NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Nature of Business
CVR Partners, LP (referred to as "CVR Partners" or the "Partnership") is a Delaware limited partnership formed by CVR Energy, Inc. (together with its subsidiaries, but excluding the Partnership and its subsidiaries, "CVR Energy") to own, operate and grow its nitrogen fertilizer business.
Nitrogen fertilizer is used by farmers to improve the yield and quality of their crops, primarily corn and wheat. The Partnership principally produces ammonia and urea ammonium nitrate ("UAN"), an aqueous solution of urea and ammonium nitrate. The Partnership's product sales are sold on a wholesale basis in North America.
The Partnership produces nitrogen fertilizer products at
two
manufacturing facilities, which are located in Coffeyville, Kansas (the "Coffeyville Facility") and East Dubuque, Illinois (the "East Dubuque Facility"). On April 1, 2016, the Partnership completed the merger (the "East Dubuque Merger") with CVR Nitrogen, LP (formerly known as East Dubuque Nitrogen Partners, L.P. and also formerly known as Rentech Nitrogen Partners, L.P.) ("CVR Nitrogen") and with CVR Nitrogen GP, LLC (formerly known as East Dubuque Nitrogen GP, LLC and also formerly known as Rentech Nitrogen GP, LLC) ("CVR Nitrogen GP"), whereby the Partnership acquired the East Dubuque Facility. See
Note 3 ("East Dubuque Merger")
for further discussion.
The Partnership's subsidiaries include Coffeyville Resources Nitrogen Fertilizers, LLC ("CRNF"), which owns and operates the Coffeyville Facility, and East Dubuque Nitrogen Fertilizers, LLC ("EDNF"), which owns and operates the East Dubuque Facility. Both facilities manufacture ammonia and are able to further upgrade to other nitrogen fertilizer products, principally UAN.
Immediately subsequent to the East Dubuque Merger and as of
December 31, 2016
, public security holders held approximately
34%
of the Partnership's outstanding limited partner interests and Coffeyville Resources, LLC ("CRLLC"), a wholly-owned subsidiary of CVR Energy, held approximately
66%
of the Partnership's outstanding limited partner interests and
100%
of the noneconomic general partner interest. Prior to the East Dubuque Merger and as of December 31, 2015, public security holders held approximately
47%
of the Partnership's outstanding limited partner interests and CRLLC held approximating
53%
of the Partnership's outstanding limited partner interests and
100%
of the noneconomic general partner interest.
As of
December 31, 2016
and
2015
, Icahn Enterprises L.P. ("IEP") and its affiliates owned approximately
82%
of the shares of CVR Energy.
Management and Operations
CVR GP, LLC ("CVR GP" or the "general partner") manages and operates the Partnership. Common unitholders have only limited voting rights on matters affecting the Partnership. In addition, common unitholders have no right to elect the general partner's directors on an annual or continuing basis.
The Partnership is operated by a combination of the general partner's senior management team and CVR Energy's senior management team pursuant to a services agreement among CVR Energy, CVR GP and the Partnership. The various rights and responsibilities of the Partnership's partners are set forth in the Partnership's limited partnership agreement. The Partnership also is party to a number of agreements with CVR Energy and its subsidiaries, including CVR GP, to regulate certain business relations between the Partnership and the other parties thereto.
See Note 15
("
Related Party Transactions
") for further discussion.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying Partnership consolidated financial statements, prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"), include the accounts of CVR Partners and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Partnership considers all highly liquid money market accounts with original maturities of three months or less to be cash equivalents. Under the Partnership's cash management system, checks issued but not presented to banks frequently result
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
in book overdraft balances for accounting purposes and are classified within accounts payable in the Consolidated Balance Sheets. The change in book overdrafts are reported in the Consolidated Statements of Cash Flows as a component of operating cash flows for accounts payable as they do not represent bank overdrafts. The amount of these checks included in accounts payable as of
December 31, 2016
and
2015
was
$5.8 million
and
$1.9 million
, respectively.
Accounts Receivable, net
CVR Partners grants credit to its customers. Credit is extended based on an evaluation of a customer's financial condition; generally, collateral is not required. Accounts receivable are due on negotiated terms and are stated at amounts due from customers, net of an allowance for doubtful accounts. Accounts outstanding longer than their contractual payment terms are considered past due. CVR Partners determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts are past due, the customer's ability to pay its obligations to CVR Partners, and the condition of the general economy and the industry as a whole. CVR Partners writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Amounts collected on accounts receivable are included in net cash provided by operating activities in the Consolidated Statements of Cash Flows. At December 31, 2015,
one
customer individually represented greater than 10% of the total net accounts receivable balance. The largest concentration of credit for any
one
customer at
December 31, 2016
and
2015
was approximately
9%
and
14%
, respectively, of the total accounts receivable balance.
Inventories
Inventories consist of fertilizer products which are valued at the lower of first-in, first-out ("FIFO") cost, or market. Inventories also include raw materials, precious metals, parts and supplies, which are valued at the lower of moving-average cost, which approximates FIFO, or market. The cost of inventories includes inbound freight costs. At
December 31, 2016
and
2015
, inventories on the Consolidated Balance Sheets included depreciation of approximately
$4.1 million
and
$1.8 million
, respectively.
Property, Plant, and Equipment
Additions to property, plant and equipment, including capitalized interest and certain costs allocable to construction and property purchases, are recorded at cost. Capitalized interest is added to any capital project over
$1.0 million
in costs which is expected to take more than
six
months to complete. Depreciation is computed using principally the straight-line method over the estimated useful lives of the various classes of depreciable assets. The lives used in computing depreciation for such assets are as follows:
|
|
|
Asset
|
Range of Useful
Lives, in Years
|
Improvements to land
|
30
|
Buildings
|
20 to 30
|
Machinery and equipment
|
5 to 30
|
Automotive equipment
|
5
|
Furniture and fixtures
|
3 to 7
|
Railcars
|
25 to 30
|
Leasehold improvements are depreciated on the straight-line method over the shorter of the contractual lease term or the estimated useful life. Expenditures for routine maintenance and repair costs are expensed when incurred. Such expenses are reported in direct operating expenses (exclusive of depreciation and amortization) in the Partnership's Consolidated Statements of Operations.
Goodwill
Goodwill represents the excess of the cost of an acquired entity over the fair value of the assets acquired less liabilities assumed. Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate the asset might be impaired. The Partnership uses November 1 of each year as its annual valuation date for its goodwill impairment test.
See Note 8
("
Goodwill
") for further discussion.
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred Financing Costs
The lender and other third-party costs associated with debt issuances are deferred and amortized to interest expense and other financing costs using the effective-interest method over the life of the debt. Deferred financing costs related to line-of-credit arrangements are amortized using the straight-line method through the termination date of the facility.
Planned Major Maintenance Costs
The direct-expense method of accounting is used for maintenance activities, including planned major maintenance activities and other less extensive shutdowns. Maintenance costs are recognized as expense when maintenance services are performed. Planned major maintenance activities generally occur every
two
to
three
years.
During the second quarter of 2016, the East Dubuque Facility completed a major scheduled turnaround. Overall results were negatively impacted due to the lost production during the downtime that resulted in reduced sales and certain reduced variable expenses included in cost of materials and other and direct operating expenses (exclusive of depreciation and amortization). Costs, exclusive of the impacts due to the lost production during the downtime, of approximately
$6.6 million
associated with the 2016 East Dubuque Facility turnaround are included in direct operating expenses (exclusive of depreciation and amortization) in the Consolidated Statements of Operations for the year ended December 31, 2016.
During the third quarter of 2015, the Coffeyville Facility completed a major scheduled turnaround. Overall results were negatively impacted due to the lost production during the downtime that resulted in reduced sales and certain reduced variable expenses included in cost of materials and other and direct operating expenses (exclusive of depreciation and amortization). Costs, exclusive of the impacts due to the lost production during the downtime, of approximately
$7.0 million
associated with the 2015 Coffeyville Facility turnaround are included in direct operating expenses (exclusive of depreciation and amortization) in the Consolidated Statements of Operations for the year ended December 31, 2015.
Cost Classifications
Cost of materials and other consist primarily of freight and distribution expenses, feedstock expenses, purchased ammonia and purchased hydrogen.
Direct operating expenses (exclusive of depreciation and amortization) consist primarily of energy and other utility costs, direct costs of labor, property taxes, plant-related maintenance services and environmental and safety compliance costs as well as catalyst and chemical costs. Direct operating expenses also include allocated share-based compensation from CVR Energy and its subsidiaries, as discussed in
Note 4
("
Share‑Based Compensation
").
Selling, general and administrative expenses consist primarily of direct and allocated legal expenses, treasury, accounting, marketing, human resources, information technology and maintaining the corporate offices. Selling, general and administrative expenses also include allocated share-based compensation from CVR Energy and its subsidiaries, as discussed in
Note 4
("
Share‑Based Compensation
").
Income Taxes
CVR Partners is treated as a partnership for U.S. federal income tax purposes. The income tax liability of the common unitholders is not reflected in the consolidated financial statements of the Partnership. Generally, each common unitholder is required to take into account its respective share of CVR Partners' income, gains, loss and deductions. The Partnership is not subject to income taxes, except for a franchise tax in the State of Texas, a replacement tax in the State of Illinois and as discussed below.
CVR Nitrogen Holdings, LLC, a corporate entity wholly owned by CVR Partners, generates income or loss based on its own activities. As a limited liability company electing tax treatment as a corporation, the entity is subject to federal and state income taxes.
Under the Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic ("ASC") 740,
Income Taxes
, both the Partnership (for taxes based on income such as the Texas franchise tax and the Illinois replacement tax) and the corporate entity account for income taxes using the asset and liability method under which deferred income taxes are recognized for the future tax effects of temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities using the enacted statutory tax rates in effect at the end of the period. A valuation allowance for deferred tax assets is recorded when it is more likely than not that the benefit from the deferred tax asset will not be realized. When applicable, penalties and interest related to uncertain tax positions are recorded as income tax expense.
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Segment Reporting
The Partnership accounts for segment reporting in accordance with ASC 280,
Segment Reporting
, which establishes standards for entities to report information about the operating segments and geographic areas in which they operate. CVR Partners only operates
one
segment and all of its operations are located in the United States.
Impairment of Long-Lived Assets
The Partnership accounts for impairment of long-lived assets in accordance with ASC 360,
Property, Plant and Equipment — Impairment or Disposal of Long-Lived Assets
("ASC 360"). In accordance with ASC 360, the Partnership reviews long-lived assets (excluding goodwill) for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future net cash flows, an impairment charge is recognized for the amount by which the carrying amount of the assets exceeds their fair value. Assets to be disposed of are reported at the lower of their carrying value or fair value less cost to sell. No impairment charges were recognized for any of the periods presented.
Revenue Recognition
Revenues for products sold are recorded upon delivery of the products to customers, which is the point at which title is transferred, the customer has the assumed risk of loss, and payment has been received or collection is reasonably assured. Deferred revenue represents customer prepayments under contracts to guarantee a price and supply of nitrogen fertilizer in quantities expected to be delivered in the next
12
months in the normal course of business. Taxes collected from customers and remitted to governmental authorities are not included in reported revenues.
Shipping Costs
Pass-through finished goods delivery costs reimbursed by customers are reported in net sales, while an offsetting expense is included in cost of materials and other.
Derivative Instruments and Fair Value of Financial Instruments
Prior to their expiration in February 2016, the Partnership had used forward swap contracts primarily to reduce the exposure to changes in interest rates on its debt and to provide a cash flow hedge. These derivative instruments were designated as hedges for accounting purposes and accordingly, were recorded at fair value in the Consolidated Balance Sheets. The measurement of the cash flow hedge ineffectiveness was recognized in earnings, if applicable. The effective portion of the gain or loss on the swaps was reported in accumulated other comprehensive income (loss) ("AOCI"), in accordance with ASC 815,
Derivatives and Hedging
. See
Note 11 ("Interest Rate Swap Agreements")
for further discussion.
From time to time, the Partnership enters into forward contracts with fixed delivery prices to purchase portions of its natural gas requirements. The Partnership elected to apply the normal purchase and normal sale exclusion to natural gas contracts that are entered into to be used in production within a reasonable time during the normal course of business. Accordingly, the fair value of these contracts are not recorded on the Consolidated Balance Sheets.
Other financial instruments consisting of cash, accounts receivable, and accounts payable are carried at cost, which approximates fair value, as a result of the short-term nature of the instruments.
Share-Based Compensation
The Partnership has recorded share-based compensation related to the CVR Partners, LP Long Term Incentive Plan (the "CVR Partners LTIP") and has been allocated share-based compensation from CVR Energy. The Partnership accounts for share-based compensation in accordance with ASC 718,
Compensation — Stock Compensation
("ASC 718"). ASC 718 requires that compensation costs relating to share-based payment transactions be recognized in a company's financial statements. ASC 718 applies to transactions in which an entity exchanges its equity instruments for goods or services and also may apply to liabilities an entity incurs for goods or services that are based on the fair value of those equity instruments.
See Note 4 ("Share‑Based Compensation")
for further discussion.
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Environmental Matters
Liabilities related to future remediation costs of past environmental contamination of properties are recognized when the related costs are considered probable and can be reasonably estimated. Estimates of these costs are based upon currently available facts, internal and third-party assessments of contamination, available remediation technology, site-specific costs, and currently enacted laws and regulations. In reporting environmental liabilities, no offset is made for potential recoveries. Loss contingency accruals, including those for environmental remediation, are subject to revision as further information develops or circumstances change and such accruals can take into account the legal liability of other parties. Environmental expenditures are capitalized at the time of the expenditure when such costs provide future economic benefits.
Use of Estimates
The consolidated financial statements have been prepared in conformity with GAAP, using management's best estimates and judgments where appropriate. These estimates and judgments affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates and judgments.
