CVR PARTNERS, LP 10-K

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm The Board of Directors of CVR GP, LLC The Unitholders of CVR Partners, LP The General Partner of CVR Partners, LP: Opinion on the financial statements We have audited the accompanying consolidated balance sheets of CVR Partners, LP (a Delaware limited partnership) and subsidiaries (the “Partnership”) as of December 31, 2020 and 2019, the related consolidated statements of operations, partners’ capital, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Partnership as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Partnership’s internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 23, 2021 expressed an unqualified opinion. Basis for opinion These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on the Partnership’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical audit matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Goodwill Impairment Assessment As described in Note 2 to the consolidated financial statements, annually or as facts or circumstances may dictate, management performs a valuation of the Coffeyville Facility reporting unit to determine if a goodwill impairment exists. During the second quarter of 2020 following the completion of the spring planting season and observation of certain market and other conditions described in Note 2, the Partnership concluded a triggering event occurred and performed an interim quantitative impairment assessment. The identification of a triggering event and the determination of the fair value of the reporting unit required management to make significant estimates and develop assumptions related to cash flow forecasts using estimates of future nitrogen fertilizer product pricing, volumes to be sold, costs to be incurred for key process inputs and other operating expenses December 31, 2020 | 46 Table of Contents as well as estimating appropriate discount rates and growth rates for future periods. Changes in these assumptions could have had a significant impact on the identification of a triggering event as well as the reporting unit’s estimated fair value. As a result of the quantitative impairment assessment, a full goodwill impairment of $41.0 million was recorded during the year ended December 31, 2020. We identified the goodwill impairment assessment of the Coffeyville Facility reporting unit as a critical audit matter. The principal consideration for our determination that the goodwill impairment assessment is a critical audit matter was the degree of complexity and subjectivity inherent in determining management’s estimates. Our audit procedures related to the Coffeyville Facility reporting unit’s goodwill impairment assessment included the following, among others: • We tested the design and operating effectiveness of management’s processes and controls over the identification of a triggering event and the fair value assessment of the Coffeyville reporting unit. • We evaluated the reasonableness of a triggering event by considering the current market conditions following the completion of the spring planting season as well as the economic uncertainty surrounding the COVID-19 pandemic. • We evaluated the reasonableness of future nitrogen fertilizer pricing assumptions by comparing the prices used by management to current industry and economic trends considering the impacts of the COVID-19 pandemic as well as comparing those prices to the historical performance of the Coffeyville reporting unit, performed sensitivity analyses to evaluate the change in the fair value estimates that would result from changes in those price assumptions, and recalculated management’s estimates. • We compared forecasted sales volumes and expenses to historical operating results. • We utilized valuation professionals with specialized skills and knowledge to assist in evaluating the Coffeyville Facility’s discounted cash flow model and guideline public company methods and certain significant assumptions, including the discount rate, terminal growth rate, and cost of capital. • We evaluated whether the assumptions used were consistent with evidence obtained in other areas of the audit. /s/ GRANT THORNTON LLP We have served as the Partnership’s auditor since 2013. Houston, Texas February 23, 2021 December 31, 2020 | 47 Table of Contents Report of Independent Registered Public Accounting Firm The Board of Directors of CVR GP, LLC The Unitholders of CVR Partners, LP The General Partner of CVR Partners, LP: Opinion on internal control over financial reporting We have audited the internal control over financial reporting of CVR Partners, LP (a Delaware limited partnership) and subsidiaries (the “Partnership”) as of December 31, 2020, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Partnership as of and for the year ended December 31, 2020, and our report dated February 23, 2021 expressed an unqualified opinion on those financial statements. Basis for opinion The Partnership’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting . Our responsibility is to express an opinion on the Partnership’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and limitations of internal control over financial reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ GRANT THORNTON LLP Houston, Texas February 23, 2021 December 31, 2020 | 48 Table of Contents CVR Partners, LP and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, (in thousands) 2020 2019 ASSETS Current assets: Cash and cash equivalents $ 30,559 $ 36,994 Accounts receivable 36,896 34,264 Inventories 42,349 48,296 Prepaid expenses and other current assets 8,410 5,406 Total current assets 118,214 124,960 Property, plant, and equipment, net 897,847 951,959 Goodwill — 40,969 Other long-term assets 16,819 20,067 Total assets $ 1,032,880 $ 1,137,955 LIABILITIES AND PARTNERS’ CAPITAL Current liabilities: Current portion of long-term debt $ 2,240 $ — Accounts payable 19,544 21,069 Accounts payable to affiliates 5,217 2,578 Deferred revenue 30,631 27,841 Other current liabilities 18,709 24,043 Total current liabilities 76,341 75,531 Long-term liabilities: Long-term debt, net of current portion 633,942 632,406 Other long-term liabilities 8,356 10,474 Total long-term liabilities 642,298 642,880 Commitments and contingencies (See Note 8) Partners’ capital: Common unitholders, 10,705,710 and 11,328,297 units issued and outstanding as of December 31, 2020 and 2019, respectively 314,240 419,543 General partner interest 1 1 Total partners’ capital 314,241 419,544 Total liabilities and partners’ capital $ 1,032,880 $ 1,137,955 The accompanying notes are an integral part of these consolidated financial statements. December 31, 2020 | 49 Table of Contents CVR Partners, LP and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, (in thousands, except per unit data) 2020 2019 2018 Net sales $ 349,953 $ 404,177 $ 351,082 Operating costs and expenses: Cost of materials and other 91,117 94,103 88,461 Direct operating expenses (exclusive of depreciation and amortization) 157,916 173,629 159,319 Depreciation and amortization 76,077 79,839 71,575 Cost of sales 325,110 347,571 319,355 Selling, general and administrative expenses 18,174 25,829 25,023 Loss on asset disposals 582 3,397 390 Goodwill impairment 40,969 — — Operating (loss) income ( 34,882 ) 27,380 6,314 Other (expense) income: Interest expense, net ( 63,428 ) ( 62,636 ) ( 62,588 ) Other income, net 159 269 6,201 Loss before income taxes ( 98,151 ) ( 34,987 ) ( 50,073 ) Income tax expense (benefit) 30 ( 18 ) ( 46 ) Net loss $ ( 98,181 ) $ ( 34,969 ) $ ( 50,027 ) Net loss per common unit - basic and diluted $ ( 8.77 ) $ ( 3.09 ) $ ( 4.42 ) Distributions declared per common unit — 4.00 — Weighted-average common units outstanding: Basic and Diluted 11,195 11,328 11,328 The accompanying notes are an integral part of these consolidated financial statements. December 31, 2020 | 50 Table of Contents CVR Partners, LP and Subsidiaries CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL (in thousands, except unit data) Common Units General Partner Interest Total Partners ’ Capital Issued Amount Balance at December 31, 2017 11,328,297 $ 549,852 $ 1 $ 549,853 Net loss — ( 50,027 ) — ( 50,027 ) Balance at December 31, 2018 11,328,297 499,825 1 499,826 Cash distributions to common unitholders – Affiliates — ( 15,568 ) — ( 15,568 ) Cash distributions to common unitholders – Non-affiliates — ( 29,745 ) — ( 29,745 ) Net loss — ( 34,969 ) — ( 34,969 ) Balance at December 31, 2019 11,328,297 419,543 1 419,544 Net loss — ( 98,181 ) — ( 98,181 ) Repurchase of common units ( 623,177 ) ( 7,076 ) — ( 7,076 ) Fractional unit impact of reverse unit split 590 — — — Other — ( 46 ) — ( 46 ) Balance at December 31, 2020 10,705,710 $ 314,240 $ 1 $ 314,241 The accompanying notes are an integral part of these consolidated financial statements. December 31, 2020 | 51 Table of Contents CVR Partners, LP and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, (in thousands) 2020 2019 2018 Cash flows from operating activities: Net loss $ ( 98,181 ) $ ( 34,969 ) $ ( 50,027 ) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 76,077 79,839 71,575 Amortization of deferred financing costs and original issue discount 4,049 3,666 3,333 Goodwill impairment 40,969 — — Loss on asset disposals 582 3,397 390 Share-based compensation 1,035 3,445 3,017 Other adjustments 964 ( 5 ) 1,690 Changes in assets and liabilities: Accounts receivable 2,892 936 ( 6,698 ) Inventories 538 9,914 ( 8,670 ) Prepaid