Oct 30, 2014
Executives
Wes Harris - Investor Relations Mark Pytosh - CEO Susan Ball - CFO
Operator
Greetings and welcome to the CVR Partners Third Quarter 2014 Conference Call. At this time, all participants are in listen-only mode.
A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
It’s now my pleasure to introduce your host, Wes Harris, Investor Relations for CVR Partners. Please go ahead Wes.
Wes Harris
Thanks, Kevin. Good morning, everyone.
We appreciate you participation on today’s call. As usual with me today are Chief Executive Officer, Mark Pytosh; and Chief Financial Officer, Susan Ball.
As in the past before we discuss our results, we will make the following Safe Harbor statements. In accordance with the federal securities laws, statements made in this earnings call relating to matters that are not historical facts are considered forward-looking statements.
These forward-looking statements are based on management’s beliefs and assumptions using currently available information and expectations as of today. These forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, including those noted in our filings with the SEC.
In addition, today’s presentation includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures are included in our 2014 third quarter results press release we issued this morning.
Adjusted EBITDA is an example of such non-GAAP measures. Adjusted EBITDA represents net income adjusted for depreciation, amortization, net interest expense, income taxes, and non-cash share-based compensation.
With that, I’ll turn the call over to Mark.
Mark Pytosh
Thank you, Wes, and good morning everyone. Thank you for joining us for CVR’s third quarter earnings call.
Highlights for the quarter included UAN production of 223,500 tons, revenue of 66.7 million, adjusted EBITDA of 21.1 million and net income of 12.7 million. In today’s press release we also announced the third quarter distribution of $0.27 per common unit.
The distribution will be paid on November 17th to unit holders of record on November 10. Looking specifically at our operating performance during this year’s third quarter, the gasifier ran at 95%, the ammonia unit operated at 92% and the UAN plant at 89%.
We started the quarter strong with high production rates for the month of July; however, in late August we had the unusual event both of our gasifiers being down at the same time. This caused us about five days of ammonia and UAN production.
However, while the plant was down we completed a number of smaller maintenance items with the goal of maximizing our UAN production levels in the coming months. Given this backdrop in quarter, we produced 99,800 tons of ammonia, we purchased 4,000 tons of ammonia as feedstock and we converted the substantial majority of our ammonia into 223,500 tons of UAN.
This left a balance of 11,800 net tons of ammonia available for sale. On our second quarter earnings call, I discussed that for this year’s fill season we’ve entered into agreements for the significant majority of our expected UAN production for the second half of 2014.
And such we have pricing locked in for the significant majority of our expected fourth quarter deliveries. In the third quarter of 2014, we received an average realized gate price of $254 per ton of UAN versus $259 per ton of UAN in the third quarter of 2013, and $283 per ton in the second quarter of 2014.
For ammonia we’ve received $503 per ton in the third quarter of 2014 versus $505 per ton in the third quarter of 2013 than $521 per ton in the second quarter of 2014. As expected third quarter pricing is lower than the second quarter, a reduction in prices for the fall from spring levels is typical as the majority of the tons being delivered in the second half of the year go into store just compared to going into the ground during the spring season.
With that, I will turn the call over to Susan Ball, our Chief Financial Officer to discuss our detailed financial results. After that I’ll provide some closing comments before opening the call for questions.
Susan?
Susan Ball
Thank you, Mark, and good morning everyone. As Mark mentioned, net sales for the 2014 third quarter were $66.7 million as compared to $69.2 million in 2013.
The key factors contributing to the decrease were lower sales volumes and prices for UAN and to a lesser extent, lower hydrogen sales to CVR Refining’s adjacent refinery. Partially offsetting the overall decrease was higher ammonia sales volumes in 2014.
Cost of product sold for the 2014 third quarter was $15.4 million as compared to $13 million in 2013. This increase was substantially due to higher cost for railcar repairs and inspections and ammonia purchases that were partially offset by lower freight expenses as a result of lower UAN sales volume.
Direct operating expenses were $26.1 million for the 2014 third quarter as compared to $23.7 million for the similar period last year. This increase was primarily attributable to higher utilities, refractory brick amortization and property taxes.
