CVR Energy, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; unaudited interim results. CVR is a holding company with petroleum refining and nitrogen fertilizer businesses, consolidated through its majority-owned partnerships. IEP owned approximately 82% of CVR at quarter-end.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales ($ millions) | 2,279.9 | 1,977.1 | 7,267.7 | 6,549.8 |
| Operating income ($ millions) | 6.8 | 40.4 | 354.9 | 670.7 |
| Net income ($ millions) | 21.3 | 78.2 | 379.0 | 562.6 |
| Net income attributable to CVR stockholders ($ millions) | 7.9 | 44.0 | 218.3 | 392.4 |
| Diluted EPS | $0.09 | $0.51 | $2.51 | $4.52 |
| Adjusted EBITDA ($ millions; non-GAAP) | 90.5 | 42.4 | 391.9 | 549.7 |
- Revenue rose on higher petroleum sales volumes, partly offset by lower gasoline and distillate prices. Q3 petroleum sales volumes increased 23%, in part because the comparable 2013 period was affected by a Coffeyville FCCU outage.
- Operating margin was approximately 0.3% in Q3 and 4.9% for the nine-month period, versus approximately 2.0% and 10.2%, respectively, in 2013.
- Petroleum operating income fell to $3.9 million from $23.4 million in Q3 and to $320.4 million from $588.1 million for nine months. Refining margin per crude-throughput barrel declined to $9.96 from $11.89 in Q3 and to $14.29 from $20.15 for nine months.
- Nitrogen fertilizer operating income declined to $14.4 million from $21.3 million in Q3 and to $56.3 million from $95.2 million for nine months, reflecting weaker product pricing and higher costs.
- Derivative gains were $25.7 million in Q3 versus $72.5 million a year earlier; nine-month gains were $171.1 million versus $173.0 million. Results are also sensitive to FIFO inventory valuation: petroleum reported an unfavorable FIFO impact of $52.0 million in Q3 2014, compared with a favorable $54.3 million in Q3 2013.
- Operating cash flow for nine months was $530.8 million, up from $321.3 million. Capital expenditures were $171.4 million; operating cash flow less capital expenditures was approximately $359.4 million. Financing cash outflow was $330.2 million, including $369.0 million of CVR dividends and $148.5 million of partnership distributions, partly offset by offering proceeds.
Balance sheet and liquidity
- At September 30, cash and cash equivalents were $793.1 million, down from $842.1 million at December 31, 2013. Working capital was $1,191.5 million, versus $1,230.2 million.
- Total debt, including current maturities, was $675.3 million, compared with $676.2 million at year-end. It primarily comprised $500 million of 6.5% senior notes due 2022, a $125 million nitrogen fertilizer term loan due April 2016, and capital leases.
- The Refining Partnership had no ABL borrowings and $372.7 million of availability; the Nitrogen Fertilizer Partnership had no revolving borrowings and $25 million available. Both partnerships reported compliance with their debt covenants.
- CVR reported sufficient resources for anticipated requirements over at least the next 12 months, while noting that operating cash generation and access to credit depend on margins, markets, and other factors. Partnership cash is not freely available to CVR except through distributions.
Changes, outlook, risks, and unusual items
- For the nine months, sales increased but operating income and parent-attributable earnings decreased materially, primarily because of lower refining margins and higher operating costs; fertilizer earnings also weakened. Lower income taxes and interest costs partly offset the decline.
- A July 29 fire at the Coffeyville refinery’s isomerization unit injured four employees, one fatally. The refinery temporarily shut down and resumed operations in August, with the isomerization unit still offline at August 23. Recorded repair and other costs were approximately $5.5 million; a $0.5 million insurance receivable was recorded, and the partnership expected qualifying costs above its $5 million property deductible to be recoverable. Some 2015 turnaround work was accelerated.
- Management estimated 2014 RIN costs of approximately $100–$125 million; $82.3 million had been incurred in the first nine months. The EPA denied Wynnewood’s request for 2013 small-refinery hardship relief. RIN prices, supply, and compliance deadlines remain risks.
- Expected 2014 capital spending was approximately $225–$250 million, excluding capitalized interest. The Refining Partnership approved a Coffeyville hydrogen plant in October, estimated at $122.5 million, with anticipated completion in Q2 2016. The Wynnewood hydrocracker project was expected to cost approximately $50 million, with $40.6 million spent by September 30.
- CVR declared a Q3 dividend of $0.75 per share after quarter-end. The partnerships declared Q3 distributions of $0.54 per Refining Partnership unit and $0.27 per Nitrogen Fertilizer Partnership unit. Distribution policies may be changed, and neither partnership is obligated to distribute cash.
- CVR accrued approximately $22.6 million for a Goldman Sachs judgment and $22.7 million for a Deutsche Bank judgment; it appealed both. CVR paid the Deutsche Bank judgment on October 27, subject to potential refund if its appeal succeeds.
- CVR is exposed to potential controlled-group pension liabilities related to Icahn affiliates. The referenced ACF and Federal-Mogul plans had an estimated combined termination underfunding of $442.6 million at September 30; CVR recorded no liability for this contingent exposure.
- Other key risks include volatile crude and product prices, refining and fertilizer margins, facility outages, environmental and RFS requirements, and reliance on third-party supply and transportation. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Assess underlying refining and fertilizer profitability apart from derivative gains, FIFO effects, and other non-GAAP adjustments.
- Track Coffeyville repair progress, insurance recoveries, any related claims, and the financial or operational effect of the fatal incident.
- Verify actual RIN spending and compliance outcomes against the $100–$125 million 2014 estimate.
- Review the appeals and payment status of the Goldman Sachs and Deutsche Bank judgments, and the unrecorded affiliate pension exposure.
- Monitor capital-project costs, refinery reliability, liquidity at each partnership, debt covenant headroom, and whether distributions remain supportable by available cash.