Allocation of Costs
CVR Energy and its subsidiaries provide a variety of services to the Partnership, including cash management and financing services, employee benefits provided through CVR Energy's benefit plans, administrative services provided by CVR Energy's employees and management, insurance and office space leased in CVR Energy's headquarters building and other locations. As such, the accompanying consolidated financial statements include costs that have been incurred by CVR Energy on behalf of the Partnership. These amounts incurred by CVR Energy are then billed or allocated to the Partnership and are properly classified on the Consolidated Statements of Operations as either direct operating expenses (exclusive of depreciation and amortization) or as selling, general and administrative expenses. The billing and allocation of such costs are governed by the services agreement entered into between CVR Energy, Inc., CVR Partners and CVR GP in October 2007 and subsequently amended. The services agreement provides guidance for the treatment of certain general and administrative expenses and certain direct operating expenses incurred on the Partnership's behalf. Such expenses include, but are not limited to, salaries, benefits, share-based compensation expense, insurance, accounting, tax, legal and technology services. Costs which are specifically incurred on behalf of the Partnership are billed directly to the Partnership. See
Note 15 ("Related Party Transactions")
for a detailed discussion of the billing procedures and the basis for calculating the charges for specific products and services.
The Partnership's general partner manages the Partnership's operations and activities as specified in the partnership agreement. The general partner of the Partnership is managed by its board of directors. The partnership agreement provides that the Partnership will reimburse its general partner for all direct and indirect expenses it incurs or payments it makes on behalf of the Partnership (including salary, bonus, incentive compensation and other amounts paid to any person to perform services for the Partnership or for its general partner in connection with operating the Partnership). See
Note 15 ("Related Party Transactions")
for a detailed discussion of the operation of the general partner and the basis of the reimbursements.
Subsequent Events
The Partnership evaluated subsequent events, if any, that would require an adjustment to the Partnership's consolidated financial statements or require disclosure in the notes to the consolidated financial statements through the date of issuance of the consolidated financial statements.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, creating a new topic, FASB ASC Topic 606,
"Revenue from Contracts with Customers"
("ASU 2014-09"), which supersedes revenue recognition requirements in FASB ASC Topic 605, “Revenue Recognition.” This ASU requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. In addition, an entity is required to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The standard was originally effective for interim and annual periods beginning after December 15, 2016 and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. On July 9, 2015, the FASB approved a one-year deferral of the effective date making the standard effective for interim and annual periods beginning after December 15, 2017. The FASB will continue to permit entities to adopt the standard on the original effective date if they choose. The Partnership has developed an implementation
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
plan to adopt the new standard. As part of this plan, the Partnership is currently assessing the impact of the new guidance on its business processes, business and accounting systems, and consolidated financial statements and related disclosures, which involves review of existing revenue streams, evaluation of accounting policies and identification of the types of arrangements where differences may arise in the conversion to the new standard. The Partnership expects to complete the assessment phase of its implementation plan within the next several months, after which the Partnership will initiate the design and implementation phases of the plan, including implementing any changes to existing business processes and systems to accommodate the new standard, during 2017. The Partnership will adopt this standard as of January 1, 2018 using the modified retrospective application method. To date, the Partnership has not identified any material differences in its existing revenue recognition methods that would require modification under the new standard.
In April 2015, the FASB issued ASU 2015-03,
"Simplifying the Presentation of Debt Issuance Costs"
("ASU 2015-03"). The new standard required that all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt. The standard was effective for interim and annual periods beginning after December 15, 2015 and was required to be applied on a retrospective basis. Early adoption was permitted. The Partnership adopted ASU 2015-03 as of January 1, 2016 and applied the standard retrospectively to the Consolidated Balance Sheet. Refer to
Note 10 ("Debt")
for further details.
In February 2016, the FASB issued ASU 2016-02, "
Leases"
("ASU 2016-02")
.
The new standard revises accounting for operating leases by a lessee, among other changes, and requires a lessee to recognize a liability to make lease payments and an asset representing its right to use the underlying asset for the lease term in the balance sheet. The standard is effective for the first interim and annual periods beginning after December 15, 2018, with early adoption permitted. At adoption, ASU 2016-02 will be applied using the modified retrospective application method. The Partnership is currently evaluating the standard and the impact on its consolidated financial statements and footnote disclosures.
In January 2017, the FASB issued ASU 2017-04, "
Simplifying the Test for Goodwill Impairment
" ("ASU2017-04"). The new standard simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill quantitative impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The standard is effective for interim and annual periods beginning after December 15, 2019 and early adoption is permitted. The Partnership will adopt this standard as of January 1, 2017.
(3) East Dubuque Merger
On April 1, 2016, the Partnership completed the East Dubuque Merger as contemplated by the Agreement and Plan of Merger, dated as of August 9, 2015 (the "Merger Agreement"), whereby the Partnership acquired CVR Nitrogen and CVR Nitrogen GP. Pursuant to the East Dubuque Merger, the Partnership acquired the East Dubuque Facility. The primary reasons for the East Dubuque Merger were to expand the Partnership's geographical footprint, diversify its raw material feedstocks, widen its customer reach and increase its potential for cash-flow generation.
CVR Nitrogen was required to sell or spin off its facility located in Pasadena, Texas (the "Pasadena Facility") as a condition to closing of the East Dubuque Merger. On March 14, 2016, CVR Nitrogen completed the sale of
100%
of the issued and outstanding membership interests of its subsidiary that owned the Pasadena Facility to a third party. Holders of common units representing limited partner interests in CVR Nitrogen ("CVR Nitrogen common units") of record as of March 28, 2016 received consideration for the Pasadena Facility and may receive additional consideration in the future according to the terms of the purchase agreement. The Partnership did not receive and will not receive any consideration relating to the sale of the Pasadena Facility.
Under the terms of the Merger Agreement, holders of CVR Nitrogen common units eligible to receive consideration received
1.04
common units (the "unit consideration") representing limited partner interests in CVR Partners ("CVR Partners common units") and
$2.57
in cash, without interest, (the "cash consideration" and together with the unit consideration, the "merger consideration") for each CVR Nitrogen common unit. Pursuant to the Merger Agreement, CVR Partners issued approximately
40.2 million
CVR Partners common units and paid approximately
$99.2 million
in cash consideration to CVR Nitrogen common unitholders and certain holders of CVR Nitrogen phantom units discussed below.
Phantom units granted and outstanding under CVR Nitrogen’s equity plans and held by an employee who continued in the employment of a CVR Partners-affiliated entity upon closing of the East Dubuque Merger were canceled and replaced with new incentive awards of substantially equivalent value and on similar terms. See
Note 4 ("Share‑Based Compensation")
for further discussion. Each phantom unit granted and outstanding and held by (i) an employee who did not continue in employment of a
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CVR Partners-affiliated entity, or (ii) a director of CVR Nitrogen GP, upon closing of the East Dubuque Merger, vested in full and the holders thereof received the merger consideration.
In accordance with the FASB’s ASC Topic 805 — Business Combinations ("ASC 805"), the Partnership accounted for the East Dubuque Merger as an acquisition of a business with CVR Partners as the acquirer. ASC 805 requires that the consideration transferred be measured at the current market price at the date of the closing of the East Dubuque Merger. The aggregate merger consideration was approximately
$802.4 million
, including the fair value of CVR Partners common units issued of
$335.7 million
, a cash contribution of
$99.2 million
and
$367.5 million
fair value of assumed debt. The East Dubuque Facility contributed net sales of
$128.0 million
and an operating loss of
$1.2 million
to the Consolidated Statement of Operations for the year ended
December 31, 2016
.
In March 2016, CVR Energy purchased
400,000
CVR Nitrogen common units, representing approximately
1%
of the outstanding CVR Nitrogen limited partner interests. CVR Energy did not receive merger consideration for these designated CVR Nitrogen common units. The Partnership recorded the noncontrolling interest fair value of
$4.6 million
in the purchase price consideration on April 1, 2016. Subsequent to the East Dubuque Merger, CVR Energy contributed
$0.5 million
to CVR Nitrogen, and the Partnership purchased the
400,000
CVR Nitrogen common units from CVR Energy during the second quarter of 2016 for
$5.0 million
. The transaction eliminated the noncontrolling interest, and the net impact of
$0.1 million
was recorded as an increase to partners' capital on the Consolidated Statement of Partners' Capital for the year ended
December 31, 2016
.
Purchase Price Consideration
A summary of the total purchase price is as follows:
|
|
|
|
|
|
|
|
Purchase Price
|
|
|
(in millions)
|
Fair value of CVR Partners common units issued, as of the close of the East Dubuque Merger
|
|
$
|
335.7
|
|
Cash payment to CVR Nitrogen common unitholders and certain phantom unitholders
|
|
99.2
|
|
Fair value of consideration transferred
|
|
434.9
|
|
Fair value of noncontrolling interest for parent affiliate units (1)
|
|
4.6
|
|
Total purchase price consideration to be allocated
|
|
$
|
439.5
|
|
The fair value of the unit consideration was determined as follows:
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Unit Consideration
|
|
|
(units in thousands)
|
CVR Nitrogen common units outstanding, as of the close of the East Dubuque Merger
|
|
38,985
|
|
Less: Noncontrolling interest from parent affiliate units (1)
|
|
400
|
|
Net units subject to merger consideration
|
|
38,585
|
|
Unit consideration per CVR Nitrogen common unit
|
|
1.04
|
|
Number of CVR Partners common units issued for merger consideration
|
|
40,129
|
|
Number of CVR Partners common units issued for CVR Nitrogen phantom units issued to noncontinuing employees and CVR Nitrogen board members (2)
|
|
26
|
|
Total number of CVR Partners units issued
|
|
40,155
|
|
Fair value per CVR Partners common unit, as of the close of the East Dubuque Merger
|
|
$
|
8.36
|
|
Fair value of CVR Partners common units issued (in millions)
|
|
$
|
335.7
|
|
|
|
|
_____________
|
|
(1)
|
See above for discussion of parent affiliate units.
|
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
(2)
|
As discussed above, each phantom unit granted and outstanding and held by (i) an employee who did not continue in the employment of a CVR Partners-affiliated entity, or (ii) a director of CVR Nitrogen GP, upon closing of the East Dubuque Merger, vested in full and the holders thereof received the merger consideration.
|
Merger-Related Indebtedness
CVR Nitrogen’s debt arrangements that remained in place after the closing date of the East Dubuque Merger included
$320.0 million
of its
6.50%
notes due 2021 (the "2021 Notes"). The majority of the 2021 Notes were repurchased in June 2016, as discussed further in Note 11 ("Debt").
Immediately prior to the East Dubuque Merger, CVR Nitrogen also had outstanding balances under a credit agreement with Wells Fargo Bank, National Association, as successor-in-interest by assignment from General Electric Company, as administrative agent (the "Wells Fargo Credit Agreement"). The Wells Fargo Credit Agreement consisted of a
$50.0 million
senior secured revolving credit facility with a
$10.0 million
letter of credit sublimit. In connection with the closing of the East Dubuque Merger, the Partnership paid
$49.4 million
for the outstanding balance, accrued interest and fees under the Wells Fargo Credit Agreement, and the Wells Fargo Credit Agreement was canceled.
Purchase Price Allocation
Under the acquisition method of accounting, the purchase price was allocated to CVR Nitrogen's net tangible assets based on their fair values as of April 1, 2016. The Partnership has obtained an independent appraisal of the net assets acquired. Determining the fair value of net tangible assets requires judgment and involves the use of significant estimates and assumptions. The Partnership based its fair value estimates on assumptions it believes to be reasonable but are inherently uncertain.
The following table, set forth below, displays the purchase price allocated to CVR Nitrogen's net tangible assets based on their fair values as of April 1, 2016. There were
no
identifiable intangible assets.
|
|
|
|
|
|
|
|
Purchase Price Allocation
|
|
|
(in millions)
|
Cash
|
|
$
|
35.4
|
|
Accounts receivable
|
|
8.9
|
|
Inventories
|
|
49.1
|
|
Prepaid expenses and other current assets (1)
|
|
5.2
|
|
Property, plant and equipment
|
|
775.3
|
|
Other long-term assets
|
|
1.1
|
|
Deferred revenue
|
|
(29.8
|
)
|
Other current liabilities (2)
|
|
(37.0
|
)
|
Long-term debt
|
|
(367.5
|
)
|
Other long-term liabilities
|
|
(1.2
|
)
|
Total fair value of net assets acquired
|
|
439.5
|
|
Less: Cash acquired
|
|
35.4
|
|
Total consideration transferred, net of cash acquired
|
|
$
|
404.1
|
|
_____________
|
|
(1)
|
Includes
$4.0 million
for the estimated fair value of insurance proceeds related to an event that occurred prior to the East Dubuque Merger. The Partnership received
$4.0 million
during the second quarter of 2016, which was included in operating activities on the Consolidated Statement of Cash Flows the year ended December 31, 2016.
|
|
|
(2)
|
Includes an assumed liability of
$11.8 million
for third-party financial advisory services provided to CVR Nitrogen that became payable upon the closing of the East Dubuque Merger, and was subsequently paid by CVR Partners on April 1, 2016, which was included in operating activities on the Consolidated Statement of Cash Flows for the year ended December 31, 2016.
|
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Pro Forma Financial Information
The summary pro forma financial information for the periods presented below gives effect to the East Dubuque Merger as if it had occurred at the beginning of the periods presented. The pro forma financial information for all periods presented were adjusted to give effect to pro forma events that are i) directly attributable to the East Dubuque Merger, ii) factually supportable and iii) expected to have a continuing impact on the consolidated results of operations.
Pro forma net income (loss) has been adjusted to exclude
$3.8 million
and
$6.0 million
, respectively, of merger-related costs incurred during the year ended
December 31, 2016
and
2015
. Pro forma net income (loss) has also been adjusted to exclude
$13.0 million
of nonrecurring expenses related to the fair value adjustment to acquisition-date inventory and deferred revenue for the year ended
December 31, 2016
.
Incremental interest expense for financing the cash merger consideration and financing the payoff of the Wells Fargo Credit Agreement has also been adjusted for in the pro forma financial information, as well as incremental depreciation resulting from increased fair value of the property, plant and equipment as noted in the preliminary purchase price allocation.
