CVR Energy, Inc. — Q3 2013 Form 10-Q
Business context and period. CVR is a diversified holding company with petroleum refining and nitrogen fertilizer businesses, consolidated through majority-owned CVR Refining and CVR Partners. This unaudited filing covers the three and nine months ended September 30, 2013, compared with the same periods in 2012. IEP owned approximately 82% of CVR at quarter-end.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $1,977.1 million | $2,409.6 million | $6,549.8 million | $6,686.5 million |
| Operating income | $40.4 million | $533.7 million | $670.7 million | $910.0 million |
| Net income | $78.2 million | $218.5 million | $562.6 million | $367.8 million |
| Net income attributable to CVR stockholders | $44.0 million | $208.9 million | $392.4 million | $338.4 million |
| Basic EPS | $0.51 | $2.41 | $4.52 | $3.90 |
| Operating cash flow | $(41.1) million | $347.9 million | $321.3 million | $783.8 million |
- Refining: Q3 petroleum operating income was $23.4 million versus $507.5 million; refining margin was $175.8 million, or $11.89 per crude throughput barrel, versus $643.3 million, or $36.31 per barrel. Nine-month petroleum operating income fell to $588.1 million from $891.2 million.
- Fertilizer: Q3 operating income was $21.3 million versus $32.3 million; nine-month operating income was $95.2 million versus $99.8 million. Expanded UAN capacity lifted nine-month UAN sales volume, while prices were lower.
- Cash, liquidity and debt: At September 30, cash was $887.1 million, working capital $1,395.2 million, and total debt including current obligations $676.4 million. Refining had $372.9 million of ABL availability and no borrowings; the fertilizer partnership had $25 million available on its revolver. The filing reports compliance with applicable debt covenants.
- Cash uses: Nine-month capital expenditures were $183.6 million. Cash dividends to CVR stockholders totaled $1,172.2 million; distributions to public unitholders of the two partnerships totaled $139.1 million. Cash declined $8.9 million over the nine-month period.
Material changes versus comparable periods
- Q3 sales decreased $432.5 million, primarily from lower petroleum sales volume and product prices. The Coffeyville FCCU was offline for about 55 days for repairs, reducing refinery throughput and production. The outage also contributed to approximately $20.8 million in repair costs.
- Q3 operating income fell $493.3 million, mainly due to weaker petroleum margins and the FCCU outage. Refining throughput was 167,563 barrels per day versus 203,038 a year earlier.
- RIN expense rose sharply: $57.4 million in Q3 and $155.0 million for the first nine months, versus $7.1 million and $16.5 million, respectively, in 2012.
- Reported earnings were materially affected by derivative accounting: Q3 recorded a $72.5 million net gain versus a $168.9 million loss in 2012; nine-month results recorded a $173.0 million gain versus a $277.4 million loss. These gains and losses should be distinguished from operating performance and cash settlements.
- Nine-month operating income declined despite higher reported net income, reflecting the derivative swing and other items. The 2013 period also included a $26.1 million loss on extinguishment of debt; 2012 included $44.2 million of tender-offer expenses, among other comparability differences.
Outlook, risks and unusual items
- Management expected 2013 RIN costs of approximately $175 million to $190 million and said the amount was difficult to estimate; RIN prices were volatile. Wynnewood sought hardship relief from RFS requirements for 2013 and 2014.
- Expected 2013 capital spending was $190 million to $215 million for petroleum and $40 million to $48 million for fertilizer. A Wynnewood hydrocracker project was expected to cost about $60 million, with $16.3 million spent by September 30. The UAN expansion was completed in February 2013.
- Management stated that cash, operating cash flows and available credit were expected to cover anticipated operating needs for at least 12 months, while noting that cash generation depends on volatile refining and fertilizer margins and other external factors.
- Environmental and regulatory exposure includes refinery compliance projects, possible further Wynnewood enforcement, and RIN obligations. The filing estimates remaining Coffeyville consent-decree costs at about $40 million and identifies substantial MSAT II capital requirements. Long-term unconditional purchase obligations total $1,440.7 million, including about $965.5 million under the Keystone transportation agreements.
- Potential affiliate pension exposure is significant but contingent and unrecorded: ACF and Federal-Mogul plans would be underfunded by approximately $702.9 million collectively if voluntarily terminated. CVR says it could be jointly liable as a member of the controlled group.
- Other legal matters include two fully accrued $18.5 million banker-fee claims, a Wynnewood acquisition-related escrow dispute, and a civil suit following the fatal 2012 boiler incident; management said the latter was too preliminary to assess.
- After quarter-end, CVR declared a $0.75-per-share dividend; each partnership also declared a Q3 distribution: $0.36 per fertilizer unit and $0.30 per refining unit. Partnership distributions are discretionary and may be changed or suspended.
Key facts for investors to verify
- Whether Coffeyville’s FCCU repairs restored normal operating rates and what follow-on maintenance or costs may arise.
- Actual RIN costs, any EPA hardship relief for Wynnewood, and whether projected full-year RIN spending was achieved.
- Underlying refining margins and cash performance excluding derivative fair-value movements, and the nature and timing of derivative settlements.
- Capital-spending progress, completion timing and expected returns for the Wynnewood hydrocracker and environmental projects.
- Cash availability at CVR parent versus the separately financed partnerships, debt covenant headroom, and capacity to sustain dividends and partnership distributions.
- Developments in the affiliate pension exposure, tax uncertainties, environmental proceedings, property-tax appeal and outstanding litigation.