Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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(Mark One) |
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| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 30, 2018 |
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OR |
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission file number: 001-33492
CVR ENERGY, INC.
(Exact name of registrant as specified in its charter)
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Delaware | 61-1512186 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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2277 Plaza Drive, Suite 500 | |
Sugar Land, Texas (Address of principal executive offices) | 77479 (Zip Code) |
(281) 207-3200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o |
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Smaller reporting company o | Emerging growth company o | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No þ
There were 100,530,599 shares of the registrant’s common stock outstanding at October 23, 2018.
CVR ENERGY, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For The Quarter Ended September 30, 2018
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CVR ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
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| | | | | | | |
(In millions) | September 30, 2018 | | December 31, 2017 |
ASSETS |
Current assets: | | | |
Cash and cash equivalents (including $460 and $223, respectively, of consolidated variable interest entities (“VIEs”)) | $ | 702 |
| | $ | 482 |
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Accounts receivable of VIEs | 214 |
| | 179 |
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Due from parent | — |
| | 5 |
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Inventories of VIEs | 427 |
| | 385 |
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Prepaid expenses and other current assets (including $35 and $30, respectively, of VIEs) | 47 |
| | 43 |
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Total current assets | 1,390 |
| | 1,094 |
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Property, plant and equipment, net of accumulated depreciation (including $2,425 and $2,548, respectively, of VIEs) | 2,441 |
| | 2,572 |
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Other long-term assets (including $162 and $137, respectively, of VIEs) | 171 |
| | 141 |
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Total assets | $ | 4,002 |
| | $ | 3,807 |
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LIABILITIES AND EQUITY |
Current liabilities: | | | |
Note payable and capital lease obligations of VIEs | $ | 2 |
| | $ | 2 |
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Accounts payable (including $407 and $329, respectively, of VIEs) | 409 |
| | 334 |
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Other current liabilities (including $164 and $181, respectively, of VIEs) | 193 |
| | 208 |
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Total current liabilities | 604 |
| | 544 |
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Long-term liabilities: | | | |
Long-term debt and capital lease obligations of VIEs, net of current portion | 1,166 |
| | 1,164 |
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Deferred income taxes | 347 |
| | 386 |
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Other long-term liabilities (including $10 and $4, respectively, of VIEs) | 22 |
| | 9 |
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Total long-term liabilities | 1,535 |
| | 1,559 |
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Commitments and contingencies (See Note 9) |
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Equity: | | | |
CVR stockholders’ equity: | | | |
Common stock $0.01 par value per share, 350,000,000 shares authorized, 100,629,209 shares issued (86,929,660 shares issued as of December 31, 2017) | 1 |
| | 1 |
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Additional paid-in-capital | 1,473 |
| | 1,197 |
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Retained deficit | (233 | ) | | (277 | ) |
Treasury stock, 98,610 shares at cost | (2 | ) | | (2 | ) |
Total CVR stockholders’ equity | 1,239 |
| | 919 |
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Noncontrolling interest | 624 |
| | 785 |
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Total equity | 1,863 |
| | 1,704 |
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Total liabilities and equity | $ | 4,002 |
| | $ | 3,807 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
CVR ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(In millions, except per share data) | 2018 | | 2017 | | 2018 | | 2017 |
Net sales | $ | 1,935 |
| | $ | 1,454 |
| | $ | 5,386 |
| | $ | 4,395 |
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Operating costs and expenses: | | | | | | | |
Cost of materials and other | 1,561 |
| | 1,133 |
| | 4,370 |
| | 3,582 |
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Direct operating expenses (exclusive of depreciation and amortization as reflected below) | 121 |
| | 160 |
| | 394 |
| | 422 |
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Depreciation and amortization | 49 |
| | 51 |
| | 151 |
| | 152 |
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Cost of sales | 1,731 |
| | 1,344 |
| | 4,915 |
| | 4,156 |
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Selling, general and administrative expenses (exclusive of depreciation and amortization as reflected below) | 28 |
| | 27 |
| | 83 |
| | 82 |
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Depreciation and amortization | 2 |
| | 3 |
| | 8 |
| | 7 |
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Loss on asset disposals | — |
| | 1 |
| | 5 |
| | 2 |
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Operating income | 174 |
| | 79 |
| | 375 |
| | 148 |
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Interest expense, net | (26 | ) | | (28 | ) | | (79 | ) | | (81 | ) |
Gain (loss) on derivatives, net | 5 |
| | (17 | ) | | 75 |
| | (5 | ) |
Other income, net | 3 |
| | — |
| | 6 |
| | — |
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Income before income tax expense | 156 |
| | 34 |
| | 377 |
| | 62 |
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Income tax expense | 35 |
| | 9 |
| | 73 |
| | 18 |
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Net income | 121 |
| | 25 |
| | 304 |
| | 44 |
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Less: Net income attributable to noncontrolling interest | 31 |
| | 3 |
| | 97 |
| | 10 |
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Net income attributable to CVR Energy stockholders | $ | 90 |
| | $ | 22 |
| | $ | 207 |
| | $ | 34 |
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Basic and diluted earnings per share | $ | 0.94 |
| | $ | 0.26 |
| | $ | 2.31 |
| | $ | 0.39 |
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Dividends declared per share | $ | 0.75 |
| | $ | 0.50 |
| | $ | 2.00 |
| | $ | 1.50 |
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Weighted-average common shares outstanding: | | | | | | | |
Basic and diluted | 95.8 |
| | 86.8 |
| | 89.8 |
| | 86.8 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
CVR ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) |
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| Nine Months Ended
September 30, |
(In millions) | 2018 | | 2017 |
Cash flows from operating activities: | | | |
Net income | $ | 304 |
| | $ | 44 |
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Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 159 |
| | 159 |
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Deferred income taxes expense | 47 |
| | 15 |
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Share-based compensation | 17 |
| | 10 |
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Other non-cash items | 7 |
| | 7 |
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Changes in assets and liabilities: | | | |
Current assets and liabilities | (30 | ) | | 92 |
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Non-current assets and liabilities | 15 |
| | — |
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Net cash provided by operating activities | 519 |
| | 327 |
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Cash flows from investing activities: | | | |
Capital expenditures | (68 | ) | | (80 | ) |
Other investing activities | 1 |
| | (1 | ) |
Net cash used in investing activities | (67 | ) | | (81 | ) |
Cash flows from financing activities: | | | |
Dividends to CVR Energy’s stockholders | (162 | ) | | (130 | ) |
Distributions to CVR Refining’s noncontrolling interest holders | (67 | ) | | — |
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Distributions to CVR Partners’ noncontrolling interest holders | — |
| | (2 | ) |
Other financing activities | (3 | ) | | (1 | ) |
Net cash used in financing activities | (232 | ) | | (133 | ) |
Net increase in cash and cash equivalents | 220 |
| | 113 |
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Cash and cash equivalents, beginning of period | 482 |
| | 736 |
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Cash and cash equivalents, end of period | $ | 702 |
| | $ | 849 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Organization and Basis of Presentation
Organization
CVR Energy, Inc. (“CVR Energy, “CVR,”, “we,” “us,”, “our,” or the “Company”) is a diversified holding company primarily engaged in the petroleum refining and nitrogen fertilizer manufacturing industries through its holdings in CVR Refining, LP (“CVR Refining”) and CVR Partners, LP (“CVR Partners”). CVR Refining is a refiner that does not have crude oil exploration or production operations (an “independent petroleum refiner”) and is a marketer of high value transportation fuels. CVR Partners produces and markets nitrogen fertilizers in the form of ammonia and urea ammonium nitrate (“UAN”). Ammonia is a direct application fertilizer and is primarily used as a building block for other nitrogen products for industrial applications and finished fertilizer products. UAN is an aqueous solution of urea and ammonium nitrate. The Company’s operations include two business segments: the petroleum segment and the nitrogen fertilizer segment. CVR’s common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “CVI.”
