CVR Energy, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Unaudited consolidated results include CVR’s petroleum refining and nitrogen fertilizer partnerships; public partnership interests are reflected as noncontrolling interests.
Business context and financial performance
CVR operates two segments: petroleum refining and marketing, and nitrogen fertilizer production. The refining business operates the Coffeyville, Kansas and Wynnewood, Oklahoma refineries. Icahn Enterprises and affiliates owned approximately 82% of CVR at quarter-end.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $1,408.8m | $2,279.9m | $4,421.9m | $7,267.7m |
| Operating income | $121.5m | $6.8m | $532.3m | $354.9m |
| Net income | $98.9m | $21.3m | $375.7m | $379.0m |
| Net income attributable to CVR shareholders | $57.9m | $7.9m | $214.6m | $218.3m |
| Diluted EPS | $0.67 | $0.09 | $2.47 | $2.51 |
| Operating cash flow | $235.9m | $125.3m | $612.3m | $530.8m |
Q3 refining margin was $297.9m, or $16.17 per crude throughput barrel, versus $161.5m, or $9.96 per barrel, a year earlier. Nine-month refining margin was $912.8m, or $16.38 per barrel, versus $767.3m, or $14.29 per barrel. Adjusted EBITDA, a non-GAAP measure, was $153.8m for Q3 and $463.2m for nine months, compared with $90.5m and $391.9m, respectively.
The nitrogen fertilizer segment recorded a Q3 operating loss of $11.8m, versus operating income of $14.4m; nine-month operating income was $48.4m, down from $56.3m. Q3 Adjusted Nitrogen Fertilizer EBITDA was $3.8m, versus $21.1m.
Liquidity, debt and capital spending
- Cash and cash equivalents were $1,012.0m at September 30, 2015, up from $753.7m at December 31, 2014. Consolidated working capital was $960.1m, down from $1,033.0m.
- Total debt, including capital leases, was $673.9m. This included $500m of 6.5% senior notes due 2022 and a $125m nitrogen fertilizer term loan due April 2016; the latter is classified as current. No revolving-credit borrowings were outstanding. Refining had $372.2m of ABL availability; nitrogen fertilizer had $25m of revolver availability.
- Nine-month capital expenditures were $141.9m, versus $171.4m in 2014. Full-year 2015 estimated capital spending was $245m–$270m. Management stated existing cash, operating cash flow and available credit were expected to cover anticipated needs for at least 12 months.
- Nine-month investing cash outflow was $73.8m and financing cash outflow was $280.2m. Cash increased by $258.3m during the period.
Material changes, outlook and risks
- Lower commodity selling prices drove the sales decline: nine-month gasoline and distillate average prices fell 38.3% and 42.2%, respectively. Higher refining margins and lower crude costs supported petroleum operating income; Q3 sales volumes also benefited from the prior-year Coffeyville outage.
- Q3 nitrogen fertilizer results were pressured by a full plant turnaround and downtime involving the Linde air separation unit. The turnaround cost was approximately $6.6m in Q3 ($7.0m for nine months); production and on-stream factors fell materially. Management said that excluding turnaround and Linde downtime, Q3 on-stream factors would have been materially higher.
- The first phase of the Coffeyville refinery turnaround began in late September and was expected to continue until mid-November, at an estimated cost of $95m–$98m. A second phase was scheduled for early 2016, with estimated cost of $30m–$35m. The refinery hydrogen plant project was estimated at $122.5m, with completion anticipated in Q2 2016.
- Management estimated 2015 RIN costs of $100m–$125m; $93.4m had been incurred for the first nine months. Final EPA renewable-fuel volume requirements were pending, creating uncertainty around future RIN costs.
- CVR Partners agreed to acquire Rentech Nitrogen. Consideration was 1.04 CVR Partners units plus $2.57 cash per eligible Rentech unit, with approximately 40.7m CVR Partners units expected to be issued. Closing remained subject to conditions, including the sale or spin-off of Rentech’s Pasadena facility. Two lawsuits challenged the transaction and sought, among other remedies, to enjoin it; outcomes were uncertain. CVR Partners had a conditional commitment for up to $150m of affiliate term financing to support merger-related uses.
- Q3 results included $11.8m of derivative gains. Nine-month results included a $52.2m derivative loss, partially offset by $36.6m of other income, including gains on securities sales and reclassification. A $27.3m flood-insurance recovery was recorded in the first nine months; the broader settlement proceeds were approximately $31.3m.
- Environmental accruals were $2.8m at quarter-end. CVR also disclosed potential exposure to underfunded pension plans of Icahn affiliates as a member of their controlled group; estimated combined plan underfunding upon termination was $623.4m, but no liability was recorded because exposure was contingent. Other risks include commodity-price and refining-margin volatility, operational interruptions, environmental regulation, and refinancing the nitrogen fertilizer loan due in April 2016.
CVR declared a $0.50-per-share Q3 dividend, payable November 16, 2015. CVR Refining declared a $1.01-per-unit Q3 distribution. These payments were declared after quarter-end; partnership and company distributions remain subject to board discretion and applicable restrictions.
Most important facts for investors to verify
- Progress, costs and production impacts of the Coffeyville and nitrogen fertilizer turnarounds, and completion and budget for the hydrogen plant project.
- Refinancing plans and terms for the $125m nitrogen fertilizer term loan maturing April 2016, and liquidity available at each separate entity.
- Final EPA RFS requirements and actual full-year RIN expense compared with management’s $100m–$125m estimate.
- Rentech merger closing conditions, Pasadena facility disposition, litigation outcomes, financing draw and final unit dilution.
- Underlying refining performance after accounting for FIFO inventory effects, derivative results and the nonrecurring insurance and securities gains.