CVR PARTNERS, LP The following discussion and analysis of our financial condition, results of operations and cash flow should be read in conjunction with our consolidated financial statements and related notes and with the statistical information and financial data included elsewhere in this Report. References to "CVR 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. This discussion and analysis covers the years endedDecember 31, 2022 and 2021 and discusses year-to-year comparisons between such periods. The discussions of the year endedDecember 31, 2020 and year-to-year comparisons between the years endedDecember 31, 2021 and 2020 that are not included in this Annual Report on Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Partnership's Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 filed onFebruary 23, 2022 , and such discussions are incorporated by reference into this Report. 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 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, one located inCoffeyville, Kansas operated by its wholly owned subsidiary,Coffeyville Resources Nitrogen Fertilizers, LLC ("CRNF") (the "Coffeyville Facility") and one located inEast Dubuque, Illinois operated by its wholly owned subsidiary,East Dubuque Nitrogen Fertilizers, LLC ("EDNF") (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 and renewables refining, marketing, and logistics operations.December 31, 2022
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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. •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:
Environmental, Health & Safety ("EH&S") - We aim to achieve continuous improvement in all EH&S areas through ensuring our people's commitment to environmental, health and safety comes first, the refinement of existing policies, continuous training, and enhanced monitoring procedures.
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.
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Table of Contents Achievements
From the beginning of the fiscal year through the date of filing, we successfully executed a number of achievements in support of our strategic objectives shown below:
Safety Reliability Market Capture Financial Discipline
Achieved reductions in process safety tier 1
incident rate and total recordable injury rate ü ü
of 37% and 86%, respectively, compared to 2021 Safely completed the planned turnarounds at both facilities on time and on budget, as well ü ü ü ü as inspected, repaired and replaced major equipment as necessary during this downtime Achieved record UAN production volumes at the ü ü Coffeyville Facility inMarch 2022 Achieved record ammonia production at the East ü ü Dubuque Facility inDecember 2022 Completed transaction intended to monetize 45Q tax credits and received an initial upfront ü payment, net of expenses, of$18.1 million inJanuary 2023 Declared cash distribution of$10.50 per common unit for the fourth quarter of 2022, bringing ü ü cumulative distributions declared to date of$24.58 per common unit related to 2022 Achieved average reduction in CO2e emissions of ü over 1 million metric tons per year since 2020 Completed targeted$95 million debt reduction plan with the repayment of the remaining$65 million balance of the 9.25% Senior Secured Notes, due 2023 (the "2023 Notes") in the first ü quarter of 2022 for a total reduction in annual cash interest expense of approximately$9 million Repurchased over 111,000 common units for$12.4 ü million
Environmental, Social & Governance ("ESG") Highlights
In the past year, we achieved numerous milestones through our commitment to sustainability, including environmental and safety stewardship, diversity and inclusion, community outreach and sound corporate governance. InDecember 2022 ,CVR Energy published its first public report based on theSustainability Accounting Standards Board standards, which includes information regarding our ESG accomplishments.CVR Energy's 2021 Environmental, Social & Governance Report ("2021 ESG Report") is available at CVR Partner's website at www.CVRPartners.com.CVR Energy's 2021 ESG Report does not constitute a part of, and is not incorporated by reference into, this Annual Report on Form 10-K or any other report we file with (or furnish to) theSEC , whether made before or after the date of this Annual Report on Form 10-K.
