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spk02: on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Mr. Richard Roberts, Senior Manager of FP&A and Investor Relations for CVR Partners. Thank you. You may begin.
spk03: Thank you, Melissa. Good morning, everyone. We appreciate your participation in today's call. With me today are Mark Pytosh, our Chief Executive Officer, Tracy Jackson, our Chief Financial Officer, and other members of management. Prior to discussing our 2021 second quarter results, let me remind you that this conference call may contain forward-looking statements as that term is defined under federal securities laws. For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward-looking statements. You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release. As a result, actual operations or results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise, except to the extent required by law. Let me remind you that CVR Partners completed a one-for-ten reverse split of its common units on November 23, 2020. Any per-unit references made on this call are on a split-adjusted basis. This call also includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures, including reconciliation to the most directly comparable GAAP financial measures, are included in our 2021 second quarter earnings release that we filed with the SEC yesterday after the close of the market. Let me also remind you that we are a variable distribution MLP. We will review our previously established reserves, current cash usage, evaluate future anticipated cash needs, and may reserve amounts for other future cash needs as determined by our General Partners Board. As a result, our distributions, if any, will vary from quarter to quarter due to several factors, including, but not limited to, operating performance, fluctuations in the prices received for finished products, capital expenditures, and cash reserves deemed necessary or appropriate by the Board of Directors of our general partner. With that said, I'll turn the call over to Mark Pytosh, our Chief Executive Officer.
spk15: Mark? Thank you, Richard. Good morning, everyone, and thank you for joining us for today's call. The summarized financial highlights for the second quarter of 2021 included net sales of $138 million, net income of $7 million, EBITDA of $51 million, And the Board of Directors declared a second quarter distribution of $1.72 per common unit, which will be paid on August 23rd, 2021 to union or hold as your record at the close of the market on August 13th. During the second quarter of 2021, we operated the plant safely and reliably with consolidated ammonia plant utilization of 98%. Demand for UAM was strong throughout the quarter, with supply impacted by a number of other nitrogen fertilizer plants that faced operating issues following the shutdowns related to winter storm URI. Our combined operations produced approximately 217,000 gross tons of ammonia, of which 70,000 net tons were available for sale for the second quarter of 2021. This compares to production of 216,000 gross tons of ammonia, of which 79,000 net tons were available for sale in the prior year period. We produced 334,000 tons of UAN in the second quarter, of 2021 as compared to 321,000 tons in the prior year period. During the second quarter of 2021, we sold approximately 370,000 tons of UAN at an average price of $237 per ton and approximately 80,000 tons of ammonia at an average price of $403 per ton. Relative to the second quarter of 2020, UAN sales increased while ammonia sales declined as less ammonia was required due to the strong fall 2020 ammonia application. Year-over-year pricing was 44% higher for UAN and 21% higher for ammonia. Nitrogen fertilizer prices have increased significantly since the start of the year, and that strength continued through the spring planting season and into the summer. Fertilizer inventory levels remain tight across the US due in part to URI-related shutdowns earlier in the year and the deferred turnaround activity from 2020 that is now being completed. The continued strength in crop prices and tight inventory levels has kept pricing firm for nitrogen fertilizers, and we have a good order book already for the fall, which I will discuss further in my closing remarks. I will now turn the call over to Tracy to discuss our financial results.
spk17: Thank you, Mark. Before I get into our results, I would like to highlight that during the second quarter of 2021, we revised our reporting to include adjusted EBITDA, which excludes significant non-cash items that we believe may obscure our underlying results and trends. For the second quarter of 2021, we reported net sales of 138 million and operating income of 30 million compared to net sales of 105 million and an operating loss of 26 million in the second quarter of 2020. Net income for the second quarter of 2021 was 7 million or 66 cents per common unit and adjusted EBITDA was 51 million. This compares to a net loss of 42 million or $3.68 per common unit and adjusted EBITDA of 39 million for the prior year period. The year-over-year increase in adjusted EBITDA was driven by higher UAN and ammonia sales prices offset slightly by higher feedstock costs and operating expenses. Direct operating expenses for the second quarter of 2021 were 53 million compared to 40 million in the prior year period. Second quarter direct operating expenses include a $4 million charge for electricity expenses allocated to us by the City of Coffeyville related to Winter Storm Erie. Excluding this charge, as well as inventory and turnaround impact, direct operating expenses increased by approximately $10 million, primarily related to higher stock-based compensation as a result of the increased unit price. Turning to capital spending, during the second quarter of 2021, we spent $4 million on capital projects, which was primarily maintenance capital. We estimate total capital spending for 2021 to be approximately $27 to $31 million, of which $20 to $22 million is expected to be maintenance capital. This excludes turnaround spending, which we expect to be approximately $8 to $10 million of expense. Looking at the balance sheet as of June 30th, we had approximately $75 million of liquidity, which was comprised of approximately $43 million in cash and availability under the ABL facility of approximately $32 million. Within our cash balance of $43 million, we had approximately $2 million related to customer prepayments for the future delivery of product. In June, we completed a refinancing of a substantial portion of our outstanding senior notes with a reduction to the coupon of over 300 basis points that will reduce our annual interest expense by over $17 million. Total debt outstanding at June 30 was $645 million. which is comprised of $550 million of the new six and an eighth senior notes due in 2028 and $95 million of the nine and a quarter senior notes due in 2023. As we have discussed previously, we intend to take advantage of the improvements in the nitrogen fertilizer market and potential 45Q tax credits income to repay the remaining 2023 senior notes outstanding over the next two years. In assessing our cash available for distribution, we generated EBITDA of $51 million had current cash needs of $15 million for debt service, $3 million for financing fees, and $3 million for maintenance capital expenditures. We added back the $4 million non-cash electricity charge from the City of Coffeyville, while the actual cost may be paid over the next 10 years. We're currently evaluating our legal rights with respect to this surcharge. In addition, the Board of Directors of our General Partner established reserves of $15 million to recapture prior negative cash available and $1 million for the planned turnaround at Coggesville in the fall of 2021. As a result, there was $18 million of cash available for distribution, and the board of directors of our general partner declared a distribution of $1.72 for a common unit. Looking ahead to the third quarter of 2021, we estimate our total ammonia utilization rate to be greater than 95%. We expect direct operating expenses to range between $38 and $43 million, excluding inventory impact, and total capital spending to be between $9 and $12 million. With that, I will turn the call back over to Mark.
