. For the nine
months ended September 30, 2011 and 2010, expense incurred
related to the use of the office and laboratory space totaled
approximately $76,000 and $72,000, respectively. There was
approximately $8,000 and $0.0 unpaid with respect to the lease
agreement as of September 30, 2011 and December 31,
2010, respectively. The lease agreement was amended and restated
in connection with the Offering. As amended, the agreement
expires in October 2017 (but may be terminated at any time
during the initial term at CRNFs option upon
180 days prior written notice). CRNF has the option
to renew the lease agreement for up to five additional one-year
periods by providing CRRM with notice of renewal at least
60 days prior to the expiration of the then existing term.
Environmental
Agreement
CRNF entered into an environmental agreement with CRRM that
provides for certain indemnification and access rights in
connection with environmental matters affecting the refinery and
the nitrogen fertilizer plant. Generally, both CRNF and CRRM
have agreed to indemnify and defend each other and each
others affiliates against liabilities associated with
certain hazardous materials and violations of environmental laws
that are a result of or caused by the indemnifying partys
actions or business operations. This obligation extends to
indemnification for liabilities arising out of off-site disposal
of certain hazardous materials. Indemnification
22
CVR
Partners, LP and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
obligations of the parties will be reduced by applicable amounts
recovered by an indemnified party from third parties or from
insurance coverage.
The agreement provides for indemnification in the case of
contamination or releases of hazardous materials that are
present but unknown at the time the agreement is entered into to
the extent such contamination or releases are identified in
reasonable detail during the period ending five years after the
date of the agreement. The agreement further provides for
indemnification in the case of contamination or releases which
occur subsequent to the date the agreement is entered into.
The term of the agreement is for at least 20 years, or for
so long as the feedstock and shared services agreement is in
force, whichever is longer.
Services
Agreement
CVR Partners obtains certain management and other services from
CVR Energy pursuant to a services agreement between the
Partnership, CVR GP, LLC and CVR Energy. Under this agreement,
the Partnerships general partner has engaged CVR Energy to
conduct its
day-to-day
business operations. CVR Energy provides CVR Partners with the
following services under the agreement, among others:
|
|
|
|
|
services from CVR Energys employees in capacities
equivalent to the capacities of corporate executive officers,
except that those who serve in such capacities under the
agreement shall serve the Partnership on a shared, part-time
basis only, unless the Partnership and CVR Energy agree
otherwise;
|
|
|
|
administrative and professional services, including legal,
accounting services, human resources, insurance, tax, credit,
finance, government affairs and regulatory affairs;
|
|
|
|
management of the Partnerships property and the property
of its operating subsidiary in the ordinary course of business;
|
|
|
|
recommendations on capital raising activities to the board of
directors of the Partnerships general partner, including
the issuance of debt or equity interests, the entry into credit
facilities and other capital market transactions;
|
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|
managing or overseeing litigation and administrative or
regulatory proceedings, and establishing appropriate insurance
policies for the Partnership, and providing safety and
environmental advice;
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|
recommending the payment of distributions; and
|
|
|
|
managing or providing advice for other projects as may be agreed
by CVR Energy and its general partner from time to time.
|
As payment for services provided under the agreement, the
Partnership, its general partner or CRNF must pay CVR Energy
(i) all costs incurred by CVR Energy in connection with the
employment of its employees, other than administrative
personnel, who provide the Partnership services under the
agreement on a full-time basis, but excluding share-based
compensation; (ii) a prorated share of costs incurred by
CVR Energy in connection with the employment of its employees,
including administrative personnel, who provide the Partnership
services under the agreement on a part-time basis, but excluding
share-based compensation, and such prorated share shall be
determined by CVR Energy on a commercially reasonable basis,
based on the percentage of total working time that such shared
personnel are engaged in performing services for the
Partnership; (iii) a prorated share of certain
administrative costs, including office costs, services by
outside vendors, other sales, general and administrative costs
and depreciation and amortization; and (iv) various other
administrative costs in accordance with the terms of the
agreement, including travel, insurance, legal and audit
services, government and public relations and bank charges.
23
CVR
Partners, LP and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Either CVR Energy or the Partnerships general partner may
temporarily or permanently exclude any particular service from
the scope of the agreement upon 180 days notice.
Beginning in April 2012, either CVR Energy or the
Partnerships general partner may terminate the agreement
upon at least 180 days notice, but not more than one
years notice. Furthermore, the Partnerships general
partner may terminate the agreement immediately if CVR Energy
becomes bankrupt or dissolves or commences liquidation or
winding-up
procedures.
In order to facilitate the carrying out of services under the
agreement, CVR Partners and CVR Energy have granted one another
certain royalty-free, non-exclusive and non-transferable rights
to use one anothers intellectual property under certain
circumstances.
Net amounts incurred under the services agreement for the three
months ended September 30, 2011 and 2010 were approximately
$2.5 million and $2.3 million, respectively. Of these
charges, approximately $2.1 million and $1.8 million
were included in selling, general and administrative expenses
(exclusive of depreciation and amortization). In addition,
$0.5 million and $0.5 million, respectively, were
included in direct operating expenses (exclusive of depreciation
and amortization). Net amounts incurred under the services
agreement for the nine months ended September 30, 2011 and
2010 were approximately $7.9 million and $7.3 million,
respectively. Of these charges, approximately $6.4 million
and $5.7 million were included in selling, general and
administrative expenses (exclusive of depreciation and
amortization). In addition, approximately $1.4 million and
$1.6 million, respectively, were included in direct
operating expenses (exclusive of depreciation and amortization).
For services performed in connection with the services
agreement, the Partnership recognized personnel costs of
approximately $1.1 million and $0.8 million,
respectively, for the three months ended September 30, 2011
and 2010. For services performed in connection with the services
agreement, the Partnership recognized personnel costs of
approximately $3.7 million and $2.3 million,
respectively, for the nine months ended September 30, 2011
and 2010. At September 30, 2011 and December 31, 2010,
payables of approximately $1.1 million and
$2.4 million, respectively, were included in accounts
payable on the Consolidated Balance Sheets with respect to
amounts billed in accordance with the services agreement.
Limited
Partnership Agreement
In connection with the Offering, CVR GP and CRLLC entered into
the second amended and restated agreement of limited partnership
of the Partnership, dated April 13, 2011.
The Partnerships general partner manages the
Partnerships operations and activities as specified in the
partnership agreement. The general partner of the Partnership is
managed by its board of directors. CRLLC has the right to select
the directors of the general partner. Actions by the general
partner that are made in its individual capacity are made by
CRLLC as the sole member of the general partner and not by its
board of directors. The members of the board of directors of the
general partner are not elected by the unitholders and are not
subject to re-election on a regular basis in the future. The
officers of the general partner manage the
day-to-day
affairs of the Partnerships business.
The partnership agreement provides that the Partnership will
reimburse its general partner for all direct and indirect
expenses it incurs or payments it makes on behalf of the
Partnership (including salary, bonus, incentive compensation and
other amounts paid to any person to perform services for the
Partnership or for its general partner in connection with
operating the Partnership). The Partnership reimbursed its
general partner for the three and nine months ended
September 30, 2011 approximately $0.5 million and
$0.7 million, respectively, pursuant to the partnership
agreement for personnel costs related to the compensation of
executives at the general partner who manage the
Partnerships business. For the three and nine months ended
September 30, 2010, the partnership did not make any
reimbursement payments to its general partner.
24
CVR
Partners, LP and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Due
from Affiliate
CVR Partners historically supplemented CRLLCs working
capital needs. CVR Partners had the right to receive such
amounts from CRLLC upon request.
On December 31, 2010, the due from affiliate balance was
reduced to $0.0 as a result of the due from affiliate balance of
$160.0 million being distributed by the Partnership to
CRLLC and the special general partner. At September 30,
2011 and December 31, 2010, included in prepaid expenses
and other current assets on the Consolidated Balance Sheets are
receivables of zero and approximately $2.3 million,
respectively, for accrued interest with respect to amounts due
from affiliate. For the three months ended September 30,
2011, the Partnership recognized no interest income associated
with the due from affiliate balance compared to approximately
$3.0 million, for the three months ended September 30,
2010. For the nine months ended September 30, 2011 the
Partnership recognized no interest income associated with the
due from affiliate balance compared to approximately
$9.6 million, for the nine months ended September 30,
2010.
Concurrently with the closing of the Offering, on April 13,
2011, CRNF as borrower and CVR Partners as guarantor, entered
into a new 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 million and a revolving credit facility
of $25.0 million with an uncommitted incremental facility
of up to $50.0 million. No amounts were outstanding under
the revolving credit facility at September 30, 2011. There
is no scheduled amortization and the credit facility matures in
April 2016. The credit facility will be used to finance on-going
working capital, capital expenditures, letters of credit
issuances and general needs of the Partnership. The Partnership,
upon the closing of the new credit facility, made a special
distribution to CRLLC of approximately $87.2 million in
order to, among other things, fund the offer to purchase
CRLLCs senior secured notes required upon consummation of
the Offering.
Borrowings under the credit facility bear interest based on a
pricing grid determined by the trailing four quarter leverage
ratio. The initial pricing for borrowings under the credit
facility is the Eurodollar rate plus a margin of 3.75%, or, for
base rate loans, the prime rate plus 2.75%, based on the
schedule below. Under its terms, the lenders under the credit
facility were granted a perfected, first priority security
interest (subject to certain customary exceptions) in
substantially all of the assets of CVR Partners and CRNF.
|
|
|
|
|
|
|
|
|
|
|
Leverage
|
|
|
Applicable Margin for
|
|
|
|
Applicable Margin for
|
|
Ratio
|
|
|
Base Rate Loans
|
|
|
|
Eurodollar Rate Loans
|
|
|
³
3.00:1.00
|
|
|
|
3.25
|
%
|
|
|
|
4.25
|
%
|
³
3.00:1.00
|
|
|
|
3.00
|
%
|
|
|
|
4.00
|
%
|
³
2.00:1.00
|
|
|
|
3.00
|
%
|
|
|
|
4.00
|
%
|
³
2.00:1.00
|
|
|
|
2.75
|
%
|
|
|
|
3.75
|
%
|
³
1.00:1.00
|
|
|
|
2.75
|
%
|
|
|
|
3.75
|
%
|
³
1.00:1.00
|
|
|
|
2.50
|
%
|
|
|
|
3.50
|
%
|
The credit facility requires CRNF to maintain a minimum interest
coverage ratio and a maximum leverage ratio and contains
customary covenants for a financing of this type that limit,
subject to certain exceptions, the incurrence of additional
indebtedness or guarantees, creation of liens on assets, the
ability to dispose assets, make restricted payments, investments
or acquisitions, enter into sale-leaseback transactions or enter
into affiliate transactions. The credit facility provides that
the Partnership can make distributions to holders of the
Partnerships common units provided the Partnership is in
compliance with our leverage ratio and interest coverage ratio
covenants on a pro forma basis after giving effect to such
distribution and there is no default or event of default under
the facility.
