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EX-32.3 - EX-32.3 - CVR PARTNERS, LPuanq22015exhibit323.htm
EX-31.1 - EX-31.1 - CVR PARTNERS, LPuanq22015exhibit311.htm
EX-31.3 - EX-31.3 - CVR PARTNERS, LPuanq22015exhibit313.htm
EX-31.2 - EX-31.2 - CVR PARTNERS, LPuanq22015exhibit312.htm
EX-32.1 - EX-32.1 - CVR PARTNERS, LPuanq22015exhibit321.htm
EX-32.2 - EX-32.2 - CVR PARTNERS, LPuanq22015exhibit322.htm

 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended June 30, 2015
 
 
OR
 
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from               to              .

Commission file number: 001-35120

CVR Partners, LP
(Exact name of registrant as specified in its charter)
Delaware
56-2677689
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
2277 Plaza Drive, Suite 500
 
Sugar Land, Texas
(Address of principal executive offices)
77479
(Zip Code)
(281) 207-3200
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 
Accelerated filer o
 
  Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
 (Do not check if smaller reporting company.)
 
 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o     No þ

There were 73,122,997 common units outstanding at July 28, 2015.
 





 CVR PARTNERS, LP AND SUBSIDIARIES

INDEX TO QUARTERLY REPORT ON FORM 10-Q
For The Quarter Ended June 30, 2015


 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2



GLOSSARY OF SELECTED TERMS

The following are definitions of certain terms used in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (this “Report”):     

ammonia
Ammonia is a direct application fertilizer and is primarily used as a building block for other nitrogen products for industrial applications and finished fertilizer products.
 
 
capacity
Capacity is defined as the throughput a process unit is capable of sustaining, either on a calendar or stream day basis. The throughput may be expressed in terms of maximum sustainable, nameplate or economic capacity. The maximum sustainable or nameplate capacities may not be the most economical. The economic capacity is the throughput that generally provides the greatest economic benefit based on considerations such as feedstock costs, product values and downstream unit constraints.
 
 
catalyst
A substance that alters, accelerates, or instigates chemical changes, but is neither produced, consumed nor altered in the process.
 
 
Coffeyville Resources or CRLLC
Coffeyville Resources, LLC, the subsidiary of CVR Energy which directly owns our general partner and 38,920,000 common units, or approximately 53% of our common units.
 
 
common units
Common units representing limited partner interests of CVR Partners, LP.
 
 
corn belt
The primary corn producing region of the United States, which includes Illinois, Indiana, Iowa, Minnesota, Missouri, Nebraska, Ohio and Wisconsin.
 
 
CVR Energy
CVR Energy, Inc., a publicly traded company listed on the New York Stock Exchange under the ticker symbol “CVI,” which indirectly owns our general partner and the common units owned by CRLLC.
 
 
CVR Refining
CVR Refining, LP, a publicly traded limited partnership listed on the New York Stock Exchange under the ticker symbol “CVRR,” which currently owns and operates a complex full coking medium-sour crude oil refinery with a rated capacity of 115,000 barrels per calendar day (bpcd) in Coffeyville, Kansas, a complex crude oil refinery with a rated capacity of 70,000 bpcd in Wynnewood, Oklahoma and ancillary businesses.
 
 
farm belt
Refers to the states of Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Ohio, Oklahoma, South Dakota, Texas and Wisconsin.
 
 
feedstocks
Petroleum coke and petroleum products (such as crude oil and natural gas liquids) that are processed and blended into refined products, such as gasoline, diesel fuel and jet fuel, which are produced by a refinery.
 
 
general partner
CVR GP, LLC, our general partner, which is a wholly-owned subsidiary of Coffeyville Resources, LLC.
 
 
Initial Public Offering
The initial public offering of CVR Partners, LP common units that closed on April 13, 2011.
 
 
MMbtu
One million British thermal units: a measure of energy. One Btu of heat is required to raise the temperature of one pound of water one degree Fahrenheit.
 
 
MSCF
One thousand standard cubic feet, a customary gas measurement.
 
 
netback
Netback represents net sales less freight revenue divided by product sales volume in tons. Netback is also referred to as product pricing at gate.
 
 
on-stream
Measurement of the reliability of the gasification, ammonia and UAN units, defined as the total number of hours operated by each unit divided by the total number of hours in the reporting period.
 
 
pet coke
Petroleum coke - a coal-like substance that is produced during the oil refining process.
 
 
product pricing at gate
Product pricing at gate represents net sales less freight revenue divided by product sales volume in tons. Product pricing at gate is also referred to as netback.
 
 

3


Secondary Offering
The registered public offering of 12,000,000 common units of CVR Partners, LP, by CRLLC, which closed on May 28, 2013.
 
 
throughput
The volume processed through a unit.
 
 
ton
One ton is equal to 2,000 pounds.
 
 
turnaround
A periodically required standard procedure to refurbish and maintain a facility that involves the shutdown and inspection of major processing units.
 
 
UAN
UAN is an aqueous solution of urea and ammonium nitrate used as a fertilizer.

4


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

CVR PARTNERS, LP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
 
June 30,
2015
 
December 31,
2014
 
(unaudited)
 
 
 
(in thousands, except unit data)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
66,981

 
$
79,914

Accounts receivable, net of allowance for doubtful accounts of $18 and $34, at June 30, 2015 and December 31, 2014, respectively
10,397

 
7,136

Inventories
35,721

 
35,614

Prepaid expenses and other current assets, including $876 and $1,848 from affiliates at June 30, 2015 and December 31, 2014, respectively
4,687

 
6,914

Total current assets
117,786

 
129,578

Property, plant, and equipment, net of accumulated depreciation
397,828

 
404,934

Goodwill
40,969

 
40,969

Deferred financing costs, net

 
272

Other long-term assets, including $882 and $957 with affiliates at June 30, 2015 and December 31, 2014, respectively
3,376

 
3,086

Total assets
$
559,959

 
$
578,839

LIABILITIES AND PARTNERS’ CAPITAL
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
125,000

 
$

Accounts payable, including $1,843 and $2,279 due to affiliates at June 30, 2015 and December 31, 2014, respectively
14,637

 
12,747

Personnel accruals, including $1,710 and $1,129 with affiliates at June 30, 2015 and December 31, 2014, respectively
4,382

 
3,785

Deferred revenue
1,911

 
13,613

Accrued expenses and other current liabilities, including $1,295 and $2,094 with affiliates at June 30, 2015 and December 31, 2014, respectively
5,695

 
9,562

Total current liabilities
151,625

 
39,707

Long-term liabilities:
 
 
 
Long-term debt, net of current portion

 
125,000

Other long-term liabilities
16

 
201

Total long-term liabilities
16

 
125,201

Commitments and contingencies


 


Partners’ capital:
 
 
 
Common unitholders 73,122,997 units issued and outstanding at June 30, 2015 and December 31, 2014
408,932

 
414,968

General partner interest
1

 
1

Accumulated other comprehensive loss
(615
)
 
(1,038)
Total partners’ capital
408,318

 
413,931

Total liabilities and partners’ capital
$
559,959

 
$
578,839

See accompanying notes to the condensed consolidated financial statements.

5


CVR PARTNERS, LP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
(unaudited)
 
(in thousands, except per unit data)
Net sales
$
80,815

 
$
77,215

 
$
173,865

 
$
157,531

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of product sold (exclusive of depreciation and amortization) — Affiliates
2,184

 
2,327

 
4,002

 
4,573

Cost of product sold (exclusive of depreciation and amortization) — Third parties
13,240

 
17,109

 
37,191

 
36,571

 
15,424

 
19,436

 
41,193

 
41,144

Direct operating expenses (exclusive of depreciation and amortization) — Affiliates
1,195

 
817

 
2,222

 
1,570

Direct operating expenses (exclusive of depreciation and amortization) — Third parties
23,951

 
26,100

 
47,338

 
49,536

 
25,146

 
26,917

 
49,560

 
51,106

Selling, general and administrative expenses (exclusive of depreciation and amortization) — Affiliates
3,361

 
3,973

 
6,628

 
7,509

Selling, general and administrative expenses (exclusive of depreciation and amortization) — Third parties
1,162

 
1,297

 
2,478

 
2,415

 
4,523

 
5,270

 
9,106

 
9,924

Depreciation and amortization
7,010

 
6,792

 
13,829

 
13,459

Total operating costs and expenses
52,103

 
58,415

 
113,688

 
115,633

Operating income
28,712

 
18,800

 
60,177

 
41,898

Other income (expense):
 
 
 
 
 
 
 
Interest expense and other financing costs
(1,717
)
 
(1,669
)
 
(3,414
)
 
(3,328
)
Interest income
12

 
6

 
24

 
12

Other income, net
5

 

 
11

 
15

Total other income (expense)
(1,700
)
 
(1,663
)
 
(3,379
)
 
(3,301
)
Income before income tax expense
27,012

 
17,137

 
56,798

 
38,597

Income tax expense (benefit)
(4
)
 
7

 
8

 
14

Net income
$
27,016

 
$
17,130

 
$
56,790

 
$
38,583

 
 
 
 
 
 
 
 
Net income per common unit – basic
$
0.37

 
$
0.23

 
$
0.78

 
$
0.53

Net income per common unit – diluted
$
0.37

 
$
0.23

 
$
0.78

 
$
0.53

Weighted-average common units outstanding:
 
 
 
 
 
 
 
Basic
73,123

 
73,113

 
73,123

 
73,113

Diluted
73,131

 
73,146

 
73,131

 
73,145



See accompanying notes to the condensed consolidated financial statements.


