CVR PARTNERS, LP The following discussion and analysis of our financial condition, results of operations, and cash flows should be read in conjunction with the unaudited condensed consolidated financial statements and related notes and with the statistical information and financial data appearing in this Report, as well as our Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theSecurities and Exchange Commission ("SEC") onFebruary 23, 2021 (the "2020 Form 10-K"). Results of operations for the three and nine months endedSeptember 30, 2021 and cash flows for the nine months endedSeptember 30, 2021 are not necessarily indicative of results to be attained for any other period. See "Important Information Regarding Forward-Looking Statements." Reflected in this discussion and analysis is how management views the Partnership's current financial condition and results of operations along with key external variables and management actions that may impact the Partnership. Understanding significant external variables, such as market conditions, weather, and seasonal trends, among others, and management actions taken to manage the Partnership, address external variables, among others, which will increase users' understanding of the Partnership, its financial condition and results of operations. This discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed below and elsewhere in this Report.
Partnership Overview
CVR Partners, LP ("CVR Partners " or the "Partnership") is aDelaware limited partnership formed in 2011 byCVR Energy, Inc. ("CVR Energy") to own, operate, and grow its nitrogen fertilizer business. The Partnership produces and distributes nitrogen fertilizer products, which are used by farmers to improve the yield and quality of their crops. The Partnership produces these products at two manufacturing facilities, which are located inCoffeyville, Kansas (the "Coffeyville Facility") andEast Dubuque, Illinois (the "East Dubuque Facility"). Our principal products are ammonia and urea ammonium nitrate ("UAN"). All of our products are sold on a wholesale basis. References toCVR Partners , the Partnership, "we", "us", and "our" may refer to consolidated subsidiaries ofCVR Partners or one or both of the facilities, as the context may require. Additionally, as the context may require, references toCVR Energy may refer toCVR Energy and its consolidated subsidiaries which include its petroleum refining, marketing, and logistics operations.
Strategy and Goals
The Partnership has adopted Mission and Values, which articulate the Partnership's expectations for how it and its employees do business each and every day.
Mission and Core Values Our Mission is to be a top tier North American nitrogen-based fertilizer company as measured by safe and reliable operations, superior performance and profitable growth. The foundation of how we operate is built on five core Values:
•Safety - We always put safety first. The protection of our employees, contractors and communities is paramount. We have an unwavering commitment to safety above all else. If it's not safe, then we don't do it.
•Environment - We care for our environment. Complying with all regulations and minimizing any environmental impact from our operations is essential. We understand our obligation to the environment and that it's our duty to protect it.
•Integrity - We require high business ethics. We comply with the law and practice sound corporate governance. We only conduct business one way-the right way with integrity.
•Corporate Citizenship - We are proud members of the communities where we
operate. We are good neighbors and know that it's a privilege we can't take for
granted. We seek to make a positive economic and social impact through our
financial donations and the contributions of time, knowledge and talent of our
employees to the places where we live and work.
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•Continuous Improvement - We believe in both individual and team success. We
foster accountability under a performance-driven culture that supports creative
thinking, teamwork, diversity and personal development so that employees can
realize their maximum potential. We use defined work practices for consistency,
efficiency and to create value across the organization.
Our core values are driven by our people, inform the way we do business each and every day and enhance our ability to accomplish our mission and related strategic objectives.
Strategic Objectives
We have outlined the following strategic objectives to drive the accomplishment of our mission:
Reliability - Our goal is to achieve industry-leading utilization rates at both of our facilities through safe and reliable operations. We are focusing on improvements in day-to-day plant operations, identifying alternative sources for plant inputs to reduce lost time due to third-party operational constraints, and optimizing our commercial and marketing functions to maintain plant operations at their highest level.
Market Capture - We continuously evaluate opportunities to improve the facilities' realized pricing at the gate and reduce variable costs incurred in production to maximize our capture of market opportunities.
Financial Discipline - We strive to be as efficient as possible by maintaining low operating costs and disciplined deployment of capital.
Achievements
During the first nine months of 2021, we successfully executed a number of achievements in support of our strategic objectives shown below through the date of this filing:
Safety Reliability Market Capture Financial Discipline
Operated both facilities safely and reliably ü ü ü
and at high utilization rates
Achieved reductions in environmental events
and project safety management tier 1 incidents ü
of 75% and 73%, respectively, compared to the
first nine months of 2020
Achieved record truck shipments and total
shipments from the Coffeyville Facility in ü ü ü
Achieved record ammonia production at the ü ü Coffeyville Facility inSeptember 2021 Utilized downtime throughout the year to proactively complete maintenance work at the Coffeyville Facility, enabling the deferral of ü ü ü the planned turnaround from Fall 2021 to Summer 2022Reduced CVR Partners' annual cash interest expense by over 31% through refinancing a substantial portion of the 2023 Notes and ü subsequently redeeming$15 million of the remaining balance of the 2023 Notes Declared total cash distributions of$4.65 per common unit related to the first nine months ü of 2021 September 30, 2021 | 20
-------------------------------------------------------------------------------- Table of Contents Industry Factors and Market Indicators Within the nitrogen fertilizer business, earnings and cash flows from operations are primarily affected by the relationship between nitrogen fertilizer product prices, utilization, and operating costs and expenses, including pet coke and natural gas feedstock costs. The price at which nitrogen fertilizer 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, local market conditions, operating levels of competing facilities, weather conditions, the availability of imports, impacts of foreign imports and foreign subsidies thereof, 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, new facility development, 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.
