CVR ENERGY INC quarterly report, Q2 FY2013

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CVR Energy, Inc. — Form 10-Q Summary

Reporting period: Quarter ended June 30, 2013; filed August 2, 2013. Financial statements are unaudited. CVR operates petroleum refining and nitrogen fertilizer businesses through majority-owned publicly traded partnerships; it consolidates both businesses. Icahn affiliates owned approximately 82% of CVR at quarter-end.

Financial results and liquidity

  • Second quarter: Net sales were $2.220 billion, down 3.8% year over year. Operating income was $262.7 million, up 11.4%; net income was $271.7 million versus $165.3 million. Net income attributable to CVR stockholders was $183.4 million, or $2.11 per diluted share, compared with $154.7 million, or $1.75.
  • First half: Net sales were $4.573 billion, up 6.9%; operating income was $630.3 million versus $376.3 million. Net income attributable to CVR stockholders was $348.4 million, or $4.01 per diluted share, versus $129.5 million, or $1.46.
  • Cash flow: First-half operating cash flow was $362.4 million, down from $435.9 million. Capital expenditures were $114.6 million versus $105.2 million. Cash increased $238.5 million to $1.135 billion. Second-quarter operating cash flow was $84.1 million versus $249.6 million.
  • Balance sheet: Working capital was $1.462 billion. Total debt, including current obligations, was $676.8 million, down from $898.2 million at year-end 2012. Long-term debt included $500 million of 6.5% notes due 2022, a $125 million fertilizer term loan due 2016, and capital leases. CVR Refining had $372.9 million of ABL availability and no borrowings; the fertilizer partnership had $25 million available on its revolver.
  • Margins and segments: Petroleum operating income was $229.1 million in Q2 (versus $248.9 million) and $564.7 million for six months (versus $383.8 million). Refining margin was $20.56 per crude-throughput barrel in Q2 and $23.63 for the first half, compared with $20.98 and $20.58, respectively. Nitrogen fertilizer operating income was $37.1 million in Q2 and $73.9 million for six months, versus $36.1 million and $67.5 million.

Material changes versus prior periods

  • Q2 consolidated sales declined mainly on lower petroleum sales volume and prices; first-half sales rose largely because refinery throughput and sales volumes recovered after the 2012 Coffeyville turnaround. The fertilizer UAN expansion also increased sales volumes.
  • First-half operating income benefited from higher petroleum refining margins and lower corporate SG&A. Prior-year SG&A included $44.2 million of IEP tender-offer costs and higher share-based compensation. Q2 SG&A fell $43.1 million year over year.
  • Derivative results were unusually influential: a $120.5 million Q2 gain versus $38.8 million, and a $100.5 million first-half gain versus a $108.5 million loss. The 2013 first-half result also included a $26.1 million loss on extinguishment of debt after repayment of the Second Lien Notes.
  • First-half operating cash flow fell despite higher earnings, reflecting a $169.7 million cash outflow from trade working capital, partly offset by $179.9 million from other working capital changes.

Outlook, commentary, risks and unusual items

  • Management stated that cash, operating cash flows and available credit were expected to cover anticipated operating needs for at least 12 months, while noting results depend on margins and other factors outside the company’s control. No consolidated earnings guidance is provided in the filing.
  • Estimated 2013 capital expenditures were $275–$295 million for petroleum and $40–$50 million for fertilizer. The UAN expansion was completed in February 2013; total project capital expenditures were approximately $130 million. The Wynnewood hydrocracker project was expected to cost approximately $60 million.
  • Management estimated petroleum RIN costs of $200–$240 million for 2013, compared with $21 million for all of 2012; first-half 2013 RIN expense was $97.6 million. The 2013 renewable fuel standard was not yet finalized, and Wynnewood planned to seek small-refinery hardship relief.
  • CVR paid $1.107 billion in dividends during the first half, including two special dividends; total paid was $12.75 per share. The regular quarterly dividend policy was initially set at $0.75 per share. Subsequent to quarter-end, CVR declared another $0.75 dividend. Partnership distributions are discretionary and may be changed or suspended.
  • Environmental and regulatory exposures include estimated MSAT II compliance capital of $59 million at Coffeyville and $98 million at Wynnewood, expected remaining costs of approximately $40 million under the Coffeyville consent decree, and volatile RIN obligations. A $10.5 million annual reduction in fertilizer-plant property taxes for 2013–2016 followed a county settlement.
  • CVR disclosed potential joint-and-several exposure to pension obligations of Icahn-controlled affiliates. ACF and Federal-Mogul plans would have been underfunded by an estimated $764.4 million collectively if terminated; CVR recorded no liability. Starfire indemnified CVR, but its ability to fund the indemnity is not assured.
  • Other matters include accrued $18.5 million claims each from Goldman Sachs and Deutsche Bank, an unresolved Wynnewood acquisition escrow dispute, and environmental insurance litigation related to the 2007 flood and crude-oil discharge. The filing also describes the fatal 2012 Wynnewood boiler incident and OSHA citations, which CVR is contesting.

Most important facts for investors to verify

  • How much reported earnings depended on mark-to-market derivative gains, and how those gains compare with realized cash settlements and underlying refining margins.
  • Whether RIN prices, availability, EPA requirements and any hardship relief change the projected 2013 compliance cost.
  • Whether operating cash generation can support planned capital spending, debt service and distributions after the unusually large first-half dividends.
  • Partnership cash availability and distribution restrictions, including debt covenants and the partnerships’ ability to maintain distributions.
  • The eventual costs and outcomes of pension, environmental, OSHA, tax and litigation contingencies, including the collectability of the Starfire indemnity.