CVR Energy, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. CVR Energy is a diversified holding company operating petroleum refining and nitrogen fertilizer businesses through CVR Refining and CVR Partners. The results consolidate both partnerships; CVR owned approximately 66% of Refining and 34% of Partners at quarter-end. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $1,453.8 | $1,240.3 | $4,395.3 | $3,429.0 |
| Operating income | $78.9 | $27.2 | $147.8 | $78.0 |
| Net income | $25.3 | $2.0 | $44.2 | $15.0 |
| Net income attributable to CVR stockholders | $22.2 | $5.4 | $33.9 | $17.6 |
| Adjusted EBITDA attributable to CVR stockholders | $90.9 | $58.2 | $209.0 | $158.8 |
Q3 operating margin was approximately 5.4%, versus 2.2% a year earlier; nine-month operating margin was approximately 3.4%, versus 2.3%. These are calculated from reported net sales and operating income. Basic and diluted EPS was $0.26 in Q3 and $0.39 for the nine-month period, compared with $0.06 and $0.20, respectively.
- Petroleum: Q3 operating income was $98.7, versus $28.4; nine-month operating income was $157.3, versus $62.5. Refining margin per crude throughput barrel was $14.52 in Q3 ($9.66 prior year) and $10.86 for nine months ($9.55). Higher product prices, stronger refining margins and increased sales volumes supported results.
- Nitrogen fertilizer: Q3 operating loss was $15.9, versus income of $2.4; nine-month operating income was $1.6, versus $25.8. Adjusted Nitrogen Fertilizer EBITDA was $5.0 in Q3 and $58.1 for nine months, down from $17.4 and $74.4. Lower fertilizer prices and operating costs, including turnaround and downtime effects, weighed on performance.
- Cash flow and investment: Nine-month operating cash flow was $326.8, compared with $218.9; capital expenditures were $79.9, compared with $105.6. Investing cash outflow was $80.4 and financing cash outflow was $133.1. Cash increased by $113.3 to $849.1.
- Liquidity: Working capital was $765.0, compared with $749.6 at year-end 2016. Consolidated cash comprised $218.7 at CVR Energy, $560.4 at Refining and $70.0 at Partners. Refining had $371.6 available under its ABL facility and Partners had $47.6 available; neither facility had borrowings outstanding.
- Debt: Reported total debt including current portion was $1,166.1 on a net carrying-value basis. Principal obligations included $500.0 of 6.5% notes due 2022, $645.0 of 9.25% secured notes due 2023, $2.2 of 2021 notes and capital leases. Nine-month interest expense was $82.3, up from $56.8, primarily reflecting the fertilizer partnership’s debt and higher-rate 2023 notes.
- Dividends: CVR declared $0.50 per share for Q3 after quarter-end, payable November 17, 2017. Refining also declared a $0.94-per-unit distribution. CVR’s reported dividends declared were $0.50 per share in both Q3 comparison periods and $1.50 per share for each nine-month period.
Material changes versus the prior comparable period
- Consolidated sales rose 17% in Q3 and 28% for nine months. The increase was driven by petroleum, including higher gasoline and distillate prices and higher volumes; nitrogen fertilizer sales fell as UAN and ammonia prices weakened.
- Q3 petroleum operating income improved substantially, but the fertilizer segment swung to an operating loss. For nine months, fertilizer operating income declined despite inclusion of the East Dubuque facility in both periods after its April 2016 acquisition. The nine-month comparison is not fully like-for-like because 2016 includes East Dubuque only from April 1.
- Q3 petroleum results included a $14.9 favorable FIFO inventory impact and a $17.0 derivative loss; the comparable 2016 quarter had a $7.7 unfavorable FIFO impact and a $1.7 derivative loss. Nine-month FIFO impact was slightly unfavorable in 2017 versus favorable by $29.7 in 2016.
- Q3 included $21.7 of Wynnewood refinery turnaround expense. The East Dubuque fertilizer facility had a planned 14-day turnaround and eight additional days of unplanned downtime. Nine-month capital spending fell, while operating cash flow increased.
Outlook, risks and unusual items
- Management said existing cash, operating cash flows and available credit were expected to meet anticipated operating cash needs for at least 12 months, while cautioning that future capital or RIN compliance costs could be higher. Estimated 2017 RIN costs were $235–$265; reported RIN expense was $163.5 for the first nine months. The recorded biofuel blending obligation was $185.3 at September 30.
- Estimated 2017 capital expenditures were $130.0, including $110.0 for petroleum and $15.0 for nitrogen fertilizer. These estimates could change.
- Refining’s $400 million ABL facility was scheduled to mature December 20, 2017. The company was negotiating an extension and expected to finalize it in November 2017; confirm the subsequent outcome. Refining was in compliance with its debt covenants. Partners’ 2023-note fixed charge coverage ratio was below 1.75:1, with $72.7 remaining in its restricted-payment basket; it reported covenant compliance.
- The next Wynnewood turnaround began in late September, was expected to last approximately 42 days and was estimated to cost $70.0 in total. A second phase was expected in the second half of 2018. The Coffeyville fertilizer facility planned a turnaround in 2018. After quarter-end, East Dubuque experienced a piping outage; repair work was ongoing at filing and was expected to take 12 days, with immaterial estimated cost.
- Material risks include volatile refining margins and crude prices, fertilizer price cyclicality, RIN availability and pricing, operational outages, environmental regulation, and substantial purchase and transportation commitments. Unconditional purchase obligations totaled $1,271.7, including long-term crude transportation commitments.
- CVR disclosed potential contingent exposure to underfunded pension plans of Icahn-controlled affiliates. The plans’ estimated combined underfunding on voluntary termination was $451.8 at September 30; CVR recorded no liability. The U.S. Attorney’s Office for the Southern District of New York requested information concerning RFS-related activities and Mr. Icahn’s advisory role. The company said it was cooperating, reported no claims or allegations, and did not expect a material impact, while giving no assurance.
- Subsequent events included a 50/50 joint venture with Plains to acquire the Cushing-to-Broome pipeline and an agreement to acquire a separate Cushing-to-Ellis pipeline, subject to conditions and expected to close in Q4 2017. Financial terms were not disclosed.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Investor verification priorities
- Confirm the refinancing or extension of Refining’s ABL facility and its borrowing-base availability.
- Track refining margins, crude differentials, RIN prices and the actual full-year RIN compliance cost against management’s estimate.
- Assess whether fertilizer prices and East Dubuque/Coffeyville reliability recover, including actual outage duration, turnaround costs and 2018 maintenance needs.
- Review cash generation and debt service alongside dividends and partnership distributions, noting that partnership cash is not freely available to the parent and distributions are not guaranteed.
- Monitor the U.S. Attorney’s inquiry, affiliate pension exposure, and the status, terms and expected benefits of the Plains pipeline transactions.