General Business Environment
Throughout 2020, the COVID-19 pandemic and actions taken by governments and others in response thereto negatively impacted the worldwide economy, financial markets, and the agricultural industry, resulting in significant business and operational disruptions. Consequently, theU.S. demand for liquid transportation fuels, including ethanol (the production of which is a significant driver of demand for corn), declined, causing many refineries and plants to reduce production or idle. During 2021, government restrictions have eased, vaccines have become available, and demand for transportation fuels has increased. Demand for ethanol for fuels blending has largely recovered to pre-COVID-19 levels, although an increase in outbreaks of any variant of COVID-19 could reverse this recovery. Concerns over the long-term negative effects of the COVID-19 pandemic on economic and business prospects across the world have contributed to increased market and grain price volatility and have diminished expectations for the global economy. The Partnership believes the general business environment in which it operates will continue to remain volatile during 2021 and into 2022, driven by uncertainty around the availability and prices of its feedstocks, demand for its products, and global supply disruptions. As a result, future operating results and current and long-term financial conditions could be negatively impacted if economic conditions decline, remain volatile, and do not return to pre-pandemic levels. Due to the uncertainty of the global recovery, including its duration, timing, and strength, the Partnership is not able at this time to predict the extent to which these events may have a material, or any, effect on its financial or operational results in future periods.
Market Indicators
While there is risk of shorter-term volatility given the inherent nature of the commodity cycle, the Partnership believes the long-term fundamentals for theU.S. nitrogen fertilizer industry remain intact. The Partnership views the anticipated combination of (i) increasing global population, (ii) decreasing arable land per capita, (iii) continued evolution to more protein-based diets in developing countries, (iv) sustained use of corn as feedstock for the domestic production of ethanol, and (v) positioning at the lower end of the global cost curve should provide a solid foundation for nitrogen fertilizer producers in theU.S. over the longer term. Corn and soybeans are two major crops planted by farmers inNorth America . Corn crops result in the depletion of the amount of nitrogen within the soil in which it is grown, which in turn, results in the need for this nutrient to be replenished after each growing cycle. Unlike corn, soybeans are able to obtain most of their own nitrogen through a process known as "N fixation." As such, upon harvesting of soybeans, the soil retains a certain amount of nitrogen which results in lower demand for nitrogen fertilizer for the following corn planting cycle. Due to these factors, nitrogen fertilizer consumers generally operate a balanced corn-soybean rotational planting cycle as evident through the chart presented below for 2021 and 2020. The relationship between the total acres planted for both corn and soybean has a direct impact on the overall demand for nitrogen products, as the market and demand for nitrogen increases with increased corn acres and decreases with increased soybean acres. Additionally, an estimated 8 billion pounds of soybean oil is expected to be used in producing cleaner biodieselSeptember 30, 2021 | 21 -------------------------------------------------------------------------------- Table of Contents in marketing year 2020/2021. Multiple refiners have announced biodiesel expansion projects for 2021 and beyond, which will only increase the demand and capacity for soybeans. Due to the uncertainty of how these factors will truly affect the soybean market, it is not yet known how the nitrogen business will be impacted. The 2021United States Department of Agriculture ("USDA") reports on corn and soybean acres planted indicated farmers' intentions to plant 93.3 million acres of corn, representing an increase of 2.9% in corn acres planted as compared to 90.7 million corn acres in 2020. Planted soybean acres are estimated to be 87.2 million acres, representing a 4.7% increase in soybean acres planted as compared to 83.4 million soybean acres in 2020. The combined corn and soybean planted acres of 180.5 million is the highest in history, and based on expected yields and crop prices, farm economics have been very attractive in 2021. Ethanol is blended with gasoline to meet renewable fuel standard requirements and for its octane value. Ethanol production has historically consumed approximately 35% of theU.S. corn crop, so demand for corn generally rises and falls with ethanol demand. There was a decline in ethanol demand in 2020 due to decreased demand for transportation fuels as a result of the COVID-19 pandemic. However, the lower ethanol demand did not alter the spring 2021 or 2020 planting decisions by farmers as evidenced in the charts below.
