Q3 2022 CVR Partners LP Earnings Call
Greetings and welcome to the CVR partners L. P third quarter 2022 conference call.
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A question and answer session will follow the formal presentation.
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At this time I'll now turn the conference over to Miss your converts.
Vice President of S. P N E and INR Mr. Roberts, you may now begin.
Thank you Robin and good morning, everyone. We appreciate your participation in today's call.
With me today are Mark <unk>, our Chief Executive Officer.
Newman, our Chief Financial Officer, and other members of management.
Prior to discussing our 2022 third quarter results. Let me remind you that this conference call may contain forward looking statements as that term is defined under federal securities laws.
This purpose any statements made during this call that are not statements of historical facts may be deemed to be forward looking statements.
You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release.
As a result actual operations or results may differ materially from the results discussed in the forward looking statements.
We undertake no obligation to publicly update any forward looking statements, whether as a result of new information future events or otherwise except to the extent required by law.
Let me remind you that CVR partners completed a one for 10 reverse split of its common units on November 23, 2020, and he per unit references made on this call are on a split adjusted basis.
This call also includes various non-GAAP financial measures the disclosures related to such non-GAAP measures, including reconciliation to the most directly comparable GAAP financial measures are included in our 2022 third quarter earnings release that we filed with the SEC for the period.
I also remind you that we are a variable distribution MLP.
He will review our previously established reserves current cash usage evaluate future anticipated cash needs and May reserve amounts for other future cash needs as determined by our general Partners' Board.
As a result, our distributions if any will vary from quarter to quarter due to several factors, including but not limited to operating performance fluctuations in the prices received for finished products capital expenditures and cash reserves deemed necessary or appropriate by the board of directors of our general partner with that said I'll turn the call over to Mark <unk>, Our Chief Executive Officer, Mark. Thank you.
Richard Good morning, everyone and thank you for joining us for today's third quarter earnings call. The financial highlights for the third quarter of 2022 include net sales of $156 million, a net loss of $20 million EBITDA of $10 million and the board of directors declared a third quarter distribution of $1 77 per common.
Unit.
Should we paid on November 21 to unit holders of record at the close of the market on November 14th.
During the third quarter 2022, we successfully completed the planned turnarounds at the Coffeyville and east Dubuque facilities on time and in line with budget.
During the turnarounds, we completed an extensive amount of work that should allow us facilities to run at higher utilization rates than they have over the past year.
We currently do not anticipate any additional planned turnaround activity until the fall of 2024.
In addition to the downtime for the planned turnarounds. We also experienced approximately 11 days of downtime at the Coffeyville facility due to outages at the third party air separation facility.
Coffeyville was down for its turnaround the operator of the.
Third party air separation facility completed a $19 million of investments intended to improve its reliability.
For the third quarter of 2022, our consolidated ammonia plant utilization was 52%. This resulted in combined ammonia production of 114000 gross tons of which 36000 net tons were available for sale and uhm production of 184000 tonnes during.
During the quarter, we sold approximately 275000 tons of UA and at an average price of $433 per ton and approximately 27000 tons of ammonia at an average price of $837 per ton.
Relative to the third quarter of 2021, UAS and ammonia sales volumes were lower as a result of the planned turnarounds this year.
Prices for the third quarter improved significantly from last year with ammonia prices, increasing 65% and UAS prices increasing 42%.
By completing two turnarounds in one quarter, we are pleased to be paying a distribution to our unit holders for the sixth consecutive quarter, bringing total distributions over the past six quarters to nearly $24 per unit.
Looking ahead, we believe the strong market for nitrogen fertilizers won't persist through 2023 as a result of continued tight market conditions globally, which I will discuss further in my closing remarks, I will now turn the call over to Dave to discuss our financial results. Thank you Mark for.
For the third quarter of 2022, we reported net sales of $156 million and an operating loss of $12 million.
Net loss for the quarter was $20 million or $1 87 per common unit and EBITDA was $10 million relative to the third quarter of 2021, EBITDA declined primarily due to lower production volumes and increased operating expenses related to a planned turnaround this year.
Direct operating expenses for the third quarter of 2022 were $109 million, which included $31 million related to the planned turnarounds at Coffeyville and East Dubuque.
Excluding inventory and turnaround impacts direct operating expenses increased by approximately $14 million, primarily related to increased repair and maintenance expenses and higher labor costs.
During the third quarter of 2022, we spent 26 million on capital projects, which was primarily maintenance capital.
We estimate total capital spending for 2020 to be approximately 44 to 47 million of which $43 million to $45 million is expected to be maintenance capital.
We ended the quarter with total liquidity of 154 million, which consisted of $119 million in cash and availability under the ABL facility of $35 million.
Within our cash balance of $119 million, we had approximately $52 million related to customer prepayments for the future delivery of product.