During August 2018, CVR Energy completed an exchange offer whereby public unitholders tendered a total of 21,625,106 CVR Refining common units in exchange for a total of 13,699,549 shares of CVR Energy common stock. In connection with this exchange offer, we incurred a total of $0.7 million of issuance costs, which were capitalized to additional paid-in-capital. Further, due to the change in our ownership of CVR Refining while maintaining control, we recognized an increase of $276 million to additional paid-in capital as a result of the reduction of non-controlling interest totaling $191 million and the recognition of a deferred tax asset totaling $85 million from changes in book versus tax basis in CVR Refining. As of September 30, 2018, and following the exchange offer, Icahn Enterprises L.P. (“IEP”) and its affiliates owned approximately 71% of the Company’s outstanding shares.
On October 24, 2018, the board of directors of the Company declared a cash dividend for the third quarter of 2018 to the Company’s stockholders of $0.75 per share, or $75 million in the aggregate. The dividend will be paid on November 12, 2018 to stockholders of record at the close of business on November 5, 2018. IEP will receive $54 million in respect of its ownership interest in the Company’s shares.
CVR Refining, LP
As of September 30, 2018, public security holders held approximately 19% of CVR Refining’s outstanding common units (including units owned by affiliates of IEP, representing approximately 3.9% of CVR Refining’s outstanding common units), CVR Energy, Inc. and CVR Refining Holdings, LLC (“CVR Refining Holdings”), an indirect wholly-owned subsidiary of CVR Energy, owned 100% of CVR Refining’s noneconomic general partner interest and approximately 81% of CVR Refining’s outstanding limited partner interests. The noncontrolling interest reflected on the Condensed Consolidated Balance Sheets of CVR is impacted by the net income of, and distributions from, CVR Refining.
On October 24, 2018, the board of directors of CVR Refining’s general partner declared a cash distribution for the third quarter of 2018 to CVR Refining’s unitholders of $0.90 per common unit, or $133 million in aggregate. The cash distribution will be paid on November 12, 2018 to unitholders of record at the close of business on November 5, 2018. The Company will receive $107 million in respect of its CVR Refining common units.
CVR Partners, LP
As of September 30, 2018, public security holders held approximately 66% of CVR Partner’s outstanding common units, and Coffeyville Resources, LLC (“CRLLC”), a wholly-owned subsidiary of CVR Energy, held approximately 34% of CVR Refining’s outstanding common units. In addition, CRLLC owns 100% of CVR Partner’s general partner, CVR GP, LLC, which holds a non-economic general partner interest. The noncontrolling interest reflected on the Condensed Consolidated Balance Sheets of CVR is impacted by the net income of, and distributions from, CVR Partners.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). These condensed consolidated financial statements should be read in conjunction with the December 31, 2017 audited consolidated financial statements and notes thereto included in CVR Energy’s Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the SEC on February 26, 2018 the (the “2017 Form 10-K”). Our condensed consolidated financial statements include the consolidated results of CVR Refining and CVR Partners, which are defined as variable interest entities.
In the opinion of the Company’s management, the accompanying condensed consolidated financial statements reflect all adjustments that are necessary to fairly present the financial position of the Company as of September 30, 2018 and December 31, 2017, the results of operations of the Company for the three and nine month periods ended September 30, 2018 and 2017 and the cash flows of the Company for the nine month periods ended September 30, 2018 and 2017. Such adjustments are of a normal recurring nature, unless otherwise disclosed. Certain information has been reclassified to present historical information in a manner consistent with current presentation.
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Results of operations and cash flows for the interim periods presented are not necessarily indicative of the results that will be realized for the year ending December 31, 2018 or any other interim or annual period.
(2) Recent Accounting Pronouncements
Adoption of New Revenue Standard
On January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) using the modified retrospective method applied to contracts which were not completed as of January 1, 2018. The standard was applied prospectively and the comparative information for 2017 has not been restated and continues to be reported under the accounting standards in effect for the prior period. The Company did not identify any material differences in its existing revenue recognition methods that require modification under the new standard and, as such, a cumulative effect adjustment of applying the standard using the modified retrospective method was not recorded.