expenses and other current assets ( 4,514 ) 1,582 ( 1,196 ) Accounts payable ( 1,635 ) ( 8,077 ) 5,215 Deferred revenue ( 1,612 ) ( 14,575 ) 10,828 Accrued expenses and other current liabilities ( 1,726 ) ( 6,542 ) 1,367 Other long-term assets and liabilities 302 546 1,410 Net cash provided by operating activities 19,740 39,157 32,234 Cash flows from investing activities: Capital expenditures ( 18,598 ) ( 18,656 ) ( 19,806 ) Proceeds from the sale of assets 48 127 175 Net cash used in investing activities ( 18,550 ) ( 18,529 ) ( 19,631 ) Cash flows from financing activities: Repurchase of common units ( 7,076 ) — — Cash distributions to common unitholders – Affiliates — ( 15,568 ) — Cash distribution to common unitholders – Non-affiliates — ( 29,745 ) — Payment of deferred financing costs ( 448 ) — — Other financing activities ( 101 ) ( 97 ) — Net cash used in financing activities ( 7,625 ) ( 45,410 ) — Net (decrease) increase in cash and cash equivalents ( 6,435 ) ( 24,782 ) 12,603 Cash and cash equivalents, beginning of period 36,994 61,776 49,173 Cash and cash equivalents, end of period $ 30,559 $ 36,994 $ 61,776 The accompanying notes are an integral part of these consolidated financial statements. December 31, 2020 | 52 Table of Contents CVR Partners, LP and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Organization and Nature of Business CVR Partners, LP (“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. 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”). Both facilities manufacture ammonia and are able to further upgrade to other nitrogen fertilizer products, principally urea ammonium nitrate (“UAN”). Nitrogen fertilizer is used by farmers to improve the yield and quality of their crops, primarily corn and wheat. The Partnership’s products are sold on a wholesale basis in the United States of America. As used in these financial statements, references to CVR Partners, the Partnership, “we”, “us”, and “our” may refer to consolidated subsidiaries of CVR Partners or one or both of the facilities, as the context may require. NYSE Listing Requirements and Reverse Unit Split The Partnership’s common units are listed on the New York Stock Exchange (the “NYSE”) under the symbol “UAN.” On April 20, 2020, the average closing price of the Partnership’s common units over a 30 consecutive trading-day period fell below $1.00 per common unit, resulting in noncompliance with the continued listing standards in Section 802.01C of the NYSE Listed Company Manual. The Partnership received written notification of this noncompliance from the NYSE on April 22, 2020, and had until January 1, 2021 to regain compliance or be subject to the NYSE’s suspension and delisting procedures. On November 2, 2020, the Partnership announced that the board of directors of its general partner (the “Board”) had approved a 1-for-10 reverse split of the Partnership’s common units that was completed on November 23, 2020, pursuant to which each ten common units of the Partnership were converted into one common unit of the Partnership (the “Reverse Unit Split”). In accordance with the Partnership’s Agreement of Limited Partnership, as amended (the “Partnership Agreement”), following the Reverse Unit Split, any fractional units of record holders were rounded up or down, as applicable, to the nearest whole common unit, with any fraction equal to or above 0.5 common units rounding up to the next higher common unit. Following the Reverse Unit Split, the number of common units outstanding decreased from approximately 111 million common units to approximately 11 million common units, with proportionate adjustments to the common units under the Partnership’s long-term incentive plan and outstanding awards thereunder. The Partnership’s common units began trading on a split-adjusted basis when markets opened on November 24, 2020, under the symbol “UAN” and a new CUSIP number. As of November 30, 2020, the Reverse Unit Split enabled the Partnership to regain compliance with NYSE listing requirements ahead of the January 1, 2021 deadline. All references to common units and per unit amounts in the consolidated financial statements and notes related thereto have been retrospectively adjusted to reflect the effect of the Reverse Unit Split for all periods presented. Interest Holders As of December 31, 2020, public common unit holders held approximately 64 % of the Partnership’s outstanding limited partner interests; CVR Services, LLC (“CVR Services”) (formerly Coffeyville Resources, LLC), a wholly-owned subsidiary of CVR Energy, held approximately 36 % of the Partnership’s outstanding limited partner interests; and CVR GP, LLC (“CVR GP” or the “general partner”), a wholly owned subsidiary of CVR Energy, held 100 % of the Partnership’s general partner interest. As of December 31, 2020, Icahn Enterprises L.P. (“IEP”) and its affiliates owned approximately 71 % of the common stock of CVR Energy. Unit Repurchase Program On May 6, 2020, the Board, on behalf of the Partnership, authorized a unit repurchase program (the “Unit Repurchase Program”). The Unit Repurchase Program enables the Partnership to repurchase up to $ 10 million of the Partnership’s common units. Repurchases under the Unit Repurchase Program may be made from time-to-time through open market transactions, block trades, privately negotiated transactions, or otherwise in accordance with applicable securities laws. The timing, price, and amount of repurchases (if any) will be made at the discretion of management of our general partner and are subject to market conditions, as well as corporate, regulatory, and other considerations. During the year ended December 31, 2020, adjusted to reflect the impact of the Reverse Unit Split, the Partnership repurchased 623,177 common units on the open market December 31, 2020 | 53 Table of Contents CVR Partners, LP and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) in accordance with a repurchase agreement under Rules 10b5-1 and 10b-18 of the Exchange Act at a cost of $ 7.1 million, inclusive of transaction costs, or an average price of $ 11.35 per common unit. At December 31, 2020, the Partnership had $ 2.9 million in authority remaining under the Unit Repurchase Program. On February 22, 2021, the Board authorized an additional $ 10 million for the Unit Repurchase Program. This Unit Repurchase Program does not obligate the Partnership to acquire any common units and may be cancelled or terminated by the Board at any time. Management and Operations The Partnership, including CVR GP, is led by the Board, and its committees and managed by the general partner’s executive officers, CVR Services (as sole member of the general partner), and certain officers of CVR Energy and its subsidiaries, pursuant to the Partnership Agreement, as well as a number of agreements between the Partnership, CVR GP, CVR Energy, and certain of their respective subsidiaries, including a service agreement. See Note 9 (“Related Party Transactions”) for further discussion. Common unitholders have limited voting rights on matters affecting the Partnership and have no right to elect the general partner’s directors or officers, whether on an annual or continuing basis or otherwise. Subsequent Events The Partnership evaluated subsequent events, if any, that would require an adjustment to the Partnership’s consolidated financial statements or require disclosure in the notes to the consolidated financial statements through the date of issuance of these consolidated financial statements. Where applicable, the notes to these consolidated financial statements have been updated to discuss all significant subsequent events which have occurred. (2) Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements, prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”), include the accounts of CVR Partners and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. Reclassifications Certain reclassifications have been made within the consolidated financial statements for the years ended December 31, 2019 and 2018 to conform with current presentation. Catalyst inventory with a value of $ 5.6 million as of December 31, 2019 was reclassified in the first quarter of 2020 to Other long-term assets to conform to current presentation. Use of Estimates The consolidated financial statements are prepared in conformity with GAAP, which requires management to make estimates and assumptions that affect the reported amounts and disclosure of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are reviewed on an ongoing basis, based on currently available information. Changes in facts and circumstances may result in revised estimates and actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include cash on hand and on deposit, investments in highly liquid money market accounts, and debt instruments with original maturities of three months or less. Accounts Receivable, net Accounts receivable, net primarily consist of customer accounts receivable recorded at the invoiced amounts and generally do not bear interest. Also included within Accounts Receivable are unbilled fixed price contracts which is discussed further within Note 6 (“Revenue”). December 31, 2020 | 54 Table of Contents CVR Partners, LP and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Allowances for doubtful accounts are generally recorded when it becomes probable the receivable will not be collected and is booked to bad debt expense. The largest concentration of credit for any one customer