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EX-32.3 - EX-32.3 - CVR PARTNERS, LPuanq22016exhibit323.htm
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EX-32.1 - EX-32.1 - CVR PARTNERS, LPuanq22016exhibit321.htm
EX-31.3 - EX-31.3 - CVR PARTNERS, LPuanq22016exhibit313.htm
EX-31.2 - EX-31.2 - CVR PARTNERS, LPuanq22016exhibit312.htm
EX-31.1 - EX-31.1 - CVR PARTNERS, LPuanq22016exhibit311.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, 2016
 
 
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 o
 
Accelerated filer þ
 
  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 113,282,973 common units outstanding at July 26, 2016.
 





 CVR PARTNERS, LP AND SUBSIDIARIES

INDEX TO QUARTERLY REPORT ON FORM 10-Q
For The Quarter Ended June 30, 2016


 
 
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, 2016 (this "Report"):     

2015 Form 10-K
The Partnership's Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 18, 2016.
 
 
2021 Notes
$320.0 million aggregate principal amount of 6.5% Senior Notes due 2021, which were issued by CVR Nitrogen and CVR Nitrogen Finance. In June 2016 the majority of the Notes were repaid. $4.2 million aggregate principal amount of the Notes remain outstanding as of June 30, 2016.
 
 
2023 Notes
$645.0 million aggregate principal amount of 9.25% Senior Notes due 2023, which were issued through CVR Partners and CVR Nitrogen Finance.
 
 
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.
 
 
Change of Control Offer
The offer commenced on April 29, 2016 by the CVR Nitrogen and CVR Nitrogen Finance to purchase any and all of the outstanding 2021 Notes at 101% of par value.
 
 
Coffeyville Facility
CVR Partners' nitrogen fertilizer manufacturing facility located in Coffeyville, Kansas.
 
 
common units
Common units representing limited partner interests of CVR Partners.
 
 
corn belt
The primary corn producing region of the United States, which includes Illinois, Indiana, Iowa, Minnesota, Missouri, Nebraska, Ohio and Wisconsin.
 
 
Credit Agreement
CRNF's $125.0 million term loan, $25.0 million revolving and $50.0 million uncommitted incremental credit facility, guaranteed by the Partnership, entered into with a group of lenders including Goldman Sachs Lending Partners LLC, as administrative and collateral agent.
 
 
CRLLC
Coffeyville Resources, LLC, the subsidiary of CVR Energy which directly owns our general partner and 38,920,000 common units.
 
 
CRLLC Facility
The Partnership's $300.0 million senior term loan credit facility with CRLLC, which was repaid in full and terminated on June 10, 2016.
 
 
CRNF
Coffeyville Resources Nitrogen Fertilizers, LLC.
 
 
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 Nitrogen Finance
CVR Nitrogen Finance Corporation, an indirect wholly-owned subsidiary of the Partnership (formerly known as East Dubuque Finance Corporation and also formerly known as Rentech Nitrogen Finance Corporation).
 
 
CVR Nitrogen
CVR Nitrogen, LP (formerly known as East Dubuque Nitrogen Partners, L.P. and also formerly known as Rentech Nitrogen Partners L.P.).
 
 
CVR Nitrogen GP
CVR Nitrogen GP, LLC (formerly known as East Dubuque Nitrogen GP, LLC and also formerly known as Rentech Nitrogen GP, LLC).
 
 

3


CVR Partners
CVR Partners, LP.
 
 
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.
 
 
East Dubuque Facility
CVR Partners' nitrogen fertilizer manufacturing facility located in East Dubuque, Illinois.
 
 
East Dubuque Merger
The transactions contemplated by the Merger Agreement, whereby the Partnership acquired CVR Nitrogen and CVR Nitrogen GP on April 1, 2016.
 
 
EDNF
East Dubuque Nitrogen Fertilizers, LLC (formerly known as Rentech Nitrogen, LLC).
 
 
farm belt
Refers to the states of Illinois, Indiana, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Ohio, Oklahoma, South Dakota, Texas and Wisconsin.
 
 
GAAP
U.S. generally accepted accounting principles.
 
 
general partner
CVR GP, LLC, our general partner, which is a wholly-owned subsidiary of CRLLC.
 
 
Merger Agreement
The Agreement and Plan of Merger, dated as of August 9, 2015, whereby the Partnership acquired CVR Nitrogen and CVR Nitrogen GP.
 
 
Mid Corn Belt
Primarily includes Illinois, Indiana, Iowa, Missouri, Nebraska and Kansas.
 
 
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.
 
 
Partnership
CVR Partners, LP.
 
 
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.
 
 
Southern Plains
Primarily includes Oklahoma, Texas and New Mexico.
 
 
Tender Offer
The cash tender offer commenced on April 29, 2016 by CVR Nitrogen and CVR Nitrogen Finance to purchase any and all of the outstanding 2021 Notes at 101.5% of par value.
 
 
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.
 
 
Wells Fargo Credit Agreement
CVR Nitrogen's credit agreement with Wells Fargo Bank, National Association, as successor-in-interest by assignment from General Electric Company, as administrative agent, which was repaid in April 2016 and terminated.
 
 
wheat belt
The primary wheat producing region of the United States, which includes Oklahoma, Kansas, North Dakota, South Dakota and Texas
 
 

4


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

CVR PARTNERS, LP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
 
June 30,
2016
 
December 31,
2015
 
(unaudited)
 
 
 
(in thousands, except unit data)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
76,261

 
$
49,967

Accounts receivable, net of allowance for doubtful accounts of $42 and $27, at June 30, 2016 and December 31, 2015, respectively
16,059

 
7,187

Inventories
53,113

 
37,529

Prepaid expenses and other current assets, including $837 and $883 from affiliates at June 30, 2016 and December 31, 2015, respectively
6,403

 
3,862

Total current assets
151,836

 
98,545

Property, plant, and equipment, net of accumulated depreciation
1,154,568

 
393,133

Goodwill
40,969

 
40,969

Other long-term assets, including $688 and $777 with affiliates at June 30, 2016 and December 31, 2015, respectively
5,276

 
3,608

Total assets
$
1,352,649

 
$
536,255

LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
 
 
 
Accounts payable, including $2,075 and $1,940 due to affiliates at June 30, 2016 and December 31, 2015, respectively
$
33,998

 
$
11,103

Personnel accruals, including $1,946 and $1,974 with affiliates at June 30, 2016 and December 31, 2015, respectively
7,160

 
5,999

Deferred revenue
1,326

 
3,129

Accrued expenses and other current liabilities, including $1,545 and $2,334 with affiliates at June 30, 2016 and December 31, 2015, respectively
11,571

 
5,683

Total current liabilities
54,055

 
25,914

Long-term liabilities:
 
 
 
Long-term debt, net of current portion
625,312

 
124,773

Other long-term liabilities
1,142

 
16

Total long-term liabilities
626,454

 
124,789

Commitments and contingencies


 


Partners’ capital:
 
 
 
Common unitholders, 113,282,973 and 73,128,269 units issued and outstanding at June 30, 2016 and December 31, 2015, respectively
672,139

 
385,670

General partner interest
1

 
1

Accumulated other comprehensive loss

 
(119
)
Total partners’ capital
672,140

 
385,552

Total liabilities and partners’ capital
$
1,352,649

 
$
536,255

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,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
(unaudited)
 
(in thousands, except per unit data)
Net sales
$
119,797

 
$
80,815

 
$
192,889

 
$
173,865

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of product sold (exclusive of depreciation and amortization) — Affiliates
536

 
2,184

 
1,357

 
4,002

Cost of product sold (exclusive of depreciation and amortization) — Third parties
35,513

 
13,240

 
51,073

 
37,191

 
36,049

 
15,424

 
52,430

 
41,193

Direct operating expenses (exclusive of depreciation and amortization) — Affiliates
1,249

 
1,195

 
2,101

 
2,222

Direct operating expenses (exclusive of depreciation and amortization) — Third parties
52,895

 
23,951

 
75,733

 
47,338

 
54,144

 
25,146

 
77,834

 
49,560

Selling, general and administrative expenses (exclusive of depreciation and amortization) — Affiliates
3,917

 
3,361

 
7,379

 
6,628

Selling, general and administrative expenses (exclusive of depreciation and amortization) — Third parties
4,426

 
1,162

 
7,356

 
2,478

 
8,343

 
4,523

 
14,735

 
9,106

Depreciation and amortization
17,559

 
7,010

 
24,535

 
13,829

Total operating costs and expenses
116,095

 
52,103

 
169,534

 
113,688

Operating income
3,702

 
28,712

 
23,355

 
60,177

Other income (expense):
 
 
 
 
 
 
 
Interest expense and other financing costs
(15,552
)
 
(1,717
)
 
(17,187
)
 
(3,414
)
Interest income
2

 
12

 
4

 
24

Loss on extinguishment of debt
(5,116
)
 

 
(5,116
)
 

Other income, net
34

 
5

 
58

 
11

Total other income (expense)
(20,632
)
 
(1,700
)
 
(22,241
)
 
(3,379
)
Income (loss) before income tax expense (benefit)
(16,930
)
 
27,012

 
1,114

 
56,798

Income tax expense (benefit)
76

 
(4
)
 
77

 
8

Net income (loss)
$
(17,006
)
 
$
27,016

 
$
1,037

 
$
56,790

 
 
 
 
 
 
 
 
Net income (loss) per common unit – basic
$
(0.15
)
 
$
0.37

 
$
0.01

 
$
0.78

Net income (loss) per common unit – diluted
$
(0.15
)
 
$
0.37

 
$
0.01

 
$
0.78

Weighted-average common units outstanding:
 
 
 
 
 
 
 
Basic
113,283

 
73,123

 
93,206

 
73,123

Diluted
113,283

 
73,131

 
93,206

 
73,131



See accompanying notes to the condensed consolidated financial statements.


