CVR Energy, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated results include CVR Refining and CVR Partners. CVR operates petroleum refining and nitrogen fertilizer businesses.
Financial results and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $1.935 billion | $1.454 billion | $5.386 billion | $4.395 billion |
| Operating income | $174 million | $79 million | $375 million | $148 million |
| Net income | $121 million | $25 million | $304 million | $44 million |
| Net income attributable to CVR stockholders | $90 million | $22 million | $207 million | $34 million |
| Basic and diluted EPS | $0.94 | $0.26 | $2.31 | $0.39 |
| Adjusted EBITDA | $172 million | $91 million | $361 million | $209 million |
- Revenue and earnings: Q3 sales rose $481 million, mainly on higher petroleum sales volumes; nine-month sales rose $991 million, largely with stronger refining crack spreads. Earnings also benefited from lower RIN costs and, for the nine-month period, a $75 million net derivative gain versus a $5 million loss in 2017.
- Margins and segments: Petroleum refining margin was $313 million in Q3 and $824 million for nine months, compared with $272 million and $624 million, respectively, in 2017. Margin per throughput barrel was $15.54 and $14.50, versus $13.81 and $10.32. Petroleum operating income was $176 million for Q3 and $390 million year to date. Nitrogen fertilizer operating income was $3 million in Q3 (versus a $16 million loss) and a $1 million loss for nine months (versus $2 million income); nine-month adjusted fertilizer EBITDA was unchanged at $58 million.
- Cash flow: Nine-month operating cash flow was $519 million, compared with $327 million; capital expenditures were $68 million, versus $80 million. Financing outflows were $232 million, including $162 million of CVR stockholder dividends and $67 million of distributions to CVR Refining noncontrolling holders. Cash increased $220 million to $702 million.
- Liquidity: Current assets were $1.390 billion and current liabilities $604 million. The company reported $702 million consolidated cash, including $460 million held by consolidated variable-interest entities; it separately stated that $243 million was cash residing at CVR Energy. Available capacity was $394 million under CVR Refining’s ABL facility and $50 million under CVR Partners’ facility. No facility borrowings were outstanding, and the company reported covenant compliance.
- Debt: Long-term debt and capital lease obligations were approximately $1.19 billion before unamortized issuance costs and current lease obligations. Principal notes included $500 million of 6.50% notes due 2022 and $645 million of 9.25% secured notes due 2023.
Material changes versus prior period
- Q3 petroleum sales volumes increased about 3.5% year over year, while nine-month sales volumes fell about 4.8%, partly because of a first-quarter Coffeyville FCCU outage. Nine-month petroleum margin improved on stronger crack spreads and lower RIN expense.
- Net RIN costs fell to $20 million for Q3 and $47 million for nine months, from $64 million and $164 million, respectively.
- Fertilizer prices improved, but nine-month sales volumes declined amid planned and unplanned downtime. The Coffeyville fertilizer facility completed a turnaround in Q2; East Dubuque had 12 days of unplanned downtime in Q1.
- In August, CVR exchanged 21.6 million CVR Refining units for 13.7 million CVR Energy shares. The transaction increased CVR’s ownership of CVR Refining, reduced noncontrolling interest, and increased CVR Energy additional paid-in capital by $276 million. Icahn Enterprises and affiliates held approximately 71% of CVR Energy at quarter-end.
Outlook, risks and unusual items
- Management said existing cash, operating cash flow and available credit were expected to fund operations for at least 12 months, while noting future cash needs could exceed expectations.
- Estimated 2018 capital expenditures were $100–$120 million. The second phase of the Wynnewood refinery turnaround was expected in the first half of 2019, with estimated turnaround expense of approximately $25 million.
- Management estimated 2018 net RIN costs of approximately $60–$65 million. RIN prices and availability, refining margins, crude-oil differentials, operating reliability, and fertilizer pricing and demand remain significant variables.
- On October 24, the board declared a $0.75-per-share CVR Energy dividend, payable November 12. CVR Refining also declared a $0.90-per-unit distribution.
- CVR received a DOJ letter alleging Clean Air Act and consent-decree violations at the Coffeyville refinery. A tolling agreement extends negotiations through March 31, 2019; the potential financial effect could not be estimated. A separate U.S. Attorney inquiry concerning RFS-related activities remained ongoing; the filing said no claims or allegations had been made against CVR Energy or Carl Icahn.
- CVR Partners submitted a business-interruption insurance claim but could not estimate recovery or timing. The filing also disclosed $33 million of assets held for sale, with no loss recognized on classification.
- Following the ownership exchange, CVR said it was no longer considered liable for certain pension obligations of Icahn-affiliated controlled-group entities. Those sponsors’ reported unfunded plan balances were $435 million as of June 30, 2018; Federal-Mogul was sold by Icahn affiliates on October 1.
- CVR estimated that adoption of the new lease standard on January 1, 2019 could add approximately $50–$100 million of operating lease right-of-use assets and liabilities. The company did not expect a material effect on operating results or cash flows.
Investor verification points
- Track refining margins, crude differentials, RIN costs and the company’s ability to meet its $60–$65 million 2018 RIN estimate.
- Monitor refinery and fertilizer plant reliability, including the planned Wynnewood turnaround and effects of prior outages on production and cash generation.
- Follow the Coffeyville Clean Air Act matter, the ongoing RFS inquiry, and any updates to potential costs or claims.
- Confirm where cash is held and available to the parent versus the consolidated partnerships, and assess distributions, debt covenants and capital spending against liquidity.
- Review the status of the fertilizer business interruption claim and the effect of the lease-standard adoption on reported assets and liabilities.