CVR Energy, Inc. 10-Q Summary: Quarter Ended September 30, 2009
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2009. CVR Energy, Inc. operates as an independent petroleum refiner and marketer in the mid-continental United States and a producer of nitrogen fertilizer products. The company operates through two primary segments: Petroleum (refining and marketing) and Nitrogen Fertilizer (production of ammonia and UAN). The company is a controlled company with approximately 73% of outstanding shares owned by Goldman Sachs Funds and Kelso Funds.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Net Sales | $811.7 million | $2,214.4 million |
| Net Income (Loss) | $(13.4) million | $59.9 million |
| Operating Income (Loss) | $(10.8) million | $188.6 million |
| Diluted EPS | $(0.16) | $0.69 |
| Cash and Cash Equivalents | $86.9 million (Sep 30, 2009) | N/A |
| Working Capital | $243.9 million | N/A |
| Total Debt | $494.9 million | N/A |
| Operating Cash Flow | $26.6 million (Q3) | $118.1 million (YTD) |
| Capital Expenditures | $11.9 million (Q3) | $36.5 million (YTD) |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased significantly compared to the prior year periods due to lower product prices and reduced sales volumes. Petroleum sales dropped $743.9 million in Q3 2009 vs. Q3 2008, driven by a 40-47% decrease in gasoline and distillate prices.
- Profitability Shift: The company reported a net loss of $13.4 million for Q3 2009, a sharp reversal from the $99.7 million net income in Q3 2008. This was driven by decreased refining margins, increased share-based compensation, and a significant reduction in derivative gains.
- Derivative Impact: Gain on derivatives dropped from $76.7 million in Q3 2008 to $3.1 million in Q3 2009. This variance is primarily due to the mark-to-market accounting of the Cash Flow Swap, which generated a $98.9 million unrealized gain in 2008 versus only $2.6 million in 2009.
- Share-Based Compensation: Expenses increased substantially due to a rise in the company's stock price. Share-based compensation expense increased by $37.3 million in Q3 2009 compared to a reversal of expense in the same period in 2008.
- Refining Margins: The NYMEX 2-1-1 crack spread decreased 41% year-over-year in Q3, negatively impacting refining margins, though this was partially offset by favorable crude oil discounts and FIFO inventory impacts.
Guidance, Outlook, and Risks
- Cash Flow Swap Termination: On October 8, 2009, the company terminated its Cash Flow Swap with J. Aron & Company (a related party). This swap, which previously caused significant volatility in reported earnings due to mark-to-market adjustments, was settled for a payment of approximately $3.9 million to the company. The related $60 million funded letter of credit was also terminated.
- Credit Facility Amendment: On October 2, 2009, the company entered into a third amendment to its credit facility. This amendment provides financial flexibility by modifying financial covenants (leverage ratio adjusted to 2.75:1.00) and allows the parent company to incur indebtedness to fund interest payments via dividends.
- Capital Expenditures: The company forecasts total consolidated capital expenditures of approximately $63.2 million for 2009 and $68.0 million for 2010. A significant portion is non-discretionary, required for environmental compliance (Tier II gasoline standards) and scheduled turnarounds.
- Environmental and Legal Risks:
- Flood/Discharge: Ongoing costs related to the 2007 flood and crude oil discharge remain, though remedial actions are substantially complete. The company is litigating insurance coverage for these costs.
- TransCanada Litigation: The company is disputing the validity of petroleum transportation service agreements with TransCanada, which could involve potential payments of $510 million if the agreements are upheld.
- Samson Litigation: The company is defending against lawsuits alleging it received proceeds from crude oil sold by Samson Resources to a bankrupt entity (SemCrude).
- Market Risks: The company remains exposed to volatile crude oil and refined product prices, as well as interest rate fluctuations on its floating-rate debt.
Investor Verification Checklist
- Derivative Accounting: Verify the impact of the Cash Flow Swap termination on future earnings volatility and the classification of the $3.9 million settlement.
- Share-Based Compensation: Monitor the trajectory of share-based compensation expenses, which are highly sensitive to stock price movements and significantly impacted Q3 results.
- Refining Margins: Assess the sustainability of refining margins given the decline in the NYMEX 2-1-1 crack spread and the company's reliance on crude oil discounts.
- Debt Covenants: Confirm compliance with the amended credit facility covenants, specifically the leverage and interest coverage ratios, given the recent amendments.
- Environmental Liabilities: Review the status of the EPA Consent Decree regarding FCCU emissions controls and the outcome of insurance litigation regarding the 2007 flood.