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, weather conditions, the availability
of imports, the availability and price of feedstocks to produce nitrogen
fertilizer, 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
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Table of Contents 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
Russia-Ukraine Conflict - InFebruary 2022 ,Russia invadedUkraine , significantly impacting global fertilizer and agriculture markets.The Black Sea is a major export point for nitrogen fertilizer and grains fromRussia andUkraine . Since the invasion began, theBlack Sea has been closed to exports which prompted tightening global supply conditions for nitrogen fertilizer in advance of spring planting and wheat and corn availability, asRussia andUkraine are major wheat exporters andUkraine is a major corn exporter. In 2022, grain harvested inUkraine was approximately 40% lower than 2021 due to lack of planting inputs, fuel, and workers to complete the planting of crops. The ability to export grains fromUkraine , particularly wheat, have improved but continue to be restricted due to lack of access to export terminals in theBlack Sea and limited rail or trucking capacity. Additionally, many countries have formally or informally adopted sanctions on a number of Russian exports and individuals affiliated with Russian government leadership. While fertilizers have not been formally sanctioned by countries, many customers are either unwilling to purchase Russian fertilizers or logistics make it too costly to import Russian fertilizers. Additionally, natural gas supplied fromRussia toWestern Europe has been constrained and natural gas prices have remained elevated sinceSeptember 2021 , causing a significant portion of European nitrogen fertilizer production capacity to be curtailed or costs to be elevated compared to competitors in other regions of the world. Overall, these events have caused grain and fertilizer prices to rise, and we currently expect these conditions to persist through the spring of 2023. The ultimate outcome of theRussia -Ukraine conflict and any associated market disruptions are difficult to predict and may affect our business in unforeseen ways. COVID-19 - The economic effects from the COVID-19 pandemic on our business were and may again be significant. Although our business has recovered since the onset of the pandemic inMarch 2020 , there continues to be uncertainty and unpredictability about the lingering impacts to the worldwide economy, including in connection with the spread of variants of COVID-19 and resulting restrictions, that could negatively affect our business, financial condition, results of operations , and liquidity in future periods. The Partnership believes the general business environment in which it operates will continue to remain volatile, driven by uncertainty around the availability and prices of its feedstocks, demand for its products, inflation, 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 and remain volatile. 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 and soybeans as feedstock for the domestic production of ethanol and other renewable fuels, and (v) positioning at the lower end of the global cost curve should provide a solid foundation for nitrogen fertilizer producers inthe United States 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 by the chart presented below for 2022, 2021, and 2020. The relationship between the total acres planted for both corn and soybeans 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 11.6 billion pounds of soybean oil is expected to be used in producing cleaner renewables in marketing year 2022/2023. Multiple refiners have announced renewable diesel expansion projects for 2023 and beyond, which will only increase the demand for soybeans and potentially for corn and canola.December 31, 2022
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The United States Department of Agriculture ("USDA") estimates that in spring 2022 farmers planted 88.6 million acres of corn, representing a decrease of 5.1% in corn acres planted as compared to 93.4 million corn acres in 2021. Planted soybean acres were estimated to be 87.5 million acres, representing a 0.3% increase in soybean acres planted as compared to 87.2 million soybean acres in 2021. The estimated combined corn and soybean planted acres of 176.1 million in 2022 is a 2.5% decrease from the total acreage planted in 2021, which was the highest in history. Due to higher input costs for corn planting and increased demand for soybeans, particularly for renewable diesel production, it was more favorable for farmers to plant soybeans compared to corn. The lower planted corn acres in 2022 and lower corn production are expected to be supportive of corn prices for 2023. Ethanol is blended with gasoline to meet renewable fuel standard requirements and for its octane value. Since 2006, ethanol production has consumed approximately 36% of theU.S. corn crop, so demand for corn generally rises and falls with ethanol demand, as evidenced in the charts below.