Impact on Financial Statements
The Company identified presentation changes associated with contracts requiring customer prepayment prior to delivery and the need to gross up certain fees collected from customers. Prior to adoption of ASC 606, deferred revenue was recorded by CVR Partners upon customer prepayment. Under the new revenue standard, a receivable and associated deferred revenue is recorded at the point in time in which a prepaid contract is legally enforceable and the associated right to consideration is unconditional. The adoption of ASC 606 resulted in a $21 million increase to deferred revenue and accounts receivable as of January 1, 2018. After the effect of adoption of the new revenue standard, deferred revenue and accounts receivable of CVR Partners were $34 million and $31 million, respectively, as of January 1, 2018. Additionally, fees collected from certain customers were previously recorded as a reduction to cost of materials and other. The particular fee, the Oil Spill Liability Tax, relates to taxes imposed on refineries as part of the crude oil procurement process, is charged to certain of CVR Refining’s customers on product sales and is required under the new standard to be included in the transaction price. The impact of the change in presentation was an increase of $1 million to net sales and cost of materials and other for the three and nine months ended September 30, 2018.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following tables display the effect of the changes to the Condensed Consolidated Balance Sheet as of September 30, 2018 for the adoption of ASC 606. The Company’s Condensed Consolidated Statement of Cash Flows was not impacted due to the adoption of ASC 606 for the three and nine months ended September 30, 2018.
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| | September 30, 2018 |
Balance Sheet | | As Reported | | Balances Without Adoption of ASC 606 | | Effect of Change |
(In millions) | | | | | | |
Assets | | | | | | |
Accounts Receivable | | $ | 214 |
| | $ | 207 |
| | $ | 7 |
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| | | | | | |
Liabilities | | | | | | |
Deferred Revenue | | $ | 32 |
| | $ | 25 |
| | $ | 7 |
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New Accounting Standards Issued But Not Yet Implemented
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”), creating a new topic, FASB ASC Topic 842, “Leases” (“Topic 842”), which supersedes lease requirements in FASB ASC Topic 840, “Leases”. The new standard revises accounting for operating leases by a lessee, among other changes, and requires a lessee to recognize a liability related to future lease payments and an asset representing its right to use of the underlying asset for the lease term on the balance sheet. Quantitative and qualitative disclosures, including disclosures regarding significant judgments made by management, will be required. In July 2018, the FASB issued updated guidance which provides entities with an additional transition method to adopt Topic 842. Under the new transition method, an entity initially applies the new leases standard at the adoption date, versus at the beginning of the earliest period presented, and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company expects to elect this transition method at the adoption date of January 1, 2019. The Company also plans to elect the short-term lease exception provided for in the standard and therefore will only recognize right-of-use assets and lease liabilities for leases with a term greater than one year. The Company continues to focus its implementation efforts on accounting policy and disclosure updates and system implementation necessary to meet the standard’s requirements. Based on information available to date, the Company estimates the operating lease right of use asset and lease liability may approximate $50.0 - $100.0 million upon adoption. This preliminary estimate of the effect on the Company’s Consolidated Balance Sheets as a result of implementing the standard on January 1, 2019 could differ materially depending on guidance changes from the FASB, changes in outstanding leases, final verification of the Company’s lease accounting estimates, and any changes in the Company’s plans to elect certain practical expedients. The Company does not expect the adoption of this standard to have a material impact on the recognition, measurement or presentation of amounts within the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Cash Flows.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40). This ASU addresses customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This standard is effective for the Company beginning January 1, 2020, with early adoption permitted. The amendments in this standard can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is evaluating the effect of adopting this new accounting guidance on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). The ASU eliminates such disclosures as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. Certain disclosures are required to be applied on a retrospective basis and others on a prospective basis. This standard is effective for the Company beginning January 1, 2020, with early adoption permitted. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption will have a material impact on the Company's disclosures.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
(3) Revenue
The following tables present the Company’s revenue disaggregated by major product. The following tables include a reconciliation of the disaggregated revenue with the Company’s reportable segments.
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| Three Months Ended September 30, 2018 |
(In millions) | Petroleum | | Nitrogen Fertilizer | | Other / Eliminations | | Consolidated |
Major Product | | | | | | | |
Gasoline | $ | 951 |
| | $ | — |
| | $ | — |
| | $ | 951 |
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Distillates (a) | 840 |
| | — |
| | — |
| | 840 |
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Ammonia | — |
| | 11 |
| | — |
| | 11 |
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UAN | — |
| | 53 |
| | — |
| | 53 |
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Urea products | — |
| | 5 |
| | — |
| | 5 |
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Freight revenue | 6 |
| | 9 |
| | — |
| | 15 |
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Other (b) | 47 |
| | 2 |
| | (2 | ) | | 47 |
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Revenue from product sales | 1,844 |
| | 80 |
| | (2 | ) | | 1,922 |
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Crude oil sales | 12 |
| | — |
| | — |
| | 12 |
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Other revenue | 1 |
| | — |
| | — |
| | 1 |
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Total revenue | $ | 1,857 |
| | $ | 80 |
| | $ | (2 | ) | | $ | 1,935 |
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| Nine Months Ended September 30, 2018 |
(In millions) | Petroleum | | Nitrogen Fertilizer | | Other / Eliminations | | Consolidated |
Major Product | | | | | | | |
Gasoline | $ | 2,558 |
| | $ | — |
| | $ | — |
| | $ | 2,558 |
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Distillates (a) | 2,324 |
| | — |
| | — |
| | 2,324 |
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Ammonia | — |
| | 51 |
| | — |
| | 51 |
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UAN | — |
| | 157 |
| | — |
| | 157 |
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Urea products | — |
| | 15 |
| | — |
| | 15 |
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Freight revenue | 17 |
| | 24 |
| | — |
| | 41 |
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Other (b) | 161 |
| | 6 |
| | (6 | ) | | 161 |
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Revenue from product sales | 5,060 |
| | 253 |
| | (6 | ) | | 5,307 |
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| | | | | | | |
Crude oil sales | 75 |
| | — |
| | — |
| | 75 |
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Other revenue | 4 |
| | — |
| | — |
| | 4 |
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Total revenue | $ | 5,139 |
| | $ | 253 |
| | $ | (6 | ) | | $ | 5,386 |
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(a) | Distillates consist primarily of diesel fuel, kerosene and jet fuel. |
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(b) | Other revenue consists primarily of feedstock and asphalt sales and Cushing, OK storage tank lease revenue. See Note 6 (Property, Plant and Equipment) for further discussion. |
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Petroleum
The petroleum segment’s revenue from product sales is recorded upon delivery of the products to customers, which is the point at which title is transferred and the customer has assumed the risk of loss. This generally takes place as product passes into the pipeline, as a product transfer order occurs within a pipeline system, or as product enters equipment or locations supplied or designated by the customer. The petroleum segment has elected to apply the sales tax practical expedient, whereby qualifying excise and other taxes collected from customers and remitted to governmental authorities are not included in reported revenues.