was approximately 20 % and 18 % of the net accounts receivable balance at December 31, 2020 and 2019, respectively. Bad debt expense was $ 0.1 million and $ 0.1 million for the years ended December 31, 2020 and 2019, respectively. A recovery was recognized during the year ended 2018 of $ 1.1 million related to bad debt expense previously written off. Inventories Inventories consist of fertilizer products which are valued at the lower of FIFO cost, or net realizable value. Inventories also include raw materials (primarily gauze, natural gas, and pet coke) and parts and supplies that are valued at the lower of moving-average cost, which approximates FIFO, or net realizable value. The cost of inventories includes inbound freight costs. Inventories consisted of the following: December 31, (in thousands) 2020 2019 Finished goods $ 9,815 $ 17,612 Raw materials 152 243 Parts, supplies and other 32,382 30,441 Total Inventories $ 42,349 $ 48,296 At December 31, 2020 and 2019, inventories included depreciation of approximately $ 2.0 million and $ 4.5 million, respectively. Property, Plant and Equipment, net Additions to property, plant and equipment, including capitalized interest and certain costs allocable to construction and property purchases, are recorded at cost. Expenditures for improvements that increase economic benefit or returns and/or extend useful life are capitalized. Depreciation is computed using the straight-line method over the estimated useful lives of the various classes of depreciable assets. The lives used in computing depreciation for significant asset classes are as follows: Asset Range of Useful Lives, in Years Land and improvements 10 to 30 Buildings and improvements 3 to 30 Automotive equipment 5 to 30 Machinery and equipment 2 to 30 Other 3 to 10 Property, plant and equipment, net consisted of the following: December 31, (in thousands) 2020 2019 Machinery and equipment $ 1,388,735 $ 1,378,651 Buildings and improvements 17,598 17,221 Automotive equipment 16,608 16,691 Land and improvements 14,132 14,075 Construction in progress 12,098 5,198 Other 1,721 1,752 1,450,892 1,433,588 Less: Accumulated depreciation 553,045 481,629 Total Property, plant and equipment, net $ 897,847 $ 951,959 December 31, 2020 | 55 Table of Contents CVR Partners, LP and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Leasehold improvements and assets held under finance leases are depreciated or amortized on the straight-line method over the shorter of the contractual lease term or the estimated useful life of the asset. Expenditures for routine maintenance and repair costs are expensed when incurred. Such expenses are reported in Direct operating expenses (exclusive of depreciation and amortization) in the Partnership’s Consolidated Statements of Operations. As of December 31, 2020, the Partnership had not identified the existence of an impairment indicator for our long-lived asset groups as outlined under Accounting Standards Codification (“ASC”) Topic 360, Property, Plant, and Equipment . Leases At inception, the Partnership determines whether an arrangement is a lease and the appropriate lease classification. Operating leases are included as operating lease right-of-use (“ROU”) assets within Other long-term assets and lease liabilities within Other current liabilities and Other long-term liabilities on our Consolidated Balance Sheets. Finance leases are included as ROU finance leases within Property, plant, and equipment, net, and finance lease liabilities within Other current liabilities and Long-term debt, net of current portion on our Consolidated Balance Sheets. Leases with an initial expected term of 12 months or less are considered short-term and are not recorded on our Consolidated Balance Sheets. The Partnership recognizes lease expense for these leases on a straight-line basis over the expected lease term. ROU assets represent the Partnership’s right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the commencement date based on the present value of minimum lease payments over the lease term. The lease term is modified to reflect options to extend or terminate the lease when it is reasonably certain we will exercise such option. The depreciable life of assets and leasehold improvements is limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise, in which case the depreciation policy in the “Property, Plant and Equipment, net” section above is applicable. The periodic lease payments are treated as payments of the lease obligation and interest is recorded as interest expense. Impairment of Long-Lived Assets and Goodwill Long-lived assets used in operations are assessed for impairment whenever changes in facts and circumstances indicate a possible significant deterioration in future expected cash flows. If the sum of the undiscounted expected future cash flows of an asset group is less than the carrying value, including applicable liabilities, the carrying value is written down to its estimated fair value. Individual assets are grouped for impairment purposes based on a judgmental assessment of the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other assets (for example, at a fertilizer facility level). The Partnership tests goodwill for impairment annually impairment annually on November 1 of each year, or more frequently if events or changes in circumstances indicate the asset might be impaired. One of the Partnership’s reporting units, the Coffeyville Facility, had a goodwill balance of $ 41.0 million at December 31, 2019. During the second quarter of 2020, following completion of the spring planting season, the market pricing for ammonia and UAN, which are the facility’s two primary products, experienced significant pricing declines driven by updated market expectations around supply and demand fundamentals which were expected to continue into the second half of 2020. Additionally, significant uncertainty remained as to the nature and extent of impacts to be seen on the overall demand for corn and soybean given reduced ethanol production and broader economic conditions which had negatively impacted demand. Therefore, in connection with the preparation of the financial statements for the three months ended June 30, 2020, given the pricing declines experienced in the second quarter of 2020, further muting of the Partnership’s near-term economic recovery assumptions, including revised forecasts for product pricing in 2020 and beyond, and market price performance of the Partnership’s common units, the Partnership concluded an impairment indicator was present and a triggering event under ASC Topic 350, Intangibles-Goodwill and Other , had occurred as of June 30, 2020 and an interim quantitative impairment assessment was performed. Significant assumptions inherent in the valuation methodologies for goodwill included, but are not limited to, prospective financial information, growth rates, discount rates, inflationary factors, and cost of capital. Based on the interim quantitative analysis, it was determined that the estimated fair value of the Coffeyville Facility reporting unit did not exceed its carrying value. As a result, the Partnership recorded a full non-cash impairment charge of $ 41.0 million during the three months ended June 30, 2020. There was no goodwill remaining as of December 31, 2020. December 31, 2020 | 56 Table of Contents CVR Partners, LP and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) The Partnership performed the annual impairment reviews of goodwill for 2019 and 2018 and concluded no impairments. For the period ended December 31, 2019, the Partnership performed a qualitative assessment and concluded there were no events or circumstances which would trigger the performance of a quantitative analysis after reviewing all factors impacting the Coffeyville Facility, including improved market conditions and financial results in 2019 as compared to the financial forecasts from those used in the fair value analysis at December 31, 2018 where the estimated fair value of the Coffeyville Facility reporting unit exceeded its carrying value by approximately 36 % based upon the results of the Partnership’s quantitative goodwill impairment test. Loss Contingencies In the ordinary course of business, CVR Partners may become party to lawsuits, administrative proceedings, and governmental investigations, including environmental, regulatory, and other matters. The outcome of these matters cannot always be predicted accurately, but the Partnership accrues liabilities for these matters if the Partnership has determined that it is probable a loss has been incurred and the loss can be reasonably estimated. As of December 31, 2020 and 2019, there are no matters or contingencies that require recognition or disclosure. The Partnership is subject to various stringent federal, state, and local environmental, health, and safety rules and regulations. Liabilities related to future remediation costs of past environmental contamination of properties are recognized when the related costs are considered probable and can be reasonably estimated. Estimates of these costs are based upon currently available facts, internal and third-party assessments of contamination, available remediation technology, site-specific costs, and currently enacted laws and regulations. In reporting environmental liabilities, no offset is made for potential recoveries. Loss contingency accruals, including those for environmental remediation, are subject to revision as