Q2 2019 Earnings Call
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Our same Michael last name, which VI CH.
Its conference.
It is the.
Husky Energy Inc.
Awesome Okay.
I have a call.
DVR.
Our partners.
Yeah.
What's your what's your company.
Era, it's felt A.I.E.R.A.
Hey, our E Bay.
Hey, I.E.R.A.
Yeah got it.
Hey, Michael its Howard cycle.
Thank you.
Entered 16000 tons of viewing and.
And 71000 net tons of ammonia available for sale compared to production of 174000 gross tons of ammonia 241000 tons. The yen and 65000 net tons of ammonia available for sale in the prior year period.
We sold approximately 340000 tons of UAN and during the second quarter of 2019 at an average price of $217 per ton.
UAN pricing for the quarter increased 14% over the prior year period.
In addition, we sold approximately 110000 tons of ammonia during the second quarter of 2019 at an average price of $456 per ton.
Ammonia pricing for the quarter increased 31% over the prior year period.
Low natural gas prices combined with strong demand and constrained river movements resulted in CVR partners solid financial results for the quarter.
Uhhuh and sales volumes were up 26% year over year in the second quarter of 2019.
Despite the persistent wet weather and flooding conditions experienced during the quarter. There was still strong demand for nitrogen due to the catch up from the poor fall application and late start to spring.
I will now turn the call over to Tracy to discuss our financial results. Thank you Mark.
Turning to our results for the second quarter of 2019, we reported net sales for the period at $138 million and operating income of $35 million compared to net sales of 93 million and an operating loss of less than $1 million in the second quarter of 2018.
Net income for the second quarter, 2019 was $19 million or 17 cents per common unit and adjusted EBITDA was $60 million. This compares to a net loss of $16 million or 15 cents per common unit and adjusted EBITDA of $26 million for the prior year period. These improvements were driven predominantly by improved UAN and ammonia pricing and sales volumes.
The increase in UAN sales volumes is primarily attributable to strong demand for nitrogen as Mark just discussed direct operating expenses for the second quarter of 2019 decreased to $46 million from $47 million in the prior year period, excluding inventory impacts direct operating expenses decreased by approximately $6 million year over year, primarily related to turnaround expenses.
Incurred in 2018 and not in 2019, turning to capital spending during the second quarter 2019, we spent $2 million on capital projects, which was primarily maintenance capital. We continue to estimate total capital spending for 2019 to be approximately 20% to $25 million, excluding turnaround spending in the fall we have a planned turnaround at east Dubuque, which we expect will cost approximately $7 million.
Looking at the balance sheet as of June Thirtyth, we had approximately $69 million in cash, including approximately $2 million related to customer prepayments for the future delivery of product availability under the ABL facility was $48 million less $25 million in our cash included on our in our borrowing base.
We currently believe our total liquidity position of approximately $93 million at the end of the quarter sufficient going forward.
Our long term gross debt and finance lease obligations of $631 million, including current portion remains unchanged.
As a reminder, the majority of our gross debt position is comprised of our mine in the quarter Senior notes. Due 2023. These notes became callable in June of this year at 104.6% apart.
Available cash for distribution of $15 million is derived from our positive adjusted EBITDA for the quarter after consideration of reserves at $15 million for debt service and $2 million for environmental and maintenance capital expenditures. In addition, we reserved $28 million for future turnarounds capital and operating cash operating cash needs.
We are a variable distribution MLP, we will review our previously established reserves 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 our of directors of our general partner with that I will turn the call back over to Mark.
Thanks Tracy.
Weather impacted the business in the second quarter in two ways.
Planting conditions were late.
We're never dry enough to effectively plan either of the corn or soybeans crops into the severe flooding in Kansas and Oklahoma curtailed viewing on rail shipments for 18 days between mid May in mid June .
Despite these conditions there was still strong demand for nitrogen due to the catch up from the portfolio application at a late start to spring.
The late planting season extended well into July for the side dress and top dress seasons, and fertilizer consumption has broad customer inventories to very low levels at the end of the planting season.
The late planting season also delayed the start of the summer fill season for you again, which we expect will begin in the next couple of weeks.
There's been a lot of speculation about the number of planted corn and soybean acres versus preventative planted acres.
At the end of June the USPI issued a confusing planning intentions report that estimated nearly 92 million acres of corn were planted in the spring.
But only 82 million acres of soybeans.
From our point of view looking at demand for nitrogen fertilizer at our plants. We believe that the planted corn acres are significantly overstated and farmers either waited longer to plant soybeans are preventatively planted a portion of their acreage.
For those acres that were planted excess moisture should negatively impact yield per acre corn yields were estimated by the us da.
To be down 10 bushels to 166 bushels per acre for this planting season versus last year, we have seen yield estimates for corn as low as 160 bushels per acre.