Many of the petroleum segment’s contracts have index-based pricing which is considered variable consideration that should be estimated in determining the transaction price. The petroleum segment determined that it does not need to estimate the variable consideration because the uncertainty related to the consideration is resolved on the pricing date or the date when the product is delivered.
The petroleum segment may incur broker commissions or transportation costs prior to product transfer on some of its sales. The petroleum segment has elected to apply the practical expedient allowing it to expense the broker costs since the contract durations are less than a year in length. Transportation costs are accounted for as fulfillment costs and are expensed as incurred since they do not meet the requirement for capitalization.
The petroleum segment’s contracts with its customers state the terms of the sale, including the description, quantity, and price of each product sold. Depending on the product sold, payment from customers is generally due in full within 2 to 32 days of product delivery or invoice date. The petroleum segment’s contracts with customers commonly include a provision which states that the petroleum segment will accept customer returns of off-spec product, refund the customer (or provide on-spec product), and pay for damages to any customer equipment which resulted from the off-spec product. Typically, if the customer is not satisfied with the product, the price is adjusted downward instead of the product being returned or exchanged. The petroleum segment has determined that product returns or refunds are very rare and will account for them as they occur. The petroleum segment generally provides no warranty other than the implicit promise that goods delivered are free of liens and encumbrances and meet the agreed upon specification.
Freight revenue recognized by the petroleum segment is primarily tariff and line loss charges rebilled to customers to reimburse the petroleum segment for expenses incurred from a pipeline operator. An offsetting expense is included in cost of materials and other.
Nitrogen Fertilizer
The nitrogen fertilizer segment sells its products on a wholesale basis under a contract or by purchase order. The nitrogen fertilizer segment’s contracts with customers, including purchase orders, generally contain fixed pricing and most have terms of less than one year. The nitrogen fertilizer segment recognizes revenue at the point in time at which the customer obtains control of the product, which is generally upon delivery and acceptance by the customer. The customer acceptance point is stated in the contract and may be at one of the nitrogen fertilizer segment’s manufacturing facilities, at one of the nitrogen fertilizer segment’s off-site loading facilities, or at the customer’s designated facility. Freight revenue recognized by the nitrogen fertilizer segment represents the pass-through finished goods delivery costs incurred prior to customer acceptance and is reimbursed by customers. An offsetting expense for freight is included in cost of materials and other. Qualifying taxes collected from customers and remitted to governmental authorities are not included in reported revenues.
Depending on the product sold and the type of contract, payments from customers are generally either due prior to delivery or within 15 to 30 days of product delivery.
The nitrogen fertilizer segment generally provides no warranty other than the implicit promise that goods delivered are free of liens and encumbrances and meet the agreed upon specifications. Product returns are rare, and as such, the nitrogen fertilizer segment does not record a specific warranty reserve or consider activities related to such warranty, if any, to be a separate performance obligation.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The nitrogen fertilizer segment has an immaterial amount of variable consideration for contracts with an original duration of less than a year. A small portion of the nitrogen fertilizer partnership’s revenue includes contracts extending beyond one year, some of which contain variable pricing in which the majority of the variability is attributed to the market-based pricing. The nitrogen fertilizer segment’s contracts do not contain a significant financing component.
The nitrogen fertilizer segment has an immaterial amount of fee-based revenue, included in other revenue in the table above, that is recognized based on the net amount of the proceeds received, consistent with prior accounting practice.
Transaction price allocated to remaining performance obligations
As of September 30, 2018, CVR Partners had approximately $12 million of remaining performance obligations for contracts with an original expected duration of more than one year. CVR Partners expects to recognize approximately 51% of these performance obligations as revenue by the end of 2019, an additional 25% by 2020 and the remaining balance thereafter.
Contract balances
The CVR Partners’ deferred revenue is a contract liability that primarily relates to fertilizer sales contracts requiring customer prepayment prior to product delivery to guarantee a price and supply of nitrogen fertilizer. Deferred revenue is recorded at the point in time in which a prepaid contract is legally enforceable and the associated right to consideration is unconditional prior to transferring product to the customer. An associated receivable is recorded for uncollected prepaid contract amounts. Contracts requiring prepayment are generally short-term in nature and, as discussed above, revenue is recognized at the point in time in which the customer obtains control of the product.
A summary of CVR Partners’ deferred revenue activity during the nine months ended September 30, 2018 is presented below:
|
| | | | |
(In millions) | | Nine Months Ended September 30, |
Balance at January 1, 2018 | | $ | 34 |
|
Add: | | |
New prepay contracts entered into during the period | | 36 |
|
Less: | | |
Revenue recognized that was included in the contract liability balance at the beginning of the period | | 34 |
|
Revenue recognized related to contracts entered into during the period | | 4 |
|
Balance at September 30, 2018 | | $ | 32 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
(4) Share-Based Compensation
There have been no material new awards or changes in existing awards during 2018. A summary of share-based compensation expense during the three and nine months ended September 30, 2018 and 2017 are presented below:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(In millions) | 2018 | | 2017 | | 2018 | | 2017 |
CVR Energy LTIP | | | | | | | |
Performance Unit Award | $ | 1 |
| | $ | 1 |
| | $ | 3 |
| | $ | 3 |
|
CVR Refining LTIP | | | | | | | |
Phantom Units Award | 1 |
| | 1 |
| | 8 |
| | 4 |
|
CVR Partners LTIP | | | | | | | |
Phantom Units Award | 1 |
| | — |
| | 2 |
| | 1 |
|
Incentive Unit Awards | 2 |
| | 1 |
| | 4 |
| | 3 |
|
Total Share-Based Compensation Expense | $ | 5 |
| | $ | 3 |
| | $ | 17 |
| | $ | 11 |
|
(5) Inventories
|
| | | | | | | |
(In millions) | September 30, 2018 | | December 31, 2017 |
Raw materials and precious metals | $ | 139 |
| | $ | 114 |
|
In-process inventories | 19 |
| | 22 |
|
Finished goods | 195 |
| | 172 |
|
Parts and supplies | 74 |
| | 77 |
|
Total Inventories | $ | 427 |
| | $ | 385 |
|
(6) Property, Plant and Equipment
|
| | | | | | | |
(In millions) | September 30, 2018 | | December 31, 2017 |
Land and improvements | $ | 43 |
| | $ | 48 |
|
Buildings | 82 |
| | 83 |
|
Machinery and equipment | 3,741 |
| | 3,734 |
|
Other | 160 |
| | 138 |
|
| 4,026 |
| | 4,003 |
|
Less: Accumulated depreciation | 1,585 |
| | 1,431 |
|
Total property, plant and equipment, net | $ | 2,441 |
| | $ | 2,572 |
|
Capitalized interest recognized as a reduction in interest expense was immaterial for the three and nine month periods ended September 30, 2018 and 2017.