6


CVR PARTNERS, LP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
(unaudited)
 
(in thousands)
Net income
$
27,016

 
$
17,130

 
$
56,790

 
$
38,583

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in fair value of interest rate swaps
(38
)
 
(98
)
 
(110
)
 
(193
)
Net loss reclassified into income on settlement of interest rate swaps
266

 
273

 
533

 
541

Other comprehensive income (loss)
228

 
175

 
423

 
348

Total comprehensive income
$
27,244

 
$
17,305

 
$
57,213

 
$
38,931



See accompanying notes to the condensed consolidated financial statements.


7


CVR PARTNERS, LP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL

 
Common Units 
 
General
Partner
Interest  
 
Accumulated
Other
Comprehensive
Income/(Loss)  
 
Total
 
Issued
 
Amount
 
 
 
 
 
 
 
 
(unaudited)
 
 
 
 
 
(in thousands, except unit data)
Balance at December 31, 2014
73,122,997

 
$
414,968

 
$
1

 
$
(1,038
)
 
$
413,931

Cash distributions to common unitholders – Affiliates

 
(33,471
)
 

 

 
(33,471
)
Cash distributions to common unitholders – Non-affiliates

 
(29,415
)
 

 

 
(29,415
)
Share-based compensation – Affiliates

 
60

 

 

 
60

Net income

 
56,790

 

 

 
56,790

Net gains (losses) on interest rate swaps

 

 

 
423

 
423

Balance at June 30, 2015
73,122,997

 
$
408,932

 
$
1

 
$
(615
)
 
$
408,318


See accompanying notes to the condensed consolidated financial statements.


8


CVR PARTNERS, LP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
 
 
 
 
(unaudited)
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
56,790

 
$
38,583

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
13,829

 
13,459

Allowance for doubtful accounts
(16
)
 
(20
)
Amortization of deferred financing costs
479

 
478

(Gain) loss on disposition of fixed assets
22

 
406

Share-based compensation – Affiliates
1,136

 
1,560

Share-based compensation
289

 
209

Change in assets and liabilities:
 
 
 
Accounts receivable
(3,245
)
 
(353
)
Inventories
(107
)
 
2,151

Prepaid expenses and other current assets
2,020

 
3,880

Other long-term assets
(52
)
 
(300
)
Accounts payable
908

 
(2,971
)
Deferred revenue
(11,702
)
 
(297
)
Accrued expenses and other current liabilities
(4,395
)
 
3,237

Other long-term liabilities
(2
)
 
(68
)
Net cash provided by operating activities
55,954

 
59,954

Cash flows from investing activities:
 
 
 
Capital expenditures
(6,033
)
 
(7,491
)
Proceeds from sale of assets
32

 
91

Net cash used in investing activities
(6,001
)
 
(7,400
)
Cash flows from financing activities:
 
 
 
Cash distributions to common unitholders – Affiliates
(33,471
)
 
(31,525
)
Cash distributions to common unitholders – Non-affiliates
(29,415
)
 
(27,696
)
Redemption of common units

 
(5
)
Net cash used in financing activities
(62,886
)
 
(59,226
)
Net increase (decrease) in cash and cash equivalents
(12,933
)
 
(6,672
)
Cash and cash equivalents, beginning of period
79,914

 
85,142

Cash and cash equivalents, end of period
$
66,981

 
$
78,470

Supplemental disclosures:
 
 
 
Cash paid for income taxes, net
$
35

 
$
33

Cash paid for interest, net of capitalized interest of $79 in 2014
$
2,934

 
$
2,849

Non-cash investing and financing activities:
 
 
 
Construction in progress additions included in accounts payable
$
2,048

 
$
2,571

Change in accounts payable related to construction in progress
$
982

 
$
705


See accompanying notes to the condensed consolidated financial statements.

9

CVR PARTNERS, LP AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(unaudited)





(1) Formation of the Partnership, Organization and Nature of Business

Organization

CVR Partners, LP (referred to as "CVR Partners" or the "Partnership") is a Delaware limited partnership, formed in June 2007 by CVR Energy, Inc. (together with its subsidiaries, but excluding the Partnership and its subsidiaries, "CVR Energy") to own Coffeyville Resources Nitrogen Fertilizers, LLC ("CRNF"). CRNF is an independent producer and marketer of upgraded nitrogen fertilizer products sold in North America. CRNF operates a dual-train coke gasifier plant that produces high-purity hydrogen, most of which is subsequently converted to ammonia and upgraded to urea ammonium nitrate ("UAN").

CRNF produces and distributes nitrogen fertilizer products, which are used primarily by farmers to improve the yield and quality of their crops. CRNF's principal products are UAN and ammonia. These products are manufactured at CRNF's facility in Coffeyville, Kansas. CRNF's product sales are heavily weighted toward UAN and all of its products are sold on a wholesale basis.

Operation of Partnership

Subsequent to the closing of the Partnership's initial public offering (the "Initial Public Offering"), in April 2011 and through May 27, 2013, public security holders held approximately 30% of the Partnership's common units and Coffeyville Resources, LLC ("CRLLC"), a wholly-owned subsidiary of CVR Energy, held approximately 70% of the Partnership's common units and the general partner interest. As of June 30, 2015, Icahn Enterprises L.P. ("IEP") and its affiliates owned approximately 82% of the shares of CVR Energy.

On May 28, 2013, CRLLC sold 12,000,000 of the Partnership's common units to the public in a registered public offering (the "Secondary Offering"). The Partnership did not receive any of the proceeds from the sale of common units by CRLLC. Subsequent to the closing of the Secondary Offering and as of June 30, 2015, public security holders held approximately 47% of the Partnership's common units and CRLLC held approximately 53% of the Partnership's common units and 100% of the general partner interest.

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 limited partnership agreement. The Partnership also is party to a number of agreements with CVR Energy and CVR GP to regulate certain business relations between the Partnership and the other parties thereto. See Note 13 ("Related Party Transactions") for further discussion.

(2) Basis of Presentation

The accompanying Partnership condensed consolidated financial statements include the accounts of CVR Partners and CRNF, its wholly-owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. The accompanying condensed consolidated financial statements were 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”). These condensed consolidated financial statements should be read in conjunction with the December 31, 2014 audited consolidated financial statements and notes thereto included in CVR Partners’ Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the SEC as of February 20, 2015 (the "2014 Form 10-K").

The condensed consolidated financial statements include certain selling, general and administrative expenses and direct operating expenses that CVR Energy and its subsidiaries incurred on behalf of the Partnership. These related party transactions are governed by the services agreement. See Note 13 ("Related Party Transactions") for additional discussion of the services agreement and billing and allocation of certain costs.

10

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2015
(unaudited)


In the opinion of the Partnership’s management, the accompanying condensed consolidated financial statements and related notes reflect all adjustments (consisting only of normal recurring adjustments) that are necessary to fairly present the financial position of the Partnership as of June 30, 2015 and December 31, 2014, the results of operations and comprehensive income of the Partnership for the three and six months ended June 30, 2015 and 2014, the cash flows of the Partnership for the six months ended June 30, 2015 and 2014 and the changes in partners’ capital for the Partnership for the six months ended June 30, 2015.

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Results of operations and cash flows for the interim periods presented are not necessarily indicative of the results that will be realized for the year ending December 31, 2015 or any other interim or annual period.

(3) Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"), which 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. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard is 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 not yet selected a transition method and is currently evaluating the standard and the impact on its consolidated financial statements and footnote disclosures.

In April 2015, the FASB issued ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"). The new standard 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. The standard is effective for interim and annual periods beginning after December 31, 2015 and is required to be applied on a retrospective basis. Early adoption is permitted. The Partnership expects that the adoption of ASU 2015-03 will result in a reclassification of certain debt issuance costs on the Condensed Consolidated Balance Sheets.

(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. Accordingly, CVR Partners has recorded compensation expense for these plans. All compensation expense related to these plans for full-time employees of CVR Partners has been allocated 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 is 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 is not responsible for payment are reflected as an increase or decrease to partners' capital.

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 June 30, 2015, only grants of restricted stock 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.


