CVR Energy, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless noted. CVR is a holding company with petroleum refining and nitrogen fertilizer businesses. It consolidated both publicly traded partnerships; Icahn Enterprises and affiliates owned approximately 82% of CVR.
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $1,536.5 million | $1,507.1 million |
| Operating income | $90.5 million | $67.6 million |
| Net income | $103.6 million | $38.2 million |
| Net income attributable to CVR stockholders | $66.2 million; $0.76 per diluted share | $22.2 million; $0.26 per diluted share |
| Operating cash flow | $24.5 million | $137.2 million |
| Capital expenditures | $20.0 million | $24.2 million |
| Cash and cash equivalents, March 31 | $420.0 million | $803.6 million at March 31, 2017 |
Net sales rose 2.0%; operating income increased by $22.9 million. Net income benefited substantially from a $59.3 million net derivative gain, versus $12.2 million a year earlier. Adjusted EBITDA, a non-GAAP measure, was $85.9 million versus $80.4 million. The company declared a $0.50-per-share dividend, unchanged year over year.
Segments and material changes
- Petroleum: Segment net sales were $1,458.2 million, up $34.7 million, and operating income was $97.2 million versus $66.0 million. Refining margin was $240.5 million, or $15.04 per crude-oil throughput barrel, compared with $222.2 million, or $11.52 per barrel. Higher transportation-fuel prices and better refining spreads supported results; refinery throughput was lower.
- Refinery disruption: A Coffeyville FCCU outage lasted approximately 48 days, reducing crude throughput about 17.1% and petroleum sales volumes about 17.1%. The outage also contributed to inventory growth and working-capital cash use. A favorable $20.4 million FIFO inventory impact supported reported results.
- Nitrogen fertilizer: Segment sales declined to $79.9 million from $85.3 million, and operating results shifted to a $3.4 million loss from $5.3 million income. Lower ammonia sales volumes, higher direct operating costs, and higher depreciation contributed. East Dubuque experienced an unplanned 12-day January outage. The Coffeyville fertilizer facility began a scheduled turnaround in April, expected to last about 15 days and cost approximately $7 million, excluding lost production.
Cash, debt and liquidity
Operating cash flow fell to $24.5 million, principally as working capital absorbed cash: inventory increased $37.1 million and prepaid expenses and other current assets increased $77.4 million, including excess RINs and crude oil in transit. Cash declined $61.8 million during the quarter after $66.5 million of financing outflows, including $43.4 million of CVR dividends and $22.6 million of distributions to Refining Partnership public unitholders. Working capital was $624.8 million.
At March 31, total debt and capital lease obligations were $1,191.7 million before unamortized issuance costs and discounts; balance-sheet debt carrying value, including current portion, was approximately $1,167.0 million. The principal notes were $500 million of 6.5% notes due 2022 and $645 million of 9.25% secured notes due 2023. Refining had $297.9 million of ABL availability and $6.4 million of letters of credit, with no borrowings; Nitrogen Fertilizer had $49.2 million available under its ABL, also with no borrowings. Management said cash, operating cash flows, and facilities were expected to meet anticipated needs for at least 12 months. Consolidated cash included amounts held by the partnerships, which are not freely available to CVR and are subject to distribution policies and debt restrictions.
Outlook, risks and notable items
- Management estimated 2018 net RIN costs of approximately $80 million, subject to volatile credit prices and compliance needs. Q1 RIN net cost was reported as a $22.7 million benefit, favorably affected by reduced obligations and lower market prices.
- Estimated 2018 capital spending was $160 million. The second phase of the Wynnewood refinery turnaround was expected in the first half of 2019, with estimated turnaround expense of approximately $25 million; Coffeyville refinery turnaround was expected in the second half of 2020.
- The 2023 Notes’ fixed-charge coverage ratio was below the 1.75-to-1.0 distribution threshold; $72.7 million remained in the restricted-payment basket. The partnership reported covenant compliance. Refining reported covenant compliance and satisfaction of its 2022 Notes coverage test.
- CVR disclosed a U.S. Attorney’s Office information request concerning RFS-related activities and Carl Icahn’s role as a presidential adviser. The company was cooperating; no claims or allegations had been made, and management did not expect a material impact.
- Because Icahn affiliates’ ownership exceeds 80%, CVR may be jointly liable for certain affiliate pension obligations. Two affiliate plans had estimated aggregate underfunding of $417.1 million if voluntarily terminated; CVR recorded no liability for this contingent exposure.
- Other exposures include volatile refining margins and crude prices, RIN availability and cost, operating interruptions, fertilizer seasonality, environmental requirements, and long-term purchase commitments. The filing reported $1,053.7 million of unconditional purchase obligations, including substantial pipeline transportation commitments.
- ASC 606 was adopted January 1, 2018 with no material change to revenue recognition; its presentation effects on Q1 sales and costs were each $0.2 million. The company was assessing the upcoming lease standard and could not yet estimate its impact.
Investor verification points
- Assess how much reported earnings depended on derivative gains, FIFO effects, and the favorable RIN impact, versus recurring operating performance.
- Track recovery from the Coffeyville FCCU disruption, throughput, inventory and working-capital normalization, and the April fertilizer turnaround and East Dubuque reliability.
- Verify RIN market costs and compliance exposure against management’s approximately $80 million 2018 estimate.
- Monitor cash held at each entity, ABL borrowing-base availability, debt covenants and restrictions on partnership distributions, alongside the declared dividends.
- Review affiliate pension exposure, the federal inquiry, environmental obligations, and the scale and duration of contractual purchase commitments.