With fertilizer inventories for to distributors and retailers lower than normal in the short term the reduce corn production from this planting season bodes well for 2020.
Corn prices have rallied about 75 cents a bushel since April and are at the highest absolute prices in several years, we expect fertilizer demand to be strong in the third quarter and expect demand to further increase when customers begin focusing on the spring 2020 planning season, where we currently expect planted acres to be significantly higher than 2019.
As Tracy mentioned, we are planning, a 28 day $7 million turnaround at our east Dubuque facility starting in September .
And are focused on a significant upgrade of our natural gas reformer and various other reliability and repair projects.
Over the next several turnarounds at both of our plants, we will be targeting projects that are intended to improve our reliability and de bottleneck. The plan some incremental ways to gain added production for a low capital investment.
Our plants have been strong performers in the past several years, but we know we can do better in the future.
Finally, I want to reiterate that the partnership will continue to focus on maximizing free cash flow by safely operating our plants reliably and at high utilization rates prudently managing our costs.
Being judicious with our capital and maximizing our marketing and logistics activities.
In closing I would like to thank all of our employees for their contributions in the second quarter to help us navigate challenging weather conditions and being well prepared to capitalize on this past spring season.
With that we're ready to answer any questions Dana.
Thank you at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star too if you would like to move your questions from the queue for participants using speaker equipment. It may be necessary to pick up your handset.
Before pressing the star Keith.
Our first question comes from the line of Adam Samuelson with Goldman Sachs. Please proceed with your question.
Thanks, Good morning, everyone.
Good morning, Adam.
So mark I guess first I'd be interested.
In getting a little bit more color on the market.
Outlook, thus far in July and how it frames the second half I mean, I believe at least in the trade press that there was a summer fill price from you guys that got lifted.
Late last week.
But but any sense or color you can provide on how much of the threeq you volume might still be summer and spring pricing or near spring pricing relative to what would be a notable step down for threeq as always happens at the Sameer.
Sure.
So what I would say that out of miserably and im not going to get quantitative on that measure, but there's a there's a there's been a decent period in July where we've still been selling in season product.
And.
And so.
We had a late season and then the embargo further although rail facilities in Oklahoma were equally embargo during.
Sort of mid May to mid June for a big chunk of that time some of the product left later and then people had to catch up on the.
Refill their so when further into July the normal may be two or three weeks.
And we did sell some product out of east Dubuque, but that that was an isolated.
Sale, and we still have tons to sell at east Dubuque.
The sort of the main fill season I expect to come in the next couple of weeks. So we'll get some blending of sort of a late spring pricing and as you know typically the spring pricing starts to fall in June so it won't be exactly where the second quarter pricing was but.
The season definitely went longer the most important thing about the late season was that it's sort of drew down all the inventory in the.
The dealer distributor network, which bodes well for the demand to refill the tanks. So we were expecting.
A very healthy demand coming out in the.
During the third quarter, because the tanks are largely empty at this stage.
Yes, and maybe any similar commentary or thoughts on the on the ammonia market, where obviously you don't have the late season demands, but you also had a pretty sharp correction of prices is the goal.
As we got a season, just had 100 frame that market a little bit yes. It's.
I would say its a.
A little bit of two markets because the the other northern plains is very different than the southern plains, which is still much better than the golfer Tampa price.
I would say depending on where your plant was you you may not have had the best spring we had a very fortunate spring at East Dubuque.
We had a lot of need of pent up need there because it didnt get put down on the fall so.
The spring was very good at East Dubuque, and we have pretty healthy demand profile looking into the fall.
But I expect the market to pick up there because if the planted acres are correct theres going to be a desire of weather condition pulled together to to have a strong ammonia run in the fall but.
Theres been more I'd say carry over in the southern Plains and the northern Plains, the northern Plains.
There is more ammonia that was able to get onto the ground, but in the southern plains. The weather just was it wasnt going to allow us to double the rate.
Okay now that that's very helpful and then.
Couple of just on the on the debt refinancing the bonds become callable in June has any.
Any.
Any color you can provide on that.
The marketing the market opportunity to refinance there.
So we've been evaluating the market the rates that are available to us.
And we'll look to see what the fed does next week and continue the discussion with our board around the call premium versus the rates available and make a decision in the future.
Okay.
And then I guess the last one from me just making sure I understand the reserves taken for Capex in the turnarounds.
In Twoq relative to the distribution should we think about that as a conscious effort to maybe ensure that they are actually the certainly in threeq you and you have the turnaround a distribution.
But but is it intended to kind of level load or more more straight line the distribution.
Well.
In in market conditions and production hold.
Well, what I would say there Adam is that.
We this year, we have a pretty aggressive spending plan in the second half and the capex kind of drifted backwards into the second half.
Partly around spending around the turnaround and so.
We generated more cash in the second quarter and the board decided that it would.