During the period, we began actively marketing assets with a carrying value of $33 million at September 30, 2018. The carrying value of these assets held for sale were included in other long-term assets on our Condensed Consolidated Balance Sheets. No loss was recognized upon designation of these assets as held for sale.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
(7) Long-Term Debt
|
| | | | | | | |
Debt Balance, Net of Current Maturities and Unamortized Issuance Costs |
(In millions) | September 30, 2018 | | December 31, 2017 |
6.50% Senior Notes due 2022 (a) | $ | 500 |
| | $ | 500 |
|
9.25% Senior Secured Notes due 2023 (b) | 645 |
| | 645 |
|
6.50% Senior Notes due 2021 | 2 |
| | 2 |
|
Capital lease obligations | 43 |
| | 45 |
|
Total long-term debt, before debt issuance costs, discount and current portion of capital lease obligations | 1,190 |
| | 1,192 |
|
Less: | | | |
Unamortized debt issuance cost and debt discount | (22 | ) | | (26 | ) |
Current portion of capital lease obligations | (2 | ) | | (2 | ) |
Long-term debt, net of current portion | $ | 1,166 |
| | $ | 1,164 |
|
| |
(a) | The estimated fair value of total long-term debt outstanding was approximately $508 million and $515 million as of September 30, 2018 and December 31, 2017, respectively. |
| |
(b) | The estimated fair value of total long-term debt outstanding was approximately $684 million and $694 million as of September 30, 2018 and December 31, 2017, respectively. |
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| Total Capacity | | Amount Borrowed as of September 30, 2018 | | Outstanding Letters of Credit | | Available Capacity as of September 30, 2018 | | Maturity Date |
| |
Amended and Restated Asset Based (ABL) Credit Facility (c) | $ | 400 |
| | $ | — |
| | $ | 6 |
| | $ | 394 |
| | November 14, 2022 |
Asset Based (ABL) Credit Facility (d) | 50 |
| | — |
| | — |
| | 50 |
| | September 30, 2021 |
| |
(c) | Loans under the Amended and Restated ABL Credit Facility initially bear interest at an annual rate equal to (i) 1.50% plus LIBOR or (ii) 0.50% plus a base rate, subject to quarterly excess availability. |
| |
(d) | Loans under the ABL Credit Facility initially bear interest at an annual rate equal to (i) 2.00% plus LIBOR or (ii) 1.00% plus a base rate, subject to a 0.50% step-down based on the previous quarter’s excess availability. |
The Company is in compliance with all covenants of the ABL credit facilities and the senior notes as of September 30, 2018.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
(8) Supplemental Cash Flow Information
Cash flows related to income taxes, interest, construction in process and dividends were as follows:
|
| | | | | | | |
| Nine Months Ended
September 30, |
(In millions) | 2018 | | 2017 |
Supplemental disclosures: | |
Cash paid for income taxes, net of refunds | $ | 13 |
| | $ | 10 |
|
Cash paid for interest | 55 |
| | 56 |
|
Non-cash investing and financing activities: | | | |
Construction in progress additions included in accounts payable | $ | 10 |
| | $ | 8 |
|
Change in accounts payable related to construction in progress additions | 2 |
| | 9 |
|
Landlord incentives for leasehold improvements | — |
| | 1 |
|
(9) Commitments and Contingencies
There have been no material changes in the Company’s commitments and contingencies disclosed in the 2017 Form 10-K. In the ordinary course of business, the Company may become party to lawsuits, administrative proceedings and governmental investigations, including environmental, regulatory and other matters. The outcome of these matters cannot always be predicted accurately, but the Company accrues liabilities for these matters if the Company has determined that it is probable a loss has been incurred and the loss can be reasonably estimated. While it is not possible to predict the outcome of such proceedings, if one or more of them were decided against us, the Company believes there would be no material impact on its consolidated financial statements.
Crude Oil Supply Agreement
On August 31, 2012, Coffeyville Resources Refining and Marketing, LLC (“CRRM”), a wholly-owned subsidiary of CVR Refining, and Vitol Inc. (“Vitol”) entered into an Amended and Restated Crude Oil Supply Agreement (as amended, the “Vitol Agreement”). Under the Vitol Agreement, Vitol supplies the petroleum business with crude oil and intermediation logistics, which helps to reduce CVR Refining’s inventory position and mitigate crude oil pricing risk. The Vitol Agreement will automatically renew for successive one-year terms (each such term, a “Renewal Term”) unless either party provides the other with notice of nonrenewal at least 180 days prior to the expiration of any Renewal Term. The Vitol Agreement currently extends through December 31, 2019.
Renewable Fuel Standards
CVR Refining is subject to the Renewable Fuel Standard (“RFS”) of the Environmental Protection Agency (“EPA”), which requires refiners to either blend “renewable fuels” in with their transportation fuels or purchase renewable fuel credits, known as renewable identification numbers (“RINs”), in lieu of blending. Due to mandates in the RFS requiring increasing volumes of renewable fuels to replace petroleum products in the U.S. transportation fuel market, there may be a decrease in demand for petroleum products. CVR Refining is not able to blend the substantial majority of its transportation fuels and has to purchase RINs on the open market, as well as waiver credits for cellulosic biofuels from the EPA, in order to comply with the RFS.
