CVR Energy, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; the filing also presents fourth-quarter results. CVR Energy is a holding company with petroleum refining and nitrogen fertilizer businesses, operated through CVR Refining and CVR Partners. CVR owned approximately 66% of CVR Refining and 34% of CVR Partners at year-end; Icahn Enterprises and affiliates owned approximately 82% of CVR Energy.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $4.782 billion | $5.433 billion |
| Operating income | $90.9 million | $421.6 million |
| Net income | $8.9 million | $297.8 million |
| Net income attributable to CVR stockholders | $24.7 million; $0.28 per share | $169.6 million; $1.95 per share |
| Operating cash flow | $267.5 million | $536.8 million |
| Capital expenditures | $132.7 million | $218.7 million |
| Cash and cash equivalents | $735.8 million | $765.1 million |
| Working capital | $749.6 million | $789.0 million |
| Debt, including current portion | $1.165 billion | $667.1 million |
- Consolidated sales fell 12%; operating income declined 78%. Lower petroleum sales prices and weaker refining margins were the main drivers. Consolidated operating margin was approximately 1.9%, versus 7.8% in 2015.
- Petroleum sales were $4.431 billion and operating income was $77.8 million, versus $5.162 billion and $361.7 million. Refining margin fell to $9.27 per crude barrel from $14.45; the NYMEX 2-1-1 crack spread declined to $14.66 from $20.41 per barrel. Lower product prices were partly offset by a favorable $52.1 million FIFO inventory impact and lower turnaround costs.
- Nitrogen fertilizer sales increased to $356.3 million from $289.2 million, primarily reflecting the East Dubuque acquisition and higher volumes. Operating income declined to $26.8 million from $68.7 million; UAN and ammonia gate prices fell to $177 and $376 per ton, respectively.
- Fourth-quarter 2016 sales were $1.353 billion, operating income was $12.9 million, and net loss was $6.0 million; net income attributable to CVR stockholders was $7.1 million, or $0.08 per share.
Material changes and financing
- On April 1, 2016, CVR Partners acquired the East Dubuque nitrogen fertilizer business. The reported acquisition consideration was approximately $802.4 million, including assumed debt. CVR Partners issued units and paid cash; public ownership of CVR Partners increased to approximately 66%. The acquired facility contributed $127.9 million in sales and a $1.2 million operating loss from acquisition through year-end.
- CVR Partners issued $645 million of 9.25% senior secured notes due 2023. Proceeds funded repayment of a $300 million related-party term loan and repurchase of most of the acquired 2021 notes; $2.2 million of the 2021 notes remained outstanding at year-end. The $500 million 6.5% CVR Refining notes due 2022 remained outstanding.
- Year-end cash was distributed among CVR Energy ($366.1 million), CVR Refining ($314.1 million), and CVR Partners ($55.6 million). At February 14, 2017, reported availability was $312.4 million under CVR Refining’s ABL facility and $250 million under its intercompany facility; CVR Partners reported $49.3 million of ABL availability at year-end and no borrowings. The Refining ABL facility matures December 20, 2017.
- CVR Energy paid $2.00 per share in dividends during 2016 ($173.6 million total); the board declared a further $0.50-per-share fourth-quarter dividend in February 2017. CVR Refining made no distributions in 2016; CVR Partners distributions totaled $69.5 million for the quarters shown in the filing.
Outlook, risks, and unusual items
- The company gives no specific consolidated earnings or revenue guidance. Management estimated 2017 capital expenditures of $183 million, excluding major scheduled turnaround expenses. The Wynnewood refinery turnaround was planned in two phases for the second half of 2017 and 2018, with estimated costs of $80–$100 million; a hydrocracker catalyst change-out was estimated at $15 million.
- Management expected substantial new North American nitrogen fertilizer supply to come online in early 2017, potentially increasing pricing volatility. It described longer-term U.S. fertilizer fundamentals as supportive, while emphasizing commodity-cycle risk.
- Key petroleum exposures include volatile crack spreads, crude differentials, regional product markets, reliance on the Vitol crude supply agreement (then extending through December 31, 2017), and RIN prices. RIN expense was $205.9 million in 2016, and the year-end biofuel blending obligation was $186.3 million, versus $9.5 million a year earlier.
- Operational and regulatory risks include refinery or plant downtime, planned turnarounds, environmental compliance, pipeline and supplier interruptions, fertilizer seasonality and weather, and potential changes in RFS requirements. Wynnewood’s Tier 3 gasoline compliance deadline was accelerated to December 21, 2018 after it lost small-volume-refinery status; the filing did not anticipate additional controls or capital spending for compliance.
- Environmental remediation accruals were $4.8 million at year-end. Separately, CVR disclosed potential controlled-group liability for Icahn-affiliate pension plans estimated to be underfunded by $613.4 million if voluntarily terminated; CVR recorded no liability for this contingent exposure.
- Other notable items: 2016 included a $4.9 million debt-extinguishment loss and $38.1 million of scheduled turnaround expense. The 2015 comparison included a $27.3 million flood-insurance recovery. The 2016 tax benefit was $19.8 million despite a pretax loss of $10.9 million.
- Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether refining margins and RIN costs improve or deteriorate, and how those changes affect cash generation and distributions.
- Refinancing or replacement plans for CVR Refining’s ABL facility before its December 2017 maturity, alongside the higher debt and interest burden following the East Dubuque acquisition.
- Actual costs, schedule, and operating impact of the planned Wynnewood turnarounds and hydrocracker work, plus 2017 capital spending versus the estimate.
- East Dubuque’s post-acquisition operating performance, fertilizer pricing, new industry capacity, and the cash available for CVR Partners distributions.
- Developments in environmental matters, RIN obligations, the affiliate pension exposure, and the company’s reliance on major customers, suppliers, and related-party arrangements.