[[Image Removed: cvi-20210930_g2.jpg]][[Image Removed: cvi-20210930_g3.jpg]]
(1)Information used within this chart was obtained from the
Weather continues to be a critical variable for crop production. The normal weather in the spring and the fall of 2020 allowed for an efficient spring application period and fall harvest. However, the unusual derecho storm in the Midwest inAugust 2020 damaged a significant number of corn acres, reducing harvested corn yields and, coupled with higher demand for corn starting in the second half of 2020, led to much lower corn inventory levels and significantly higher corn prices. Soybeans have also experienced high demand levels starting in the second half of 2020 and inventory levels are much lower, resulting in much higher soybean prices. The higher grain prices increased planted corn and soybean acres for the spring of 2021 and led to higher demand for nitrogen fertilizer, as well as other crop inputs. Fertilizer prices have risen significantly sinceJanuary 1, 2021 due to strong grain prices, the strong spring 2021 planting season, and lower fertilizer supply due to nitrogen fertilizer production outages during Winter Storm Uri and Hurricane Ida and significant escalation in global feedstock costs for nitrogen fertilizer production. While natural gas prices were at historical lows across the world in 2020, they have escalated significantly since the summer of 2021, causing nitrogen fertilizer production to be reduced or shut-in inEurope . In addition to escalating coal and LNG prices inChina , nitrogen fertilizer exports have been reduced significantly in the second half of 2021. OnJune 30, 2021 ,CF Industries Nitrogen, L.L.C. ,Terra Nitrogen, Limited Partnership , andTerra International (Oklahoma) LLC filed petitions with theU.S. Department of Commerce and theU.S. International Trade Commission (the "ITC") requesting the initiation of antidumping and countervailing duty investigations on imports of UAN fromRussia andTrinidad and Tobago ("Trinidad"). InAugust 2021 , theU.S. Department of Commerce decided to pursue an investigation to determine the extent of dumping and unfair subsidies associated with imports fromRussia andTrinidad , and the ITC initiated aSeptember 30, 2021 | 22 -------------------------------------------------------------------------------- Table of Contents concurrent investigation to determine whether such imports materially injure theU.S. industry. We believe it is too early to determine how these investigations might affectCVR Partners and the nitrogen fertilizer industry in theU.S. in general.
The tables below show relevant market indicators by month through
[[Image Removed: cvi-20210930_g4.jpg]][[Image Removed: cvi-20210930_g5.jpg]]
(1)Information used within these charts was obtained from various third-party
sources, including Green Markets (a
Results of Operations
The following should be read in conjunction with the information outlined in the previous sections of this Part I, Item 2, the financial statements, and related notes thereto in Part I, Item 1 of this Report. The charts presented below summarize our ammonia utilization rates on a consolidated basis for the three and nine months endedSeptember 30, 2021 and 2020. Utilization is an important measure used by management to assess operational output at each of the Partnership's facilities. Utilization is calculated as actual tons of ammonia produced divided by capacity adjusted for planned maintenance and turnarounds. Utilization is presented solely on ammonia production rather than each nitrogen product as it provides a comparative baseline against industry peers and eliminates the disparity of facility configurations for upgrade of ammonia into other nitrogen products. With efforts primarily focused on ammonia upgrade capabilities, we believe this measure provides a meaningful view of how well we operate.September 30, 2021 | 23
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[[Image Removed: cvi-20210930_g6.jpg]][[Image Removed: cvi-20210930_g7.jpg]] On a consolidated basis for the three and nine months endedSeptember 30, 2021 , utilization decreased to 94% and 93%, respectively. The decreases during the three and nine months endedSeptember 30, 2021 were primarily due to downtime associated with the Messer air separation plant at the Coffeyville Facility experienced in January, June, and August of 2021 (the "Messer Outages"), as well as downtime at the Coffeyville Facility and East Dubuque Facility in July andSeptember 2021 , respectively, due to externally driven power outages (the "Power Outages"), compared to the same periods of 2020. Sales and Pricing per Ton - Two of our key operating metrics are total sales volumes for ammonia and UAN, along with the product pricing per ton realized at the gate. Total product sales volumes were unfavorable, driven by lower production due to the Messer Outages and the Power Outages. For the three and nine months endedSeptember 30, 2021 , the low sales volumes were more than offset by price increases of 110% and 42%, respectively, for ammonia and 118% and 54%, respectively, for UAN. Ammonia and UAN sales prices were favorable primarily due to higher crop pricing coupled with lower fertilizer supply driven by production outages from Winter Storm Uri inFebruary 2021 and Hurricane Ida in August andSeptember 2021 , as well as increased industry turnaround activity. Product pricing at the gate represents net sales less freight revenue divided by product sales volume in tons and is shown in order to provide a pricing measure comparable across the fertilizer industry.
Operating Highlights for the Three Months Ended
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Operating Highlights for the Nine Months Ended
[[Image Removed: cvi-20210930_g10.jpg]][[Image Removed: cvi-20210930_g11.jpg]] Production Volumes - Gross tons produced for ammonia represent the total ammonia produced, including ammonia produced that was upgraded into other fertilizer products. Net tons available for sale represent the ammonia available for sale that was not upgraded into other fertilizer products. Production for the three and nine months endedSeptember 30, 2021 was impacted by the Messer Outages and the Power Outages. The table below presents these metrics for the three and nine months endedSeptember 30, 2021 and 2020: Three Months Ended Nine Months Ended September 30, September 30, (in thousands of tons) 2021 2020 2021 2020 Ammonia (gross produced) 205 215 610 631 Ammonia (net available for sale) 65 71 205 228 UAN 314 330 920 968 Feedstock - Our Coffeyville Facility utilizes a pet coke gasification process to produce nitrogen fertilizer. Our East Dubuque Facility uses natural gas in its production of ammonia. The table below presents these feedstocks for both facilities for the three and nine months endedSeptember 30, 2021 and 2020: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Petroleum coke used in production (thousand tons) 129 129 390 393 Petroleum coke (dollars per ton)$ 50.35
2,043 2,136 6,079 6,408
Natural gas used in production (dollars per MMBtu) (1)
$ 4.29 $ 2.10 $ 3.48 $ 2.15 Natural gas in cost of materials and other (thousands of MMBtu) (1) 1,786 2,026 5,436 6,660 Natural gas in cost of materials and other (dollars per MMBtu) (1)$ 3.78 $ 2.01 $ 3.27 $ 2.25
(1)The feedstock natural gas shown above does not include natural gas used for fuel. The cost of fuel natural gas is included in Direct operating expenses (exclusive of depreciation and amortization).