The price of RINs has been extremely volatile over several years. The cost of RINs is dependent upon a variety of factors, which include the availability of RINs for purchase, the price at which RINs can be purchased, transportation fuel production levels, the mix of the petroleum business’ petroleum products, as well as the fuel blending performed at its refineries and downstream terminals, all of which can vary significantly from period to period.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The net cost of RINs for the three months ended September 30, 2018 and 2017 was $20 million and $64 million, respectively. The net cost of RINs for the nine months ended September 30, 2018 and 2017 was $47 million and $164 million, respectively. The net costs of RINs was a reduction to cost of materials and other in the Condensed Consolidated Statements of Operations. RINs expense includes the purchased cost of RINs, the impact of recognizing CVR Refining’s uncommitted biofuel blending obligation at fair value based on market prices at each reporting date and is reduced by the valuation change of RINs purchases in excess of CVR Refining’s RFS obligation as of the reporting date. During the three and nine months ended September 30, 2018, the net cost of RINs was favorably impacted by a reduction in CVR Refining’s RFS obligation and reduced market pricing. As of September 30, 2018 and December 31, 2017, CVR Refining’s biofuel blending obligation was approximately $7 million and $28 million, respectively, which was recorded in other current liabilities on the Condensed Consolidated Balance Sheets. CVR Refining recorded a RINs asset within prepaid and other current assets in the Condensed Consolidated Balance Sheet of $4 million, representing excess RINs primarily due to a reduction in its RFS obligation during the first quarter of 2018.
Litigation
The U.S. Attorney's office for the Southern District of New York contacted CVR Energy in September 2017 seeking production of information pertaining to CVR Refining's, CVR Energy's and Mr. Carl C. Icahn's activities relating to the Renewable Fuel Standard ("RFS") and Mr. Icahn's former role as an advisor to the President. CVR Energy is cooperating with the request and provided information in response to the subpoena. The U.S. Attorney's office has not made any claims or allegations against CVR Energy or Mr. Icahn. CVR Energy maintains a strong compliance program and, while no assurances can be made, CVR Energy does not believe this inquiry will have a material impact on its business, financial condition, results of operations or cash flows.
On August 21, 2018, CRRM received a letter from the United States Department of Justice (“DOJ”) on behalf of the EPA and Kansas Department of Health and Environment (“KDHE”) alleging violations of the Clean Air Act (“CAA”) and a 2012 Consent Decree between CRRM, the United States (on behalf of EPA) and KDHE at CRRM’s Coffeyville refinery. In September 2018, CRRM executed a tolling agreement with the DOJ and KDHE extending time for negotiation regarding the agencies’ allegations through March 31, 2019. At this time the Company cannot reasonably estimate the potential penalties, costs, fines or other expenditures that may result from this matter or any subsequent enforcement or litigation relating thereto and, therefore, the Company cannot determine if the ultimate outcome of this matter will have a material impact on the Company’s financial position, results of operations or cash flows.
In 2018, CVR Partners submitted a business interruption claim for losses under its insurance policies, related to damage and resulting reduced equipment production rates experienced during the second half of 2017 and early 2018. At this time, the Company cannot estimate either the outcome of this claim or the timing of any potential recoveries.
In September 2018, the Kansas Court of Appeals upheld property tax determinations by the Kansas Board of Tax Appeals in connection with CVR Partners’ dispute with Montgomery County, Kansas over prior year property tax payments as previously disclosed. CVR Partners continues to monitor this matter.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
Affiliate Pension Obligations
Prior to the exchange offer discussed in Note 1, Mr. Carl C. Icahn, through certain affiliates, owned approximately 82% of the Company’s capital stock. Applicable pension and tax laws make each member of a “controlled group” of entities, generally defined as entities in which there is at least an 80% common ownership interest, jointly and severally liable for certain pension plan obligations of any member of the controlled group. These pension obligations include ongoing contributions to fund the plan, as well as liability for any unfunded liabilities that may exist at the time the plan is terminated. As a result of the historical ownership interest in CVR Energy by Mr. Icahn’s affiliates (prior to the exchange offer), the Company was subject to the pension liabilities of all entities in which Mr. Icahn had a direct or indirect ownership interest of at least 80%. Two such entities, ACF Industries LLC (“ACF”) and Federal-Mogul, are the sponsors of several pension plans. As members of the controlled group, CVR Energy would be liable for any failure of ACF and Federal-Mogul to make ongoing pension contributions or to pay the unfunded liabilities upon a termination of their respective pension plans. The unfunded plan balances for these sponsors was $435 million and $424 million as of June 30, 2018 and December 31, 2017, respectively. These results are based on the information provided by Mr. Icahn’s affiliates based on information from the plans’ actuaries. As of September 30, 2018, and following the exchange offer, Mr. Icahn’s affiliates own approximately 71% of the Company’s capital stock and, therefore the Company is no longer considered to be liable for the aforementioned pension obligations of the controlled group. On October 1, 2018, Federal-Mogul was sold by Mr. Icahn’s affiliates to a third party.
(10) Fair Value Measurements
In accordance with FASB ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC 820”), the Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets or liabilities, such as a business.
ASC 820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
| |
• | Level 1 — Quoted prices in active markets for identical assets or liabilities |
| |
• | Level 2 — Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities) |
| |
• | Level 3 — Significant unobservable inputs (including the Company’s own assumptions in determining the fair value) |
The following tables set forth the assets and liabilities measured at fair value on a recurring basis, by input level, as of September 30, 2018 and December 31, 2017:
|
| | | | | | | | | | | | | | | |
Location and Description | September 30, 2018 |
(In millions) | Level 1 |
| Level 2 |
| Level 3 |
| Total |
Cash equivalents | $ | 50 |
| | $ | — |
| | $ | — |
| | $ | 50 |
|
Total Assets | $ | 50 |
| | $ | — |
| | $ | — |
| | $ | 50 |
|
Other current liabilities (commodity derivatives) | $ | — |
| | $ | (30 | ) | | $ | — |
| | $ | (30 | ) |
Other current liabilities (biofuel blending obligation) | — |
| | (2 | ) | | — |
| | (2 | ) |
Total Liabilities | $ | — |
| | $ | (32 | ) | | $ | — |
| | $ | (32 | ) |
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
|
| | | | | | | | | | | | | | | |
Location and Description | December 31, 2017 |
(In millions) | Level 1 | | Level 2 | | Level 3 | | Total |
Cash equivalents | $ | 15 |
| | $ | — |
| | $ | — |
| | $ | 15 |
|
Total Assets | $ | 15 |
| | $ | — |
| | $ | — |
| | $ | 15 |
|
Other current liabilities (commodity derivatives) | $ | — |
| | $ | (64 | ) | | $ | — |
| | $ | (64 | ) |
Other long-term liabilities (biofuel blending obligation) | — |
| | (1 | ) | | — |
| | (1 | ) |
Total Liabilities | $ | — |
| | $ | (65 | ) | | $ | — |
| | $ | (65 | ) |
As of September 30, 2018 and December 31, 2017, the only financial assets and liabilities that are measured at fair value on a recurring basis are the Company’s cash equivalents, investments, derivative instruments and the uncommitted biofuel blending obligation. Additionally, the fair value of the Company’s debt issuances is disclosed in Note 7 ("Long-Term Debt").
