CVR Energy, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. CVR is a diversified holding company operating petroleum refining and nitrogen fertilizer businesses through consolidated partnerships. Results are unaudited; the East Dubuque fertilizer facility was acquired April 1, 2016, affecting year-over-year comparability.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $1,434.4 million | $1,283.2 million | $2,941.5 million | $2,188.7 million |
| Operating income | $1.3 million | $90.7 million | $68.9 million | $50.8 million |
| Net income (loss) | $(19.3) million | $43.8 million | $18.9 million | $12.9 million |
| Net income (loss) attributable to CVR stockholders | $(10.5) million | $28.4 million | $11.7 million | $12.2 million |
| Diluted EPS | $(0.12) | $0.33 | $0.13 | $0.14 |
| Adjusted EBITDA attributable to CVR stockholders | $37.7 million | $64.4 million | $118.1 million | $100.6 million |
Q2 petroleum refining margin was $130.2 million, or $6.69 per crude throughput barrel, versus $222.5 million, or $12.07 per barrel, a year earlier. First-half refining margin was $352.4 million, or $9.10 per barrel, versus $334.2 million, or $9.50 per barrel. These are company-defined non-GAAP measures. Q2 consolidated operating margin was approximately 0.1% of sales; first-half operating margin was approximately 2.3%.
At June 30, cash and cash equivalents were $829.9 million, working capital $740.9 million, and total assets $4.03 billion. Six-month operating cash flow was $242.1 million; capital expenditures were $57.4 million; investing cash outflow was $58.8 million; and financing cash outflow was $89.2 million, principally reflecting $86.8 million of CVR shareholder dividends. Cash increased $94.1 million to $829.9 million. Management stated liquidity was expected to cover anticipated requirements for at least 12 months, subject to operating performance and other risks.
Reported total debt, including current portion, was $1,165.6 million (net carrying amount). Principal obligations included $500 million of 6.5% notes due 2022, $645 million of 9.25% secured notes due 2023, $2.2 million of 2021 notes, and capital leases. The Refining Partnership had no ABL borrowings and $333.2 million of availability; the facility was scheduled to mature December 20, 2017, and refinancing options were under consideration. The fertilizer partnership had no ABL borrowings and $50 million available.
Material changes and business drivers
- Q2 sales rose $151.2 million, mainly on higher petroleum prices and volumes, but operating income fell $89.4 million as refinery margins weakened and costs rose. Petroleum segment operating results shifted to a $7.4 million loss from $90.1 million income.
- Petroleum Q2 refining margin was pressured by higher crude costs and RIN expense. RIN expense more than doubled to $105.6 million from $51.0 million; the FIFO inventory impact also shifted from a favorable $46.2 million to an unfavorable $15.4 million.
- For the first half, operating income improved by $18.1 million, primarily from higher petroleum segment income and lower turnaround expenses. First-half interest expense increased $24.0 million to $54.6 million, largely reflecting fertilizer partnership debt and the higher-rate 2023 notes.
- Fertilizer Q2 sales fell $21.9 million to $97.9 million as UAN and ammonia prices declined. Segment operating income nevertheless increased to $12.2 million from $3.7 million, mainly due to lower expenses and the prior-year East Dubuque turnaround and purchase-accounting effects. First-half fertilizer sales and earnings comparisons are affected by the April 2016 acquisition.
Outlook, risks and unusual items
- Management estimated 2017 RIN costs of $200 million to $250 million, based on recent market prices and current assumptions. The biofuel blending obligation was approximately $279.9 million at June 30; RIN prices and regulatory requirements are volatile, and inability to obtain credits or comply with mandates could materially affect results.
- Estimated 2017 capital spending was $175 million, including $150 million for petroleum and $15 million for fertilizer operations. Estimates may change.
- The first phase of the Wynnewood refinery turnaround was scheduled to begin in late September 2017, expected to last about 42 days and cost approximately $70 million. An East Dubuque turnaround began in July, expected to last about 14 days and cost approximately $3 million, excluding lost-production effects.
- Fertilizer pricing uncertainty and lack of significant fill-season orders had prompted goodwill monitoring. No impairment triggering event was identified at June 30, but lower-than-estimated prices could trigger a future test and potential impairment.
- The fertilizer partnership’s 2023-note fixed-charge coverage ratio was below 1.75:1; $72.7 million remained in the restricted-payment basket. The refining partnership reported compliance with its note and ABL covenants; both partnerships reported compliance with applicable covenants.
- Potential contingent exposure exists for underfunded pension plans of Icahn-affiliated entities because CVR is in a controlled group. Those plans had estimated combined underfunding of $509.1 million if terminated; CVR recorded no liability. Environmental accruals were $4.3 million. Management reported no new material litigation developments.
- CVR paid a $0.50-per-share dividend for Q1 and declared a further $0.50-per-share Q2 dividend, payable August 14, 2017. IEP and affiliates owned approximately 82% of CVR shares.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the Refining Partnership refinanced or otherwise addressed the December 2017 ABL maturity, and the resulting borrowing capacity and terms.
- Actual RIN costs and obligation balances versus management’s $200–$250 million 2017 estimate, including the impact of subsequent EPA mandates and credit prices.
- Refinery and fertilizer turnaround completion, costs, downtime, and effects on production and cash generation.
- Fertilizer pricing, fill-season orders, covenant headroom, and whether subsequent conditions require a goodwill impairment test.
- Cash generation available for dividends after debt service, capital needs, contractual commitments, and partnership distribution restrictions.
- Developments in the contingent affiliate pension exposure and any changes in environmental, tax, or litigation contingencies.