Financial Highlights for the Three and Nine Months Ended
Overview - For the three months endedSeptember 30, 2021 , the Partnership's operating income and net income were$46.3 million and$35.0 million , respectively, representing improvements of$49.4 million and$54.0 million , respectively, compared to the three months endedSeptember 30, 2020 . These increases were driven by the significantly higher pricing environment for ammonia and UAN products in 2021. For the nine months endedSeptember 30, 2021 , the Partnership's operating income and net income were$62.6 million and$16.7 million , respectively, representing a$96.4 million and$98.0 September 30, 2021 | 25 -------------------------------------------------------------------------------- Table of Contents million increase in operating income and net income, respectively, compared to the nine months endedSeptember 30, 2020 . Beyond the goodwill impairment of$41.0 million negatively impacting the 2020 period, these improvements were driven primarily by higher ammonia and UAN sales prices in 2021 due to higher crop pricing combined with lower nitrogen fertilizer supply driven by production outages during Winter Storm Uri inFebruary 2021 , Hurricane Ida in August andSeptember 2021 , and an increase in turnaround activity across the industry that further reduced available supply.
[[Image Removed: cvi-20210930_g12.jpg]][[Image Removed: cvi-20210930_g13.jpg]]
[[Image Removed: cvi-20210930_g14.jpg]][[Image Removed: cvi-20210930_g15.jpg]]
(1)See "Non-GAAP Reconciliations" section below for reconciliations of the non-GAAP measures shown above.
Net Sales - For the three months endedSeptember 30, 2021 , net sales increased by$65.2 million to$144.7 million compared to the three months endedSeptember 30, 2020 . This increase was primarily due to favorable pricing conditions which contributed$67.3 million in higher revenues, partially offset by decreased sales volumes contributing$6.4 million in lower revenues, as compared to the three months endedSeptember 30, 2020 .
The following table demonstrates the impact of changes in sales volumes and
pricing for the primary components of net sales, excluding urea products,
freight, and other revenue, for the three months ended
Price Volume
(in thousands) Variance Variance
UAN $ 53,358 $ (6,044)
Ammonia 13,908 (353)
The $265 and $165 per ton increases in ammonia and UAN sales pricing,
respectively, for the three months ended September 30, 2021 , as compared to the
three months ended September 30, 2020 , were primarily attributable to continued
improvement in market conditions as supplies of nitrogen fertilizer remained
tight following the production outages related to
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Winter Storm Uri, heightened turnaround activity during the summer, and further
production outages following Hurricane Ida. The decrease in UAN sales volumes
for the three months ended September 30, 2021 compared to the three months ended
September 30, 2020 was primarily attributable to lower production at both
facilities caused by the Messer Outages and the Power Outages.
For the nine months ended September 30, 2021 , net sales increased by $84.0
million to $343.7 million compared to the nine months ended September 30, 2020 .
This increase was primarily due to favorable sales pricing contributing $99.3
million in higher revenue, partially offset by decreased sales volumes which
contributed $24.4 million in lower revenues, as compared to the nine months
ended September 30, 2020 .
The following table demonstrates the impact of changes in sales volumes and
pricing for the primary components of net sales, excluding urea products,
freight, and other revenue, for the nine months ended
Price Volume
(in thousands) Variance Variance
UAN $ 79,174 $ (8,521)
Ammonia 20,166 (15,892)
The $123 and $84 per ton increases in ammonia and UAN sales pricing,
respectively, for the nine months ended September 30, 2021 as compared to the
nine months ended September 30, 2020 were primarily attributable to improved
market conditions due to continued strong demand for crop inputs as a result of
higher crop prices and tight fertilizer inventories driven by nitrogen
fertilizer production outages during Winter Storm Uri and Hurricane Ida and
heightened turnaround activity during the summer. The decrease in ammonia and
UAN sales volumes for the nine months ended September 30, 2021 compared to the
nine months ended September 30, 2020 was primarily attributable to lower
production due to the Messer Outages and production and shipping impacts from
Winter Storm Uri.
[[Image Removed: cvi-20210930_g16.jpg]][[Image Removed: cvi-20210930_g17.jpg]]
(1)Exclusive of depreciation and amortization expense.