further information develops or circumstances change and such accruals can take into account the legal liability of other parties. Management periodically reviews and, as appropriate, revises its environmental accruals. Environmental expenditures for capital assets are capitalized at the time of the expenditure when such costs provide future economic benefits. As of December 31, 2020 and 2019, no liabilities have been recognized for environmental remediation matters as no matters have been identified that are considered to be probable or estimable. Revenue Recognition The Partnership recognizes revenue based on consideration specified in contracts or agreements with customers when performance obligations are satisfied by transferring control over products or services to a customer. The adoption of ASC Topic 606, Revenue from Contracts with Customers , resulted in the recognition of deferred revenue and related receivables, on a gross basis, associated with contracts that guarantee a price and supply of nitrogen fertilizer products in quantities expected to be delivered in the normal course of business. Other accounting policies relevant to revenue include: • Revenue transactions that pass control at customers’ designated facilities; • Non-monetary product exchanges which are entered into in the normal course of business are included on a net cost basis in operating expenses on the Consolidated Statements of Operations; and • Pass-through finished goods delivery costs reimbursed by customers are reported in net sales, while an offsetting expense is included in cost of materials and other. Other considerations - Excise and other taxes collected from customers and remitted to governmental authorities are excluded from reported revenues. Cost Classifications Cost of materials and other consist primarily of freight and distribution expenses, feedstock expenses, purchased ammonia, and purchased hydrogen. Direct operating expenses (exclusive of depreciation and amortization) consist primarily of energy and other utility costs, direct costs of labor, property taxes, plant-related maintenance services, including turnaround, and environmental and safety compliance costs, as well as catalyst and chemical costs. Each of these financial statement line items are also impacted by changes in inventory balances. Direct operating expenses also include allocated share-based compensation from CVR Energy and its subsidiaries, as discussed in Note 7 (“Share-Based Compensation”). Selling, general and December 31, 2020 | 57 Table of Contents CVR Partners, LP and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) administrative expenses consist primarily of legal expenses, treasury, accounting, marketing, human resources, information technology, and maintaining the corporate and administrative offices in Texas and Kansas. Share-Based Compensation The Partnership accounts for share-based compensation in accordance with ASC Topic 718, Compensation — Stock Compensation (“ASC 718”). Currently, all of the Partnership’s share-based compensation awards are liability-classified and are measured at fair value at the end of each reporting period based on the applicable closing unit price. Compensation expense will fluctuate based on changes in the applicable unit price value and expense reversals resulting from employee terminations prior to award vesting. See Note 7 (“Share-Based Compensation”) for further discussion. Income Taxes CVR Partners accounts for income taxes utilizing the asset and liability approach. Under this method, deferred tax assets and liabilities are recognized for the anticipated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred amounts are measured using enacted tax rates expected to apply to taxable income in the year those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Allocation of Costs CVR Energy and its subsidiaries provide a variety of services to the Partnership, including employee benefits provided through CVR Energy’s benefit plans, administrative services provided by CVR Energy’s employees and management, insurance, and office space leased by CVR Energy. As such, the accompanying consolidated financial statements include costs that have been incurred by CVR Energy on behalf of the Partnership. These amounts incurred by CVR Energy are then billed or allocated to the Partnership and are classified on the Consolidated Statements of Operations as either Direct operating expenses (exclusive of depreciation and amortization) or as Selling, general and administrative expenses. See Note 9 (“Related Party Transactions”) for a detailed discussion of the billing procedures and the basis for calculating the charges for specific products and services. Recent Accounting Pronouncements - Adoption of Credit Losses Standard In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326). The ASU replaces the incurred loss model with a current expected credit loss model for more timely recognition of expected impairment losses for most financial assets and certain other instruments that are not measured at fair value through net income. Effective January 1, 2020, we adopted this ASU with no material impact on the Partnership’s consolidated financial position or results of operations. Recent Accounting Pronouncements - Adoption of Fair Value Measurement Standard In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). The ASU eliminates such disclosures as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. Certain disclosures are required to be applied on a retrospective basis and others on a prospective basis. Effective January 1, 2020, we adopted this ASU with no material impact on the Partnership’s disclosures. Recent Accounting Pronouncements - New Accounting Standards Issued But Not Yet Implemented In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740). The ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and modifies other areas of the topic to clarify the application of GAAP. Certain amendments within the standard are required to be applied on a retrospective basis and others on a prospective basis. This standard is effective for the Partnership beginning January 1, 2021, with early adoption permitted. The Partnership is evaluating the effect of adopting this new accounting guidance on its consolidated financial December 31, 2020 | 58 Table of Contents CVR Partners, LP and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) statements, but does not currently expect adoption will have a material impact on the Partnership’s consolidated financial position or results of operations. The Partnership does not intend to early adopt this ASU. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). This ASU was issued because, by the end of 2021, banks will no longer be required to report information that is used to determine London Interbank Offered Rate (“LIBOR”), which is used globally by all types of entities. As a result, LIBOR could be discontinued, as well as other interest rates used globally. ASU 2020-04 provides companies with optional expedients for contract modifications under Topics 310, 470, 842, and 815-15, excluded components of certain hedging relationships, fair value hedges, and cash flow hedges, as well as certain exceptions, which are intended to help ease the potential accounting burden associated with transitioning away from these reference rates. Companies can apply the ASU immediately. However, the guidance will only be available for a limited time (generally through December 31, 2022). The Partnership is currently evaluating the impact that adopting this new accounting standard will have on its consolidated financial statements and related disclosures. In October 2020, the FASB issued ASU 2020-10, Codification Improvements. The ASU amends various sections of the codification in the Boards ongoing efforts to simplify and improve guidance. This standard is effective for the Partnership beginning January 1, 2021, with early adoption permitted. The Partnership is evaluating the effect of adopting this new accounting guidance on its consolidated financial statements, but does not currently expect adoption will have a material impact on the Partnership’s consolidated financial position or results of operations. The Partnership does not intend to early adopt this ASU. (3) Leases Lease Overview We lease railcars and certain facilities to support the Partnership’s operations. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 20 years or more. The exercise of lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. Certain of our lease agreements include rental payments which are adjusted periodically for factors such as inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. Additionally, we do not have any lessor or sub-leasing arrangements. Balance Sheet Summary at December 31, 2020 and 2019 The following tables summarize the ROU asset and lease liability balances for the Partnership’s operating and finance leases at December 31, 2020 and 2019: December 31, (in thousands) 2020 2019 Operating Leases: ROU asset, net Railcars $ 7,327 $ 10,826 Real estate and other 3,040 2,581 Lease liability Railcars $ 7,696 $ 11,088 Real estate and other 867 228 Finance Leases: ROU asset, net Real estate and other $ 101 $ 201 Lease liability Real estate and other $ 105 $ 205 December 31, 2020 | 59 Table of Contents CVR Partners, LP and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Lease Expense Summary for the Year Ended December 31, 2020 and 2019 We recognize lease expense on a straight-line basis over the lease term. For the year ended December 31, 2020 and 2019, we recognized lease expense comprised of the following components: Year Ended December 31, (in thousands) 2020 2019 Operating lease expense $ 4,113 $ 3,122 Finance lease expense: Amortization of ROU asset $ 101 $ 322 Interest expense on lease liability 6 10 Short-term lease expense, recognized within Direct operating expenses (exclusive of depreciation and amortization), was $ 0.4 million and $ 0.4 million for the year ended December 31, 2020 and 2019, respectively. Lease Terms and Discount Rates The following outlines the remaining lease terms and discount rates used in the measurement of the Partnership’s ROU assets and liabilities: Year Ended December 31, 2020 2019 Weighted-average remaining lease term (years) Operating Leases 2.9 3.4 Finance Leases 1.3 2.3 Weighted-average discount rate Operating Leases 5.1 % 5.1 % Finance Leases 4.0 % 3.9 % Maturities of Lease Liabilities The following summarizes the remaining minimum lease payments through maturity of the Partnership’s ROU assets and liabilities at December 31, 2020: (in thousands) Operating Leases Finance Leases 2021 $ 3,672 $ 107 2022 3,236 — 2023 1,367 — 2024 684 — 2025 263 — Thereafter — — Total lease payments 9,222 107 Less: imputed interest ( 659 ) ( 2 ) Total lease liability $ 8,563 $ 105 On July 31, 2020, the Partnership and Messer LLC (“Messer”) entered into an On-Site Product Supply Agreement (the “Messer Agreement”). Under the Messer Agreement, among other obligations, Messer is obligated to supply and make certain capital improvements during the term of the Messer Agreement, and the Partnership is obligated to take as available and pay for, oxygen, nitrogen, and compressed dry air from Messer’s facility. This arrangement for the Partnership’s purchase of oxygen, nitrogen, and dry air from Messer does not meet the definition of a lease under FASB ASC Topic 842, Leases, (“Topic 842”), as the Partnership does not expect to receive substantially all of the output of Messer’s on-site production from its air separation unit over the life of the Messer Agreement. The Messer Agreement also obligates Messer to install a new oxygen December 31, 2020 | 60 Table of Contents CVR Partners, LP and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) storage vessel and related equipment to be used solely by the Coffeyville Facility. The arrangement for the use of the oxygen storage vessel and related equipment meets the definition of a lease under Topic 842, as the Partnership will receive all output associated with the vessel. Based on terms outlined in the Messer Agreement, the Partnership expects the lease of the oxygen storage vessel to be classified as a financing lease with an amount between $ 20 and $ 25 million being capitalized upon lease commencement when the oxygen storage vessel is placed in service. (4) Other Current Liabilities Other current liabilities were as follows: December 31, (in thousands) 2020 2019 Personnel accruals $ 7,475 $ 8,187 Operating lease liabilities 3,309 3,523 Accrued interest 2,506 2,518 Sales incentives 2,215 1,614 Share-based compensation 442 5,011 Prepaid revenue contracts 197 277 Other accrued expenses and liabilities 2,565 2,913 Total other current liabilities $ 18,709 $ 24,043 Other current liabilities include amounts accrued by the Partnership and owed to CVR Energy and its affiliates of $ 5.4 million at December 31, 2019. The Partnership had no separate affiliate liabilities owed to CVR Energy and its affiliates at December 31, 2020, as allocation of affiliate accruals is part of the amount charged to the Partnership under the new Corporate Master Service Agreement, which became effective January 1, 2020 (the “Corporate MSA”). Refer to Note 9 (“Related Party Transactions”) for additional discussion. (5) Long-Term Debt Long-term debt consists of the following: December 31, (in thousands) 2020 2019 9.25 % Senior Secured Notes, due June 2023 (1)(2) $ 645,000 $ 645,000 6.50 % Senior Notes, due April 2021, net of current portion (3) — $ 2,240 Unamortized discount and debt issuance costs (4) ( 11,058 ) ( 14,834 ) Total long-term debt 633,942 632,406 Current portion of long-term debt (3) 2,240 — Total long-term debt, including current portion $ 636,182 $ 632,406 (1) This debt was issued at a $ 16.1 million discount which is being amortized, as interest expense, over the remaining term of the debt. Debt issuance costs associated with this debt totaled $ 9.4 million. (2) The estimated fair value of total long-term debt outstanding was approximately $ 645.7 million and $ 673.8 million as of December 31, 2020 and 2019, respectively. This estimate of fair value is a Level 2 measurement as it was determined by quotations obtained from a broker-dealer who makes a market in these and similar securities. (3) The 6.50 % Senior Notes, due April 2021, mature within 12 months, and, therefore, the outstanding balance of $ 2.2 million has been classified as short-term as of December 31, 2020. (4) For the years ended December 31, 2020, 2019, and 2018, amortization of the discount on debt and amortization of deferred financing costs reported as Interest expense, net totaled approximately $ 3.8 million, $ 3.4 million, and $ 3.1 million, respectively. December 31, 2020 | 61 Table of Contents CVR Partners, LP and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Credit Agreements (in thousands) Total Capacity Amount borrowed as of December 31, 2020 Outstanding Letters of Credit Available capacity as of December 31, 2020 Maturity Date ABL Credit Agreement (1)(2) $ 20,146 $ — $ — $ 20,146 September 30, 2022 (1) At the option of the borrowers, loans under the ABL Credit Agreement initially bear interest at an annual rate equal to (i) 1.00 % plus a base rate, Thereafter, loans will bear interest (i) at such rates if our quarterly excess availability is greater than 50% and (ii) 1.50 % plus a base rate, otherwise. (2) The ABL Credit Agreement was amended on September 29, 2020 to, among other things, reduce the commitments thereunder to $ 35 million and extended the maturity date to September 30, 2022. Deferred financing costs of $ 0.4 million were capitalized related to this amendment and will be amortized from Prepaid expenses and other current assets and Other long-term assets over the remaining term of the ABL Credit Agreement. Amortization expense was $ 0.2 million for the years ended December 31, 2020, 2019, and 2018. 9.25 % Senior Secured Notes due 2023 On June 10, 2016, CVR Partners and CVR Nitrogen Finance Corporation (“CVR Nitrogen Finance”), an indirect wholly-owned subsidiary of CVR Partners (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 million aggregate principal amount of 9.25 % 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. The 2023 Notes are guaranteed on a senior secured basis by all of the Partnership’s existing subsidiaries. On or after June 15, 2019, the 2023 Notes Issuers may on any one or more occasions, redeem all or part of the 2023 Notes at the redemption prices set forth below expressed as a percentage of the principal amount of the 2023 Notes plus accrued and unpaid interest to the applicable redemption date. 12-month period beginning June 15, Percentage 2020 102.313 % 2021 and thereafter 100 % The 2023 Notes contain customary covenants for a financing of this type that, among other things, restrict CVR Partners’ ability and the ability of certain of its subsidiaries to: (i) sell assets; (ii) pay distributions on, redeem or repurchase the Partnership’s units or redeem or repurchase its subordinated debt; (iii) make investments; (iv) incur or guarantee additional indebtedness or issue preferred units; (v) create or incur certain liens; (vi) enter into agreements that restrict distributions or other payments from the Partnerships’ restricted subsidiaries to the Partnership; (vii) consolidate, merge or transfer all or substantially all of the Partnerships’ assets; (viii) engage in transactions with affiliates; and (ix) create unrestricted subsidiaries. In addition, the indenture contains customary events of default, the occurrence of which would result in or permit the trustee or the holders of at least 25 % of the 2023 Notes to cause the acceleration of the 2023 Notes, in addition to the pursuit of other available remedies. ABL Credit Agreement On September 29, 2020, CVR Partners amended the ABL Credit Agreement, a senior secured asset based revolving credit facility (the “ABL Credit Facility”) with a group of lenders and UBS AG (“UBS”), as administrative agent and collateral agent. The ABL Credit Amendment amended the aggregate principal amount of availability of up to $ 35 million with an incremental facility, which permits an increase in borrowings of up to $ 25 million in the aggregate subject to additional lender commitments and certain other conditions. The ABL Credit Amendment is scheduled to mature on September 30, 2022. The Partnership is in compliance with all covenants of the 9.25 % Senior Secured Notes, the 6.50 % Senior Notes, and the ABL Credit Agreement as of December 31, 2020. December 31, 2020 | 62 Table of Contents CVR Partners, LP and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (6) Revenue The following table presents the Partnership’s revenue, disaggregated by major product: Year Ended December 31, (in thousands) 2020 2019 2018 Ammonia $ 94,117 $ 94,467 $ 66,254 UAN 198,258 251,199 222,329 Urea products 14,115 