[[Image Removed: cvi-20221231_g4.jpg]][[Image Removed: cvi-20221231_g5.jpg]]
(1)Information used within this chart was obtained from the
Weather continues to be a critical variable for crop production. Even with high planted acres and trendline yields per acre, inthe United States , inventory levels for corn and soybeans remain below historical levels and prices have remained elevated. With tight grain and fertilizer inventory levels driven by theRussia -Ukraine conflict, prices for grains and fertilizers are expected to remain elevated through the spring of 2023. While the weather conditions were difficult early in spring 2022, farmers were able to complete the crop planting later than normal. Demand for nitrogen fertilizer, as well as other crop inputs, was strong for the spring 2022 planting season. During the summer 2022 growing season, severe drought conditions were experienced inAsia ,Europe , and parts of theU.S. As a result, crop yields are projected to be below expectations and grain inventories are projected to be at the low end of historical levels, causing grain prices to rise. We expect tight grain inventories to positively impact planted acreage for the spring of 2023 and boost the demand for nitrogen fertilizer. 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 ("USDOC") 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"). OnJuly 18, 2022 , the ITC made a negative final injury determination concerning its investigation of imports fromRussia andTrinidad despite USDOC's final determination in June that UAN is subsidized and dumped in the U.S. market by producers in both countries. Since the decision inJuly 2022 , we have observed minimal impact on the supply or demand for nitrogen fertilizer as a result of these actions.December 31, 2022 | 37
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Table of Contents The charts below show relevant market indicators by month throughDecember 31, 2022 :
Ammonia and UAN Market Pricing (1) Natural Gas and Pet Coke Market Pricing (1)
[[Image Removed: cvi-20221231_g6.jpg]][[Image Removed: cvi-20221231_g7.jpg]]
(1)Information used within these charts was obtained from various third-party sources including Green Markets (aBloomberg Company ), Pace Petroleum Coke Quarterly, and the EIA, amongst others. Results of Operations
The following should be read in conjunction with the information outlined in the previous sections of this Part II, Item 7 and the financial statements and related notes thereto in Part II, Item 8 of this Report.
The chart presented below summarizes our ammonia utilization rates on a consolidated basis for the years endedDecember 31, 2022 , 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. 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 production primarily focused on ammonia upgrade capabilities, we believe this measure provides a meaningful view of how we operate.December 31, 2022 | 38
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Consolidated Ammonia Utilization
[[Image Removed: cvi-20221231_g8.jpg]]
On a consolidated basis, utilization decreased 11% to 81% for the year ended
December 31, 2022 compared to the year ended December 31, 2021 . This decrease
was primarily due to the completion of planned turnarounds at both facilities in
the third quarter of 2022, along with unplanned downtime in 2022 associated with
the Messer air separation plant (the "Messer Outages") at the Coffeyville
Facility and various pieces of equipment at the East Dubuque Facility, compared
to unplanned downtime at the Coffeyville Facility and the East Dubuque Facility
in July and September 2021 , respectively, due to externally driven power outages
and downtime at the East Dubuque Facility in October 2021 for equipment repair.
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. 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.
Sales (thousand tons) Product Pricing at Gate ($ per ton)
[[Image Removed: cvi-20221231_g9.jpg]][[Image Removed: cvi-20221231_g10.jpg]]
For the year ended December 31, 2022 , total product sales volumes were
unfavorable driven by lower production at both facilities due to the planned
turnarounds in the third quarter of 2022, as well as increased downtime from the
Messer Outages at the Coffeyville Facility and various pieces of equipment at
the East Dubuque Facility in 2022, as compared to 2021. For the year ended
December 31, 2022 , total product sales were favorable driven by sales price
increases of 88% for ammonia and 84% for UAN. Ammonia and UAN sales prices were
favorable primarily due to continued tight market conditions due to lower
fertilizer supply driven by ongoing impacts from the Russia -Ukraine conflict,
including reduced production from Europe as a result of the high energy price
environment, and higher crop pricing.