In assessing our cash available for distribution, we generated EBITDA of $10 million and had net cash needs of 35 million for interest costs maintenance Capex and other reserves.
We also released prior reserves of $28 million for the planned turnarounds and $15 million for expected working capital needs.
As a result, there was $19 million of cash available for distribution and the board of directors of our general partner declared a distribution of $1 77 per common unit.
Looking ahead to the fourth quarter of 2022, we estimate our ammonia utilization rate to be between 93%, 98%. We expect direct operating expenses, excluding inventory impacts to be between 60, and $70 million and total capital spending to be between five and $10 million.
I will turn the call back over to Mark. Thanks.
Thanks, Dave.
Third quarter was a critical turning point for the partnership we made a significant significant investment in the reliability of our two production facilities. As a result, we've seen the highest rates of daily production in the history of both plants due to the work we performed during the two turnarounds in total we spent $33 million in expense.
Best of $26 million in capital for short and long term reliability improvements. Additionally, the owner of the air separation plant Coffeyville invested $19 million in reliability improvements and upgrades to its plant.
The work now complete and the investments made we intend to run it reliable high rates of production until the next turnaround which is currently planned for the fall of 2024.
There is no turnaround activity planned in 2023.
Growing conditions for this year's crops have been difficult for many regions in the Midwest with hot and dry weather, causing droughts in a number of markets.
<unk> estimates that planted corn acres were $88 6 million with estimated yields of 172 bushels per acre in soybeans were $87 5 million acres with yields of 50 bushels per acre we.
I believe estimated yields by the USDA are still optimistic.
Inventory carryout levels are estimated to be 8% for corn and 5% for soybeans, keeping inventories at or below the low end of the 10 year range global inventory levels, a corner, particularly tied to the poor crop production in Asia, and Europe because of the drought conditions in both regions.
Overall grain market conditions currently bode well for nitrogen fertilizer demand in 2023, and analysts estimate that planted corn acres in the U S will be $93 million to $95 million.
Because of warm dry conditions. This fall harvest has started a bit earlier and faster than normal we have begun to see some fall ammonia application, which is a week or two earlier than normal and should allow for a longer application period.
We are expecting a record fall ammonia application around our east Dubuque region.
Energy availability in pricing, particularly natural gas and coal continued to have a major impact on global agriculture markets. Since our last earnings call. The natural gas shortages in Europe grown more acute as Russia has reduced natural gas flow on the nordstream pipeline to zero, causing natural gas prices in Europe to remain in the $20 to $40.
Per an MBT range Nike.
Nitrogen fertilizer production curtailments in Europe are widespread and is currently estimated that Europe is running at 40% to 50% of production capacity.
Lack of production has led to a shortage of nitrogen fertilizer for farmers in Europe and cost a structural shift in the markets, where our producers in the U S. In Trinidad are exporting nitrogen fertilizers to Europe . This shift has tightened the supply in the U S and prices have risen steadily since July to reach equilibrium with.
European pricing.
We expect a structural shift in the U S being an exporter of nitrogen fertilizer to Europe will last for the next several years as European production costs are likely to stay above the global cost curve.
Even at a greater abundance of LNG for Europe becomes available we believe the landed cost of natural gas in Europe should remain the highest in the world and fertilizer production costs should be at the high end of the global cost curve.
Our realized product prices in the third quarter reflected fundamentals in the summer before the U S export activity to Europe gained momentum.
UA and prices will rise in the fourth quarter of 'twenty, two and first quarter of 2023 from third quarter levels to reflect a large price increases in the market since July .
We are selective with our initial UAS sales sales volume in July due to the turnarounds, we had planned at both plants during the third quarter.
We currently have sold forward product through year end 2022 and ended the first quarter of 2023.
Year over year product prices are expected to be higher for the next couple of quarters, but pricing for the spring of 2023 likely to be comparable to the high seen in the spring of 2022.
On 45 tax credits for the Coffeyville facility, we've made significant progress on all of the structuring documents and continue to expect to close this transaction with the tax equity investor in the fourth quarter.
We still expect to receive initial net cash proceeds of approximately $15 million at closing of the transaction with additional annual payments to follow over the next seven years.
With the passing of the inflation reduction act, which raised the values for $45 two tax credits for new carbon capture projects.
We are evaluating our future options at the East Dubuque facility as several developers are pursuing sequestration prop projects near our facility, we will update our efforts in future calls.
We are continuing to evaluate some lower cost brownfield development projects at both plants that can be attractive targeted capacity increases to our existing footprint. If approved these projects would take several years to complete.
We are not currently contemplating any greenfield development projects.
This has been a critical year for CVR partners and we've taken advantage of strong nitrogen fertilizer market conditions to position the partnership for the future.
