Business context and reporting period
CVR Energy, Inc. is a holding company with petroleum refining and nitrogen fertilizer businesses, reported through CVR Refining and CVR Partners. This unaudited Form 10-Q covers the three months ended March 31, 2016, compared with the first quarter of 2015. Results consolidate both partnerships and include noncontrolling interests. On April 1, 2016, CVR Partners completed its acquisition of East Dubuque Nitrogen Partners; the acquired facility is not included in first-quarter operating results.
Financial results and key metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $905.5 million | $1,388.9 million |
| Operating income (loss) | $(39.9) million | $136.6 million |
| Net income (loss) | $(30.9) million | $84.7 million |
| Net income (loss) attributable to CVR stockholders | $(16.2) million | $54.9 million |
| Diluted EPS | $(0.19) | $0.63 |
| Adjusted EBITDA | $36.2 million | $163.7 million |
| Cash from operating activities | $21.6 million | $178.2 million |
| Capital expenditures | $47.5 million | $45.5 million |
Cash and cash equivalents were $681.8 million at March 31, down from $765.1 million at December 31, 2015. Working capital was $679.5 million, versus $789.0 million. Gross debt and capital lease obligations were $673.1 million; after $6.0 million of unamortized debt issuance costs, reported total debt was $667.1 million. This included $500 million of 6.5% notes due 2022 and a $125 million fertilizer-partnership term loan due in April 2016. The refining ABL had no borrowings and $245.3 million of availability, subject to borrowing-base limits; $28.0 million of letters of credit were outstanding. Both businesses reported compliance with applicable debt covenants at quarter-end.
CVR declared dividends of $0.50 per share in both comparable quarters. The first-quarter 2016 dividend was declared after quarter-end and scheduled for payment May 16, 2016. The filing reports no consolidated gross margin percentage; petroleum refining margin was $111.7 million, or $6.67 per crude throughput barrel, versus $248.3 million, or $13.68 per barrel, in Q1 2015.
Material changes versus the prior comparable period
- Sales fell $483.4 million, principally due to lower petroleum product prices. Average gasoline and distillate selling prices declined 29.7% and 37.9%, respectively. Petroleum sales decreased $470.4 million; fertilizer sales decreased $20.0 million.
- Petroleum operating results swung to a $56.0 million loss from $109.2 million income. Lower refining margins and $29.4 million of Coffeyville turnaround expense were key factors. Refinery crude throughput declined 7.7%, primarily because of the turnaround.
- Nitrogen fertilizer operating income fell to $19.7 million from $31.5 million. Lower UAN and ammonia prices and lower UAN sales contributed; cost of product sold declined, partly offsetting the revenue decline. Adjusted Nitrogen Fertilizer EBITDA was $27.9 million versus $38.4 million.
- Operating cash flow fell by $156.6 million. Q1 2016 included $21.4 million of cash inflows from derivative settlements; the prior-year quarter included $84.7 million of net income and favorable working-capital effects.
- Derivative losses were $1.2 million versus $51.4 million in Q1 2015. The prior-year period also included $36.0 million of other income, including gains related to securities; these items make year-over-year comparisons less directly representative of operating performance.
Outlook, management commentary, risks and unusual items
- Management estimated 2016 RIN costs of approximately $160 million to $190 million, based on recent market prices and current assumptions. RIN expense was $43.1 million in Q1 2016, compared with $36.6 million a year earlier. RIN prices, availability, regulation and blending volumes create significant uncertainty.
- Estimated 2016 capital spending was $202 million, excluding East Dubuque spending. The hydrogen plant at Coffeyville was expected to be completed in Q2 2016; estimated project cost was $108.3 million, with $84.6 million incurred by quarter-end. East Dubuque planned a Q2 2016 turnaround, estimated at $5 million to $7 million, and an ammonia-converter project estimated at $8 million to $11 million after closing.
- Management stated it expected existing cash, operating cash flows and available facilities to cover anticipated requirements for at least 12 months, while cautioning that future cash generation and financing are subject to market and operating conditions. This is not a guarantee of future liquidity.
- The East Dubuque acquisition issued approximately 40.2 million CVR Partners units and required approximately $99.2 million in cash consideration. After closing, CVR’s ownership of CVR Partners’ common units decreased from approximately 53% to approximately 34%. The partnership borrowed $300 million under a two-year, 12% affiliate loan from CRLLC and entered into a separate $320 million, two-year, 12% affiliate facility with AEPC for potential repurchase or refinancing of East Dubuque notes. These post-quarter-end arrangements materially change fertilizer-partnership leverage and interest costs. The filing says third-party refinancing options were being considered.
- Major risks include volatile refining and fertilizer margins, crude oil and natural gas prices, RIN costs, seasonal fertilizer demand and working capital, facility outages, environmental requirements, supplier and transportation dependence, and debt refinancing and covenant constraints. The filing also discloses potential controlled-group liability for affiliate pension plans reported as underfunded by approximately $583.8 million on a voluntary-termination basis; CVR recorded no liability for this contingent exposure.
- Environmental accruals were $3.5 million at March 31. Unrecognized tax benefits were approximately $44.1 million, with $6.0 million of accrued interest related to uncertain tax positions. The company also had $1.368 billion of unconditional purchase obligations, including long-term crude transportation commitments.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing does not provide formal full-year earnings or margin guidance.
Important facts for investors to verify
- How refining margins, throughput and turnaround-related costs develop after the Coffeyville work, and whether the stated 2016 capital-spending estimates change.
- Actual RIN costs and availability against the $160 million to $190 million estimate, including the effect of regulatory or market changes.
- East Dubuque integration, operating performance and turnaround results; repayment or refinancing of the $300 million and $320 million affiliate facilities; and the terms of any replacement financing.
- Cash generation, borrowing-base availability, covenant compliance and capacity to sustain dividends and partnership distributions amid lower operating results.
- Fertilizer prices, natural gas and pet coke costs, seasonal working-capital needs, and exposure to East Dubuque’s natural-gas supply and transportation arrangements.
- Developments in environmental and tax matters and the potential, unrecorded affiliate pension liability. Also distinguish GAAP results from management’s non-GAAP Adjusted EBITDA measures.