spk15: Thanks, Tracy. Weather conditions for spring fertilizer application and planting were good in 2021. The USDA currently estimates planted corn acres were 93 million and soybean acres were 88 million. For corn and soybeans, temperatures and moisture levels over the next month will be critical to driving harvest yields. Drought conditions remain in parts of the northern plains, but the heart of the Midwest has been getting timely rain, so the corn crop looks okay overall. Assuming the USDA's planted acres and crop yield estimates hold, the expected 2021 inventory carryout of 7.6% for corn and 3% for soybeans continues to be at the low end of the 10-year range, while corn and soybean prices remain near 10-year highs. Spring ammonia application went well, and when combined with the fall 2020 application, it was the largest combined application since we purchased East Dubuque in 2016. Demand for UAM was strong and consistent through the quarter and continued into July for side dress and top dress. Our inventory levels were very low at the end of the quarter, so we were well positioned coming into the summer. On the supply side of the market, due to concerns for employee and contractor safety and restrictions from COVID-19 protocols, many North American nitrogen fertilizer producers delayed major plant turnarounds scheduled for 2020 into 2021. Many of these turnarounds that were delayed have or will be starting in the third quarter. So we expect industry production levels should be lower in the second half of this year compared to 2020. Additionally, during winter storm URI, most North American nitrogen fertilizer production facilities ceased operations for one to two weeks due to shortages of natural gas or excessively high prices. Many of the plants that were taken down during URI have had subsequent operating issues that resulted in additional outages and lower production. The impact of these two factors tied our nitrogen fertilizer inventory levels at the end of the planting season compared to the past several years. Since our last earnings call, all nitrogen fertilizer prices have remained firm. As compared to the past five years, we did not see the normal seasonal decline in nitrogen fertilizer prices into the summer. Sales for summer ammonia fill, fall prepay, and UAN fill were completed in late June and July. at price levels comparable to spring spot pricing. We have a solid order book for both UAN and UAN going into the fall, but have more product to sell for the fourth quarter shipment. In our sales effort, we factored in our planned fall turnaround for the Coffeyville plant that is expected to start in early fourth quarter. We continue to evaluate structuring alternatives for the pursuit of 45Q tax credits for the carbon capture and sequestration through enhanced oil recovery activities that are ongoing at the Coffeyville plant. As part of these efforts, we continue to monitor several pieces of proposed legislation moving through Congress that could provide additional flexibility and incentives for companies to pursue carbon capture and sequestration. At our East Dubuque facility, we are evaluating the progress of a couple CO2 sequestration projects in Iowa and Illinois that might create a sequestration opportunity for the plant. While those projects are at early stages, considerable effort is being made to bring those projects from the drawing board to reality. Some of the proposed legislative changes could aid the development of these projects. As Tracy mentioned, we were pleased to complete the refinancing of our debt structure in June that will reduce our annual interest expense by more than $17 million. We also intend to reduce our debt outstanding by $95 million over the next couple of years. This reduction in debt costs should allow us to invest more in the business or make additional distributions to our unit holders. With greatly improved nitrogen fertilizer market conditions and the debt refinancing, we currently believe that we can both pay distributions and repay debt from our operating free cash flow. We are especially pleased to be paying a distribution of $1.72 per unit, our first since the fourth quarter of 2019. While fertilizer market conditions are strong, We're not changing our focus on maximizing cash flow generation by safely and reliably operating our plants with a keen focus on the health and safety of our employees, contractors, and communities, prudently managing costs, being judicious with capital but targeting select investments and reliability projects and incremental additions to production capacity, maximizing our marketing and logistics capabilities, and targeting opportunities to reduce our carbon footprint. In closing, I would like to thank our employees for their excellent execution during the second quarter and their continued commitment to being healthy and safe in everything we do. With that, we're ready for the Q&A session. Melissa.
spk02: Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Richard Cuss with Jefferies. Please proceed with your question.
spk05: Hey, guys. Thanks for taking my questions this morning. So the first one for me is, you know, I was a little bit surprised on the price realization that you guys were able to get in Q2. What percent of your order book or what percent of, I guess, the volumes that you sold during the quarter were actually pre-sold at, you know, lower pricing levels of Q1?
spk15: You know, I don't have the exact percentages in front of me, but we typically – We typically sell a fair amount of our product, both products, forward to anywhere from, call it, one to six months. So the spring, there was a large component of the spring that was priced in, call it, February, March, as prices were rising. And into the second quarter of the ammonia, we typically, in the spring, we price a big part of that in the December timeframe for prepay. So customers purchase it. on a prepaid basis in December. So that had a big pricing element from a few months ago. So that's typical. We typically, again, would sell one to six months in advance. So it's more reflective. I would call the second quarter pricing reflective of a combination of the first and second quarter market price in whatever way you would define that. But the second quarter was kind of a combination.