11

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2015
(unaudited)

Restricted Stock Units

Through the CVR Energy LTIP, shares of restricted common stock were previously granted to employees of CVR Energy. These restricted shares are generally graded-vesting awards, which vest over a three-year period. Compensation expense is recognized on a straight-line basis over the vesting period of the respective tranche of the award. The IEP acquisition of CVR Energy and related Transaction Agreement, dated April 18, 2012, between CVR Energy and an affiliate of IEP (the “Transaction Agreement”) triggered a modification to outstanding awards under the CVR Energy LTIP. Pursuant to the Transaction Agreement, restricted shares scheduled to vest in 2013, 2014 and 2015 were converted to restricted stock units whereby the awards would be settled in cash upon vesting in an amount equal to the lesser of the offer price of $30.00 per share or the fair market value as determined at the most recent valuation date of December 31 of each year. The awards are remeasured at each subsequent reporting date until they vest.

In 2012 and 2013, restricted stock units and dividend equivalent rights were granted to certain employees of CVR Energy and its subsidiaries. The awards are expected to vest over three years, with one-third of the award vesting each year. Each restricted stock unit and dividend equivalent right represents the right to receive, upon vesting, a cash payment equal to (a) the fair market value of one share of CVR Energy's common stock, plus (b) the cash value of all dividends declared and paid per share of CVR Energy's common stock from the grant date to and including the vesting date. The awards will be remeasured at each subsequent reporting date until they vest.

Assuming the allocation of costs from CVR Energy remains consistent with the allocation percentages in place at June 30, 2015, the amount of total unrecognized compensation cost related to restricted stock units and associated dividend equivalent rights was nominal and will be recognized over a weighted-average period of approximately 0.5 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 expense has been determined by the number of restricted stock units and associated dividend equivalent rights and respective allocation percentage for individuals for whom, as of June 30, 2015, compensation expense has been allocated to the Partnership. Compensation expense recorded for the three months ended June 30, 2015 and 2014, related to the awards, was approximately $2,000 and $0.1 million, respectively. Compensation expense recorded for the six months ended June 30, 2015 and 2014, related to the awards, was approximately $28,000 and $0.1 million, respectively. The Partnership is not responsible for the payment of CVR Energy restricted stock units and associated dividend equivalent rights, and accordingly, the expenses recorded have been reflected as increases to partners' capital.

Performance Unit Awards

Mr. Lipinski, CVR Energy's Chief Executive Officer and President, had performance unit awards that were fully vested as of December 31, 2014 and reimbursed as of March 31, 2015 with no remaining performance units outstanding. Total compensation expense recorded for the three and six months ended June 30, 2014 related to the performance unit awards was $0.3 million and $0.7 million, respectively.

Incentive Unit Awards – CVR Energy

In 2013, 2014 and 2015, 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 (a) the average fair market value of one common unit of CVR Refining, LP ("CVR Refining") in accordance with the award agreement, plus (b) 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 allocation of costs from CVR Energy remains consistent with the allocation percentages in place at June 30, 2015, there was approximately $0.8 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 1.4 years.

12

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2015
(unaudited)

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 expense has been determined by the number of incentive units and respective allocation percentage for individuals for whom, as of June 30, 2015, compensation expense has been allocated to the Partnership. Compensation expense recorded for the three months ended June 30, 2015 and 2014 related to the awards was approximately $0.2 million and $0.2 million, respectively. Compensation expense recorded for the six months ended June 30, 2015 and 2014 related to the awards was approximately $0.4 million and $0.3 million, respectively. The Partnership will be responsible for reimbursing CVR Energy for its allocated portion of the awards.

As of June 30, 2015 and December 31, 2014, the Partnership had a liability of $0.5 million and $0.2 million, respectively, for its allocated portion of non-vested incentive units and associated distribution equivalent rights, which is recorded in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets.

Long-Term Incentive Plan – CVR Partners

The Partnership has a long-term incentive plan ("CVR Partners LTIP") that provides for the grant of options, unit appreciation rights, distribution equivalent rights, restricted units, phantom units and other unit-based awards. Individuals who are eligible to receive awards pursuant to the CVR Partners LTIP include (1) employees of the Partnership and its subsidiaries, (2) employees of the general partner, (3) members of the board of directors of the general partner, and (4) CVR Partners' parent's employees, consultants and directors.

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 of the general partner are considered a non-employee equity based award and are required to be marked-to-market each reporting period until they vest. Awards to employees of the Partnership and employees of the general partner vest over a three year period. The maximum number of common units issuable under the CVR Partners LTIP is 5,000,000. As of June 30, 2015, there were 4,820,215 common units available for issuance under the CVR Partners LTIP. As substantially all phantom unit awards discussed below are cash settled awards, they do not reduce the number of common units outstanding.

Certain Units and Phantom Units

In 2013 and during 2014, 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. 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 phantom unit and distribution equivalent right represents the right to receive, upon vesting, a cash payment equal to (a) the average fair market value of one unit of the Partnership's common units in accordance with the award agreement, plus (b) 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.

A summary of the phantom unit activity during the six months ended June 30, 2015 is presented below:

 
Phantom Units
 
Weighted-Average
Grant Date Fair Value
Non-vested at January 1, 2015
243,946
 
$
11.07

Granted

 

Vested

 

Forfeited
(2,388
)
 
10.99

Non-vested at June 30, 2015
241,558

 
$
11.08


Unrecognized compensation expense associated with the unvested phantom units at June 30, 2015 was approximately $2.1 million and is expected to be recognized over a weighted average period of 1.4 years. Compensation expense recorded for the three months

13

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2015
(unaudited)

ended June 30, 2015 and 2014 related to the awards under the CVR Partners LTIP was approximately $0.4 million and $0.2 million, respectively. Compensation expense recorded for the six months ended June 30, 2015 and 2014 related to the awards under the CVR Partners LTIP was approximately $1.0 million and $0.6 million, respectively. As of June 30, 2015 and December 31, 2014 the Partnership had a liability of $1.2 million and $0.2 million, respectively, for cash settled non-vested phantom unit awards and associated distribution equivalent rights, which is recorded in personnel accruals on the Condensed Consolidated Balance Sheets.

Performance-Based Phantom Unit Award

In May 2014, the Partnership entered into a Phantom Unit Agreement with Mr. Pytosh, the Chief Executive Officer and President of the general partner, that included performance-based phantom units and distribution equivalent rights. Compensation cost for these awards is being recognized over the performance cycles of May 1, 2014 to December 31, 2014, January 1, 2015 to December 31, 2015 and January 1, 2016 to December 31, 2016, as the services are provided. Each phantom unit and distribution equivalent right represents the right to receive, upon vesting, a cash payment equal to (a) the average closing price of the Partnership's common units in accordance with the agreement, multiplied by a performance factor that is based upon the level of the Partnership’s production of UAN, and (b) the per unit cash value of all distributions declared and paid by the Partnership from the grant date to and including the vesting date. Assuming the allocation of costs from CVR Energy remains consistent with the allocation percentages in place at June 30, 2015, unrecognized compensation expense associated with the unvested units at June 30, 2015 was approximately $0.1 million and is expected to be recognized over a weighted average period of 1.0 years. Compensation expense recorded for the three months ended June 30, 2015 and 2014 related to the awards was approximately $10,000 and $46,000, respectively. Compensation expense recorded for the six months ended June 30, 2015 and 2014 related to the awards was approximately $39,000 and $46,000, respectively. The Partnership will be reimbursed by CVR Energy and CVR Refining for the portion of the award attributable to time Mr. Pytosh spends working on matters for those companies. As of June 30, 2015 and December 31, 2014, the Partnership had a nominal liability for the non-vested phantom unit award and associated distribution equivalent rights, which is recorded in personnel accruals on the Condensed Consolidated Balance Sheets.

(5) Inventories

Inventories consisted of the following:


June 30,
2015
 
December 31,
2014
 
 
 
 
 
(in thousands)
Finished goods
$
8,569

 
$
12,393

Raw materials and precious metals
10,041

 
9,333

Parts and supplies
17,111

 
13,888

 
$
35,721

 
$
35,614



14

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2015
(unaudited)

(6) Property, Plant and Equipment

A summary of costs and accumulated depreciation for property, plant and equipment is as follows:

 
June 30,
2015
 
December 31,
2014
 
 
 
 
 
(in thousands)
Land and improvements
$
5,441

 
$
5,263

Buildings and improvements
2,830

 
2,266

Machinery and equipment
560,599

 
559,210

Automotive equipment
448

 
497

Furniture and fixtures
913

 
882

Railcars
14,850

 
14,524

Construction in progress
10,678

 
6,515

 
$
595,759

 
$
589,157

Less: Accumulated depreciation
197,931

 
184,223

Total property, plant and equipment, net
$
397,828

 
$
404,934


Capitalized interest recognized as a reduction of interest expense for the three and six months ended June 30, 2014 totaled approximately $44,000 and $79,000, respectively, and was $0 for the three and six months ended June 30, 2015.

Direct operating expenses exclude depreciation and amortization of approximately $6.9 million and $6.7 million for the three months ended June 30, 2015 and 2014, respectively, and approximately $13.5 million and $13.3 million for the six months ended June 30, 2015 and 2014, respectively.

Cost of product sold expenses exclude depreciation and amortization of approximately $0.1 million and $0.1 million for the three months ended June 30, 2015 and 2014, respectively, and approximately $0.3 million and $0.2 million for the six months ended June 30, 2015 and 2014, respectively.