17,430 20,633 Net sales, exclusive of freight and other 306,490 363,096 309,216 Freight revenue 33,329 33,436 33,567 Other revenue 10,134 7,645 8,299 Net sales $ 349,953 $ 404,177 $ 351,082 The Partnership sells its products on a wholesale basis under a contract or by purchase order. The Partnership’s contracts with customers generally contain fixed pricing and most have terms of less than one year. The Partnership recognizes revenue at the point in time at which the customer obtains control of the product, which is generally upon delivery and acceptance by the customer. The customer acceptance point is stated in the contract and may be at one of the Partnership’s manufacturing facilities, at one of the Partnership’s off-site loading facilities, or at the customer’s designated facility. Freight revenue recognized by the Partnership represents the pass-through finished goods delivery costs incurred prior to customer acceptance and is reimbursed by customers. An offsetting expense for freight is included in Cost of materials and other. Qualifying taxes collected from customers and remitted to governmental authorities are not included in reported revenues. Depending on the product sold and the type of contract, payments from customers are generally either due prior to delivery or within 15 to 30 days of product delivery. The Partnership generally provides no warranty other than the implicit promise that goods delivered are free of liens and encumbrances and meet the agreed upon specifications. Product returns are rare, and as such, the Partnership does not record a specific warranty reserve or consider activities related to such warranty, if any, to be a separate performance obligation. The Partnership has an immaterial amount of variable consideration for contracts with an original duration of less than a year. A small portion of the Partnership’s revenue includes contracts extending beyond one year, some of which contain variable pricing in which the majority of the variability is attributed to the market-based pricing. The Partnership’s contracts do not contain a significant financing component. The Partnership has an immaterial amount of fee-based revenue, included in other revenue in the table above, that is recognized based on the net amount of the proceeds received. Transaction Price - Allocation to Remaining Performance Obligations As of December 31, 2020, the Partnership had approximately $ 6.1 million of remaining performance obligations for contracts with an original expected duration of more than one year. The Partnership expects to recognize approximately $ 3.5 million of these performance obligations as revenue by the end of 2021, an additional $ 2.3 million in 2022, and the remaining balance thereafter. The Partnership has elected to not disclose the amount of transaction price allocated to remaining performance obligations for contracts with an original expected duration of less than one year. The Partnership has elected to not disclose variable consideration allocated to wholly unsatisfied performance obligations that are based on market prices that have not yet been determined. Contract Balances The Partnership’s deferred revenue is a contract liability that primarily relates to nitrogen fertilizer sales contracts requiring customer prepayment prior to product delivery to guarantee a price and supply of nitrogen fertilizer. Deferred revenue is recorded at the point in time in which a prepaid contract is legally enforceable and the associated right to consideration is unconditional prior to transferring product to the customer. An associated receivable is recorded for uncollected prepaid December 31, 2020 | 63 Table of Contents CVR Partners, LP and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) contract amounts. Contracts requiring prepayment are generally short-term in nature and, as discussed above, revenue is recognized at the point in time in which the customer obtains control of the product. A summary of the deferred revenue activity during the year ended December 31, 2020 is presented below: (in thousands) Balance at December 31, 2019 $ 27,841 Add: New prepay contracts entered into during the period (1) 56,490 Less: Revenue recognized that was included in the contract liability balance at the beginning of the period ( 27,060 ) Revenue recognized related to contracts entered into during the period ( 26,141 ) Other changes ( 499 ) Balance at December 31, 2020 $ 30,631 (1) Includes $ 33.4 million where payment associated with prepaid contracts was collected. Major Customers CVR Partners has two customers who comprised 26 %, 28 %, and 20 % of net sales for the years ended December 31, 2020, 2019, and 2018, respectively. (7) Share-Based Compensation CVR Partners’ Phantom Unit Awards CVR Partners has a Long-Term Incentive Plan (“LTIP”) which permits the granting of options, stock and unit appreciation rights (“SARs”), restricted shares, restricted stock units, phantom units, unit awards, substitute awards, other unit-based awards, cash awards, dividend and distribution equivalent rights, share awards, and performance awards (including performance share units, performance units, and performance-based restricted stock). As of December 31, 2020, only phantom unit awards under the LTIP remained outstanding. Individuals who are eligible to receive awards and grants under the LTIP include CVR Energy’s and the Partnership’s employees, officers, consultants, advisors, and directors. A summary of phantom unit award activity and changes under the LTIP during the year ended December 31, 2020 is presented below: (in thousands, except per unit data) Units Weighted- Average Grant Date Fair Value Aggregate Intrinsic Value Non-vested at December 31, 2019 155,707 $ 30.71 $ 4,827 Granted 444,385 12.12 Vested ( 62,594 ) 31.31 Forfeited ( 18,617 ) 31.23 Non-vested at December 31, 2020 518,881 $ 14.70 $ 8,312 Unrecognized compensation expense associated with the phantom units at December 31, 2020 was approximately $ 7.4 million, which is expected to be recognized over a weighted average period of 2.8 years. Compensation expense recorded for the years ended December 31, 2020, 2019, and 2018 related to awards under the CVR Partners LTIP was approximately $ 0.6 million, $ 2.3 million, and $ 1.9 million, respectively. As of December 31, 2020 and 2019, the Partnership had a liability of $ 0.9 million and $ 1.2 million, respectively, for cash settled non-vested phantom unit awards and associated distribution equivalent rights. For the years ended December 31, 2020, 2019, and 2018, the Partnership paid cash of $ 0.8 million, $ 1.7 million, and $ 1.7 million, respectively, to settle liability-classified awards upon vesting. December 31, 2020 | 64 Table of Contents CVR Partners, LP and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Incentive Unit Awards — CVR Energy CVR Energy grants awards of incentive units and dividend and distribution equivalent rights to certain of its employees and those of its subsidiaries, including CVR GP, who provide shared services for CVR Energy and its subsidiaries, including the Partnership. Costs related to these incentive unit awards are allocated to the Partnership based on time spent on Partnership business. Total compensation expense allocated to the Partnership for the years ended December 31, 2020, 2019, and 2018 related to the incentive units was $ 0.4 million, $ 1.0 million and $ 0.5 million, respectively. The Partnership had no separate liabilities related to these incentive unit awards as of December 31, 2020, as the allocation of compensation expense for incentive unit awards is part of the amount charged to the Partnership under the Corporate MSA. The Partnership had a liability of $ 1.4 million as of December 31, 2019, which is recorded in Other current liabilities. For the years ended December 31, 2020 and 2018, the Partnership made reimbursements to CVR Energy of $ 2.2 million and $ 0.8 million, respectively, and no reimbursements for the year ended December 31, 2019 related to its allocated portion of CVR Energy’s incentive unit awards payments. See Note 9 (“Related Party Transactions”) for further discussion of the Corporate MSA. Performance Unit Awards In connection with an employment agreement with the Partnership’s Executive Chairman dated November 1, 2017, CVR Energy entered into a performance unit award agreement (the “2017 Performance Unit Award Agreement”) on November 1, 2017, with our Executive Chairman representing the right to receive upon vesting, a cash payment equal to $ 10.0 million if the average closing price of CVR Energy’s common stock over the 30 day trading period from January 4, 2022 to February 15, 2022 is equal to or greater than $ 60 per share. There were no compensation costs recognized for the years ended December 31, 2020 and 2019 under the 2017 Performance Unit Award Agreement. Compensation costs recognized for the year ended December 31, 2018 were $ 0.4 million. Under the 2017 Performance Unit Award Agreement, as of December 31, 2020, the Partnership had no outstanding liability, and an outstanding liability of $ 0.4 million as of December 31, 2019, which was recorded in Other current liabilities on the Consolidated Balance Sheets. At December 31, 2020, there was approximately $ 2.3 million of total unrecognized compensation costs related to the 2017 Performance Unit Award Agreement. Other Benefit Plans CVR Energy sponsors and administers two defined contribution 401(k) plans, the CVR