CVR Energy, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. CVR is a holding company operating petroleum refining and nitrogen fertilizer businesses through CVR Refining and CVR Partners. Results include the East Dubuque fertilizer facility from its April 1, 2016 acquisition.
Financial performance and liquidity
- Third quarter: Net sales were $1,240.3 million, down 12% from $1,408.8 million. Operating income was $27.2 million versus $121.5 million; net income attributable to CVR stockholders was $5.4 million, or $0.06 per diluted share, versus $57.9 million, or $0.67 per share. The company declared $0.50 per share in dividends.
- Nine months: Net sales were $3,429.0 million versus $4,421.9 million. Operating income was $78.0 million versus $532.3 million; net income attributable to CVR stockholders was $17.6 million, or $0.20 per share, versus $214.6 million, or $2.47 per share. Adjusted EBITDA, a non-GAAP measure, was $158.8 million versus $463.2 million.
- Refining: Q3 refining margin fell to $176.0 million from $297.9 million; margin per crude throughput barrel was $9.66 versus $16.17. Nine-month refining margin was $510.2 million versus $912.8 million. Petroleum segment operating income was $28.4 million for Q3 and $62.5 million for nine months, compared with $137.2 million and $497.2 million, respectively, in 2015.
- Fertilizer: Q3 segment operating income was $2.4 million versus a loss of $11.8 million, while nine-month operating income was $25.8 million versus $48.4 million. Nine-month Adjusted Nitrogen Fertilizer EBITDA was $74.4 million versus $78.3 million.
- Cash flow: Nine-month operating cash flow was $218.9 million versus $612.3 million. Investing used $172.0 million and financing used $49.4 million; cash declined $2.5 million to $762.6 million. Capital expenditures were $105.6 million.
- Balance sheet and liquidity: Cash was $762.6 million, working capital $842.6 million, and total assets $4,055.0 million at September 30. MD&A reports total debt, including current portion, of $1,166.3 million; the debt note lists $1,196.5 million gross debt and capital leases before unamortized discounts and issuance costs. Refining had $323.4 million availability on its ABL facility and no borrowings; the fertilizer partnership had $48.0 million availability and no borrowings. Both partnerships reported covenant compliance.
Material changes versus 2015
- Weaker refining economics drove most of the earnings decline: the Q3 NYMEX 2-1-1 crack spread fell to $14.03 per barrel from $21.14, and nine-month refining margin decreased by $402.6 million. Lower fuel prices and lower throughput also reduced petroleum sales.
- RIN costs rose to $58.3 million in Q3 from $19.3 million and to $152.4 million for nine months from $93.4 million. The petroleum business recorded a $126.6 million biofuel blending obligation at quarter-end, versus $9.5 million at year-end 2015.
- The East Dubuque acquisition added facility sales and operating costs, expanded fertilizer assets, and increased noncontrolling interest. The acquisition’s stated aggregate consideration was approximately $802.4 million, including assumed debt; the purchase price allocation was preliminary.
- In June, the fertilizer partnership issued $645 million of 9.25% secured notes due 2023 and repurchased approximately $315.8 million of 2021 notes. Interest expense increased to $26.2 million in Q3 from $11.9 million and to $56.8 million for nine months from $36.5 million.
- The 2015 nine-month comparison included a $27.3 million flood insurance recovery; 2016 included $38.1 million of major scheduled turnaround expense for nine months. Derivative results also differed substantially between periods.
Outlook, risks and unusual items
- Management estimated 2016 RIN costs of approximately $210 million to $250 million, based on recent prices and current assumptions. RIN availability, prices, regulation and blending volumes could materially affect results.
- Estimated 2016 capital spending was $153.3 million. The Coffeyville refinery hydrogen plant was estimated to cost $108 million excluding capitalized interest; approximately $96.2 million had been incurred by September 30. A crude pipeline joint venture is expected to complete construction in the second half of 2017; CVR Refining expects to contribute approximately $9.3 million in total.
- Management stated that cash, operating cash flow and available credit were expected to meet anticipated needs for at least 12 months, while cautioning that cash generation depends on refining and fertilizer margins and other factors. No specific earnings or margin guidance was provided.
- Key operating risks include volatile refining margins and commodity prices, RIN costs, plant outages and turnarounds, fertilizer pricing and seasonality, environmental compliance, and access to transportation and feedstocks. The company reported a PHMSA pipeline notice proposing a roughly $0.5 million penalty; it paid about $160,000 and contests the balance and proposed compliance order. Environmental accruals were $5.3 million.
- Affiliate pension plans were estimated to be underfunded by $549.6 million if terminated; CVR recorded no liability, but could have contingent controlled-group exposure. Unrecognized tax benefits were $44.1 million, with $7.4 million accrued interest.
- An interim goodwill test for the Coffeyville fertilizer facility recorded no impairment. The filing cites fair value exceeding carrying value by approximately 17% in the note and approximately 15% in MD&A; fertilizer price assumptions are identified as a key sensitivity.
Important facts for investors to verify
- Reconcile the goodwill fair-value cushion discrepancy (17% versus 15%) and assess sensitivity to fertilizer prices.
- Track RIN prices, the $126.6 million blending obligation, and actual full-year RIN expense against the $210–$250 million estimate.
- Review refinancing costs, covenants and distribution limits under the 9.25% 2023 notes, and distinguish gross debt from the net carrying debt figure.
- Assess whether weaker refining margins, reduced throughput and scheduled maintenance continue to constrain petroleum earnings and cash generation.
- Monitor the PHMSA matter, environmental compliance costs, and potential contingent exposure from Icahn-affiliated pension plans.
- Confirm capital project spending, the East Dubuque acquisition allocation, and the sustainability of dividends and partnership distributions.