Depreciation and amortization excluded from selling, general and administrative expenses was nominal for the three and six months ended June 30, 2015 and 2014.

(7) Partners’ Capital and Partnership Distributions

The Partnership has two types of partnership interests outstanding:

common units; and

a general partner interest, which is not entitled to any distributions, and which is held by the general partner.

At June 30, 2015, the Partnership had a total of 73,122,997 common units issued and outstanding, of which 38,920,000 common units were owned by CRLLC, representing approximately 53% of the total Partnership 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.


15

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2015
(unaudited)

Available cash for each quarter 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 and reserves for future operating or capital needs that the board of directors of the general partner deems necessary or appropriate, 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, where applicable, major scheduled turnaround expenses, loss on extinguishment of debt and loss on disposition of assets. 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. 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 Partnership’s unitholders during 2015 for the respective quarters to which the distributions relate:

 
December 31,
2014
 
March 31,
2015
 
Total Cash
Distributions
 Paid in 2015 
 
 
 
 
 
 
 
($ in millions, expect per common unit amounts)
Amount paid to CRLLC
$
16.0

 
$
17.5

 
$
33.5

Amounts paid to public unitholders
14.0

 
15.4

 
29.4

Total amount paid
$
30.0

 
$
32.9

 
$
62.9

Per common unit
$
0.41

 
$
0.45

 
$
0.86

Common units outstanding (in thousands)
73,123

 
73,123

 
 

On July 29, 2015, the Board of Directors of the general partner of the Partnership declared a cash distribution for the second quarter of 2015 in the amount of $0.39 per common unit, or approximately $28.5 million in aggregate. The cash distribution will be paid on August 17, 2015 to the Partnership's unitholders of record at the close of business on August 10, 2015.

(8) Net Income per Common Unit

The Partnership's net income is allocated wholly to the common units, as the general partner does not have an economic interest. Basic and diluted net income per common unit is calculated by dividing net income by the weighted-average number of common units outstanding during the period and, when applicable, gives effect to certain 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.


16

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2015
(unaudited)

(9) Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities were as follows:


June 30,
2015
 
December 31, 2014
 
 
 
 
 
(in thousands)
Property taxes
$
1,364

 
$
1,376

Current interest rate swap liabilities
615

 
855

Accrued interest
458

 
458

Railcar maintenance accruals
384

 
2,827

Other accrued expenses and liabilities (1)
2,874

 
4,046

 
$
5,695

 
$
9,562

____________

(1)
Other accrued expenses and liabilities include amounts owed by the Partnership to Coffeyville Resources Refining & Marketing, LLC (“CRRM”), a related party, under the feedstock and shared services agreement and the services agreement. Refer to Note 13 ("Related Party Transactions") for additional discussion.

(10) Credit Facility

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 outstanding under the revolving credit facility at June 30, 2015 and December 31, 2014. There is no scheduled amortization. The credit facility matures in April 2016; therefore, the principal portion of the term loan is presented in current portion of long-term debt on the Condensed Consolidated Balance Sheet as of June 30, 2015. The Partnership is considering capital structure and refinancing options associated with the credit facility maturity.

Borrowings under the credit facility bear interest at either a Eurodollar rate or a base rate plus in either case 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. Currently, the interest rate is 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.

The credit facility requires CVR Partners to maintain a minimum interest coverage ratio and a maximum leverage ratio and contains customary covenants for a financing of this type that limit, subject to certain exceptions, the incurrence of additional indebtedness or guarantees, incurrence of liens, disposal of assets, making restricted payments, making investments or acquisitions, entry into sale-leaseback transactions and entry into affiliate transactions. The credit facility provides that the Partnership can make distributions to holders of the Partnership's common units provided the Partnership is in compliance with its leverage ratio and interest coverage ratio covenants on a pro forma basis after giving effect to such distribution and there is no default or event of default under the facility. As of June 30, 2015, CVR Partners was in compliance with the covenants contained in the credit facility.


17

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2015
(unaudited)

(11) Interest Rate Swap Agreements

CRNF has 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 matures in April 2016, as discussed further in Note 10 ("Credit Facility"). The aggregate notional amount covered under these agreements, which commenced on August 12, 2011 and expire on February 12, 2016, totals $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 receives a floating rate based on three month LIBOR and pays a fixed rate of 1.94%. Under the terms of the interest rate swap agreement entered into on July 1, 2011, CRNF receives a floating rate based on three month LIBOR and pays a fixed rate of 1.975%. Both swap agreements are settled every 90 days. The effect of these swap agreements is to lock in a fixed rate of interest of approximately 1.96% plus the applicable margin paid to lenders over three month LIBOR governed by the credit facility. At June 30, 2015, the effective rate of the term loan facility, net of impact of the interest rate swap agreements, was approximately 4.57%. The agreements were designated as cash flow hedges at inception, and accordingly, the effective portion of the gain or loss on the swap is reported as a component of accumulated other comprehensive income (loss) (“AOCI”) and will be reclassified into interest expense when the interest rate swap transaction affects earnings. Any ineffective portion of the gain or loss will be 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 Condensed Consolidated Statements of Operations was $0.3 million and $0.3 million for the three months ended June 30, 2015 and 2014, respectively, and $0.5 million and $0.5 million for the six months ended June 30, 2015 and 2014, respectively.

The interest rate swap agreements held by the Partnership also provide for the right to offset. However, as the interest rate swaps are in a liability position, there are no amounts offset in the Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014. See Note 14 ("Fair Value Measurements") for discussion of the fair value of the interest rate swap agreements.


(12) Commitments and Contingencies

Leases and Unconditional Purchase Obligations

The minimum required payments for the Partnership’s operating leases and unconditional purchase obligations are as follows:


Operating
Leases   
 
Unconditional
Purchase
Obligations(1)
 
 
 
 
 
(in thousands)
Six months ending December 31, 2015
$
2,780

 
$
10,605

Year Ending December 31,
 
 
 
2016
4,943

 
14,848

2017
3,308

 
14,885

2018
2,496

 
13,386

2019
1,897

 
12,113

Thereafter
3,661

 
65,774

 
$
19,085

 
$
131,611

_____________

(1)
This includes 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 13 ("Related Party Transactions") for further discussion of the coke supply agreement.

CRNF leases railcars and facilities under long-term operating leases. Lease expense is included in cost of product sold (exclusive of depreciation and amortization) and for the three months ended June 30, 2015 and 2014 totaled approximately $1.2 million and $1.1 million, respectively. Lease expense for the six months ended June 30, 2015 and 2014 totaled approximately $2.3 million and $2.3 million, respectively. The lease agreements have various remaining terms. Some agreements are renewable, at

18

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2015
(unaudited)

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.

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 three months ended June 30, 2015 and 2014, totaled approximately $0.8 million and $1.0 million, respectively. For the six months ended June 30, 2015 and 2014, the expense totaled approximately $1.6 million and $2.0 million, respectively.

The Partnership is a party to a pet coke supply agreement with HollyFrontier Corporation. The term of this agreement ends in December 2015 and may be renewed. The delivered cost of this pet coke is included in cost of product sold (exclusive of depreciation and amortization) and totaled approximately $1.0 million and $1.0 million, respectively, for the three months ended June 30, 2015 and 2014. For the six months ended June 30, 2015 and 2014, these expenses totaled approximately $2.3 million and $2.3 million, respectively.

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, if any, 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. Except as described below, there were no new proceedings or material developments in proceedings from those provided in the 2014 Form 10-K or in the quarterly report on Form 10-Q for the quarter ended March 31, 2015, which was filed with the SEC on May 1, 2015 (the "2015 Q1 Form 10-Q"). In the opinion of management, the ultimate resolution of any other litigation matters is not expected to have a material adverse effect on the accompanying condensed consolidated financial statements. There can be no assurance that management’s beliefs or opinions with respect to liability for potential litigation matters are accurate.

Environmental, Health and Safety (“EHS”) Matters

CRNF 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 laws or technology occur.

There have been no new developments or material changes to the environmental accruals or expected capital expenditures related to compliance with the foregoing environmental matters from those provided in the 2014 Form 10-K or the 2015 Q1 Form 10-Q. CRNF believes it is in substantial compliance with existing EHS rules and regulations. There can be no assurance that the EHS matters which may develop in the future will not have a material adverse effect on the Partnership's business, financial condition or results of operations.

(13) 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 subsidiaries) that govern the business relations among each party including: the (i) Feedstock and Shared Services Agreement; (ii) Coke Supply Agreement; (iii) Environmental Agreement; (iv) Services Agreement; (v) GP Services Agreement and (vi) Limited Partnership Agreement. Except as otherwise described below, there have been no new developments or material changes to these agreements from those provided in the 2014 Form 10-K.


19

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2015
(unaudited)

Amounts owed to CVR Partners and CRNF from CVR Energy and its subsidiaries with respect to these agreements are included in prepaid expenses and other current assets and other long-term assets on the Condensed Consolidated Balance Sheets. Conversely, amounts owed to CVR Energy and its subsidiaries by CVR Partners and CRNF with respect to these agreements are included in accounts payable, personnel accruals and accrued expenses and other current liabilities on the Partnership's Condensed 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 feedstock 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 nitrogen fertilizer plant.