6


CVR PARTNERS, LP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
(unaudited)
 
(in thousands)
Net income (loss)
$
(17,006
)
 
$
27,016

 
$
1,037

 
$
56,790

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in fair value of interest rate swaps

 
(38
)
 

 
(110
)
Net loss reclassified into income on settlement of interest rate swaps

 
266

 
119

 
533

Other comprehensive income

 
228

 
119

 
423

Total comprehensive income (loss)
$
(17,006
)
 
$
27,244

 
$
1,156

 
$
57,213

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)
 
Noncontrolling Interest
 
Total
 
Issued
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(unaudited)
 
(in thousands, except unit data)
Balance at December 31, 2015
73,128,269

 
$
385,670

 
$
1

 
$
(119
)
 
$

 
$
385,552

Cash distributions to common unitholders – Affiliates

 
(21,017
)
 

 

 

 
(21,017
)
Cash distributions to common unitholders – Non-affiliates

 
(29,314
)
 

 

 

 
(29,314
)
Share-based compensation – Affiliates

 
(1
)
 

 

 

 
(1
)
Issuance of common units for the merger consideration
40,154,704

 
335,693

 

 

 

 
335,693

Noncontrolling interest

 

 

 

 
4,564

 
4,564

Contribution from affiliates

 

 

 

 
507

 
507

Purchase of noncontrolling interest

 
71

 

 

 
(5,071
)
 
(5,000
)
Net income

 
1,037

 

 

 

 
1,037

Other comprehensive income

 

 

 
119

 

 
119

Balance at June 30, 2016
113,282,973

 
$
672,139

 
$
1

 
$

 
$

 
$
672,140


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,
 
2016
 
2015
 
 
 
 
 
(unaudited)
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
1,037

 
$
56,790

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
24,535

 
13,829

Allowance for doubtful accounts
15

 
(16
)
Amortization of deferred financing costs and original issue discount
378

 
479

Amortization of debt fair value adjustment
1,250

 

(Gain) loss on disposition of fixed assets
44

 
22

Loss on extinguishment of debt
5,116

 

Share-based compensation – Affiliates
899

 
1,136

Share-based compensation
718

 
289

Change in assets and liabilities:
 
 
 
Accounts receivable
54

 
(3,245
)
Inventories
34,615

 
(107
)
Prepaid expenses and other current assets
2,604

 
2,020

Other long-term assets
(263
)
 
(52
)
Accounts payable
8,955

 
908

Deferred revenue
(31,640
)
 
(11,702
)
Accrued expenses and other current liabilities
(19,231
)
 
(4,395
)
Other long-term liabilities
68

 
(2
)
Net cash provided by operating activities
29,154

 
55,954

Cash flows from investing activities:
 
 
 
Capital expenditures
(11,869
)
 
(6,033
)
Acquisition of CVR Nitrogen, LP, net of cash acquired
(63,869
)
 

Proceeds from sale of assets

 
32

Net cash used in investing activities
(75,738
)
 
(6,001
)

9


 
Six Months Ended 
 June 30,
 
2016
 
2015
 
 
 
 
 
(unaudited)
 
(in thousands)
Cash flows from financing activities:
 
 
 
Principal and premium payments on 2021 Notes
(320,539
)
 

Principal payment on CRLLC Facility
(300,000
)
 

Principal payments on long-term debt
(125,000
)
 

Payment of revolving debt
(49,100
)
 

Payment of financing costs
(6,528
)
 

Proceeds on issuance of 2023 Notes, net of original issue discount
628,869

 

Proceeds on CRLLC Facility
300,000

 

Contribution from affiliate
507

 

Cash distributions to common unitholders – Affiliates
(21,017
)
 
(33,471
)
Cash distributions to common unitholders – Non-affiliates
(29,314
)
 
(29,415
)
Purchase of noncontrolling interest
(5,000
)
 

Net cash provided by (used in) financing activities
72,878

 
(62,886
)
Net increase (decrease) in cash and cash equivalents
26,294

 
(12,933
)
Cash and cash equivalents, beginning of period
49,967

 
79,914

Cash and cash equivalents, end of period
$
76,261

 
$
66,981

 
 
 
 
Supplemental disclosures:
 
 
 
Cash paid for income taxes, net
$
14

 
$
35

Cash paid for interest, net of capitalized interest of $401 in 2016
$
22,304

 
$
2,934

Non-cash investing and financing activities:
 
 
 
Construction in progress additions included in accounts payable
$
5,065

 
$
2,048

Change in accounts payable related to construction in progress
$
(145
)
 
$
982

Reduction of proceeds from 2023 Notes from underwriting discount
$
16,131

 
$

Fair value of common units issued in a business combination
$
335,693

 
$

Fair value of debt assumed in a business combination
$
367,500

 
$


See accompanying notes to the condensed consolidated financial statements.

10

CVR PARTNERS, LP AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2016

(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 by CVR Energy, Inc. (together with its subsidiaries, but excluding the Partnership and its subsidiaries, "CVR Energy") to own, operate and grow its nitrogen fertilizer business. Nitrogen fertilizer is used by farmers to improve the yield and quality of their crops, primarily corn and wheat. The Partnership principally produces ammonia and urea ammonium nitrate ("UAN"), an aqueous solution of urea and ammonium nitrate. The Partnership's product sales are sold on a wholesale basis in North America.

The Partnership produces nitrogen fertilizer products at two manufacturing facilities, which are located in Coffeyville, Kansas (the "Coffeyville Facility") and East Dubuque, Illinois (the "East Dubuque Facility"). On April 1, 2016, the Partnership completed the merger (the "East Dubuque Merger") with CVR Nitrogen, LP (formerly known as East Dubuque Nitrogen Partners, L.P. and also formerly known as Rentech Nitrogen Partners, L.P.) ("CVR Nitrogen") and with CVR Nitrogen GP, LLC (formerly known as East Dubuque Nitrogen GP, LLC and also formerly known as Rentech Nitrogen GP, LLC) ("CVR Nitrogen GP"), whereby the Partnership acquired the East Dubuque Facility. See Note 4 ("East Dubuque Merger") for further discussion.

The Partnership's subsidiaries include Coffeyville Resources Nitrogen Fertilizers, LLC ("CRNF"), which owns and operates the Coffeyville Facility, and East Dubuque Nitrogen Fertilizers, LLC ("EDNF"), which owns and operates the East Dubuque Facility. Both facilities manufacture ammonia and are able to further upgrade to other nitrogen fertilizer products, principally UAN.

As of June 30, 2016, public security holders held approximately 66% of the Partnership's outstanding limited partner interests and Coffeyville Resources, LLC ("CRLLC"), a wholly-owned subsidiary of CVR Energy, held approximately 34% of the Partnership's outstanding limited partner interests and 100% of the noneconomic general partner interest. As of June 30, 2016, Icahn Enterprises L.P. and its affiliates owned approximately 82% of the shares of CVR Energy.

Management and Operations

CVR GP, LLC ("CVR GP" or the "general partner") manages and operates the Partnership. Common unitholders have only limited voting rights on matters affecting the Partnership. In addition, common unitholders have no right to elect the general partner's directors on an annual or continuing basis.

The Partnership is operated by a combination of the general partner's senior management team and CVR Energy's senior management team pursuant to a services agreement among CVR Energy, CVR GP and the Partnership. The various rights and responsibilities of the Partnership's partners are set forth in the 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 14 ("Related Party Transactions") for further discussion.

(2) Basis of Presentation

The accompanying Partnership condensed consolidated financial statements include the accounts of CVR Partners and its subsidiaries. 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, 2015 audited consolidated financial statements and notes thereto included in CVR Partners’ Annual Report on Form 10-K for the year ended December 31, 2015, which was filed with the SEC on February 18, 2016 (the "2015 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

11

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2016
(unaudited)

the services agreement. See Note 14 ("Related Party Transactions") for additional discussion of the services agreement and billing and allocation of certain costs.

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, 2016 and December 31, 2015, the results of operations and comprehensive income (loss) of the Partnership for the three and six months ended June 30, 2016 and 2015, the cash flows of the Partnership for the six months ended June 30, 2016 and 2015 and the changes in partners’ capital for the Partnership for the six months ended June 30, 2016.

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, 2016 or any other interim or annual period.

Planned Major Maintenance Costs

The direct-expense method of accounting is used for maintenance activities, including planned major maintenance activities and other less extensive shutdowns. Maintenance costs are recognized as expense when maintenance services are performed. Planned major maintenance activities generally occur every two to three years. During the second quarter of 2016, the East Dubuque Facility completed a major scheduled turnaround. Overall results were negatively impacted due to the lost production during the downtime that resulted in reduced sales and certain reduced variable expenses included in cost of product sold (exclusive of depreciation and amortization) and direct operating expenses (exclusive of depreciation and amortization). Costs of approximately $6.6 million, associated with the 2016 East Dubuque turnaround, are included in direct operating expenses (exclusive of depreciation and amortization) in the Condensed Consolidated Statements of Operations for both the three and six months ended June 30, 2016.

Cost Classifications

Cost of product sold (exclusive of depreciation and amortization) consist primarily of freight and distribution expenses, feedstock expenses, purchased ammonia and purchased hydrogen.

Direct operating expenses (exclusive of depreciation and amortization) consist primarily of energy and other utility costs, direct costs of labor, property taxes, plant-related maintenance services and environmental and safety compliance costs as well as catalyst and chemical costs. Direct operating expenses also include allocated share-based compensation from CVR Energy and its subsidiaries, as discussed in Note 5 ("Share‑Based Compensation").

Selling, general and administrative expenses (exclusive of depreciation and amortization) consist primarily of direct and allocated legal expenses, treasury, accounting, marketing, human resources, information technology and maintaining the corporate offices. Selling, general and administrative expenses also include allocated share-based compensation from CVR Energy and its subsidiaries, as discussed in Note 5 ("Share‑Based Compensation").


12

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2016
(unaudited)

Cost of product sold, direct operating expenses, and selling, general and administrative expenses are presented exclusive of depreciation and amortization on the Condensed Consolidated Statements of Operations. Depreciation and amortization consisted of the following:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
(in millions)
Depreciation and amortization excluded from direct operating expenses
$
17.3

 
$
6.9

 
$
24.1

 
$
13.5

Depreciation and amortization excluded from cost of product sold
0.2

 
0.1

 
0.3

 
0.3

Depreciation and amortization excluded from selling, general and administrative expenses
0.1

 

 
0.1

 

 
$
17.6

 
$
7.0

 
$
24.5

 
$
13.8

Income Taxes
CVR Partners is treated as a partnership for U.S. federal income tax purposes. The income tax liability of the common unitholders is not reflected in the consolidated financial statements of the Partnership. Generally, each common unitholder is required to take into account its respective share of CVR Partners' income, gains, loss and deductions. The Partnership is not subject to income taxes, except for a franchise tax in the State of Texas and a replacement tax in the State of Illinois.
CVR Nitrogen Holdings, LLC, a corporate entity wholly owned by CVR Partners, generates income or loss based on its own activities. As a corporation, the entity is subject to federal and state income taxes.
Under the Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic ("ASC") 740, Income Taxes, both the Partnership (for taxes based on income such as the Texas franchise tax and the Illinois replacement tax) and the corporate entity account for income taxes using the asset and liability method under which deferred income taxes are recognized for the future tax effects of temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities using the enacted statutory tax rates in effect at the end of the period. A valuation allowance for deferred tax assets is recorded when it is more likely than not that the benefit from the deferred tax asset will not be realized. When applicable, penalties and interest related to uncertain tax positions are recorded as income tax expense.