spk05: I see. And then, you know, your comments imply that you should see a pretty big step up in pricing then more towards what you really saw from a market standpoint in Q2 as we look to Q3. Is there a much pre-sold volume then at lower pricing in Q3, or should we be looking for that step up in pricing then?
spk15: Yes, in that case, you know, by the time we were pricing third quarter this year, The market had moved to the spot. They call it the spot pricing. So we didn't sell any product until June and July. So it kind of reflected current spot. Yeah.
spk05: Okay. That's good to hear. And then, you know, from a demand standpoint, obviously things remain robust. How should we think about the, you know, your shipment levels as you look to Q3, acknowledging that it's a, you know, seasonally slower quarter, but, you know, how do you expect those shipment levels to trend relative to last year, given the environment?
spk15: So typically in the third quarter, ammonia shipments are lower because we're waiting for fall applications. So they tend to be lower in the third quarter. But UAN is pretty consistent. So I would expect a high degree of shipments in UAN. But even in ammonia, we've sold some product for this third quarter. So we should see decent shipments of ammonia. Obviously, the big movement will be in probably the November timeframe for the fall application, but we should see good ammonia movement. But I call it typical UAM movement, which should be pretty good.
spk05: Got it. Understood. And then lastly for me, on the cost side, I know last quarter on the direct operating costs, you guys had talked $35 to $40 million. You came in at $53. Could you maybe go through what the difference was there one more time? I know you had mentioned a few special items there.
spk15: Sure. Well, the two biggies are we have this electricity charge. So during winter storm Uri, we were one of the few plants that operated. We did receive surcharge from our electricity provider. They're proposing that to be paid over a 10-year period. We're challenging that and the assumptions behind it. But we took a charge for the net present value of the whole thing in the quarter. So that was $4 million. And then we had a larger stock-based comp, so our SG&A number was high because of the increase in the stock price. Those were the two bigger numbers that were sort of outside the normal, what I call, operating environment.
spk05: Okay, got it. I really appreciate that. Thanks for the time.
spk02: Thank you. Our next question comes from the line of Brian Derubio with Baird. Please proceed with your question.
spk06: Good morning. You said in your commentary that, you know, you're looking to, you know, both pay distributions and reduce debt, particularly the nine and quarters. How are you going to balance that, you know, over the next couple of years? Obviously, you took advantage this quarter, paid the distribution to shareholders, but how are you balancing that? the decision to pay the distribution and the amount versus repaying the balance of the nine and a quarters?
spk15: Again, it'll come down to a board decision about how much they want to allocate to debt repayment and how much would be available for distributions. But I think that the theory that we're operating under is I would consider kind of a steady pace of repayment is the way to think about it. so do a decent debt pay down, but we do expect, given where pricing is, that there would be still a significant amount of free cash flow available for distribution even after those payments are made.
spk06: Okay, and the plan is still within the next two years to extinguish that stub piece?
spk12: That's correct. Okay.
spk06: Hopefully. The section... Yeah. Uh, section four, section 45 to tax credit. So, you know, where do you stand in terms of being able to monetize the ones that you have today? Uh, I know you were looking at several different structures, any updates on that?
spk15: Um, and we're continuing to press, um, we're progressing on the structure. Uh, there were, there's some, I would say some new information out of the IRS, which clarified some issues with, um, with respect to the carbon capture equipment, which affects our structure. We're sort of of the view that when we've got a bow wrapped around this, we'll lay it out there, but we're making progress. It's moving around. As an example, in the infrastructure legislation and in the big one that comes behind that, there's some various proposals on carbon capture, which a combination of increasing the length of the time to claim credits, the price of the credit. So all of that's going to factor in to completing our wrapping up of the structure, which is, you know, what are the credits worth and how long can we claim them? Because that affects, you know, the, uh, the value of our, of our asset in effect. So we're working through that. We're, um, Our plan is to keep moving along and see how the legislation falls out. I think it's generally very favorable for us, but who knows with activities in D.C. what will come out of the various pieces of legislation. But there's clearly, I think, a desire to provide more incentive for carbon capture and in different forms. So we're going to hopefully take advantage of that.
spk17: I think the only thing I would add to that is tying those two things together. So the plan is to kind of radically pay down that stub amount before maturity in the early 2023. But once we are able to monetize the 45Q credit, we'll likely take out the remainder of the balance, whatever it is at that time, and take advantage of the interest savings that's available to us.
spk06: Okay. That is helpful. And then just looking at the sales and production data schedule that you provided, caught my eye there was a fair amount, almost 16% drop in the use of natural gas in terms of volume and cost of materials and other. It was 2711 versus 3216 thousands of MMBTUs. Any reason why you had that large drop?
spk07: There wasn't really any drop in production.
spk06: Page seven of the press release.
spk15: I'm looking at the press release. Yeah. I'm not sure off the top of my head that we can explain it. We'll have to get back to you on that. But it wasn't an effect of the change in production because our production was right in line with last year. Yeah, I know.
spk06: I used to get magically more efficient. versus last year?
spk15: No, it didn't get more efficient.
spk17: I think it's probably inventory build of ammonia at East Dubuque, but we will have Richard check it if you guys can connect after the call.
spk07: Perfect. That's great. Appreciate the time.
spk02: Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. Our next question comes from the line of William Stein, private investor. Please go ahead, sir.
