CVR Energy, Inc. 10-Q Summary: Quarter Ended September 30, 2008
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2008. CVR Energy, Inc. operates two primary segments: Petroleum (refining and marketing transportation fuels) and Nitrogen Fertilizer (production of ammonia and UAN). The company operates a 115,000 barrel-per-day refinery in Coffeyville, Kansas, and a nitrogen fertilizer plant utilizing pet coke gasification. The financial statements are unaudited and reflect a restatement of prior period data due to errors in crude oil cost calculations identified in 2007.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Three Months Ended Sep 30, 2007 (Restated) | Nine Months Ended Sep 30, 2007 (Restated) |
|---|---|---|---|---|
| Net Sales | $1,580.9 million | $4,316.4 million | $586.0 million | $1,819.9 million |
| Operating Income | $72.0 million | $282.3 million | $31.6 million | $155.4 million |
| Net Income | $99.7 million | $152.9 million | $11.2 million | $(43.1) million |
| Diluted EPS | $1.16 | $1.77 | $0.13 (Pro Forma) | $(0.50) (Pro Forma) |
| Cash from Operations | $81.5 million (Q3) | $104.8 million (YTD) | $5.0 million (Q3) | $165.7 million (YTD) |
| Total Debt | Outstanding debt was $485.5 million as of Sep 30, 2008. No revolver borrowings were outstanding. | |||
| Working Capital | ||||
| Cash & Equivalents | $59.9 million as of Sep 30, 2008. |
Material Changes vs. Prior Period
- Revenue Surge: Net sales increased 170% for the quarter and 137% year-to-date compared to 2007. This was driven by significantly higher crude throughput (refinery fully operational vs. flood downtime in 2007) and higher product prices.
- Profitability: Net income turned from a loss of $43.1 million in the first nine months of 2007 to a profit of $152.9 million in 2008. The Nitrogen Fertilizer segment saw operating income jump from $34.9 million to $95.6 million YTD due to higher fertilizer prices and volumes.
- Derivative Impact: The company recorded a net gain on derivatives of $76.7 million for the quarter (vs. $40.5 million gain in 2007) and a net loss of $50.5 million YTD (vs. $251.9 million loss in 2007). This volatility is primarily due to the "Cash Flow Swap" with J. Aron, which is marked-to-market and significantly impacts earnings.
- Flood Costs: Net costs associated with the 2007 flood were minimal in 2008 ($0.8 million recovery) compared to $32.2 million in costs in Q3 2007.
Guidance, Outlook, Risks, and Unusual Items
- Derivative Liability: A significant liability of $264.5 million is recorded for the Cash Flow Swap payable to J. Aron. While the company recorded unrealized gains in the quarter, it paid $33.8 million in realized losses in October 2008. The swap agreement requires payments if crack spreads rise above a fixed level.
- Insurance Recovery: The company is litigating with insurers regarding the 2007 flood and crude oil discharge. As of September 30, 2008, $54.7 million in insurance receivables remained outstanding. Management believes recovery is probable but disputes exist regarding policy limits ("Zone A" vs. "Zone B") and coverage definitions.
- Capital Expenditures: The company is evaluating the timing of a $120 million fertilizer plant expansion, potentially delaying completion to December 2010 or later due to credit market conditions. Capital spending for 2008 is capped at $125 million under the credit facility.
- Internal Controls: The company disclosed material weaknesses in internal controls related to crude oil cost accounting. While remediation efforts (centralized accounting, additional reviews) are underway, testing was not complete as of September 30, 2008, and controls were deemed ineffective.
- Convertible Debt: The company withdrew a registration statement for a proposed $125 million convertible notes offering in November 2008, citing improved liquidity and lower crude prices.
Investor Verification Checklist
- Derivative Exposure: Verify the current status of the Cash Flow Swap with J. Aron and the potential cash outflow required if crack spreads remain elevated.
- Insurance Litigation: Monitor the progress of lawsuits against property and environmental insurers to confirm the collectability of the $54.7 million receivable.
- Internal Control Remediation: Confirm the completion of testing and remediation of material weaknesses in crude oil cost accounting to ensure future financial statement reliability.
- Capital Plan: Assess the decision regarding the fertilizer plant expansion and its impact on future cash flows and leverage ratios.
- Refining Margins: Track the NYMEX 2-1-1 crack spread and regional basis differentials, as these directly impact the Petroleum segment's profitability and the derivative swap settlements.