CVR Refining’s commodity derivative contracts and the uncommitted biofuel blending obligation, which use fair value measurements and are valued using broker quoted market prices of similar instruments, are considered Level 2 inputs. The Company had no transfers of assets and liabilities between any of the above levels during the nine months ended September 30, 2018.
(11) Derivative Financial Instruments
CVR Refining and CVR Partners are subject to price fluctuations caused by supply conditions, weather, economic conditions, interest rate fluctuations and other factors. To manage price risk on crude oil and other inventories and to fix margins on certain future production, CVR Refining from time to time enters into various commodity derivative transactions. CVR Refining does not apply hedge accounting with respect to derivative instruments held. Gains or losses related to the change in fair value and periodic settlements of these derivative instruments are classified as gain (loss) on derivatives, net in the Condensed Consolidated Statements of Operations.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
CVR Refining has adopted accounting standards which impose extensive record-keeping requirements in order to designate a derivative financial instrument as a hedge. CVR Refining holds derivative instruments, such as exchange-traded crude oil futures and certain over-the-counter forward swap agreements, which it believes provide an economic hedge on future transactions, but such instruments are not designated as hedges under GAAP. There are no premiums paid or received at inception of the derivative contracts and upon settlement.
CVR Refining enters into commodity swap contracts in order to fix the margin on a portion of future production. Additionally, CVR Refining may enter into price and basis swaps in order to fix the price on a portion of its commodity purchases and product sales. The physical volumes are not exchanged and these contracts are net settled with cash. The contract fair value of the commodity swaps is reflected on the Condensed Consolidated Balance Sheets with changes in fair value currently recognized in the Condensed Consolidated Statements of Operations. Quoted prices for similar assets or liabilities in active markets (Level 2) are considered to determine the fair values for the purpose of marking to market the hedging instruments at each period end. The fair value of the outstanding contracts at September 30, 2018 and December 31, 2017 was a net unrealized loss of $30 million and $64 million, respectively, all of which was included in other current liabilities. A change of $1.00 per barrel in the fair value of the benchmark crude or product basis would result in an increase or decrease in the related fair value of the commodity instruments and forward purchase and sale commitments of $1 million.
|
| | | | | | | | | | | | | | | |
Gain (Loss) on Derivatives | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
(In millions) | 2018 | | 2017 | | 2018 | | 2017 |
Gain (loss) on derivatives, net: | | | | | | | |
Forward purchases | $ | 4 |
| | $ | — |
| | $ | 33 |
| | $ | — |
|
Swaps | — |
| | (17 | ) | | 43 |
| | (5 | ) |
Futures | 1 |
| | — |
| | (1 | ) | | — |
|
Total gain (loss) on derivatives, net | $ | 5 |
| | $ | (17 | ) | | $ | 75 |
| | $ | (5 | ) |
|
| | | | | |
Open Commodity Derivative Instruments |
(In millions of barrels) | September 30, 2018 | | December 31, 2017 |
Commodity Swap Instruments: | | | |
2-1-1 Crack spreads | — |
| | 7 |
|
Distillate Crack spreads | — |
| | 4 |
|
Gasoline Crack spreads | — |
| | 4 |
|
Purchase and Sale Commitments: | | | |
Canadian crude oil | 2 |
| | 6 |
|
Offsetting Assets and Liabilities
The commodity swap agreements discussed above include multiple derivative positions with a number of counterparties for which CVR Refining has entered into agreements governing the nature of the derivative transactions. Each of the counterparty agreements provides for the right to setoff each individual derivative position to arrive at the net receivable due from the counterparty or payable owed by CVR Refining. As a result of the right to setoff, CVR Refining’s recognized assets and liabilities associated with the outstanding commodity swap derivative positions have been presented net in the Condensed Consolidated Balance Sheets. The tables below outline the gross amounts of the recognized assets and liabilities and the gross amounts offset in the Condensed Consolidated Balance Sheets for the various types of open derivative positions at CVR Refining.
The offsetting assets and liabilities for CVR Refining’s derivatives as of September 30, 2018 and December 31, 2017 are recorded as current assets and current liabilities in prepaid expenses and other current assets and accrued expenses and other current liabilities, respectively, in the Condensed Consolidated Balance Sheets as follows:
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
|
| | | | | | | | | | | | | | | |
| Derivative Assets | | Derivative Liabilities |
(In millions) | September 30, 2018 | | December 31, 2017 | | September 30, 2018 | | December 31, 2017 |
Commodity Derivatives | $ | 5 |
| | $ | 7 |
| | $ | 35 |
| | $ | 71 |
|
Less: Counterparty Netting | (5 | ) | | (7 | ) | | (5 | ) | | (7 | ) |
Total Net Fair Value of Derivatives | $ | — |
| | $ | — |
| | $ | 30 |
| | $ | 64 |
|
Commodity derivatives include commodity swaps and forward purchase and sale commitments. There were no outstanding commodity swap positions as of September 30, 2018.
