CVR Energy, Inc. 2009 Annual Report (10-K) Summary
Business Context and Reporting Period
This filing covers the fiscal year ended December 31, 2009. CVR Energy, Inc. operates as an independent petroleum refiner and marketer of high-value transportation fuels, alongside a nitrogen fertilizer business (ammonia and UAN) held through a limited partnership (CVR Partners, LP). The company operates a 115,000 barrels-per-day (bpd) refinery in Coffeyville, Kansas, and a nitrogen fertilizer plant utilizing a unique pet coke gasification process. The company is a "controlled company" under NYSE rules, with approximately 64% of outstanding shares beneficially owned by the Goldman Sachs Funds and Kelso Funds.
Key Financial Metrics (Year Ended Dec 31, 2009)
| Metric | 2009 Value | 2008 Value |
|---|---|---|
| Net Sales | $3,136.3 million | $5,016.1 million |
| Operating Income | $208.2 million | $148.7 million |
| Net Income | $69.4 million | $163.9 million |
| Diluted EPS | $0.80 | $1.90 |
| Operating Cash Flow | $85.3 million | $83.2 million |
| Total Debt | $491.3 million | $495.9 million |
| Cash & Equivalents | $36.9 million | $8.9 million |
| Working Capital | $235.4 million | $128.5 million |
Segment Performance: The petroleum business generated $2.9 billion in sales and $170.2 million in operating income. The nitrogen fertilizer business generated $208.4 million in sales and $48.9 million in operating income.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased by 37.5% ($1.88 billion) compared to 2008, primarily driven by a 42% drop in average crude oil prices (from $98.52/bbl in 2008 to $57.64/bbl in 2009) and lower refined product prices.
- Operating Income Increase: Despite lower sales, operating income increased 40% to $208.2 million. This was driven by a significant improvement in petroleum refining margins ($420.6 million in 2009 vs. $324.9 million in 2008) and the absence of the $42.8 million goodwill impairment charge recorded in 2008.
- Net Income Decline: Net income fell 58% to $69.4 million. This was largely due to a $65.3 million net loss on derivatives (primarily the Cash Flow Swap) in 2009, compared to a $125.3 million net gain in 2008.
- Liquidity Improvement: Cash and cash equivalents increased significantly to $36.9 million from $8.9 million, and working capital more than doubled to $235.4 million.
Guidance, Outlook, Risks, and Unusual Items
Unusual Items:
- Cash Flow Swap: The company terminated its Cash Flow Swap with J. Aron (a Goldman Sachs subsidiary) on October 8, 2009. This swap caused significant volatility in net income due to mark-to-market accounting. The 2009 results included a $40.9 million unrealized loss and $14.3 million realized loss on the swap.
- Flood Costs: Net costs associated with the 2007 flood were minimal in 2009 ($0.6 million) compared to $7.9 million in 2008.
Outlook and Capital Needs:
- Capital Expenditures: 2009 actual capex was $48.8 million. The 2010 budget is $68.4 million, including $22.0 million for Tier II gasoline compliance and $15.4 million for environmental/safety projects.
- Debt Service: The company has $479.5 million in term debt and $86.2 million available under its revolving credit facility. Management believes cash flows and credit facilities are sufficient for the next 12 months.
Risks and Contingencies:
- Environmental Compliance: The company is subject to a Consent Decree with the EPA and KDHE requiring approximately $54 million in expenditures (mostly capital) to install emission controls by 2011 (subject to extension). Estimated remediation costs for past contamination through 2013 are $2.9 million.
- Market Volatility: Earnings are highly sensitive to the "crack spread" (refining margin) and natural gas prices (which influence fertilizer pricing). A decline in natural gas prices could disproportionately hurt the company's competitive advantage in the fertilizer segment.
- Customer Concentration: The top five petroleum customers represented 48.8% of sales, and the top five fertilizer customers represented over 44% of sales in 2009.
Key Facts for Investor Verification
- Derivative Accounting Impact: Verify the reconciliation of GAAP Net Income ($69.4M) to "Net Income adjusted for unrealized gain/loss from Cash Flow Swap" ($94.1M) to understand core operating performance versus accounting volatility.
- Environmental Liabilities: Confirm the status of the EPA Consent Decree extension and the specific timeline for the $54 million capital expenditure requirement.
- Debt Covenants: Review the financial covenants (Leverage Ratio max 2.75:1; Interest Coverage min 3.00:1) and the company's compliance status, noting the recent amendments to the credit facility.
- Partnership Structure: Understand the relationship with CVR Partners, LP, specifically the Incentive Distribution Rights (IDRs) held by the managing general partner, which could reduce future cash distributions to CVR Energy stockholders.
- Refining Margins: Monitor the "consumed crude differential" (discount to WTI) and regional basis differentials, as these are critical drivers of the petroleum segment's profitability.