The summary pro forma financial information is for informational purposes only and does not purport to represent what the Partnership's consolidated results of operations actually would have been if the East Dubuque Merger had occurred at any date, and such data does not purport to project the Partnership's results of operations for any future period. The basic and diluted units outstanding used to calculate the pro forma net income (loss) per unit amounts presented below have been adjusted to assume units issued at the closing of the East Dubuque Merger were outstanding since January 1, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
(in thousands, except per unit data)
|
Net sales
|
|
$
|
391,132
|
|
|
$
|
490,538
|
|
Net income (loss)
|
|
(14,619
|
)
|
|
89,818
|
|
Net income (loss) per common unit, basic and diluted
|
|
(0.13
|
)
|
|
0.79
|
|
Expenses Associated with the East Dubuque Merger
During the year ended
December 31, 2016
and
2015
, the Partnership incurred
$3.1 million
and
$2.3 million
, respectively, of legal and other professional fees and other merger-related expenses, which were included in selling, general and administrative expense.
(4) Share‑Based Compensation
Certain employees of CVR Partners and employees of CVR Energy who perform services for the Partnership under the services agreement with CVR Energy participate in equity compensation plans of CVR Partners' affiliates. All compensation expense related to these plans for full-time employees of CVR Partners has been attributed
100%
to the Partnership. For employees of CVR Energy, the Partnership records share-based compensation relative to the percentage of time spent by each employee providing services to the Partnership as compared to the total calculated share-based compensation by CVR Energy. The Partnership recognizes the costs of share-based compensation in selling, general and administrative expenses and direct operating expenses (exclusive of depreciation and amortization). Allocated expense amounts related to plans for which the Partnership is responsible for payment are reflected as an increase or decrease to accrued expenses and other current liabilities. The Partnership was not responsible for payment of the allocated share-based compensation for certain plans as discussed below. Allocated expense amounts related to plans for which the Partnership was not responsible for payment were reflected as an increase or decrease to partners' capital.
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Long-Term Incentive Plan — CVR Energy
CVR Energy has a Long-Term Incentive Plan ("CVR Energy LTIP") that permits the grant of options, stock appreciation rights, restricted shares, restricted stock units, dividend equivalent rights, share awards and performance awards (including performance share units, performance units and performance based restricted stock). As of
December 31, 2016
, only grants of performance units under the CVR Energy LTIP remain outstanding. Individuals who are eligible to receive awards and grants under the CVR Energy LTIP include CVR Energy’s or its subsidiaries’ (including the Partnership) employees, officers, consultants and directors.
Restricted Stock Units
Through the CVR Energy LTIP, shares of restricted stock and restricted stock units had been granted to employees of CVR Energy and its subsidiaries. As of
December 31, 2016
, these awards were fully vested.
Total compensation expense recorded for the years ended
December 31, 2016
was nominal. Total compensation for the years ended December 31,
2015
and
2014
, related to the restricted stock units, was approximately
$0.1 million
and
$0.2 million
, respectively. The Partnership is not responsible for payment of CVR Energy restricted stock unit awards, and accordingly, the expenses recorded were reflected as an increase to partners' capital.
Performance Unit Awards
In December 2013, CVR Energy entered into performance unit award agreements with Mr. Lipinski. Compensation cost for these awards was recognized over the substantive service period. Compensation expense recorded for the year ended December 31, 2014 related to the performance unit awards was
$0.7 million
. The awards were fully vested at December 31, 2014. The Partnership reimbursed CVR Energy approximately
$0.3 million
and
$0.8 million
, respectively, for its allocated portion of the performance unit award during 2015 and 2014.
In December 2015, CVR Energy entered into a performance unit award agreement (the "2015 Performance Unit Award Agreement") with Mr. Lipinski. Compensation cost for the 2015 Performance Unit Award Agreement was recognized over the performance cycle from January 1, 2016 to December 31, 2016. Compensation expense recorded for the year ended December 31, 2016 was
$0.5 million
, and the Partnership is responsible for reimbursing CVR Energy in the first quarter of 2017.
In December 2016, CVR Energy entered into a performance unit award agreement (the "2016 Performance Unit Award Agreement") with Mr. Lipinski. Compensation cost for the 2016 Performance Unit Award Agreement will be recognized over the performance cycle from January 1, 2017 to December 31, 2017. The performance unit award represents the right to receive, upon vesting, a cash payment equal to a defined threshold in accordance with the award agreement, multiplied by a performance factor that is based upon the achievement of certain operating objectives. The Partnership will be responsible for reimbursing CVR Energy for its allocated portion of the performance unit award. Assuming a target performance threshold and that the allocation of costs from CVR Energy remains consistent with the allocation percentages in place at December 31, 2016, there was approximately
$0.5 million
of total unrecognized compensation cost related to the 2016 Performance Unit award Agreement to be recognized over a period of
1.0
year.
Incentive Unit Awards — CVR Energy
CVR Energy granted awards of incentive units and distribution equivalent rights to certain employees of CRLLC, CVR Energy, and the Partnership's general partner who provide shared services to CVR Energy and its subsidiaries (including the Partnership). The awards are generally graded-vesting awards, which are expected to vest over
three
years, with one-third of the award vesting each year. Compensation expense is recognized on a straight-line basis over the vesting period of the respective tranche of the award. Each incentive unit and distribution equivalent right represents the right to receive, upon vesting, a cash payment equal to (i) the average fair market value of
one
common unit of CVR Refining, LP ("CVR Refining") in accordance with the award agreement, plus (ii) the per unit cash value of all distributions declared and paid by CVR Refining from the grant date to and including the vesting date. The awards, which are liability-classified, are remeasured at each subsequent reporting date until they vest.
Assuming the portion of time spent on CVR Partners related matters by CVR Energy employees providing services to CVR Partners remains consistent with the amount of services provided during
December 31, 2016
, there was approximately
$1.6 million
of total unrecognized compensation cost related to the incentive units and associated distribution equivalent rights to be recognized over a weighted-average period of approximately
1.7
years. Inclusion of a vesting table would not be meaningful due to changes in allocation percentages that may occur from time to time. The unrecognized compensation
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
expense has been determined by the number of incentive units and respective allocation percentage for individuals for whom, as of
December 31, 2016
, compensation expense has been allocated to the Partnership. Compensation expense for the years ended
December 31, 2016
,
2015
and
2014
related to the incentive unit awards was
$0.4 million
,
$0.9 million
and
$0.5 million
, respectively. The Partnership is responsible for reimbursing CVR Energy for its allocated portion of the awards.
As of
December 31, 2016
and
2015
, the Partnership had a liability related to these awards of
$0.4 million
and
$0.5 million
, respectively, which were recorded in accrued expenses and other current liabilities. For the years ended
December 31, 2016
,
2015
and
2014
, the Partnership reimbursed CVR Energy
$0.5 million
,
$0.6 million
and
$0.3 million
, respectively, for its allocated portion of the incentive unit award payments.
Long-Term Incentive Plan — CVR Partners
The CVR Partners LTIP provides for the grant of options, unit appreciation rights, distribution equivalent rights, restricted units, phantom units and other unit-based awards, each in respect of common units. Individuals eligible to receive awards under the CVR Partners LTIP include (i) employees of the Partnership and its subsidiaries (ii) employees of the general partner, (iii) members of the board of directors of the general partner and (iv) certain CVR Partners' parent's employees, consultants and directors who perform services for the benefit of the Partnership.
Through the CVR Partners LTIP, phantom and common units have been awarded to employees of the Partnership and the general partner and to members of the board of directors of the general partner. Phantom unit awards made to employees and members of the board of directors of the general partner are considered non-employee equity-based awards and are required to be remeasured at each reporting period. Awards to employees of the Partnership and employees of the general partner vest over a
three
-year period and awards to members of the board of directors of the general partner generally vest immediately on the grant date. The maximum number of common units issuable under the CVR Partners LTIP is
5,000,000
. As of
December 31, 2016
, there were
4,820,215
common units available for issuance under the CVR Partners LTIP. As phantom unit awards discussed below are cash-settled awards, they do not reduce the number of common units available for issuance.
Common Units and Certain Phantom Units Awards
Awards of phantom units and distribution equivalent rights were granted to certain employees of the Partnership and its subsidiaries' employees and the employees of the general partner. Common unit awards granted in prior years are not material in the periods presented and were fully vested and settled as of December 31, 2015. The phantom unit awards are generally graded-vesting awards, which are expected to vest over
three
years with one-third of the award vesting each year. Compensation expense is recognized on a straight-line basis over the vesting period of the respective tranche of the award. Each phantom unit and distribution equivalent right represents the right to receive, upon vesting, a cash payment equal to (i) the average fair market value of
one
unit of the Partnership's common units in accordance with the award agreement, plus (ii) the per unit cash value of all distributions declared and paid by the Partnership from the grant date to and including the vesting date. The awards, which are liability-classified, are remeasured at each subsequent reporting date until they vest.
In connection with the East Dubuque Merger as described in
Note 3 ("East Dubuque Merger")
,
195,980
phantom units were granted to certain CVR Nitrogen employees. A related liability of
$0.6 million
was recorded as part of the opening balance sheet and included in personnel accruals in the purchase price allocation in
Note 3 ("East Dubuque Merger")
. Subsequent to the East Dubuque Merger,
79,654
awards were subject to an accelerated vesting date and were paid in full resulting in the early recognition of
$0.4 million
as compensation expense in selling, general and administrative expenses for the year ended December 31, 2016.
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the common units and phantom units (collectively "Units") activity under the CVR Partners LTIP during the years ended December 31,
2016
,
2015
and
2014
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Units
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
(dollars in thousands)
|
Non-vested at December 31, 2013
|
171,119
|
|
|
$
|
21.34
|
|
|
$
|
2,817
|
|
Granted
|
198,141
|
|
|
9.44
|
|
|
|
Vested
|
(48,310
|
)
|
|
20.95
|
|
|
|
|
Forfeited
|
(77,004
|
)
|
|
23.49
|
|
|
|
|
Non-vested at December 31, 2014
|
243,946
|
|
|
$
|
11.07
|
|
|
$
|
2,376
|
|
Granted
|
245,199
|
|
|
7.87
|
|
|
|
Vested
|
(94,854
|
)
|
|
12.55
|
|
|
|
|
Forfeited
|
(2,388
|
)
|
|
10.99
|
|
|
|
|
Non-vested at December 31, 2015
|
391,903
|
|
|
$
|
8.71
|
|
|
$
|
3,139
|
|
Granted
|
680,718
|
|
|
6.20
|
|
|
|
Vested
|
(292,536
|
)
|
|
8.78
|
|
|
|
Forfeited
|
(8,299
|
)
|
|
8.72
|
|
|
|
Non-vested at December 31, 2016
|
771,786
|
|
|
$
|
6.47
|
|
|
$
|
4,638
|
|
Unrecognized compensation expense associated with the unvested phantom units at December 31,
2016
was approximately
$3.9 million
, which is expected to be recognized over a weighted average period of
1.7
years. In conjunction with the resignation of the former Chief Executive Officer that was effective January 1, 2014, all awards granted to him that were non-vested at the resignation date were forfeited. The associated change to the non-vested units forfeited was reflected at the resignation date and is included in the summary above. Compensation expense recorded for the years ended December 31,
2016
,
2015
and
2014
related to the awards under the CVR Partners LTIP was approximately
$1.8 million
,
$1.3 million
and
$0.3 million
, respectively. Compensation expense related to the awards issued to employees of the Partnership and its subsidiaries under the CVR Partners LTIP has been recorded in selling, general and administrative expenses - third parties and direct operating expenses (exclusive of depreciation and amortization) - third parties. Compensation expense related to the awards issued to employees and members of the board of directors of the general partner under the CVR Partners LTIP has been recorded in selling, general and administrative expenses - affiliates and direct operating expenses (exclusive of depreciation and amortization) - affiliates as the expense has been incurred for the benefit of employees or directors of the general partner.
As of December 31,
2016
and
2015
, the Partnership had a liability of
$1.0 million
and
$0.7 million
, respectively, for cash settled non-vested phantom unit awards and associated distribution equivalent rights, which is recorded in personnel accruals on the Consolidated Balance Sheets. For the year ended December 31,
2016
,
2015
and
2014
, the Partnership paid cash of
$2.1 million
,
$0.8 million
and
$0.4 million
, respectively, to settle liability-classified awards upon vesting.
Performance-Based Phantom Unit Award
In May 2014, the Partnership entered into a Phantom Unit Agreement with Mark A. Pytosh, Chief Executive Officer and President of the general partner, which included performance-based phantom units and distribution equivalent rights. The award was fully vested at December 31, 2016 and amounts associated with the agreement were not material.
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(5) Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
|
|
|
|
(in thousands)
|
Finished goods
|
$
|
15,860
|
|
|
$
|
9,589
|
|
Raw materials and precious metals
|
8,818
|
|
|
9,055
|
|
Parts and supplies
|
33,489
|
|
|
18,885
|
|
Total inventories
|
$
|
58,167
|
|
|
$
|
37,529
|
|
(6) Property, Plant, and Equipment
Property, plant, and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
|
|
|
|
(in thousands)
|
Land and improvements
|
$
|
12,995
|
|
|
$
|
5,441
|
|
Buildings and improvements
|
14,881
|
|
|
3,049
|
|
Machinery and equipment
|
1,343,980
|
|
|
574,326
|
|
Automotive equipment
|
599
|
|
|
448
|
|
Furniture and fixtures
|
1,437
|
|
|
918
|
|
Railcars
|
16,261
|
|
|
16,315
|
|
Construction in progress
|
9,588
|
|
|
1,641
|
|
|
$
|
1,399,741
|
|
|
$
|
602,138
|
|
Less: Accumulated depreciation
|
269,620
|
|
|
209,005
|
|
Total property, plant, and equipment, net
|
$
|
1,130,121
|
|
|
$
|
393,133
|
|
Capitalized interest recognized as a reduction of interest expense for the years ended December 31,
2016
,
2015
and
2014
was approximately
$0.5 million
,
$9,000
, and
$0.1 million
, respectively.