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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 year endedDecember 31, 2022 was impacted by unplanned downtime associated with the Messer Outages at the Coffeyville Facility and various pieces of equipment at the East Dubuque Facility in 2022, along with the completion of the planned turnarounds at both facilities during the third quarter of 2022. The table below presents these metrics for the years endedDecember 31, 2022 , 2021, and 2020: Year Ended December 31, (in thousands of tons) 2022 2021 2020 Ammonia (gross produced) 703 807 852 Ammonia (net available for sale) 213 275 303 UAN 1,140 1,208 1,303 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 years endedDecember 31, 2022 , 2021, and 2020: Year
Ended
2022 2021 2020
Petroleum coke used in production (thousand tons) 425 514 523
Petroleum coke (dollars per ton) $ 52.88 $ 44.69 $ 35.25
Natural gas used in production (thousands of 6,905 8,049 8,611
MMBtu) (1)
Natural gas used in production (dollars per MMBtu) $ 6.66 $ 3.95 $ 2.31
(1)
Natural gas in cost of materials and other 6,701 7,848 9,349
(thousands of MMBtu) (1)
Natural gas in cost of materials and other $ 6.37 $ 3.83 $ 2.35
(dollars per MMBtu) (1)
(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
Overview - For the year endedDecember 31, 2022 , the Partnership's operating income and net income were$319.9 million and$286.8 million , respectively, a$185.4 million increase in operating income and a$208.6 million increase in net income, respectively, compared to the year endedDecember 31, 2021 . These increases were primarily driven by higher product sales prices for UAN and ammonia in 2022, partially offset by reduced sales volumes, increased costs associated with the two planned turnarounds during the third quarter of 2022, and increased feedstock prices in 2022.Net Sales Operating Income (Loss) [[Image Removed: cvi-20221231_g11.jpg]][[Image Removed: cvi-20221231_g12.jpg]]December 31, 2022 | 40
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Net Income (Loss) EBITDA (1)
[[Image Removed: cvi-20221231_g13.jpg]][[Image Removed: cvi-20221231_g14.jpg]]
(1)See "Non-GAAP Reconciliations" section below for reconciliations of the non-GAAP measures shown above.
Net Sales - Net sales increased by$303.0 million to$835.6 million for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . This increase was primarily due to favorable UAN and ammonia pricing conditions which contributed$347.7 million in higher revenues, partially offset by decreased sales volumes which reduced revenues by$53.8 million compared to the year endedDecember 31, 2021 . For the years endedDecember 31, 2022 and 2021, net sales included$34.8 million and$31.4 million in freight revenue, respectively, and$11.3 million and$10.3 million in other revenue, respectively.
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 year ended
Price Volume
(in thousands) Variance Variance
UAN $ 254,225 $ (13,708)
Ammonia 93,521 (40,138)
For the year ended December 31, 2022 compared to the year ended December 31,
2021 , ammonia and UAN sales prices were favorable primarily due to continued
tight market conditions due to lower fertilizer supply driven by ongoing impacts
from the Russia -Ukraine conflict, including reduced production from Europe as a
result of the high energy price environment, and higher crop pricing. Total
product sales volumes were unfavorable driven by lower production due to
unplanned downtime associated with the Messer Outages at the Coffeyville
Facility and various pieces of equipment at the East Dubuque Facility in 2022,
along with the completion of the planned turnarounds at both facilities during
the third quarter of 2022.
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Cost of Materials and Other Direct Operating Expenses (1)
[[Image Removed: cvi-20221231_g15.jpg]][[Image Removed: cvi-20221231_g16.jpg]]
(1)Exclusive of depreciation and amortization expense.
Cost of Materials and Other - For the year ended
Direct Operating Expenses (exclusive of depreciation and amortization) - For the year endedDecember 31, 2022 , direct operating expenses (exclusive of depreciation and amortization) were$270.2 million compared to$198.7 million for the year endedDecember 31, 2021 . The$71.5 million variance was primarily due to higher turnaround costs incurred during the planned turnarounds at both facilities during 2022, which increased turnaround expenses by$30.5 million , increased repair and maintenance expenses by$14.9 million , and increased personnel costs by$2.7 million . In addition to these turnaround related increases, there were$14.2 million of higher prices for natural gas for fuel purposes,$4.0 million of increased operating materials and office costs,$3.5 million related to higher electricity pricing, and$2.6 million of higher insurance costs. These increases were partially offset by an inventory build contributing$2.7 million .
Depreciation and Amortization Selling, General, and Administrative Expenses and
Other
[[Image Removed: cvi-20221231_g17.jpg]][[Image Removed: cvi-20221231_g18.jpg]]
Depreciation and Amortization Expense - Depreciation and amortization expense
increased $8.6 million for the year ended December 31, 2022 compared to the year
ended December 31, 2021 , primarily as a result of $8.2 million of accelerated
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Table of Contents depreciation related to various assets scheduled for retirement during our 2022 planned turnarounds, as well as depreciation on new projects placed into service during these turnarounds. Selling, General, and Administrative Expenses, and Other - Selling, general, and administrative expenses and other increased approximately$4.9 million for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . The increase was primarily related to increased personnel costs in 2022, mostly attributable to share-based compensation, contributing$3.6 million and increased expenses for outside services, public relations, and insurance contributing$1.7 million , partially offset by a decrease in loss on asset disposals of$0.7 million . Other Income, Net - Other income, net for the year endedDecember 31, 2022 was$1.1 million , compared to$4.7 million for the year endedDecember 31, 2021 . The decrease was due to sales of natural gas at the East Dubuque Facility inFebruary 2021 , partially offset by a$0.9 million settlement received in 2022 related to an outage at the Coffeyville Facility inJuly 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 with accounting principles generally accepted inthe United States ("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.
