CVR Energy, Inc. — 2015 Form 10-K
Business context and period. Annual report for the fiscal year ended December 31, 2015. CVR Energy is a holding company whose two principal businesses are petroleum refining and marketing, operated through CVR Refining, and nitrogen fertilizer manufacturing, operated through CVR Partners. CVR Energy owned approximately 66% and 53%, respectively, of their common units at year-end; the partnerships’ results are consolidated, with public investors’ share reported as noncontrolling interest.
Financial results and key metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $5,432.5 million | $9,109.5 million |
| Operating income | $421.6 million | $264.3 million |
| Net income | $297.8 million | $309.4 million |
| Net income attributable to CVR Energy stockholders | $169.6 million | $173.9 million |
| Diluted EPS | $1.95 | $2.00 |
| Cash from operating activities | $536.8 million | $640.3 million |
| Capital expenditures | $218.7 million | $218.4 million |
| Cash and cash equivalents at year-end | $765.1 million | $753.7 million |
| Total debt, including current portion | $673.5 million | $674.9 million |
| Working capital | $789.9 million | $1,033.0 million |
- Margins and segments: Petroleum operating income was $361.7 million, versus $207.2 million; reported refining margin rose to $14.45 per crude-throughput barrel from $11.38. Petroleum Adjusted EBITDA, a non-GAAP measure, was $602.0 million versus $621.6 million. Nitrogen fertilizer operating income declined to $68.7 million from $82.8 million, and Adjusted EBITDA fell to $106.8 million from $110.3 million.
- Cash flow and liquidity: Operating cash flow decreased by $103.5 million year over year, while year-end cash increased modestly. Cash was held across distinct entities: $527.8 million at CVR Energy, $187.3 million at CVR Refining, and $50.0 million at CVR Partners; these balances are not freely interchangeable. CVR Refining had no ABL borrowings at year-end and $290.1 million of availability, subject to borrowing-base limits. CVR Partners had $125.0 million of term debt due April 2016 and $25.0 million of revolving availability.
- Distributions: CVR Energy paid $2.00 per share in 2015, versus $5.00 in 2014, which included a special dividend. CVR Refining paid $3.12 per unit and CVR Partners $1.25 per unit during 2015. Boards may change or suspend distributions, and debt covenants restrict them.
Material changes versus prior periods
- Consolidated sales fell $3.68 billion, principally because lower crude and refined-product prices reduced petroleum sales; gasoline and distillate average selling prices fell 36.4% and 42.3%, respectively.
- Operating income improved $157.3 million from 2014, primarily as petroleum refining margins improved and a $27.3 million flood-related insurance recovery was recognized. The prior year included a larger unfavorable FIFO inventory impact ($160.8 million versus $60.3 million in 2015).
- Despite higher operating income, net income attributable to CVR Energy stockholders slipped to $169.6 million. Derivative results swung from a $185.6 million gain in 2014 to a $28.6 million loss in 2015; other income included gains associated with investment securities.
- 2015 included $109.2 million of major turnaround expenses, including $102.2 million at Coffeyville and $7.0 million at the fertilizer plant. Refinery throughput was also affected by the Coffeyville turnaround.
- Fertilizer sales and operating income weakened amid lower UAN prices, lower production/on-stream factors, and the 2015 plant turnaround and Linde-related outages.
Outlook, commentary, risks and unusual items
- Management stated that available cash and existing facilities were expected to meet anticipated operating cash needs for at least the next 12 months, but this depends on future margins, performance, and financing access. No formal consolidated earnings guidance is provided in the filing.
- Management estimated 2016 RIN compliance costs of approximately $140 million to $190 million, compared with $123.9 million in 2015. RIN pricing and availability, refining margins, crude differentials, and regional demand are significant uncertainties.
- 2016 capital spending was estimated at $220 million, excluding major turnarounds. The second phase of the Coffeyville turnaround was scheduled for late February 2016, with estimated cost of $35 million to $38 million. The Coffeyville hydrogen plant was expected to cost approximately $122.5 million and be completed in the second quarter of 2016.
- CVR Partners agreed to acquire Rentech Nitrogen for 1.04 CVR Partners units plus $2.57 cash per eligible Rentech unit. The transaction remained subject to conditions, including sale or spin-off of Rentech’s Pasadena facility. Rentech unitholders approved the deal in February 2016; CVR Partners also arranged up to $150 million of affiliate financing for specified transaction and refinancing needs.
- Key risks include volatile refining and fertilizer margins; the approaching fertilizer credit-facility maturity; operational outages and large turnaround requirements; RIN costs; environmental obligations and permitting; seasonal and weather-driven fertilizer demand; and reliance on suppliers, pipelines, and concentrated customers.
- Environmental accruals were $3.6 million at year-end, but remediation costs could change as investigations progress. Separately, CVR disclosed potential joint liability for affiliates’ pension obligations: two Icahn-affiliated plans were estimated to be underfunded by $589.2 million if voluntarily terminated. No liability was recorded for this contingent exposure.
- Other notable items: the 2015 flood-insurance settlement produced $31.3 million, of which $27.3 million was recorded as income; the 2014 Coffeyville refinery fire involved a fatality; and the company disclosed an SEC investigation regarding tender-offer disclosures and litigation concerning the pending Rentech merger. The merger litigation had a proposed settlement subject to court approval.
Important facts for investors to verify
- Whether CVR Partners refinanced or repaid its $125 million term loan when it matured in April 2016, and the resulting borrowing terms and covenant headroom.
- Actual 2016 RIN expense versus the company’s $140 million–$190 million estimate, and the effect on refining cash generation.
- Completion, final cost, and operating impact of the Coffeyville turnaround and hydrogen-plant project.
- Completion and financing of the Rentech Nitrogen acquisition, including the Pasadena facility disposition and any merger-related costs or liabilities.
- Whether partnership cash distributions and CVR Energy’s dividend remain supported by operating cash flow after capital spending, debt service, and required reserves.
- Updates on environmental remediation, permits, merger litigation, the SEC inquiry, and possible affiliate pension exposure.