CVR ENERGY INC quarterly report, Q2 FY2014

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CVR Energy, Inc. — Q2 2014 Form 10-Q

Reporting period: Three and six months ended June 30, 2014; unaudited. CVR is a diversified holding company with petroleum refining and nitrogen fertilizer businesses. It consolidates CVR Refining and CVR Partners, including results attributable to public unitholders as noncontrolling interests. Icahn affiliates owned approximately 82% of CVR at quarter-end.

Financial performance and liquidity

  • Q2 revenue: $2.540 billion, up 14.4% year over year. Operating income was $164.6 million versus $262.7 million; net income was $144.0 million versus $271.7 million; net income attributable to CVR stockholders was $83.7 million versus $183.4 million. Diluted EPS was $0.96 versus $2.11.
  • First-half revenue: $4.988 billion, up 9.1%. Operating income was $348.1 million versus $630.3 million; net income was $357.7 million versus $484.4 million; CVR stockholder net income was $210.4 million versus $348.4 million. Diluted EPS was $2.42 versus $4.01.
  • Operating margins: Consolidated operating margin was approximately 6.5% in Q2 versus 11.8% a year earlier, and 7.0% for the first half versus 13.8%. Adjusted EBITDA, a non-GAAP measure, was $147.2 million in Q2 versus $221.3 million, and $301.4 million for the first half versus $507.3 million.
  • Cash flow: First-half operating cash flow was $405.5 million versus $381.0 million. Investing used $193.0 million, primarily reflecting capital spending and purchases of available-for-sale securities; financing used $55.9 million. Cash increased $156.6 million to $998.7 million. Q2 operating cash flow was $124.2 million versus $102.7 million.
  • Balance sheet and debt: Cash was $998.7 million, working capital $1.456 billion, and total assets $3.980 billion at June 30. Total debt, including current obligations, was $675.5 million. Long-term debt included $500 million of 6.5% notes due 2022 and a $125 million nitrogen fertilizer term loan. No ABL or fertilizer revolver borrowings were outstanding; stated availability was $372.7 million and $25.0 million, respectively. The partnerships were in compliance with debt covenants.
  • Capital returns: CVR paid $130.2 million of dividends in the first half. After quarter-end, it declared a $2.00-per-share special dividend ($173.7 million total) and a $0.75-per-share Q2 dividend ($65.1 million total).

Material changes versus prior year

  • Petroleum segment operating income fell to $151.9 million in Q2 from $229.1 million and to $316.5 million for the first half from $564.7 million. Refining margin declined to $15.22 per crude throughput barrel in Q2 from $20.56, and to $16.17 for the first half from $23.63. Management cited higher crude costs, narrower crude discounts, weaker market refining margins, and higher operating expenses.
  • Petroleum sales volumes increased: Q2 refined product sales were up 14.3%; first-half volumes were up 11.3%. Higher volumes lifted revenue, but did not offset lower margins and higher costs. First-half average gasoline and distillate selling prices fell 2.8% and 1.6%, respectively.
  • Nitrogen fertilizer operating income declined to $18.8 million in Q2 from $37.1 million and to $41.9 million for the first half from $73.9 million. Lower UAN and ammonia prices were key factors; first-half UAN sales volume rose to 493,900 tons from 411,400 following the expansion, but UAN gate prices fell 15.0%.
  • Reported derivative gains were material and volatile: $35.9 million in Q2 2014 versus $120.5 million in Q2 2013, and $145.3 million in the first half versus $100.5 million. First-half 2013 also included a $26.1 million debt-extinguishment loss, absent in 2014.
  • First-half cash generation benefited from working-capital movements, including increased payables, amounts due to the parent, and accrued taxes. Capital spending was broadly similar year over year at $114.9 million.

Outlook, risks, and unusual items

  • Management expected 2014 capital expenditures of approximately $275–$300 million, including $245–$265 million for petroleum and $24–$26 million for fertilizer. The Wynnewood hydrocracker project was expected to cost about $55 million; approximately $37.2 million had been spent by June 30.
  • Management estimated 2014 RIN costs of approximately $100–$150 million. First-half RIN costs were $63.8 million. RIN prices, availability, and the ability to pass compliance costs to customers remain risks.
  • Management said existing cash, operating cash flow, and available credit were expected to meet anticipated requirements for at least 12 months, while cautioning that cash generation depends on margins, operating performance, and market and regulatory conditions. Partnership distributions are discretionary and may be changed or suspended.
  • On July 29, 2014, a fire at the Coffeyville refinery’s isomerization unit injured four employees and led to a refinery shutdown after damage to its control system. The preliminary expected outage was approximately four weeks; repair costs were still being assessed. Property insurance has a $5 million deductible; business-interruption coverage has a 45-day waiting period, and management did not then expect it to apply.
  • Potential contingent exposure includes affiliate pension obligations: CVR belongs to a controlled group associated with Icahn affiliates. Two affiliate pension plans had estimated combined underfunding of $450.1 million if voluntarily terminated as of June 30; CVR recorded no liability for this contingent exposure. The filing also describes unresolved Oklahoma environmental enforcement matters, though management did not expect related costs to be material. Environmental accruals were $1.3 million.
  • Other exposures include refining and fertilizer commodity-price volatility, outages and accidents, environmental and renewable-fuel regulation, crude supply and transportation, and fertilizer seasonality. Unrecognized tax benefits were approximately $52.6 million, with $4.6 million accrued for related interest.
  • After quarter-end, CVR declared Q2 distributions of $0.96 per CVR Refining unit and $0.33 per CVR Partners unit. The Refining Partnership also completed a June 30 unit offering that generated approximately $164 million net for redemption of units held by CVR’s subsidiary.

Investor facts to verify

  • Whether the Coffeyville refinery returned to service on the anticipated timeline, the final repair cost, insurance recoveries, and any production or margin effects.
  • Whether refining margins, crude differentials, and product basis improved or weakened after the period; derivative gains should be distinguished from underlying operating performance and cash settlements.
  • Actual RIN costs and the outcome of the Wynnewood hardship petition and applicable EPA compliance deadlines.
  • Delivery and economics of the Wynnewood hydrocracker and fertilizer PSA upgrade, including expected production benefits and total capital spending.
  • Whether partnership cash distributions and CVR dividends remain supportable given operating cash flow, capital needs, debt terms, and the substantial special dividend.
  • Developments in affiliate pension exposure, environmental proceedings, and the $52.6 million of unrecognized tax benefits.