The following are non-GAAP measures we present for the year ended
EBITDA - Net income (loss) before (i) interest expense, net, (ii) income tax expense (benefit) and (iii) depreciation and amortization expense.
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 our 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 comparable
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.
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Table of Contents 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.
Major Scheduled Turnaround Activities
Coffeyville Facility - A planned turnaround at the Coffeyville Facility commenced inJuly 2022 and was completed inmid-August 2022 . For the year endedDecember 31, 2022 , we incurred turnaround expense of$12.1 million . For the year endedDecember 31, 2021 , we incurred turnaround expense of$0.3 million related to planning for the Coffeyville Facility's turnaround completed during the third quarter of 2022. During the planning and execution of this turnaround, the Partnership updated the estimated useful lives of certain assets, which resulted in additional depreciation expense of$6.2 million during the year endedDecember 31, 2022 . Additionally, the Coffeyville Facility had planned downtime during the fourth quarter of 2021 at a cost of$2.0 million . East Dubuque Facility - A planned turnaround at the East Dubuque Facility commenced inAugust 2022 and was completed inmid-September 2022 . For the year endedDecember 31, 2022 , we incurred turnaround expense of$21.3 million . For the year endedDecember 31, 2021 , we incurred turnaround expense of$0.6 million related to planning for the East Dubuque Facility's turnaround completed during the third quarter of 2022. During the planning and execution of this turnaround, the Partnership updated the estimated useful lives of certain assets, which resulted in additional depreciation expense of$6.4 million and$4.5 million during the years endedDecember 31, 2022 and 2021, respectively.
Non-GAAP Reconciliations
Reconciliation of Net Income (Loss) to EBITDA and Adjusted EBITDA
Year Ended December 31,
(in thousands) 2022 2021 2020
Net income (loss) $ 286,801 $ 78,155 $ (98,181)
Interest expense, net 34,065 60,978 63,428
Income tax expense 160 57 30
Depreciation and amortization 82,137 73,480 76,077
EBITDA 403,163 212,670 41,354
Goodwill impairment - - 40,969
Adjusted EBITDA $ 403,163 $ 212,670 $ 82,323
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Reconciliation of Net Cash Provided By Operating Activities to EBITDA and
Adjusted EBITDA
Year Ended December 31,
(in thousands) 2022 2021 2020
Net cash provided by operating activities $ 301,464 $ 188,725 $ 19,740
Non-cash items:
Loss on extinguishment of debt (628) (8,462) -
Share-based compensation (25,264) (23,069) (1,035)
Goodwill impairment - - (40,969)
Other (977) (3,889) (5,595)
Adjustments:
Interest expense, net 34,065 60,978 63,428
Income tax expense 160 57 30
Change in assets and liabilities 94,343 (1,670) 5,755
EBITDA 403,163 212,670 41,354
Goodwill impairment - - 40,969
Adjusted EBITDA $ 403,163 $ 212,670 $ 82,323 Reconciliation of EBITDA to Available Cash for Distribution
Year Ended December 31,
(in thousands) 2022 2021 2020
EBITDA $ 403,163 $ 212,670 $ 41,354
Non-cash items:
Goodwill impairment - - 40,969
Current (reserves) adjustments for amounts related to:
Net cash interest expense (excluding capitalized
interest) (34,733) (50,562) (59,995)
Debt service (65,000) (30,000) -
Financing fees (815) (4,627) -
Maintenance capital expenditures (40,793) (16,226) (11,649)
Utility pass-through (2,700) 4,013 -
Common units repurchased (12,398) (529) (7,076)
Other (reserves) releases:
Reserve for recapture of prior negative available cash - (14,980) (5,917)
Future turnaround (16,750) (10,750) (4,500)
Reserve for repayment of current portion of long-term debt
- - (2,240)
Cash reserves for future operating needs - 5,308 (5,308)
Major scheduled expenditures 29,761 2,240 2,567