(7) Partners’ Capital and Partnership Distributions
The Partnership has
two
types of partnership interests outstanding:
|
|
•
|
a general partner interest, which is not entitled to any distributions, and which is held by the general partner.
|
At December 31,
2016
and 2015, the Partnership had a total of
113,282,973
and
73,128,269
common units issued and outstanding, respectively, of which
38,920,000
common units were owned by CRLLC, representing approximately
34%
and
53%
, respectively, of the total Partnership common units outstanding.
The board of directors of the Partnership's general partner has a policy for the Partnership to distribute all available cash generated on a quarterly basis. Cash distributions will be made to the common unitholders of record on the applicable record date, generally within
60
days after the end of each quarter. Available cash for each quarter will be determined by the board of directors of the general partner following the end of such quarter.
Available cash begins with Adjusted EBITDA reduced for cash needed for (i) net cash interest expense (excluding capitalized interest) and debt service and other contractual obligations; (ii) maintenance capital expenditures; and (iii) to the extent applicable, major scheduled turnaround expenses, reserves for future operating or capital needs that the board of
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
directors of the general partner deems necessary or appropriate, and expenses associated with the East Dubuque Merger, if any. Adjusted EBITDA is defined as EBITDA (net income before interest expense, net, income tax expense, depreciation and amortization) further adjusted for the impact of non-cash share-based compensation, and, when applicable, major scheduled turnaround expense, gain or loss on extinguishment of debt, loss on disposition of assets, expenses associated with the East Dubuque Merger and business interruption insurance recovery. Available cash for distribution may be increased by the release of previously established cash reserves, if any, at the discretion of the board of directors of the general partner, and available cash is increased by the business interruption insurance proceeds and the impact of purchase accounting. Actual distributions are set by the board of directors of the general partner. The board of directors of the general partner may modify the cash distribution policy at any time, and the partnership agreement does not require the board of directors of the general partner to make distributions at all.
The following is a summary of cash distributions paid to the unitholders during the years ended December 31,
2016
,
2015
and
2014
for the respective quarters to which the distributions relate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2015
|
|
March 31,
2016
(1)
|
|
June 30,
2016
|
|
September 30,
2016
|
|
Total Cash
Distributions
Paid in 2016
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions, except per common unit amounts)
|
Amount paid to CRLLC
|
$
|
10.5
|
|
|
$
|
10.5
|
|
|
$
|
6.6
|
|
|
$
|
—
|
|
|
$
|
27.6
|
|
Amounts paid to public unitholders
|
9.2
|
|
|
20.1
|
|
|
12.7
|
|
|
—
|
|
|
42.0
|
|
Total amount paid
|
$
|
19.7
|
|
|
$
|
30.6
|
|
|
$
|
19.3
|
|
|
$
|
—
|
|
|
$
|
69.6
|
|
Per common unit
|
$
|
0.27
|
|
|
$
|
0.27
|
|
|
$
|
0.17
|
|
|
$
|
—
|
|
|
$
|
0.71
|
|
Common units outstanding (in thousands)
|
73,128
|
|
|
113,283
|
|
|
113,283
|
|
|
113,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2014
|
|
March 31,
2015
|
|
June 30,
2015
|
|
September 30,
2015
|
|
Total Cash
Distributions
Paid in 2015
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions, except per common unit amounts)
|
Amount paid to CRLLC
|
$
|
16.0
|
|
|
$
|
17.5
|
|
|
$
|
15.2
|
|
|
$
|
—
|
|
|
$
|
48.7
|
|
Amounts paid to public unitholders
|
14.0
|
|
|
15.4
|
|
|
13.3
|
|
|
—
|
|
|
42.7
|
|
Total amount paid
|
$
|
30.0
|
|
|
$
|
32.9
|
|
|
$
|
28.5
|
|
|
$
|
—
|
|
|
$
|
91.4
|
|
Per common unit
|
$
|
0.41
|
|
|
$
|
0.45
|
|
|
$
|
0.39
|
|
|
$
|
—
|
|
|
$
|
1.25
|
|
Common units outstanding (in thousands)
|
73,123
|
|
|
73,123
|
|
|
73,123
|
|
|
73,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
March 31,
2014
|
|
June 30,
2014
|
|
September 30,
2014
|
|
Total Cash
Distributions
Paid in 2014
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions, except per common unit amounts)
|
Amount paid to CRLLC
|
$
|
16.7
|
|
|
$
|
14.8
|
|
|
$
|
12.8
|
|
|
$
|
10.5
|
|
|
$
|
54.9
|
|
Amounts paid to public unitholders
|
14.7
|
|
|
13.0
|
|
|
11.3
|
|
|
9.2
|
|
|
48.2
|
|
Total amount paid
|
$
|
31.4
|
|
|
$
|
27.8
|
|
|
$
|
24.1
|
|
|
$
|
19.7
|
|
|
$
|
103.1
|
|
Per common unit
|
$
|
0.43
|
|
|
$
|
0.38
|
|
|
$
|
0.33
|
|
|
$
|
0.27
|
|
|
$
|
1.41
|
|
Common units outstanding (in thousands)
|
73,113
|
|
|
73,113
|
|
|
73,114
|
|
|
73,117
|
|
|
|
_____________________________
(1) The distribution per common unit for the three months ended March 31, 2016 is calculated based on the post-merger common units outstanding.
(8) Goodwill
The Partnership evaluates the carrying value of goodwill annually as of November 1 and between annual evaluations if
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. The Partnership's goodwill reporting unit is the Coffeyville Facility.
Based on a significant decline in market capitalization and lower cash flow forecasts resulting from weakened fertilizer pricing trends during the third quarter of 2016, the Partnership identified a triggering event and therefore performed an interim goodwill impairment test as of September 30, 2016. The goodwill impairment quantitative testing involves a two-step process. Step 1 compares the fair value of the reporting unit to its carrying value. The Coffeyville Facility reporting unit fair value is based upon consideration of various valuation methodologies, including guideline public company multiples and projected future cash flows discounted at rates commensurate with the risk involved. The carrying amount of the reporting unit was less than its fair value; therefore, a Step 2 was not required to be completed and no impairment was recorded.
The fair value of the reporting unit exceeded its carrying value by approximately
17 percent
based upon the results of the Step 1 test as of September 30, 2016. Judgments and assumptions are inherent in management’s estimates used to determine the fair value of the reporting unit. Assumptions used in the discounted cash flows ("DCF") require the exercise of significant judgment, including judgment about appropriate discount rates and terminal values, growth rates, and the amount and timing of expected future cash flows. The discount rates used in the DCF, which are intended to reflect the risks inherent in future cash flow projections, are based on estimates of the weighted-average cost of capital of a market participant. Such estimates are derived from analysis of peer companies and consider the industry weighted average return on debt and equity from a market participant perspective. The most significant assumption to determining the fair value of the reporting unit was forecasted fertilizer pricing. Changes in assumptions may result in a change in management's estimates and may result in an impairment in future periods, including, but not limited to, further declines in the forecasted fertilizer pricing.
Subsequent to the September 30, 2016 interim impairment test, the Partnership elected to perform a qualitative evaluation as of November 1, 2016 to determine whether it was necessary to perform the quantitative two step goodwill analysis described in ASC 350, "
Intangibles - Goodwill and Other
". After assessing the totality of events and circumstances, it was determined that it was not more likely than not that the fair value of the Partnership was less than the carrying value, and so it was not necessary to perform the two-step goodwill impairment analysis. Based on the results of the tests, no impairment of goodwill was recorded for any of the periods presented.
(9) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
December 31,
2015
|
|
|
|
|
|
(in thousands)
|
Property taxes
|
$
|
1,742
|
|
|
$
|
1,371
|
|
Current interest rate swap liabilities
|
—
|
|
|
119
|
|
Accrued interest
|
2,683
|
|
|
458
|
|
Railcar maintenance accruals
|
2,502
|
|
|
209
|
|
Affiliates (1)
|
2,515
|
|
|
2,334
|
|
Other accrued expenses and liabilities
|
2,932
|
|
|
1,192
|
|
Total accrued expenses and other current liabilities
|
$
|
12,374
|
|
|
$
|
5,683
|
|
_______________________________________
|
|
(1)
|
Accrued expenses and other current liabilities include amounts owed by the Partnership to CVR Energy under the feedstock and shared services agreement and services agreement. Refer to "Allocation of Costs" in
Note 2 ("Summary of Significant Accounting Policies")
and refer to
Note 15 ("Related Party Transactions")
for additional discussion.
|
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(10) Debt
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
As of
December 31, 2016
|
|
As of
December 31,
2015
|
|
|
|
|
|
(in thousands)
|
9.250% senior secured notes, due 2023
|
$
|
645,000
|
|
|
$
|
—
|
|
6.50% notes, due 2021
|
2,240
|
|
|
—
|
|
Credit Agreement term loan, due 2016
|
—
|
|
|
125,000
|
|
Total long-term debt, before unamortized discount and debt issuance costs
|
647,240
|
|
|
125,000
|
|
Less:
|
|
|
|
Unamortized discount
|
15,220
|
|
|
—
|
|
Unamortized debt issuance costs
|
8,913
|
|
|
227
|
|
Total long-term debt, net of current portion
|
$
|
623,107
|
|
|
$
|
124,773
|
|
As discussed in
Note 2 ("Summary of Significant Accounting Policies")
, the Partnership adopted ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs", which requires that all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt. As a result of adoption of the standard, debt issuance costs of
$0.2 million
were reclassified as a direct deduction from the carrying value of the related debt balances in the Consolidated Balance Sheets as of December 31, 2015. A nominal amount of debt issuance costs related to the revolving credit facility was presented as assets in the Consolidated Balance Sheet as of December 31, 2015.
For the year ended
December 31, 2016
,
2015
and
2014
, amortization of the discount on debt and amortization of deferred financing costs reported as interest expense and other financing costs totaled approximately
$1.7 million
,
$1.0 million
and
$1.0 million
, respectively.
2023 Notes
On June 10, 2016, the Partnership and CVR Nitrogen Finance Corporation, an indirect wholly-owned subsidiary of the Partnership, (together the "2023 Notes Issuers"), certain subsidiary guarantors named therein and Wilmington Trust, National Association, as trustee and as collateral trustee, completed a private offering of
$645.0 million
aggregate principal amount of
9.250%
Senior Secured Notes due 2023 (the "2023 Notes"). The 2023 Notes mature on June 15, 2023, unless earlier redeemed or repurchased by the issuers. Interest on the 2023 Notes is payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2016. The 2023 Notes are guaranteed on a senior secured basis by all of the Partnership’s existing subsidiaries.
The 2023 Notes were issued at a
$16.1 million
discount, which is being amortized over the term of the 2023 Notes as interest expense using the effective-interest method. The Partnership received approximately
$622.9 million
of cash proceeds, net of the original issue discount and underwriting fees, but before deducting other third-party fees and expenses associated with the offering. The net proceeds from the sale of the 2023 Notes were used to: (i) repay all amounts outstanding under the CRLLC Facility (defined and discussed below); (ii) finance the 2021 Notes Tender Offer (defined and discussed below) and (iii) to pay related fees and expenses.
The debt issuance costs of the 2023 Notes totaled approximately
$9.4 million
and are being amortized over the term of the 2023 Notes as interest expense using the effective-interest amortization method.
The 2023 Notes contain customary covenants for a financing of this type that, among other things, restrict the Partnership’s ability and the ability of certain of its subsidiaries to: (i) sell assets; (ii) pay distributions on, redeem or repurchase the Partnership’s units or redeem or repurchase its subordinated debt; (iii) make investments; (iv) incur or guarantee additional indebtedness or issue preferred units; (v) create or incur certain liens; (vi) enter into agreements that restrict distributions or other payments from the Partnership’s restricted subsidiaries to the Partnership; (vii) consolidate, merge or transfer all or substantially all of the Partnership’s assets; (viii) engage in transactions with affiliates; and (ix) create unrestricted subsidiaries. As of
December 31, 2016
, the Partnership was in compliance with the covenants contained in the 2023 Notes.
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Included in other current liabilities on the Consolidated Balance Sheets is accrued interest payable totaling approximately
$2.7 million
as of
December 31, 2016
related to the 2023 Notes. At
December 31, 2016
, the estimated fair value of the 2023 Notes was approximately
$664.4 million
. This estimate of fair value is Level 2 as it was determined by quotations obtained from a broker-dealer who makes a market in these and similar securities.
2021 Notes
The
$320.0 million
2021 Notes were issued by CVR Nitrogen and CVR Nitrogen Finance (the "2021 Notes Issuers") prior to the East Dubuque Merger. The 2021 Notes bear interest at a rate of
6.5%
per annum, payable semi-annually in arrears on April 15 and October 15 of each year. The 2021 Notes are scheduled to mature on April 15, 2021, unless repurchased or redeemed earlier in accordance with their terms.
On April 29, 2016, the 2021 Notes Issuers commenced a cash tender offer (the "Tender Offer") to purchase any and all of the outstanding 2021 Notes. In connection with the Tender Offer, the 2021 Notes Issuers solicited the consents of holders of the notes to certain proposed amendments to the indenture governing the notes (the "Consent Solicitation"). As a result of the Tender Offer, on June 10, 2016, the 2021 Notes Issuers repurchased
$315,245,000
of 2021 Notes, representing approximately
98.5%
of the total outstanding principal amount of the notes at a purchase price of
$1,015
per $1,000 in principal amount. The total amount paid related to the Tender Offer was approximately
$320.0 million
, including an approximate
$4.7 million
premium. Additionally, the 2021 Notes Issuers paid
$3.1 million
for accrued and unpaid interest for the tendered notes up to the settlement date. The 2021 Notes Issuers received the requisite consents in respect of the 2021 Notes in connection with the Consent Solicitation to amend the indenture governing the 2021 Notes. As a result, the 2021 Notes Issuers executed a supplemental indenture, dated as of June 10, 2016, which eliminated or modified substantially all of the restrictive covenants relating to CVR Nitrogen and its subsidiaries, eliminated all events of default other than failure to pay principal, premium or interest on the 2021 Notes, eliminated all conditions to satisfaction and discharge, and released the liens on the collateral securing the 2021 Notes. The repurchase of a portion of the 2021 Notes resulted in a loss on extinguishment of debt of approximately
$5.1 million
for the year ended December 31, 2016, which includes the Tender Offer premium of
$4.7 million
and the write-off of the unamortized portion of the purchase accounting adjustment of
$0.4 million
.
