Business Context and Reporting Period
Company: CVR Energy, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: CVR Energy operates two primary segments: an independent petroleum refining business and a nitrogen fertilizer business. The petroleum segment includes a 115,000 barrels-per-day (bpd) complex full coking refinery in Coffeyville, Kansas, along with supporting crude oil gathering, pipeline, and marketing operations. The nitrogen fertilizer segment, held through CVR Partners, LP, produces ammonia and UAN (urea ammonium nitrate) using a unique pet coke gasification process.
Key Financial Metrics (Year Ended Dec 31, 2010)
| Metric | 2010 Value | 2009 Value |
|---|---|---|
| Net Sales | $4,079.8 million | $3,136.3 million |
| Operating Income | $93.1 million | $208.2 million |
| Net Income | $14.3 million | $69.4 million |
| Diluted EPS | $0.16 | $0.80 |
| Operating Cash Flow | $225.4 million | $85.3 million |
| Total Debt (Principal) | $472.5 million | $491.3 million |
| Cash & Equivalents | $200.0 million | $36.9 million |
| Capital Expenditures | $32.4 million | $48.8 million |
Segment Performance:
- Petroleum: Net sales of $3.9 billion; Operating income of $104.6 million (down from $170.2 million in 2009). Refining margin per barrel decreased to $8.84 from $10.65.
- Nitrogen Fertilizer: Net sales of $180.5 million; Operating income of $20.4 million (down from $48.9 million in 2009).
Material Changes vs. Prior Period
- Revenue Increase: Consolidated net sales increased 30% to $4.1 billion, driven primarily by a 33% increase in petroleum net sales due to higher product prices (gasoline and distillate) and increased distillate sales volumes.
- Profitability Decline: Despite higher revenue, operating income fell 55% to $93.1 million. This was caused by a decline in refining margins, increased direct operating expenses, and higher share-based compensation costs ($37.2 million in 2010 vs. $8.8 million in 2009).
- Debt Restructuring: In April 2010, the company issued $500 million in senior secured notes (First and Second Lien) to pay off $453.3 million in term loans. This resulted in a $16.6 million loss on extinguishment of debt.
- Operational Disruptions: The nitrogen fertilizer business faced significant downtime due to a biennial turnaround and a September 2010 rupture of a high-pressure UAN vessel, which halted production for approximately six weeks. The petroleum refinery experienced a December 2010 FCCU malfunction and fire, reducing throughput.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Liquidity: As of March 2, 2011, the company had $192.1 million available under a new $250 million asset-backed revolving credit facility (ABL) and approximately $103.6 million in cash.
- Capital Spending: Budgeted capital expenditures for 2011 are $95.8 million, including $50 million for a scheduled refinery turnaround and $25 million for new crude oil storage in Cushing, Oklahoma.
- Partnership IPO: CVR Partners, LP (the fertilizer business) filed a registration statement for an initial public offering (IPO) in December 2010. The offering is subject to market conditions and regulatory approval. If consummated, it may alter the consolidation of the fertilizer business and provide funding for a $135 million UAN expansion project.
Key Risks & Contingencies:
- Environmental Compliance: The company is subject to a Consent Decree with the EPA and Kansas Department of Health and Environment regarding air emissions. Remaining compliance costs are estimated at $49 million. There are also ongoing remediation obligations for historic contamination at the refinery and terminal sites.
- Commodity Price Volatility: Earnings are highly sensitive to the "crack spread" (margin between refined products and crude oil) and nitrogen fertilizer prices, which are cyclical and volatile.
- Operational Hazards: The company faces risks of unplanned downtime, equipment failure, and environmental releases, as evidenced by the 2010 UAN vessel rupture and refinery fire.
- Customer Concentration: The top five petroleum customers represented 47.6% of sales in 2010. The top five ammonia and UAN customers represented 44.2% and 43.3% of sales, respectively.
Investor Verification Checklist
- Refining Margins: Verify the sustainability of the $8.84 per barrel refining margin given the volatility in crude oil differentials and product prices.
- Environmental Liabilities: Confirm the status of the EPA Consent Decree negotiations and the estimated $49 million in remaining compliance costs.
- Partnership IPO Status: Monitor the progress of the CVR Partners, LP IPO, as its success is critical for funding the UAN expansion and potentially changing the company's capital structure.
- Debt Covenants: Review compliance with financial covenants under the new ABL credit facility and senior secured notes, particularly the fixed charge coverage ratio.
- Operational Reliability: Assess the impact of the December 2010 refinery fire and September 2010 UAN vessel rupture on future maintenance costs and production schedules.