CVR Energy, Inc. — Q1 2015 Form 10-Q
Business context and reporting period: Unaudited results for the three months ended March 31, 2015, compared with Q1 2014. CVR is a holding company with petroleum refining and nitrogen fertilizer businesses, consolidated through its majority-owned partnerships. Icahn Enterprises and affiliates owned approximately 82% of CVR at quarter-end.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $1,388.9 million | $2,447.4 million |
| Operating income | $136.6 million | $183.5 million |
| Net income | $84.7 million | $213.7 million |
| Net income attributable to CVR shareholders | $54.9 million | $126.7 million |
| Diluted EPS | $0.63 | $1.46 |
| Adjusted EBITDA | $163.7 million | $154.1 million |
| Operating cash flow | $178.2 million | $281.3 million |
| Capital expenditures | $45.5 million | $61.9 million |
- Margins and segments: Petroleum operating income declined to $109.2 million from $164.6 million; refining margin fell to $13.68 per crude-throughput barrel from $17.17. Nitrogen fertilizer operating income rose to $31.5 million from $23.1 million, with sales increasing to $93.1 million from $80.3 million.
- Cash and liquidity: Cash and equivalents were $852.2 million at March 31, up from $753.7 million at year-end. Working capital was $1,038.2 million. Cash flow from operations less capital expenditures was $132.7 million.
- Debt: Total debt, including current portion, was $674.6 million, primarily $500 million of 6.5% notes due 2022 and a $125 million nitrogen fertilizer term loan. The refining ABL facility had $339.1 million available, subject to borrowing-base limits; the fertilizer revolver had $25 million available. Both partnerships were in covenant compliance, and neither had revolver borrowings.
- Capital returns: CVR paid a $0.50-per-share dividend during the quarter. After quarter-end, the board declared another $0.50-per-share dividend. The partnerships declared Q1 distributions of $0.76 per refining unit and $0.45 per fertilizer unit; distributions are discretionary and may be changed or suspended.
Changes versus Q1 2014
- Sales fell $1,058.5 million, mainly because petroleum product prices were substantially lower; gasoline and distillate average prices declined 44.4% and 43.7%, respectively. Petroleum sales volume decreased approximately 2.1%.
- Operating income declined $46.9 million, principally from lower petroleum refining margins. Nitrogen fertilizer results improved on higher sales volumes and prices.
- Reported earnings were also affected by a $51.4 million derivative loss versus a $109.4 million gain in Q1 2014. Other income included a $20.1 million realized gain on securities sold and an $11.7 million unrealized gain transferred to income when securities were reclassified to trading.
- Operating cash flow declined by $103.1 million. Adjusted EBITDA increased, but this non-GAAP measure includes adjustments for derivatives, inventory FIFO effects, and other items; it is not equivalent to operating cash flow.
Outlook, risks, and unusual items
- Management said existing cash, operating cash flow, and available credit were expected to cover anticipated operating needs for at least 12 months, while cautioning that future cash generation depends on market and operating conditions.
- Estimated 2015 capital spending was $295 million to $335 million. Major projects included a $122.5 million Coffeyville hydrogen plant, targeted for completion in Q2 2016, and $14 million to $15 million for two crude storage tanks. The Coffeyville refinery turnaround was planned in phases beginning late 2015 and early 2016; a nitrogen fertilizer plant turnaround was planned for Q3 2015.
- Management estimated 2015 RIN compliance costs of $125 million to $175 million, subject to fuel mandates, credit availability, and prices. Q1 RIN expense was $36.6 million.
- Key business risks include volatile refining and fertilizer margins, crude and product prices, RIN costs and availability, refinery or plant outages, environmental compliance, and dependence on transportation and other suppliers.
- CVR could be liable as a member of Icahn-affiliated controlled groups for underfunded affiliate pension plans. The plans’ estimated termination underfunding was $492.5 million at March 31, 2015; CVR recorded no liability because exposure is contingent.
- A jury judgment related to the 2007 refinery flood and crude oil discharge was amended to approximately $30.4 million, but both sides appealed. CVR had recognized only a $4.0 million receivable and recorded no additional gain. A property-tax reassessment matter remained pending, with no amount recognized.
- Environmental accruals were $0.9 million. The filing also disclosed $1,356.0 million of unconditional purchase obligations, including long-term crude transportation commitments; these are contractual commitments, not reported debt.
Important facts for investors to verify
- Whether refining margins and crude differentials recover, and how derivative results and FIFO inventory effects affect reported earnings.
- Actual RIN costs and final regulatory requirements compared with management’s $125 million to $175 million estimate.
- Execution, cost, and timing of the planned capital projects and turnarounds, alongside available liquidity and partnership distributions.
- Developments in the insurance appeal, property-tax case, environmental obligations, and potential exposure to Icahn-affiliate pension liabilities.
- That consolidated cash is held across CVR and its partnerships; partnership cash is not freely interchangeable, and distributions are not guaranteed.