Pursuant to the feedstock and shared services 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. Net monthly receipts of hydrogen from CRRM have been reflected in cost of product sold (exclusive of depreciation and amortization) for CVR Partners, when applicable. For the three months ended June 30, 2015 and 2014, the net sales generated from the sale of hydrogen to CRRM were approximately $2.0 million and $0.9 million, respectively. For the six months ended June 30, 2015 and 2014, the net sales generated from the sale of hydrogen to CRRM were approximately $8.5 million and $6.8 million, respectively. At June 30, 2015 and December 31, 2014, there were approximately $0.3 million and $1.3 million, respectively, of receivables included in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets associated with unpaid balances related to 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 nitrogen fertilizer plant, as determined by CRNF in a commercially reasonable manner. Reimbursed direct operating expenses (exclusive of depreciation and amortization) associated with nitrogen for the three months ended June 30, 2015 and 2014, were approximately $0 and $0.3 million, respectively. Reimbursed direct operating expenses (exclusive of depreciation and amortization) associated with nitrogen for the six months ended June 30, 2015 and 2014, were approximately $0 and $0.5 million, respectively.

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 three and six months ended June 30, 2015 and 2014, the net sales generated from the sale of tail gas to CRRM were nominal. In April 2011, in connection with the tail gas stream transfers to CRRM, CRRM installed a pipe between the Coffeyville, Kansas refinery and the nitrogen fertilizer plant to transfer the tail gas. CRNF agreed to pay CRRM the cost of installing the pipe and provide an additional 15% to cover the cost of capital, which is due from CRNF to CRRM over four years. At June 30, 2015 and December 31, 2014, there were assets of approximately $0.2 million and $0.2 million, respectively, included in prepaid expenses and other current assets and approximately $0.9 million and $1.0 million, respectively, included in other long-term assets. Additionally, at December 31, 2014, there was a liability of approximately $0.1 million in accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets.

At June 30, 2015 and December 31, 2014, receivables of approximately $0.1 million and $0.2 million, respectively, were included in prepaid expenses and other current assets on the Condensed Consolidated Balance Sheets for amounts yet to be received related to components of the feedstock and shared services agreement, other than amounts related to hydrogen transfers and tail gas discussed above. At June 30, 2015 and December 31, 2014, current obligations of approximately $0.8 million and $1.1 million, respectively, were included in accounts payable on the Condensed Consolidated Balance Sheets associated with unpaid balances related to components of the feedstock and shared services agreement, other than amounts related to hydrogen transfers and tail gas discussed above.

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

20

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2015
(unaudited)

(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, or the UAN-based price, and 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 (exclusive of transportation cost), or 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 pay any taxes associated with the sale, purchase, transportation, delivery, storage or consumption of the pet coke. CRNF is 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 cost of pet coke associated with the transfer of pet coke from CRRM to CRNF were approximately $2.1 million and $2.2 million for the three months ended June 30, 2015 and 2014, respectively, which was recorded in cost of product sold (exclusive of depreciation and amortization). For the six months ended June 30, 2015 and 2014, cost of pet coke associated with the transfer of pet coke from CRRM to CRNF was approximately $3.9 million and $4.5 million, respectively. Payables of $0.3 million and $0.5 million related to the coke supply agreement were included in accounts payable on the Condensed Consolidated Balance Sheets at June 30, 2015 and December 31, 2014, respectively.

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.

Net amounts incurred under the services agreement for the three and six months ended June 30, 2015 and 2014 were as follows:

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
(in millions)
Direct operating expenses (exclusive of depreciation and amortization) — Affiliates
$
1.0

 
$
0.9

 
$
1.9

 
$
1.8

Selling, general and administrative expenses (exclusive of depreciation and amortization) — Affiliates
2.5

 
2.7

 
4.9

 
5.3

Total
$
3.5

 
$
3.6

 
$
6.8

 
$
7.1



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 $1.5 million and $1.5 million, respectively, for the three months ended June 30, 2015 and 2014. For services performed in connection with the services agreement, the Partnership recognized personnel costs of $2.6 million and $2.8 million, respectively, for the six months ended June 30, 2015 and 2014. At June 30, 2015 and December 31, 2014, current obligations of $2.0 million and $2.6 million, respectively, were included in accounts payable and accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets with respect to amounts billed in accordance with the services agreement. At June 30, 2015 and December 31, 2014, receivables of $0.2 million and $0.1 million, respectively, 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 services agreement.


21

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2015
(unaudited)

Limited Partnership Agreement

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 reimbursed its general partner for the three months ended June 30, 2015 and 2014 approximately $1.0 million and $0.6 million, 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. For the six months ended June 30, 2015 and 2014, approximately $2.1 million and $0.9 million were incurred related to amounts due for reimbursement, respectively. At June 30, 2015 and December 31, 2014, current obligations of $1.7 million and $1.1 million, respectively, were included in personnel accruals on the Condensed Consolidated Balance Sheets related to amounts outstanding in accordance with the limited partnership agreement.

Insight Portfolio Group

Insight Portfolio Group LLC ("Insight Portfolio Group") is an entity formed by Mr. 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.

(14) Fair Value Measurements

In accordance with ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC 820”), the Partnership utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets or liabilities, such as a business.

ASC 820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

Level 1 — Quoted prices in active markets for identical assets and liabilities

Level 2 — Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities)

Level 3 — Significant unobservable inputs (including the Partnership’s own assumptions in determining the fair value).

The following table sets forth the assets and liabilities measured at fair value on a recurring basis, by input level, as of June 30, 2015 and December 31, 2014, respectively.

 
June 30, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
 
(in thousands)
Financial Statement Caption and Description
 
 
 
 
 
 
 
Cash equivalents (money market account)
$
45,344

 
$

 
$

 
$
45,344

Other current liabilities (interest rate swaps)

 
615

 

 
615



22

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2015
(unaudited)

 
December 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
 
(in thousands)
Financial Statement Caption and Description
 
 
 
 
 
 
 
Cash equivalents (money market account)
$
53,323

 
$

 
$

 
$
53,323

Other current liabilities (interest rate swaps)

 
855

 

 
855

Other long-term liabilities (interest rate swaps)

 
183

 

 
183

Total Liabilities
$

 
$
1,038

 
$

 
$
1,038


As of June 30, 2015 and December 31, 2014, the only financial assets and liabilities that are measured at fair value on a recurring basis are the Partnership’s money market accounts and derivative instruments. The carrying value of the Partnership’s debt approximates fair value. The Partnership has interest rate swaps that are measured at fair value on 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 are 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 six months ended June 30, 2015.

23


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with the unaudited condensed consolidated financial statements and related notes and with the statistical information and financial data appearing in this Report, as well as the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2014 and filed with the Securities and Exchange Commission (“SEC”) as of February 20, 2015 (the "2014 Form 10-K"). Results of operations and cash flows for the three and six months ended June 30, 2015 and 2014 are not necessarily indicative of results to be attained for any other period.

Forward-Looking Statements

This Report, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains “forward-looking statements” as defined by the SEC, including statements concerning contemplated transactions and strategic plans, expectations and objectives for future operations. Forward-looking statements include, without limitation:

statements, other than statements of historical fact, that address activities, events or developments that we expect, believe or anticipate will or may occur in the future;

statements relating to future financial or operational performance, future distributions, future capital sources and capital expenditures; and

any other statements preceded by, followed by or that include the words “anticipates,” “believes,” “expects,” “plans,” “intends,” “estimates,” “projects,” “could,” “should,” “may” or similar expressions.

Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this Report, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, are reasonable, we can give no assurance that such plans, intentions or expectations will be achieved. These statements are based on assumptions made by us based on our experience and perception of historical trends, current conditions, expected future developments and other factors that we believe are appropriate in the circumstances. Such statements are subject to a number of risks and uncertainties, many of which are beyond our control. You are cautioned that any such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in the forward-looking statements as a result of various factors, including but not limited to those set forth under “Risk Factors” in the 2014 Form 10-K. Such factors include, among others:

our ability to make cash distributions on the common units;

the volatile nature of our business and the variable nature of our distributions;

the ability of our general partner to modify or revoke our distribution policy at any time;

the cyclical nature of our business;

the seasonal nature of our business;

the dependence of our operations on a few third-party suppliers, including providers of transportation services and equipment;

our reliance on pet coke that we purchase from CVR Refining;

the supply and price levels of essential raw materials;

the risk of a material decline in production at our nitrogen fertilizer plant;

potential operating hazards from accidents, fire, severe weather, floods or other natural disasters;


24


competition in the nitrogen fertilizer businesses;

capital expenditures and potential liabilities arising from environmental laws and regulations;

existing and proposed environmental laws and regulations, including those relating to climate change, alternative energy or fuel sources, and the end-use and application of fertilizers;

new regulations concerning the transportation of hazardous chemicals, risks of terrorism and the security of chemical manufacturing facilities;

the risk of security breaches;

our lack of asset diversification;

our dependence on significant customers;

the potential loss of our transportation cost advantage over our competitors;

our potential inability to successfully implement our business strategies, including the completion of significant capital programs;

our reliance on CVR Energy’s senior management team and conflicts of interest they face operating each of CVR Partners, CVR Refining and CVR Energy;

risks relating to our relationships with CVR Energy and CVR Refining;

control of our general partner by CVR Energy;

our ability to continue to license the technology used in our operations;

restrictions in our debt agreements;
 
changes in our treatment as a partnership for U.S. federal income or state tax purposes; and

instability and volatility in the capital and credit markets.

