CVR Energy, Inc. — Q1 2012 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2012, compared with Q1 2011; balance-sheet comparisons are to December 31, 2011. CVR operates petroleum refining and marketing and, through approximately 70% ownership, nitrogen fertilizer production. Results include a full quarter from the Wynnewood refinery, acquired in December 2011.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Net sales | $1,968.6 million | $1,167.3 million |
| Operating income | $140.5 million | $109.6 million |
| Net income (loss) | $(16.0) million | $45.8 million |
| Net income (loss) attributable to CVR stockholders | $(25.2) million; $(0.29) per diluted share | $45.8 million; $0.52 per diluted share |
| Net cash from operating activities | $186.3 million | $(15.9) million |
| Capital expenditures | $59.5 million | $7.3 million |
| Cash and cash equivalents | $500.9 million | $388.3 million at Dec. 31, 2011 |
| Working capital | $741.2 million | $769.2 million at Dec. 31, 2011 |
| Long-term debt and capital lease obligations | $852.9 million | $853.9 million at Dec. 31, 2011 |
Operating margin was supported by higher segment operating income: petroleum contributed $134.9 million versus $105.7 million, and nitrogen fertilizer contributed $31.4 million versus $16.8 million. Petroleum refining margin was $267.8 million, or $20.07 per crude-oil throughput barrel, versus $181.0 million, or $20.38 per barrel. Nitrogen fertilizer adjusted EBITDA, a non-GAAP measure, was $38.0 million versus $25.9 million.
Consolidated results included a $147.3 million net derivative loss, including a $128.2 million unrealized loss, compared with a $22.1 million derivative loss in Q1 2011. The unrealized loss was primarily associated with commodity swaps; it materially outweighed the improvement in operating income and drove the consolidated net loss. The filing reports no ABL borrowings and $373.4 million of availability at March 31, with $26.6 million of letters of credit outstanding. The $400 million ABL facility had $324.0 million available as of May 1.
Material changes versus Q1 2011
- Sales rose 68.6%, primarily because Wynnewood added a full quarter of sales; Wynnewood accounted for approximately $825.5 million of sales and $65.7 million of net income.
- Higher crude prices and throughput lifted product costs; average consumed crude cost increased approximately 13% to $101.25 per barrel. Refinery sales volume also increased with the acquisition.
- Petroleum direct operating expenses increased, reflecting Wynnewood, the Coffeyville turnaround and other costs. Q1 2012 turnaround expense was $21.0 million versus $3.1 million.
- Fertilizer sales increased on higher plant-gate prices and hydrogen sales, partly offset by lower UAN volumes and reduced on-stream factors. Ammonia and UAN plant-gate prices increased 8.6% and 51.1%, respectively.
- Interest expense increased $6.0 million to $19.2 million, mainly due to the additional $200 million of first-lien notes issued in December 2011 and related financing-cost amortization.
- Cash from operations improved substantially, while investing cash outflow rose with higher capital spending. Cash increased $112.6 million during the quarter.
Outlook, risks and unusual items
- Spending and operations: Management expected 2012 petroleum capital expenditures of approximately $175–185 million and fertilizer capital expenditures of $95–100 million. The UAN expansion was expected to add approximately 400,000 tons of annual capacity and be completed in Q1 2013. Wynnewood and the fertilizer plant were scheduled for Q4 2012 turnarounds; expected Wynnewood turnaround expense was approximately $85 million, with approximately $5 million expected for the fertilizer turnaround.
- Liquidity outlook: Management stated that cash, operating cash flow and available credit were expected to cover anticipated operating cash needs for at least the next 12 months, while cautioning that future spending and performance could differ from expectations.
- Change-of-control transaction: On April 18, 2012, CVR entered an agreement concerning the Icahn Parties’ amended tender offer at $30 per share in cash plus a contingent cash payment right. The offer was scheduled to expire May 4, subject to extension. If completed, it could change board control and lead to a sale process. A change of control could require an offer to repurchase notes at 101% of principal and trigger an ABL default absent a lender waiver. CVR’s proposed sale of part of its CVR Partners stake was restricted while the transaction agreement remained in effect; the planned CVR quarterly dividend would not proceed unless the offer terminated.
- Environmental and legal matters: A Coffeyville consent decree provided for approximately $49 million of remaining FCCU-control costs, mostly capital expenditures, plus a $0.7 million penalty and a $1.2 million environmental project. The fertilizer plant’s elevated property taxes were under appeal; success could result in refunds, while failure would likely sustain higher taxes. The filing also describes ongoing environmental, regulatory and litigation exposures, including unresolved insurance recovery matters.
- Commodity exposure: Refining margins, crude differentials, product prices and fertilizer prices are volatile. Commodity swaps can create substantial reported earnings volatility because they are not designated as accounting hedges.
- Unusual costs: The company had incurred approximately $14.8 million of costs related to the tender-offer and transaction matters by March 31; Wynnewood acquisition transaction and integration expenses were approximately $3.7 million for the quarter.
Important facts for investors to verify
- Reconcile the $128.2 million unrealized derivative loss with the underlying swap positions, future production margins and subsequent fair-value changes.
- Assess the sustainability of operating cash flow and segment margins, including working-capital movements, crude-oil differentials, turnaround costs and Wynnewood’s post-acquisition performance.
- Track the tender offer and any subsequent sale process, dividend decisions, and potential note-repurchase or ABL consequences of a change of control.
- Monitor actual 2012 capital and turnaround spending, UAN expansion completion and funding, and the fertilizer plant’s operating reliability.
- Review the outcomes of the property-tax appeals, environmental decree obligations, insurance recoveries and other disclosed contingencies.