CVR Energy, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 20, 2015. This is an annual report, not a standalone fourth-quarter filing. CVR Energy is a holding company controlling petroleum refining and nitrogen fertilizer partnerships, and consolidates their results. It owned approximately 66% of CVR Refining and 53% of CVR Partners at year-end; Icahn affiliates owned approximately 82% of CVR Energy.
Financial results and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $9,109.5 million | $8,985.8 million |
| Operating income | $264.3 million | $710.5 million |
| Net income | $309.4 million | $522.0 million |
| Net income attributable to CVR Energy stockholders | $173.9 million; diluted EPS $2.00 | $370.7 million; diluted EPS $4.27 |
| Adjusted EBITDA (non-GAAP) | $473.5 million | $659.7 million |
| Cash provided by operating activities | $640.3 million | $440.1 million |
| Capital expenditures | $218.4 million | $256.5 million |
| Cash and cash equivalents at year-end | $753.7 million | $842.1 million |
| Working capital at year-end | $1,033.0 million | $1,230.2 million |
| Total debt, including current portion | $674.9 million | $676.2 million |
Operating margin was approximately 2.9% of sales, versus 7.9% in 2013. Cash flow from operations increased largely because of favorable trade working-capital movements, including inventory and receivables reductions; it should not be read as an equivalent increase in recurring earnings. Financing cash outflow was $432.1 million, including $434.2 million of CVR Energy dividends and distributions to public partnership unitholders, partly offset by proceeds from the refining partnership’s offering.
Debt at year-end included $500 million of 6.5% notes due 2022, a $125 million nitrogen fertilizer term loan due April 2016, and capital leases. The refining partnership had $372.7 million of ABL availability at December 31, 2014, net of letters of credit; the nitrogen fertilizer partnership had $25 million available under its revolving facility. These facilities and cash balances are held by separate entities and are not freely interchangeable. Management said available cash, operating cash flows and credit facilities were expected to meet anticipated needs for at least the next 12 months.
Material changes versus 2013
- Sales rose 1.4%, but operating income fell 62.8% and net income attributable to CVR Energy stockholders fell 53.1%.
- Petroleum operating income declined to $207.2 million from $603.0 million. Refining margin fell to $11.38 per crude throughput barrel from $16.90, reflecting lower product prices, narrower refining economics and higher operating costs. Average gasoline and distillate selling prices each fell about 7%.
- Petroleum throughput increased to 207,829 barrels per day from 197,689, but refinery interruptions affected production: a July fire at Coffeyville and a 16-day Wynnewood FCCU outage in the fourth quarter.
- Nitrogen fertilizer operating income declined to $82.8 million from $124.9 million. Lower UAN and ammonia pricing, reduced ammonia sales and higher distribution costs outweighed higher UAN volumes. UAN sales volume rose 5.1%; UAN gate price declined about 8.2%.
- Derivative gains increased to $185.6 million from $57.1 million, while the petroleum business recorded an unfavorable FIFO inventory impact of $160.8 million, including a $36.8 million lower-of-cost-or-market write-down. These accounting and mark-to-market effects materially influenced reported results.
- Year-end cash decreased by $88.4 million. CVR paid $5.00 per share in 2014 dividends, including a $2.00 special dividend, compared with $14.25 per share in 2013, which included two special dividends.
Outlook, risks and unusual items
- Capital plans: Management estimated 2015 capital spending of $280 million to $320 million. A Coffeyville hydrogen plant was approved at an estimated cost of $122.5 million, with completion expected in the second quarter of 2016. A full nitrogen fertilizer plant turnaround was planned for the third quarter of 2015; Coffeyville refinery turnaround work was scheduled to begin in late 2015 and continue into early 2016.
- RIN exposure: 2014 renewable-fuel credit costs were $127.2 million. The petroleum business estimated 2015 RIN costs of $95 million to $170 million; actual costs depend on regulations, credit prices and operating volumes. EPA had not finalized the 2014 standards by year-end.
- Market sensitivity: Refining results are exposed to crack spreads, crude differentials, product prices, energy costs and regional logistics. Management noted late-2014 crude-price declines, reduced domestic crude advantages and weaker refining margins. Fertilizer results depend on commodity prices, seasonal demand, weather and production reliability; the pet-coke plant’s high fixed-cost structure magnifies downtime risk.
- Operations and safety: The Coffeyville July 2014 fire caused one employee fatality and interrupted operations; gross repair and other costs were approximately $6.3 million, with a $1.3 million insurance receivable recorded. Wynnewood’s 2012 boiler explosion killed two employees; OSHA citations and the company’s placement in its Severe Violators Enforcement Program were being contested, and a civil lawsuit remained in discovery.
- Environmental and legal matters: Remaining estimated costs under the Coffeyville consent decree were approximately $44 million; remaining Wynnewood consent-order costs were estimated at $3 million. Additional Wynnewood air and RCRA enforcement outcomes were not yet determinable. CVR was appealing judgments of approximately $22.6 million and $22.7 million in banker-fee litigation, which it had paid subject to refund if successful. A $27.1 million insurance verdict related to the 2007 flood was not recognized in earnings. The SEC was investigating disclosures related to the 2012 tender offer; CVR said it was cooperating.
- Contingent affiliate pension exposure: Because of Icahn affiliates’ ownership, CVR may be jointly liable for certain controlled-group pension obligations. Two affiliate plans would have been underfunded by a combined approximately $473.8 million if voluntarily terminated as of December 31, 2014; CVR recorded no liability for this contingent exposure.
- Governance and distributions: CVR is a controlled company and relies on NYSE governance exemptions. Partnership distributions and CVR dividends are discretionary and subject to debt covenants, operating cash generation and the separate partnerships’ available cash.
CVR’s 2014 financial statements received an unqualified audit opinion, and the auditor also gave an unqualified opinion on internal control over financial reporting.
Investor facts to verify
- Whether 2015 refining margins, crude differentials and operating reliability recover after 2014’s decline and outages.
- Actual RIN costs and compliance obligations versus management’s $95 million–$170 million 2015 estimate.
- Progress, costs and funding for the hydrogen plant, refinery turnarounds and nitrogen plant turnaround.
- Refinancing plans for the nitrogen fertilizer partnership’s $125 million term loan maturing in April 2016.
- Outcomes of the banker-fee appeals, SEC investigation, Wynnewood enforcement matters and fatal-accident litigation.
- Whether cash generation supports partnership distributions and CVR dividends without weakening liquidity or covenant headroom.