CVR Energy, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 20, 2020. CVR Energy operates petroleum refineries and nitrogen fertilizer facilities. Comparisons below are with 2018 unless noted. Dollars are in millions except per-share and per-barrel amounts.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $6,364 | $7,124 |
| Operating income | $580 | $532 |
| Net income | $362 | $366 |
| Net income attributable to CVR Energy stockholders | $380 | $259 |
| Basic and diluted EPS | $3.78 | $2.80 |
| EBITDA, non-GAAP | $880 | $821 |
| Operating cash flow | $747 | $628 |
| Capital expenditures and turnaround expenditures | $159 | $110 |
| Cash and cash equivalents at year-end | $652 | $668 |
| Long-term debt and finance lease obligations, net of current portion | $1,190 | $1,167 |
- Net sales declined about 11%, principally reflecting lower gasoline and distillate prices. Operating income rose about 9%; net income attributable to CVR stockholders rose about 47%. Consolidated net income was lower, in part because the CVR Refining unit purchase changed the allocation to noncontrolling interests.
- Operating cash flow improved by $119 million, principally due to a $152 million favorable working-capital change, partly offset by lower operating results excluding non-cash items. Investing cash outflow was $121 million; financing cash outflow was $642 million, including $301 million to acquire remaining CVR Refining units and $306 million of CVR Energy dividends. Cash decreased $16 million year over year.
- At year-end, CVR Refining had $393 million of availability under its $400 million ABL facility and CVR Partners had $50 million under its facility. The company reported compliance with debt covenants and believed cash, operating cash flow and available credit would cover anticipated needs for at least 12 months.
- Gross indebtedness was disclosed as $1.195 billion at December 31, 2019. In January 2020, CVR Energy issued $600 million of 5.25% notes due 2025 and $400 million of 5.75% notes due 2028, and redeemed CVR Refining’s $500 million 6.50% notes due 2022. Management reported total indebtedness of $1.691 billion as of January 31, 2020.
Segments and changes versus prior year
- Petroleum: Net sales were $5.968 billion, down from $6.780 billion. Operating income was $574 million versus $544 million; net income was $559 million versus $511 million. Refining margin rose to $1.203 billion, or $15.26 per throughput barrel, from $1.178 billion, or $15.18. Average throughput increased to 215,971 barrels per day from 212,595. Lower RIN expense and higher throughput contributed to margin growth, while derivative gains fell by $127 million. Excluding inventory valuation effects, refining margin was $1.160 billion versus $1.211 billion.
- Nitrogen fertilizer: Net sales increased to $404 million from $351 million, mainly on improved pricing and higher sales volumes. Operating income was $27 million versus $6 million; the segment still recorded a net loss, narrowed to $35 million from $50 million. EBITDA, a non-GAAP measure, rose to $107 million from $84 million. Weather delayed planting and fertilizer applications; East Dubuque completed a 32-day turnaround.
- CVR acquired all remaining CVR Refining common units in January 2019 for approximately $301 million, making CVR Refining wholly owned and eliminating its public units. This affected year-over-year noncontrolling-interest and tax comparisons.
- CVR changed Petroleum turnaround accounting effective January 1, 2019, retrospectively adopting deferral and four-year amortization rather than expensing planned turnarounds as incurred. The company recast comparative statements; management said the method better reflects the benefits of turnaround spending.
Outlook, risks and notable items
- Management forecast 2020 capital spending of $133–$150 million, including $45–$55 million of growth projects requiring additional approvals. The Coffeyville refinery turnaround was expected in spring 2020, with total estimated spending of $145–$155 million.
- Estimated 2020 RFS compliance cost was $100–$110 million, compared with $43 million recognized in 2019 and $60 million in 2018. RIN prices, regulatory decisions and the outcome of litigation could affect the cost.
- Management described long-term U.S. nitrogen fertilizer fundamentals as supportive, but highlighted commodity cyclicality and 2019 weather-related disruption. No formal earnings or revenue guidance was provided in the supplied filing text.
- Major risks include volatile refining margins and fertilizer prices, crude and feedstock availability and cost, RIN obligations, customer concentration, seasonal demand, facility outages, environmental compliance, and dependence on pipelines and other third parties. The Coffeyville fertilizer facility’s pet coke purchases from the refinery declined to about 40% of supply in 2019; third-party supply contracts were scheduled to end in December 2020.
- Unresolved matters include DOJ/EPA/Kansas allegations of Clean Air Act and consent-decree violations at Coffeyville, with potential costs not estimable; class-action lawsuits challenging the CVR Refining unit call-option purchase; and a court decision vacating Wynnewood’s 2017 small-refinery exemption, which was remanded to the EPA and subject to appeal. Environmental remediation accruals were approximately $6 million.
- CVR declared $3.05 per share in 2019 dividends; an additional $0.80-per-share fourth-quarter dividend was declared in February 2020. A $300 million repurchase authorization was approved, but no shares were repurchased in 2019. CVR Partners paid $0.40 per unit in 2019 and declared no fourth-quarter distribution.
- Icahn Enterprises and affiliates held approximately 71% of CVR Energy at year-end. The company relies on controlled-company governance exemptions. The two largest customers represented 25% of Petroleum sales and 28% of fertilizer sales in 2019.
Important facts for investors to verify
- Whether reported earnings and cash generation remain resilient after adjusting for the retrospective turnaround-accounting change, inventory valuation effects and volatile derivative gains or losses.
- Actual Coffeyville turnaround cost, timing and operating impact, alongside execution and returns from planned growth projects.
- 2020 RIN compliance expense and the outcomes of the EPA rulemaking and Wynnewood exemption litigation.
- Refinancing effects on total debt, interest expense, covenant headroom and liquidity following the January 2020 notes issuance and redemption.
- Resolution and potential financial exposure from the Coffeyville Clean Air Act matter and CVR Refining call-option lawsuits, for which outcomes or costs were not clear or estimable in the filing.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; the filing identified finished-goods inventory valuation and the turnaround-accounting change as critical audit matters.