CVR Energy, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Amounts are in millions of dollars except per-share data and operating metrics. CVR Energy operates petroleum refining and nitrogen fertilizer businesses. Comparisons are with Q1 2018; 2018 results were retrospectively adjusted for the turnaround-cost accounting change.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Net sales | $1,486 | $1,537 | Down 3.3% |
| Operating income | $160 | $136 | Up 17.6%; operating margin approximately 10.8% vs. 8.8% |
| Net income | $102 | $93 | Up 9.7% |
| Net income attributable to CVR Energy stockholders | $101 | $60 | EPS was $1.00 vs. $0.69; the comparison reflects the purchase of remaining CVR Refining units and reduced noncontrolling interest |
| Operating cash flow | $228 | $26 | Increase was primarily due to working-capital changes |
| Capital and turnaround expenditures | $42 | $21 | Investing cash outflow was $42 vs. $21 |
| Cash and cash equivalents | $467 | $668 at Dec. 31, 2018 | Quarterly cash decrease of $201 |
| Long-term debt and finance lease obligations, net of current portion | $1,191 | $1,167 at Dec. 31, 2018 | Includes $69 of finance lease obligations before current portion and debt-cost adjustments |
| Available revolving credit capacity | $443 | — | $393 under refining facility and $50 under fertilizer facility; no borrowings outstanding |
| Dividend declared per share | $0.75 | $0.50 | Q1 2019 dividend declared after quarter-end, payable May 13, 2019 |
Current assets were $1,125 and current liabilities $580 at March 31, 2019. Management said cash, operating cash generation and available credit were expected to meet existing operating needs for at least 12 months, while noting that future cash requirements and financing access could vary.
Segments and material period-over-period changes
- Petroleum: Revenue was $1,397 vs. $1,458; operating income was $156 vs. $143; EBITDA was $209 vs. $192. Throughput rose to approximately 212,807 barrels per day from 189,598, largely on improved Coffeyville throughput. Refining margin increased to $317 from $300, but margin per throughput barrel fell to $16.55 from $17.58; excluding inventory valuation impacts, it was $14.88 vs. $16.41. Higher sales volumes and a $32 favorable inventory valuation impact helped, while RIN expense shifted to $13 from a $23 benefit a year earlier.
- Nitrogen fertilizer: Revenue rose to $92 from $80, and operating income improved to $9 from a $3 loss. Fertilizer EBITDA increased to $26 from $13. Better pricing added approximately $22 of revenue, partly offset by $10 from lower volumes. Management cited delayed seasonal demand following wet fall weather and flooding and freezing conditions affecting application and UAN demand.
- Cash uses and ownership: On January 29, CVR Energy acquired all remaining CVR Refining common units for approximately $301. The purchase was funded with about $105 of short-term borrowings and cash on hand; the borrowing was repaid in February. Financing outflows also included $75 of CVR Energy dividends and $9 of CVR Partners distributions. CVR Refining became wholly owned.
Outlook, accounting changes, risks and contingencies
- Management estimated 2019 RFS compliance costs of $80–$90, subject to RIN prices, production, product mix and blending. Q1 RFS expense was $13, compared with a $23 benefit in Q1 2018.
- Estimated 2019 capital expenditures were $210–$240, including $50–$60 of growth projects requiring further approval. First-quarter expenditures were $29, plus $13 of turnaround expenditures.
- Effective January 1, 2019, the petroleum segment changed turnaround accounting from expensing costs as incurred to deferring and amortizing them over four years; prior comparative figures and the December 2018 balance sheet were retrospectively adjusted. The company also adopted lease accounting, recognizing approximately $56 of additional operating-lease right-of-use assets and lease liabilities at adoption, as well as finance-lease balances. Management reported no impact on operating results or cash flows from lease adoption.
- Key business risks include volatile refining and fertilizer margins, feedstock and product prices, RIN availability and cost, seasonality and weather, operational interruptions, transportation constraints, regulation and liquidity. The company reported covenant compliance at quarter-end and no material changes to previously disclosed risk factors.
- Legal matters include nine early-stage lawsuits by former CVR Refining unitholders challenging the call-option purchase; the company said it considers them without merit and intends to defend them. A Clean Air Act and consent-decree matter involving the Coffeyville refinery remained under negotiation; potential costs could not be reasonably estimated. A federal inquiry concerning RFS-related activities had made no claims or allegations against CVR Energy or Mr. Icahn, according to the filing. Separately, a Kansas property-tax settlement was expected to produce $7.9 of benefits through favorable assessments from 2019 to 2028, subject to the agreement.
- The board declared a $0.75-per-share Q1 dividend after quarter-end. Dividends and CVR Partners distributions remain discretionary and may change.
Important facts for investors to verify
- Whether improved refinery throughput and operating income persist, given lower refining margin per barrel and volatile crude, product and RIN economics.
- Whether fertilizer pricing and seasonal demand recover, in light of weather-related timing shifts and lower Q1 production volumes.
- Cash generation and liquidity after the $301 CVR Refining unit purchase, dividends and planned capital spending; confirm debt and lease obligations and facility availability.
- Potential exposure and developments in the Clean Air Act matter and CVR Refining call-option lawsuits, for which outcomes or costs were not established in the filing.
- Actual 2019 RFS compliance expense versus the $80–$90 estimate, and actual capital spending versus the $210–$240 estimate.