Since we have the cash on hand, we have this big spend on the horizon that we would go ahead and reserve a portion of our free cash flow to to pay for that spending so thats really where the reserve came from.
Right, but just.
Good for the maintenance capital for the rest of the year and the turnaround costs for Threeq. So just as we're thinking about whatever EBITDA proves to be in the second half and how that filters into distributable cash flow.
You already have the turnaround expense in most of the maintenance capital already reserved for Frac, Ed. Yes, again, yes, we had a big quarter a lot of free cash flow.
And the board decided that it would be prudent to go ahead and set aside that big spending dollars now.
And.
Sort to see what happens in the second half so.
We're in a good position going into the second half.
And the turnaround and that Capex or our reserves. So we're good we're in a good shape right now.
Okay understood I appreciate the color I'll pass it on thanks.
Thanks, Adam.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from the line of Charles Newbridge with Cowen. Please proceed with your question.
Hi, guys.
Just a quick question you had was your gas cost in Q2 lower than one Q1 due on two we look for lower still in Threeq you at this point.
A little early to call the Threeq use.
My life Prognostication skills are the greatest of there so.
Well looking at the strip then is it isn't low it's going to be level looks like it's going to be lower okay. Yes, the third quarter gas price strip today would be lower than the second quarter, which was lower than the first quarter. So.
And the forward strip looks reasonably low for.
Today's prices look low through the end of next year.
Okay is there is there any reason to start thinking about whether you would.
Some of your gas forward I mean, I mean, coffeyville, obviously, not an issue but is there any reason to do it for east Dubuque at this point or not.
We were always evaluating it and you know I think are well, we'd like to do that the opportunity presents itself to take a portion of that when our gas price. So im hoping we'll be able to put something in place there.
As we go so we look at it.
All the time, so I'm hopeful we'll put something in there pretty attractive right now.
I guess then.
When you look at the cadence of sales over the course of the next two quarters.
Is there any reason to think that Threeq you might be.
A little on the lighter side because of the late planting late harvest that will likely occur because of that or is that might be offset by the fact you have all this prevent planting has made to the lending had pulled out early to get and any opportunity to get fertilizer down on it is going to be taken.
Well, how do you play those against each other.
The third quarter is always a light quarter, because we don't put a lot of ammonia on the ground.
The third quarter, so relative to the second quarter, the second in the fourth or big quarter for ammonia application.
So that's the third will always be lower than the second just because ammonia doesn't move that much and then the fourth will be where we'll see that activity really pick up so.
Volumes are always going to be lighter will be as you know Charlie we shipped pretty ratably out at Coffeyville, Uli and so we'll have.
All else being equal in the plants running we'll have the normal shipping schedule, there and then east Dubuque, we'll be shipping you add bubbly, the big move and ammonia won't be till the fourth quarter.
Okay, and there is no right now expectations.
Our.
Fairly higher for good demand because of the likely increase in corn acres.
I think that what I.
We saw each other to southwest conference I think most customers are saying they really would like to see good weather in the fall to be able to have a strong ammonia application in preparation for the building of a big.
Acreage number in the spring.
Okay and last question is it is it I mean I assume it's it's reasonable for getting the pricing you are seeing but looking at the volumes into Q that had a lot of that carry over that we discussed after the first quarter that didn't get down during one q. I didn't get out. So you carried through into Twoq are you managing basically get rented at all so I think is it reasonable to assume that threeq you volumes at least from a.
From a sales perspective.
And even maybe in the entire second half might be a little bit a little bit liner.
I would definitely agree I guess, you just don't have the inventory to work through well what I would tell you is that again you again moods.
I'd say more ratably, so I don't think there'll be any big changes there.
We did lose a little bit of ammonia application in the first because of the weather and that got taken up in the second but we I think the second half will be normal a lot of you and movement of certain than UAN and ammonia before so I don't expect anything unusual the planting cycle.
Didn't really change.
Any of that what I consider the normal pattern of purchasing and.
Other than the fill season was a little bit lighter than normal terms of that that picking up and by the second half.
Okay and then one other thing you guys took advantage of the fact that a lot of.
Product couldn't make it up river because of the river issues and the high occurrence in the high water and all.
Is that something Thats still.
Affecting affecting deliveries or is that now completely by the boards and things are for lack of better are back to normal I would say the Mississippi. The when you look at reverse in the country. The Mississippi is upstream normal.
But there are other there are other rivers and are not normal in the southern planes that are affecting it but thats not really affecting us per se, but the Mississippi is back to normal.
Okay, so thinking it up to east Dubuque and be competitive again as opposed to in the second quarter when they basically they couldn't pay.
Yes, that's correct.
Okay. Thanks very much.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to management for closing remarks.
Well again, we want to thank everybody for joining our call today and we we look forward to speaking to you on the third quarter call. Thank you very much.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.