Cost of Materials and Other - For the three and nine months endedSeptember 30, 2021 , cost of materials and other was$26.1 million and$70.0 million , respectively, as compared to$21.7 million and$67.7 million for the three and nine months endedSeptember 30, 2020 , respectively. For the three and nine months endedSeptember 30, 2021 , increased costs were primarily due to increased feedstock costs for coke, natural gas, and hydrogen of$6.8 million and$11.2 million , respectively, offset by lower distribution costs of$2.2 million and$5.4 million , respectively. Further, during the nine months endedSeptember 30, 2021 , there were lower purchases of third-party ammonia of$3.3 million as compared to the nine months endedSeptember 30, 2020 which offset the increased feedstock costs.September 30, 2021 | 27
-------------------------------------------------------------------------------- Table of Contents Direct Operating Expenses (exclusive of depreciation and amortization) - Direct operating expenses (exclusive of depreciation and amortization) for the three and nine months endedSeptember 30, 2021 were$48.3 million and$138.6 million , respectively, as compared to$38.6 million and$113.7 million for the three and nine months endedSeptember 30, 2020 , respectively. For the three and nine months endedSeptember 30, 2021 , the increases were primarily due to higher personnel costs for labor of$1.2 million and$4.2 million , respectively; higher stock-based compensation expense of$3.9 million and$11.1 million , respectively, as a result of higher market prices forCVR Partners' units; higher utilities costs and electrical provider pricing and usage of$3.7 million and$11.5 million , respectively; and higher natural gas prices of$3.5 million and$6.1 million , respectively. These increases were partially offset by lower chemicals, catalysts, and other operating costs of$3.3 million and$7.8 million for the three and nine months endedSeptember 30, 2021 as compared to the three and nine months endedSeptember 30, 2020 , respectively. [[Image Removed: cvi-20210930_g18.jpg]][[Image Removed: cvi-20210930_g19.jpg]] Depreciation and Amortization Expense - Depreciation and amortization expense for the three and nine months endedSeptember 30, 2021 were$17.4 million and$52.6 million , respectively, compared to$18.0 million and$57.0 million for the three and nine months endedSeptember 30, 2020 , respectively. The decreases were primarily the result of inventory changes and certain assets being fully depreciated or retired during the three and nine months endedSeptember 30, 2021 . Selling, General, and Administrative Expenses, and Other - Selling, general and administrative expenses and other for the three and nine months endedSeptember 30, 2021 were$6.6 million and$19.8 million , respectively, compared to$4.3 million and$14.2 million , respectively, for the three and nine months endedSeptember 30, 2020 . The increases were primarily related to higher personnel costs in 2021 due to an increase in stock-based compensation expense resulting from market increases inCVR Partners' unit price. Other Income, Net - Other income, net for the three and nine months endedSeptember 30, 2021 was nominal and$4.6 million , respectively, compared to approximately$0.1 million for both the three and nine months endedSeptember 30, 2020 . The increase for the nine months endedSeptember 30, 2021 was due to sales of natural gas volumes at the East Dubuque Facility inFebruary 2021 .
Non-GAAP Measures
Our management uses certain non-GAAP performance measures, and reconciliations to those measures, to evaluate current and past performance and prospects for the future to supplement our financial information presented in accordance withU.S. GAAP. These non-GAAP financial measures are important factors in assessing our operating results and profitability and include the performance and liquidity measures defined below. Beginning with the second quarter of 2021, management began reporting Adjusted EBITDA, as defined below. We believe the presentation of this non-GAAP measure is meaningful to compare our operating results between periods and peer companies. All prior periods presented have been conformed to the definition below. The following are non-GAAP measures we present for the period endedSeptember 30, 2021 :
EBITDA - Net income (loss) before (i) interest expense, net, (ii) income tax expense (benefit) and (iii) depreciation and amortization expense.
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Adjusted EBITDA - EBITDA adjusted for certain significant non-cash items and items that management believes are not attributable to or indicative of our on-going operations or that may obscure our underlying results and trends.
Reconciliation of Net Cash Provided By Operating Activities to EBITDA - Net cash provided by operating activities reduced by (i) interest expense, net, (ii) income tax expense (benefit), (iii) change in working capital, and (iv) other non-cash adjustments. Available Cash for Distribution - EBITDA for the quarter excluding non-cash income or expense items (if any), for which adjustment is deemed necessary or appropriate by the board of directors of our general partner (the "Board") in its sole discretion, less (i) reserves for maintenance capital expenditures, debt service and other contractual obligations, and (ii) reserves for future operating or capital needs (if any), in each case, that the Board deems necessary or appropriate in its sole discretion. Available cash for distribution may be increased by the release of previously established cash reserves, if any, and other excess cash, at the discretion of the Board. We present these measures because we believe they may help investors, analysts, lenders, and ratings agencies analyze our results of operations and liquidity in conjunction with ourU.S. GAAP results, including, but not limited to, our operating performance as compared to other publicly traded companies in the fertilizer industry, without regard to historical cost basis or financing methods, and our ability to incur and service debt and fund capital expenditures. Non-GAAP measures have important limitations as analytical tools because they exclude some, but not all, items that affect net earnings and operating income. These measures should not be considered substitutes for their most directly comparableU.S. GAAP financial measures. Refer to the "Non-GAAP Reconciliations" included herein for reconciliation of these amounts. Due to rounding, numbers presented within this section may not add or equal to numbers or totals presented elsewhere within this document.
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.
Coffeyville Facility - The next planned turnaround at the Coffeyville Facility is expected to commence in the fall of 2022. For the three and nine months endedSeptember 30, 2021 , we incurred turnaround expense of$0.3 million and$0.4 million , respectively, related to planning for the Coffeyville Facility's expected turnaround in the fall of 2022. Additionally, the Coffeyville Facility has planned downtime which is expected to commence in the fourth quarter of 2021. East Dubuque Facility - The next planned turnaround at the East Dubuque Facility is expected to occur in the summer of 2022. For the three and nine months endedSeptember 30, 2021 , we incurred turnaround expense of$0.2 million and$0.3 million , respectively, related to planning for the East Dubuque Facility's expected turnaround in the summer of 2022.