Concurrently with, but separately from the Tender Offer, the 2021 Notes Issuers also commenced an offer to purchase all of the outstanding 2021 Notes at a price equal to
101%
of the principal amount thereof, as required as a result of the East Dubuque Merger (the "Change of Control Offer"). The offer expired on June 28, 2016. As a result of the Change of Control Offer, the 2021 Notes Issuers repurchased
$560,000
of 2021 Notes at a purchase price of
$1,010
per $1,000 in principal amount. The total amount paid related to the Change of Control Offer was approximately
$0.6 million
, including a nominal amount of premium and accrued and unpaid interest. In November 2016, the Partnership repurchased
$1.9 million
principal amount of 2021 Notes, resulting in a
$0.2 million
gain on extinguishment of debt.
As of
December 31, 2016
,
$2,240,000
of principal amount of the 2021 Notes remained outstanding and accrued interest was nominal.
Asset Based (ABL) Credit Facility
On September 30, 2016, the Partnership entered into a senior secured asset based revolving credit facility (the "ABL Credit Facility") with a group of lenders and UBS AG, Stamford Branch ("UBS"), as administrative agent and collateral agent. The ABL Credit Facility has an aggregate principal amount of availability of up to
$50.0 million
with an incremental facility, which permits an increase in borrowings of up to
$25.0 million
in the aggregate subject to additional lender commitments and certain other conditions. The proceeds of the loans may be used for capital expenditures and working capital and general corporate purposes of the Partnership and its subsidiaries. The ABL Credit Facility provides for loans and standby letters of credit in an amount up to the aggregate availability under the facility, subject to meeting certain borrowing base conditions, with sub-limits of the lesser of
10%
of the total facility commitment and
$5.0 million
for swingline loans and
$10.0 million
for letters of credit. The ABL Credit Facility is scheduled to mature on September 30, 2021.
At the option of the borrowers, loans under the ABL Credit Facility initially bear interest at an annual rate equal to (i)
2.00%
plus LIBOR or (ii)
1.00%
plus a base rate, subject to a
0.50%
step-down based on the previous quarter’s excess availability. The borrowers must also pay a commitment fee on the unutilized commitments and also pay customary letter of credit fees.
The ABL Credit Facility also contains customary covenants for a financing of this type that limit the ability of the Partnership and its subsidiaries to, among other things, incur liens, engage in a consolidation, merger, purchase or sale of assets, pay dividends, incur indebtedness, make advances, investments and loans, enter into affiliate transactions, issue equity interests
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
or create subsidiaries and unrestricted subsidiaries. The ABL Credit Facility also contains a fixed charge coverage ratio financial covenant, as defined therein. The Partnership was in compliance with the covenants of the ABL Credit Facility as of
December 31, 2016
In connection with the ABL Credit Facility, the Partnership incurred lender and other third-party costs of approximately
$1.2 million
, which are being deferred and amortized to interest expense and other financing costs using the straight-line method over the term of the facility.
As of
December 31, 2016
, the Partnership and its subsidiaries had availability under the ABL Credit Facility of
$49.3 million
. There were
no
borrowings outstanding under the ABL Credit Facility as of
December 31, 2016
.
CRLLC Facility
On April 1, 2016, in connection with the closing of the East Dubuque Merger, the Partnership entered into a
$300.0 million
senior term loan credit facility (the "CRLLC Facility") with CRLLC, as the lender, the proceeds of which were used by the Partnership (i) to fund the repayment of amounts outstanding under the Wells Fargo Credit Agreement discussed in Note 4 ("East Dubuque Merger") (ii) to pay the cash consideration and to pay fees and expenses in connection with the East Dubuque Merger and related transactions and (iii) to repay all of the loans outstanding under the Credit Agreement discussed below. The CRLLC Facility had a term of
two
years and an interest rate of
12.0%
per annum. Interest was calculated on the basis of the actual number of days elapsed over a
360
-day year and payable quarterly. In April 2016, the Partnership borrowed
$300.0 million
under the CRLLC Facility. On June 10, 2016, the Partnership paid off the
$300.0 million
outstanding under the CRLLC Facility, paid
$7.0 million
in interest, and terminated the CRLLC Facility.
Credit Agreement
The Partnership's credit facility includes a term loan facility of
$125.0 million
and a revolving credit facility of
$25.0 million
with an uncommitted incremental facility of up to
$50.0 million
.
No
amounts were drawn under the revolving credit facility. There was no scheduled amortization. The principal portion of the term loan is presented as long-term debt on the Consolidated Balance Sheet as of December 31, 2015 as the Partnership had the intent and ability to refinance the obligation on a long-term basis.
The credit facility was scheduled to mature on April 13, 2016. On April 1, 2016, in connection with the completion of the East Dubuque Merger, the Partnership repaid all amounts outstanding under the Credit Agreement and paid
$0.3 million
for accrued and unpaid interest. Effective upon such repayment, the Credit Agreement and all related loan documents and security interests were terminated and released. The repayment was funded from amounts drawn on the CRLLC Facility, as discussed above. The Partnership recognized a nominal amount of loss on debt extinguishment in connection with the termination of the Credit Agreement.
Previous borrowings under the credit facility bore interest at either a Eurodollar rate or a base rate plus a margin based on a pricing grid determined by the trailing
four
quarter leverage ratio. The margin for borrowings under the credit facility ranges from
3.50%
to
4.25%
for Eurodollar loans and
2.50%
to
3.25%
for base rate loans. During the periods presented, the interest rate was either the
Eurodollar rate
plus a margin of
3.50%
or, for base rate loans, the
prime rate
plus
2.50%
. Under its terms, the lenders under the credit facility were granted a first priority security interest (subject to certain customary exceptions) in substantially all of the assets of CVR Partners and CRNF. At December 31, 2015, the effective rate was approximately
4.60%
, inclusive of the impact of the interest rate swaps discussed in
Note 11 ("Interest Rate Swap Agreements")
.
The carrying value approximated fair value as of December 31, 2015.
(11) Interest Rate Swap Agreements
CRNF had
two
floating-to-fixed interest rate swap agreements for the purpose of hedging the interest rate risk associated with a portion of its
$125.0 million
floating rate term debt which expired on February 12, 2016. The floating rate term debt is discussed further in
Note 10
("
Debt
"). The aggregate notional amount covered under these agreements, which commenced on August 12, 2011 and expired on February 12, 2016, totaled
$62.5 million
(split evenly between the two agreements). Under the terms of the interest rate swap agreement entered into on June 30, 2011, CRNF received a floating rate based on
three-month LIBOR
and paid a fixed rate of
1.94%
. Under the terms of the interest rate swap agreement entered into on July 1, 2011, CRNF received a floating rate based on
three-month LIBOR
and paid a fixed rate of
1.975%
. Both swap agreements were settled every
90 days
. The effect of these swap agreements was to lock in a fixed rate of interest of approximately
1.96%
plus the applicable margin paid to lenders over
three-month LIBOR
as governed by the CRNF credit facility. The agreements were designated as
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
cash flow hedges at inception and accordingly, the effective portion of the gain or loss on the swap was reported as a component of accumulated other comprehensive income (loss) ("AOCI"), and was reclassified into interest expense when the interest rate swap transaction affected earnings. Any ineffective portion of the gain or loss was recognized immediately in interest expense. The realized loss on the interest rate swap reclassified from AOCI into interest expense and other financing costs on the Consolidated Statements of Operations was
$0.1 million
for the year ended December 31, 2016. The realized loss on the interest rate swap reclassified from AOCI into interest expense and other financing costs on the Consolidated Statements of Operations was
$1.1 million
for each of the years ended December 31, 2015 and 2014.
The interest rate swap agreements previously held by the Partnership also provided for the right to offset. However, as the interest rate swaps were both in a liability position, there were no amounts offset in the Consolidated Balance Sheet as of December 31, 2015.
See Note 16 ("Fair Value of Financial Instruments")
for discussion of the fair value of the interest rate swap agreements.
(12) Net Income (Loss) Per Common Unit
The Partnership's net income (loss) is allocated wholly to the common unitholders as the general partner does not have an economic interest. Basic and diluted net income (loss) per common unit is calculated by dividing net income (loss) by the weighted-average number of common units outstanding during the period and, when applicable, gives effect to unvested common units granted under the CVR Partners LTIP. The common units issued during the period are included on a weighted-average basis for the days in which they were outstanding.
(13) Benefit Plans
A subsidiary of CVR Energy sponsors and administers a defined contribution 401(k) plan, the CVR Energy 401(k) Plan (the "Non-union Plan"), in which non-union employees of the general partner, CVR Partners and its subsidiaries may participate. Participants in the Non-union Plan may elect to contribute a designated percentage of their eligible compensation in accordance with the Non-union Plan, subject to statutory limits. The Partnership provides a matching contribution of
100%
of the first
6%
of eligible compensation contributed by participants. Participants in the Non-union Plan are immediately vested in their individual contributions. The Non-union Plan provides for a
three
-year vesting schedule for the Partnership's matching contributions and contains a provision to count service with predecessor organizations. The Partnership's contributions under the Non-union Plan were approximately
$1.2 million
,
$0.9 million
and
$0.7 million
, for the years ended
December 31, 2016
,
2015
and
2014
, respectively.
Beginning April 1, 2016 as a result of the East Dubuque Merger, the Partnership acquired the Rentech Nitrogen GP, LLC Union 401(k) Plan (the "Union Plan"), which is sponsored by CVR Nitrogen GP. The Union Plan is administered by a subsidiary of CVR Energy and is maintained for the benefit of union employees at the East Dubuque Facility. Contributions to the represented plan are determined in accordance with provisions of the negotiated labor contract. Participants in the Union Plan are immediately vested in their individual contributions as well as the Partnership’s contributions on their behalf. The Partnership's contributions under the Union Plan were approximately
$0.1 million
for the year ended
December 31, 2016
.
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(14) Commitments and Contingencies
Leases and Unconditional Purchase Obligations
The minimum required payments for operating leases and unconditional purchase obligations are as follows:
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
Operating
Leases
|
|
Unconditional
Purchase
Obligations
|
|
|
|
|
|
(in thousands)
|
2017
|
$
|
4,304
|
|
|
$
|
25,982
|
|
2018
|
3,452
|
|
|
14,289
|
|
2019
|
2,836
|
|
|
11,419
|
|
2020
|
2,310
|
|
|
6,426
|
|
2021
|
2,130
|
|
|
4,643
|
|
Thereafter
|
2,605
|
|
|
32,436
|
|
|
$
|
17,637
|
|
|
$
|
95,195
|
|
CRNF leases railcars and facilities under long-term operating leases. Lease expense is included in cost of materials and other for the years ended
December 31, 2016
,
2015
and
2014
and totaled approximately
$4.9 million
,
$4.6 million
and
$4.6 million
, respectively. The lease agreements have various remaining terms. Some agreements are renewable, at CRNF's option, for additional periods. It is expected, in the ordinary course of business, that leases will be renewed or replaced as they expire. The Partnership leases
115
UAN railcars from a related party, which is included in the operating lease commitments shown above. See
Note 15 ("Related Party Transactions")
for further discussion.
The Partnership's purchase obligation for pet coke from CVR Refining and has been derived from a calculation of the average pet coke price paid to CVR Refining over the preceding
two
year period.
See Note 15 ("Related Party Transactions")
for further discussion of the coke supply agreement.
During 2005, CRNF entered into the Amended and Restated On-Site Product Supply Agreement with The BOC Group, Inc. (as predecessor in interest to Linde LLC). Pursuant to the agreement, which expires in 2020, CRNF is required to take as available and pay for the supply of oxygen and nitrogen to the fertilizer operation. Expenses associated with this agreement are included in direct operating expenses (exclusive of depreciation and amortization) and for the years ended
December 31, 2016
,
2015
and
2014
, totaled approximately
$3.9 million
,
$3.4 million
and
$4.0 million
, respectively.
The Partnership is party to a pet coke supply agreement with HollyFrontier Corporation. The term of this agreement ends in December
2017
. The delivered cost of this pet coke totaled approximately
$4.9 million
,
$4.8 million
and
$4.3 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively, which was recorded in cost of materials and other.
EDNF is a party to a utility service agreement with Jo-Carroll Energy, Inc. The term of this agreement ends in 2019 and includes certain charges on a take-or-pay basis. The cost of electricity is included in direct operating expenses (exclusive of depreciation and amortization) and amounts associated with this agreement totaled approximately
$6.8 million
for the post-acquisition period ended
December 31, 2016
.
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Commitments for natural gas purchases consist of the following:
|
|
|
|
|
|
December 31,
2016
|
|
|
|
(in thousands, except weighted average rate)
|
MMBtus under fixed-price contracts
|
1,539
|
|
Commitments to purchase natural gas (1)
|
$
|
5,324
|
|
Weighted average rate per MMBtu (1)
|
$
|
3.46
|
|
____________
(1)
Commitments and weighted average rate per MMBtu is based on the fixed rates applicable to each contract, exclusive of transportation costs.
Litigation
From time to time, the Partnership is involved in various lawsuits arising in the normal course of business, including matters such as those described below under "Environmental, Health, and Safety ("EHS") Matters." Liabilities related to such litigation are recognized when the related costs are probable and can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. It is possible that management's estimates of the outcomes will change within the next year due to uncertainties inherent in litigation and settlement negotiations. In the opinion of management, the ultimate resolution of any other litigation matters is not expected to have a material adverse effect on the Partnership's results of operations or financial condition. There can be no assurance that management's beliefs or opinions with respect to liability for potential litigation matters are accurate.