As of September 30, 2011, CRNF was in compliance with the
covenants of the credit facility.
25
CVR
Partners, LP and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with the credit facility, through
September 30, 2011, the Partnership has incurred lender and
other third party costs of approximately $4.8 million. The
costs associated with the credit facility have been deferred and
are being amortized over the term of the credit facility as
interest expense using the effective-interest amortization
method for the term loan facility and the straight-line method
for the revolving credit facility.
On June 30 and July 1, 2011 CRNF entered into two
floating-to-fixed
interest rate swap agreements for the purpose of hedging the
interest rate risk associated with a portion of its
$125 million floating rate term debt which matures in April
2016. The aggregate notional amount covered under these
agreements totals $62.5 million (split evenly between the
two agreement dates) and commenced on August 12, 2011 and
expires on February 12, 2016. Under the terms of the
interest rate swap agreement entered into on June 30, 2011,
CRNF receives a floating rate based on three month LIBOR and pay
a fixed rate of 1.94%. Under the terms of the interest rate swap
agreement entered into on July 1, 2011, CRNF receives a
floating rate based on three month LIBOR and pays a fixed rate
of 1.975%. Both swap agreements will be settled every
90 days. The effect of these swap agreements is to lock in
a fixed rate of interest of approximately 1.96% plus the
applicable margin paid to lenders over three month LIBOR as
governed by the CRNF credit agreement. At September 30,
2011, the effective rate was approximately 4.86%. The agreements
were designated as cash flow hedges at inception and
accordingly, the effective portion of the gain or loss on the
swap is reported as a component of accumulated other
comprehensive income (loss) (AOCI), and will be
reclassified into interest expense when the interest rate swap
transaction affects earnings. The ineffective portion of the
gain or loss will be recognized immediately in current interest
expense. The interest expense re-classed from AOCI into earnings
was $142,000 for the three months ended September 30, 2011.
|
|
(19)
|
Fair
Value of Financial Instruments
|
The book values of cash and cash equivalents, accounts
receivable and accounts payable are considered to be
representative of their respective fair values due to the
immediate short term maturity of these financial
instruments. The carrying value of the Partnerships debt
approximates fair value.
The fair values of financial instruments are estimated based
upon current market conditions and quoted market prices for the
same or similar instruments. Management estimates that the
carrying value approximates fair value for all of the
Partnerships assets and liabilities that fall under the
scope of ASC 825, Financial Instruments (ASC825).
Fair value measurements are derived using inputs (assumptions
that market participants would use in pricing an asset or
liability) including assumptions about risk. FASB ASC 820
categorizes inputs used in fair value measurements into three
broad levels as follows:
|
|
|
|
|
(Level 1) Quoted prices in active markets for
identical assets or liabilities.
|
|
|
|
(Level 2) Observable inputs other than quoted prices
included in Level 1, such as quoted prices for similar
assets and liabilities in active markets, similar assets and
liabilities in markets that are not active or can be
corroborated by observable market data.
|
|
|
|
(Level 3) Unobservable inputs that are supported by
little or no market activity and that are significant to the
fair value of the assets or liabilities. This includes valuation
techniques that involve significant unobservable inputs.
|
26
CVR
Partners, LP and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the assets and liabilities
measured at fair value on a recurring basis, by input level, as
of September 30, 2011. At December 31, 2010, the
Partnership did not have any assets or liabilities measured at
fair value on a recurring level.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2011
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Location and Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents (money market account)
|
|
$
|
160,019
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
160,019
|
|
Other current assets (marketable securities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
160,019
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
160,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities (interest rate swap)
|
|
|
|
|
|
|
(868
|
)
|
|
|
|
|
|
|
(868
|
)
|
Other long-term liabilities (interest rate swap)
|
|
|
|
|
|
|
(1,544
|
)
|
|
|
|
|
|
|
(1,544
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
|
|
|
$
|
(2,412
|
)
|
|
$
|
|
|
|
$
|
(2,412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss (interest rate swap)
|
|
$
|
|
|
|
$
|
2,412
|
|
|
$
|
|
|
|
$
|
2,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2011, the only financial assets and
liabilities that are measured at fair value on a recurring basis
are the Partnerships money market accounts and derivative
instruments. The carrying value of the Partnerships debt
approximates fair value. The Partnership has an interest rate
swap that is measured at fair value on a recurring basis using
Level 2 inputs (see Note 18 Interest Rate
Swaps). The Partnership had no transfers of assets or
liabilities between any of the above levels during the nine
months ended September 30, 2011.
The Partnerships cash and cash equivalent are all
Level 1.
The fair values of these interest rate swap instruments are
based on discounted cash flow models that incorporate the cash
flows of the derivatives, as well as the current LIBOR rate and
a forward LIBOR curve, along with other observable market inputs.
Distribution
On October 27, 2011, the Board of Directors of the
Partnerships general partner declared a cash distribution
for the third quarter of 2011 to the Partnerships
unitholders of $0.572 per unit. The cash distribution will be
paid on November 14, 2011, to unitholders of record at the
close of business on November 7, 2011.
27
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis should be read in
conjunction with the condensed consolidated financial statements
and related notes and with the statistical information and
financial data appearing in this Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2011, as well as the
Partnerships prospectus dated April 7, 2011 and filed
with the Securities and Exchange Commission (SEC) on
April 11, 2011. Results of operations for the three and
nine months ended September 30, 2011 are not necessarily
indicative of results to be attained for any other period.
Forward-Looking
Statements
This
Form 10-Q,
including this Managements Discussion and Analysis of
Financial Condition and Results of Operations, contains
forward-looking statements as defined by the SEC.
Such statements are those concerning contemplated transactions
and strategic plans, expectations and objectives for future
operations. These 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 Quarterly Report on
Form 10-Q,
including this Managements 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 our
Prospectus dated April 7, 2011 and filed with the SEC on
April 11, 2011. Such factors include, among others:
|
|
|
|
|
our ability to make cash distributions on the units;
|
|
|
|
the volatile nature of our business and the variable nature of
our distributions;
|
|
|
|
the ability of our general partner to modify or revoke our
distribution policy at any time;
|
|
|
|
our ability to forecast our future financial condition or
results of operations and our future revenues and expenses;
|
|
|
|
the cyclical nature of our business;
|
|
|
|
adverse weather conditions, including potential floods and other
natural disasters;
|
|
|
|
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 Energy;
|
|
|
|
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;
|
28
|
|
|
|
|
the risk associated with governmental policies affecting the
agricultural industry;
|
|
|
|
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 on 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 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 CVR Energys senior management team;
|
|
|
|
our ability to continue to license the technology used in our
operations;
|
|
|
|
restrictions in our debt agreements;
|
|
|
|
our limited operating history as a stand-alone company;
|
|
|
|
risks relating to our relationships with CVR Energy;
|
|
|
|
control of our general partner by CVR Energy;
|
|
|
|
the conflicts of interest faced by our senior management team,
which operates both us and CVR Energy;
|
|
|
|
changes in our treatment as a partnership for U.S. income
or state tax purposes; and
|
|
|
|
instability and volatility in the capital and credit markets.
|
All forward-looking statements contained in this
Form 10-Q
speak only as of the date of this document. We undertake no
obligation to update or revise publicly any forward-looking
statements to reflect events or circumstances that occur after
the date of this
Form 10-Q,
or to reflect the occurrence of unanticipated events.
Company
Overview
Overview
We are a Delaware limited partnership formed by CVR Energy, Inc.
to own, operate and grow our nitrogen fertilizer business.
Strategically located adjacent to CVR Energys refinery in
Coffeyville, Kansas, our nitrogen fertilizer manufacturing
facility is the only operation in North America that utilizes a
petroleum coke, or pet coke, gasification process to produce
nitrogen fertilizer. Our facility includes a 1,225
ton-per-day
ammonia unit, a 2,025
ton-per-day
UAN unit, and a gasifier complex having a capacity of
84 million standard cubic feet per day. Our gasifier is a
dual-train facility, with each gasifier able to function
independently of the other, thereby providing redundancy and
improving our reliability. We upgrade a majority of the ammonia
we produce to higher margin UAN fertilizer, an aqueous solution
of urea and ammonium nitrate that has historically commanded a
premium price over ammonia. In 2010, we produced 392,745 tons of
ammonia, of which approximately 60% was upgraded into 578,272
tons of UAN. For the nine months ended September 30, 2011,
we produced 310,354 tons of ammonia, of which approximately 71%
was upgraded into 535,800 tons of UAN.
The primary raw material feedstock used 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 significantly 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
29
believe our nitrogen fertilizer business has historically been
the lowest cost producer and marketer of ammonia and UAN
fertilizers in North America. We currently purchase most of our
pet coke from CVR Energy 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 utilized by
our plant was produced and supplied by CVR Energys crude
oil refinery.
Initial
Public Offering
On April 13, 2011, we completed the Offering, pursuant to
which 22,080,000 common units, representing approximately 30% of
limited partner interest in the Partnership, were sold to the
public at a price of $16.00 per common unit. The net proceeds to
CVR Partners from the Offering were approximately
$324.2 million, after deducting underwriting discounts and
commissions and offering expenses. The net proceeds from the
Offering were used as follows: approximately $18.4 million
was used to make a distribution to CRLLC in satisfaction of the
Partnerships obligation to reimburse CRLLC for certain
capital expenditures it made on our behalf; approximately
$117.1 million was used to make a special distribution to
CRLLC in order to, among other things, fund the offer to
purchase CRLLCs senior secured notes required upon
consummation of the Offering; approximately $26.0 million
was used to purchase (and subsequently extinguish) the incentive
distribution rights, or IDRs, owned by our general partner;
approximately $4.8 million was used to pay financing fees
and associated legal and professional fees resulting from our
new credit facility; and the balance was used for or will be
used for general partnership purposes, including approximately
$104.0 million to fund our UAN expansion.
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
Energys adjacent refinery supplies us with most of the pet
coke feedstock we need pursuant to a long-term 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.
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. 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, excluding 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 2010,
30
approximately 45% of the corn planted in the United States was
grown within a $35/UAN ton freight train rate of the 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 location on Union Pacifics main
line increases our transportation cost advantage by lowering the
costs of bringing our products to customers, assuming freight
rates and pipeline tariffs for U.S. Gulf Coast importers as
recently in effect. 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
and we do not incur any intermediate transfer, storage, barge
freight or pipeline freight charges. We estimate that our plant
enjoys a transportation cost advantage of approximately $25 per
ton over competitors located in the U.S. Gulf Coast.
Selling products to customers within economic rail
transportation limits of the nitrogen fertilizer plant and
keeping transportation costs low are keys to maintaining
profitability.
