CVR ENERGY INC quarterly report, Q1 FY2014

CVR Energy, Inc. — Q1 2014 Form 10-Q

Reporting period: Three months ended March 31, 2014; filed May 2, 2014. CVR is a holding company with petroleum refining and nitrogen fertilizer businesses. It consolidates both publicly traded partnerships while owning approximately 71% of CVR Refining and 53% of CVR Partners. IEP affiliates owned approximately 82% of CVR Energy.

Financial performance and liquidity

Metric	Q1 2014	Q1 2013
Net sales	$2,447.4 million	$2,352.4 million
Operating income	$183.5 million	$367.7 million
Net income	$213.7 million	$212.7 million
Net income attributable to CVR Energy stockholders	$126.7 million	$165.0 million
Basic and diluted EPS	$1.46	$1.90
Adjusted EBITDA	$154.1 million	$286.6 million
Operating cash flow	$281.3 million	$278.3 million
Capital expenditures	$61.9 million	$63.7 million

• Operating margin was approximately 7.5% of sales, versus 15.6% a year earlier. Refining margin fell to $312.0 million ($17.17 per crude-oil throughput barrel) from $468.2 million ($26.71 per barrel).
• Q1 net income included a $109.4 million net derivative gain, compared with a $20.0 million derivative loss in Q1 2013. The 2014 gain primarily reflected changes in crack spreads; it included unrealized mark-to-market effects. Adjusted EBITDA also declined substantially.
• At March 31, cash and cash equivalents were $962.1 million, working capital was $1,286.3 million, total debt including current portion was $675.9 million, and total assets were $3,869.9 million. Cash was held across CVR Energy ($462.8 million), CVR Refining ($413.4 million) and CVR Partners ($85.9 million); partnership cash is not freely available to the parent.
• Debt comprised $500 million of 6.5% senior notes due 2022, a $125 million nitrogen fertilizer term loan due April 2016, and capital leases. Refining had no ABL borrowings and $372.9 million availability; the fertilizer partnership had no revolving borrowings and $25 million availability. Both partnerships reported covenant compliance.
• CVR generated $120.0 million of net cash in the quarter. Operating cash flow benefited from $143.6 million of favorable other working-capital changes, including an $82.6 million increase in amounts due to parent.

Material changes versus Q1 2013

• Sales rose $95.0 million, primarily on higher petroleum sales volumes, despite lower product prices. Petroleum sales volumes increased 8.4%; average gasoline and distillate prices declined 5.7% and 3.5%, respectively.
• Petroleum operating income fell $171.0 million, mainly from a $156.2 million reduction in refining margin and $13.2 million higher direct operating expenses. The consumed crude-oil discount to WTI narrowed to $2.68 per barrel from $4.98.
• Nitrogen fertilizer operating income decreased to $23.1 million from $36.8 million. UAN volumes increased with the expanded capacity in operation, but UAN and ammonia plant-gate prices declined 14.2% and 27.8%; higher ammonia purchases and other costs also weighed on results.
• CVR Energy stockholder earnings declined despite slightly higher consolidated net income, partly reflecting a greater share of consolidated partnership earnings attributable to noncontrolling investors. Q1 2013 also included a $26.1 million loss on extinguishment of debt, while Q1 2014 did not.

Outlook, risks and unusual items

• No consolidated earnings guidance was provided. Management said cash, operating cash flow and available credit were expected to cover anticipated operating needs for at least the next 12 months, while cautioning that future cash generation and capital requirements are uncertain.
• For 2014, petroleum capital spending was estimated at $340–$350 million, including refinery maintenance and growth projects. Nitrogen fertilizer maintenance capital was estimated at $9–$11 million; a Q2 shutdown and $5–$7 million project were expected to improve hydrogen recovery and add approximately 7,000–9,000 tons of annual ammonia capacity.
• Management estimated 2014 RIN costs of $75–$150 million; Q1 costs were $34.7 million. RIN prices, availability and the ability to pass compliance costs to customers remain uncertain. Wynnewood had sought hardship relief from the RFS for 2013 and 2014.
• Environmental and regulatory exposure includes pending Oklahoma enforcement matters concerning alleged Clean Air Act, Clean Water Act and RCRA violations at Wynnewood. Costs could not be predicted; management did not expect penalties, controls or operational changes to be material. Environmental accruals were $1.4 million. RIN obligations recorded in current liabilities were $39.9 million.
• A significant unrecorded contingent exposure arises from CVR’s membership in the controlled group of IEP affiliates: two affiliate pension plans had estimated combined underfunding of $483.1 million on a voluntary termination basis at March 31, 2014. The filing states that CVR could be liable for certain obligations; no liability was recorded.
• Other material commitments include $1.4 billion of unconditional purchase obligations, including approximately $958.7 million under long-term Keystone transportation agreements. The crude-oil supply agreement with Vitol has an initial term through December 31, 2014.
• CVR declared a $0.75-per-share Q1 dividend after quarter-end. The partnerships declared distributions of $0.98 per CVR Refining unit and $0.38 per CVR Partners unit. Partnership distribution policies may be changed and do not guarantee payment.

Investor verification priorities

1. Separate recurring operating performance from the $109.4 million derivative gain; review hedge volumes, fair values, settlements and sensitivity to crack-spread changes.
2. Assess whether refining margins, crude-oil differentials, throughput and higher operating costs support earnings and cash generation, particularly amid the planned capital program.
3. Verify the RIN cost outlook and Wynnewood’s hardship-relief status, along with the outcome and potential costs of environmental enforcement proceedings.
4. Review cash accessibility between the parent and partnerships, the working-capital contribution to operating cash flow, and the sustainability of dividends and partnership distributions.
5. Evaluate the potential scope of affiliate pension liability and the assumptions behind the disclosed $483.1 million underfunding estimate.