The owners of the Coffeyville refinery and nitrogen business are opting to put the fertilizer business in a limited partnership, according to recent filings with the Securities and Exchange Commission. The owners announced last September (GM Oct. 2, p. 1) a plan to sell $300 million worth of stock in an IPO called CVR Energy Inc., under which the fertilizer and refinery would be subsidiaries. Now, according to recent filings, prior to offering shares, a new limited partnership, Coffeyville Resources Partners LP (LP), would be formed. The fertilizer business would be transferred to the LP.
The LP will have two general partners. A managing general partner, Coffeyville Nitrogen GP LLC (Fertilizer GP), will be sold to an entity owned by CVR controlling stockholders and senior management at a fair market value. The Fertilizer GP will be owned by an entity owned by Goldman Sachs Funds, the Kelso Funds, and senior management. The second general partner will be a wholly-owned subsidiary of CVR.
The company says it has noticed that entities structured as master limited partnerships, or MLPs, have over recent history demonstrated significantly greater relative market valuation levels compared to corporations in the refining and marketing sector. One of the reasons for these higher valuations, says the company, is the treatment these entities receive as partnerships for federal income tax purposes.
The LP will be required to make quarterly distributions of 100 percent of its available cash.
The LP will also enter into a petroleum coke supply agreement with CVR tied to the market price for UAN. At the initial acquisition of the company, the cost of product sold in the nitrogen business was based on a coke price of $15.00/st. The agreement will be for 20 years, renewable for five-year intervals thereafter. It will be for the lesser of either 100 percent of the refinery’s petcoke production or 500,000 st.
The fertilizer business will also have an $11.5 million charge under a management services agreement, according to current estimates.
Management says that the feedstock and various shared services agreements will not have a material impact on the fertilizer business. However, a requirement to supply hydrogen to the refinery could conceivably reduce fertilizer production, though the agreements would require the refinery to compensate the fertilizer business for the value of production lost due to the hydrogen supply requirement.
In other news, Coffeyville 2006 nitrogen operating income was off 48.2 percent, or $34.2 million, to $36.8 million versus $71.0 million in 2005.
Nitrogen sales were off 6 percent, or $10.5 million, to $162.5 million from 2005’s $173.0 million. Of the $10.5 million, $1.6 million was due to decreased selling prices, while $8.9 million was a reduction in sales volumes. Ammonia sales were off 17 percent, or 24,000 st, while UAN sales unit volumes were off .2 percent, or 988 st. The ammonia decrease was the result of decreased production volumes during the year due to a turnaround in July 2006 and ammonia downtime due to a cracked converter, as well as the transfer of hydrogen to the refinery to facilitate sulfur recovery in the ultra low sulfur diesel production unit. The hydrogen transfer to the refinery is scheduled to be replaced with hydrogen produced by a new continuous catalytic reformer scheduled to be completed in the fall of 2007.
Overall, Coffeyville said ammonia prices were up 4 percent for the year, while UAN prices were off 6 percent.
Ammonia production in 2006 was 369,300 st, versus the year-ago 413,200 st. UAN production in 2006 was 633,100 st, versus the year-ago 663,300 st.
During 2006, Brandt Consolidated Inc. and MFA accounted for 22.2 percent and 13.1 percent of Coffeyville’s ammonia sales. Agriliance and ConAgra Fertilizer accounted for 6.3 percent and 8.4 percent of UAN sales. Coffeyville says approximately 80 percent of its fertilizer goes to agriculture, with the remaining 20 percent industrial.
Coffeyville-wide, the company reported 2006 net income of $191.6 million on sales of $3.04 billion, versus a loss in 2005 of $66.8 million on sales of $2.43 billion. Operating income for 2006 was $281.6 million, versus $270.8 million for 2005. As can be seen by these figures, the refinery brings in the bulk of the revenues for Coffeyville, with refinery 2006 revenues at $2.9 billion versus fertilizer’s $162.5 million.
Still in the planning for the fertilizer business is a $40 million expansion that would increase UAN production by 50 percent to 1 million st.