The value of nitrogen fertilizer products is also an important
consideration in understanding our results. For the nine months
ended September 30, 2011, we upgraded approximately 71% of
our ammonia production into UAN, a product that presently
generates a greater value than ammonia. During 2010, we upgraded
approximately 60% of our ammonia production into UAN. UAN
production is a major contributor to our profitability.
The high fixed cost of our direct operating expense structure
also directly affects our profitability. Our facilitys 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 86%
of direct operating expenses over the 24 months ended
December 31, 2010.
Our largest raw material expense is pet coke, which we purchase
from CVR Energy and third parties. For the three months ended
September 30, 2011 and 2010, we spent approximately
$5.6 million and $3.1 million, respectively, for pet
coke, which equaled an average cost per ton of $43 and $26,
respectively. For the nine months ended September 30, 2011
and 2010, we spent approximately $11.6 million and
$6.7 million, respectively, for pet coke, which equaled an
average cost per ton of $30 and $19, respectively. If pet coke
prices rise substantially in the future, we may be unable to
increase our prices to recover increased raw material costs,
because the price floor for nitrogen fertilizer products is
generally correlated with natural gas prices, the primary raw
material used by our competitors, and not pet coke prices.
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. The
nitrogen fertilizer plant generally undergoes a facility
turnaround every two years. The turnaround typically lasts
13-15 days
each turnaround year and costs approximately $3 million to
$5 million per turnaround. The nitrogen fertilizer plant
underwent a turnaround in the fourth quarter of 2010, at a cost
of approximately $3.5 million and the next turnaround is
currently scheduled for the fourth quarter of 2012. In
connection with the most recent biennial turnaround, the
nitrogen fertilizer business also wrote-off approximately
$1.4 million of fixed assets.
Factors
Affecting Comparability of Our Financial Results
Our historical results of operations for the periods presented
may not be comparable with prior periods or to our results of
operations in the future for the reasons discussed below.
Publicly
Traded Partnership Expenses
We expect that our general and administrative expenses will
increase due to the costs of operating as a publicly traded
partnership, including costs associated with SEC reporting
requirements, including annual and quarterly reports to
unitholders, tax return and
Schedule K-1
preparation and distribution, independent auditor
31
fees, investor relations activities and registrar and transfer
agent fees. We estimate that these incremental general and
administrative expenses, which also include increased personnel
costs, will approximate $5.5 million per year, excluding
the costs associated with the initial implementation of our
Sarbanes-Oxley Section 404 internal controls review and
testing. Our historical financial statements do not reflect the
impact of these expenses, which will affect the comparability of
our post-offering results with our financial statements from
periods prior to the completion of the Offering.
September
2010 UAN Vessel Rupture
On September 30, 2010, our nitrogen fertilizer plant
experienced an interruption in operations due to a rupture of a
high-pressure UAN vessel. All operations at our nitrogen
fertilizer facility were immediately shut down. No one was
injured in the incident. Our nitrogen fertilizer facility had
previously scheduled a major turnaround to begin on
October 5, 2010. To minimize disruption and impact to the
production schedule, the turnaround was accelerated. The
turnaround was completed on October 29, 2010 with the
gasification and ammonia units in operation. The fertilizer
facility restarted production of UAN on November 16, 2010
and as of December 31, 2010 repairs to the facility as a
result of the rupture were substantially complete. Besides
adversely impacting UAN sales in the fourth quarter of 2010, the
outage caused us to shift delivery of lower priced tons from the
fourth quarter of 2010 to the first and second quarters of 2011.
Total gross costs recorded as of September 30, 2011 due to
the incident were approximately $11.2 million for repairs
and maintenance and other associated costs. As of
September 30, 2011, approximately $7.0 million of
insurance proceeds have been received related to the property
damage insurance claim. Of the costs incurred, approximately
$4.6 million were capitalized. We also recognized income of
approximately $3.4 million during 2011 from insurance
proceeds received related to our business interruption policy.
Approximately $0.5 million was received during the third
quarter with the remainder received in March and April 2011.
Fertilizer
Plant Property Taxes
Our nitrogen fertilizer plant received a ten year property tax
abatement from Montgomery County, Kansas in connection with its
construction that expired on December 31, 2007. In
connection with the expiration of the abatement, the county
reassessed our nitrogen fertilizer plant and classified the
nitrogen fertilizer plant as almost entirely real property
instead of almost entirely personal property. The reassessment
has resulted in an increase in our annual property tax expense
for the plant by an average of approximately $10.7 million
per year for the years ended December 31, 2008 and
December 31, 2009, and approximately $11.7 million for
the year ended December 31, 2010. We do not agree with the
countys classification of our nitrogen fertilizer plant
and are currently disputing it before the Kansas Court of Tax
Appeals, or COTA. However, we have fully accrued and paid for
the property tax the county claims we owe for the years ended
December 31, 2010, 2009 and 2008. We have estimated and
accrued for nine months of property taxes for 2011. This
property tax expense is reflected as a direct operating expense
in our financial results. An evidentiary hearing before COTA
occurred during the first quarter of 2011 regarding our property
tax claims for the year ended December 31, 2008. We believe
that it is possible that COTA may issue a ruling sometime during
2011. However, the timing of a ruling in the case is uncertain,
and there can be no assurance we will receive a ruling in 2011.
If we are successful in having the nitrogen fertilizer plant
reclassified as personal property, in whole or in part, a
portion of the accrued and paid expenses would be refunded to
us, which could have a material positive effect on our results
of operations. If we are not successful in having the nitrogen
fertilizer plant reclassified as personal property, in whole or
in part, we expect that we will continue to pay property taxes
at elevated rates.
Distributions
to Unitholders
We intend to make cash distributions of all available cash we
generate each quarter, which began with the quarter ended
June 30, 2011. Available cash for each quarter will be
determined by the board of directors of our general partner
following the end of such quarter. Available cash for each
quarter will generally equal our cash flow from operations for
the quarter, less cash needed for maintenance capital
expenditures, debt service and other contractual obligations and
reserves for future operating or capital needs that the board of
directors of our general partner deems necessary or appropriate.
Additionally, the Partnership also retains the cash on
32
hand associated with prepaid sales at each quarter end for
future distributions to common unitholders based upon the
recognition into income of the prepaid sales. The board of
directors of our general partner may modify our cash
distribution policy at any time, and our partnership agreement
does not require us to make distributions at all.
Credit
Facility
On April 13, 2011, CRNF, as borrower, and the Partnership,
as guarantor, entered into a new credit facility with a group of
lenders. The credit facility includes a term loan facility of
$125.0 million and a revolving credit facility of
$25.0 million with an uncommitted incremental facility of
up to $50.0 million. There is no scheduled amortization and
the credit facility matures in April 2016.
In recent historic periods prior to the Offering, we did not
incur interest expense. Borrowings under the credit facility
bear interest, at the Partnerships option, at either the
Eurodollar Rate, plus a margin that ranges from 3.50% to 4.25%,
or the Base Rate, plus a margin that ranges from 2.50% to 3.25%.
The applicable interest rate margin is determined based on the
Partnerships leverage ratio for the trailing four
quarters. The average interest rate for the term loan during the
three months ended September 30, 2011 was 4.02%. Under its
terms, the lenders under the credit facility were granted a
perfected, first priority security interest (subject to certain
customary exceptions) in substantially all of the assets of the
Partnership and CRNF.
Interest
Rate Swap
Our profitability and cash flows are affected by changes in
interest rates, specifically LIBOR and prime rates. The primary
purpose of our interest rate risk management activities is to
hedge our exposure to changes in interest rates.
On June 30 and July 1, 2011, CRNF entered into two Interest
Rate Swap agreements with J. Aron. We have determined that the
Interest Rate Swaps do qualify as a hedge for hedge accounting
treatment. The Interest Rate Swap agreements commenced on
August 12, 2011; therefore, the impact recorded for the
three and nine months ended September 30, 2011 is
$0.1 million in interest expense. For the three and nine
months ended September 30, 2011, the Partnership recorded a
decrease in fair market value on the Interest Rate Swap
agreements of $2.4 million, which is unrealized, in
accumulated other comprehensive income.
Results
of Operations
The following tables summarize the financial data and key
operating statistics for CVR Partners and our operating
subsidiary for the three and nine months ended
September 30, 2011 and 2010. The following data should be
read in conjunction with our condensed consolidated financial
statements and the notes thereto included elsewhere in this
Form 10-Q.