spk08: Great. Thanks so much for taking my question. Some have been answered already. But, Mike, I want to address a comment you made about cyclicality in pricing. I think you just noted that at some point relatively recently you've transitioned to selling at prices that are closer to spot. You know, the prices that you realized during Q2 were pretty far away from that. If we plug in spot pricing, to the volumes that you delivered in Q2, it appears you might have had something on the order of $6 or $7 per share in cash available for distribution. But as you highlighted on this call and in the press release today, that we're at a very strong part of the cycle right now. As investors, should we anticipate that the current pricing environment rolls over at some point relatively quickly and goes back down to how things have been for the last, I don't know, seven, eight years or so? Or is there any reason to be a bit more optimistic that the current pricing environment can persist for some time? Because it seems to me that if it can, it is relatively realistic that you could do much higher distributions, something on the order of 20 bucks a year. I think given your stock price of about 60 bucks, addressing this would be of great interest to investors. Thank you.
spk15: Okay. So there are several questions in there. So I'll start at the top. I think I've said a number of past calls. We typically are a seller. Our market is based on when our customers are wanting to buy products. So that changes periodically year to year because of a variety of factors, seasonality, weather, pricing, things like that. So we tend to sell product when the customers are buying because that's when there's liquidity. So this past year, customers bought earlier going into the spring. So that's why when you look at the second quarter, it's kind of a blending of first quarter and second quarter. We have to participate in the market when the customers are buying. So We can't just sell everything at spot pricing and expect that we're going to move all of our inventory or production through the system. But the difference between the second quarter and the third quarter was we have sold forward into the third quarter, but the pricing was set – at basically late June and July, which was effectively the market pricing was spot spring pricing. So that pricing was much better looking into the third quarter based on where spot pricing was at that time. So I just want to be clear. The market provides liquidity to us at multiple times during the year, and we try to participate when it's available, and so we sell, I wouldn't call it rateable, but we sell it when liquidity is offered. So we can't, I don't think I could lay out, and it's different every year, so it'll be hard to tell you that there's an exact pattern that holds. But let's go to the market, though. What I would tell you is the underpinnings of our business are very solid right now. And it starts really at the farm level. Um, grain prices are high and, um, higher than they've been in the last, you know, really basically the last six or seven years, maybe back to 10 years, going back to 10 years. And that's because demand's been good for grain and supply has been, um, I think rushing to keep up with that, but weather's always a factor in controlling it. And grain prices going into the end of this season and then to the fall, our carryout inventory is going to be one of the low points in the last 10 years. So inventory levels look good. If you look forward on the grain pricing for December, grain prices look very good through the end of this calendar year, which sets up very well for the spring of 22. So the demand side, it looks really good. And grain prices look good, which means farmers are making money. And that's, you know, any business, the critical part of the business is if your customer's making money. Are customers making money? And really the prospects look very solid there. On the supply side, we've had, I described in my comments, but we've had a confluence of factors where demand picked up And supply has been, there have been issues with production, and part of it was the winter storm, and part of it was the turnaround schedule. And I described the turnaround schedule here in the U.S., but also globally a lot of production is catching up on turnaround. So the inventory levels for this time of year are at the, you know, just appear to be at the lowest that they've been in a number of years because production also has had limits. And it's going to take us some time to catch up to that. So I think that the supply-demand balance looks quite good going into 22. And I think, you know, I think our prospects look really good. We don't give forward forecasts, so I'm not going to comment on the distribution levels and things like that. But, you know, we, you know, our goal is to be, you know, balanced in our thought process and pay down some debt and provide distributions on top of that. And we feel very good about our prospects there. So that's a rambling answer to your question, but did I answer all your questions?
spk08: I think so, Mark. I appreciate it. I wonder if you have any comment on your expectation for this stronger part of the cycle. I think what you just said is you you would anticipate it to remain strong in 2022. Any sort of change in the volatility of the cycle beyond that, or is it just too far out to tell?
spk15: Thanks so much. You know, I, we are a cyclical business, so I'm not going to pretend like, you know, the cycles are, you know, aren't going to come back. They always do. I would just say a couple things that are interesting for our business for the go forward. Number one, The growing consumption of grains in renewable fuels is a factor that could have a bearing on the go forward. This is on the farm side. There's more soybeans being consumed in making renewable diesel. And there are some prospects for corn participating in either renewable diesel or in additional ethanol blending. And so grain demand, there could be, I'd say, more of a secular change based on the growing use of renewable fuels. The other is the production of blue or green ammonia. that would be used in other sectors outside of agriculture, like in power or transportation. We don't, right now, we don't have that. That would be a new market for ammonia, and that would take away some of the production that would be used for ag. And so that's, I think most companies, we are, you know, we've been looking at, you know, being able to produce blue ammonia at both of our plants. Right now, we think we can certify Coffeyville as a blue ammonia plant, and then if we take the appropriate steps, do the same at East Dubuque. But that would be a new market, and it would not be an agricultural market, and that would mean that the agricultural market has to compete with a new source of demand. The other factor, at least over the next few years, is this anti-dumping case that CF has filed with the Department of Commerce and ITC. And if you go back to some of our conference calls from 19 to 20, we're talking about the entry of product from Russia and Trinidad into the U.S. We believe that this subsidized product based on the price of natural gas and was dumped here in the U.S., particularly after the the EU put tariffs on UAN. So if, if in fact that they ultimately, uh, do provide or put a duty on UAN, that also could, could be a more of a multi-year change to, to our business. So there's some really interesting, uh, you know, I'd say factors that could have, could lengthen this cycle, could affect our business in a more structural way. And, um, And I would say that we're optimistic about it, but a lot of this has to play out in front of us going forward.
spk04: Thank you.
spk02: Thank you. Ladies and gentlemen, that concludes our time for questions and answers. I'll now turn the floor back to management for any final comments.
spk14: All right.
spk15: Well, appreciate everyone's time today, and we look forward to talking to you on our third quarter results coming up. Thank you very much.
