CVR Energy, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; unaudited. Amounts below are in millions of dollars except per-share and per-barrel data.
Business context
CVR operates two businesses: petroleum refining and marketing, and nitrogen fertilizer production through its approximately 70%-owned CVR Partners. The petroleum business includes the Coffeyville, Kansas refinery and the 70,000-barrel-per-day Wynnewood, Oklahoma refinery, acquired in December 2011. Accordingly, 2012 comparisons include Wynnewood for the full periods, unlike 2011.
Icahn-affiliated entities held approximately 82% of CVR’s shares at September 30, 2012, following a $30-per-share cash tender offer that also included a contingent payment right. CVR’s solicitation of third-party acquisition proposals ended July 23 without a qualifying offer.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $2,409.6 | $1,352.0 | $6,686.6 | $3,966.9 |
| Operating income | $533.7 | $212.2 | $910.0 | $539.7 |
| Net income | $218.5 | $120.2 | $367.8 | $300.2 |
| Net income attributable to CVR stockholders | $208.9 | $109.3 | $338.4 | $279.9 |
| Diluted earnings per share | $2.41 | $1.25 | $3.86 | $3.19 |
| Cash provided by operating activities | — | — | $783.8 | $345.9 |
| Capital expenditures | — | — | $145.1 | $46.6 |
Q3 net sales increased 78.2% and income attributable to CVR stockholders increased 91.1%; for the nine months, sales increased 68.6% while attributable income rose 20.9%. The petroleum segment drove the improvement: Q3 operating income was $507.5 versus $179.8, and nine-month operating income was $891.2 versus $469.0. Its refining margin was $36.31 per crude-oil-throughput barrel in Q3 and $26.34 for the nine months, compared with $25.03 and $23.77, respectively, in 2011.
Nitrogen fertilizer operating income was $32.3 in Q3 versus $37.5, but $99.8 for the nine months versus $93.6. Nine-month UAN plant-gate prices improved, while production and on-stream factors were lower than in 2011.
Cash, debt and liquidity at September 30: Cash and cash equivalents were $988.2; working capital was $1,137.7. Long-term debt and capital lease obligations totaled $850.9, including senior secured notes, the Partnership’s $125.0 term loan and capital leases. The $400.0 ABL facility had no borrowings and $372.8 availability after letters of credit. The company reported covenant compliance. Nine-month operating cash flow substantially exceeded the prior-year period; investing outflows were $143.6 and financing outflows were $40.3.
Material changes and unusual items
- Acquisition and refining results: Wynnewood contributed $772.8 of Q3 sales and $154.4 of Q3 operating income; nine-month contributions were $2,380.6 and $319.1. The acquisition materially increases scale and limits direct comparison with 2011.
- Commodity derivatives: Net derivative losses were $169.0 in Q3 and $277.4 for the nine months, including unrealized losses of $115.7 and $197.0. The outstanding crack-spread contracts covered 26.3 million barrels and had a net fair-value liability of approximately $115.7 at quarter-end. These instruments were not designated as GAAP hedges, so fair-value changes affected reported earnings.
- Costs and working capital: Nine-month selling, general and administrative expense increased to $147.8 from $69.0, reflecting transaction and acquisition/integration costs, higher staffing and related items. CVR reported $44.2 of transaction-related costs; it was challenging a majority of expenses charged. Favorable inventory reductions supported operating cash flow, while receivables increased.
- Ownership-related compensation and taxes: The change of control modified employee restricted-stock awards, resulting in $12.4 of additional share-based compensation and liability classification. CVR also joined Icahn-affiliated AEPC’s consolidated federal tax group; $44.5 was due to AEPC at quarter-end under the tax allocation agreement.
Outlook, risks and contingencies
- Turnarounds and fourth-quarter impact: Wynnewood’s turnaround began in Q4; CVR expected approximately $100.0 of 2012 turnaround expense and 50–55 days of downtime, with a significant effect on Q4 revenue. The nitrogen fertilizer plant’s October turnaround lasted 19 days; approximately $4.7 of October expense was estimated, with lost production also affecting Q4.
- Refinery incident: A September 28 boiler explosion at Wynnewood fatally injured two employees. Damage was reported as limited to the boiler, with no evidence of environmental impact; internal, OSHA and Oklahoma Department of Labor investigations were ongoing.
- Capital plans: Management expected 2012 petroleum capital expenditures of approximately $160–165 and nitrogen fertilizer capital expenditures of $90–105. The approximately $125 UAN expansion project had incurred $92.8 through September 30 and was expected to be completed by January 1, 2013.
- Post-quarter refinancing: On October 23, CVR Refining issued $500.0 of 6.5% second-lien notes due 2022. Proceeds funded the purchase of approximately $323.0 of first-lien notes; the company planned to tender for or redeem the remaining $124.1. Management anticipated approximately $31.7 of premiums and an $8.4 write-off of deferred financing costs in Q4. CVR also filed to pursue an IPO of CVR Refining, but completion and terms were uncertain.
- Commitments and exposures: Unconditional purchase obligations totaled $932.9, including long-term crude transportation commitments. The company disclosed $26.1 of unrecognized tax benefits. Two investment-bank suits each alleged approximately $18.5 in unpaid tender-offer advisory fees; CVR disputed the claims but had accrued the amounts. A Kansas property-tax classification appeal could produce a refund if successful; otherwise elevated taxes were expected to continue. Environmental regulation, renewable-fuel requirements and related capital or compliance costs remain risks.
- Management stated that cash, operating cash flow and available credit were expected to cover anticipated operating requirements for at least the next 12 months, while cautioning that future performance and capital needs depend on market and other factors beyond its control. Refining margins, crude-oil supply and prices, fertilizer markets, operating reliability, regulation and debt restrictions were identified as key risks.
Important facts for investors to verify
- How Q4 results reflect Wynnewood and fertilizer turnarounds, including downtime, expenses and production recovery.
- Whether derivative settlements and fair-value movements continue to materially affect earnings and cash flows.
- Final completion, cost and capacity impact of the UAN expansion, and the actual 2012 capital-spending and turnaround totals.
- Final use of refinancing proceeds, redemption of remaining first-lien notes, Q4 extinguishment costs and the resulting debt and interest burden.
- Progress and terms, if any, of the CVR Refining IPO, and any implications for CVR’s ownership and cash flows.
- Developments in the Wynnewood incident investigations, advisory-fee litigation, tax matters and environmental/property-tax proceedings.