All information in Managements Discussion and
Analysis of Financial
33
Condition and Results of Operations, except for the
balance sheet data as of December 31, 2010, is unaudited.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
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|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(unaudited)
|
|
|
|
(in millions)
|
|
|
Consolidated Statements of Operations Data
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Net sales
|
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$
|
77.2
|
|
|
$
|
46.4
|
|
|
$
|
215.3
|
|
|
$
|
141.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sold Affiliates
|
|
|
3.6
|
|
|
|
2.9
|
|
|
|
8.0
|
|
|
|
5.1
|
|
Cost of product sold Third Parties
|
|
|
7.3
|
|
|
|
7.9
|
|
|
|
20.2
|
|
|
|
22.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.9
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|
|
|
10.8
|
|
|
|
28.2
|
|
|
|
27.7
|
|
Direct operating expenses Affiliates(1)
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|
|
0.2
|
|
|
|
0.5
|
|
|
|
1.0
|
|
|
|
1.4
|
|
Direct operating expenses Third Parties(1)
|
|
|
19.9
|
|
|
|
16.7
|
|
|
|
64.4
|
|
|
|
59.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.1
|
|
|
|
17.2
|
|
|
|
65.4
|
|
|
|
60.7
|
|
Insurance recovery business interruption
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
(3.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
Affiliates(1)
|
|
|
3.4
|
|
|
|
2.4
|
|
|
|
13.1
|
|
|
|
6.8
|
|
Selling, general and administrative expenses Third
Parties(1)
|
|
|
1.1
|
|
|
|
0.9
|
|
|
|
4.5
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.5
|
|
|
|
3.3
|
|
|
|
17.6
|
|
|
|
8.8
|
|
Depreciation and amortization(2)
|
|
|
4.7
|
|
|
|
4.5
|
|
|
|
13.9
|
|
|
|
13.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
37.5
|
|
|
$
|
10.6
|
|
|
$
|
93.6
|
|
|
$
|
30.0
|
|
Interest expense and other financing costs
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
(2.6
|
)
|
|
|
|
|
Interest income
|
|
|
|
|
|
|
3.0
|
|
|
|
0.1
|
|
|
|
9.6
|
|
Other income (expense)
|
|
|
0.2
|
|
|
|
(0.1
|
)
|
|
|
0.1
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
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|
|
(1.2
|
)
|
|
|
2.9
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|
|
|
(2.4
|
)
|
|
|
9.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense
|
|
|
36.3
|
|
|
|
13.5
|
|
|
|
91.2
|
|
|
|
39.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)(3)
|
|
$
|
36.3
|
|
|
$
|
13.5
|
|
|
$
|
91.2
|
|
|
$
|
39.5
|
|
Adjusted EBITDA(4)
|
|
$
|
43.3
|
|
|
$
|
15.7
|
|
|
$
|
114.0
|
|
|
$
|
45.1
|
|
Available cash for distribution(5)
|
|
$
|
41.8
|
|
|
|
|
|
|
$
|
71.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
As of December 31,
|
|
Balance Sheet Data
|
|
2011
|
|
|
2010
|
|
|
|
(unaudited)
|
|
|
|
(in millions)
|
|
|
Cash and cash equivalents
|
|
$
|
255.5
|
|
|
$
|
42.7
|
|
Working capital
|
|
$
|
234.7
|
|
|
$
|
27.1
|
|
Total assets
|
|
$
|
673.8
|
|
|
$
|
452.2
|
|
Partners Capital
|
|
$
|
489.3
|
|
|
$
|
402.2
|
|
34
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(unaudited)
|
|
|
|
|
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(in millions)
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|
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Cash Flow and Other Data
|
|
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|
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|
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Net cash flow provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
57.7
|
|
|
$
|
27.0
|
|
|
$
|
107.9
|
|
|
$
|
56.6
|
|
Investing activities
|
|
$
|
(2.0
|
)
|
|
$
|
(1.9
|
)
|
|
$
|
(7.8
|
)
|
|
$
|
(3.8
|
)
|
Financing activities
|
|
$
|
(30.0
|
)
|
|
$
|
|
|
|
$
|
112.7
|
|
|
$
|
(29.5
|
)
|
Capital expenditures for property, plant and equipment
|
|
$
|
4.5
|
|
|
$
|
1.9
|
|
|
$
|
10.5
|
|
|
$
|
3.8
|
|
Depreciation and amortization
|
|
$
|
4.7
|
|
|
$
|
4.5
|
|
|
$
|
13.9
|
|
|
$
|
13.9
|
|
|
|
|
(1) |
|
Amounts are shown exclusive of depreciation and amortization. |
|
(2) |
|
Depreciation and amortization is comprised of the following
components as excluded from direct operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(unaudited)
|
|
|
|
(in millions)
|
|
|
Depreciation and amortization excluded from direct operating
expenses
|
|
$
|
4.7
|
|
|
$
|
4.5
|
|
|
$
|
13.9
|
|
|
$
|
13.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
4.7
|
|
|
$
|
4.5
|
|
|
$
|
13.9
|
|
|
$
|
13.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
The following are certain charges and costs incurred in each of
the relevant periods that are meaningful to understanding our
net income and in evaluating our performance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(unaudited)
|
|
|
|
(in millions)
|
|
|
Share-based compensation expense(a)
|
|
$
|
0.9
|
|
|
$
|
0.7
|
|
|
$
|
6.4
|
|
|
$
|
1.3
|
|
|
|
|
(a) |
|
Represents the impact of share-based compensation awards
allocated from CVR Energy and CALLC III and share-based
compensation associated with awards from our LTIP. Subsequent to
June 30, 2011, no additional amounts will be allocated to
us by CALLC III. We are not responsible for payment of
share-based compensation awards allocated from CVR Energy and
CALLC III and all such expense amounts are reflected as an
increase or decrease to Partners capital. |
|
|
|
(4) |
|
Adjusted EBITDA is defined as net income before income tax
expense, net interest (income) expense, depreciation and
amortization expense and certain other items management believes
affect the comparability of operating results. Adjusted EBITDA
is not a recognized term under GAAP and should not be
substituted for net income as a measure of performance but
should be utilized as a supplemental measure of performance in
evaluating our business. Management believes that adjusted
EBITDA provides relevant and useful information that enables
external users of our financial statements, such as industry
analysts, investors, lenders and rating agencies to better
understand and evaluate our ongoing operating results and allows
for greater transparency in the reviewing of our overall
financial, operational and economic performance. Management
believes it is appropriate to exclude certain items from EBITDA,
such as share-based compensation and major scheduled turnaround
expenses because management believes these items affect the
comparability of operating results. |
|
(5) |
|
We define available cash for distribution generally as equal to
our cash flow from operations for the quarter, less cash needed
for maintenance capital expenditures, debt service and other
contractual obligations, |
35
|
|
|
|
|
and reserves for future operating or capital needs that our
board of directors of our general partner deems necessary or
appropriate. For the nine months ended September 30, 2011,
available cash for distribution is calculated for the period
beginning at the closing of the Offering (April 13, 2011
through September 30, 2011). The Partnership also retains
the cash on hand associated with prepaid sales at each quarter
end for future distribution to common unitholders based upon the
recognition into income of the prepaid sales. |
The tables below provide an overview of our results of
operations, relevant market indicators and key operating
statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(unaudited)
|
|
|
|
(in millions)
|
|
|
Key Operating Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production (thousand tons):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ammonia (gross produced)(1)
|
|
|
102.7
|
|
|
|
112.6
|
|
|
|
310.4
|
|
|
|
322.9
|
|
Ammonia (net available for sale)(1)
|
|
|
25.9
|
|
|
|
41.0
|
|
|
|
89.3
|
|
|
|
117.9
|
|
UAN
|
|
|
185.8
|
|
|
|
173.8
|
|
|
|
535.8
|
|
|
|
500.5
|
|
Pet coke consumed (thousand tons)
|
|
|
131.2
|
|
|
|
118.6
|
|
|
|
391.0
|
|
|
|
351.8
|
|
Pet coke (cost per ton)
|
|
$
|
43
|
|
|
$
|
26
|
|
|
$
|
30
|
|
|
$
|
19
|
|
Sales (thousand tons):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ammonia
|
|
|
22.6
|
|
|
|
33.4
|
|
|
|
83.5
|
|
|
|
115.2
|
|
UAN
|
|
|
179.2
|
|
|
|
178.9
|
|
|
|
524.7
|
|
|
|
506.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
|
201.8
|
|
|
|
212.3
|
|
|
|
608.2
|
|
|
|
622.1
|
|
Product pricing (plant gate) (dollars per ton)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ammonia
|
|
$
|
568
|
|
|
$
|
317
|
|
|
$
|
569
|
|
|
$
|
305
|
|
UAN
|
|
$
|
294
|
|
|
$
|
168
|
|
|
$
|
266
|
|
|
$
|
180
|
|
On-stream factor(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gasification
|
|
|
99.2
|
%
|
|
|
99.2
|
%
|
|
|
99.5
|
%
|
|
|
95.8
|
%
|
Ammonia
|
|
|
98.6
|
%
|
|
|
99.0
|
%
|
|
|
98.0
|
%
|
|
|
94.6
|
%
|
UAN
|
|
|
97.0
|
%
|
|
|
96.9
|
%
|
|
|
95.9
|
%
|
|
|
92.2
|
%
|
Reconciliation to net sales (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight in revenue
|
|
$
|
6.0
|
|
|
$
|
5.8
|
|
|
$
|
16.1
|
|
|
$
|
14.6
|
|
Hydrogen and other gases revenue
|
|
|
5.7
|
|
|
|
|
|
|
|
11.9
|
|
|
|
|
|
Sales net plant gate
|
|
|
65.5
|
|
|
|
40.6
|
|
|
|
187.3
|
|
|
|
126.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
77.2
|
|
|
$
|
46.4
|
|
|
$
|
215.3
|
|
|
$
|
141.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
(unaudited)
|
|
|
Market Indicators
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas NYMEX (dollars per MMBtu)
|
|
$
|
4.06
|
|
|
$
|
4.38
|
|
|
$
|
4.21
|
|
|
$
|
4.52
|
|
Ammonia Southern Plains (dollars per ton)
|
|
$
|
619
|
|
|
$
|
465
|
|
|
$
|
609
|
|
|
$
|
385
|
|
UAN Mid Cornbelt (dollars per ton)
|
|
$
|
401
|
|
|
$
|
247
|
|
|
$
|
373
|
|
|
$
|
246
|
|
|
|
|
(1) |
|
The gross tons produced for ammonia represent the total ammonia
produced, including ammonia produced that was upgraded into UAN.
The net tons available for sale represent the ammonia available
for sale that was not upgraded into UAN. |
36
|
|
|
(2) |
|
Plant gate sales per ton represent net sales less freight and
hydrogen revenue divided by product sales volume in tons in the
reporting period. Plant gate pricing per ton is shown in order
to provide a pricing measure that is comparable across the
fertilizer industry. |
|
(3) |
|
On-stream factor is the total number of hours operated divided
by the total number of hours in the reporting period. |
Three
Months Ended September 30, 2011 Compared to the Three
Months Ended September 30, 2010
Net Sales. Net sales were
$77.2 million for the three months ended September 30,
2011 compared to $46.4 million for the three months ended
September 30, 2010. For the three months ended
September 30, 2011, ammonia and UAN made up
$13.3 million and $58.2 million of our net sales,
respectively. This compared to ammonia and UAN net sales of
$11.4 million and $35.0 million for the three months
ended September 30, 2010. The increase of
$30.8 million was the result of both higher average plant
gate prices for both ammonia and UAN and greater hydrogen sales
to CVR Energys refinery offset by lower sales unit volumes
for ammonia. The following table demonstrates the impact of
sales volumes and pricing for ammonia, UAN and hydrogen for the
quarters ended September 30, 2011 and September 30,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2011
|
|
Three Months Ended September 30, 2010
|
|
|
Total Variance
|
|
|
Price
|
|
Volume
|
|
|
Volume(1)
|
|
$ per ton(2)
|
|
Sales $(3)
|
|
Volume(1)
|
|
$ per ton (2)
|
|
Sales $(3)
|
|
|
Volume(1)
|
|
Sales $(3)
|
|
|
Variance
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Ammonia
|
|
|
22,606
|
|
|
$
|
589
|
|
|
$
|
13.3
|
|
|
|
33,438
|
|
|
$
|
341
|
|
|
$
|
11.4
|
|
|
|
|
(10,832
|
)
|
|
$
|
1.9
|
|
|
|
$
|
8.3
|
|
|
$
|
(6.4
|
)
|
UAN
|
|
|
179,244
|
|
|
$
|
324
|
|
|
$
|
58.2
|
|
|
|
178,949
|
|
|
$
|
196
|
|
|
$
|
35.0
|
|
|
|
|
295
|
|
|
$
|
23.2
|
|
|
|
$
|
23.0
|
|
|
$
|
0.2
|
|
Hydrogen
|
|
|
528,593
|
|
|
$
|
11
|
|
|
$
|
5.7
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
582,593
|
|
|
$
|
5.7
|
|
|
|
$
|
|
|
|
$
|
5.7
|
|
|
|
|
(1) |
|
Sales volume in tons |
|
(2) |
|
Includes freight charges |
|
(3) |
|
Sales dollars in millions |
The decrease in ammonia sales volume for the three months ended
September 30, 2011 compared to the three months ended
September 30, 2010 was primarily attributable to our
providing hydrogen to CVR Energys refinery as requested
pursuant to the feedstock agreement instead of using this
hydrogen to produce ammonia. On-stream factors (total number of
hours operated divided by total hours in the reporting period)
for the gasification, ammonia and UAN units continue to
demonstrate their reliability with the units reporting 99.2%,
98.6% and 97.0%, respectively, on-stream for the three months
ended September 30, 2011. On-stream rates for the third
quarter of 2010 were 99.2%, 99.0% and 96.9% for the
gasification, ammonia and UAN units, respectively.