All forward-looking statements contained in this Report speak only as of the date of this Report. We undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that occur after the date of this Report, or to reflect the occurrence of unanticipated events, except to the extent required by law.

Partnership Overview

We are a Delaware limited partnership formed by CVR Energy to own, operate and grow our nitrogen fertilizer business. Strategically located adjacent to CVR Refining’s refinery in Coffeyville, Kansas, our nitrogen fertilizer manufacturing facility is the only operation in North America that utilizes a petroleum coke, or pet coke, gasification process to produce nitrogen fertilizer.

We produce and distribute nitrogen fertilizer products, which are used primarily by farmers to improve the yield and quality of their crops. Our principal products are UAN and ammonia. These products are manufactured at our facility in Coffeyville, Kansas. Our product sales are heavily weighted toward UAN and all of our products are sold on a wholesale basis.

Our facility includes a 1,225 ton-per-day ammonia unit, a 3,000 ton-per-day UAN unit, and a gasifier complex having a capacity of 84 million standard cubic feet per day of hydrogen. Our gasifier is a dual-train facility, with each gasifier able to function independently of the other, thereby providing redundancy and improving our reliability. With the completion of the UAN expansion in February 2013, we now upgrade substantially all of the ammonia we produce to higher margin UAN fertilizer, an aqueous solution of urea and ammonium nitrate which has historically commanded a premium price over ammonia. In 2014, we produced 963.7 thousand tons of UAN and 388.9 thousand tons of ammonia. Approximately 97% of our produced ammonia tons and the majority of the

25


purchased ammonia tons were upgraded into UAN in 2014. For the three months ended June 30, 2015 and 2014, we produced 253.5 thousand tons and 223.4 thousand tons of UAN and 107.1 thousand tons and 92.2 thousand tons of ammonia, respectively. For the six months ended June 30, 2015 and 2014, we produced 505.6 thousand tons and 480.6 thousand tons of UAN and 203.0 thousand tons and 183.3 thousand tons of ammonia, respectively. For the three months ended June 30, 2015 and 2014, approximately 96% and 97%, respectively, of our produced ammonia tons and the majority of purchased ammonia tons were upgraded into UAN. For the six months ended June 30, 2015 and 2014, approximately 97% and 94%, respectively, of our produced ammonia tons and the majority of purchased ammonia tons were upgraded into UAN.

CVR Energy, which indirectly owns our general partner and approximately 53% of our outstanding common units, also indirectly owns the general partner and approximately 66% of the common units of CVR Refining at June 30, 2015. CVR Refining owns and operates a complex full coking medium-sour crude oil refinery with a rated capacity of 115,000 barrels per calendar day (bpcd) in Coffeyville, Kansas, a complex crude oil refinery with a rated capacity of 70,000 bpcd in Wynnewood, Oklahoma and ancillary businesses.

We intend to continue to expand our existing asset base and utilize the experience of our and CVR Energy’s management teams to execute our growth strategy, which includes expanded production of UAN and acquiring and building additional infrastructure and production assets.

The primary raw material feedstock utilized in our nitrogen fertilizer production process is pet coke, which is produced during the crude oil refining process. In contrast, substantially all of our nitrogen fertilizer competitors use natural gas as their primary raw material feedstock. Historically, pet coke has been less expensive than natural gas on a per ton of fertilizer produced basis and pet coke prices have been more stable when compared to natural gas prices. By using pet coke as the primary raw material feedstock instead of natural gas, we believe our nitrogen fertilizer business has historically been one of the lower cost producers and marketers of UAN and ammonia fertilizers in North America. We currently purchase most of our pet coke from CVR Refining pursuant to a long-term agreement having an initial term that ends in 2027, subject to renewal. During the past five years, over 70% of the pet coke consumed by our plant was produced and supplied by CVR Refining’s Coffeyville, Kansas crude oil refinery.

Major Influences on Results of Operations

Our earnings and cash flows from operations are primarily affected by the relationship between nitrogen fertilizer product prices, on-stream factors and direct operating expenses. Unlike our competitors, we do not use natural gas as a feedstock and use a minimal amount of natural gas as an energy source in our operations. As a result, volatile swings in natural gas prices have a minimal impact on our results of operations. Instead, CVR Refining’s adjacent refinery supplies us with most of the pet coke feedstock we need pursuant to a 20 year pet coke supply agreement entered into in October 2007. The price at which our products are ultimately sold depends on numerous factors, including the global supply and demand for nitrogen fertilizer products which, in turn, depends on, among other factors, world grain demand and production levels, changes in world population, the cost and availability of fertilizer transportation infrastructure, weather conditions, the availability of imports and the extent of government intervention in agriculture markets.

Nitrogen fertilizer prices are also affected by local factors, including local market conditions and the operating levels of competing facilities. An expansion or upgrade of competitors’ facilities, political and economic developments and other factors are likely to continue to play an important role in nitrogen fertilizer industry economics. These factors can impact, among other things, the level of inventories in the market, resulting in price volatility and a reduction in product margins. Moreover, the industry typically experiences seasonal fluctuations in demand for nitrogen fertilizer products.

In addition, the demand for fertilizers is affected by the aggregate crop planting decisions and fertilizer application rate decisions of individual farmers. Individual farmers make planting decisions based largely on the prospective profitability of a harvest, while the specific varieties and amounts of fertilizer they apply depend on factors like crop prices, their current liquidity, soil conditions, weather patterns and the types of crops planted.

Natural gas is the most significant raw material required in our competitors’ production of nitrogen fertilizers. Over the past several years, natural gas prices have experienced high levels of price volatility. This pricing and volatility has a direct impact on our competitors' cost of producing nitrogen fertilizer.

In order to assess our operating performance, we calculate the product pricing at gate as an input to determine our operating margin. Product pricing at gate represents net sales less freight revenue divided by product sales volume in tons. We believe product pricing at gate is a meaningful measure because we sell products at our plant gate and terminal locations' gates ("sold gate") and delivered to the

26


customer's designated delivery site ("sold delivered"). The relative percentage of sold gate versus sold delivered can change period to period. The product pricing at gate provides a measure that is consistently comparable period to period.

We and other competitors in the U.S. farm belt share a significant transportation cost advantage when compared to our out-of-region competitors in serving the U.S. farm belt agricultural market. In 2014, approximately 49% of the corn planted in the United States was grown within an estimated $45 per UAN ton freight train rate of our nitrogen fertilizer plant. We are therefore able to cost-effectively sell substantially all of our products in the higher margin agricultural market, whereas a significant portion of our competitors’ revenues is derived from the lower margin industrial market. Our products leave the plant either in railcars for destinations located principally on the Union Pacific Railroad or in trucks for direct shipment to customers. We do not currently incur significant intermediate transfer, storage, barge freight or pipeline freight charges; however, we do incur costs to maintain and repair our railcar fleet. Selling products to customers within economic rail transportation limits of the nitrogen fertilizer plant and keeping transportation costs low are keys to maintaining profitability.

The high fixed cost of our direct operating expense structure also directly affects our profitability. Our facility’s pet coke gasification process results in a significantly higher percentage of fixed costs than a natural gas-based fertilizer plant. Major fixed operating expenses include electrical energy, employee labor, maintenance, including contract labor and outside services. We estimate these fixed costs averaged approximately 80% of direct operating expenses over the 24 months ended June 30, 2015.

Our largest raw material expense used in the production of ammonia is pet coke, which we purchase from CVR Refining and third parties. For the three months ended June 30, 2015 and 2014, we incurred approximately $3.1 million and $3.2 million, respectively, for the cost of pet coke, which equaled an average cost per ton of $25 and $27. For the six months ended June 30, 2015 and 2014, we incurred approximately $6.7 million and $6.8 million, respectively, for the cost of pet coke, which equaled an average cost per ton of $27 and $28.

Consistent, safe and reliable operations at our nitrogen fertilizer plant are critical to our financial performance and results of operations. Unplanned downtime of the plant may result in lost margin opportunity, increased maintenance expense and a temporary increase in working capital investment and related inventory position. The financial impact of planned downtime, such as major turnaround maintenance, is mitigated through a diligent planning process that takes into account margin environment, the availability of resources to perform the needed maintenance, feedstock logistics and other factors. Historically, the nitrogen fertilizer plant has undergone a full facility turnaround every two to three years. Turnarounds are expected to last 14-21 days. A less involved facility shutdown was performed during the second quarter of 2014 and included both the installation of a waste heat boiler and the completion of several key tasks in order to upgrade the pressure swing adsorption unit. The Partnership is planning to undergo the next full facility turnaround in the third quarter of 2015 and we currently anticipate the cost will be approximately $7.0 million.