Energy 401(k) Plan and the CVR Energy 401(k) Plan for Represented Employees (the “Plans”), in which employees of the general partner, CVR Partners and its subsidiaries may participate. Participants in the Plans may elect to contribute a designated percentage of their eligible compensation in accordance with the Plans, subject to statutory limits. CVR Partners provides a matching contribution of 100 % of the first 6 % of eligible compensation contributed by participants. Participants in both Plans are immediately vested in their individual contributions. The Plans provide for a three-year vesting schedule for the Partnership’s matching contributions and contain a provision to count service with predecessor organizations. The Partnership’s contributions under the Plans were approximately $ 1.9 million, $ 1.8 million, and $ 1.8 million for the years ended December 31, 2020, 2019, and 2018, respectively. Effective January 1, 2021, the matching contributions for the Plans have been suspended. December 31, 2020 | 65 Table of Contents CVR Partners, LP and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) (8) Commitments Supply Commitments The minimum required payments for unconditional purchase obligations, including the natural gas purchases outlined below, are as follows: (in thousands) Unconditional Purchase Obligations Year Ending December 31, 2021 $ 36,132 2022 11,207 2023 9,540 2024 5,006 2025 5,006 Thereafter 33,244 $ 100,135 Supply Commitments - The Partnership is a party to various supply agreements with both related and third parties which commit the Partnership to purchase minimum volumes of hydrogen, oxygen, nitrogen, pet coke, and natural gas to run its plants’ operations. The Partnership is also party to a natural gas supply agreement with various third-parties. Natural gas expense for the years ended December 31, 2020, 2019, and 2018 totaled approximately $ 32.4 million, $ 33.1 million, and $ 42.4 million, respectively, and is included in Cost of materials and other and Direct operating expenses (exclusive of depreciation and amortization). The Partnership entered into the Coffeyville Master Service Agreement (“Coffeyville MSA”) with Coffeyville Resources Refining & Marketing, LLC, an indirect, wholly-owned subsidiary of CVR Energy (“CRRM”), pursuant to which, it agrees to pay a monthly fee for pet coke purchases. The Partnership’s Coffeyville Facility obtains a significant amount ( 60 % on average during last five years , 33 % in 2020) of the pet coke it needs from the Coffeyville MSA. Any remaining pet coke needs are required to be purchased from various third parties. The price paid pursuant to the Coffeyville MSA 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. See Note 9 (“Related Party Transactions”) for further discussion of the Coffeyville MSA. Pursuant to the Coffeyville MSA, the Partnership agreed, with respect to the Coffeyville Facility, to pay CRRM for hydrogen purchases. The committed hydrogen volume pricing is based on a monthly fixed fee (based on the fixed and capital charges associated with producing the committed volume) and a monthly variable fee (based on the natural gas price associated with hydrogen actually received). In the event the Coffeyville Facility fails to take delivery of the full committed volume in a month, the Partnership remains obligated to pay CRRM for the monthly fixed fee and the monthly variable fee based upon the actual hydrogen volume received, if any. In the event CRRM fails to deliver any portion of the committed volume for the applicable month for any reason other than planned repairs and maintenance, the Partnership will be entitled to a pro-rata reduction of the monthly fixed fee. See Note 9 (“Related Party Transactions”) for further discussion. The Partnership, with respect to the Coffeyville Facility, is also party to the Messer Agreement, pursuant to which, it is required to take as available and pay for the supply of oxygen and nitrogen to the plant. This agreement was renewed and commenced in July 2020 for an initial term of 15 years with annual renewals thereafter. Expenses associated with this agreement are included in Direct operating expenses (exclusive of depreciation and amortization), and, for the years ended December 31, 2020, 2019, and 2018, totaled approximately $ 4.2 million, $ 4.2 million, and $ 3.8 million, respectively. In addition to the related party Coffeyville MSA, the Coffeyville Facility has pet coke supply agreements with multiple third-party refineries to purchase approximately 275,000 tons of pet coke at a fixed price for delivery at different dates through December 2021. The Coffeyville Facility has historically purchased third-party pet coke based on spot purchases and supply December 31, 2020 | 66 Table of Contents CVR Partners, LP and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) agreements in place at the time. The delivered cost of third-party pet coke purchases is included in Cost of materials and other and totaled approximately $ 17.9 million, $ 10.3 million, and $ 4.8 million for the years ended December 31, 2020, 2019, and 2018, respectively. During 2019, the Partnership, with respect to the East Dubuque Facility, entered into a utility service agreement with a new third-party energy cooperative. The new utility service agreement does not contain purchase commitments. The cost of utilities, including natural gas purchases, is included in Direct operating expenses (exclusive of depreciation and amortization). Prior to entering into the new utility service agreement, the East Dubuque Facility had a utility service agreement with a third-party energy cooperative which included certain charges on a take-or-pay basis and amounts associated with this agreement totaled approximately $ 3.7 million and $ 10.6 million for the years ended December 31, 2019 and 2018, respectively. (9) Related Party Transactions Limited Partnership Agreement The Partnership’s general partner manages the Partnership’s operations and activities as specified in CVR Partners’ limited partnership agreement. The general partner of the Partnership, CVR GP, is managed by its board of directors. The partnership agreement provides that the Partnership will reimburse CVR GP 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. Omnibus Agreement We are party to an omnibus agreement with CVR Energy and our general partner, pursuant to which we have agreed that CVR Energy will have a preferential right to acquire any assets or group of assets that do not constitute assets used in a fertilizer restricted business. In determining whether to exercise any preferential right under the omnibus agreement, CVR Energy will be permitted to act in its sole discretion, without any fiduciary obligation to us or the unitholders whatsoever. These obligations will continue so long as CVR Energy owns at least 50% of our general partner. There was no activity reported under this agreement during the years ended 2020, 2019, and 2018. Coffeyville MSA Effective January 1, 2020, the Conflicts Committee of the Board and the audit committee of CVR Energy approved, and CRNF and CRRM entered into the Coffeyville MSA which is comprised of various supply and service agreements effectively replacing, on substantially equivalent terms, other related party agreements in place during 2019 and 2018 as (the “Replaced Coffeyville Agreements”). In addition to affirming the terms and services described in the Replaced Coffeyville Agreements and resetting the durations thereof, as applicable, commencing January 1, 2020, the Coffeyville MSA provides for monthly payments, subject to netting, for all goods and services supplied under the Coffeyville MSA. The Coffeyville MSA will continue in effect until terminated in writing, in whole or in part, by either party, or until terminated automatically in the event a party falls out of common control with the other party. The Coffeyville MSA provides the following services: • Cross Easements - Both CRNF and CRRM can access and utilize each other’s land in certain circumstances in order to operate their respective businesses. • Hydrogen Purchase and Sale - CRRM agrees to sell and deliver a committed hydrogen volume of 90,000 mscf per month to CRNF and CRNF agrees to purchase and receive the committed volume. CRNF also has the option to purchase excess volume from CRRM, if available. • Raw Water and Facilities Sharing - CRNF and CRRM are each owners of an undivided one-half interest in and to the water rights and agree to (i) allocate raw water resources between CVR Energy’s Coffeyville Refinery and our Coffeyville Facility and (ii) provide for the management of the water intake system which draws raw water from the Verdigris River for both our Coffeyville Facility and CVR Energy’s Coffeyville Refinery. • Coke Supply - Our Coffeyville Facility purchases pet coke from CVR Energy’s Coffeyville Refinery which provides that CRRM must deliver, and the Coffeyville Facility must purchase, during each calendar year an annual required amount of pet coke equal to the lesser of (i) 100 percent of the pet coke or (ii) 500,000 tons of pet coke. If during a December 31, 2020 | 67 Table of Contents CVR Partners, LP and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) calendar month, more than 41,667 tons of pet coke is produced and available for purchase, then the Coffeyville Facility will have the option to purchase the excess at the purchase price provided for in the agreement. If the option is