spk02: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Thank you. Thank you. you Thank you. Thank you. Bye. We'll be right back. you Thank you. Greetings and welcome to the CVR Partners LP second quarter 2021 conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Mr. Richard Roberts, Senior Manager of FP&A and Investor Relations for CVR Partners. Thank you. You may begin.
spk03: Thank you, Melissa. Good morning, everyone. We appreciate your participation in today's call. With me today are Mark Pytosh, our Chief Executive Officer, Tracy Jackson, our Chief Financial Officer, and other members of management. Prior to discussing our 2021 second quarter results, let me remind you that this conference call may contain forward-looking statements as that term is defined under federal securities laws. For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward-looking statements. You are cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest earnings release. As a result, actual operations or results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise, except to the extent required by law. Let me remind you that TBR Partners completed a one-for-ten reverse split of its common units on November 23, 2020. Any per unit references made on this call are on a split adjusted basis. This call also includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures, including reconciliation to the most directly comparable GAAP financial measures, are included in our 2021 second quarter earnings release that we filed with the SEC yesterday after the close of the market. Let me also remind you that we are a variable distribution MLP. We will review our previously established reserves, current cash usage, evaluate future anticipated cash needs, and may reserve amounts for other future cash needs as determined by our General Partners Board. As a result, our distributions, if any, will vary from quarter to quarter due to several factors, including, but not limited to, operating performance, fluctuations in the prices received for finished products, capital expenditures, and cash reserves deemed necessary or appropriate by the Board of Directors of our General Partner. With that said, I'll turn the call over to Mark Pytosh, our Chief Executive Officer.
spk15: Mark? Thank you, Richard. Good morning, everyone, and thank you for joining us for today's call. The summarized financial highlights for the second quarter of 2021 included net sales of $138 million, net income of $7 million, EBITDA of $51 million, and the Board of Directors declared a second quarter distribution of $1.72 per common unit, which will be paid on August 23rd, 2021 to union or hold as your record at the close of the market on August 13th. During the second quarter of 2021, we operated the plant safely and reliably. with consolidated ammonia plant utilization of 98%. Demand for UAM was strong throughout the quarter, with supply impacted by a number of other nitrogen fertilizer plants that faced operating issues following the shutdowns related to winter storm URI. Our combined operations produced approximately 217,000 gross tons of ammonia, of which 70,000 net tons were available for sale for the second quarter of 2021. This compares to production of 216,000 gross tons of ammonia of which 79,000 net tons were available for sale in the prior year period. We produced 334,000 tons of UAN in the second quarter of 2021 as compared to 321,000 tons in the prior year period. During the second quarter of 2021, we sold approximately 370,000 tons of UAN at an average price of $237 per ton and approximately 80,000 tons of ammonia at an average price of $403 per ton. Relative to the second quarter of 2020, UAN sales increased while ammonia sales declined as less ammonia was required due to the strong fall 2020 ammonia application. Year-over-year pricing was 44% higher for UAN and 21% higher for ammonia. Nitrogen fertilizer prices have increased significantly since the start of the year, and that strength continued through the spring planting season and into the summer. Fertilizer inventory levels remain tight across the U.S., due in part to URI-related shutdowns earlier in the year and the deferred turnaround activity from 2020 that is now being completed. The continued strength in crop prices and tight inventory levels has kept pricing firm for nitrogen fertilizers, and we have a good order book already for the fall, which I will discuss further in my closing remarks. I will now turn the call over to Tracy to discuss our financial results.
spk17: Thank you, Mark. Before I get into our results, I would like to highlight that during the second quarter of 2021, we revised our reporting to include adjusted EBITDA, which excludes significant non-cash items that we believe may obscure our underlying results and trends. For the second quarter of 2021, we reported net sales of $138 million and operating income of $30 million compared to net sales of $105 million and an operating loss of $26 million in the second quarter of 2020. Net income for the second quarter of 2021 was $7 million, or 66 cents per common unit, and adjusted EBITDA was $51 million. This compares to a net loss of $42 million, or $3.68 per common unit, and adjusted EBITDA of $39 million for the prior year period. The year-over-year increase in adjusted EBITDA was driven by higher UAN and ammonia sales prices, offset slightly by higher feedstock costs and operating expenses. Direct operating expenses for the second quarter of 2021 were $53 million compared to $40 million in the prior year period. Second quarter direct operating expenses include a $4 million charge for electricity expenses allocated to us by the City of Coffeyville related to Winter Storm Uri. Excluding this charge, as well as inventory and turnaround impact, direct operating expenses increased by approximately $10 million, primarily related to higher stock-based compensation as a result of the increased unit price. Turning to capital spending, during the second quarter of 2021, we spent 4 million on capital projects, which was primarily maintenance capital. We estimate total capital spending for 2021 to be approximately 27 to 31 million, of which 20 to 22 million is expected to be maintenance capital. This excludes turnaround spending, which we expect to be approximately 8 to 10 million of expense. Looking at the balance sheet as of June 30th, we had approximately 75 million of liquidity which was comprised of approximately $43 million in cash and availability under the ABL facility of approximately $32 million. Within our cash balance of $43 million, we had approximately $2 million related to customer prepayments for the future delivery of product. In June, we completed a refinancing of a substantial portion of our outstanding senior notes with a reduction to the coupon of over 300 basis points that will reduce our annual interest expense by over $17 million. Total debt outstanding at June 30 was $645 million, which was comprised of $550 million of the new six and an eighth senior notes due in 2028 and $95 million of the nine and a quarter senior notes due in 2023. As we have discussed previously, we intend to take advantage of the improvements in the nitrogen fertilizer market and potential 45Q tax credits income to repay the remaining 2023 senior notes outstanding over the next two years. In assessing our cash available for distribution, we generated EBITDA of $51 million, had current cash needs of $15 million for debt service, $3 million for financing fees, and $3 million for maintenance capital expenditures. We added back the $4 million non-cash electricity charge from the City of Coffeyville, while the actual cost may be paid over the next 10 years. We're currently evaluating our legal rights with respect to this surcharge. In addition, the Board of Directors of our General Partner established reserves of $15 million to recapture prior negative cash available and $1 million for the planned turnaround at Coggyville in the fall of 2021. As a result, there was $18 million of cash available for distribution, and the Board of Directors of our General Partner declared a distribution of $1.72 for a common unit. Looking ahead to the third quarter of 2021, we estimate our total ammonia utilization rate to be greater than 95%, We expect direct operating expenses to range between $38 and $43 million, excluding inventory impact, and total capital spending to be between $9 and $12 million. With that, I will turn the call back over to Mark.