Agreements with CVR Energy and CVR Refining

We are party to several agreements with CVR Energy and its affiliates that govern the business relations among us, CVR Energy and its subsidiaries (including CVR Refining), and our general partner. These include the pet coke supply agreement under which we buy the pet coke we use in our nitrogen fertilizer plant; a services agreement, under which CVR Energy and its subsidiaries provide us with management services including the services of its senior management team; a feedstock and shared services agreement, which governs the provision of feedstocks, including, but not limited to, hydrogen, high-pressure steam, nitrogen, instrument air, oxygen and natural gas; a raw water and facilities sharing agreement, which allocates raw water resources between the two businesses; an easement agreement; an environmental agreement; and a lease agreement pursuant to which we lease office space and laboratory space. These agreements were not the result of arm's-length negotiations and the terms of these agreements are not necessarily as favorable to the parties to these agreements as terms which could have been obtained from unaffiliated third parties. See Note 13 ("Related Party Transactions") to Part I, Item 1 of this Report for additional discussion of the agreements.


27


Factors Affecting Comparability of Our Financial Results

Our historical results of operations for the periods presented may not be comparable with prior periods or to our results of operations in the future for the reason discussed below.

May 2014 Downtime

During the three months ended June 30, 2014, the gasification, ammonia and UAN units were taken down for between 5 to 7 days each for a planned installation of a waste heat boiler and our completion of several key tasks in order to upgrade to the pressure swing adsorption unit. Overall results were negatively impacted due to the lost production during the downtime and the resulting reduced sales and associated cost of product sold. The Partnership incurred costs related to the repairs and maintenance and other associated costs of approximately $0.5 million, which were recognized in direct operating expenses (exclusive of depreciation and amortization) in the Condensed Consolidated Statements of Operation during the three months ended June 30, 2014.

Results of Operations

The period to period comparisons of our results of operations have been prepared using the historical periods included in our consolidated financial statements. In order to effectively review and assess our historical financial information below, we have also included supplemental operating measures and industry measures that we believe are material to understanding our business.

To supplement our actual results calculated in accordance with GAAP for the applicable periods, the Partnership also uses certain non-GAAP financial measures, which are reconciled to our GAAP-based results below. These non-GAAP financial measures should not be considered as an alternative to GAAP results.

The following tables summarize the financial data and key operating statistics for CVR Partners and our operating subsidiary for the three and six months ended June 30, 2015 and 2014. The following data should be read in conjunction with our condensed consolidated financial statements and the notes thereto included elsewhere in this Report. All information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” except for the balance sheet data as of December 31, 2014, is unaudited.


28


 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015

2014
 
2015

2014
 
 
 
 
 
 
 
 
 
(in millions)
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
Net sales
$
80.8

 
$
77.2

 
$
173.9

 
$
157.5

Cost of product sold – Affiliates (1)
2.2

 
2.3

 
4.0

 
4.5

Cost of product sold – Third parties (1)
13.2

 
17.1

 
37.2

 
36.6

 
15.4

 
19.4

 
41.2

 
41.1

Direct operating expenses – Affiliates (1) (2)
1.2

 
0.8

 
2.2

 
1.6

Direct operating expenses – Third parties (1) (3)
23.5

 
26.1

 
47.0

 
49.5

Major scheduled turnaround expenses
0.4

 

 
0.4

 

 
25.1

 
26.9

 
49.6

 
51.1

Selling, general and administrative expenses – Affiliates (1) (2)
3.4

 
4.0

 
6.6

 
7.5

Selling, general and administrative expenses – Third parties (1)
1.2

 
1.3

 
2.5

 
2.4

 
4.6

 
5.3

 
9.1

 
9.9

Depreciation and amortization
7.0

 
6.8

 
13.8

 
13.5

Operating income
28.7

 
18.8

 
60.2

 
41.9

Interest expense and other financing costs
(1.7
)
 
(1.7)

 
(3.4
)
 
(3.3)

Interest income

 

 

 

Other income, net

 

 

 

Total other income (expense)
(1.7
)
 
(1.7
)
 
(3.4
)
 
(3.3
)
Income before income tax expense
27.0

 
17.1

 
56.8

 
38.6

Income tax expense (benefit)

 

 

 

Net income
$
27.0

 
$
17.1

 
$
56.8

 
$
38.6

EBITDA (4)
$
35.7

 
$
25.6

 
$
74.0

 
$
55.4

Adjusted EBITDA (4)
$
36.1

 
$
25.7

 
$
74.5

 
$
55.7

Available cash for distribution (5)
$
28.4

 
$
24.0

 
$
61.0

 
$
51.8

 
 
 
 
 
 
 
 
Reconciliation to net sales:
 
 
 
 
 
 
 
Sales net at gate
$
70.5

 
$
69.2

 
$
149.7

 
$
136.2

Freight in revenue
7.8

 
6.7

 
14.8

 
13.5

Hydrogen revenue
2.0

 
0.9

 
8.5

 
6.8

Other
0.5

 
0.4

 
0.9

 
1.0

Total net sales
$
80.8

 
$
77.2

 
$
173.9

 
$
157.5


 
As of 
 June 30, 
 2015
 
As of 
 December 31, 
 2014
 
 
 
(audited)
 
(in millions)
Balance Sheet Data:
 
 
 
Cash and cash equivalents
$
67.0

 
$
79.9

Working capital (deficiency) (6)
(33.8
)
 
89.9

Total assets
560.0

 
578.8

Total debt, including current portion
125.0

 
125.0

Total long-term liabilities

 
125.2

Total partners’ capital
408.3

 
413.9



29


 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
(in millions)
Cash Flow Data:
 
 
 
 
 
 
 
Net cash flow provided by (used in):
 
 
 
 
 
 
 
Operating activities
$
30.6

 
$
24.4

 
$
56.0

 
$
59.9

Investing activities
(3.4
)
 
(4.0
)
 
(6.0
)
 
(7.4
)
Financing activities
(32.9
)
 
(27.8
)
 
(62.9
)
 
(59.2
)
Net increase (decrease) in cash and cash equivalents
$
(5.7
)
 
$
(7.4
)
 
$
(12.9
)
 
$
(6.7
)
 
 
 
 
 
 
 
 
Capital expenditures for property, plant and equipment
$
3.4

 
$
4.1

 
$
6.0

 
$
7.5


______________


(1)
Amounts are shown exclusive of depreciation and amortization. Amounts excluded from selling, general and administrative expenses are nominal. Depreciation and amortization is primarily comprised of the following components:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
(in millions)
Depreciation and amortization excluded from direct operating expenses
$
6.9

 
$
6.7

 
$
13.5

 
$
13.3

Depreciation and amortization excluded from cost of product sold
0.1

 
0.1

 
0.3

 
0.2

 
$
7.0

 
$
6.8

 
$
13.8

 
$
13.5


(2)
Our selling, general and administrative expenses and direct operating expenses include amounts for share-based compensation charges, which include amounts related to CVR Energy's share-based compensation expense allocated to us by CVR Energy for financial reporting purposes. See Note 4 ("Share‑Based Compensation") to Part I, Item 1 of this Report for further discussion of allocated share-based compensation. The charges for allocated share-based compensation was approximately $0.1 million and $0.6 million, respectively, for the three months ended June 30, 2015 and 2014, which was included in selling, general and administrative expenses (exclusive of depreciation and amortization) on the Condensed Consolidated Statement of Operations. The charges for share-based compensation in selling, general and administrative expenses (exclusive of depreciation and amortization) were $0.4 million and $1.1 million for the six months ended June 30, 2015 and 2014, respectively. The amounts included in direct operating expenses (exclusive of depreciation and amortization) were nominal for the three and six months ended June 30, 2015 and 2014.

(3)
Amounts are shown exclusive of major scheduled turnaround expenses that are separately disclosed.

(4)
EBITDA is defined as net income before (i) interest (income) expense, (ii) income tax expense and (iii) depreciation and amortization expense.

Adjusted EBITDA is defined as EBITDA further adjusted for the impact of non-cash share-based compensation, and, when applicable, major scheduled turnaround expenses, loss on extinguishment of debt and loss on disposition of assets.

We present EBITDA because we believe it allows users of our financial statements, such as investors and analysts, to assess our financial performance without regard to financing methods, capital structure or historical cost basis. We present Adjusted EBITDA because we have found it helpful to consider an operating measure that excludes expenses, such as major scheduled turnaround expenses, loss on extinguishment of debt and loss on disposition of assets, relating to transactions not reflective of our core operations. When applicable, each of these expenses is discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our SEC reports, so that investors have complete information about expenses. In addition, we believe that it is useful to exclude from Adjusted EBITDA non-cash share-based compensation, although it is a recurring cost incurred in the ordinary course of business. In our view, non-cash share-based compensation, which also is presented in our financial statements and discussed herein, reflects a non-cash cost which may obscure, for a given period, trends in the underlying business, due to the timing and nature of the equity awards. We also present Adjusted

30


EBITDA because it is the starting point used by the board of directors of our general partner when calculating our available cash for distribution.

