CVR Energy, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited consolidated results include petroleum refining and marketing and nitrogen fertilizer operations. The Wynnewood refinery, acquired in December 2011, contributes to 2012 results but not the comparable 2011 periods; reported year-over-year growth is therefore not fully comparable.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $2,308.3m | $1,447.7m | $4,276.9m | $2,615.0m |
| Operating income | $235.8m | $217.9m | $376.3m | $327.5m |
| Net income | $165.4m | $134.2m | $149.3m | $180.0m |
| Net income attributable to CVR stockholders | $154.7m | $124.9m | $129.5m | $170.7m |
| Diluted EPS | $1.75 | $1.42 | $1.46 | $1.94 |
| Operating cash flow | Not separately shown here | Not separately shown here | $435.9m | $162.6m |
| Capital expenditures | $45.6m | $13.7m | $105.2m | $21.0m |
Q2 operating income margin was approximately 10.2%, compared with 15.1% a year earlier; six-month margin was approximately 8.8%, versus 12.5%. Petroleum refining margin was $20.98 per crude-oil throughput barrel in Q2, down from $25.49; for the first half it was $20.58, down from $23.08. These refining-margin figures are company-defined non-GAAP measures.
For the first half, operating cash flow less capital expenditures was approximately $330.7m, versus $141.7m in 2011. Cash and cash equivalents were $692.6m at June 30, and working capital was $904.5m. Long-term debt and capital lease obligations totaled $851.9m; the company also had no ABL borrowings, $347.0m of ABL availability and $53.0m of outstanding letters of credit. The ABL facility has a $400m commitment.
Changes and drivers versus the prior comparable period
- Q2 sales rose 59.4%, chiefly because Wynnewood added volume; lower gasoline and distillate selling prices partly offset the increase. First-half sales rose 63.6%, also primarily reflecting Wynnewood.
- Q2 net income attributable to CVR stockholders increased 23.9%, while first-half attributable income fell 24.1%. The first-half decline chiefly reflects an $81.3m unrealized derivative loss, versus a $3.2m gain in 2011, alongside higher interest and operating costs.
- Derivative results were volatile: Q2 included a $46.9m unrealized gain and an $8.1m realized loss; first-half results included an $81.3m unrealized loss and a $27.2m realized loss.
- Q2 petroleum operating income was $248.9m versus $183.5m; nitrogen fertilizer operating income was $36.0m versus $39.3m. First-half figures were $383.8m versus $289.2m for petroleum and $67.5m versus $56.1m for fertilizer.
- Higher SG&A included acquisition and integration costs and costs related to the Icahn tender offer and transaction agreement. Management reported $29.4m of such transaction costs in Q2 and $44.2m for the first half, and said it was challenging a majority of the expenses; successful challenges could result in reversals.
- First-half cash increased by $304.3m, compared with $547.9m in 2011. The prior period included proceeds from the CVR Partners IPO and debt issuance; 2012 investing outflows rose substantially with capital spending.
Outlook, management commentary and risks
- Management said cash, operating cash flow, working capital and available credit were expected to meet anticipated operating needs for at least the next 12 months, while cautioning that future performance and cash needs are subject to uncertainty. No full-year earnings guidance was provided.
- For 2012, expected petroleum capital expenditures were $195m–$200m, plus approximately $100m of Wynnewood turnaround expense; expected nitrogen fertilizer capital expenditures were $100m–$110m. The UAN expansion was expected to be completed by January 1, 2013, at an estimated total cost of approximately $125m including capitalized interest.
- Wynnewood’s fourth-quarter 2012 turnaround was expected to cost approximately $100m, last 40–45 days and significantly affect Q4 revenue. The fertilizer plant’s Q4 turnaround was expected to cost approximately $5m and last 16–18 days.
- On May 7, 2012, Icahn-affiliated parties gained control; Icahn owned approximately 82% of CVR at quarter-end. The $30-per-share cash tender offer included a non-transferable contingent payment right if a qualifying sale agreement was executed by August 18, 2013 and the sale closed. The company’s solicitation period for third-party proposals ended July 23 without qualifying offers.
- The change of control led to an offer to repurchase the senior notes at 101% of principal; no notes were tendered by the July 5 expiry. A credit agreement amendment prevented the transaction from triggering an ABL default. CVR also joined an Icahn-affiliated consolidated federal tax group and owed AEPC $28.3m under the tax allocation agreement, payable in Q3.
- Refining results remain exposed to crude/product price spreads, crude supply and logistics, inventory accounting, operational interruptions and environmental compliance. The early-June Seaway reversal reduced access to waterborne crude supply, and management said the consumed crude discount to WTI narrowed to $2.06 per barrel in Q2 from $5.04 a year earlier.
- Key contingencies include an accrued $18.5m Goldman Sachs fee claim, disputed fertilizer-plant property taxes that could produce a refund or continued elevated costs, and environmental matters. Planned Coffeyville FCCU controls under a consent decree had approximately $49m of remaining expected costs, plus a $1.2m environmental project and approximately $0.7m penalty. The company also disclosed extensive regulatory exposure and other litigation.
- Icahn’s control creates potential conflicts and concentration-of-control risks. CVR elected NYSE controlled-company exemptions from requirements concerning board independence and independent nominating and compensation committees. Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the sales and operating-income growth reflects Wynnewood acquisition volume versus underlying performance, and how the upcoming turnaround affects results.
- How derivative settlements and mark-to-market movements affect earnings and cash flows; these contracts were not designated as accounting hedges.
- Whether management succeeds in challenging tender-offer-related expenses, and the ultimate outcome and timing of the Goldman Sachs fee claim.
- Progress, cost and timing of the UAN expansion and planned refinery projects, including environmental compliance spending.
- Liquidity and debt terms, including ABL borrowing-base availability, the 2015 and 2017 note maturities, and the effect of any future change of control.
- Developments in the Icahn contingent payment right, related-party arrangements, fertilizer property-tax appeals and disclosed environmental proceedings.