CVR Energy, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed March 14, 2013. This is an annual report, not a standalone fourth-quarter filing. The company is a holding company with petroleum refining and nitrogen fertilizer businesses. 2012 includes a full year of Wynnewood refinery results, acquired in December 2011, versus only a brief post-acquisition period in 2011.
Financial performance and liquidity
| Metric | 2012 | 2011 | Change / context |
|---|---|---|---|
| Net sales | $8.567 billion | $5.029 billion | Up 70%; principally higher petroleum volumes, including a full year at Wynnewood, and higher product prices. |
| Operating income | $1,034.9 million | $566.6 million | Up 83%; operating margin approximately 12.1%, versus 11.3%. |
| Net income | $412.6 million | $378.6 million | Includes earnings attributable to noncontrolling interests. |
| Net income attributable to CVR stockholders | $378.6 million; $4.36 diluted EPS | $345.8 million; $3.94 diluted EPS | Up about 9%; derivative losses and debt-refinancing charges weighed on results. |
| Cash from operating activities | $762.6 million | $278.6 million | Higher earnings and a favorable inventory-related working-capital effect contributed. |
| Capital expenditures | $212.2 million | $91.2 million | Included $64.5 million for the UAN expansion. |
| Cash and cash equivalents | $896.0 million | $388.3 million | 2012 cash comprised $615.1 million at CVR Energy, $153.1 million at Refining, and $127.8 million at Nitrogen Fertilizer. |
| Working capital | $1,135.4 million | $769.2 million | Consolidated. |
| Total debt, including current portion | $898.2 million | $863.8 million | Year-end debt included $500 million of 6.5% notes due 2022, $222.8 million face amount of notes due 2017, and a $125 million fertilizer term loan; also includes capital leases. |
Segment results: Petroleum sales were $8.282 billion and operating income was $1,012.5 million, versus $4.752 billion and $465.7 million in 2011. Refining margin rose to $26.04 per crude-throughput barrel from $21.80. Adjusted Petroleum EBITDA was $1,178.9 million, a non-GAAP measure. Nitrogen Fertilizer sales were $302.3 million and operating income was $115.8 million, versus $302.9 million and $136.2 million. Adjusted Nitrogen Fertilizer EBITDA was $148.2 million, also non-GAAP.
Fourth-quarter detail: 2012 Q4 net sales were $1.881 billion, operating income $124.9 million, and net income attributable to CVR stockholders $40.2 million (diluted EPS $0.46). In Q4 2011, those figures were $1.062 billion, $26.9 million, and $65.9 million (diluted EPS $0.75). Quarterly earnings were affected by volatile derivative marks and a $37.5 million debt-extinguishment loss in Q4 2012.
Material changes and unusual items
- Petroleum operating income increased substantially, reflecting stronger refining margins and a full year of Wynnewood operations. The Wynnewood turnaround cost $102.5 million in 2012; Coffeyville’s two-phase turnaround incurred $21.2 million in 2012.
- Petroleum’s FIFO inventory impact shifted to an unfavorable $58.4 million from a favorable $25.6 million in 2011.
- Net derivative loss was $285.6 million in 2012, compared with a $78.1 million gain in 2011, mainly from commodity swaps. CVR reported $137.6 million of realized and $148.0 million of unrealized losses.
- A $500 million, 6.5% senior secured notes issuance in October 2012 funded the tender and redemption of the 9% First Lien Notes. The refinancing produced a $37.5 million extinguishment loss, including premiums and financing-cost write-offs.
- SG&A rose to $183.4 million from $98.0 million, including $44.2 million of costs related to the Icahn tender offer/proxy contest and $11.0 million of Wynnewood transaction and integration costs.
- In May 2012, Icahn affiliates obtained approximately 82% ownership. The change in control also caused loss of small-refiner status for MSAT II compliance, accelerating projects expected to cost $59 million at Coffeyville and $94 million at Wynnewood.
Outlook, risks, contingencies, and subsequent events
- Outlook and investment: No quantified earnings or margin guidance is provided. Management expected 2013 capital spending of approximately $282.7 million, including $231.7 million for petroleum and $49.3 million for nitrogen fertilizer. The UAN expansion was completed in February 2013 and was expected to reach full operating rates in March, increasing UAN capacity by about 400,000 tons annually (approximately 50%).
- Market exposure: Refining earnings depend on volatile crack spreads, crude differentials, product prices, and access to advantaged crude. Management warned that Seaway’s reversal and capacity expansion could reduce favorable mid-continent crude discounts. RIN prices were highly volatile and compliance costs could be material. Fertilizer earnings face commodity-price, weather, seasonal-demand, and low-natural-gas-price risks.
- Operations and safety: A September 2012 boiler explosion at Wynnewood fatally injured two employees; OSHA and Oklahoma authorities were investigating. The filing also describes material exposure to unplanned outages, weather and flooding, supplier interruption, customer concentration, and operating a geographically concentrated asset base.
- Environmental and legal matters: Coffeyville’s EPA consent decree carried about $41 million of remaining compliance costs, including approximately $39 million in capital expenditures, plus a $1.2 million environmental project. DOJ’s February 2013 consent decree for the 2007 flood/oil discharge required $0.6 million in civil penalties, $1.7 million in Coast Guard reimbursement, and refinery flood-control and preparedness measures; separate Risk Management Program negotiations had reopened. Environmental remediation estimates are subject to change.
- Debt and liquidity: Management stated that available cash and facilities were expected to meet anticipated needs for at least 12 months, while noting dependence on operating cash generation and partnership distributions. At December 31, the refining ABL had no borrowings and $372.3 million of availability; the fertilizer revolver was undrawn with $25 million available. After year-end, the Refining Partnership IPO proceeds were used to discharge the 2017 notes. As of the filing, reported remaining principal debt was $500 million of 2022 notes and the $125 million fertilizer term loan, apart from leases.
- Post-year-end transactions: The Refining Partnership IPO raised $690 million gross, and CVR retained approximately 81% ownership. CVR declared and paid a $5.50-per-share special dividend, approximately $477.6 million in total, and announced an expected $0.75 quarterly dividend beginning in Q2 2013, subject to board declaration. The fertilizer partnership paid a $0.192-per-unit Q4 2012 distribution in February 2013.
- Governance and related parties: Icahn’s approximately 82% voting ownership gives him significant influence; CVR relies on NYSE controlled-company exemptions. The filing discloses affiliate arrangements, including railcar leasing and a tax allocation agreement.
Most important facts for investors to verify
- Whether refining margins and crude-oil discounts remained favorable after the Seaway reversal and expansion, and how much 2012 earnings reflected unusually strong market conditions.
- The earnings and cash-flow impact of derivative positions, including the 23.3 million barrels of crack-spread swaps outstanding at year-end and their reported unrealized loss.
- Actual 2013 capital spending, completion and operating performance of the UAN expansion, and the effect of major refinery compliance and turnaround spending.
- RIN compliance costs, MSAT II project costs, and progress on EPA/DOJ obligations and other environmental investigations.
- Post-IPO debt, ABL availability and distribution restrictions, as well as cash held at each subsidiary; consolidated cash is not necessarily freely transferable among the separate partnerships.
- The final outcome of the Wynnewood fatality investigation, pending fee litigation, and other disclosed contingencies; the filing text does not provide a clear final resolution for these matters.