Goodwill Impairment
As a result of lower expectations for market conditions in the fertilizer industry during 2020, the market performance of the Partnership's common units, a qualitative analysis, and additional risks associated with the business, the Partnership performed an interim quantitative impairment assessment of goodwill for the Coffeyville Facility reporting unit as ofJune 30, 2020 . The results of the impairment test indicated the carrying amount of this reporting unit exceeded the estimated fair value, and a full, non-cash impairment charge of$41.0 million was required. Refer to Part II, Item 8 of our 2020 Form 10-K for further discussion.September 30, 2021 | 29
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Table of Contents Non-GAAP Reconciliations
Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2021 2020 2021 2020
Net income (loss) $ 35,029 $ (18,952) $ 16,665 $ (81,299)
Interest expense, net 11,313 15,877 50,564 47,550
Income tax expense - 23 19 40
Depreciation and amortization 17,406 18,029 52,648 56,997
EBITDA 63,748 14,977 119,896 23,288
Adjustments:
Goodwill impairment - - - 40,969
Adjusted EBITDA $ 63,748 $ 14,977 $ 119,896 $ 64,257
Reconciliation of Net Cash Provided By Operating Activities to EBITDA and
Adjusted EBITDA
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2021 2020 2021 2020
Net cash provided by operating activities
Non-cash items:
Loss on extinguishment of debt (536) - (8,299) - Goodwill impairment - - - (40,969) Other (5,822) (1,757) (18,601) (3,968) Adjustments: Interest expense, net 11,313 15,877 50,564 47,550 Income tax expense - 23 19 40 Change in assets and liabilities (38,496) (21,605) (24,055) (8,582) EBITDA 63,748 14,977 119,896 23,288 Goodwill impairment - - - 40,969 Adjusted EBITDA$ 63,748 $ 14,977 $ 119,896 $ 64,257 September 30, 2021 | 30
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Reconciliation of EBITDA to Available Cash for Distribution
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2021 2020 2021 2020
EBITDA $ 63,748 $ 14,977 $ 119,896 $ 23,288
Non-cash items:
Goodwill impairment - - - 40,969
Current (reserves) adjustments for amounts
related to:
Net cash interest expense (excluding
capitalized interest) (10,637) (15,000) (40,357) (44,998)
Debt service (15,000) - (15,000) -
Financing fees (1,382) - (4,627) -
Maintenance capital expenditures (2,484) (3,086) (7,423) (9,445)
Utility pass-through 543 - 4,688 -
Common units repurchased - (1,269) (529) (2,277)
Other (reserves) releases:
Reserve for recapture of prior negative
available cash - - (14,980) (5,917)
Future turnaround (3,496) (1,500) (6,375) (3,000)
Previously established cash reserves - - - 2,567
Reserve for repayment of current portion of
long-term debt - - - (2,240)
Cash reserves for future operating needs - - 5,308 (10,744)
Available Cash for distribution (1) (2)
$ 40,601 $ (11,797) Common units outstanding 10,681 11,099 10,681 11,099 (1)Amount represents the cumulative available cash based on year-to-date results. However, available cash for distribution is calculated quarterly, with distributions (if any) being paid in the period following declaration. (2)The Partnership did not declare a cash distribution related to the first quarter of 2021, declared and paid a$1.72 cash distribution related to the second quarter of 2021, and declared a cash distribution of$2.93 per common unit related to the third quarter of 2021. Liquidity and Capital Resources Our principal source of liquidity has historically been and continues to be cash from operations, which can include cash advances from customers resulting from prepay contracts. Our principal uses of cash are for working capital, capital expenditures, funding our debt service obligations, and paying distributions to our unitholders, as further discussed below. The effects of the COVID-19 pandemic resulted in a reduction inU.S. economic activity in 2020 and into 2021. These effects caused significant volatility and disruption of the financial markets, and we have observed adverse impacts to our business and financial performance, of which the nature and extent of such impacts remains uncertain. In early 2021, as the impacts of the COVID-19 pandemic started to recover, Winter Storm Uri caused unprecedented disruptions to natural gas and electricity supply throughout the Midwest andGulf Coast regions, leading to lower fertilizer supply due to production outages which increased the price of fertilizer. This period of extreme economic disruption may continue to have an impact on our business, results of operations, and access to sources of liquidity. While we believe demand for our fertilizer products is stable, there is still uncertainty on the horizon as COVID-19 vaccines are distributed and countries and states continue to monitor their efforts against the virus, and variants thereof, and weigh further lock-down measures. In executing financial discipline, we have successfully implemented and are maintaining the following measures: •Taking advantage of downtime to perform maintenance activities which enabled us to defer the East Dubuque Facility turnaround from 2021 to 2022; and •Reducing the amount of maintenance capital expenditures to only include those projects which are a priority to support continuing safe and reliable operations, or which we consider are critical to support future activities. September 30, 2021 | 31 --------------------------------------------------------------------------------