Available cash for distribution (1) (2) $ 259,735 Common units outstanding 10,570 10,681 10,706 (1)Amount represents the cumulative available cash based on full year results. However, available cash for distribution is calculated quarterly, with distributions (if any) being paid in the period following declaration. (2)The Partnership declared and paid cash distributions of$5.24 ,$2.26 ,$10.05 , and$1.77 per common unit related to the fourth quarter of 2021, and first, second, and third quarters of 2022, respectively, and declared a cash distribution of$10.50 per common unit related to the fourth quarter of 2022, to be paid inMarch 2023 . December 31, 2022 | 45
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Table of Contents 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. Fertilizer market conditions improved steadily throughout 2021 and into 2022 driven by a combination of increased demand for products amid a series of supply disruptions that led to tight fertilizer inventories and concerns around availability of product. In the first quarter of 2022 following the Russian invasion ofUkraine , fertilizer prices increased further and have been volatile over concerns of a reduction in global supply of fertilizers due to restrictions on supply of Russian fertilizers andRussia's decision to restrict fertilizer exports through the end of 2022. Further, the disruption in natural gas flows toEurope following the shutdown of the Nordstream pipeline in the summer of 2022 resulted in a spike in European natural gas and electricity prices, causing many nitrogen fertilizer production facilities inEurope to cease or curtail operations. As a result nitrogen fertilizer exports from theU.S. toEurope have increased, thereby reducing the domestic availability of nitrogen fertilizers inthe United States and causing prices to move higher. Despite the volatility in recent commodity pricing, the increase in fertilizer product pricing has had a favorable impact to our business and has not significantly impacted our primary source of liquidity. While we believe demand for our fertilizer products is stable, there is still uncertainty on the horizon as countries weigh potential impacts of the ongoingRussia -Ukraine conflict. In executing financial discipline, we are continuing to focus maintenance capital expenditures to only include those projects which are a priority to support continuing safe and reliable operations, or which are considered critical to support future activities. When considering the market conditions and actions described above, we currently 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 and other inflationary pressures. 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 redeem, repurchase, refinance, or retire our outstanding debt through privately negotiated transactions, open market repurchases, redemptions, exchanges, tender offers or otherwise, but we are under no obligation to do so. 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. OnFebruary 22, 2022 , the Partnership redeemed the remaining$65 million in aggregate principal amount of its 9.25% Senior Secured Notes, dueJune 2023 (the "2023 Notes") at par, plus accrued and unpaid interest. This transaction represents a significant and favorable change in the Partnership's cash flow and liquidity position with annual savings of approximately$6.0 million in future interest expense, as compared to our 2021 Form 10-K. Refer to Part II, Item 8, Note 5 ("Long-Term Debt") of this Report for further information. The Partnership and its subsidiaries were in compliance with all applicable covenants under their respective debt instruments as ofDecember 31, 2022 and through the date of filing.
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
December 31, 2022
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Table of Contents
December 31 , (in thousands) 2022
2021
9.25% Senior Secured Notes, due
6.125% Senior Secured Notes, due
Unamortized discount and debt issuance costs (3,200) (4,358)
Total long-term debt $ 546,800 $610,642
(1)The
As ofDecember 31, 2022 , the Partnership had 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 Part II, Item 8, Note 5 ("Long-Term Debt") of this Report for further information.
