CVR Energy, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. CVR is a holding company operating petroleum refining and nitrogen fertilizer businesses through CVR Refining and CVR Partners. Results consolidate both partnerships. CVR completed the CVR Refining IPO in January 2013 and retained approximately 81% ownership; it owned approximately 70% of CVR Partners. These changes affect comparability with the prior-year quarter.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $2,352.4 million | $1,968.6 million |
| Operating income | $367.7 million | $140.5 million |
| Net income (loss) | $212.7 million | ($16.0) million |
| Net income (loss) attributable to CVR stockholders | $165.0 million | ($25.2) million |
| Diluted EPS | $1.90 | ($0.29) |
| Operating cash flow | $278.3 million | $186.3 million |
| Capital expenditures | $63.7 million | $59.5 million |
- Sales rose 19.5%, primarily on higher petroleum volumes. Operating income increased 161.7%; the filing attributes the improvement chiefly to stronger refining margins and lower direct operating costs, alongside lower SG&A.
- Petroleum operating income was $335.6 million, versus $134.9 million; refining margin was $26.71 per crude-throughput barrel, versus $20.07. Refinery throughput increased to 204,590 barrels per day from 155,385, partly because Coffeyville had turnaround downtime in Q1 2012.
- Nitrogen fertilizer operating income was $36.8 million, versus $31.4 million. Sales were $81.4 million, up from $78.3 million. The completed UAN expansion supported higher sales volumes; ammonia prices rose while UAN prices fell.
- Consolidated operating margin was approximately 15.6%, compared with 7.1% in Q1 2012. Net income attributable to CVR stockholders was approximately 7.0% of sales; the prior period reported a loss.
- Cash and cash equivalents were $1,040.8 million at March 31, up from $896.0 million at year-end; working capital was $1,283.2 million. Cash is held across distinct entities: $362.5 million at CVR Energy, $525.1 million at CVR Refining and $153.2 million at CVR Partners, and partnership cash is not freely interchangeable with parent cash.
- Total debt, including current portion, was approximately $677.0 million, down from $898.2 million at year-end. The balance 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; Refining had $372.8 million of ABL availability and $27.2 million of letters of credit.
- Operating cash flow exceeded capital expenditures by approximately $214.6 million. Financing cash flow included $655.7 million of net CVR Refining IPO proceeds, $243.4 million of senior-note repayments and a $477.6 million CVR special dividend.
Material changes and unusual items
- CVR Refining’s IPO generated $655.7 million net proceeds. Approximately $253 million was used to repay the remaining Second Lien Notes; the repayment produced a $26.1 million extinguishment loss. Consolidated debt fell, while noncontrolling interest increased following the IPO.
- CVR paid a special dividend of $5.50 per share, approximately $477.6 million in aggregate. The board adopted a quarterly dividend policy with an expected initial rate of $0.75 per share, subject to board declaration.
- Net derivative loss improved to $20.0 million from $147.2 million in Q1 2012, but included $52.5 million of realized losses and a $32.5 million unrealized gain. Refining crack-spread swaps covered 22.8 million barrels and had a reported net unrealized loss of $34.1 million at quarter-end.
- SG&A declined $16.9 million, principally because Q1 2012 included $14.8 million in IEP tender-offer-related proxy expenses and $3.7 million in Wynnewood acquisition/integration costs. In Q1 2013, CVR also recorded a $26.1 million debt extinguishment loss.
- Montgomery County’s settlement is expected to reduce nitrogen plant property taxes by about $10.5 million annually for 2013–2016, based on current mill levy rates. The UAN expansion was completed in February 2013 and reached full rates before quarter-end.
Outlook, risks and contingencies
- Management stated that cash, operating cash flow and available credit were expected to cover anticipated operating needs for at least 12 months, while cautioning that actual future cash needs and performance could differ.
- For 2013, expected capital spending was $250–$270 million for petroleum and $43–$53 million for nitrogen fertilizer. The UAN expansion was expected to cost approximately $130 million in total; $120.2 million had been spent by March 31. A Wynnewood hydrocracker project was expected to cost approximately $50 million.
- Management declared after quarter-end a $0.75-per-share CVR dividend, a $0.610-per-unit CVR Partners distribution and a $1.58-per-unit CVR Refining distribution. Partnership distributions depend on available cash, board decisions and covenant conditions; neither partnership is obligated to distribute cash every quarter.
- Key business exposures include volatile refining spreads and crude oil prices, fertilizer pricing and seasonality, refinery or plant downtime, and uncertain costs or availability of renewable identification numbers (RINs). Wynnewood became subject to RFS requirements in 2013; the filing warns that higher or unavailable RINs could materially affect results.
- Environmental obligations include estimated remaining costs of approximately $41 million under the Coffeyville EPA consent decree, primarily capital spending, and approximately $2 million remaining under the Wynnewood consent order. Anticipated MSAT II compliance capital expenditures were approximately $59 million at Coffeyville and $94 million at Wynnewood; proposed Tier 3 compliance at Coffeyville was expected to cost less than $20 million.
- Other matters include two fully accrued claims seeking approximately $18.5 million each from Goldman Sachs and Deutsche Bank, a Wynnewood purchase/escrow dispute with unspecified damages, and continuing environmental and tax matters. OSHA cited WRC after the 2012 boiler explosion that killed two employees; WRC contested the citations. The filing says penalties were not expected to be material.
- Contractual commitments include $1.418 billion of unconditional purchase obligations, including approximately $993.9 million payable over 18 years under Keystone crude transportation agreements. The filing reported no SEC-defined off-balance-sheet arrangements.
Investor verification priorities
- Assess whether the Q1 margin and earnings gains are sustainable, separating higher throughput and refining margins from turnaround comparability, derivative marks and other unusual items.
- Confirm cash availability by legal entity, partnership distribution capacity, and the parent’s ability to fund dividends and expenses from partnership distributions.
- Track RIN costs and pass-through, refining crack spreads, crude differentials, and the performance and full costs of the UAN expansion.
- Review 2013 capital spending against the stated ranges, particularly refinery maintenance and environmental projects, and monitor debt covenants and committed purchase obligations.
- Follow developments in environmental compliance, the OSHA contest, litigation and tax exposures, including the $41.1 million of unrecognized tax benefits disclosed at quarter-end.