(3) Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standard Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers", 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. The standard was originally effective for interim and annual periods beginning after December 15, 2016 and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. On July 9, 2015, the FASB approved a one-year deferral of the effective date making the standard effective for interim and annual periods beginning after December 15, 2017. The FASB will continue to permit entities to adopt the standard on the original effective date if they choose. The Partnership has 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 15, 2015 and is required to be applied on a retrospective basis. Early adoption was permitted. The Partnership adopted ASU 2015-03 as of January 1, 2016 and applied the standard retrospectively to the Condensed Consolidated Balance Sheet. Refer to Note 11 ("Debt") for further details.

In February 2016, the FASB issued ASU 2016-02, "Leases" ("ASU 2016-02"). The new standard revises accounting for operating leases by a lessee, among other changes, and requires a lessee to recognize a liability to make lease payments and an asset representing its right to use the underlying asset for the lease term in the balance sheet. The standard is effective for the first interim and annual periods beginning after December 15, 2018, with early adoption permitted. At adoption, ASU 2016-02 will be applied using a modified

13

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2016
(unaudited)

retrospective approach. The Partnership is currently evaluating the standard and the impact on its consolidated financial statements and footnote disclosures.

(4) East Dubuque Merger

On April 1, 2016, the Partnership completed the East Dubuque Merger as contemplated by the Agreement and Plan of Merger, dated as of August 9, 2015 (the "Merger Agreement"), whereby the Partnership acquired CVR Nitrogen and CVR Nitrogen GP. Pursuant to the East Dubuque Merger, the Partnership acquired the East Dubuque Facility.

CVR Nitrogen was required to sell or spin off its facility located in Pasadena, Texas (the "Pasadena Facility") as a condition to closing of the East Dubuque Merger. On March 14, 2016, CVR Nitrogen completed the sale of 100% of the issued and outstanding membership interests of its subsidiary that owned the Pasadena Facility to a third party. Holders of common units representing limited partner interests in CVR Nitrogen ("CVR Nitrogen common units") of record as of March 28, 2016 received consideration for the Pasadena Facility and may receive additional consideration in the future according to the terms of the purchase agreement. The Partnership did not receive and will not receive any consideration relating to the sale of the Pasadena Facility.

Under the terms of the Merger Agreement, holders of CVR Nitrogen common units eligible to receive consideration received 1.04 common units (the "unit consideration") representing limited partner interests in CVR Partners ("CVR Partners common units") and $2.57 in cash, without interest, (the "cash consideration" and together with the unit consideration, the "merger consideration") for each CVR Nitrogen common unit. Pursuant to the Merger Agreement, CVR Partners issued approximately 40.2 million CVR Partners common units and paid approximately $99.2 million in cash consideration to CVR Nitrogen common unitholders and certain holders of CVR Nitrogen phantom units discussed below.

Phantom units granted and outstanding under CVR Nitrogen’s equity plans and held by an employee who continued in the employment of a CVR Partners-affiliated entity upon closing of the East Dubuque Merger were canceled and replaced with new incentive awards of substantially equivalent value and on similar terms. See Note 5 ("Share‑Based Compensation") for further discussion. Each phantom unit granted and outstanding and held by (i) an employee who did not continue in employment of a CVR Partners-affiliated entity, or (ii) a director of CVR Nitrogen GP, upon closing of the East Dubuque Merger, vested in full and the holders thereof received the merger consideration.

In accordance with the FASB’s ASC Topic 805 — Business Combinations ("ASC 805"), the Partnership accounted for the East Dubuque Merger as an acquisition of a business with CVR Partners as the acquirer. ASC 805 requires that the consideration transferred be measured at the current market price at the date of the closing of the East Dubuque Merger. The aggregate merger consideration was approximately $802.4 million, including the fair value of CVR Partners common units issued of $335.7 million, a cash contribution of $99.2 million and $367.5 million fair value of assumed debt. The East Dubuque Facility contributed net sales of $59.7 million and an operating loss of $8.2 million to our Condensed Consolidated Statement of Operations for both the three and six months ended June 30, 2016.

In March 2016, CVR Energy purchased 400,000 CVR Nitrogen common units, representing approximately 1% of the outstanding CVR Nitrogen limited partner interests. CVR Energy did not receive merger consideration for these designated CVR Nitrogen common units. The Partnership recorded the noncontrolling interest fair value of $4.6 million in the purchase price consideration on April 1, 2016. Subsequent to the East Dubuque Merger, CVR Energy contributed $0.5 million to CVR Nitrogen, and the Partnership purchased the 400,000 CVR Nitrogen common units from CVR Energy during the second quarter of 2016 for $5.0 million. The transaction eliminated the noncontrolling interest, and the net impact of $0.1 million was recorded as an increase to partners' capital on the Condensed Consolidated Statement of Partners' Capital for the six months ended June 30, 2016. The Partnership owns 100% of the outstanding limited partners interests of CVR Nitrogen as of June 30, 2016.


14

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2016
(unaudited)

Purchase Price Consideration

A summary of the total purchase price is as follows:
 
 
Purchase Price
 
 
(in millions)
Fair value of CVR Partners common units issued, as of the close of the East Dubuque Merger
 
$
335.7

Cash payment to CVR Nitrogen common unitholders and certain phantom unitholders
 
99.2

Fair value of consideration transferred
 
434.9

Fair value of noncontrolling interest for parent affiliate units (1)
 
4.6

Total purchase price consideration to be allocated
 
$
439.5


The fair value of the unit consideration was determined as follows:
 
 
 
 
 
Fair Value of Unit Consideration
 
 
(units in thousands)
CVR Nitrogen common units outstanding, as of the close of the East Dubuque Merger
 
38,985

Less: Noncontrolling interest from parent affiliate units (1)
 
400

Net units subject to merger consideration
 
38,585

Unit consideration per CVR Nitrogen common unit
 
1.04

Number of CVR Partners common units to be issued for merger consideration
 
40,129

Number of CVR Partners common units to be issued for CVR Nitrogen phantom units issued to noncontinuing employees and CVR Nitrogen board members (2)
 
26

Total number of CVR Partners units to be issued
 
40,155

Fair value per CVR Partners common unit, as of the close of the East Dubuque Merger
 
$
8.36

Fair value of CVR Partners common units issued (in millions)
 
$
335.7

 
 
 
_____________
(1)
See above for discussion of parent affiliate units.
(2)
As discussed above, each phantom unit granted and outstanding and held by (i) an employee who did not continue in the employment of a CVR Partners-affiliated entity, or (ii) a director of CVR Nitrogen GP, upon closing of the East Dubuque Merger, vested in full and the holders thereof received the merger consideration.

Merger-Related Indebtedness

CVR Nitrogen’s debt arrangements that remained in place after the closing date of the East Dubuque Merger included $320.0 million of its 6.5% notes due 2021 (the "2021 Notes"). The majority of the 2021 Notes were repurchased in June 2016, as discussed further in Note 11 ("Debt").

Immediately prior to the East Dubuque Merger, CVR Nitrogen also had outstanding balances under a credit agreement with Wells Fargo Bank, National Association, as successor-in-interest by assignment from General Electric Company, as administrative agent (the "Wells Fargo Credit Agreement"). The Wells Fargo Credit Agreement consisted of a $50.0 million senior secured revolving credit facility with a $10.0 million letter of credit sublimit. In connection with the closing of the East Dubuque Merger, the Partnership paid $49.4 million for the outstanding balance, accrued interest and fees under the Wells Fargo Credit Agreement, and the Wells Fargo Credit Agreement was canceled.


15

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2016
(unaudited)

Preliminary Purchase Price Allocation

Under the acquisition method of accounting, the purchase price was allocated to CVR Nitrogen's net tangible assets based on their fair values as of April 1, 2016. The Partnership has obtained a preliminary independent appraisal of the net assets acquired. Determining the fair value of net tangible assets requires judgment and involves the use of significant estimates and assumptions. The Partnership based its fair value estimates on assumptions it believes to be reasonable but are inherently uncertain. Although the Partnership believes the estimates of fair value of the assets and liabilities acquired are accurate, these estimates are preliminary and are subject to change during the measurement period. This measurement period may extend up to one year from the acquisition date.

The following table, set forth below, displays the estimated purchase price allocated to CVR Nitrogen's net tangible assets based on their fair values as of April 1, 2016. There were no identifiable intangible assets.

 
 
Purchase Price Allocation
 
 
(in millions)
Cash
 
$
35.4

Accounts receivable
 
8.9

Inventories
 
49.5

Prepaid expenses and other current assets (1)
 
5.2

Property, plant and equipment
 
774.9

Other long-term assets
 
1.1

Deferred revenue
 
(29.8
)
Other current liabilities (2)
 
(37.0
)
Long-term debt
 
(367.5
)
Other long-term liabilities
 
(1.2
)
Total fair value of net assets acquired
 
439.5

Less: Cash acquired
 
35.4

Total consideration transferred, net of cash acquired
 
$
404.1

_____________
(1)
Includes $4.0 million for the estimated fair value of insurance proceeds related to an event that occurred prior to the East Dubuque Merger. The Partnership received $4.0 million during the three months ended June 30, 2016, which was included in operating activities on the Consolidated Statement of Cash Flows for the six months ended June 30, 2016.
(2)
Includes an assumed liability of $11.8 million for third-party financial advisory services provided to CVR Nitrogen that became payable upon the closing of the East Dubuque Merger, and was subsequently paid by CVR Partners on April 1, 2016, which was included in operating activities on the Consolidated Statement of Cash Flows for the six months ended June 30, 2016.