spk15: Thanks, Tracy. Weather conditions for spring fertilizer application and planting were good in 2021. The USDA currently estimates planted corn acres were 93 million and soybean acres were 88 million. For corn and soybeans, temperatures and moisture levels over the next month will be critical to driving harvest yields. Drought conditions remain in parts of the northern plains, but the heart of the Midwest has been getting timely rain, so the corn crop looks okay overall. Assuming the USDA's planted acres and crop yield estimates hold, the expected 2021 inventory carryout is 7.6% for corn and 3% for soybeans continues to be at the low end of the 10-year range. while corn and soybean prices remained near 10-year highs. Spring ammonia application went well, and when combined with the fall 2020 application, it was the largest combined application since we purchased East Dubuque in 2016. Demand for UAM was strong and consistent through the quarter and continued into July for side dress and top dress. Our inventory levels were very low at the end of the quarter, so we were well-positioned coming into the summer. On the supply side of the market, due to concerns for employee and contractor safety and restrictions from COVID-19 protocols, many North American nitrogen fertilizer producers delayed major plant turnarounds scheduled for 2020 into 2021. Many of these turnarounds that were delayed have or will be starting in the third quarter, so we expect industry production levels should be lower in the second half of this year compared to 2020. Additionally, during winter storm Uri, most North American nitrogen fertilizer production facilities ceased operations for one to two weeks due to shortages of natural gas or excessively high prices. Many of the plants that were taken down during Uri have had subsequent operating issues that resulted in additional outages and lower production. The impact of these two factors tied our nitrogen fertilizer inventory levels at the end of the planting season compared to the past several years. Since our last earnings call, all nitrogen fertilizer prices have remained firm. As compared to the past five years, we did not see the normal seasonal decline in nitrogen fertilizer prices into the summer. Sales for summer ammonia fill, fall prepay, and UAN fill were completed in late June and July at price levels comparable to spring spot pricing. We have a solid order book for both UAN and UAN going into the fall, but have more product to sell for the fourth quarter shipment. In our sales effort, we factored in our planned fall turnaround for the Coffeyville plant that is expected to start in early fourth quarter. We continue to evaluate structuring alternatives for the pursuit of 45Q tax credits for the carbon capture and sequestration through enhanced oil recovery activities that are ongoing at the Coffeyville plant. As part of these efforts, we continue to monitor several pieces of proposed legislation moving through Congress that could provide additional flexibility and incentives for companies to pursue carbon capture and sequestration. At our East Dubuque facility, we are evaluating the progress of a couple CO2 sequestration projects in Iowa and Illinois that might create a sequestration opportunity for the plant. While those projects are in early stages, considerable effort is being made to bring those projects from the drawing board to reality. Some of the proposed legislative changes could aid the development of these projects. As Tracy mentioned, we were pleased to complete the refinancing of our debt structure in June that will reduce our annual interest expense by more than $17 million. We also intend to reduce our debt outstanding by $95 million over the next couple of years. This reduction in debt costs should allow us to invest more in the business or make additional distributions to our unit holders. With greatly improved nitrogen fertilizer market conditions and the debt refinancing We currently believe that we can both pay distributions and repay debt from our operating free cash flow. We are especially pleased to be paying a distribution of $1.72 per unit, our first since the fourth quarter of 2019. While fertilizer market conditions are strong, we're not changing our focus on maximizing cash flow generation by safely and reliably operating our plants with a keen focus on the health and safety of our employees, contractors, and communities, prudently managing costs, being judicious with capital but targeting select investments and reliability projects and incremental additions to production capacity, maximizing our marketing and logistics capabilities, and targeting opportunities to reduce our carbon footprint. In closing, I would like to thank our employees for their excellent execution during the second quarter and their continued commitment to being healthy and safe in everything we do. With that, we're ready for the Q&A session. Melissa.
spk02: Thank you. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Richard Cuss with Jefferies. Please proceed with your question.
spk05: Hey, guys. Thanks for taking my questions this morning. So the first one for me is, you know, I was a little bit surprised on the price realization that you guys were able to get in Q2. What percent of your order book or what percent of, I guess, the volumes that you sold during the quarter were actually pre-sold at, you know, lower pricing levels of Q1?
spk15: You know, I don't have the exact percentages in front of me, but we typically – We typically sell a fair amount of our product, both products, forward to anywhere from, call it, one to six months. So the spring, there was a large component of the spring that was priced in, call it, February, March, as prices were rising. And into the second quarter of the ammonia, we typically, in the spring, we price a big part of that in the December timeframe for prepay. So customers purchase it. on a prepaid basis in December. So that had a big pricing element from a few months ago. So that's typical. We typically, again, would sell one to six months in advance. So it's more reflective. I would call the second quarter pricing reflective of a combination of the first and second quarter market price in whatever way you would define that. But the second quarter was kind of a combination.