Plant gate prices are prices FOB the delivery point less any
freight cost we absorb to deliver the product. We believe plant
gate price is meaningful because we sell products both FOB our
plant gate (sold plant) and FOB the customers 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 September 30, 2011 were higher for both
ammonia and UAN over the comparable period of 2010, increasing
78.9% and 75.3% respectively. The price increases reflect strong
farm belt market conditions.
Cost of Product Sold. Cost of product
sold is primarily comprised of pet coke expense, freight expense
and distribution expense. Cost of product sold for the three
months ended September 30, 2011 was $10.9 million
compared to $10.8 million for the three months ended
September 30, 2010. The increase of $0.1 million is
the result of, higher affiliate costs of $0.7 million,
offset by lower third party costs of $0.6 million. Besides
decreased costs associated with lower ammonia sales volumes, we
experienced an increase in pet coke costs of $2.5 million
($1.1 million from transaction with affiliates) and
increased freight expense of $0.1 million partially offset
by a decrease in hydrogen costs of $0.4 million.
Direct Operating Expenses (Exclusive of Depreciation and
Amortization). Direct operating expenses
include costs associated with the actual operations of our
plant, such as repairs and maintenance, energy and
37
utility costs, catalyst and chemical costs, outside services,
labor and environmental compliance costs. Direct operating
expenses (exclusive of depreciation and amortization) for the
three months ended September 30, 2011 were
$20.1 million as compared to approximately
$17.2 million for the three months ended September 30,
2010. The increase of $2.9 million for the three months
ended September 30, 2011 over the comparable period in 2010
was due to a $3.2 million increase in costs from third
parties coupled with a $0.3 million decrease in direct
operating costs from transactions with affiliates. The
$2.9 million increase was primarily the result of the
increase in expenses for utilities ($4.9 million), repairs
and maintenance ($1.1 million), refractory amortization
($0.2 million), catalyst ($0.2 million) and chemicals
($0.2 million), partially offset by the receipt and
recognition of $2.5 million of insurance proceeds for
property damage, $0.9 million increase in other reimbursed
expenses and decreases in property taxes ($0.1 million) and
equipment rental ($0.2 million).
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 Energy and
CRLLC on our behalf and billed or allocated to us. Certain of
our expenses are subject to the services agreement with CVR
Energy and our general partner. Selling, general and
administrative expenses (exclusive of depreciation and
amortization) were $4.5 million for the quarter ended
September 30, 2011, as compared to $3.3 million for
the quarter ended September 30, 2010. The increase of
$1.2 million for the three months ended September 30,
2011 over the comparable period in 2010 was due to a
$1.0 million increase in costs with affiliates coupled with
a $0.2 million increase in costs from transactions from
third parties. This variance was primarily the result of
increases in share-based compensation expense of
$0.3 million, outside services of $0.4 million and
$0.8 million of increased expenses related to the services
agreement, partially offset by 2010 asset write-offs of
$0.5 million.
Operating Income. Operating income was
$37.5 million for the three months ended September 30,
2011 as compared to operating income of $10.6 million for
the three months ended September 30, 2010. This increase of
$26.9 million was primarily the result of the increase in
nitrogen fertilizer margin of $30.7 million. This favorable
increase was partially offset by an increase in selling, general
and administrative expenses (exclusive of depreciation and
amortization) of $1.2 million and direct operating expenses
(exclusive of depreciation and amortization) of
$2.9 million.
Interest Expense. Interest expense for
the three months ended September 30, 2011 was approximately
$1.4 million and $0.0 for the three months ended
September 30, 2010. Interest expense for the three months
ended September 30, 2011 was primarily attributable to bank
interest expense of $1.3 million on the $125.0 million
term loan facility, $0.3 million of deferred financing
amortization and $0.1 million of interest expense related
to the interest rate swap, partially offset by capitalized
interest of $0.3 million.
Interest Income. Interest income was
negligible for the quarter ended September 30, 2011, as
compared to $3.0 million for the quarter ended
September 30, 2010. Interest income in the third quarter of
2010 was primarily attributable to the amounts owed to us by our
affiliate, CRLLC. The due from balance from our affiliates was
fully distributed in December 2010 and resulted in no
outstanding affiliate balance owed during the third quarter of
2011.
Income Tax Expense. Income tax expense
for the quarters ended September 30, 2011 and 2010 was
immaterial and consisted of amounts payable pursuant to a Texas
state franchise tax.
Net Income. For the quarter ended
September 30, 2011, net income was $36.3 million as
compared to $13.5 million of net income for the quarter
ended September 30, 2010, an increase of
$22.8 million. The increase in net income was primarily due
to the increase in pricing, offset by an increase in selling,
general and administrative expenses (exclusive of depreciation
and amortization), an increase in the cost of raw materials, a
decrease in interest income and an increase in direct operating
expenses (exclusive of depreciation and amortization).
38
Nine
Months Ended September 30, 2011 Compared to the Nine Months
Ended September 30, 2010
Net Sales. Net sales were
$215.3 million for the nine months ended September 30,
2011 compared to $141.1 million for the nine months ended
September 30, 2010. For the nine months ended
September 30, 2011, ammonia and UAN made up
$49.0 million and $154.4 million of our net sales,
respectively. This compared to ammonia and UAN net sales of
$38.0 million and $103.1 million for the nine months
ended September 30, 2010. The increase of
$74.2 million was the result of both higher average plant
gate prices for both ammonia and UAN, a 3.5% increase in UAN
sales unit volumes and greater hydrogen sales to CVR
Energys refinery offset by lower ammonia product sales
volume. The following table demonstrates the impact of sales
volumes and pricing for ammonia, UAN and hydrogen for the nine
months ended September 30, 2011 and September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2011
|
|
|
Nine Months Ended September 30, 2010
|
|
|
|
Total Variance
|
|
|
|
Price
|
|
|
Volume
|
|
|
|
Volume(1)
|
|
|
$ per ton(2)
|
|
|
Sales $(3)
|
|
|
Volume(1)
|
|
|
$ per ton (2)
|
|
|
Sales $(3)
|
|
|
|
Volume(1)
|
|
|
Sales $(3)
|
|
|
|
Variance
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Ammonia
|
|
|
83,510
|
|
|
$
|
587
|
|
|
$
|
49.0
|
|
|
|
115,230
|
|
|
$
|
330
|
|
|
$
|
38.0
|
|
|
|
|
(31,720
|
)
|
|
$
|
11.0
|
|
|
|
$
|
29.6
|
|
|
$
|
(18.6
|
)
|
UAN
|
|
|
524,670
|
|
|
$
|
294
|
|
|
$
|
154.4
|
|
|
|
506,872
|
|
|
$
|
203
|
|
|
$
|
103.1
|
|
|
|
|
17,797
|
|
|
$
|
51.3
|
|
|
|
$
|
46.1
|
|
|
$
|
5.2
|
|
Hydrogen
|
|
|
1,159,090
|
|
|
$
|
10
|
|
|
$
|
11.8
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
1,159,090
|
|
|
$
|
11.8
|
|
|
|
$
|
|
|
|
$
|
11.8
|
|
|
|
|
(1) |
|
Sales volume in tons |
|
(2) |
|
Includes freight charges |
|
(3) |
|
Sales dollars in millions |
The decrease in ammonia sales volume for the nine months ended
September 30, 2011 compared to the nine months ended
September 30, 2010 was primarily attributable to the 2010
period having higher than normal volumes after a sluggish fall
season in 2009 coupled with decreased ammonia production in the
second and third quarters of 2011 due to the exporting of
hydrogen to the refinery of CVR Energy instead of producing
ammonia. UAN sales volumes increased due to production levels in
the nine months ended September 30, 2011 over the same
period in 2010 as a result of a plant outage that occurred in
2010. On-stream factors (total number of hours operated divided
by total hours in the reporting period) for the gasification,
ammonia and UAN units continue to demonstrate their reliability
as all increased over the nine months ended September 30,
2010 with the units reporting 99.5%, 98.0% and 95.9%,
respectively, on-stream for the nine months ended
September 30, 2011. On-stream rates for the nine months
ended September 30, 2010 were 95.8%, 94.6% and 92.2% for
the gasification, ammonia and UAN units, respectively.
Plant gate prices are prices FOB the delivery point less any
freight cost we absorb to deliver the product. We believe plant
gate price is meaningful because we sell products both FOB our
plant gate (sold plant) and FOB the customers 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
nine months ended September 30, 2011 were higher for both
ammonia and UAN over the comparable period of 2010, increasing
86.5% and 47.9% respectively. The price increases reflect strong
farm belt market conditions. While UAN pricing in the nine
months ended September 30, 2011 was higher than last year,
it nevertheless was adversely impacted by the outage of a
high-pressure UAN vessel that occurred in September 2010. This
caused us to shift delivery of lower priced tons from the fourth
quarter of 2010 to the first and second quarters of 2011.
The demand for nitrogen fertilizer is affected by the aggregate
crop planting decisions and nitrogen 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 nitrogen fertilizer they apply depend on factors like
crop prices, their current liquidity, soil conditions, weather
patterns and the types of crops planted.
Cost of Product Sold. Cost of product
sold is primarily comprised of pet coke expense, freight expense
and distribution expense. Cost of product sold for the nine
months ended September 30, 2011 was $28.2 million
compared to $27.7 million for the nine months ended
September 30, 2010. The increase of $0.5 million was
the result of $2.9 million of higher costs from
transactions with affiliates, offset by
39
$2.4 million from lower costs from third parties. Besides
increased costs associated with higher UAN sales volumes and a
$1.3 million increase in freight expense, we experienced an
increase in pet coke costs of $4.9 million
($3.7 million from transaction with affiliates) and a
decrease in hydrogen costs of $0.8 million.
Direct Operating Expenses (Exclusive of Depreciation and
Amortization). Direct operating expenses
include costs associated with the actual operations of our
plant, such as repairs and maintenance, energy and utility
costs, catalyst and chemical costs, outside services, labor and
environmental compliance costs. Direct operating expenses
(exclusive of depreciation and amortization) for the nine months
ended September 30, 2011 were $65.4 million as
compared to $60.7 million for the nine months ended
September 30, 2010. The increase of $4.7 million for
the nine months ended September 30, 2011 over the
comparable period in 2010 was due to a $5.1 million
increase in costs from third parties coupled with a decrease in
direct operating costs from transactions with affiliates
($0.4 million). The $4.7 million increase was
primarily the result of increases in expenses for repairs and
maintenance ($4.4 million), utilities ($4.4 million),
labor ($0.4 million) and environmental ($0.3 million).