Pro Forma Financial Information

The summary pro forma financial information for the periods presented below gives effect to the East Dubuque Merger as if it had occurred at January 1, 2015. The pro forma financial information for all periods presented were adjusted to give effect to pro forma events that are i) directly attributable to the East Dubuque Merger, ii) factually supportable and iii) expected to have a continuing impact on the consolidated results of operations.

Pro forma net income (loss) has been adjusted to exclude $1.2 million and $0.5 million, respectively, of merger-related costs incurred during the three months ended June 30, 2016 and 2015 and to exclude $3.2 million and $0.5 million, respectively, of merger-related costs incurred during the six months ended June 30, 2016 and 2015. Pro forma net income (loss) has also been adjusted to

16

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2016
(unaudited)

exclude $13.0 million of nonrecurring expenses related to the fair value adjustment to acquisition-date inventory and deferred revenue for both the three and six months ended June 30, 2016.

Incremental interest expense for financing the cash merger consideration and financing the payoff of the Wells Fargo Credit Agreement has also been adjusted for in the pro forma financial information, as well as incremental depreciation resulting from increased fair value of the property, plant and equipment as noted in the preliminary purchase price allocation.
 
The summary pro forma financial information is for informational purposes only and does not purport to represent what the Partnership's consolidated results of operations actually would have been if the East Dubuque Merger had occurred at any date, and such data does not purport to project the Partnership's results of operations for any future period. The basic and diluted units outstanding used to calculate the pro forma net income (loss) per unit amounts presented below have been adjusted to assume units issued at the closing of the East Dubuque Merger were outstanding since January 1, 2015.

 
 
Three Months Ended June 30,
 
Six Months Ended 
 June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except per unit data)
Net sales
 
$
119,797

 
$
152,875

 
$
227,737

 
$
282,677

Net income (loss)
 
(2,747
)
 
52,610

 
12,182

 
81,102

Net income (loss) per common unit, basic and diluted
 
(0.02
)
 
0.46

 
0.11

 
0.72


Expenses Associated with the East Dubuque Merger

During the three and six months ended June 30, 2016, the Partnership incurred $1.2 million and $2.5 million, respectively, of legal and other professional fees and other merger-related expenses, which were included in selling, general and administrative expenses (exclusive of depreciation and amortization).

(5) 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-based 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. Allocated expense amounts related to plans for which the Partnership is not responsible for payment are immaterial and 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, 2016, performance units remain outstanding under the CVR Energy LTIP. 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.

Performance Unit Awards

In December 2015, CVR Energy entered into a performance unit award agreement (the "2015 Performance Unit Award Agreement") with its Chief Executive Officer. Compensation cost for the 2015 Performance Unit Award Agreement will be recognized over the performance cycle from January 1, 2016 to December 31, 2016. The performance unit award represents the right to receive, upon vesting, a cash payment equal to a defined threshold in accordance with the award agreement, multiplied by a performance factor

17

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2016
(unaudited)

that is based upon the achievement of certain operating objectives. The Partnership will be responsible for reimbursing CVR Energy for its allocated portion of the performance unit award. Assuming a target performance threshold and that the allocation of costs from CVR Energy remains consistent with the allocation percentages in place at June 30, 2016, there was approximately $0.3 million of total unrecognized compensation cost related to the 2015 Performance Unit Award Agreement to be recognized over a weighted-average period of approximately 0.5 years. Compensation expense recorded for the three and six months ended June 30, 2016 related to the awards was approximately $0.1 million and $0.2 million, respectively. The Partnership will be responsible for reimbursing CVR Energy for its allocated portion of the awards. As of June 30, 2016, the Partnership had a liability of $0.2 million, for its allocated portion of the 2015 Performance Unit Award Agreement, which is recorded in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheet.

Incentive Unit Awards – CVR Energy

CVR Energy has granted awards of incentive units and distribution equivalent rights to certain employees of CRLLC, CVR Energy and the Partnership's general partner who provide shared services to CVR Energy and its subsidiaries (including the Partnership). The awards are generally graded-vesting awards, which are expected to vest over three years, with one-third of the award vesting each year. Compensation expense is recognized on a straight-line basis over the vesting period of the respective tranche of the award. Each incentive unit and distribution equivalent right represents the right to receive, upon vesting, a cash payment equal to (i) the average fair market value of one common unit of CVR Refining, LP ("CVR Refining") in accordance with the award agreement, plus (ii) the per unit cash value of all distributions declared and paid by CVR Refining from the grant date to and including the vesting date. The awards, which are liability-classified, are remeasured at each subsequent reporting date until they vest.

Assuming the allocation of costs from CVR Energy remains consistent with the allocation percentages in place at June 30, 2016, there was approximately $0.7 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 1.2 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 incentive units and respective allocation percentage for individuals for whom, as of June 30, 2016, compensation expense has been allocated to the Partnership. Compensation expense recorded for the three months ended June 30, 2016 and 2015 related to the awards was nominal and approximately $0.2 million, respectively. Compensation expense recorded for the six months ended June 30, 2016 and 2015 related to the awards was nominal and approximately $0.4 million, respectively. The Partnership will be responsible for reimbursing CVR Energy for its allocated portion of the awards.

As of both June 30, 2016 and December 31, 2015, the Partnership had a liability of $0.5 million 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.


18

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2016
(unaudited)

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, each in respect of common units. Individuals eligible to receive awards pursuant to the CVR Partners LTIP include (i) employees of the Partnership and its subsidiaries, (ii) employees of the general partner, (iii) members of the board of directors of the general partner, and (iv) certain CVR Partners' parent's employees, consultants and directors who perform services for the benefit of the Partnership.

Through the CVR Partners LTIP, phantom unit awards outstanding include awards granted to employees of both the Partnership and the general partner. Phantom unit awards made to employees of the general partner are considered non-employee equity based-awards. The phantom unit awards outstanding vest over a three-year period and are required to be remeasured each reporting period until they vest. The maximum number of common units issuable under the CVR Partners LTIP is 5,000,000. As of June 30, 2016, there were 4,820,215 common units available for issuance under the CVR Partners LTIP. As all phantom unit awards discussed below are cash settled awards, they do not reduce the number of common units available for issuance.

Certain Units and Phantom Units Awards

Awards of phantom units and distribution equivalent rights have been 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 (i) the average fair market value of one unit of the Partnership's common units in accordance with the award agreement, plus (ii) the per unit cash value of all distributions declared and paid by the Partnership from the grant date to and including the vesting date. The awards, which are liability-classified, are remeasured at each subsequent reporting date until they vest.

In connection with the East Dubuque Merger as described in Note 4 ("East Dubuque Merger"), 195,980 phantom units were granted to certain CVR Nitrogen employees.  A related liability of $0.6 million was recorded as part of the opening balance sheet and included in personnel accruals in the purchase price allocation in Note 4 ("East Dubuque Merger").  Subsequent to the East Dubuque Merger, 58,730 awards were subject to an accelerated vesting date and were paid in full resulting in the early recognition of $0.3 million as compensation expense in selling, general and administrative expenses (exclusive of depreciation and amortization).


A summary of the phantom unit activity during the six months ended June 30, 2016 is presented below:

 
Phantom Units
 
Weighted-Average
Grant Date Fair Value
Non-vested at January 1, 2016
391,903

 
$
8.71

Granted
199,455

 
8.07

Vested
(58,730
)
 
8.08

Forfeited
(5,975
)
 
8.96

Non-vested at June 30, 2016
526,653

 
$
8.54


Unrecognized compensation expense associated with the unvested phantom units at June 30, 2016 was approximately $2.6 million and is expected to be recognized over a weighted average period of 1.5 years. Compensation expense recorded for the three months ended June 30, 2016 and 2015 related to the awards under the CVR Partners LTIP was approximately $0.8 million and $0.4 million, respectively. Compensation expense recorded for the six months ended June 30, 2016 and 2015 related to the awards under the CVR Partners LTIP was approximately $1.3 million and $1.0 million, respectively. Compensation expense related to the awards to employees of the Partnership and its subsidiaries under the CVR Partners LTIP has been recorded in selling, general and administrative expenses (exclusive of depreciation and amortization) - third parties and direct operating expenses (exclusive of depreciation and amortization) - third parties. Compensation expense related to the awards issued to employees of the general partner under the CVR Partners LTIP has been recorded in selling, general and administrative expenses (exclusive of depreciation and

19

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2016
(unaudited)

amortization) - affiliates and direct operating expenses (exclusive of depreciation and amortization) - affiliates. As of June 30, 2016 and December 31, 2015 the Partnership had a liability of $2.2 million and $0.7 million, respectively, for cash settled non-vested phantom unit awards and associated distribution equivalent rights, which is recorded in personnel accruals on the Condensed Consolidated Balance Sheets.

Performance-Based Phantom Unit Award

In May 2014, the Partnership entered into a Phantom Unit Agreement with Mark A. 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 (i) 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 (ii) the per unit cash value of all distributions declared and paid by the Partnership from the grant date to and including the vesting date. Compensation expense recorded for the three months ended June 30, 2016 and 2015 related to the awards was nominal. Compensation expense for the six months ended June 30, 2016 and 2015 related to the awards was approximately $52,000 and $39,000, respectively. Based on current estimates of performance thresholds for the remaining performance cycles, unrecognized compensation expense and the liability associated with the unvested phantom units as of June 30, 2016 was $0.1 million. The unrecognized compensation expense and the liability associated with the unvested phantom units as of December 31, 2015 were nominal.


(6) Inventories

Inventories consisted of the following:


June 30,
2016
 
December 31,
2015
 
 
 
 
 
(in thousands)
Finished goods
$
9,317

 
$
9,589

Raw materials and precious metals
10,089

 
9,055

Parts and supplies
33,707

 
18,885

Total inventories
$
53,113

 
$
37,529



20

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2016
(unaudited)

(7) Property, Plant and Equipment

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

 
June 30,
2016
 
December 31,
2015
 
 
 
 
 
(in thousands)
Land and improvements
$
12,958

 
$
5,441

Buildings and improvements
14,529

 
3,049

Machinery and equipment
1,337,487

 
574,326

Automotive equipment
529

 
448

Furniture and fixtures
1,280

 
918

Railcars
16,265

 
16,315

Construction in progress
5,609

 
1,641

 
$
1,388,657

 
$
602,138

Less: Accumulated depreciation
234,089

 
209,005

Total property, plant and equipment, net
$
1,154,568

 
$
393,133


Capitalized interest recognized as a reduction of interest expense was $0.4 million and $0 for the three and six months ended June 30, 2016 and 2015, respectively.