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When paired with the actions outlined above and prudently managing our operating costs and capital expenditures in 2021, we believe that our cash from operations and existing cash and cash equivalents, along with borrowings, as necessary, will be sufficient to satisfy anticipated cash requirements associated with our existing operations for at least the next 12 months. However, our future capital expenditures and other cash requirements could be higher than we currently expect as a result of various factors including, but not limited to, rising material and labor costs. Additionally, our ability to generate sufficient cash from our operating activities and secure additional financing depends on our future performance, which is subject to general economic, political, financial, competitive, and other factors, some of which may be beyond our control. Depending on the needs of our business, contractual limitations, and market conditions, we may from time to time seek to issue equity securities, incur additional debt, issue debt securities, or otherwise refinance our existing debt. There can be no assurance that we will seek to do any of the foregoing or that we will be able to do any of the foregoing on terms acceptable to us or at all. OnJune 23, 2021 , the Partnership and certain of its subsidiaries completed a private offering of$550 million aggregate principal amount of 6.125% Senior Unsecured Notes dueJune 2028 (the "2028 Notes"), which mature onJune 15, 2028 , and partially redeemed the Partnership's 9.25% Senior Notes dueJune 2023 (the "2023 Notes") in the amount of$550 million . OnSeptember 23, 2021 , the Partnership redeemed an additional$15 million in aggregate principal of the 2023 Notes. Collectively, these transactions represent a significant and favorable change in the Partnership's cash flow and liquidity position, with an annual savings of approximately$18.6 million in future interest expense, as compared to our 2020 Form 10-K. Additionally, onSeptember 30, 2021 , the Partnership entered into a new credit agreement with an aggregate principal amount of up to$35.0 million with a maturity date ofSeptember 30, 2024 (the "ABL Credit Facility") and terminated its$35.0 million ABL Credit Agreement, dated as ofSeptember 30, 2016 , as amended (the "2016 ABL Credit Agreement"). See Note 8 ("Long-Term Debt") for further discussion. The Partnership and its subsidiaries were in compliance with all covenants under their respective debt instruments as ofSeptember 30, 2021 , as applicable.
We do not have any "off-balance sheet arrangements" as such term is defined
within the rules and regulations of the
Cash and Other Liquidity
As of
September 30, December 31,
2021 2020
(in thousands)
9.25% Senior Secured Notes, due June 2023 (1) $ 80,000 $ 645,000
6.125% Senior Secured Notes, due June 2028 550,000 -
Unamortized discount and debt issuance costs (4,766) (11,058)
Total long-term debt $ 625,234 $ 633,942
Current portion of long-term debt (2) - 2,240
Total long-term debt, including current portion $ 625,234 $ 636,182
(1)The call price of the 2023 Notes decreased to par on June 15, 2021 . On
June 23, 2021 and September 23, 2021 , the Partnership redeemed $550 million and
$15 million , respectively, of the 2023 Notes at par, plus accrued and unpaid
interest. The remaining balance of $80 million is outstanding as of September
30, 2021 .
(2)The $2.2 million outstanding balance of the 6.50% Notes due April 2021 (the
"2021 Notes") was paid in full on April 15, 2021 .
On September 23, 2021 , the Partnership redeemed $15 million aggregate principal
amount of the outstanding 2023 Notes. On September 30, 2021 , the Partnership
entered into the ABL Credit Facility and terminated its 2016 ABL Credit
Agreement. The Partnership has the remaining portion of the 2023 Notes, the 2028
Notes, and the ABL Credit Facility, the proceeds of which may be used to fund
working capital, capital expenditures, and for other general corporate purposes.
Refer to Note 8 ("Long-Term Debt") for further discussion.
September 30, 2021 | 32
--------------------------------------------------------------------------------Table of Contents Capital Spending We divide capital spending needs into two categories: maintenance and growth. Maintenance capital spending includes 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 and/or a reduction in direct operating expenses. We undertake growth capital spending based on the expected return on incremental capital employed.
Our total capital expenditures for the nine months ended
Nine Months Ended
September 30, Estimated full year
(in thousands) 2021 2021
Maintenance capital $ 7,423 $14,000 - 15,000
Growth capital 6,104 6,000 - 8,000
Total capital expenditures $ 13,527 $20,000 - 23,000
Our estimated capital expenditures are subject to change due to unanticipated
changes in the cost, scope, and completion time for capital projects. For
example, we may experience unexpected changes in labor or equipment costs
necessary to comply with government regulations or to complete projects that
sustain or improve the profitability of the nitrogen fertilizer facilities. We
may also accelerate or defer some capital expenditures from time to time.
Capital spending for CVR Partners is determined by the Board.
The next planned turnaround is at the Coffeyville Facility and is expected to
occur in the summer of 2022, with an estimated cost of $8 to $10 million . The
turnaround at our East Dubuque Facility is expected to commence in the fall of
2022, with an estimated cost of $11 to $13 million . For the three and nine
months ended September 30, 2021 , we incurred turnaround expense of $0.3 million
and $0.4 million , respectively, related to planning for the Coffeyville
Facility's expected turnaround in the summer of 2022, and $0.2 million and $0.3
million , respectively, related to planning for the East Dubuque Facility's
expected turnaround in the fall of 2022. Additionally, the Coffeyville Facility
has planned downtime scheduled for certain maintenance activities, which is
expected to commence in the fourth quarter of 2021 with an estimated cost of $2
to $3 million . We will continue to monitor market conditions and make
adjustments, if needed, to our current capital spending or turnaround plans.