These increases in direct operating expenses were partially
offset by the receipt and recognition of $2.5 million of
insurance proceeds for property damage, $0.9 million
increase in other reimbursed expenses for miscellaneous
transfers, $0.5 million increase in sulfur sales to an
outside party and decreases in expenses associated with
equipment rental ($0.5 million), insurance ($0.2 million)
and refractory amortization ($0.2 million).
Insurance Recovery Business
Interruption. During the nine months ended
September 30, 2011, we recorded and received insurance
proceeds under insurance coverage for interruption of business
of $3.4 million related to the September 30, 2010 UAN
vessel rupture.
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 Energy and
CRLLC on our behalf and billed or allocated to us. Certain of
our expenses are subject to the services agreement with CVR
Energy and our general partner. Selling, general and
administrative expenses (exclusive of depreciation and
amortization) were $17.6 million for the nine months ended
September 30, 2011, as compared to $8.8 million for
the nine months ended September 30, 2010. The increase of
$8.8 million for the nine months ended September 30,
2011 over the comparable period in 2010 was due to a
$6.3 million increase in costs with affiliates coupled with
a $2.5 million increase in costs from transactions from
third parties. This variance was primarily the result of
increases in share-based compensation expense of
$4.9 million, outside services of $2.2 million, and
expenses related to the services agreement of $1.4 million.
Operating Income. Operating income was
$93.6 million for the nine months ended September 30,
2011 as compared to operating income of $30.0 million for
the nine months ended September 30, 2010. This increase of
$63.6 million was primarily the result of the increase in
nitrogen fertilizer margins of $73.7 million coupled with
business interruption recoveries recorded of $3.4 million.
These favorable increases were partially offset by an increase
in selling, general and administrative expenses (exclusive of
depreciation and amortization) of $8.8 million and direct
operating expenses (exclusive of depreciation and amortization)
of $4.7 million.
Interest Expense. Interest expense for
the nine months ended September 30, 2011 was approximately
$2.6 million and $0.0 million for the nine months
ended September 30, 2010. Interest expense for the nine
months ended September 30, 2011 was primarily attributable
to bank interest expense of $2.6 million on the
$125.0 million term loan facility, interest rate swap of
$0.1 million and $0.5 million of deferred financing
amortization partially offset by capitalized interest of
$0.6 million.
Interest Income. Interest income was
negligible for the nine months ended September 30, 2011, as
compared to $9.6 million for the nine months ended
September 30, 2010. Interest income in the nine months
ended September 30, 2010 was primarily attributable to the
amounts owed to us by our affiliate, CRLLC. The due from balance
from our affiliates was fully distributed in December 2010 and
resulted in no outstanding affiliate balance owed during the
nine months ended September 30, 2011.
Income Tax Expense. Income tax expense
for the nine months ended September 30, 2011 and 2010 was
immaterial and consisted of amounts payable pursuant to a Texas
state franchise tax.
40
Net Income. For the nine months ended
September 30, 2011, net income was $91.2 million as
compared to $39.5 million of net income for the nine months
ended September 30, 2010, an increase of
$51.7 million. The increase in net income was primarily due
to the increase in pricing, offset by an increase in selling,
general and administrative expenses (exclusive of depreciation
and amortization), an increase in the cost of raw materials, a
decrease in interest income and an increase in direct operating
expenses (exclusive of depreciation and amortization).
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 liquidity was enhanced during
the second quarter of 2011 by the receipt of $324.2 million
in net proceeds from our initial public offering after the
payment of underwriting discounts and commissions. The net
proceeds from the Offering were used as follows: approximately
$18.4 million was used to make a distribution to CRLLC to
satisfy our obligation to reimburse it for certain capital
expenditures CRLLC made on our behalf; approximately
$117.1 million was used to make a special distribution to
CRLLC in order to, among other things, fund the offer to
purchase CRLLCs senior secured notes required upon
consummation of the Offering; approximately $26.0 million
was used to purchase (and subsequently extinguish) the IDRs
owned by our general partner prior to the Offering;
approximately $4.8 million was used to pay financing fees
and associated legal and professional fees resulting from our
new credit facility and the balance was used or will be used for
general partnership purposes, including approximately
$104.0 million to fund the expected capital costs of the
continuation of our UAN expansion. In addition, in conjunction
with the completion of the Offering, we entered into a new
$125 million term loan and $25 million revolving
credit facility and were removed as a guarantor or obligor, as
applicable, under CRLLCs ABL credit facility, 9.0% First
Lien Senior Secured Notes due 2015 and 10.875% Second Lien
Senior Secured Notes due 2017.
Our principal uses of cash are expected to be operations,
distributions to common unitholders, capital expenditures and
funding our debt service obligations. We believe that our cash
from operations will be adequate to satisfy anticipated
commitments for the next twelve months and that the net proceeds
from the Offering and borrowings under our credit facility will
be adequate to fund our planned capital expenditures, including
the UAN expansion, 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.
Cash
Balance and Other Liquidity
As of September 30, 2011, we had cash and cash equivalents
of $255.5 million including $20.5 million of customer
advances. Working capital at September 30, 2011 was
$234.7 million, consisting of $291.7 million in
current assets and $57.0 million in current liabilities.
Working capital at December 31, 2010 was
$27.1 million, consisting of $73.2 million in current
assets and $46.1 million in current liabilities. As of
November 1, 2011, we had cash and cash equivalents of
$265.8 million.
Debt
As of December 31, 2010, we had no outstanding
indebtedness, but we were a guarantor or obligor, as applicable,
under CRLLCs credit facility, 9.0% First Lien Senior
Secured Notes due 2015 and 10.875% Second Lien Senior Secured
Notes due 2017. As a result of the Offering, we were released as
a guarantor
and/or
obligor under CRLLCs credit facility and senior secured
notes. In addition, as a result of the Offering, the assets of
the fertilizer business no longer constitute collateral for the
benefit of the Senior Notes or CRLLCs credit facility.
Credit
Facility
On April 13, 2011 in conjunction with the completion of the
Offering, we entered into a new credit facility with a group of
lenders including Goldman Sachs Lending Partners LLC, as
administrative and
41
collateral agent. The credit facility includes a term loan
facility of $125.0 million and a revolving credit facility
of $25.0 million with an uncommitted incremental facility
of up to $50.0 million. There is no scheduled amortization and
the credit facility matures April 2016. The credit facility will
be 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. The initial pricing for borrowings under the credit
facility is the Eurodollar rate plus a margin of 3.75%, or, for
base rate loans, the prime rate plus 2.75%. Under its terms, the
lenders under the credit facility were granted a perfected,
first priority security interest (subject to certain customary
exceptions) in substantially all of the assets of CVR Partners
and CRNF. CRNF is the borrower under the credit facility. All
obligations under the credit facility are unconditionally
guaranteed by CVR Partners and substantially all of our future,
direct and indirect, domestic subsidiaries.
The credit facility requires us to maintain (i) a minimum
interest coverage ratio (ratio of Consolidated Adjusted EBITDA
to interest) as of any fiscal quarter of 3.0 to 1.0 and
(ii) a maximum leverage ratio (ratio of debt to
Consolidated Adjusted EBITDA) of (a) as of any fiscal
quarter ended after the closing date and prior to
December 31, 2011, 3.50 to 1.0, and (b) as of any
fiscal quarter ended on or after December 31, 2011, 3.0 to
1.0 in all cases calculated on a trailing four quarter basis. It
also contains customary covenants for a financing of this type
that limit, subject to certain exceptions, the incurrence of
additional indebtedness or guarantees, creation of liens on
assets, the ability to dispose of assets, make restricted
payments, investments or acquisitions, enter into sale-lease
back transactions or enter into affiliate transactions. The
credit facility provides that we can make distributions to
holders of our common units providing 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 credit
facility. As of September 30, 2011, CVR Partners was in
compliance with the covenants of the credit facility.
The credit facility also 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 new credit facility to be in force and effect,
and change of control. An event of default will also be
triggered if CVR Energy terminates or violates any of its
covenants in any of the intercompany agreements between us and
CVR Energy and such action has a material adverse effect on us.
Interest
Rate Swap
Our profitability and cash flows are affected by changes in
interest rates, specifically LIBOR and prime rates. The primary
purpose of our interest rate risk management activities is to
hedge our exposure to changes in interest rates.
On June 30 and July 1, 2011, CRNF entered into two Interest
Rate Swap agreements with J. Aron. We have determined that the
Interest Rate Swaps qualify as a hedge for hedge accounting
treatment. These Interest Rate Swap agreements commenced
on August 12, 2011. The impact recorded for the three and
nine months ended September 30, 2011 is $0.1 million
in interest expense. For the three and nine months ended
September 30, 2011, the Partnership recorded a decrease in
fair market value on the Interest Rate Swap agreements of
$2.4 million, which is unrealized in accumulated other
comprehensive income.
Capital
Spending
Our total capital expenditures for the nine months ended
September 30, 2011 totaled $10.5 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. Growth
capital projects generally involve an expansion of existing
capacity, improvement in product yields,
and/or a
reduction in direct operating expenses. Of the
$10.5 million spent for the nine months ended
September 30, 2011, $5.7 million was related to
maintenance capital projects and the remainder was related to
growth capital projects.
42
We expect to spend approximately $45.4 million on capital
expenditures in 2011, excluding capitalized interest. Of this
amount, approximately $8.6 million will be spent on
maintenance projects and approximately $0.6 million will be
spent on growth projects including $36.2 million on a UAN
expansion project.
With the Partnership closing the Offering on April 13,
2011, we have moved forward with the planned UAN expansion.
Inclusive of capital spent prior to the Offering, we anticipate
that the total capital spend associated with the UAN expansion
will approximate $135.0 million. As of September 30,
2011, approximately $35.7 million had been spent, including
$4.8 million which was spent during the nine months ended
September 30, 2011. The continuation of the UAN expansion
is expected to be funded by proceeds of the Offering and term
loan borrowings made by the Partnership. It is anticipated that
the UAN expansion will be completed in the first quarter of 2013.
In October 2011, the board of directors of our general partner
approved a UAN terminal project that will include the
construction of a two million gallon UAN storage tank and
related truck and rail car load-out facilities that will be
located in Phillipsburg, Kansas. The property that this terminal
will be constructed on is owned by an affiliate of the
Partnership, Coffeyville Resources Terminal, LLC, who will
operate the terminal. The purpose of the UAN terminal is to
distribute approximately 20,000 tons of UAN fertilizer annually.
The expected cost of this project is approximately
$2.0 million.