CRNF received a
ten
year property tax abatement from Montgomery County, Kansas (the "County") in connection with the construction of the Coffeyville Facility that expired on December 31, 2007. In connection with the expiration of the abatement, the County reclassified and reassessed CRNF's nitrogen fertilizer plant for property tax purposes. The reclassification and reassessment resulted in an increase in CRNF's annual property tax expense by an average of approximately
$10.7 million
per year for the years ended December 31, 2008 and 2009,
$11.7 million
for the year ended December 31, 2010,
$11.4 million
for the year ended December 31, 2011 and
$11.3 million
for the year ended December 31, 2012. CRNF protested the classification and resulting valuation for each of those years to the Kansas Board of Tax Appeals ("BOTA"), followed by an appeal to the Kansas Court of Appeals. However, CRNF fully accrued and paid the property taxes the county claimed were owed for the years ended December 31, 2008 through 2012. The Kansas Court of Appeals, in a memorandum opinion dated August 9, 2013, reversed the BOTA decision in part and remanded the case to BOTA, instructing BOTA to classify each asset on an asset by asset basis instead of making a broad determination that CRNF's entire plant was real property as BOTA did originally. The County filed a motion for rehearing with the Kansas Court of Appeals and a petition for review with the Kansas Supreme Court, both of which have been denied.
In March 2015, BOTA concluded that based upon an asset by asset determination, a substantial majority of the assets in dispute will be classified as personal property for the 2008 tax year. The parties stipulated to the value of the real property, following which BOTA issued its final decision. The County has appealed the decision with respect to classification to the Kansas Court of Appeals. No amounts have been received or recognized in these consolidated financial statements related to the 2008 property tax matter or BOTA’s decision.
On February 25, 2013, the County and CRNF agreed to a settlement for tax years 2009 through 2012, which has lowered CRNF's property taxes by about
$10.7 million
per year (as compared to the 2012 tax year) for tax years 2013 through 2016 based on current mill levy rates. In addition, the settlement provides the County will support CRNF's application before BOTA for a
ten
year tax exemption for the UAN expansion. Finally, the settlement provides that CRNF will continue its appeal of the 2008 reclassification and reassessment as discussed above. During the years ended December 31,
2016
,
2015
and
2014
, CRNF recognized approximately
$1.4 million
,
$1.3 million
and
$1.3 million
, respectively, in property tax expense included in direct operating expenses (exclusive of depreciation and amortization).
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
East Dubuque Merger Litigation
On August 29, 2015, Mike Mustard, a purported unitholder of Rentech Nitrogen Partners, L.P. ("Rentech Nitrogen"), filed a class action complaint on behalf of the public unitholders of Rentech Nitrogen against Rentech Nitrogen, Rentech Nitrogen GP, LLC ("Rentech Nitrogen GP"), Rentech Nitrogen Holdings, Inc., Rentech, Inc., DSHC, LLC, CVR Partners,
two
subsidiaries of CVR Partners, and the members of the board of directors of Rentech Nitrogen GP (the "Rentech Nitrogen Board"), in the Court of Chancery of the State of Delaware (the "Mustard Lawsuit"). On October 6, 2015, Jesse Sloan, a purported unitholder of Rentech Nitrogen, filed a class action complaint on behalf of the public unitholders of Rentech Nitrogen against Rentech Nitrogen, Rentech Nitrogen GP, CVR Partners,
two
subsidiaries of CVR Partners, and the members of the Rentech Nitrogen Board, in the United States District Court for the Central District of California (the "Sloan Lawsuit"). Both lawsuits alleged, among other things, that the attempted sale of Rentech Nitrogen to CVR Partners was conducted by means of an unfair process and for an unfair price. In July 2016, the Mustard Lawsuit was dismissed. In October 2016, the United States District Court for the Central District of California issued an order and judgment approving the settlement of the Sloan Lawsuit. Under the terms of the settlement, the defendants made certain supplemental disclosures related to the East Dubuque Merger, and in return, the settlement resolves and releases all claims by unitholders of Rentech Nitrogen challenging the East Dubuque Merger.
Environmental, Health, and Safety ("EHS") Matters
The Partnership is subject to various stringent federal, state, and local EHS rules and regulations. Liabilities related to EHS matters are recognized when the related costs are probable and can be reasonably estimated. Estimates of these costs are based upon currently available facts, existing technology, site-specific costs, and currently enacted laws and regulations. In reporting EHS liabilities, no offset is made for potential recoveries. All liabilities are monitored and adjusted regularly as new facts emerge or changes in law or technology occur.
The Partnership owns and operates
two
facilities utilized for the manufacture of nitrogen fertilizers. Therefore, the Partnership has exposure to potential EHS liabilities related to past and present EHS conditions at this location. Under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), the Resource Conservation and Recovery Act, and related state laws, certain persons may be liable for the release or threatened release of hazardous substances. These persons can include the current owner or operator of property where a release or threatened release occurred, any persons who owned or operated the property when the release occurred, and any persons who disposed of, or arranged for the transportation or disposal of, hazardous substances at a contaminated property. Liability under CERCLA is strict, and under certain circumstances, joint and several, so that any responsible party may be held liable for the entire cost of investigating and remediating the release of hazardous substances.
The Partnership is also subject to extensive and frequently changing federal, state and local, environmental and health and safety laws and regulations governing the emission and release of hazardous substances into the environment, the treatment and discharge of waste water, and the storage, handling, use and transportation of nitrogen products. The ultimate impact of complying with evolving laws and regulations is not always clearly known or determinable due in part to the fact that the Partnership's operations may change over time and certain implementing regulations for laws, such as the federal Clean Air Act, have not yet been finalized, are under governmental or judicial review or are being revised. These laws and regulations could result in increased capital, operating and compliance costs.
Management periodically reviews and, as appropriate, revises its environmental accruals. Based on current information and regulatory requirements, management believes that the accruals established for environmental expenditures are adequate.
The Partnership believes it is in substantial compliance with existing EHS rules and regulations. There can be no assurance that the EHS matters described above or other EHS matters which may develop in the future will not have a material adverse effect on the business, financial condition, or results of operations of the Partnership.
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(15) Related Party Transactions
Related Party Agreements
CVR Partners is party to, or otherwise subject to certain agreements with CVR Energy and its subsidiaries, including CVR Refining and its subsidiary Coffeyville Resources Refining & Marketing, LLC ("CRRM"), that govern the business relationships among each party. The agreements are described as in effect at
December 31, 2016
.
Amounts owed to CVR Partners and its subsidiaries from CVR Energy and its subsidiaries with respect to these agreements are included in prepaid expenses and other currents assets and other long-term assets, on the Consolidated Balance Sheets. Conversely, amounts owed to CVR Energy and its subsidiaries by CVR Partners and its subsidiaries with respect to these agreements are included in accounts payable, personnel accruals, and accrued expenses and other current liabilities on the Partnership's Consolidated Balance Sheets.
Feedstock and Shared Services Agreement
CRNF is party to a feedstock and shared services agreement with CRRM, under which the
two
parties provide feedstocks and other services to one another. These feedstocks and services are utilized in the respective production processes of CRRM's Coffeyville, Kansas refinery and CRNF's Coffeyville Facility.
Pursuant to the feedstock agreement, CRNF and CRRM have agreed to transfer hydrogen to one another; provided CRNF is not required to sell hydrogen to CRRM if such hydrogen is required for operation of CRNF's nitrogen fertilizer plant, if such sale would adversely affect the Partnership's classification as a partnership for federal income tax purposes, or if such sale would not be in CRNF's best interest. Net monthly sales of hydrogen to CRRM have been reflected as net sales for CVR Partners, when applicable. Net monthly receipts of hydrogen from CRRM have been reflected in cost of materials and other for CVR Partners, when applicable. For the years ended
December 31, 2016
,
2015
and
2014
, the net sales generated from the sale of hydrogen to CRRM were approximately
$3.2 million
,
$11.8 million
and
$10.1 million
, respectively. For the years ended
December 31, 2016
, CVR Partners also recognized approximately
$0.2 million
of cost of materials and other related to the transfer of hydrogen from the refinery, and a nominal amount was recognized for the years ended December 31, 2015 and 2014. At
December 31, 2016
, approximately
$0.1 million
was included in accounts payable on the Consolidated Balance Sheets associated with hydrogen purchases. At December 31,
2015
, approximately
$0.5 million
of receivables were included in prepaid expenses and other current assets on the Consolidated Balance Sheets associated with hydrogen sales.
CRNF is also obligated to make available to CRRM any nitrogen produced by the Linde air separation plant that is not required for the operation of the Coffeyville Facility, as determined by CRNF in a commercially reasonable manner. Reimbursed direct operating expenses associated with nitrogen for the year ended December 31,
2014
was approximately
$1.0 million
and was nominal for the year ended December 31,
2015
. There were no reimbursed direct operating expenses associated with nitrogen for the year ended December 31, 2016.
With respect to oxygen requirements, CRNF is obligated to provide oxygen produced by the Linde air separation plant and made available to us to the extent that such oxygen is not required for operation of our nitrogen fertilizer plant. The oxygen is required to meet certain specifications and is to be sold at a fixed price. Approximately
$0.3 million
was reimbursed by CRRM for the sale of oxygen for the year ended
December 31, 2016
and was included as a reduction to direct operating expenses.
The agreement also provides a mechanism pursuant to which CRNF transfers a tail gas stream to CRRM. CRNF receives the benefit of eliminating a waste gas stream and recovers the fuel value of the tail gas system. For the years ended
December 31, 2016
,
2015
and
2014
, net sales generated from the sale of tail gas to CRRM were nominal. In April 2011, CRRM installed a pipe between the Coffeyville, Kansas refinery and the Coffeyville Facility to transfer the tail gas. CRNF paid CRRM the cost of installing the pipe over
three
years and provided an additional
15%
to cover the cost of capital. At
December 31, 2016
and
2015
, an asset of approximately
$0.2 million
was included in prepaid expenses and other current assets and approximately
$0.6 million
and
$0.8 million
, respectively, was included in other long-term assets.
CRNF also occasionally provides finished product tank capacity to CRRM under the agreement. Approximately
$0.1 million
and
$0.2 million
were reimbursed by CRRM for the use of tank capacity for the years ended
December 31, 2016
and
2015
, respectively. This reimbursement was recorded as a reduction to direct operating expenses.
The agreement has an initial term of
20
years, ending in 2027, which will be automatically extended for successive
five
year renewal periods. Either party may terminate the agreement, effective upon the last day of a term, by giving notice no later than
three
years prior to a renewal date. The agreement will also be terminable by mutual consent of the parties or if
one
party breaches the agreement and does not cure within applicable cure periods and the breach materially and adversely affects the
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ability of the terminating party to operate its facility. Additionally, the agreement may be terminated in some circumstances if substantially all of the operations at the Coffeyville Facility or the Coffeyville, Kansas refinery are permanently terminated, or if either party is subject to a bankruptcy proceeding or otherwise becomes insolvent.
At
December 31, 2016
and
2015
, receivables of
$0.3 million
and
$0.2 million
were included in prepaid expenses and other current assets on the Consolidated Balance Sheets associated for amounts yet to be received related to components of the feedstock and shared services agreement other than amounts related to hydrogen sales and tail gas discussed above. At
December 31, 2016
and
2015
, payables of
$0.9 million
and
$0.7 million
, respectively, were included in accounts payable on the Consolidated Balance Sheets associated with unpaid balances related to components of the feedstock and shared services agreement.
Coke Supply Agreement
CRNF is party to a coke supply agreement with CRRM pursuant to which CRRM supplies CRNF with pet coke. This agreement provides that CRRM must deliver to CRNF during each calendar year an annual required amount of pet coke equal to the lesser of (i)
100 percent
of the pet coke produced at CRRM's Coffeyville, Kansas petroleum refinery or (ii)
500,000
tons of pet coke. CRNF is also obligated to purchase this annual required amount. If during a calendar month CRRM produces more than
41,667
tons of pet coke, then CRNF will have the option to purchase the excess at the purchase price provided for in the agreement. If CRNF declines to exercise this option, CRRM may sell the excess to a third party.
CRNF obtains most (over
70%
on average during the last
five
years) of the pet coke it needs from CRRM's adjacent crude oil refinery pursuant to the pet coke supply agreement, and procures the remainder through a contract with HollyFrontier Corporation and on the open market. The price CRNF pays pursuant to the pet coke supply agreement is based on the lesser of a pet coke price derived from the price received for UAN (the "UAN-based price") or a pet coke price index. The UAN-based price begins with a pet coke price of
$25
per ton based on a price per ton for UAN that excludes transportation cost ("netback price") of
$205
per ton, and adjusts up or down
$0.50
per ton for every
$1.00
change in the netback price. The UAN-based price has a ceiling of
$40
per ton and a floor of
$5
per ton.
CRNF will also pay any taxes associated with the sale, purchase, transportation, delivery, storage or consumption of the pet coke. CRNF will be entitled to offset any amount payable for the pet coke against any amount due from CRRM under the feedstock and shared services agreement between the parties.
The agreement has an initial term of
20
years, ending in 2027, which will be automatically extended for successive
five
year renewal periods. Either party may terminate the agreement by giving notice no later than
three
years prior to a renewal date. The agreement is also terminable by mutual consent of the parties or if a party breaches the agreement and does not cure within applicable cure periods. Additionally, the agreement may be terminated in some circumstances if substantially all of the operations at the Coffeyville Facility or the Coffeyville, Kansas refinery are permanently terminated, or if either party is subject to a bankruptcy proceeding or otherwise becomes insolvent.