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 years ended
Year Ended December 31, Estimated (1)
(in thousands) 2022 2021 2023
Maintenance capital $ 40,793 $ 16,226 $31,000 - 33,000
Growth capital 653 9,460 2,000 - 3,000
Total capital expenditures $ 41,446 $ 25,686 $33,000 - 36,000
(1)Total 2023 estimated capitalized costs include approximately
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 forCVR Partners is determined by the Board. We will continue to monitor market conditions and make adjustments, if needed, to our current capital spending or turnaround plans. The planned turnaround at the Coffeyville Facility commenced inJuly 2022 and was completed inmid-August 2022 . The planned turnaround at theEast Dubuque Facility commenced inAugust 2022 and was completed inmid-September 2022 . For the years endedDecember 31, 2022 and 2021, we incurred turnaround expense of$12.1 million and$0.3 million , respectively, at the Coffeyville Facility and$21.3 million and$0.6 million , respectively, at the East Dubuque Facility. Additionally, the Coffeyville Facility had planned downtime for certain maintenance activities during the fourth quarter of 2021 at a cost of$2.0 million .
Distributions to Unitholders
The current policy of the Board is to distribute all Available Cash, as
determined by the Board in its sole discretion, 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
December 31, 2022 | 47
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Table of Contents 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 tables present quarterly distributions paid by the Partnership toCVR Partners' unitholders, including amounts paid toCVR Energy , during 2022 and 2021 (amounts presented in the table below may not add to totals presented due to rounding): Quarterly Distributions Paid (in thousands) Quarterly Distributions Related Period Date Paid Per
Common Unit Public Unitholders CVR Energy Total 2021 - 4th Quarter March 14, 2022 $ 5.24 $ 35,576$ 20,394 $ 55,970 2022 - 1st Quarter May 23, 2022 2.26 15,091 8,796 23,887 2022 - 2nd Quarter August 22, 2022 10.05 67,109 39,115 106,225 2022 - 3rd Quarter November 21, 2022 1.77 11,819 6,889 18,708 Total 2022 quarterly distributions $ 19.32$ 129,597 $ 75,193 $ 204,790 Quarterly Distributions Paid (in thousands) Quarterly Distributions Related Period Date Paid Per Common Unit Public Unitholders CVR Energy Total 2021 - 2nd Quarter August 23, 2021 $ 1.72$ 11,678 $ 6,694 $ 18,372 2021 - 3rd Quarter November 22, 2021 2.93 19,893 11,404 31,297 Total 2021 quarterly distributions $
4.65
There were no quarterly distributions declared or paid by the Partnership related to the first quarter of 2021 and the fourth quarter of 2020. During the year endedDecember 31, 2020 , there were no quarterly distributions declared or paid by the Partnership. For the fourth quarter of 2022, the Partnership, upon approval by the Board onFebruary 21, 2023 , declared a distribution of$10.50 per common unit, or$111.0 million , which is payableMarch 13, 2023 to unitholders of record as ofMarch 6, 2023 . Of this amount,CVR Energy will receive approximately$40.9 million , with the remaining amount payable to public unitholders.
Capital Structure
OnMay 6, 2020 , the Board, on behalf of the Partnership, authorized a unit repurchase program (the "Unit Repurchase Program"), which was increased onFebruary 22, 2021 . The Unit Repurchase Program, as increased, authorized the Partnership to repurchase up to$20 million of the Partnership's common units. During the years endedDecember 31, 2022 and 2021, the Partnership repurchased 111,695 and 24,378 common units, respectively, 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$12.4 million and$0.5 million , respectively, exclusive of transaction costs, or an average price of$110.98 and$21.69 per common unit, respectively. As ofDecember 31, 2022 , the Partnership had a nominal authorized amount remaining under the Unit Repurchase Program. This Unit Repurchase Program does not obligate the Partnership to acquire any common units and may be cancelled or terminated by the Board at any time.December 31, 2022 | 48
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Cash Flows
The following table sets forth our cash flows for the periods indicated below:
Year Ended December 31,
(in thousands) 2022 2021 2020Net cash provided by (used in):
Operating activities$ 301,464 $ 188,725 $ 19,740 Investing activities (44,623) (20,342) (18,550) Financing activities (283,018) (86,426) (7,625)
Net (decrease) increase in cash and cash equivalents
Operating Activities The change in net cash flows from operating activities for the year endedDecember 31, 2022 as compared to the year endedDecember 31, 2021 is primarily due to a$209 million increase in net income in 2022 as a result of stronger sales related to the higher price environment in which our products were sold in 2022 compared to 2021, and a$2.2 million net increase in non-cash share based compensation as a result of higher market prices forCVR Partners' units. This is partially offset by an unfavorable change in working capital of$90.9 million primarily due to decreasing deferred revenues in 2022 compared to increasing deferred revenues in 2021 and increasing accounts payable in 2021 in preparation for the 2022 planned turnarounds as compared to 2022, and a$7.8 million reduction in the loss on extinguishment of debt primarily associated with the partial redemption of the 2023 Notes inJune 2021 .