Planned capital expenditures for 2011 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
and/or
equipment costs necessary to comply with government regulations
or to complete projects that sustain or improve the
profitability of our nitrogen fertilizer operations.
Distributions
to Unitholders
We intend to make cash distributions of all available cash we
generate each quarter. Available cash for each quarter will be
determined by the board of directors of our general partner
following the end of such quarter. Available cash for each
quarter will generally equal our cash flow from operations for
the quarter, less cash needed for maintenance capital
expenditures, debt service and other contractual obligations and
reserves for future operating or capital needs that the board of
directors of our general partner deems necessary or appropriate.
The Partnership also retains the cash on hand associated with
prepaid sales at each quarter end for future distributions to
common unitholders based upon the recognition into income of the
prepaid sales.
In August 2011, the Partnership paid out a cash distribution to
the Partnerships unitholders for the second quarter of
2011 in the amount of $0.407 per unit or $29.7 million in
aggregate.
On October 27, 2011, the Board of Directors of the
Partnerships general partner declared a cash distribution
for the third quarter of 2011 to the Partnerships
unitholders of $0.572 per unit. The cash distribution will be
paid on November 14, 2011, to unitholders of record at the
close of business on November 7, 2011.
Cash
Flows
The following table sets forth our cash flows for the periods
indicated below (in millions):
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(unaudited)
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
107.9
|
|
|
$
|
56.6
|
|
Investing activities
|
|
|
(7.8
|
)
|
|
|
(3.8
|
)
|
Financing activities
|
|
|
112.7
|
|
|
|
(29.5
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
212.8
|
|
|
$
|
23.3
|
|
|
|
|
|
|
|
|
|
|
43
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 nine
months ended September 30, 2011 was $107.9 million.
The positive cash flow from operating activities generated over
this period was primarily attributable to net income of
$91.2 million which was driven by a strong fertilizer price
environment, high on-stream factors, and favorable impacts to
other working capital. With respect to other working capital for
the nine months ended September 30, 2011, the primary
sources of cash were an increase in business interruption
proceeds of $3.4 million, a decrease to prepaid expenses of
$2.8 million and a $1.9 million increase in deferred
revenue. Deferred revenue represents customer prepaid deposits
for the future delivery of our nitrogen fertilizer products. For
the nine months ended September 30, 2011, trade working
capital decreased our operating cash flow by $13.3 million
and was primarily attributable to an increase in inventory of
$6.0 million, coupled with a decrease in accounts payable
of $4.7 million and an increase in accounts receivable of
$2.6 million.
Net cash provided by operating activities for the nine months
ended September 30, 2010 was $56.6 million. This
positive cash flow from operating activities was primarily
attributable to net income of $39.5 million and the
increase in cash flow from other working capital balances. Trade
working capital for the nine months ended September 30,
2010 decreased operating cash flow by $0.2 million and was
attributable to a $1.6 million increase in inventory and a
$1.2 million increase in accounts receivable mostly offset
by a $2.6 million increase in accounts payable. Cash flow
realized from other working capital for the nine months ended
September 30, 2010 was $1.7 million resulting from a
$3.7 million increase in other current liabilities.
Cash
Flows Used in Investing Activities
Net cash used in investing activities for the nine months ended
September 30, 2011 was $7.8 million compared to
$3.8 million for the nine months ended September 30,
2010. The increase in capital expenditures to $10.5 million
for the nine months ended September 30, 2011 was primarily
UAN related activity.
Cash
Flows Used in Financing Activities
Net cash provided by financing activities for the nine months
ended September 30, 2011 was $112.7 million as
compared to net cash used in financing activities of
$29.5 million for the nine months ended September 30,
2010. The net cash provided by financing activities for the nine
months ended September 30, 2011 was attributable to the
proceeds from the issuance of the long-term debt of
$125.0 million and the $324.9 million of proceeds from
the Offering, offset by the $276.7 million distributed to
our affiliates, as well as the quarterly cash distribution for
the second quarter 2011 paid to the common unitholders in the
third quarter of $29.7 million and the $26.0 million
purchase of our general partners incentive distribution
rights. Cash used in financing activities in the nine months
ended September 30, 2010 was entirely attributable to
amounts loaned to our affiliate.
44
Capital
and Commercial Commitments
In addition to long-term debt, we are required to make payments
relating to various types of obligations. The following table
summarizes our minimum payments as of September 30, 2011
relating to long-term debt, operating leases, unconditional
purchase obligations and other specified capital and commercial
commitments for the period following September 30, 2011 and
thereafter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Thereafter
|
|
|
|
(unaudited)
|
|
|
|
(in millions)
|
|
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt(1)
|
|
$
|
125.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
125.0
|
|
Operating leases(2)
|
|
|
30.9
|
|
|
|
1.2
|
|
|
|
5.4
|
|
|
|
6.0
|
|
|
|
4.3
|
|
|
|
3.4
|
|
|
|
10.6
|
|
Unconditional purchase obligations(3)
|
|
|
51.7
|
|
|
|
1.5
|
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
6.1
|
|
|
|
6.2
|
|
|
|
25.9
|
|
Unconditional purchase obligations with affiliates(4)
|
|
|
232.2
|
|
|
|
3.5
|
|
|
|
15.0
|
|
|
|
15.7
|
|
|
|
15.7
|
|
|
|
14.2
|
|
|
|
168.1
|
|
Environmental liabilities(5)
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payments(6)
|
|
|
23.1
|
|
|
|
1.3
|
|
|
|
5.1
|
|
|
|
5.1
|
|
|
|
5.1
|
|
|
|
5.1
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
463.0
|
|
|
$
|
7.5
|
|
|
$
|
31.6
|
|
|
$
|
32.8
|
|
|
$
|
31.2
|
|
|
$
|
28.9
|
|
|
$
|
331.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We entered into a new credit facility in connection with the
closing of the Offering. The new credit facility includes a
$125.0 million term loan, which was fully drawn at closing,
and a $25.0 million revolving credit facility, which was
undrawn at September 30, 2011. The table assumes no amounts
are outstanding under the revolving credit facility. |
|
(2) |
|
We lease various facilities and equipment, primarily railcars,
under non-cancelable operating leases for various periods. |
|
(3) |
|
The amount includes commitments under an electric supply
agreement with the city of Coffeyville, Kansas and a product
supply agreement with Linde. |
|
(4) |
|
The amount includes commitments under our long-term pet coke
supply agreement with CVR Energy having an initial term that
ends in 2027, subject to renewal. The Partnerships
purchase obligation for pet coke from CVR Energy has been
derived from a calculation of the average pet coke price paid to
CVR Energy over the preceding two year period. |
|
(5) |
|
Represents our estimated remaining costs of remediation to
address environmental contamination resulting from a reported
release of UAN in 2005 pursuant to the State of Kansas Voluntary
Cleanup and Property Redevelopment Program. We have other
environmental liabilities which are not contractual obligations
but which would be necessary for our continued operations. |
|
(6) |
|
Interest payments are based on the current interest rate at
September 30, 2011. |
Off-Balance
Sheet Arrangements
We had no off-balance sheet arrangements as of
September 30, 2011.
Recent
Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update
(ASU)
No. 2011-04,
Fair Value Measurements (Topic 820): Amendments to
Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRS, (ASU
2011-04).
ASU 2011-04
changes the wording used to describe many of the requirements in
U.S. GAAP for measuring fair value and for disclosing
information about fair value measurements to ensure consistency
between U.S. GAAP and International Financial Reporting
Standards (IFRS). ASU
2011-04 also
expands the disclosures for fair value measurements that are
estimated using significant unobservable
(Level 3) inputs. This new guidance is to be applied
prospectively. ASU
2011-04 will
be effective for interim and annual periods beginning after
45
December 15, 2011, with early adoption permitted. We
believe that the adoption of this standard will not materially
expand our consolidated financial statement footnote disclosures.
In June 2011, the FASB issued ASU
No. 2011-05,
Comprehensive Income (ASC Topic 220): Presentation of
Comprehensive Income, (ASU
2011-05)
which amends current comprehensive income guidance. This ASU
eliminates the option to present the components of other
comprehensive income as part of the statement of
shareholders equity. Instead, we must report comprehensive
income in either a single continuous statement of comprehensive
income which contains two sections, net income and other
comprehensive income, or in two separate but consecutive
statements. ASU
2011-05 will
be effective for interim and annual periods beginning after
December 15, 2011, with early adoption permitted. The
adoption of ASU
2011-05 will
not have a material impact on our condensed consolidated
financial statements.
In September 2011, the FASB issued ASU
No. 2011-08,
Intangibles Goodwill and Other (Topic 350):
Testing Goodwill for Impairment, (ASU
2011-08).
ASU 2011-08
permits an entity to make a qualitative assessment of whether it
is more likely than not that a reporting units fair value
is less than its carrying amount before applying the two-step
goodwill impairment test. This new guidance is to be applied
prospectively. ASU
2011-08 will
be effective for interim and annual periods beginning after
December 15, 2011, with early adoption permitted. The
Partnership believes that the adoption of this standard will not
have a material impact on the consolidated financial statements.
Critical
Accounting Policies
We prepare our condensed consolidated financial statements in
accordance with GAAP. In order to apply these principles,
management must make judgments, assumptions and estimates based
on the best available information at the time. Actual results
may differ based on the accuracy of the information utilized and
subsequent events. Our accounting policies are described in the
notes to our audited financial statements included elsewhere in
this prospectus. Our critical accounting policies, which are
described below, could materially affect the amounts recorded in
our financial statements.
Impairment
of Long-Lived Assets
We calculate depreciation and amortization on a straight-line
basis over the estimated useful lives of the various classes of
depreciable assets. When assets are placed in service, we make
estimates of what we believe are their reasonable useful lives.
We account for impairment of long-lived assets in accordance
with ASC 360, Property, Plant and Equipment
Impairment or Disposal of Long-Lived Assets, or
ASC 360. In accordance with ASC 360, we review
long-lived assets (excluding goodwill, intangible assets with
indefinite lives, and deferred tax assets) for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated
undiscounted future net cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its
estimated undiscounted future net cash flows, an impairment
charge is recognized for the amount by which the carrying amount
of the assets exceeds their fair value. Assets to be disposed of
are reported at the lower of their carrying value or fair value
less cost to sell.
Goodwill
To comply with ASC 350, Intangibles Goodwill
and Other, or ASC 350, we perform a test for goodwill
impairment annually or more frequently in the event we determine
that a triggering event has occurred. Goodwill and other
intangible accounting standards provide that goodwill and other
intangible assets with indefinite lives are not amortized but
instead are tested for impairment on an annual basis. In
accordance with these standards, we completed our annual test
for impairment of goodwill as of November 1, 2010 and
determined that goodwill was not impaired.
The annual review of impairment was performed by comparing the
carrying value of the partnership to its estimated fair value.