(8) 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.

As of June 30, 2016, the Partnership had a total of 113,282,973 common units issued and outstanding, of which 38,920,000 common units were owned by CRLLC, representing approximately 34% of the total Partnership common units outstanding.

The board of directors of the Partnership's general partner has a policy for the Partnership to distribute all available cash generated on a quarterly basis. Cash distributions will be made to the common unitholders of record on the applicable record date, generally within 60 days after the end of each quarter. Available cash for each quarter will be determined by the board of directors of the general partner following the end of such quarter.

Available cash begins with Adjusted EBITDA reduced for cash needed for (i) net cash interest expense (excluding capitalized interest) and debt service and other contractual obligations; (ii) maintenance capital expenditures; and (iii) to the extent applicable, major scheduled turnaround expenses, reserves for future operating or capital needs that the board of directors of the general partner deems necessary or appropriate, and expenses associated with the East Dubuque Merger, if any. Adjusted EBITDA is defined as EBITDA (net income before interest expense, net, income tax expenses, depreciation and amortization) further adjusted for the impact of non-cash share-based compensation, and, when applicable, major scheduled turnaround expense, loss on disposition of assets and expenses associated with the East Dubuque Merger. Available cash for distribution may be increased by the release of previously established cash reserves, if any, at the discretion of the board of directors of the general partner, and available cash is increased by the business interruption insurance proceeds and the impact of purchase accounting. Actual distributions are set by the board of directors of the general partner. The board of directors of the general partner may modify the cash distribution policy at any time, and the partnership agreement does not require the board of directors of the general partner to make distributions at all.


21

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2016
(unaudited)

The following is a summary of cash distributions paid to the Partnership's unitholders during 2016 for the respective quarters to which the distributions relate:

 
December 31,
2015
 
March 31,
  2016(1)
 
Total Cash Distributions
Paid in 2016
 
 
 
 
 
 
 
($ in millions, except per common unit amounts)
Amount paid to CRLLC
$
10.5

 
$
10.5

 
$
21.0

Amount paid to public unitholders
9.2

 
20.1

 
29.3

Total amount paid
$
19.7

 
$
30.6

 
$
50.3

Per common unit
$
0.27

 
$
0.27

 
$
0.54

Common units outstanding (in thousands)
73,128

 
113,283

 
 

_____________________________

(1) The distribution per common unit for the three months ended March 31, 2016 is calculated based on the post-merger common units outstanding.

See Note 16 ("Subsequent Events") for further information on the Partnership's second quarter of 2016 distribution.

(9) Net Income (Loss) per Common Unit

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

(10) Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities were as follows:


As of 
 June 30, 
 2016
 
As of 
 December 31, 
 2015
 
 
 
 
 
(in thousands)
Property taxes
$
1,686

 
$
1,371

Current interest rate swap liabilities

 
119

Accrued interest
3,537

 
458

Railcar maintenance accruals
2,098

 
209

Affiliates (1)
1,545

 
2,334

Other accrued expenses and liabilities
2,705

 
1,192

 
$
11,571

 
$
5,683

____________

(1)
Accrued expenses and other current liabilities include amounts owed by the Partnership to CVR Energy and its subsidiaries, which are related parties, under the feedstock and shared services agreement and the services agreement. Refer to Note 14 ("Related Party Transactions") for additional discussion.


22

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2016
(unaudited)

(11) Debt

Long-term debt consisted of the following:

 
As of 
 June 30, 
 2016
 
As of 
 December 31, 
 2015
 
 
 
 
 
(in thousands)
9.25% senior secured notes, due 2023
$
645,000

 
$

6.50% notes, due 2021
4,195

 

Credit Agreement term loan, due 2016

 
125,000

Total long-term debt, before debt issuance costs and discount
649,195

 
125,000

Less:
 
 
 
Unamortized discount
16,038

 

Unamortized debt issuance costs
7,845

 
227

Total long-term debt, net of current portion
$
625,312

 
$
124,773


As discussed in Note 3 ("Recent Accounting Pronouncements"), the Partnership adopted ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs", which requires that all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt. As a result of adoption of the standard, debt issuance costs of $0.2 million were reclassified as a direct deduction from the carrying value of the related debt balances in the Condensed Consolidated Balance Sheets as of December 31, 2015. A nominal amount of debt issuance costs related to the revolving credit facility were presented as assets in the Condensed Consolidated Balance Sheet as of December 31, 2015.

For the three months ended June 30, 2016 and 2015, amortization of the discount on debt and amortization of deferred financing costs reported as interest expense and other financing costs totaled approximately $0.1 million and $0.2 million, respectively. For the six months ended June 30, 2016 and 2015, amortization of the discount on debt and amortization of deferred financing costs reported as interest expense and other financing costs totaled approximately $0.4 million and $0.5 million, respectively.


2023 Notes

On June 10, 2016, the Partnership and CVR Nitrogen Finance Corporation, an indirect wholly-owned subsidiary of the Partnership, (together the "2023 Notes Issuers"), certain subsidiary guarantors named therein and Wilmington Trust, National Association, as trustee and as collateral trustee, completed a private offering of $645.0 million aggregate principal amount of 9.250% Senior Secured Notes due 2023 (the "2023 Notes"). The 2023 Notes mature on June 15, 2023, unless earlier redeemed or repurchased by the issuers. Interest on the 2023 Notes is payable semi-annually in arrears on June 15 and December 15 of each year, beginning on December 15, 2016. The 2023 Notes are guaranteed on a senior secured basis by all of the Partnership’s existing subsidiaries.

The 2023 Notes were issued at a $16.1 million discount, which is being amortized over the term of the 2023 Notes as interest expense using the effective-interest method. The Partnership received approximately $622.9 million of cash proceeds, net of the original issue discount and underwriting fees, but before deducting other third-party fees and expenses associated with the offering. The net proceeds from the sale of the 2023 Notes were used to: (i) repay all amounts outstanding under the CRLLC Facility (defined and discussed below); (ii) finance the 2021 Notes Tender Offer (defined and discussed below) and (iii) to pay related fees and expenses.

The debt issuance costs of the 2023 Notes totaled approximately $7.9 million and are being amortized over the term of the 2023 Notes as interest expense using the effective-interest amortization method. 

The 2023 Notes contain customary covenants for a financing of this type that, among other things, restrict the Partnership’s ability and the ability of certain of its subsidiaries to: (i) sell assets; (ii) pay distributions on, redeem or repurchase the Partnership’s units or

23

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2016
(unaudited)

redeem or repurchase its subordinated debt; (iii) make investments; (iv) incur or guarantee additional indebtedness or issue preferred units; (v) create or incur certain liens; (vi) enter into agreements that restrict distributions or other payments from the Partnership’s restricted subsidiaries to the Partnership; (vii) consolidate, merge or transfer all or substantially all of the Partnership’s assets; (viii) engage in transactions with affiliates; and (ix) create unrestricted subsidiaries. As of June 30, 2016, the Partnership was in compliance with the covenants contained in the 2023 Notes.

Included in other current liabilities on the Condensed Consolidated Balance Sheets is accrued interest payable totaling approximately $3.5 million as of June 30, 2016 related to the 2023 Notes. At June 30, 2016, the estimated fair value of the 2023 Notes was approximately $656.3 million. This estimate of fair value is Level 2 as it was determined by quotations obtained from a broker-dealer who makes a market in these and similar securities.

2021 Notes

The $320.0 million 2021 Notes were issued by CVR Nitrogen and CVR Nitrogen Finance (the "2021 Notes Issuers") prior to the East Dubuque Merger. The 2021 Notes bear interest at a rate of 6.5% per annum, payable semi-annually in arrears on April 15 and October 15 of each year. The 2021 Notes are scheduled to mature on April 15, 2021, unless repurchased or redeemed earlier in accordance with their terms.

On April 29, 2016, the 2021 Notes Issuers commenced a cash tender offer (the "Tender Offer") to purchase any and all of the outstanding 2021 Notes. In connection with the Tender Offer, the 2021 Notes Issuers solicited the consents of holders of the notes to certain proposed amendments to the indenture governing the notes (the "Consent Solicitation"). As a result of the Tender Offer, on June 10, 2016, the 2021 Notes Issuers repurchased $315,245,000 of 2021 Notes, representing approximately 98.5% of the total outstanding principal amount of the notes at a purchase price of $1,015 per $1,000 in principal amount. The total amount paid related to the Tender Offer was approximately $320.0 million, including an approximate $4.7 million premium. Additionally, the 2021 Notes Issuers paid $3.1 million for accrued and unpaid interest for the tendered notes up to the settlement date. The 2021 Notes Issuers received the requisite consents in respect of the 2021 Notes in connection with the Consent Solicitation to amend the indenture governing the 2021 Notes. As a result, the 2021 Notes Issuers executed a supplemental indenture, dated as of June 10, 2016, which eliminated or modified substantially all of the restrictive covenants relating to CVR Nitrogen and its subsidiaries, eliminated all events of default other than failure to pay principal, premium or interest on the 2021 Notes, eliminated all conditions to satisfaction and discharge, and released the liens on the collateral securing the 2021 Notes. The repurchase of a portion of the 2021 Notes resulted in a loss on extinguishment of debt of approximately $5.1 million for the three and six months ended June 30, 2016, which includes the Tender Offer premium of $4.7 million and the write-off of the unamortized portion of the purchase accounting adjustment of $0.4 million.

Concurrently with, but separately from the Tender Offer, the 2021 Notes Issuers also commenced an offer to purchase all of the outstanding 2021 Notes at a price equal to 101% of the principal amount thereof, as required as a result of the East Dubuque Merger (the "Change of Control Offer"). The offer expired on June 28, 2016. As a result of the Change of Control Offer, the 2021 Notes Issuers repurchased $560,000 of 2021 Notes at a purchase price of $1,010 per $1,000 in principal amount. The total amount paid related to the Change of Control Offer was approximately $0.6 million, including a nominal amount of premium and accrued and unpaid interest.