Investing Activities
The change in net cash used in investing activities for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 was due to increased capital expenditures during 2022 of$24.1 million resulting from fixed asset additions related to both facilities' turnarounds in 2022.
Financing Activities
The change in net cash used in financing activities for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 was primarily due to an increase of$155.1 million in cash distributions paid in 2022 compared to 2021, a change of$32.8 million in the redemption of the remaining balance of the 2023 Notes during 2022 compared to the partial redemption of the 2023 Notes and the 6.5% Notes dueApril 2021 during 2021, and an increase of$11.9 million for unit repurchases in 2022 compared to 2021. These are partially offset by a$3.1 million decrease in deferred financing costs paid in 2022 compared to 2021. Additionally, inJune 2021 , the Partnership completed a private offering of$550.0 million aggregate principal amount of the 2028 Notes and used the proceeds, plus cash on hand, to redeem a portion of the 2023 Notes.
Recent Accounting Pronouncements
Refer to Part II, Item 8, Note 2 ("Summary of Significant Accounting Policies")
of this Report for a discussion of recent accounting pronouncements applicable
to the Partnership.
Critical Accounting Estimates
We prepare our consolidated financial statements in accordance with GAAP
requiring management to make judgments, assumptions, and estimates based on the
best available information at the time. Accounting estimates are considered to
be critical if (1) the nature of the estimates and assumptions is material due
to the levels of subjectivity and judgment necessary to account for highly
uncertain matters or the susceptibility of such matters to change; and (2) the
impact of the estimates and assumptions on financial condition or operating
performance is material. Actual results could differ from the estimates and
assumptions used.
December 31, 2022 | 49
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Table of Contents Inventory Valuation The cost of our fertilizer product inventories is determined under the first-in, first-out (FIFO) method. Our FIFO inventories are carried at the lower of cost or net realizable value. We compare the estimated realizable value of inventories to their cost by product at each of our facilities. Depending on inventory levels, the per-ton realizable value of our fertilizer products is estimated using pricing on in-transit orders, pricing for open, fixed-price orders that have not shipped, and, if volumes remain unaccounted for, current management pricing estimates for fertilizer products. Management's estimate for current pricing reflects up-to-date pricing in each facility's market as of the end of each reporting period. Reductions to selling prices for unreimbursed freight costs are included to arrive at net realizable value, as applicable. During the years endedDecember 31, 2022 andDecember 31, 2021 , there were no adjustments. For the year endedDecember 31, 2020 , we recognized a loss of$0.7 million in inventory to reflect its net realizable value. Due to the amount and variability in volume of fertilizer product inventories maintained, changes in production costs, and the volatility of market pricing for fertilizer products, losses recognized to reflect fertilizer product inventories at the lower of cost or net realizable value could have a material impact on the Partnership's results of operations.
Impairment of Long-lived Assets
Long-lived assets used in operations are assessed for impairment whenever changes in facts and circumstances indicate a possible significant deterioration in future expected cash flows. If the sum of the undiscounted expected future cash flows of an asset group is less than the carrying value, including applicable liabilities, the carrying value is written down to its estimated fair value. Individual assets are grouped for impairment purposes based on a judgmental assessment of the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other assets (for example, at a fertilizer facility level). In addition, when preparing the expected future cash flows or estimating the fair value of impaired assets, we make several estimates that include subjective assumptions related to future sales volumes, commodity prices, operating costs, discount rates, and capital expenditures, among others.
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