The valuation analysis used both income and market approaches as
described below:
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Income Approach: To determine fair value, we
discounted the expected future cash flows for the reporting unit
utilizing observable market data to the extent available. The
discount rate used for the 2010 impairment test was 14.6%
representing the estimated weighted-average cost of capital,
which
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reflects the overall level of inherent risk involved in the
reporting unit and the rate of return an outside investor would
expect to earn.
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Market-Based Approach: To determine the fair
value of the reporting unit, we also utilized a market based
approach. We used the guideline company method, which focuses on
comparing our risk profile and growth prospects to select
reasonably similar publicly traded companies.
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We assigned an equal weighting of 50% to the result of both the
income approach and market based approach based upon the
reliability and relevance of the data used in each analysis.
This weighting was deemed reasonable as the guideline public
companies have a high-level of comparability with the reporting
unit and the projections used in the income approach were
prepared using current estimates.
Allocation
of Costs
Our condensed consolidated financial statements include an
allocation of costs that have been incurred by CVR Energy or
CRLLC on our behalf. The allocation of such costs is governed by
the services agreement entered into by CVR Energy and us and
affiliated companies in October 2007 (and amended in connection
with the Offering). The services agreement provides guidance for
the treatment of certain general and administrative expenses and
certain direct operating expenses incurred on our behalf. Such
expenses incurred include, but are not limited to, salaries,
benefits, share-based compensation expense, insurance,
accounting, tax, legal and technology services. Prior to the
services agreement such costs were allocated to us based upon
certain assumptions and estimates that were made in order to
allocate a reasonable share of such expenses to us, so that the
condensed consolidated financial statements reflect
substantially all costs of doing business. The authoritative
guidance to allocate such costs is set forth in Staff Accounting
Bulletin, or SAB Topic 1-B Allocations of Expenses
and Related Disclosures in Financial Statements of Subsidiaries,
Divisions or Lesser Business Components of Another
Entity.
If shared costs rise, additional general and administrative
expenses could be allocated to us, which could be material. In
addition, the amounts charged or allocated to us are not
necessarily indicative of the cost that we will incur in the
future.
Share-Based
Compensation
We have been allocated non-cash share-based compensation expense
from CVR Energy and from CALLC III. CVR Energy accounts for
share-based compensation in accordance with ASC 718
Compensation Stock Compensation, or
ASC 718, as well as guidance regarding the accounting for
share-based compensation granted to employees of an equity
method investee. In accordance with ASC 718, CVR Energy and
CALLC III apply a fair-value based measurement method in
accounting for share-based compensation. We recognize the costs
of the share-based compensation incurred by CVR Energy and CALLC
III on our behalf primarily in selling, general and
administrative expenses (exclusive of depreciation and
amortization), and a corresponding increase or decrease to
partners capital, as the costs are incurred on our behalf,
following the guidance issued by the FASB regarding the
accounting for equity instruments that are issued to other than
employees for acquiring, or in conjunction with selling goods or
services, which require remeasurement at each reporting period
through the performance commitment period, or in our case,
through the vesting period. Costs are allocated by CVR Energy
and CALLC III based upon the percentage of time a CVR Energy
employee provides services to us. In the event an
individuals roles and responsibilities change with respect
to services provided to us, a reassessment is performed to
determine if the allocation percentages should be adjusted. In
accordance with the services agreement, we will not be
responsible for the payment of cash related to any share-based
compensation allocated to us by CVR Energy.
There has been considerable judgment in the significant
assumptions used in determining the fair value of the
share-based compensation allocated to us from CALLC III and from
CVR Energy associated with share-based compensation derived from
CALLC and CALLC II override units. There will be no further
allocations of share-based compensation expense associated with
CALLC III or with share-based compensation related to CALLC and
CALLC II override units subsequent to June 30, 2011.
The Partnerships grant of awards out of its LTIP to
employees or directors of its general partner are considered
non-employee awards and the awards will be marked
to-market each reporting period until they vest.
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Item 3.
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Quantitative
and Qualitative Disclosures About Market Risk
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We do not currently use derivative financial instruments to
manage risks related to changes in prices of commodities (e.g.,
ammonia, UAN or pet coke). Given that our business is currently
based entirely in the United States, we are not directly exposed
to foreign currency exchange rate risk. We do not engage in
activities that expose us to speculative or non-operating risks,
including derivative trading activities. In the opinion of our
management, there is no derivative financial instrument that
correlates effectively with, and has a trading volume sufficient
to hedge, our firm commitments and forecasted commodity purchase
or sales transactions. Our management will continue to monitor
whether financial derivatives become available which could
effectively hedge identified risks and management may in the
future elect to use derivative financial instruments consistent
with our overall business objectives to avoid unnecessary risk
and to limit, to the extent practical, risks associated with our
operating activities.
On June 30 and July 1, 2011 CRNF entered into two
floating-to-fixed
interest rate swap agreements for the purpose of hedging the
interest rate risk associated with a portion of its
$125 million floating rate term debt which matures in April
2016. The aggregate notional amount covered under these
agreements totals $62.5 million (split evenly between the
two agreement dates) and commenced on August 12, 2011 and
expires on February 12, 2016. Under the terms of the
interest rate swap agreement entered into on June 30, 2011,
CRNF receives a floating rate based on three month LIBOR and
pays a fixed rate of 1.94%. Under the terms of the interest rate
swap agreement entered into on July 1, 2011, CRNF receives
a floating rate based on three month LIBOR and pays a fixed rate
of 1.975%. Both swap agreements will be settled every
90 days. The effect of these swap agreements is to lock in
a fixed rate of interest of approximately 1.96% plus the
applicable margin paid to lenders over three month LIBOR as
governed by the CRNF credit agreement. The agreements were
designated as cash flow hedges at inception and accordingly, the
effective portion of the gain or loss on the swap is reported as
a component of accumulated other comprehensive income (loss)
(AOCI), and will be reclassified into interest
expense when the interest rate swap transaction affects
earnings. The ineffective portion of the gain or loss will be
recognized immediately in current interest expense.
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Item 4.
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Controls
and Procedures
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Evaluation
of Disclosure Controls and Procedures
Our management, under the direction of our Executive Chairman,
Chief Executive Officer and Chief Financial Officer, evaluated
as of September 30, 2011 the effectiveness of our
disclosure controls and procedures as defined in
Rule 13a-15(e)
of the Securities Exchange Act of 1934, as amended (the
Exchange Act). Based upon and as of the date of that
evaluation, our Executive Chairman, Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls
and procedures were effective, at a reasonable assurance level,
to ensure that information required to be disclosed in the
reports we file and submit under the Exchange Act is recorded,
processed, summarized and reported as and when required and is
accumulated and communicated to our management, including our
Executive Chairman, our Chief Executive Officer and our Chief
Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. It should be noted that any
system of disclosure controls and procedures, however well
designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system are met.
In addition, the design of any system of disclosure controls and
procedures is based in part upon assumptions about the
likelihood of future events. Due to these and other inherent
limitations of any such system, there can be no assurance that
any design will always succeed in achieving its stated goals
under all potential future conditions.
Changes
in Internal Control Over Financial Reporting
There has been no change in our internal control over financial
reporting required by
Rule 13a-15
of the Exchange Act that occurred during the fiscal quarter
ended September 30, 2011 that has materially affected, or
is reasonably likely to materially affect, our internal control
over financial reporting.
48
Part II.
Other Information
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Item 1.
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Legal
Proceedings
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See Note 15 (Commitments and Contingencies) to
Part I, Item I of this
Form 10-Q,
which is incorporated by reference into this Part II,
Item 1, for a description of the property tax litigation
contained in Litigation.
There are no material changes to the risk factors previously
disclosed in our Prospectus dated April 7, 2011 and filed
with the Securities and Exchange Commission on April 11,
2011.
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Exhibit
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Number
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Exhibit Title
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10.1*
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Employment Agreement, dated as of August 22, 2011, by and
between CVR GP, LLC and Randal T. Maffett.
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10.2*
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Form of CVR Partners, LP Long-Term Incentive Plan Employee
Phantom Unit Agreement.
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31.1*
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Certification of the Executive Chairman pursuant to
Rule 13a-14(a)
or 15(d)-14(a) under the Securities Exchange Act.
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31.2*
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Certification of the Chief Executive Officer pursuant to
Rule 13a-14(a)
or 15(d)-14(a) under the Securities Exchange Act.
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31.3*
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Certification of the Chief Financial Officer pursuant to
Rule 13a-14(a)
or 15(d)-14(a) under the Securities Exchange Act.
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32.1*
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Certification of the Executive Chairman pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2*
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Certification of the Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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32.3*
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Certification of the Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
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101*
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The following financial information for CVR Partners, LPs
Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2011, filed with the
SEC on November 4, 2011, formatted in XBRL
(Extensible Business Reporting Language)
includes: (1) Condensed Consolidated Balance
Sheets, (2) Condensed Consolidated Statements of
Operations, (3) Condensed Consolidated Statements of
Cash Flows, (4) Condensed Consolidated Statement of
Partners Capital and (5) the Notes to Condensed
Consolidated Financial Statements (unaudited), tagged as blocks
of text.**
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* |
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Filed herewith. |
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** |
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Users of this data are advised pursuant to Rule 406T of
Regulation S-T
that this interactive data file is deemed not filed or part of a
registration statement or prospectus for purposes of
sections 11 or 12 of the Securities Act of 1933, is deemed
not filed for purposes of section 18 of the Securities
Exchange Act of 1934, and is otherwise not subject to liability
under these sections. |
PLEASE NOTE: Pursuant to the rules and
regulations of the Securities and Exchange Commission, we have
filed or incorporated by reference the agreements referenced
above as exhibits to this quarterly report on
Form 10-Q.
The agreements have been filed to provide investors with
information regarding their respective terms. The agreements are
not intended to provide any other factual information about the
Partnership or its business or operations. In particular, the
assertions embodied in any representations, warranties and
covenants contained in the agreements may be subject to
qualifications with respect to knowledge and materiality
different from those applicable to investors and may be
qualified by information in confidential disclosure schedules
not included with the exhibits. These disclosure schedules may
contain information that modifies, qualifies and creates
exceptions to the representations, warranties and covenants set
forth in the agreements. Moreover, certain representations,
warranties and covenants in the agreements may have been used
for the purpose of allocating risk between the parties, rather
than establishing matters as facts. In addition, information
concerning the subject matter of the representations, warranties
and covenants may have changed after the date of the respective
agreement, which subsequent information may or may not be fully
reflected in the Partnerships public disclosures.
Accordingly, investors should not rely on the representations,
warranties and covenants in the agreements as characterizations
of the actual state of facts about the Partnership or its
business or operations on the date hereof.
49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CVR Partners, LP
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By:
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CVR GP, LLC, its general partner
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Chief Executive Officer
November 4, 2011
Chief Financial Officer
November 4, 2011
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