The cost of pet coke associated with the transfer of pet coke from CRRM to CRNF were approximately
$2.1 million
,
$6.6 million
and
$9.2 million
for the years ended
December 31, 2016
,
2015
and
2014
, respectively, and included in cost of materials and other on the Consolidated Statement of Operations. Payables of
$0.1 million
and
$0.3 million
related to the coke supply agreement were included in accounts payable on the Consolidated Balance Sheets as of
December 31, 2016
and
2015
, respectively.
Lease Agreement
CRNF entered into a lease agreement with CRRM under which it leases certain office and laboratory space. The initial term of the lease will expire in October 2017, provided, however, that CRNF may terminate the lease at any time during the initial term by providing
180
days prior written notice. In addition, CRNF has the option to renew the lease agreement for up to
five
additional
one
-year periods by providing CRRM with notice of renewal at least
60
days prior to the expiration of the then existing term. For each of the years ended
December 31, 2016
,
2015
and
2014
, expenses incurred related to the use of the office and laboratory space totaled approximately
$0.1 million
. There were no amounts outstanding with respect to the lease agreement as of
December 31, 2016
and
2015
.
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Environmental Agreement
CRNF entered into an environmental agreement with CRRM which provides for certain indemnification and access rights in connection with environmental matters affecting the Coffeyville, Kansas refinery and the nitrogen fertilizer plant. Generally, both CRNF and CRRM have agreed to indemnify and defend each other and each other's affiliates against liabilities associated with certain hazardous materials and violations of environmental laws that are a result of or caused by the indemnifying party's actions or business operations. This obligation extends to indemnification for liabilities arising out of off-site disposal of certain hazardous materials. Indemnification obligations of the parties will be reduced by applicable amounts recovered by an indemnified party from third parties or from insurance coverage.
The term of the agreement is for at least
20
years, ending in 2027, or for so long as the feedstock and shared services agreement is in force, whichever is longer.
Services Agreement
CVR Partners obtains certain management and other services from CVR Energy pursuant to a services agreement between the Partnership, CVR GP and CVR Energy. Under this agreement, the Partnership's general partner has engaged CVR Energy to provide certain services, including the following, among others:
|
|
•
|
services from CVR Energy's employees in capacities equivalent to the capacities of corporate executive officers, except that those who serve in such capacities under the agreement will serve the Partnership on a shared, part-time basis only, unless the Partnership and CVR Energy agree otherwise;
|
|
|
•
|
administrative and professional services, including legal, accounting, SEC and securities exchange reporting, human resources, information technology, communications, insurance, tax, credit, finance, government and regulatory affairs;
|
|
|
•
|
recommendations on capital raising activities to the board of directors of our general partner, including the issuance of debt or equity interests, the entry into credit facilities and other capital market transactions;
|
|
|
•
|
managing or overseeing litigation and administrative or regulatory proceedings, establishing appropriate insurance policies for the Partnership, and providing safety and environmental advice;
|
|
|
•
|
recommending the payment of distributions; and
|
|
|
•
|
managing or providing advice for other projects, including acquisitions, as may be agreed by our general partner and CVR Energy from time to time.
|
As payment for services provided under the agreement, the Partnership, its general partner or its subsidiaries must pay CVR Energy (i) all costs incurred by CVR Energy or its affiliates in connection with the employment of its employees who provide the Partnership services under the agreement on a full-time basis, but excluding certain share-based compensation; (ii) a prorated share of costs incurred by CVR Energy or its affiliates in connection with the employment of its employees who provide the Partnership services under the agreement on a part-time basis, but excluding certain share-based compensation, and such prorated share shall be determined by CVR Energy on a commercially reasonable basis, based on the percentage of total working time that such shared personnel are engaged in performing services for the Partnership; (iii) a prorated share of certain administrative costs, including office costs, services by outside vendors, other sales, general and administrative costs and depreciation and amortization; and (iv) various other administrative costs in accordance with the terms of the agreement, including travel, insurance, legal and audit services, government and public relations and bank charges.
Either CVR Energy or the Partnership's general partner may temporarily or permanently exclude any particular service from the scope of the agreement upon
180
days' notice. The Partnership's general partner may terminate the agreement upon at least
180
days' notice, but not more than
one
year's notice. Furthermore, the Partnership's general partner may terminate the agreement immediately if CVR Energy becomes bankrupt or dissolves or commences liquidation or winding-up procedures.
In order to facilitate the carrying out of services under the agreement, CVR Partners and CVR Energy have granted one another certain royalty-free, non-exclusive and non-transferable rights to use one another's intellectual property under certain circumstances.
The agreement also contains an indemnity provision whereby the Partnership, its general partner, and our subsidiaries, as indemnifying parties, agree to indemnify CVR Energy and its affiliates (other than the indemnifying parties themselves) against losses and liabilities incurred in connection with the performance of services under the agreement or any breach of the
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
agreement, unless such losses or liabilities arise from a breach of the agreement by CVR Energy or other misconduct on its part, as provided in the agreement. The agreement contains a provision stating that CVR Energy is an independent contractor under the agreement and nothing in the agreement may be construed to impose an implied or express fiduciary duty owed by CVR Energy, on the one hand, to the recipients of services under the agreement, on the other hand. The agreement prohibits recovery of lost profits or revenue, or special, incidental, exemplary, punitive or consequential damages from CVR Energy or certain affiliates.
Net amounts incurred under the services agreement for the years ended
December 31, 2016
,
2015
and
2014
were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
|
(in thousands)
|
Direct operating expenses (exclusive of depreciation and amortization)
|
$
|
3,583
|
|
|
$
|
3,500
|
|
|
$
|
3,415
|
|
Selling, general and administrative expenses
|
11,761
|
|
|
10,735
|
|
|
11,193
|
|
Total
|
$
|
15,344
|
|
|
$
|
14,235
|
|
|
$
|
14,608
|
|
For services performed in connection with the services agreement, the Partnership recognized personnel costs, excluding amounts related to share based compensation that are disclosed in
Note 4 ("Share‑Based Compensation")
, of
$6.9 million
,
$5.7 million
and
$5.1 million
, respectively, for the years ended
December 31, 2016
,
2015
and
2014
. At
December 31, 2016
and
2015
, payables of
$3.5 million
and
$3.2 million
, respectively, were included in accounts payable and accrued expenses and other current liabilities on the Consolidated Balance Sheets with respect to amounts billed in accordance with the services agreement.
GP Services Agreement
The Partnership is party to a GP Services Agreement dated November 29, 2011 and subsequently amended between the Partnership, CVR GP and CVR Energy. This agreement allows CVR Energy to engage CVR GP, in its capacity as the Partnership's general partner, to provide CVR Energy with (i) business development and related services and (ii) advice or recommendations for such other projects as may be agreed between the Partnership's general partner and CVR Energy from time to time. As payment for certain specific services provided under the agreement, CVR Energy must pay a prorated share of costs incurred by the Partnership or its general partner in connection with the employment of the certain employees who provide CVR Energy services on a part-time basis, as determined by the Partnership's general partner on a commercially reasonable basis based on the percentage of total working time that such shared personnel are engaged in performing services for CVR Energy. CVR Energy is not required to directly pay any compensation, salaries, bonuses or benefits to any of the Partnership's or general partner's employees who provide services to CVR Energy on a full-time or part-time basis, thus the Partnership will continue to pay their compensation.
Either CVR Energy or the Partnership's general partner may temporarily or permanently exclude any particular service from the scope of the agreement upon
180
days' notice. The Partnership's general partner also has the right to delegate the performance of some or all of the services to be provided pursuant to the agreement to one of its affiliates or any other person or entity, though such delegation does not relieve the Partnership's general partner from its obligations under the agreement. Either CVR Energy or the Partnership's general partner may terminate the agreement upon at least
180
days' notice, but not more than
one
year's notice. Furthermore, CVR Energy may terminate the agreement immediately if the Partnership, or its general partner, become bankrupt, or dissolve and commence liquidation or winding-up.
Limited Partnership Agreement
The Partnership's general partner manages the Partnership's operations and activities as specified in the partnership agreement. The general partner of the Partnership is managed by its board of directors. CRLLC has the right to select the directors of the general partner. Actions by the general partner that are made in its individual capacity are made by CRLLC as the sole member of the general partner and not by its board of directors. The members of the board of directors of the general partner are not elected by the unitholders and are not subject to re-election on a regular basis in the future. The officers of the general partner manage the day-to-day affairs of the Partnership's business.
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The partnership agreement provides that the Partnership will reimburse its general partner for all direct and indirect expenses it incurs or payments it makes on behalf of the Partnership (including salary, bonus, incentive compensation and other amounts paid to any person to perform services for the Partnership or for its general partner in connection with operating the Partnership). The Partnership recorded expenses of approximately
$4.0 million
,
$3.9 million
and
$2.6 million
, for the years ended
December 31, 2016
,
2015
and
2014
, respectively, pursuant to the partnership agreement primarily for personnel costs related to the compensation of executives at the general partner, who manage the Partnership's business. At both
December 31, 2016
and
2015
, amounts due of
$2.0 million
were included in personnel accruals on the Consolidated Balance Sheets with respect to amounts outstanding in accordance with the limited partnership agreement.
Railcar Lease Agreement
In the second quarter of 2016, the Partnership entered into agreements to lease a total of
115
UAN railcars from American Railcar Leasing, LLC ("ARL"), a company controlled by IEP. The lease agreements have a term of approximately
seven
years. The Partnership received the
115
UAN railcars during the second half of 2016. For the year ended
December 31, 2016
, rent expense of approximately
$0.3 million
was recorded in cost of materials and other in the Consolidated Statement of Operations related to these agreements.
Railcar Purchases and Maintenance
In 2014, the Partnership purchased
fifty
new UAN railcars from American Railcar Industries, Inc. ("ARI"), a company controlled by IEP, for approximately
$6.7 million
and also purchased
twelve
used UAN railcars from ARL for approximately
$1.1 million
.
Insight Portfolio Group
Insight Portfolio Group LLC ("Insight Portfolio Group") is an entity formed by Mr. Carl C. Icahn in order to maximize the potential buying power of a group of entities with which Mr. Icahn has a relationship in negotiating with a wide range of suppliers of goods, services and tangible and intangible property at negotiated rates. In January 2013, CVR Energy acquired a minority equity interest in Insight Portfolio Group. The Partnership participates in Insight Portfolio Group’s buying group through its relationship with CVR Energy. The Partnership may purchase a variety of goods and services as members of the buying group at prices and on terms that management believes would be more favorable than those which would be achieved on a stand-alone basis. Transactions with Insight Portfolio Group for each of the reporting periods were nominal.
AEPC Facility
On April 1, 2016, in connection with the closing of the East Dubuque Merger, the Partnership entered into a
$320.0 million
senior term loan facility (the "AEPC Facility") with American Entertainment Properties Corp., a Delaware corporation and an affiliate of the Partnership ("AEPC"), as the lender, which was to be used (i) by the Partnership to provide funds to CVR Nitrogen to make a change of control offer and, if applicable, a "clean-up" redemption in accordance with the indenture governing the 2021 Notes or (ii) by the Partnership or CVR Nitrogen to make a tender offer for the 2021 Notes and, in each case, pay fees and expenses related thereto. The AEPC Facility, if drawn, would have had a term of
two years
and an interest rate of
12%
per annum. In connection with the repayment of the substantial majority of the 2021 Notes, the AEPC Facility was terminated.
Commitment Letter
Simultaneously with the execution of the Merger Agreement, CVR Partners entered into a commitment letter (the "Commitment Letter") with CRLLC, pursuant to which CRLLC had committed to, on the terms and subject to the conditions set forth in the Commitment Letter, make available to CVR Partners term loan financing of up to
$150.0 million
, which amounts would have been available solely to fund the repayment of all of the loans outstanding under the Wells Fargo Credit Agreement, the cash consideration and expenses associated with the East Dubuque Merger. The term loan facility, if drawn, would have had a
one
-year term at an interest rate of three-month LIBOR plus
3.0%
per annum. In connection with the Partnership's entry into the CRLLC Facility (defined and discussed below), the Commitment Letter was terminated.
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CRLLC Guaranty
On February 9, 2016, CRLLC and the Partnership entered into a guaranty, pursuant to which CRLLC agreed to guaranty the indebtedness outstanding under the credit facility. If the credit facility became due prior to a refinancing by the Partnership, CRLLC would have been required to pay the indebtedness pursuant to this guaranty. The Partnership's obligation to repay CRLLC for the indebtedness would have been pursuant to a promissory note ("the Note"). The terms of the Note would have been mutually agreed upon by the parties, provided, the term will be the lesser of
two years
or such time that the Partnership obtains third-party financing ("New Debt") of at least
$125.0 million
on terms acceptable to the Partnership with a term of greater than
one year
from the inception of the New Debt. In connection with the Partnership's entry into the CRLLC Facility (defined and discussed below), the CRLLC Guaranty was terminated.
CRLLC Facility
On April 1, 2016, in connection with the closing of the East Dubuque Merger, the Partnership entered into a
$300.0 million
senior term loan credit facility (the "CRLLC Facility") with CRLLC, as the lender, the proceeds of which were used by the Partnership (i) to fund the repayment of amounts outstanding under the Wells Fargo Credit Agreement discussed in
Note 3 ("East Dubuque Merger")
(ii) to pay the cash consideration and to pay fees and expenses in connection with the East Dubuque Merger and related transactions and (iii) to repay all of the loans outstanding under the Credit Agreement discussed below. The CRLLC Facility had a term of
two years
and an interest rate of
12.0%
per annum. Interest was calculated on the basis of the actual number of days elapsed over a
360
-day year and payable quarterly. In April 2016, the Partnership borrowed
$300.0 million
under the CRLLC Facility. On June 10, 2016, the Partnership paid off the
$300.0 million
outstanding under the CRLLC Facility, paid
$7.0 million
in interest, and terminated the CRLLC Facility.
Parent Affiliate Units
Subsequent to the East Dubuque Merger, the Partnership purchased
400,000
CVR Nitrogen common units from CVR Energy during the second quarter of 2016 for
$5.0 million
. See
Note 3 ("East Dubuque Merger")
for further discussion.