The $4,195,000 of principal amount of the 2021 Notes that remained outstanding following the consummation of the Tender Offer and the Change of Control Offer will continue to be obligations of the 2021 Notes Issuers. Included in other current liabilities on the Condensed Consolidated Balance Sheets is accrued interest payable totaling approximately $0.1 million as of June 30, 2016 related to the 2021 Notes. At June 30, 2016, the estimated fair value of the 2021 Notes was approximately $4.2 million. This estimate of fair value is Level 2 as it was determined by quotations obtained from a broker-dealer who makes a market in these and similar securities.

CRLLC Facility

On April 1, 2016, in connection with the closing of the East Dubuque Merger, the Partnership entered into a $300.0 million senior term loan credit facility (the "CRLLC Facility") with CRLLC, as the lender, the proceeds of which were used by the Partnership (i) to fund the repayment of amounts outstanding under the Wells Fargo Credit Agreement discussed in Note 4 ("East Dubuque Merger") (ii) to pay the cash consideration and to pay fees and expenses in connection with the East Dubuque Merger and related transactions and

24

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2016
(unaudited)

(iii) to repay all of the loans outstanding under the Credit Agreement discussed below. The CRLLC Facility had a term of two years and an interest rate of 12.0% per annum. Interest was calculated on the basis of the actual number of days elapsed over a 360-day year and payable quarterly. In April 2016, the Partnership borrowed $300.0 million under the CRLLC Facility. On June 10, 2016, the Partnership paid off the $300.0 million outstanding under the CRLLC Facility, paid $7.0 million in interest, and terminated the CRLLC Facility.

Credit Agreement

On April 13, 2011, CRNF, as borrower, and CVR Partners, as guarantor, entered into a credit facility with a group of lenders including Goldman Sachs Lending Partners LLC, as administrative and collateral agent (the "Credit Agreement"). The Credit Agreement included 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 December 31, 2015. The Credit Agreement was scheduled to mature on April 13, 2016. On April 1, 2016, in connection with the completion of the East Dubuque Merger, the Partnership repaid all amounts outstanding under the Credit Agreement and paid $0.3 million for accrued and unpaid interest. Effective upon such repayment, the Credit Agreement and all related loan documents and security interests were terminated and released. The repayment was funded from amounts drawn on the CRLLC Facility, as discussed above. The Partnership recognized a nominal amount of loss on debt extinguishment in connection with the termination of the Credit Agreement.

Previous borrowings under the Credit Agreement bore 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 Agreement ranges from 3.50% to 4.25% for Eurodollar loans and 2.50% to 3.25% for base rate loans. During the periods presented, the interest rate was either the Eurodollar rate plus a margin of 3.50% or, for base rate loans, the prime rate plus 2.50%. At December 31, 2015, the effective rate of the term loan was approximately 4.60%, inclusive of the impact of the interest rate swaps discussed in Note 12 ("Interest Rate Swap Agreements").

The carrying value approximated fair value as of December 31, 2015.

(12) Interest Rate Swap Agreements

CRNF had two floating-to-fixed interest rate swap agreements for the purpose of hedging the interest rate risk associated with a portion of its $125.0 million floating rate term debt, which expired on February 12, 2016. The floating rate term debt is discussed in Note 11 ("Debt"). The aggregate notional amount covered under these agreements, which commenced on August 12, 2011, 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 received a floating rate based on three-month LIBOR and paid a fixed rate of 1.94%. Under the terms of the interest rate swap agreement entered into on July 1, 2011, CRNF receives a floating rate based on three-month LIBOR and paid a fixed rate of 1.975%. Both swap agreements were settled every 90 days. The effect of these swap agreements was to lock in a fixed rate of interest of approximately 1.96% plus the applicable margin paid to lenders over three-month LIBOR governed by the credit facility. The agreements were designated as cash flow hedges at inception, and accordingly, the effective portion of the gain or loss on the swap was reported as a component of accumulated other comprehensive income (loss) ("AOCI") and reclassified into interest expense when the interest rate swap transaction affects earnings. Any ineffective portion of the gain or loss was recognized immediately in interest expense. The realized loss on the interest rate swap reclassified from AOCI into interest expense and other financing costs on the Condensed Consolidated Statements of Operations was $0.3 million for the three months ended June 30, 2015. The realized loss on the interest rate swap reclassified from AOCI into interest expense for the six months ended June 30, 2016 and 2015 was $0.1 million and $0.5 million, respectively.

The interest rate swap agreements previously held by the Partnership also provided for the right to offset. However, as the interest rate swaps were in a liability position, there are no amounts offset in the Condensed Consolidated Balance Sheet as of December 31, 2015. See Note 15 ("Fair Value Measurements") for discussion of the fair value of the interest rate swap agreements.


25

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2016
(unaudited)


(13) 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
 
 
 
 
 
(in thousands)
Six months ending December 31, 2016
$
2,613

 
$
11,616

Year Ending December 31,
 
 
 
2017
4,328

 
13,549

2018
3,452

 
11,961

2019
2,836

 
10,453

2020
2,310

 
7,917

Thereafter
4,630

 
46,051

 
$
20,169

 
$
101,547

_____________

CRNF leases railcars and facilities under long-term operating leases. Lease expense included in cost of product sold (exclusive of depreciation and amortization) and for the three months ended June 30, 2016 and 2015 totaled approximately $1.2 million. For the six months ended June 30, 2016 and 2015, these expenses totaled approximately $2.3 million. The lease agreements have various remaining terms. Some agreements are renewable, at CRNF’s option, for additional periods. It is expected, in the ordinary course of business, that leases may be renewed or replaced as they expire. In the second quarter of 2016, the Partnership entered into agreements to lease 115 UAN railcars from a related party, which is included in the operating lease commitments shown above. See Note 14 ("Related Party Transactions") for further discussion.

CRNF’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 14 ("Related Party Transactions") for further discussion of the coke supply agreement.

CRNF is party to 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, 2016 and 2015, totaled approximately $0.9 million and $0.8 million, respectively. For the six months ended June 30, 2016 and 2015, the expense totaled $1.9 million and $1.6 million, respectively.

CRNF is a party to a pet coke supply agreement with HollyFrontier Corporation. The term of this agreement ends in December 2016. The delivered cost of this pet coke is included in cost of product sold (exclusive of depreciation and amortization) and totaled approximately $1.1 million and $1.0 million, respectively, for the three months ended June 30, 2016 and 2015. For the six months ended June 30, 2016 and 2015, these expenses totaled approximately $2.5 million and $2.3 million, respectively.


26

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2016
(unaudited)

Commitments for natural gas purchases consist of the following:
 
June 30,
2016
 
 
 
(in thousands, except weighted average rate)
MMBtus under fixed-price contracts
775

Commitments to purchase natural gas
$
1,820

Weighted average rate per MMBtu (1)
$
2.35

____________

(1)
Weighted average rate per MMBtu is based on the fixed rates applicable to each contract.

Litigation

From time to time, the Partnership is involved in various lawsuits arising in the normal course of business, including environmental, health and safety ("EHS") matters described below under "Environmental, Health and Safety 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. There were no new proceedings or material developments in proceedings from those provided in the 2015 Form 10-K. 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 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 2015 Form 10-K. 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.

(14) Related Party Transactions

Related Party Agreements

CVR Partners is party to, or otherwise subject to certain agreements with CVR Energy and its subsidiaries (including CVR Refining and its subsidiary Coffeyville Resources Refining & Marketing, LLC ("CRRM")) that govern the business 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. The agreements are described as in effect at June 30, 2016. Except as otherwise described below, there have been no new developments or material changes to these agreements from those provided in the 2015 Form 10-K.

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

27

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2016
(unaudited)

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, when applicable. 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, 2016 and 2015, the net sales generated from the sale of hydrogen to CRRM were approximately $0.5 million and $2.0 million, respectively. For the six months ended June 30, 2016 and 2015, the net sales generated from the sale of hydrogen to CRRM were approximately $1.6 million and $8.5 million, respectively. At June 30, 2016 and December 31, 2015, there was approximately $0.2 million and $0.5 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.

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, 2016 and 2015, 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 was due from CRNF to CRRM over four years. At June 30, 2016 and December 31, 2015, there were assets of approximately $0.2 million and $0.2 million, respectively, included in prepaid expenses and other current assets and approximately $0.7 million and $0.8 million, respectively, included in other long-term assets in the Condensed Consolidated Balance Sheets.

At June 30, 2016 and December 31, 2015, receivables of $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, 2016 and December 31, 2015, current obligations of approximately $0.6 million and $0.7 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.

Coke Supply Agreement

CRNF is party to a coke supply agreement with CRRM pursuant to which CRRM supplies CRNF with pet coke. This agreement provides that CRRM must deliver to CRNF during each calendar year an annual required amount of pet coke equal to the lesser of
(i) 100 percent of the pet coke produced at CRRM's Coffeyville, Kansas petroleum refinery or (ii) 500,000 tons of pet coke. CRNF is also obligated to purchase this annual required amount. If during a calendar month CRRM produces more than 41,667 tons of pet coke, then CRNF will have the option to purchase the excess at the purchase price provided for in the agreement. If CRNF declines to exercise this option, CRRM may sell the excess to a third party.


28

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2016
(unaudited)

CRNF obtains most (over 70% on average during the last five years) of the pet coke it needs from CRRM's adjacent crude oil refinery pursuant to the pet coke supply agreement, and procures the remainder through a contract with HollyFrontier Corporation and on the open market. The price CRNF pays pursuant to the pet coke supply agreement is based on the lesser of a pet coke price derived from the price received for UAN (the "UAN-based price") or a pet coke price index. The UAN-based price begins with a pet coke price of $25 per ton based on a price per ton for UAN that excludes transportation cost ("netback price") of $205 per ton, and adjusts up or down $0.50 per ton for every $1.00 change in the netback price. The UAN-based price has a ceiling of $40 per ton and a floor of $5 per ton.

