Business context and reporting period
CVR Energy, Inc.’s Form 10-K covers the fiscal year ended December 31, 2011; it is an annual report, not a standalone Q4 filing. CVR operated a petroleum refining and marketing business and controlled CVR Partners, LP, a nitrogen fertilizer producer. On December 15, 2011, CVR acquired the 70,000-barrel-per-day Wynnewood refinery, adding it to the 115,000-barrel-per-day Coffeyville refinery. Wynnewood’s results are included only from December 16 onward.
Financial and operating metrics
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $5.029 billion | $4.080 billion |
| Operating income | $566.6 million | $93.1 million |
| Net income attributable to CVR shareholders | $345.8 million | $14.3 million |
| Diluted EPS | $3.94 | $0.16 |
| Operating margin, calculated | Approximately 11.3% | Approximately 2.3% |
| Cash from operating activities | $278.6 million | $225.4 million |
| Cash from investing activities | $(674.4) million | $(31.3) million |
| Cash from financing activities | $584.1 million | $(31.0) million |
| Cash and cash equivalents at year-end | $388.3 million | $200.0 million |
| Working capital at year-end | $769.2 million | $333.6 million |
| Total debt, including current portion | $863.8 million | $477.0 million |
Petroleum segment sales were $4.752 billion and operating income was $465.7 million, versus $3.904 billion and $104.6 million in 2010. Refining margin rose to $21.80 per crude-oil-throughput barrel from $8.84; throughput declined 8.5%, mainly reflecting the Coffeyville turnaround. Nitrogen fertilizer sales were $302.9 million and operating income was $136.2 million, versus $180.5 million and $20.4 million. Higher fertilizer prices, increased UAN sales, and better plant availability contributed to the improvement.
Consolidated net income was $378.6 million before $32.8 million attributable to noncontrolling interests. The reported $78.1 million net derivative gain materially affected earnings; the filing identifies $85.3 million of unrealized derivative gains. Q4 2011 sales were $1.062 billion and operating income was $26.9 million; net income attributable to CVR shareholders was $65.9 million, including a $103.2 million derivative gain in the quarter. Cash from operations included significant working-capital use, including a $175.5 million increase in inventory.
Material changes versus the prior comparable period
- Sales increased about 23% and operating income rose substantially, principally as refining margins and fertilizer prices improved. The NYMEX 2-1-1 crack spread averaged $26.33 per barrel versus $10.07 in 2010.
- Petroleum product prices increased, but refined-fuel and propane sales volumes fell 11.5%; Coffeyville crude throughput was reduced by maintenance and turnaround activity. The 2011 consumed crude-oil cost averaged $92.09 per barrel versus $76.13.
- The 2011 results include a $66.4 million Coffeyville turnaround expense and $19.0 million of RIN compliance costs. Derivative gains, including unrealized gains, make reported earnings less directly indicative of recurring operating performance.
- The Wynnewood acquisition cost approximately $592.3 million. The acquisition drove investing cash outflow; CVR financed it in part with $200 million of additional 9% first-lien notes and an increase in its ABL facility.
- The Partnership IPO brought in public investors for approximately 30% of CVR Partners; CVR retained approximately 70% and consolidated the Partnership. Its public ownership and separate financing structure affect the cash available to CVR.
Outlook, risks, contingencies, and unusual items
Management stated that available cash, operating cash flow, and existing credit facilities were expected to meet anticipated needs for at least the next 12 months, including Wynnewood integration. This is not earnings guidance. Estimated 2012 capital spending was $278.3 million, excluding turnaround expenses; management also estimated approximately $31.7 million for the second Coffeyville turnaround phase and $85.0 million for Wynnewood’s planned turnaround. The Partnership’s UAN expansion was expected to increase annual UAN capacity by about 400,000 tons, with completion anticipated in Q1 2013.
- Liquidity and leverage: At year-end, the $400 million ABL had $313.9 million available after $86.1 million of letters of credit, with no borrowings outstanding. Consolidated cash included $151.3 million at CVR and $237.0 million at the Partnership; funds are not freely interchangeable. Notes include $447.1 million of first-lien principal due 2015 and $222.7 million of second-lien principal due 2017; the Partnership had a $125 million term loan due 2016.
- Market and operational exposure: Refining margins, crude-oil differentials, fertilizer prices, seasonal demand, weather, outages, and turnaround execution can cause significant earnings and cash-flow volatility. Wynnewood had no crude-oil intermediation agreement at the time of filing.
- Regulatory and legal matters: The Coffeyville Clean Air Act consent decree had approximately $49 million of remaining compliance costs expected, largely capital spending; a proposed global settlement awaited EPA approval. The Wynnewood Clean Water Act permit had expired and was operating under a permit shield while renewal was pending. CVR also disclosed environmental remediation, release-reporting, and government enforcement matters; management did not expect currently pending proceedings to have a material adverse effect, but outcomes remain uncertain.
- Other contingencies: The Partnership disputed elevated property-tax assessments; a January 2012 ruling upheld the real-property classification, and an appeal was planned. A pipeline-rate case could increase annual costs by approximately $14.75 million if the proposed increase were fully approved. The filing also describes potential integration costs and acquired-business liabilities.
- Subsequent events: CVR announced an intended sale of part of its Partnership investment to fund a special shareholder dividend and strengthen its balance sheet; completion, amount, and timing were not assured. A $0.08-per-share quarterly dividend was approved. Icahn-affiliated funds announced board nominations and commenced a tender offer for control in February 2012.
Important facts for investors to verify
- Separate recurring operating performance from the $78.1 million annual derivative gain and the $103.2 million Q4 derivative gain; review the fair-value and settlement details.
- Confirm the final Wynnewood purchase-price and working-capital adjustments, integration costs, and the acquired refinery’s full-year contribution.
- Track 2012 turnaround timing, downtime, spending, and the delivery of expected UAN expansion capacity.
- Monitor ABL availability, debt maturities and covenants, and the amount of cash actually accessible to the parent after Partnership restrictions and distributions.
- Follow RIN compliance costs and appeals, consent-decree approval and spending, wastewater permit renewal, property-tax appeals, and pipeline-rate proceedings.
- Review the proposed Partnership-unit sale, special dividend, and tender offer developments. The auditor gave unqualified opinions on the financial statements and internal controls, but the controls review excluded GWEC, representing 29% of year-end assets and 2% of 2011 revenue.