CVR Energy, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual filing, not a standalone fourth-quarter report. CVR Energy is a holding company operating petroleum refining and nitrogen fertilizer businesses through majority-owned publicly traded partnerships. The 2013 financial statements received an unqualified audit opinion; the auditor also reported effective internal control over financial reporting.
Financial performance and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $8,985.8 million | $8,567.3 million |
| Operating income | $710.5 million | $1,034.9 million |
| Net income | $522.0 million | $412.6 million |
| Net income attributable to CVR stockholders | $370.7 million; diluted EPS $4.27 | $378.6 million; diluted EPS $4.33 |
| Adjusted EBITDA, a non-GAAP measure | $659.7 million | $1,264.5 million |
| Cash provided by operating activities | $440.1 million | $762.6 million |
| Capital expenditures | $256.5 million | $212.2 million |
| Cash and cash equivalents at year-end | $842.1 million | $896.0 million |
| Total debt, including current portion | $676.2 million | $898.2 million |
| Working capital | $1,230.2 million | $1,135.4 million |
Operating margin was approximately 7.9%, down from 12.1% in 2012; net income attributable to CVR stockholders was approximately 4.1% of sales, versus 4.4%. Year-end cash was held across CVR Energy ($477.2 million), CVR Refining ($279.8 million) and CVR Partners ($85.1 million); cash is not freely transferable among these entities. Management stated that existing cash, operating cash flow and available facilities were expected to meet anticipated needs for at least the next 12 months.
Segments and changes versus 2012
- Petroleum: Sales rose to $8,683.5 million from $8,281.5 million, chiefly on higher volumes following 2012 refinery turnarounds. Operating income fell to $603.0 million from $1,012.5 million. Refining margin declined to $16.90 per crude-oil throughput barrel from $26.04, as product prices weakened relative to crude costs and market margins narrowed. A Coffeyville FCCU outage lasted about 55 days in 2013; repair costs were approximately $21.1 million.
- Nitrogen fertilizer: Sales increased to $323.7 million from $302.3 million and operating income rose to $124.9 million from $115.8 million. The UAN expansion came online in February 2013, adding about 400,000 tons of annual capacity; UAN sales volumes increased 40.6%. UAN plant-gate price declined about 6.9%, while ammonia price increased about 4.9%.
- Consolidated sales increased 4.9%, but operating income decreased 31.3%. Petroleum margin pressure was the main driver. Consolidated net income rose partly because 2012 included a large derivative loss; however, a larger share of partnership earnings was attributable to public unitholders in 2013, leaving CVR stockholder-attributable income slightly lower.
- Operating cash flow fell by $322.5 million, with working-capital outflows and lower operating performance contributing. Adjusted EBITDA also declined materially; it is a non-GAAP measure and should not be treated as a substitute for GAAP earnings or operating cash flow.
Debt, distributions and capital plans
Year-end debt included $500 million of 6.5% notes due 2022, $125 million of nitrogen fertilizer term debt due 2016, and capital lease obligations. The Refining Partnership had no ABL borrowings outstanding at year-end and $372.9 million of availability; the fertilizer partnership had no revolving borrowings and up to $25 million available. The partnerships reported compliance with their debt covenants. Distribution capacity remains subject to covenant, liquidity and board-policy restrictions.
CVR paid $1,237.3 million in 2013 dividends, including two special dividends; total dividends were $14.25 per share. The regular quarterly dividend policy was $0.75 per share, and a further $0.75 fourth-quarter dividend was declared in February 2014. Partnership distributions for 2013, including fourth-quarter amounts declared after year-end, were reported as $3.68 per Refining Partnership unit and $1.98 per Nitrogen Fertilizer Partnership unit. These distributions are not guaranteed and may change.
Management estimated 2014 capital spending of $362.9 million, including $343.2 million for petroleum and $18.0 million for fertilizer. The Wynnewood hydrocracker project was expected to cost about $60 million, with $23.4 million spent by year-end 2013. No explicit consolidated earnings or margin guidance was provided.
Outlook, risks and unusual items
- Management estimated 2014 RIN compliance costs of approximately $75 million to $150 million, versus $180.5 million in 2013. RIN pricing was volatile, and Wynnewood had sought small-refinery hardship relief for 2013 and 2014; the outcome and future costs were uncertain.
- MSAT II compliance projects were expected to cost approximately $63 million at Coffeyville and $105 million at Wynnewood; $24.6 million and $52.2 million, respectively, had been spent by year-end 2013. Coffeyville also anticipated less than $20 million for proposed Tier 3 standards.
- Key risks include volatile refining margins and crude differentials, unplanned refinery downtime, RIN availability and cost, fertilizer pricing and seasonal/weather-driven demand, high fixed fertilizer operating costs, supply and transport disruptions, and environmental and safety requirements.
- The September 2012 Wynnewood boiler explosion killed two employees. OSHA issued citations and placed the refinery in its Severe Violators Enforcement Program; the company contested the citations. The employees’ spouses filed a civil suit whose outcome was described as too early to assess.
- Environmental matters include expected remaining costs of about $40 million under the Coffeyville consent decree, approximately $3 million remaining under the Wynnewood air consent order, and estimated remediation spending of about $4.2 million over ten years from 2014 for specified contamination. New or unresolved regulatory matters at Wynnewood had costs that could not be predicted, although management did not expect them to be material.
- CVR disclosed potential joint-and-several exposure to pension obligations of Icahn-affiliated entities through controlled-group rules. The referenced plans would be underfunded by approximately $591.8 million if voluntarily terminated; CVR recorded no liability for this contingent exposure.
- Other significant 2013 items included a $26.1 million debt-extinguishment loss, a $57.1 million net derivative gain (versus a $285.6 million loss in 2012), and $6.1 million gain on sale of available-for-sale securities. Fourth-quarter net loss attributable to CVR stockholders was $21.7 million, including a $115.9 million derivative loss.
Important facts for investors to verify
- Whether refining margins recover and how the Coffeyville FCCU outage, subsequent reliability and planned turnarounds affect throughput and cash generation.
- Actual 2014 RIN costs and the EPA’s decision on Wynnewood’s hardship petitions; compare realized costs with management’s $75–$150 million estimate.
- Execution, remaining cost and expected returns of the Wynnewood hydrocracker and environmental compliance projects, alongside the $362.9 million 2014 capital-spending estimate.
- Cash available at each separate partnership, debt-covenant headroom and whether distributions and CVR’s regular dividend remain supportable after the 2013 special dividends.
- Developments in the Wynnewood fatality litigation and OSHA proceedings, environmental enforcement and remediation, and the contingent affiliate pension exposure.
- Effects of Icahn Enterprises’ approximately 82% ownership, related-party arrangements and the partnerships’ public-unit ownership on governance, capital allocation and distributions.