spk05: I see. And then, you know, your comments imply that you should see a pretty big step up in pricing then more towards what you really saw from a market standpoint in Q2 as we look to Q3. Is there a much pre-sold volume then at lower pricing in Q3, or should we be looking for that step up in pricing then?
spk15: Yes, in that case, you know, by the time we were pricing third quarter this year, The market had moved to the spot. They call it the spot pricing. So we didn't sell any product until June and July. So it's kind of reflective of the current spot, yeah.
spk05: Okay, that's good to hear. And then, you know, from a demand standpoint, obviously things remain robust. How should we think about the, you know, your shipment levels as you look to Q3, acknowledging that it's a, you know, seasonally slower quarter? But, you know, how do you expect those shipment levels to trend relative to last year, given the environment?
spk15: So typically in the third quarter, ammonia shipments are lower because we're waiting for fall applications. So they tend to be lower in the third quarter. But UAN is pretty consistent. So I would expect, you know, a high degree of shipments in UAN. But even in ammonia, you know, we've sold some product for this third quarter. So we should see decent shipments of ammonia. Obviously the big movement will be in, probably the November timeframe for the fall application, but we should see good ammonia movement. But I call it typical UAM movement, which should be pretty good.
spk05: Got it. Understood. And then lastly for me, on the cost side, I know last quarter on the direct operating costs, you guys had talked $35 to $40 million. You came in at $53. Could you maybe go through what the difference was there one more time? I know you had mentioned a few special items there.
spk15: Sure. Well, the two biggies are we have this electricity charge. So during winter storm Uri, we were one of the few plants that operated. We did receive surcharge from our electricity provider. They're proposing that to be paid over a 10-year period. We're challenging that and the assumptions behind it. But we took a charge for the net present value of the whole thing in the quarter. So that was $4 million. And then we had a larger stock-based comp, so our SG&A number was high because of the increase in the stock price. Those were the two bigger numbers that were sort of outside the normal, what I call, operating environment.
spk05: Okay, got it. I really appreciate that. Thanks for the time.
spk02: Thank you. Our next question comes from the line of Brian Derubio with Baird. Please proceed with your question.
spk06: Good morning. You said in your commentary that, you know, you're looking to, you know, both pay distributions and reduce debt, particularly the nine and quarters. How are you going to balance that, you know, over the next couple of years? Obviously, you took advantage this quarter, paid the distribution to shareholders, but how are you balancing that? the decision to pay the distribution and the amount versus repaying the balance of the nine and a quarters?
spk15: Again, it'll come down to a board decision about how much they want to allocate to debt repayment and how much would be available for distributions. But I think that the theory that we're operating under is I would consider kind of a steady pace of repayment is the way to think about it. so do a decent debt pay down, but we do expect, given where pricing is, that there would be still a significant amount of free cash flow available for distribution even after those payments are made.
spk06: Okay, and the plan is still within the next two years to extinguish that stub piece?
spk12: That's correct. Okay.
spk06: Hopefully. The section... Yeah. Uh, section four, section 45 to tax credit. So, you know, where do you stand in terms of being able to monetize the ones that you have today? Uh, I know you were looking at several different structures, any updates on that?
spk15: Um, and we're continuing to press, um, we're progressing on the structure. Uh, there were, there's some, I would say some new information out of the IRS, which clarified some issues with, um, with respect to the carbon capture equipment, which affects our structure. We're sort of of the view that when we've got a bow wrapped around this, we'll lay it out there, but we're making progress. It's moving around. As an example, in the infrastructure legislation and in the big one that comes behind that, there's some various proposals on carbon capture, which a combination of increasing the length of the time to claim credits, the price of the credit. So all of that's going to factor in to completing our wrapping up of the structure, which is, you know, what are the credits worth and how long can we claim them? Because that affects, you know, the, uh, the value of our, of our asset in effect. So we're working through that. We're, um, Our plan is to keep moving along and see how the legislation falls out. I think it's generally very favorable for us, but who knows with activities in D.C. what will come out of the various pieces of legislation. But there's clearly, I think, a desire to provide more incentive for carbon capture and in different forms. So we're going to hopefully take advantage of that.
spk17: I think the only thing I would add to that is tying those two things together. So the plan is to kind of radically pay down that stub amount before maturity in the early 2023. But once we are able to monetize the 45Q credit, we'll likely take out the remainder of the balance, whatever it is at that time, and take advantage of the interest savings that's available to us.
spk06: Okay. That is helpful. And then just looking at the sales and production data schedule that you provided, caught my eye there was a fair amount, almost 16% drop in the use of natural gas in terms of volume and cost of materials and other. It was 2711 versus 3216 thousands of MMBTUs. Any reason why you had that large drop? There wasn't really any drop in production. Page seven of the press release.
spk15: I'm looking at the press release. Yeah. I'm not sure off the top of my head that we could explain it. We'll have to get back to you on that. But it wasn't an effect of the change in production because our production was right in line with last year. Yeah, I know.
spk06: I used to get magically more efficient. versus last year?
spk15: No, it didn't get more efficient.
spk17: I think it's probably inventory build of ammonia at East Dubuque, but we will have Richard check it if you guys can connect after the call.
spk07: Perfect. That's great. Appreciate the time.
spk02: Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. Our next question comes from the line of William Stein, private investor. Please go ahead, sir.