Selling, general and administrative expenses for the 2014 third quarter were $4 million as compared to $4.6 million in the third quarter of 2013. Contributing to the decrease was lower share based compensation and lower outside services and general partner reimbursements.
Finally, net income for the 2014 third quarter was $12.7 million or $0.17 per common unit. This is compared to net income of $19.7 million or $0.27 per common unit for last year’s third quarter.
During the 2014 third quarter we spent $6 million on capital projects, including 700,000 for maintenance CapEx. For the 2014 full year, we expect maintenance CapEx will range between $5 million and $6 million.
Looking at the balance sheet, we continue to enjoy a solid financial profile and substantial liquidity for investing in opportunities to grow the partnership. As of September 30 we have $68 million in cash-and-cash equivalents and $25 million available under our revolving credit facility.
In addition our long-term debt remained low at a $125 million. With that, I’ll turn the call back to Mark.
Mark Pytosh
Thanks Susan. While the December 2014 corn future price has decreased about 27% from approximately higher $5 per bushel at early May to the current price of approximately $3.65 per bushel.
We have not seen a significant impact on nitrogen fertilizer prices. While it is clear there will be a large corn harvest this year with likely record yields, it remains to be seen what the impact on spring planting will be.
In our discussions with distributors and dealers most believe the planted acres for corn will be lower in 2015, but not down as significantly as corn price would suggest. At this point we expect 86 million to 88 million acres of corn will be planted with just 3% to 5% lower than the approximately 91 million acres the USDA currently estimates for planted for 2014.
This indicates there should be continued solid demand for nitrogen fertilizers in the spring. Supporting our view all potentially planted acres is almost 40% of corn production used for the production of ethanol, as a result of the renewable fuel standard mandate.
With corn prices well less than $4 per bushel, ethanol producers enjoy attractive economics even without the RFS mandate. Secondarily, moving produced or imported fertilizer product from NOLA and other points in the Southern U.S.
to the corn belt has become more challenging. Many of the bottlenecks in rail and barge infrastructure are due to high demand for crude transportation and frac sand.
Producers with capacity in close proximity to the corn belt, like our plant in Coffeyville Kansas will continue to enjoy a cost advantage compared to those producers located further away from where the fertilizer is needed. This transportation advantage will become even more important with expected increase in domestic production capacity over the next few years.
The increase in supply will have the effect of displacing some of the nitrogen ton that are currently imported. We believe the domestic based nitrogen production facilities will remain low on the global cost curve due to lower raw material and transportation cost providing attractive relative market conditions for CVR and other domestic nitrogen producers.
Given this backdrop, we expect demand for nitrogen fertilizers and pricing and more specifically UAN to remain steady through the spring of 2015. And the long-term fundamentals remain intact.
The world’s population continues to grow. The amount of arable land per capita is decreasing due to population growth.
Diets in developing countries continue to evolve to ones that are more protein based, which requires more grain to feed animals. And while the 2007 RFS mandate will be relaxed and the ethanol blending requirement should be fairly flat for the next few years, the use of corn as feedstock for the domestic production of ethanol will remain steady.
As a result we have a positive outlook for our business in the coming years. We plan to take advantage of this constructed environment, we'll continue to work diligently and indentifying internal and external opportunities that prudently grow the partnership for the benefit of all of our unit holders.
As one example of this, our sister company CVR Refining recently received board approval to build a new hydrogen plant to improve the distillate production, liquid yields and help meet future environmental requirements for the refinery. CVR Partners is planning to take approximately 25% of the hydrogen produced in the new plant to produce incremental ammonia.
We currently expect this could add about 5% to our current ammonia production, and we’re excited about that opportunity. With that, we’re ready to answer any questions you may have.
Kevin, can you open the line?
Operator
Thank you. At this time, we’ll be conducting a question-and-answer session.
(Operator Instructions) If there are no questions at this time, I’ll turn the floor back over to management for further or closing comments.
Mark Pytosh
Okay. Thanks everybody for attending this morning and we look forward to talking to you in a few months to report our fourth quarter results.
Thank you very much.
Operator
Thank you. That does conclude today’s teleconference.
You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.