We completed our targeted debt pay down and Delever the balance sheet executed major turnarounds at both of our production facilities and are nearing completion on claiming 45 Q tax credits for carbon capture at our Coffeyville facility.
Looking forward with strong market conditions expected for the rest of 2022 and 2023, we're continuing to focus on maximizing free cash flow generation and unit holder returns.
As always management is focused on safely and reliably operating our plants with a keen focus on the health and safety of our employees contractors and communities prudently managing cost being judicious with capital targeting select investments in reliability projects and incremental additions to production capacity.
<unk>, our marketing and logistics capabilities and targeting opportunities to reduce our carbon footprint.
In closing I'd like to thank our employees for their excellent execution during the third quarter, particularly during the turnarounds at both plants, while continuing to be healthy and safe in everything we do.
With that operator, we're ready for any questions.
Thank you.
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One moment, please while we poll for questions. Thank you.
Oh.
Thank you. Our first question is from the line of Rob Maguire with credit Research. Please proceed with your question.
Good morning, gentlemen, congratulations on your quarter.
Good morning, Rob.
You mentioned in your prepared remarks that.
Youre expecting to fall application window to be longer than expected and I know the spring was weak due to weather, but when we look back on this season or this fall season, how do you think will end up characterizing demand.
And from what we've seen so far and this is we're always weather dependent.
We expect to fall application to be one of the largest that we've seen in history.
For nitrogen.
Based on what the demand we've seen so far.
The length and the ability to put this for mostly for ammonia, but to put ammonia on the ground need a little bit of moisture in a couple areas of the Midwest, but.
If in fact conditions hold together, we should see a record ammonia application this fall.
Got it and then can you discuss the impact of any logistical issues that you may have experienced during the quarter were perhaps what you're seeing out there in the environment period.
So.
Really the big the big logistical question in the marketplaces that southern Mississippi River.
Which is very low due to the dry conditions.
That's typically favors our market position because our plants are located in market in the Midwest.
There has been.
We are in the United States, the big importer of urea.
A lot of that urea has been trapped in new Orleans here in the last months trying to get a upstream but.
I would say the tougher logistics questions on the river generally favor plants that are located in the Midwest. So we should be in pretty good position there because we are using either truck or rail.
Yeah.
I appreciate that.
He has been.
I'd characterize a little weak and it seems like <unk> has been a strong do you have any comments on that.
You know urea urea tends to be more volatile it's more seasonal.
And again because of some logistics issues.
And the timing on when purchasers come in it's been more volatile uhm.
Tends to be steadier, and it's been trading really the last year trading at a DCF back to normal or higher than the normal premium to urea.
One of the things Thats happened in the last couple of months is that Theres been a fair amount of UAS thats been exported to Europe Europe is a big consumer UAS and so in the U S producers.
A couple of the big ones, plus Trinidad had been shipping a lot of UAS to Europe , and that's created a tightness in the land component of the market here.
Thank you for the color and then you touched on this in your opening comments, but.
In your prepared remarks, but what portion of your fourth quarter revenue do you think will be at summer fill pricing or how should we be looking at that.
Really I would say a pretty small percentage of the fourth quarter it will be summer fail.
Didn't really sell far out because we had a turnaround so we didn't want to be too long in our sales book, So we did shorter than normal.
And we got the benefit of the market firming between the summer fill it by the end of our turnarounds.
So the pricing in the fourth quarter will reflect more I would say closer to at least where the market was lifting towards the end of the third quarter.
Thank you and then last question.
You discussed a little bit in the prepared remarks that the step up in operating costs in the second half versus the first half was that entirely a repair maintenance and labor costs is there anything else to do.
Characterize that step up.
Yes, it's predominantly what typically happens around turnarounds as it tends to.
Elevate the repair and maintenance expenses as well because when you're up one word the plants down it's kind of that one opportunity to repair and look at all of the equipment and we did a significant amount of inspections of our equipment at both plants and there were a lot of repairs that we wanted to complete we didn't want to start the plants back up without completing it.
So that was that was the biggest driver for the quarter, we did see in the third quarter on lift in.
You know kind of what I called a utility pricing like natural gas and electricity.
And that was because of natural gas prices elevated substantially.
That's come off quite a bit since the third quarter and so that should be less of a factor in sort of the fourth quarter I think in <unk>.
As we look ahead, but but really the operating direct operating expenses were driven more by the turnaround activity and again that should now that thats complaint should should fall back to normal levels.
Thank you so much for answering my questions. Good luck in the fourth quarter and the coming year.
Thank you Rob.
Thank you at this time for closing remarks, I'll turn the floor back to management. Thank you.
I just want to thank everybody.
For joining us for our third quarter call and we look forward to speaking to you about our fourth quarter results.
And in.
In February thank you very much have a good day.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.