Distributions to Unitholders
The current policy of the Board is to distribute all Available Cash the
Partnership generated on a quarterly basis. Available Cash for each quarter will
be determined by the Board following the end of such quarter. Available Cash for
each quarter is calculated as EBITDA for the quarter excluding non-cash income
or expense items (if any), for which adjustment is deemed necessary or
appropriate by the Board in its sole discretion, less (i) reserves for
maintenance capital expenditures, debt service and other contractual
obligations, and (ii) reserves for future operating or capital needs (if any),
in each case, that the Board deems necessary or appropriate in its sole
discretion. Available cash for distribution may be increased by the release of
previously established cash reserves, if any, and other excess cash, at the
discretion of the Board.
Distributions, if any, including the payment, amount, and timing thereof, are
subject to change at the discretion of the Board. The following table presents
distributions paid by the Partnership to CVR Partners' unitholders, including
amounts paid to CVR Energy , as of September 30, 2021 .
Dividends Paid (in thousands)
Dividend Per Common
Related Period Date Paid Unit Unitholders CVR Energy Total
2021 - 2nd Quarter August 23, 2021 $ 1.72 $ 11,678 $ 6,694 $ 18,372 There were no distributions declared or paid by the Partnership related to the first quarter of 2021 and fourth quarter of 2020, and no distributions were declared or paid during 2020.
For the third quarter of 2021, the Partnership, upon approval by the Board onNovember 1, 2021 , declared a distribution of$2.93 per common unit, or$31.3 million , which is payableNovember 22, 2021 to unitholders of record as ofNovember 12 ,September 30, 2021 | 33
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2021. Of this amount,
Capital Structure
OnMay 6, 2020 , the Board, on behalf of the Partnership, authorized a unit repurchase program (the "Unit Repurchase Program"). The Unit Repurchase Program enables the Partnership to repurchase up to$10 million of the Partnership's common units. OnFebruary 22, 2021 , the Board authorized an additional$10 million for the Unit Repurchase Program. During the three months endedSeptember 30, 2021 , the Partnership did not repurchase any common units. During the nine months endedSeptember 30, 2021 , the Partnership repurchased 24,378 common units on the open market in accordance with a repurchase agreement under Rules 10b5-1 and 10b-18 of the Securities Exchange Act of 1934, as amended, at a cost of$0.5 million , inclusive of transaction costs, or an average price of$21.70 per common unit. During the three and nine months endedSeptember 30, 2020 , as adjusted to reflect the impact of the 1-for-10 reverse unit split of the Partnership's common units that was effective as ofNovember 23, 2020 , the Partnership repurchased 140,378 and 229,400 common units, respectively, at a cost of$1.3 million and$2.3 million , respectively, inclusive of transaction costs, or an average price of$9.42 and$9.92 per common unit, respectively. As ofSeptember 30, 2021 , the Partnership had$12.4 million in authority remaining under the Unit Repurchase Program. This Unit Repurchase Program does not obligate the Partnership to acquire any common units and may be cancelled or terminated by the Board at any time.
Cash Flows
The following table sets forth our cash flows for the periods indicated below:
Nine Months Ended September 30,
(in thousands) 2021 2020 ChangeNet cash flow provided by (used in):
Operating activities$ 120,268 $ 29,217 $ 91,051 Investing activities (10,206) (15,126) 4,920 Financing activities (39,952) (2,800) (37,152) Net increase in cash and cash equivalents$ 70,110 $
11,291
Cash Flows Provided by Operating Activities
The change in net cash flows from operating activities for the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 is primarily due to a$96.6 million increase in EBITDA, a$15.6 million increase in non-cash share based compensation as a result of higher market prices forCVR Partners' units, favorable changes in working capital of$13.6 million , and a$8.3 million loss on extinguishment of debt primarily associated with the partial redemption of the 2023 Notes inJune 2021 . This activity is partially offset by a non-cash impairment of goodwill of$41.0 million recognized in 2020.
Cash Flows Used in Investing Activities
The change in net cash used in investing activities for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 , was due to decreased capital expenditures during 2021 of$4.9 million resulting from measures taken in 2020 to defer capital projects in light of the economic downturn, including the reduction of maintenance capital expenditures to only include those projects which are a priority to support continuing safe and reliable operations.
Cash Flows Used in Financing Activities
The change in net cash used in financing activities for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was primarily due to the partial redemptions of the 2023 Notes of$565.0 million , cash distributions paid of$18.4 million , the payment of$3.7 million in deferred financing costs during the second and third quarters of 2021 related to the offering of the 2028 Notes and the ABL Credit Facility, and the redemption of the remaining 2021 Notes of$2.2 million . These decreases were partially offset by the Partnership'sJune 2021 offering of$550.0 million of the 2028 Notes, coupled with a reduction of$1.7 million in repurchases of the Partnership's common units in 2021 compared to 2020.September 30, 2021 | 34 --------------------------------------------------------------------------------
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Our critical accounting estimates are disclosed in the "Critical Accounting
Estimates" section of our 2020 Form 10-K. No modifications have been made during
the three and nine months ended
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