CVR Energy, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. CVR Energy is a holding company operating petroleum refining and marketing businesses and nitrogen fertilizer facilities through CVR Refining and CVR Partners.
Financial results and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $7.124 billion | $5.988 billion |
| Operating income | $587 million | $107 million |
| Net income attributable to CVR Energy stockholders | $289 million | $235 million |
| Diluted EPS | $3.12 | $2.70 |
| Operating cash flow | $620 million | $168 million |
| Adjusted EBITDA (non-GAAP) | $825 million | $406 million |
At year-end, consolidated cash and cash equivalents were $668 million; total long-term debt and capital lease obligations, net, were $1.167 billion. Available borrowing capacity was $394 million under the petroleum segment’s ABL facility and $50 million under the fertilizer segment’s facility. Consolidated current assets were $1.293 billion and current liabilities were $496 million. Management said existing cash, operating cash flow and available borrowing capacity were expected to meet requirements for at least 12 months.
Full-year petroleum operating income was $599 million, versus $134 million in 2017; nitrogen fertilizer operating income was $6 million, versus a $10 million loss. The fertilizer segment nevertheless reported a $50 million net loss, improved from a $73 million loss. Petroleum refining margin rose to $15.18 per total throughput barrel from $9.92. Total refinery throughput declined to 212,595 barrels per day from 218,181.
For Q4 2018, net sales were $1.737 billion, operating income $138 million, net income attributable to CVR Energy stockholders $82 million and diluted EPS $0.82. Q4 2017 included net sales of $1.593 billion, an operating loss of $36 million and attributable net income of $200 million, including the benefit of the 2017 tax-law change.
Changes and notable items
- Stronger refining margins and crude differentials, along with lower RFS compliance expense, drove much of the year-over-year improvement. RFS expense was $60 million in 2018, compared with $249 million in 2017.
- A 48-day FCC unit outage at the Coffeyville refinery in Q1 2018 reduced production and sales. The fertilizer business completed a planned 15-day Coffeyville turnaround in Q2.
- Fertilizer sales increased to $351 million from $331 million, primarily due to stronger second-half pricing; wet fall weather reduced ammonia deliveries and left more product in inventory. A $6 million business-interruption insurance recovery was recognized in 2018.
- Operating cash flow increased by $452 million year over year, reflecting improved operating results, partly offset by working-capital and other balance changes. Cash increased by $186 million during 2018.
- Net income attributable to stockholders rose less sharply than operating income partly because 2017 benefited from a $200 million deferred-tax remeasurement benefit under the Tax Cuts and Jobs Act, while 2018 recorded $89 million of income tax expense. Noncontrolling interests also increased with segment earnings.
- In August 2018, CVR issued 13.7 million shares in exchange for 21.6 million CVR Refining units. In January 2019, it acquired the remaining CVR Refining units for approximately $301 million; CVR Refining units were subsequently delisted. The purchase was funded with approximately $105 million of short-term borrowings and the remainder from cash.
Outlook, risks and contingencies
- No specific earnings guidance is provided. Management estimated 2019 capital expenditures of $210–$240 million, including $50–$60 million of growth projects subject to further approval. A Wynnewood refinery repositioning project was targeted for completion in Q1 2019.
- Management estimated 2019 RFS compliance costs of $80–$90 million, based on then-current RIN prices and assumptions. EPA rulemaking and litigation could change future obligations and costs.
- Key operating risks include volatile refining margins and crude differentials, RIN prices, seasonal fertilizer demand, weather, feedstock and natural-gas costs, facility outages, pipeline and supplier interruptions, and environmental and safety requirements. A third-party pet coke supply agreement and the East Dubuque natural-gas service agreement were due to expire in 2019.
- The DOJ, EPA and Kansas environmental agency alleged Clean Air Act and consent-decree violations at the Coffeyville refinery. The company could not reasonably estimate potential penalties or costs. A federal inquiry into RFS-related activities had made no claims or allegations against CVR Energy or Mr. Icahn, according to the filing.
- Six lawsuits brought by purported former CVR Refining unitholders challenge the call-option transaction and seek monetary damages; the company said it believes the claims are without merit. A separate Kansas property-tax dispute remained subject to a possible state Supreme Court review.
- Environmental remediation accruals were $8 million at year-end, up from $4 million. The company cautioned that future remediation, enforcement or third-party claims could exceed estimates or insurance coverage.
- CVR is a holding company dependent on subsidiary distributions. Consolidated cash includes cash held by operating subsidiaries, so it should not be assumed to be freely available at the parent. The filing identifies Icahn-affiliate ownership of approximately 71% and related governance and potential conflict-of-interest risks.
Most important facts for investors to verify
- Whether improved 2018 refining margins and unusually favorable crude differentials are sustainable, and how the 2019 RFS cost estimate compares with actual expense.
- Parent-level versus subsidiary cash availability, debt covenants, debt maturities and the funding impact of the CVR Refining unit purchase.
- Actual 2019 capital spending, project approvals and performance after the Coffeyville outage and Wynnewood turnaround.
- Resolution and potential financial exposure from the Coffeyville Clean Air Act matter, call-option lawsuits and property-tax appeal.
- Whether the declared $0.75-per-share fourth-quarter dividend and CVR Partners’ $0.12-per-unit distribution are supported by recurring cash generation.
The filing’s financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2018.