declined, CRRM may sell the excess to a third-party. • Feedstock and Shared Services - CRNF and CRRM provide feedstock and other services to one another. These feedstocks and services are utilized in the respective production processes of CRRM’s Coffeyville Refinery and our Coffeyville Facility. Feedstocks provided under the agreement include, among others, hydrogen, high-pressure steam, nitrogen, instrument air, oxygen, and natural gas. • Lease - CRNF leases certain office and laboratory space from CRRM. Corporate MSA Also effective January 1, 2020, the Conflicts Committee of the Board and the audit committee of CVR Energy approved, and the parties entered into the Corporate MSA between CVR Services and certain of its affiliates, including CVR Energy, CVR GP and the Partnership and its subsidiaries, which is comprised of various management and service agreements effectively replacing other related party agreements, on substantially equivalent terms, in place for 2019 and 2018 as (the “Replaced Corporate Agreements”). In addition to affirming the terms and services described in the Replaced Corporate Agreements and resetting the durations thereof, as applicable, commencing January 1, 2020, the Corporate MSA provides for payment by each service recipient under the Corporate MSA of a monthly fee for goods and services supplied under the Corporate MSA, subject to netting and an annual true up, as well as pass-through of any direct costs incurred on behalf of a service recipient without markup. Under the Corporate MSA, CVR GP and the Partnership and its subsidiaries obtain certain management and other professional services from CVR Services, including the following, among others: • services from CVR Services’ employees in capacities equivalent to the capacities of corporate executive officers, except that those who serve in such capacities under the agreement will serve the Partnership on a shared, part-time basis only, unless the Partnership and CVR Services agree otherwise; • administrative and professional services, including legal, accounting, SOX compliance, financial reporting, human resources, information technology, communications, insurance, tax, credit, finance, corporate compliance, enterprise risk management, consulting, and government and regulatory affairs; • recommendations on capital raising activities to the board of directors of the general partner, including the issuance of debt or equity interests, the entry into credit facilities, and other capital market transactions; • managing or overseeing litigation and administrative or regulatory proceedings, investigations and other reviews in the ordinary course of business or operations, establishing appropriate insurance policies for the Partnership, and providing safety and environmental advice; • recommending the payment of distributions; and • managing or providing advice for other projects, including acquisitions, as may be agreed by the general partner and CVR Services from time to time. • permitting the use of the CVR Energy and CVR Partners trademarks by CVR GP and the Partnership at no cost. For services performed in connection with the services agreement, the Partnership recognized personnel costs, excluding amounts related to share based compensation (refer to Note 7 (“Share-Based Compensation”)), of $ 6.6 million, $ 7.3 million, and $ 6.6 million, respectively, for the years ended December 31, 2020, 2019, and 2018. December 31, 2020 | 68 Table of Contents CVR Partners, LP and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Related Party Activity Activity associated with the Partnership’s related party arrangements for the years ended December 31, 2020, 2019, and 2018 is summarized below: Year Ended December 31, (in thousands) 2020 2019 2018 Sales to related parties (1) $ 993 $ 119 $ 371 Purchases from related parties (2) 22,365 30,876 27,315 December 31, 2020 2019 Prepaid expenses (3) $ — $ 249 Due to related parties (4) 1,446 7,826 (1) Sales to related parties, included in Net sales, consist primarily of sales of feedstocks and services to CRRM under the Coffeyville MSA. (2) Purchases from related parties, included in Cost of materials and other, Direct operating expenses (exclusive of depreciation and amortization), and Selling, general and administrative expenses, consist primarily of pet coke and hydrogen purchased from CRRM under the Coffeyville MSA. (3) Prepaid expenses, included in Prepaid expenses and other current assets, are amounts paid for feedstocks and services provided by CRRM under the Coffeyville MSA. (4) Due to related parties, included in Accounts payable to affiliates, Other current liabilities, and Other long-term liabilities, consist primarily of amounts payable for feedstocks and other supplies and services provided by CRRM and CVR Services under the Coffeyville MSA and Corporate MSA. Environmental Agreement Our Coffeyville Facility is a party to an environmental agreement with CRRM which provides for certain indemnification and access rights in connection with environmental matters affecting CVR Energy’s Coffeyville refinery and our Coffeyville Facility. To the extent that liability arises from environmental contamination that is caused by CRRM but is also commingled with environmental contamination caused by our Coffeyville Facility, CRRM may elect, in its sole discretion and at its own cost and expense, to perform government mandated environmental activities relating to such liability, subject to certain conditions and provided that CRRM will not waive any rights to indemnification or compensation otherwise provided for in the agreement. No liability under this agreement was recorded as of December 31, 2020 and 2019. Terminal and Operating Agreement Our Coffeyville Facility entered into a lease and operating agreement with Coffeyville Resources Terminal, LLC, an indirect wholly owned subsidiary of CVR Energy (“CRT”), under which it leases the premises located at Phillipsburg, Kansas to be utilized as a UAN terminal. The initial term of the agreement will expire in May 2032, provided, however, we may terminate the lease at any time during the initial term by providing 180 days prior written notice. In addition, this agreement will automatically renew for successive five-year terms, provided that we may terminate the agreement during any renewal term with at least 180 days written notice. We will pay CRT $ 1.00 per year for rent, $ 4.00 per ton of UAN placed into the terminal, and $ 4.00 per ton of UAN taken out of the terminal. Property Exchange On October 18, 2019, the Conflicts Committee of the Board and on October 22, 2019, the audit committee of CVR Energy, each agreed to authorize the exchange of certain parcels of property owned by subsidiaries of CVR Energy with an equal number of parcels owned by subsidiaries of CVR Partners, all located in Coffeyville, Kansas (the “Property Exchange”). On February 19, 2020, a subsidiary of CVR Energy and a subsidiary of CVR Partners executed the Property Exchange agreement. This Property Exchange will enable each such subsidiary to create a more usable, contiguous parcel of land near its own operating footprint. CVR Energy and the Partnership accounted for this transaction in accordance with the ASC Topic 805-50, Business Combinations (“ Topic 805-50”), guidance on transferring assets between entities under common control. This transaction had a net impact to the Partnership’s partners’ capital of less than $ 0.1 million. December 31, 2020 | 69 Table of Contents CVR Partners, LP and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) Distributions to CVR Partners’ Unitholders The Board has a policy for the Partnership to distribute all available cash generated on a quarterly basis. Cash distributions are 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 is determined by the Board following the end of such quarter. Distributions, if any, including the payment, amount, and timing thereof, are subject to change at the discretion of the Board. There were no distributions declared or paid by the Partnership during the year ended December 31, 2020 related to the fourth quarter of 2019 or the first, second, and third quarters of 2020. No distributions were declared for the fourth quarter of 2020. The Partnership paid distributions totaling $ 4.00 per common unit on a split-adjusted basis, or $ 45.3 million during the year ended December 31, 2019. Of these distributed amounts, CVR Energy received $ 15.6 million. During the year ended December 31, 2018, the Partnership did no t pay distributions. (10) Supplemental Cash Flow Information Cash flows related to income taxes, interest, leases, and capital expenditures included in accounts payable are as follows: Year Ended December 31, (in thousands) 2020 2019 2018 Supplemental disclosures: Cash paid for income taxes, net of refunds $ 69 $ 40 $ 26 Cash paid for interest 59,850 60,057 60,168 Cash paid for amounts included in the measurement of lease liabilities (1): Operating cash flows from operating leases 4,117 4,019 Operating cash flows from finance leases 6 20 Financing cash flows from finance leases 100 321 Non-cash investing and financing activities: Change in capital expenditures included in accounts payable $ ( 2,167 ) $ 1,618 $ ( 1,031 ) (1) The lease standard was adopted on January 1, 2019 on a prospective basis. Therefore, only 2020 and 2019 are applicable to be included within the table above. December 31, 2020 | 70 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.