CVR ENERGY INC quarterly report, Q3 FY2011

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CVR Energy, Inc. — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2011. Amounts are in U.S. dollars; financial figures are in millions unless noted. CVR operates a petroleum refining and marketing business and owns approximately 70% of publicly traded CVR Partners, a nitrogen fertilizer producer. CVR consolidates the Partnership’s results.

Financial performance

  • Third quarter: Revenue was $1,352.0, up 31% from $1,031.2 a year earlier. Operating income rose to $212.2 from $50.5. Net income attributable to CVR stockholders was $109.3 versus $23.2; diluted EPS was $1.25 versus $0.27.
  • First nine months: Revenue was $3,966.9, up 35% from $2,931.6. Operating income was $539.7 versus $58.3. Net income attributable to CVR stockholders was $279.9 versus $12.0; diluted EPS was $3.19 versus $0.14.
  • Segment results: Third-quarter petroleum operating income was $179.8 versus $46.6, and fertilizer operating income was $37.5 versus $10.6. For nine months, petroleum operating income was $469.0 versus $44.1 and fertilizer operating income was $93.6 versus $30.0. Management attributed improvement principally to higher product margins.
  • Refining and fertilizer metrics: Refining margin increased to $25.03 per crude-oil throughput barrel in Q3 from $9.84; for nine months it was $23.77 versus $7.63. Fertilizer plant-gate prices for Q3 were $568/ton for ammonia and $294/ton for UAN, versus $317 and $168, respectively, a year earlier.
  • Cash flow: Nine-month operating cash flow was $345.9, up from $151.1. Investing cash use was $43.8 versus $23.0, including $46.6 of capital expenditures. Financing provided $396.3, chiefly reflecting $324.9 net proceeds from CVR Partners’ IPO and $125.0 of Partnership debt proceeds. Cash increased by $698.4 to $898.5.
  • Liquidity and debt: September 30 cash was $898.5, including $255.5 held by the Partnership; working capital was $1,059.4. Total debt was approximately $591.8, compared with $477.0 at year-end 2010. The ABL had no borrowings and $223.8 availability, with $26.2 of letters of credit outstanding. The Partnership had $125.0 outstanding on its term loan and no revolver borrowings. Both borrowers reported covenant compliance.

Changes and drivers versus the prior period

  • Stronger petroleum results reflected substantially higher gasoline and distillate prices and wider refining margins; refined-fuel sales volume was lower. The quarter also included an unfavorable $26.2 FIFO inventory impact, compared with a favorable $3.5 impact in Q3 2010.
  • Fertilizer earnings improved with stronger ammonia and UAN pricing. Nine-month UAN sales volume rose, while ammonia sales volume fell, partly because hydrogen was supplied to the refinery.
  • Costs increased: nine-month direct operating expenses were $209.3 versus $175.5, and SG&A was $69.0 versus $48.6. Nine-month derivative results changed from a $7.8 gain to a $25.1 loss; interest expense rose to $41.2 from $36.6.
  • CVR Partners’ April 2011 IPO created a roughly 30% public noncontrolling interest; its earnings are consolidated, with public holders’ share deducted from CVR-attributable income. CVR received approximately $324.9 net IPO proceeds at the Partnership level.

Outlook, unusual items, and risks

  • Management said available cash, operating cash flows, working capital and credit facilities were expected to cover existing operations for at least 12 months and fund the planned Wynnewood refinery acquisition, while cautioning that capital needs and operating cash flow could vary.
  • The refinery turnaround began in October in two phases, with the second planned for Q1 2012. Management expected approximately $80.0 of total turnaround expense, about $62.0 through 2011, and anticipated a significant Q4 2011 impact. Turnaround preparation and deferred sales reduced Q3 gross profit by approximately $8.0.
  • 2011 expected capital expenditures were approximately $107.7 for petroleum and corporate activities and $45.4 for fertilizer. The latter included UAN expansion; total expansion investment was estimated at $135.0, with completion expected in Q1 2013. Management also approved an approximately $2.0 UAN terminal project.
  • On November 2, 2011, after quarter-end, CVR agreed to buy Gary-Williams Energy Company, including its 70,000-bpd Wynnewood refinery, for $525.0 cash plus working-capital adjustments (estimated at approximately $100.0). Closing was subject to customary conditions, including antitrust review. Financing commitments included a bridge facility of up to $275.0 and $150.0 of incremental ABL commitments. CVR cited closing, integration, synergy and unforeseen-liability risks.
  • Other notable items: RIN purchases cost $15.1 for nine months after the refinery’s small-refiner exemption ended; CVR had requested EPA hardship relief. A Kansas property-tax classification dispute could produce a refund if successful or sustain elevated costs if not. Proposed MAPL rate increases could add approximately $14.75 annually at full requested rates; interim rates were in place pending proceedings.
  • Environmental and legal exposures include a DOJ/EPA suit concerning the 2007 crude-oil discharge, oversight costs, Clean Water Act penalties and alleged Risk Management Program noncompliance; the company also described ongoing environmental obligations and other litigation. The filing reported no off-balance-sheet arrangements. Management concluded disclosure controls were effective at a reasonable-assurance level.
  • Key business risks include volatile refining and fertilizer margins, crude-oil and commodity-price exposure, outages and turnaround execution, RIN and environmental compliance costs, feedstock and transportation dependence, seasonality, debt restrictions, and acquisition execution and financing.

Important facts for investors to verify

  1. Whether higher refining and fertilizer margins persist, and the effects of commodity prices, FIFO inventory accounting and derivatives on reported earnings.
  2. Turnaround schedule, costs, operating restart and resulting Q4 2011 performance.
  3. Wynnewood acquisition closing conditions, final working-capital adjustment, financing, integration costs and realized benefits.
  4. Liquidity available after acquisition funding, debt levels, covenant headroom and the Partnership’s distributions, which are discretionary and subject to credit-facility tests.
  5. Outcomes and potential financial effects of RIN hardship relief, fertilizer property-tax appeals, pipeline-rate proceedings and environmental/legal matters.