CVR Energy, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; unaudited. CVR operates a petroleum refining and marketing business and consolidates CVR Partners, LP, its nitrogen fertilizer business, in which it held 69.8% of the common units after the Partnership’s April 2011 IPO.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $1,447.7 million | $1,005.9 million | $2,615.0 million | $1,900.4 million |
| Operating income | $217.9 million | $19.4 million | $327.5 million | $7.8 million |
| Net income (loss) | $134.2 million | $1.2 million | $180.0 million | $(11.2) million |
| Net income attributable to CVR stockholders | $124.9 million | $1.2 million | $170.7 million | $(11.2) million |
| Diluted EPS | $1.42 | $0.01 | $1.94 | $(0.13) |
- Q2 petroleum operating income was $183.5 million versus $4.6 million; nitrogen fertilizer operating income was $39.3 million versus $16.5 million.
- Petroleum refining margin was $25.49 per crude-oil-throughput barrel in Q2, compared with $6.70 a year earlier. Six-month refining margin was $23.08 per barrel versus $6.41.
- Cash from operating activities for the six months was $162.6 million, up from $45.7 million. Capital expenditures were $21.0 million; cash increased $547.9 million to $748.0 million, with financing inflows including Partnership IPO proceeds and new Partnership debt.
- At June 30, cash was $748.0 million, working capital $951.4 million, and total debt including current portion $591.7 million. Long-term debt carrying value was $591.5 million; this included $125 million of CRNF term debt. The $250 million ABL facility had no borrowings and $218.4 million availability; $31.6 million of letters of credit were outstanding. CVR reported compliance with credit covenants.
- Interest expense was $14.2 million in Q2 and $27.4 million for the six months. The six-month derivative result was a $15.2 million loss, versus an $8.8 million gain in 2010; Q2 recorded a $6.9 million gain.
Material changes versus comparable periods
- Higher petroleum product prices and stronger refining margins were the primary drivers of the earnings improvement. Q2 gasoline and distillate average selling prices rose about 45% year over year; the six-month increases were approximately 38% and 43%, respectively. Higher crude and other feedstock costs partly offset the revenue gains.
- Fertilizer results also improved as plant-gate prices rose. Q2 ammonia and UAN plant-gate prices were $574 and $300 per ton, compared with $312 and $205. Fertilizer operating reliability improved: Q2 gasification, ammonia and UAN on-stream factors were 99.3%, 98.5% and 97.6%, respectively.
- The April Partnership IPO generated $325.1 million of net proceeds and introduced a 30.2% public noncontrolling interest. CVR continued to consolidate the Partnership’s results, while public holders’ share of earnings is deducted in arriving at CVR-attributable income.
- Debt and financing arrangements changed: CVR replaced its prior revolver with a $250 million ABL facility, and the Partnership issued $125 million of term debt. CVR’s ABL availability and cash position were substantial at period end, while the Partnership’s funds are subject to its own needs and distribution policy.
Outlook, commentary, risks and unusual items
- Management said existing cash, operating cash flow, working capital and available revolving facilities were expected to cover anticipated operating cash needs for at least the next 12 months; this depends on future performance and market conditions. The filing provides no earnings or revenue guidance.
- 2011 estimated capital spending: approximately $94 million for petroleum and $3 million corporate, including $23 million for additional Cushing crude storage; approximately $47.6 million for fertilizer, including $36.2 million for the UAN expansion. The expansion is expected to cost about $135 million in total and finish in Q1 2013.
- A refinery turnaround is planned across Q4 2011 and Q1 2012. Expected total turnaround expense is approximately $70 million, with about $54 million expected in 2011. Management also reported that the Partnership announced a Q2 distribution of $0.407 per common unit, with approximately $9 million expected for public unitholders; payment was scheduled for August 12, 2011. Distributions are not contractually guaranteed and may be changed.
- CVR’s refinery experienced a May 2011 small fire at its continuous catalytic reformer; the incident reduced Q2 throughput. The December 2010 FCCU incident had reduced Q1 throughput, with an estimated 1.9 million barrels of processing lost. The fertilizer plant’s September 2010 UAN-vessel rupture resulted in $11.1 million of gross repair and related costs; the company recorded $2.9 million of business-interruption insurance recovery in H1 2011.
- Renewable fuel compliance cost the refinery $5.0 million in Q2 and $8.5 million in H1 2011. Commodity price, refining-margin, crude supply, operating interruption, weather and seasonal risks remain material. The refinery turnaround, required environmental spending and the fertilizer business’s cyclical demand are additional considerations.
- Contingencies include a Kansas property-tax classification dispute that could result in a refund if successful, or continued elevated taxes if unsuccessful; and a proposed MAPL pipeline rate increase that could raise annual costs by approximately $14.75 million if fully approved. Environmental matters include ongoing refinery air-compliance negotiations, the 2007 spill-related insurance dispute and potential EPA oversight-cost recovery; management said other litigation was not expected to materially adversely affect the financial statements. The filing reported no material changes to previously disclosed risk factors.
Key facts for investors to verify
- Whether Q2 refining-margin strength and elevated product prices persist, and how crude differentials, feedstock costs and inventory effects affect margins.
- Actual cash available to CVR versus cash held by CVR Partners, including the Partnership’s debt covenants, capital spending and distribution capacity.
- Execution, cost and timing of the refinery turnaround and the $135 million UAN expansion, along with 2011 capital-spending estimates.
- Outcomes and financial exposure from the property-tax dispute, MAPL rate proceeding, environmental matters and insurance recoveries.
- Future RIN costs and the operating and margin impact of the planned refinery turnaround and any unplanned plant downtime.