CRNF will 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 $0.5 million and $2.1 million for the three months ended June 30, 2016 and 2015, respectively, which was recorded in cost of product sold (exclusive of depreciation and amortization). For the six months ended June 30, 2016 and 2015, these expenses were approximately $1.3 million and $3.9 million, respectively. Payables of $0.2 million and $0.3 million related to the coke supply agreement were included in accounts payable on the Condensed Consolidated Balance Sheets at June 30, 2016 and December 31, 2015, 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, 2016 and 2015 were as follows:

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
(in thousands)
Direct operating expenses (exclusive of depreciation and amortization) — Affiliates
$
975

 
$
954

 
$
1,640

 
$
1,844

Selling, general and administrative expenses (exclusive of depreciation and amortization) — Affiliates
3,059

 
2,535

 
5,622

 
4,918

Total
$
4,034

 
$
3,489

 
$
7,262

 
$
6,762


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 5 ("Share‑Based Compensation"), of $1.9 million and $1.5 million, respectively, for the three months ended June 30, 2016 and 2015. For services performed in connection with the services agreement, the Partnership recognized personnel costs, excluding amounts related to share-based compensation, of $3.3 million and $2.6 million for the six months ended June 30, 2016 and 2015, respectively. At June 30, 2016 and December 31, 2015, current obligations of $2.8 million and $3.2 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.


29

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2016
(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, 2016 and 2015 approximately $1.1 million and $1.0 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, 2016 and 2015, approximately $2.2 million and $2.1 million were incurred related to amounts due for reimbursement, respectively. At June 30, 2016 and December 31, 2015, current obligations of $2.0 million and $2.0 million, respectively, were included in personnel accruals and accrued expenses and other current liabilities 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. Carl C. Icahn in order to maximize the potential buying power of a group of entities with which Mr. Icahn has a relationship in negotiating with a wide range of suppliers of goods, services and tangible and intangible property at negotiated rates. In January 2013, CVR Energy acquired a minority equity interest in Insight Portfolio Group. The Partnership participates in Insight Portfolio Group’s buying group through its relationship with CVR Energy. The Partnership may purchase a variety of goods and services as members of the buying group at prices and on terms that management believes would be more favorable than those which would be achieved on a stand-alone basis. For the six months ended June 30, 2016, the Partnership paid Insight Portfolio Group a nominal amount. At June 30, 2016 and December 31, 2015, there were no unpaid balances related to transactions with the Insight Portfolio Group.

AEPC Facility

On April 1, 2016, in connection with the closing of the East Dubuque Merger, the Partnership entered into a $320.0 million senior term loan facility (the "AEPC Facility") with American Entertainment Properties Corp., a Delaware corporation and an affiliate of the Partnership ("AEPC"), as the lender, which was to be used (i) by the Partnership to provide funds to CVR Nitrogen to make a change of control offer and, if applicable, a "clean-up" redemption in accordance with the indenture governing the 2021 Notes or (ii) by the Partnership or CVR Nitrogen to make a tender offer for the 2021 Notes and, in each case, pay fees and expenses related thereto. The AEPC Facility had a term of two years and an interest rate of 12% per annum. In connection with the repayment of the substantial majority of the 2021 Notes, the AEPC Facility was terminated.

Commitment Letter

Simultaneously with the execution of the Merger Agreement, CVR Partners entered into a commitment letter (the "Commitment Letter") with CRLLC, pursuant to which CRLLC had committed to, on the terms and subject to the conditions set forth in the Commitment Letter, make available to CVR Partners term loan financing of up to $150.0 million, which amounts would have been available solely to fund the repayment of all of the loans outstanding under the Wells Fargo Credit Agreement, the cash consideration and expenses associated with the East Dubuque Merger. The term loan facility, if drawn, would have had a one year term at an interest rate of three-month LIBOR plus 3.0% per annum. In connection with the CRLLC Facility discussed below, the Commitment Letter was terminated.

CRLLC Guaranty

On February 9, 2016, CRLLC and the Partnership entered into a guaranty (the "CRLLC Guaranty"), pursuant to which CRLLC agreed to guaranty the indebtedness outstanding under the Credit Agreement. If the Credit Agreement became due prior to a refinancing by the Partnership, CRLLC would have been required to pay the indebtedness pursuant to the guaranty. The Partnership's obligation to repay CRLLC for the indebtedness would have been pursuant to a promissory note (the "Note"). The terms of the Note would have been mutually agreed upon by the parties, provided, the term would be the lesser of two years or such time that the Partnership obtains third-party financing ("New Debt") of at least $125.0 million on terms acceptable to the Partnership with a term of greater than one year from the inception of the New Debt. In connection with the CRLLC Facility discussed below, the CRLLC Guaranty was terminated.

30

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2016
(unaudited)


CRLLC Facility

On April 1, 2016, in connection with the closing of the East Dubuque Merger, the Partnership entered into the CRLLC Facility. See Note 11 ("Debt") for further discussion.

Parent Affiliate Units

Subsequent to the East Dubuque Merger, the Partnership purchased 400,000 CVR Nitrogen common units from CVR Energy during the second quarter of 2016 for $5.0 million. See Note 4 ("East Dubuque Merger") for further discussion.

Railcar Lease Agreements

In the second quarter of 2016, the Partnership entered into agreements to lease a total of 115 UAN railcars from American Railcar Leasing, LLC, a company controlled by Mr. Carl C. Icahn, CVR Energy's majority stockholder. The lease agreements have a term of approximately seven years. The Partnership anticipates physical receipt of these leased railcars and associated lease payment obligations to begin in the second half of 2016.

(15) 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).

There were no assets or liabilities measured at fair value on a recurring basis as of June 30, 2016. The following table sets forth the assets and liabilities measured at fair value on a recurring basis, by input level, as of December 31, 2015.

 
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
 
 
 
 
 
 
(in thousands)
Financial Statement Caption and Description
 
 
 
 
 
 
 
Other current liabilities (interest rate swaps)
$

 
$
119

 
$

 
$
119


The Partnership had interest rate swaps that were measured at fair value on a recurring basis using Level 2 inputs. The swaps expired in February 2016. See further discussion in Note 12 ("Interest Rate Swap Agreements"). The fair values of these interest rate swap instruments were based on discounted cash flow models that incorporated 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 fair value of the debt issuances is disclosed in Note 11 ("Debt")

31

CVR PARTNERS, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2016
(unaudited)



(16) Subsequent Events

Distribution

On July 27, 2016, the Board of Directors of the general partner of the Partnership declared a cash distribution for the second quarter of 2016 in the amount of $0.17 per common unit, or approximately $19.3 million in aggregate. The cash distribution will be paid on August 15, 2016 to the Partnership's unitholders of record at the close of business on August 8, 2016.


32


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 2015 Form 10-K. Results of operations and cash flows for the three and six months ended June 30, 2016 and 2015 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 2015 Form 10-K, the risk factors disclosed under "Risk Factors" in the Partnership's Quarterly Report on Form 10-Q for the three months ended March 31, 2016, filed with the SEC on April 29, 2016, as well as the risk factors disclosed under "Risk Factors" in Part II, Item 1.A. of this Report. 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;
 
our reliance on the natural gas and electricity that we purchase from third parties;

the supply and price levels of essential raw materials;

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


33


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

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 partial dependence on customer and distributor transportation of purchased goods;

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;

the risk of labor disputes and adverse employee relations;

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;

instability and volatility in the capital and credit markets;

risks, contingencies and uncertainties associated with the East Dubuque Merger;

our ability to complete the successful integration of the East Dubuque Facility into our business and to realize the synergies from the East Dubuque Merger; and

CVR Energy and its affiliates may compete with us.


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.


34


Partnership Overview

CVR Partners, LP ("CVR Partners," the "Partnership," "we," "us" or "our") is a Delaware limited partnership formed by CVR Energy to own, operate and grow our nitrogen fertilizer business. 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. Our product sales are heavily weighted toward UAN and all of our products are sold on a wholesale basis.

We produce our nitrogen fertilizer products at two manufacturing facilities, which are located in Coffeyville, Kansas and East Dubuque, Illinois. We acquired the East Dubuque, Illinois facility in April 2016 through our acquisition of CVR Nitrogen. For a discussion of the East Dubuque Merger, refer to "Recent Developments" below in Part I, Item 2 of this Report and Note 4 ("East Dubuque Merger") of Part I, Item 1 of this Report. The consolidated financial statements and key operating metrics for the three and six months ended June 30, 2016 include the results of the East Dubuque Facility beginning on April 1, 2016, the date of the closing of the acquisition.

Strategically located adjacent to CVR Refining’s refinery in Coffeyville, Kansas, our Coffeyville Facility is the only operation in North America that utilizes a petroleum coke, or pet coke, gasification process to produce nitrogen fertilizer. Our Coffeyville Facility includes a 1,300 ton-per-day ammonia unit, a 3,000 ton-per-day UAN unit, and a gasifier complex having a capacity of 89 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. We upgrade substantially all of the ammonia we produce at our Coffeyville Facility to higher margin UAN, which has historically commanded a premium price over ammonia. Approximately 96% of our produced ammonia tons and the majority of the purchased ammonia tons were upgraded into UAN in 2015. For the three months ended June 30, 2016 and 2015, approximately 90% and 96%, respectively, of our produced ammonia tons and the majority of purchased ammonia tons were upgraded into UAN. For the six months ended June 30, 2016 and 2015, approximately 89% and 97%, respectively, of our produced ammonia tons and the majority of purchased ammonia tons were upgraded into UAN.

Our recently acquired East Dubuque Facility includes a 1,025 ton-per-day ammonia unit and a 1,100 ton-per-day UAN unit. The facility is located on a 210-acre, 140-foot bluff above the Mississippi River, with access to the river for loading certain products. The East Dubuque Facility has the flexibility to significantly vary its product mix. This enables us to upgrade our ammonia production into varying amounts of UAN, nitric acid and liquid and granulated urea each season, depending on market demand, pricing and storage availability. Product sales are heavily weighted toward sales of ammonia and UAN. For the three months ended June 30, 2016, approximately 49% of our produced ammonia tons were upgraded to other products.

CVR Energy, which indirectly owns our general partner and approximately 34% of our outstanding common units, also indirectly owns the general partner and approximately 66% of the outstanding common units of CVR Refining at June 30, 2016. 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 Coffeyville Facility's 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. Our Coffeyville Facility's pet coke gasification process results in a significantly higher percentage of fixed costs than a natural gas-based fertilizer plant. We currently purchase most of the pet coke for our Coffeyville Facility 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 Coffeyville Facility was produced and supplied by CVR Refining’s Coffeyville, Kansas crude oil refinery.