spk08: Great. Thanks so much for taking my question. Some have been answered already. But, Mike, I want to address a comment you made about cyclicality in pricing. I think you just noted that at some point relatively recently you've transitioned to selling at prices that are closer to spot. You know, the prices that you realized during Q2 were pretty far away from that. If we plug in spot pricing, to the volumes that you delivered in Q2, it appears you might have had something on the order of $6 or $7 per share in cash available for distribution. But as you highlighted on this call and in the press release today, we're at a very strong part of the cycle right now. As investors, should we anticipate that the current pricing environment rolls over at some point relatively quickly and goes back down to how things have been for the last, I don't know, seven, eight years or so? Or is there any reason to be a bit more optimistic that the current pricing environment can persist for some time? Because it seems to me that if it can, it is relatively realistic that you could do much higher distributions, something on the order of 20 bucks a year. I think given your stock price of about 60 bucks, addressing this would be of great interest to investors. Thank you.
spk15: Okay. So there are several questions in there. So I'll start at the top. I think I've said a number of past calls. We typically are a seller. Our market is based on when our customers are wanting to buy products. So that changes periodically year to year because of a variety of factors, seasonality, weather, pricing, things like that. So we tend to sell product when the customers are buying because that's when there's liquidity. So this past year, customers bought earlier going into the spring. So that's why when you look at the second quarter, it's kind of a blending of first quarter and second quarter. We have to participate in the market when the customers are buying. So We can't just sell everything at spot pricing and expect that we're going to move all of our inventory or production through the system. But the difference between the second quarter and the third quarter was we have sold forward into the third quarter, but the pricing was set – at basically late June and July, which was effectively the market pricing was spot spring pricing. So that pricing was much better looking into the third quarter based on where spot pricing was at that time. So I just want to be clear. The market provides liquidity to us at multiple times during the year, and we try to participate when it's available, and so we sell, I wouldn't call it rateable, but we sell it when liquidity is offered. So we can't, I don't think I could lay out, and it's different every year, so it'll be hard to tell you that there's an exact pattern that holds. But let's go to the market, though. What I would tell you is the underpinnings of our business are very solid right now. And it starts really at the farm level. Um, grain prices are high and, um, higher than they've been in the last, you know, really basically the last six or seven years, maybe back to 10 years, going back to 10 years. And that's because demand's been good for grain and supply has been, um, I think rushing to keep up with that, but weather's always a factor in controlling it. And grain prices going into the end of this season and then to the fall, our carryout inventory is going to be one of the low points in the last 10 years. So inventory levels look good. If you look forward on the grain pricing for December, grain prices look very good through the end of this calendar year, which sets up very well for the spring of 22. So the demand side, it looks really good. And grain prices look good, which means farmers are making money. And that's, you know, any business, the critical part of the business is if your customer's making money. Are customers making money? And really the prospects look very solid there. On the supply side, we've had, I described in my comments, but we've had a confluence of factors where demand picked up And supply has been, there have been issues with production, and part of it was the winter storm, and part of it was the turnaround schedule. And I described the turnaround schedule here in the U.S., but also globally a lot of production is catching up on turnaround. So the inventory levels for this time of year are at the, you know, just appear to be at the lowest that they've been in a number of years because production also has had limits. And it's going to take us some time to catch up to that. So I think that the supply-demand balance looks quite good going into 22. And I think, you know, I think our prospects look really good. We don't give forward forecasts, so I'm not going to comment on the distribution levels and things like that. But, you know, we, you know, our goal is to be, you know, balanced in our thought process and pay down some debt and provide distributions on top of that. And we feel very good about our prospects there. So that's a rambling answer to your question, but did I answer all your questions?
spk08: I think so, Mark. I appreciate it. I wonder if you have any comment on your expectation for this stronger part of the cycle. I think what you just said is you you would anticipate it to remain strong in 2022. Any sort of change in the volatility of the cycle beyond that, or is it just too far out to tell? Thanks so much.
spk15: You know, I, we are a cyclical business, so I'm not going to pretend like, you know, the cycles are, you know, aren't going to come back. They always do. I would just say a couple things that are interesting for our business for the go forward. Number one, The growing consumption of grains in renewable fuels is a factor that could have a bearing on the go forward. This is on the farm side. There's more soybeans being consumed in making renewable diesel. And there are some prospects for corn participating in either renewable diesel or in additional ethanol blending. And so grain demand, there could be, I'd say, more of a secular change based on the growing use of renewable fuels. The other is the production of blue or green ammonia. that would be used in other sectors outside of agriculture, like in power or transportation. We don't, right now, we don't have that. That would be a new market for ammonia, and that would take away some of the production that would be used for ag. And so that's, I think most companies, we are, you know, we've been looking at, you know, being able to produce blue ammonia at both of our plants. Right now, we think we can certify Coffeyville as a blue ammonia plant. And then if we take the appropriate steps, do the same at East Dubuque. But that would be a new market, and it would not be an agricultural market. And that would mean that the agricultural market has to compete with a new source of demand. The other factor, at least over the next few years, this anti-dumping case that CF has filed with the Department of Commerce and ITC. And if you go back to some of our conference calls from 19 to 20, we're talking about the entry of product from Russia and Trinidad into the U.S. We believe that this subsidized product, based on the price of natural gas, and was dumped here in the U.S., particularly after the the EU put tariffs on UAN. So if, if in fact that they ultimately, uh, do provide or put a duty on UAN, that also could, could be a more of a multi-year change to, to our business. So there's some really interesting, uh, you know, I'd say factors that could have, could lengthen this cycle, could affect our business in a more structural way. And, um, And I would say that we're optimistic about it, but a lot of this has to play out in front of us going forward.
spk04: Thank you.
spk02: Thank you. Ladies and gentlemen, that concludes our time for questions and answers. I'll now turn the floor back to management for any final comments.
spk14: All right.
spk15: Well, appreciate everyone's time today, and we look forward to talking to you on our third quarter results coming up. Thank you very much.
spk02: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you.
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