EBITDA and Adjusted EBITDA are not recognized terms under GAAP and should not be substituted for net income or cash flows from operations. Management believes that EBITDA and Adjusted EBITDA enable investors and analysts to better understand our ability to make distributions to common unitholders, help investors and analysts evaluate our ongoing operating results and allow for greater transparency in reviewing our overall financial, operational and economic performance by allowing investors to evaluate the same information used by management. EBITDA and Adjusted EBITDA presented by other companies may not be comparable to our presentation, since each company may define these terms differently.

A reconciliation of our Net Income to EBITDA and Adjusted EBITDA is as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
(in millions)
Net income
$
27.0

 
$
17.1

 
$
56.8

 
$
38.6

Add:
 
 
 
 
 
 
 
Interest expense and other financing costs, net
1.7

 
1.7

 
3.4

 
3.3

Depreciation and amortization
7.0

 
6.8

 
13.8

 
13.5

EBITDA
$
35.7

 
$
25.6

 
$
74.0

 
$
55.4

Add:
 
 
 
 
 
 
 
Major scheduled turnaround expenses
0.4

 

 
0.4

 

Share-based compensation, non-cash

 
0.1

 
0.1

 
0.3

Adjusted EBITDA
$
36.1

 
$
25.7

 
$
74.5

 
$
55.7


(5)
The board of directors of our general partner has a policy to calculate available cash for distribution starting with Adjusted EBITDA. For the three and six months ended June 30, 2015 and 2014, available cash for distribution equaled our 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 and reserves for future operating or capital needs that the board of directors of the general partner deemed necessary or appropriate, if any. 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 our general partner. Actual distributions are set by the board of directors of our general partner. The board of directors of our general partner may modify our cash distribution policy at any time, and our partnership agreement does not require us to make distributions at all.

Available cash for distribution is not a recognized term under GAAP. Available cash for distribution should not be considered in isolation or as an alternative to net income or operating income, or any other measure of financial performance or operating performance. In addition, available cash for distribution is not presented as, and should not be considered, an alternative to cash flows from operations or as a measure of liquidity. Available cash for distribution as reported by the Partnership may not be comparable to similarly titled measures of other entities, thereby limiting its usefulness as a comparative measure.


31


A reconciliation of the available cash for distribution is as follows:

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
(in millions, except units and per unit data)

 
 
 
 
 
 
 
Adjusted EBITDA
$
36.1

 
$
25.7

 
$
74.5

 
$
55.7

Adjustments:
 
 
 
 
 
 
 
Less:
 
 
 
 
 
 
 
Net cash interest expense (excluding capitalized interest) and debt service
(1.5
)
 
(1.4
)
 
(2.9
)
 
(2.9
)
Maintenance capital expenditures
(2.2
)
 
(1.0
)
 
(3.6
)
 
(2.0
)
Major scheduled turnaround expenses
(0.4
)
 

 
(0.4
)
 

Cash reserves for future turnaround expenses
(4.0
)
 

 
(7.0
)
 

Plus:
 
 
 
 
 
 
 
Release of cash reserves established for turnaround expenses
0.4

 

 
0.4

 

Release of previously established cash reserves, net

 
0.7

 

 
1.0

Available cash for distribution
$
28.4

 
$
24.0

 
$
61.0

 
$
51.8

Available cash for distribution, per common unit
$
0.39

 
$
0.33

 
$
0.84

 
$
0.71

Common units outstanding (in thousands)
73,123

 
73,114

 
73,123

 
73,114


(6)
Working capital (deficiency) includes $125.0 million for the current portion of long-term debt as of June 30, 2015. Working capital excluding the current portion of long-term debt was $91.2 million as of June 30, 2015.


32



The following tables show selected information about key operating statistics and market indicators for our business:

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Key Operating Statistics:
 
 
 
 
 
 
 
Production volume (thousand tons):
 
 
 
 
 
 
 
Ammonia (gross produced) (1)
107.1

 
92.2

 
203.0

 
183.3

Ammonia (net available for sale) (1)(2)
4.4

 
3.2

 
19.1

 
12.1

UAN
253.5

 
223.4

 
505.6

 
480.6

Pet coke consumed (thousand tons)
128.2

 
117.3

 
253.1

 
242.1

Pet coke consumed (cost per ton) (3)
$
25

 
$
27

 
$
27

 
$
28

Sales (thousand tons):
 
 
 
 
 
 
 
Ammonia
6.3

 
2.9

 
19.1

 
8.3

UAN
249.8

 
239.2

 
524.3

 
493.9

Product pricing at gate (dollars per ton) (4):
 
 
 
 
 
 
 
Ammonia
$
546

 
$
521

 
$
551

 
$
493

UAN
$
269

 
$
283

 
$
265

 
$
267

On-stream factors (5):
 
 
 
 
 
 
 
Gasification
100.0
%
 
94.2
%
 
99.7
%
 
96.5
%
Ammonia
99.3
%
 
88.1
%
 
96.9
%
 
90.1
%
UAN
96.6
%
 
85.9
%
 
97.2
%
 
91.4
%

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
Market Indicators:
 
 
 
 
 
 
 
Natural gas NYMEX (dollars per MMbtu)
$
2.74

 
$
4.58

 
$
2.77

 
$
4.65

Ammonia – Southern Plains (dollars per ton)
$
546

 
$
561

 
$
550

 
$
501

UAN – Corn belt (dollars per ton)
$
305

 
$
333

 
$
309

 
$
332


____________

(1)
Gross tons produced for ammonia represent total ammonia produced, including ammonia produced that was upgraded into UAN. Net tons available for sale represent ammonia available for sale that was not upgraded into UAN.

(2)
In addition to the produced ammonia, the Partnership acquired approximately 0.6 thousand tons and 2.7 thousand tons of ammonia during the three months ended June 30, 2015 and 2014, respectively. The Partnership acquired approximately 21.8 thousand tons and 25.6 thousand tons of ammonia during the six months ended June 30, 2015 and 2014, respectively.

(3)
Our pet coke cost per ton purchased from CVR Refining averaged $21 and $24 for the three months ended June 30, 2015 and 2014, respectively. Third-party pet coke prices averaged $39 and $41 for the three months ended June 30, 2015 and 2014, respectively. For the six months ended June 30, 2015 and 2014, our pet coke cost per ton purchased from CVR Refining averaged $21 and $24, respectively. For the six months ended June 30, 2015 and 2014, third-party pet coke prices averaged $42 and $40, respectively.
 
(4)
Product pricing at gate represents net sales less freight revenue divided by product sales volume in tons, and is shown in order to provide a pricing measure that is comparable across the fertilizer industry.

(5)
On-stream factor is the total number of hours operated divided by the total number of hours in the reporting period and is included as a measure of operating efficiency. Excluding the impact of the shutdown for installation of the waste heat boiler, pressure swing adsorption unit upgrade and the Linde air separation unit maintenance, the on-stream factors for the three months ended

33


June 30, 2014 would have been 100.0% for gasifier, 94.9% for ammonia and 92.9% for UAN and the on-stream factors for the six months ended June 30, 2014 would have been 99.4% for gasifier, 93.5% for ammonia and 95.0% for UAN.


Three Months Ended June 30, 2015 Compared to the Three Months Ended June 30, 2014

Net Sales. Net sales were $80.8 million for the three months ended June 30, 2015 compared to $77.2 million for the three months ended June 30, 2014. The increase of $3.6 million was primarily the result of higher UAN sales volumes ($3.3 million), higher ammonia sales volumes ($1.9 million), and higher hydrogen sales volumes ($1.1 million), partially offset by lower UAN sales prices ($2.9 million). For the three months ended June 30, 2015, UAN and ammonia made up $74.8 million and $3.5 million of our net sales, respectively. This compared to UAN and ammonia net sales of $74.4 million and $1.5 million, respectively, for the three months ended June 30, 2014. The following table demonstrates the impact of changes in sales volumes and pricing for UAN, ammonia and hydrogen for the three months ended June 30, 2015 as compared to the three months ended June 30, 2014:

 
Three Months Ended June 30, 2015
Three Months Ended June 30, 2014
Total Variance
 
 
 
Volume(1)
$ per ton(2)
  Sales $(3)
Volume(1)
 $ per ton(2)
Sales $(3)
 Volume(1)
Sales $(3)
Price
Variance
Volume
Variance
 
 
 
 
 
 
 
 
 
 
UAN
249,790

$
299

$
74.8

239,216

$
311

$
74.4

10,574

$
0.4

$
(2.9
)
$
3.3

Ammonia
6,307

$
560

$
3.5

2,854

$
542

$
1.5

3,453

$
2.0

$
0.1

$
1.9