The East Dubuque Facility uses low-cost, North American natural gas to produce nitrogen fertilizer, primarily ammonia and UAN, We are able to purchase natural gas at competitive prices due to the plant’s connection to the Northern Natural Gas interstate pipeline system, which is within one mile of the facility, and the ANR Pipeline Company pipeline. Over the last five years, U.S. natural gas reserves have increased significantly due to, among other factors, advances in extracting shale gas, which have reduced and stabilized natural gas prices, significantly lowering our production costs.


35


Organizational Chart and Related Ownership
The following chart illustrates the organizational structure of the Partnership as of the date of this Report.

36


Recent Developments

On April 1, 2016, the Partnership completed the acquisition of CVR Nitrogen. Refer to Note 4 ("East Dubuque Merger") of Part I, Item 1 of this Report for further discussion of the East Dubuque Merger.

On June 10, 2016, the Partnership completed a private offering of $645.0 million aggregate principal amount of 9.250% Senior Secured Notes due 2023. Additionally, during the three months ended June 30, 2016, the Partnership repurchased approximately $315.8 million of the 2021 Notes pursuant to a Tender Offer and a Change of Control Offer. Refer to Note 11 ("Debt") of Part I, Item 1 of this Report for further discussion of the debt transactions.

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.

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.

We have the capacity to store approximately 160,000 tons of UAN and 80,000 tons of ammonia. Our storage tanks are located primarily at our two production facilities. Inventories are often allowed to accumulate to allow customers to take delivery to meet the seasonal demand.

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 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; therefore we are able to cost-effectively sell substantially all of our products in the higher margin agricultural market. Further, we believe a significant portion of our competitors’ revenues are derived from the lower margin industrial market.

Our products leave our Coffeyville Facility 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 Coffeyville Facility and keeping transportation costs low are keys to maintaining profitability.

The East Dubuque Facility is located in northwest Illinois, in the Mid Corn Belt. The East Dubuque primarily sells its product to customers located within 200 miles of the facility. In most instances, customers take delivery of nitrogen products at the plant and arrange and pay to transport them to their final destinations by truck. The East Dubuque Facility has direct access to a barge dock on the Mississippi River as well as a nearby rail spur serviced by the Canadian National Railway Company.

The high fixed cost of the Coffeyville Facility direct operating expense structure also directly affects our profitability. Our Coffeyville 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 of our Coffeyville Facility include a large portion of 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, 2016.

37



Our largest raw material expense used in the production of ammonia at our Coffeyville Facility is pet coke, which we purchase from CVR Refining and third parties. For the three months ended June 30, 2016 and 2015, we incurred approximately $1.6 million and $3.1 million, respectively, for the cost of pet coke, which equaled an average cost per ton of $12 and $25, respectively. For the six months ended June 30, 2016 and 2015, we incurred approximately $3.8 million and $6.7 million, respectively, for the cost of pet coke, which equaled an average cost per ton of $15 and $27, respectively.

Our largest raw material expense used in the production of ammonia at our East Dubuque Facility is natural gas, which we purchase from third parties. Our East Dubuque Facility's natural gas process results in a higher percentage of variable costs as compared to the Coffeyville Facility. For the three months ended June 30, 2016, we incurred approximately $2.5 million for feedstock natural gas, which equaled an average cost per MMBtu of $2.33.

Consistent, safe and reliable operations at our nitrogen fertilizer plants are critical to our financial performance and results of operations. Unplanned downtime 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 Coffeyville Facility has undergone a full facility turnaround every two to three years. Turnarounds at the Coffeyville Facility are expected to last 14-21 days. The Coffeyville Facility underwent a full facility turnaround in the third quarter of 2015, at a cost of approximately $7.0 million. The Partnership is planning to undergo the next scheduled full facility turnaround at the Coffeyville Facility in the second half of 2017.
Historically, the East Dubuque Facility has also undergone a full facility turnaround every two to three years. The East Dubuque Facility underwent a full facility turnaround in the second quarter of 2016, at a cost of $6.6 million. The Partnership is planning to undergo the next scheduled full facility turnaround at the East Dubuque Facility in 2018.
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 Coffeyville Facility; 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 for our Coffeyville Facility, 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; a lease agreement pursuant to which we lease office space and laboratory space; and certain financing agreements that we entered into in connection with the East Dubuque Merger. 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 14 ("Related Party Transactions") to Part I, Item 1 of this Report for additional discussion of the agreements.

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.

East Dubuque Merger

On April 1, 2016, the Partnership completed the East Dubuque Merger, whereby the Partnership acquired the East Dubuque Facility. The consolidated financial statements and key operating metrics for the three and six months ended June 30, 2016 include the results of the East Dubuque Facility beginning on April 1, 2016, the date of the closing of the acquisition.

During the three and six months ended June 30, 2016, the Partnership incurred $1.2 million and $2.5 million, respectively, of legal and other professional fees and other merger-related expenses, which were included in selling, general and administrative expenses (exclusive of depreciation and amortization).

See Note 4 ("East Dubuque Merger") for further discussion.

38



Major Scheduled Turnaround Activities

During the second quarter of 2016, the East Dubuque Facility completed a major scheduled turnaround and the ammonia and UAN units were down for approximately 28 days. Overall results were negatively impacted due to the lost production during the downtime that resulted in lost sales and certain reduced variable expenses included in cost of product sold (exclusive of depreciation and amortization) and direct operating expenses (exclusive of depreciation and amortization). Costs of approximately $6.6 million associated with the 2016 turnaround are included in direct operating expenses (exclusive of depreciation and amortization) in the Consolidated Statements of Operations for the three and six months ended June 30, 2016.

Indebtedness

On April 1, 2016, as a result of the East Dubuque Merger, the Partnership acquired CVR Nitrogen, including its debt. During the second quarter of 2016, the Partnership used $300.0 million of funds from the CRLLC Facility to finance the payoff of CVR Partners' $125.0 million term loan, payoff CVR Nitrogen's credit facility outstanding balance of $49.1 million, and to fund the cash merger consideration and certain merger-related expenses. In June 2016, the Partnership issued $645.0 million aggregate principal of 9.250% Senior Notes due 2023 to refinance the substantial majority of its existing debt, including the CRLLC Facility. As a result of the financing transactions, the Partnership wrote off approximately $5.1 million, including the write-off of the Tender Offer premium of $4.7 million and the unamortized portion of the purchase accounting adjustment of $0.4 million and is reflected on the Condensed Consolidated Statements of Operations as loss on extinguishment of debt for the three and six months ended June 30, 2016. Also as a result of the financing transactions, the Partnership's interest expense increased for the three and six months ended June 30, 2016 as compared to the prior year.

A full discussion regarding the Partnership's indebtedness can be found in Note 11 ("Debt") of Part I, Item 1 of this Report.

Results of Operations

The period to period comparisons of our results of operations have been prepared using the historical periods included in our condensed 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 subsidiaries for the three and six months ended June 30, 2016 and 2015. The results of operations for our East Dubuque Facility are included for the post acquisition period of April 1, 2016 through June 30, 2016. 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, 2015, is unaudited.


39


 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016

2015
 
2016

2015
 
 
 
 
 
 
 
 
 
(in millions)
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
Net sales
$
119.8

 
$
80.8

 
$
192.9

 
$
173.9

Cost of product sold – Affiliates (1)
0.5

 
2.2

 
1.4

 
4.0

Cost of product sold – Third parties (1)
35.5

 
13.2

 
51.0

 
37.2

 
36.0

 
15.4

 
52.4

 
41.2

Direct operating expenses – Affiliates (1) (2) (3)
1.2

 
1.2

 
2.1

 
2.2

Direct operating expenses – Third parties (1) (3)
46.4

 
23.5

 
69.2

 
47.0

Major scheduled turnaround expenses
6.6

 
0.4

 
6.6

 
0.4

 
54.2

 
25.1

 
77.9

 
49.6

Selling, general and administrative expenses – Affiliates (1) (2) (4)
3.9

 
3.4

 
7.4

 
6.6

Selling, general and administrative expenses – Third parties (1) (4)
4.4

 
1.2

 
7.3

 
2.5

 
8.3

 
4.6

 
14.7

 
9.1

Depreciation and amortization
17.6

 
7.0

 
24.5

 
13.8

Operating income
3.7

 
28.7

 
23.4

 
60.2

Interest expense and other financing costs
(15.5
)
 
(1.7)

 
(17.2
)
 
(3.4)

Interest income

 

 

 

Loss on extinguishment of debt
(5.1
)
 

 
(5.1
)
 

Other income, net

 

 

 

Total other income (expense)
(20.6
)
 
(1.7
)
 
(22.3
)
 
(3.4
)
Income (loss) before income tax expense
(16.9
)
 
27.0

 
1.1

 
56.8

Income tax expense
0.1

 

 
0.1

 

Net income (loss)
$
(17.0
)
 
$
27.0

 
$
1.0

 
$
56.8

EBITDA (5)
$
16.2

 
$
35.7

 
$
42.8

 
$
74.0

Adjusted EBITDA (5)
$
29.1

 
$
36.1

 
$
57.0

 
$
74.5

Available cash for distribution (6)
$
19.7

 
$
28.4

 
$
50.4

 
$
61.0

 
 
 
 
 
 
 
 
Reconciliation to net sales:
 
 
 
 
 
 
 
Sales net at gate
$
103.3

 
$
70.5

 
$
168.1

 
$
149.7

Freight in revenue
8.7

 
7.8

 
15.6

 
14.8

Hydrogen revenue
0.5

 
2.0

 
1.6

 
8.5

Other, including the impact of purchase accounting
7.3

 
0.5

 
7.6

 
0.9

Total net sales
$
119.8

 
$
80.8

 
$
192.9

 
$
173.9


 
As of 
 June 30, 
 2016
 
As of 
 December 31, 
 2015
 
 
 
(audited)
 
(in millions)
Balance Sheet Data:
 
 
 
Cash and cash equivalents
$
76.3

 
$
50.0

Working capital
97.8

 
72.7

Total assets
1,352.6

 
536.3

Total debt, net of current portion
625.3

 
124.8

Total partners’ capital
672.1

 
385.6



40


 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
(in millions)
Cash Flow Data:
 
 
 
 
 
 
 
Net cash flow provided by (used in):
 
 
 
 
 
 
 
Operating activities
$
5.5

 
$
30.6