(16) Fair Value of Financial Instruments
The fair values of financial instruments are estimated based upon current market conditions and quoted market prices for the same or similar instruments. Management estimates that the carrying value approximates fair value for all of the Partnerships' assets and liabilities that fall under the scope of ASC 825,
Financial Instruments
.
Fair value measurements are derived using inputs (assumptions that market participants would use in pricing an asset or liability) including assumptions about risk. ASC 820,
Fair Value Measurements
, categorizes inputs used in fair value measurements into three broad levels as follows:
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•
|
(Level 1) Quoted prices in active markets for identical assets or liabilities.
|
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•
|
(Level 2) Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, similar assets and liabilities in markets that are not active or can be corroborated by observable market data.
|
|
|
•
|
(Level 3) Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes valuation techniques that involve significant unobservable inputs.
|
There were no assets or liabilities measured at fair value on a recurring basis as of
December 31, 2016
. The following table sets forth the assets and liabilities measured at fair value on a recurring basis, by input level, as of December 31,
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Financial Statement Caption and Description
|
|
|
|
|
|
|
|
Other current liabilities (interest rate swaps)
|
$
|
—
|
|
|
$
|
119
|
|
|
$
|
—
|
|
|
$
|
119
|
|
The only financial assets and liabilities that were measured at fair value on a recurring basis during the periods presented were the Partnership’s interest rate swap instruments. The Partnership had interest rate swaps that are measured at fair value on
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
a recurring basis using Level 2 inputs. See further discussion in
Note 11
("
Interest Rate Swap Agreements
"). The fair values of these interest rate swap instruments were based on discounted cash flow models that incorporate the cash flows of the derivatives, as well as the current LIBOR rate and a forward LIBOR curve, along with other observable market inputs. The Partnership had no transfers of assets or liabilities between any of the above levels during the year ended December 31, 2015. The fair value of the debt issuances is disclosed in
Note 10 ("Debt")
.
(17) Major Customers and Suppliers
Sales of nitrogen fertilizer to major customers, as a percentage of total net sales, were as follows:
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December 31,
|
|
2016
|
|
2015
|
|
2014
|
Nitrogen Fertilizer
|
|
|
|
|
|
Customer A
|
10
|
%
|
|
10
|
%
|
|
17
|
%
|
Customer B
|
10
|
%
|
|
14
|
%
|
|
10
|
%
|
|
20
|
%
|
|
24
|
%
|
|
27
|
%
|
The Partnership maintains contracts with CVR Energy and its affiliates. See
Note 15
("
Related Party Transactions
").
CRNF currently buys several key raw materials for the Coffeyville Facility through a single supplier, Linde, which owns, operates and maintains an air separation plant. The inability of Linde to perform in accordance with its contractual obligations could have a material adverse effect on the Partnership's results of operations, financial condition and ability to make cash distributions. CVR Energy maintains, for our benefit, contingent business interruption insurance with a
$200.0 million
limit for any interruption caused by physical damage to the air separation plant that results in a loss of production from an insured peril.
The East Dubuque operations depend on the availability of natural gas. The East Dubuque Facility has an agreement with Nicor, Inc., pursuant to which the facility accesses natural gas from the ANR Pipeline Company and Northern Natural Gas pipelines. Access to satisfactory supplies of natural gas through Nicor could be disrupted due to a number of causes, including volume limitations under the agreement, pipeline malfunctions, service interruptions, mechanical failures or other reasons.
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(18) Selected Quarterly Financial Information
(Unaudited):
Summarized quarterly financial data for December 31,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
Quarter
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
|
|
|
|
|
|
(in thousands, except per unit data)
|
Net sales
|
$
|
73,092
|
|
|
$
|
119,797
|
|
|
$
|
78,474
|
|
|
$
|
84,921
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
Cost of materials and other – Affiliates
|
821
|
|
|
536
|
|
|
529
|
|
|
758
|
|
Cost of materials and other – Third parties
|
15,560
|
|
|
35,513
|
|
|
19,282
|
|
|
20,794
|
|
|
16,381
|
|
|
36,049
|
|
|
19,811
|
|
|
21,552
|
|
Direct operating expenses (exclusive of depreciation and amortization) – Affiliates
|
852
|
|
|
1,249
|
|
|
1,106
|
|
|
1,017
|
|
Direct operating expenses (exclusive of depreciation and amortization) – Third parties
|
22,838
|
|
|
52,895
|
|
|
31,460
|
|
|
36,851
|
|
|
23,690
|
|
|
54,144
|
|
|
32,566
|
|
|
37,868
|
|
Depreciation and amortization
|
6,976
|
|
|
17,559
|
|
|
16,452
|
|
|
17,259
|
|
Cost of sales
|
47,047
|
|
|
107,752
|
|
|
68,829
|
|
|
76,679
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses – Affiliates
|
3,462
|
|
|
3,917
|
|
|
3,560
|
|
|
4,050
|
|
Selling, general and administrative expenses – Third parties
|
2,930
|
|
|
4,426
|
|
|
3,701
|
|
|
3,230
|
|
|
6,392
|
|
|
8,343
|
|
|
7,261
|
|
|
7,280
|
|
Total operating costs and expenses
|
53,439
|
|
|
116,095
|
|
|
76,090
|
|
|
83,959
|
|
Operating income (loss)
|
19,653
|
|
|
3,702
|
|
|
2,384
|
|
|
962
|
|
Other income (expense):
|
|
|
|
|
|
|
|
Interest expense and other financing costs
|
(1,635
|
)
|
|
(15,552
|
)
|
|
(15,633
|
)
|
|
(15,737
|
)
|
Interest income
|
2
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Gain (loss) on extinguishment of debt
|
—
|
|
|
(5,116
|
)
|
|
—
|
|
|
254
|
|
Other income, net
|
23
|
|
|
34
|
|
|
26
|
|
|
20
|
|
Total other expense
|
(1,610
|
)
|
|
(20,632
|
)
|
|
(15,607
|
)
|
|
(15,461
|
)
|
Income (loss) before income tax expense
|
18,043
|
|
|
(16,930
|
)
|
|
(13,223
|
)
|
|
(14,499
|
)
|
Income tax expense
|
1
|
|
|
76
|
|
|
207
|
|
|
45
|
|
Net income (loss)
|
$
|
18,042
|
|
|
$
|
(17,006
|
)
|
|
$
|
(13,430
|
)
|
|
$
|
(14,544
|
)
|
Net income (loss) per common unit – basic
|
$
|
0.25
|
|
|
$
|
(0.15
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.13
|
)
|
Net income (loss) per common unit – diluted
|
$
|
0.25
|
|
|
$
|
(0.15
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(0.13
|
)
|
Weighted-average common units outstanding:
|
|
|
|
|
|
|
|
Basic
|
73,128
|
|
|
113,283
|
|
|
113,283
|
|
|
113,283
|
|
Diluted
|
73,128
|
|
|
113,283
|
|
|
113,283
|
|
|
113,283
|
|
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
Quarter
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
|
|
|
|
|
|
(in thousands, except per unit data)
|
Net sales
|
$
|
93,050
|
|
|
$
|
80,815
|
|
|
$
|
49,325
|
|
|
$
|
66,004
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
Cost of materials and other – Affiliates
|
1,818
|
|
|
2,184
|
|
|
1,147
|
|
|
1,552
|
|
Cost of materials and other – Third parties
|
23,951
|
|
|
13,240
|
|
|
13,354
|
|
|
7,943
|
|
|
25,769
|
|
|
15,424
|
|
|
14,501
|
|
|
9,495
|
|
Direct operating expenses (exclusive of depreciation and amortization) – Affiliates
|
1,027
|
|
|
1,195
|
|
|
1,030
|
|
|
841
|
|
Direct operating expenses (exclusive of depreciation and amortization) – Third parties
|
23,387
|
|
|
23,951
|
|
|
32,149
|
|
|
22,476
|
|
|
24,414
|
|
|
25,146
|
|
|
33,179
|
|
|
23,317
|
|
Depreciation and amortization
|
6,819
|
|
|
7,010
|
|
|
7,409
|
|
|
7,214
|
|
Cost of sales
|
57,002
|
|
|
47,580
|
|
|
55,089
|
|
|
40,026
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses – Affiliates
|
3,267
|
|
|
3,361
|
|
|
3,661
|
|
|
3,672
|
|
Selling, general and administrative expenses – Third parties
|
1,316
|
|
|
1,162
|
|
|
2,381
|
|
|
1,948
|
|
|
4,583
|
|
|
4,523
|
|
|
6,042
|
|
|
5,620
|
|
Total operating costs and expenses
|
61,585
|
|
|
52,103
|
|
|
61,131
|
|
|
45,646
|
|
Operating income (loss)
|
31,465
|
|
|
28,712
|
|
|
(11,806
|
)
|
|
20,358
|
|
Other income (expense):
|
|
|
|
|
|
|
|
Interest expense and other financing costs
|
(1,697
|
)
|
|
(1,717
|
)
|
|
(1,727
|
)
|
|
(1,739
|
)
|
Interest income
|
12
|
|
|
12
|
|
|
10
|
|
|
6
|
|
Other income, net
|
6
|
|
|
5
|
|
|
54
|
|
|
99
|
|
Total other expense
|
(1,679
|
)
|
|
(1,700
|
)
|
|
(1,663
|
)
|
|
(1,634
|
)
|
Income (loss) before income tax expense
|
29,786
|
|
|
27,012
|
|
|
(13,469
|
)
|
|
18,724
|
|
Income tax expense (benefit)
|
12
|
|
|
(4
|
)
|
|
9
|
|
|
(7
|
)
|
Net income (loss)
|
$
|
29,774
|
|
|
$
|
27,016
|
|
|
$
|
(13,478
|
)
|
|
$
|
18,731
|
|
Net income (loss) per common unit – basic
|
$
|
0.41
|
|
|
$
|
0.37
|
|
|
$
|
(0.18
|
)
|
|
$
|
0.26
|
|
Net income (loss) per common unit – diluted
|
$
|
0.41
|
|
|
$
|
0.37
|
|
|
$
|
(0.18
|
)
|
|
$
|
0.26
|
|
Weighted-average common units outstanding:
|
|
|
|
|
|
|
|
Basic
|
73,123
|
|
|
73,123
|
|
|
73,123
|
|
|
73,123
|
|
Diluted
|
73,131
|
|
|
73,131
|
|
|
73,123
|
|
|
73,131
|
|
Factors Impacting the Comparability of Quarterly Results of Operations
On April 1, 2016, the Partnership completed the East Dubuque Merger, whereby the Partnership acquired the East Dubuque Facility. The consolidated financial statements include the results of the East Dubuque Facility beginning on April 1, 2016, the date of the closing of the acquisition. See
Note 3 ("East Dubuque Merger")
for further discussion.
During the second quarter of 2016, the East Dubuque Facility completed a major scheduled turnaround and the ammonia and UAN units were down for approximately
28
days. Overall results were negatively impacted due to the lost production during the downtime that resulted in lost sales and certain reduced variable expenses included in cost of materials and other and direct operating expenses (exclusive of depreciation and amortization). Costs, exclusive of the impacts due to the lost production during the downtime, of approximately
$6.6 million
associated with the 2016 turnaround are included in direct
CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
operating expenses (exclusive of depreciation and amortization) in the Consolidated Statements of Operations for the quarter ended June 30, 2016.
During the second quarter of 2016, the Partnership executed multiple financing transactions, including the issuance of issued
$645.0 million
aggregate principal of
9.250%
2023 Notes to refinance the substantial majority of its existing debt. As a result of the financing transactions, the Partnership recognized
$5.1 million
loss on extinguishment of debt for the quarter ended June 30, 2016. Also as a result of the financing transactions, the Partnership's interest expense increased during the quarter ended June 30, 2016 and subsequent quarters, as compared to the prior quarters. Further discussion regarding the Partnership's indebtedness can be found in
Note 10 ("Debt")
.
During the third quarter of 2015, the Coffeyville Facility completed a major scheduled turnaround and the gasification, ammonia and UAN units were down for between
17
to
20
days each. Overall results during the third quarter of 2015 were negatively impacted due to the lost production during the downtime that resulted in reduced sales and certain reduced variable expenses included in cost of materials and other and direct operating expenses (exclusive of depreciation and amortization). Costs, exclusive of the impacts due to the lost production during the downtime, of approximately
$0.4 million
and
$6.6 million
associated with the 2015 turnaround are included in direct operating expenses (exclusive of depreciation and amortization) for the quarter ended June 30, 2015 and September 30, 2015, respectively.
Linde owns, operates, and maintains the air separation plant that provides contract volumes of oxygen, nitrogen, and compressed dry air to the gasifiers. During the third quarter of 2015, the Linde air separation unit experienced downtime, in excess of the downtime associated with the major scheduled turnaround discussed above, that resulted in the gasification, ammonia and UAN units being down for between
16
to
19
days each. Overall results in the third quarter of 2015 were negatively impacted due to the lost production during the downtime that resulted in reduced sales and certain reduced variable expenses included in cost of materials and other and direct operating expenses (exclusive of depreciation and amortization) for the quarter ended September 30, 2015.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
As of
December 31, 2016
, we have evaluated, under the direction of our Executive Chairman, Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon and as of the date of that evaluation, our Executive Chairman, Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Partnership's management, including our Executive Chairman, Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Management's Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of management, we conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in the 2013
Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on that evaluation, our Executive Chairman, Chief Executive Officer and Chief Financial Officer have concluded that our internal control over financial reporting was effective as of
December 31, 2016
. Our independent registered public accounting firm, that audited the consolidated financial statements included herein under Item 8, has issued a report on the effectiveness of our internal control over financial reporting. This report can be found under Item 8.
Changes in Internal Control Over Financial Reporting.
There has been no change in the Partnership's internal control over financial reporting required by Rule 13a-15 of the Exchange Act that occurred during the fiscal quarter ended
December 31, 2016
that has materially affected or is reasonably likely to materially affect, the Partnership's internal control over financial reporting.
Item 9B.
Other Information
None.