(12) Shareholders Equity
The following table summarizes the shareholders equity and the Non-Controlling interest for the nine months ended September 30, 2018.
|
| | | | | | | | | | | | |
| | | | | | |
(In millions) | | Total CVR Stockholders’ Equity | | Noncontrolling Interest | | Total Equity |
Balance at December 31, 2017 | | $ | 919 |
| | $ | 785 |
| | $ | 1,704 |
|
Net income | | 207 |
| | 97 |
| | 304 |
|
Additional paid-in capital impact of CVRR units exchange | | 276 |
| | (191 | ) | | 85 |
|
Dividends to CVR Energy stockholders | | (162 | ) | | — |
| | (162 | ) |
Distributions to CVR Refining public unitholders | | — |
| | (67 | ) | | (67 | ) |
Other | | (1 | ) | | — |
| | (1 | ) |
Balance at September 30, 2018 | | $ | 1,239 |
| | $ | 624 |
| | $ | 1,863 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
(13) Related Party Transactions
Icahn Enterprises
The following is a summary of dividends paid to the Company’s stockholders, including IEP, for the respective quarters to which the distributions relate:
|
| | | | | | | | | | | | | | | |
(In millions, except per share data) | December 31, 2017 | | March 31, 2018 | | June 30, 2018 | | Total Dividends Paid in 2018 |
Amount paid to IEP | $ | 36 |
| | $ | 36 |
| | $ | 53 |
| | $ | 125 |
|
Amount paid to public stockholders | 7 |
| | 8 |
| | 22 |
| | 37 |
|
Total amount paid | $ | 43 |
| | $ | 44 |
| | $ | 75 |
| | $ | 162 |
|
| | | | | | | |
Per common share | $ | 0.50 |
| | $ | 0.50 |
| | $ | 0.75 |
| | $ | 1.75 |
|
Shares outstanding (in millions) | 86.8 |
| | 86.8 |
| | 100.6 |
| | |
CVR Refining has made distributions to IEP of $10 million for the nine months ended September 30, 2018 relating to the three preceding quarters.
Activity associated with the Company’s related party arrangements for the three and nine month periods ended September 30, 2018 and 2017 is summarized below:
|
| | | | | | | | | | | | | | | |
Expenses with related parties | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2018 | | 2017 | | 2018 | | 2017 |
Cost of materials and other
| | | | | | | |
Railcar Lease Agreements and Maintenance: | | | | | | | |
ARI Leasing, LLC | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 1 |
|
| | | | | | | |
Payments made | | | | | | | |
Insight Portfolio Group | — |
| | — |
| | — |
| | — |
|
Tax Allocation Agreement: | | | | | | | |
American Entertainment Properties Corporation | $ | 5 |
| | $ | — |
| | $ | 13 |
| | $ | 10 |
|
|
| | | | | | | |
Amounts due to/from related parties | | | |
(in millions) | September 30, 2018 | | December 31, 2017 |
Accounts Receivable (Payable) | | | |
Tax Allocation Agreement: | | | |
American Entertainment Properties Corporation (“AEPC”) | $ | — |
| | $ | 5 |
|
Tax Allocation Agreement
CVR has been a member of the consolidated federal tax group of American Entertainment Properties Corporation (“AEPC”), an affiliate of IEP, and party to a tax allocation agreement with AEPC (the “Tax Allocation Agreement”). The Tax Allocation Agreement provides that AEPC will pay all consolidated federal income taxes on behalf of the consolidated tax group. CVR is required to make payments to AEPC in an amount equal to the tax liability, if any, that it would have paid if it were to file as a consolidated group separate and apart from AEPC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
As a result of the exchange offer discussed in Note 1, AEPC’s ownership of CVR has been reduced below 80% and CVR is no longer eligible to file as a member of the AEPC consolidated federal income tax group subsequent to the exchange. Beginning with the tax period after the exchange, CVR will become the parent of a new consolidated group for U.S. federal income tax purposes, and will file and pay its federal income tax obligations directly with the IRS. Pursuant to the terms of the Tax Allocation Agreement, however, CVR may be required to make payments in respect of taxes owed by AEPC for periods prior to the exchange. Similar principles may apply for state or local income tax purposes where CVR filed combined, consolidated or unitary tax returns with AEPC.
(14) Segments
CVR Energy’s revenues are derived from two operating segments: the petroleum segment and the nitrogen fertilizer segment. The Company evaluates the performance of its segments based primarily on segment operating income and EBITDA. For the purposes of the operating segment disclosure, the company presents operating income as it is the most comparable measure to the amounts presented on the condensed consolidated statement of operations. The other segment reflects intercompany eliminations, corporate cash and cash equivalents, income tax activities and other corporate activities that are not allocated to the operating segments.
The following table summarizes certain operating results and capital expenditures information by segment: |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions) | 2018 | | 2017 | | 2018 | | 2017 |
Net sales | | | | | | | |
Petroleum | $ | 1,857 |
| | $ | 1,386 |
| | $ | 5,139 |
| | $ | 4,148 |
|
Nitrogen Fertilizer | 80 |
| | 69 |
| | 253 |
| | 253 |
|
Other | (2 | ) | | (1 | ) | | (6 | ) | | (6 | ) |
Total | $ | 1,935 |
| | $ | 1,454 |
| | $ | 5,386 |
| | $ | 4,395 |
|
Operating Income | | | | | | | |
Petroleum | $ | 176 |
| | $ | 99 |
| | $ | 390 |
| | $ | 157 |
|
Nitrogen Fertilizer | 3 |
| | (16 | ) | | (1 | ) | | 2 |
|
Other | (5 | ) | | (4 | ) | | (14 | ) | | (11 | ) |
Total operating income | 174 |
| | 79 |
| | 375 |
| | 148 |
|
Interest expense, net | (26 | ) | | (28 | ) | | (79 | ) | | (81 | ) |
Loss on derivatives, net | 5 |
| | (17 | ) | | 75 |
| | (5 | ) |
Other income, net | 3 |
| | — |
| | 6 |
| | — |
|
Earnings before income taxes | $ | 156 |
| | $ | 34 |
| | $ | 377 |
| | $ | 62 |
|
Depreciation and amortization | | | | | | | |
Petroleum | 34 |
| | 33 |
| | 101 |
| | 100 |
|
Nitrogen Fertilizer | 16 |
| | 20 |
| | 53 |
| | 55 |
|
Other | 1 |
| | 1 |
| | 5 |
| | 4 |
|
Total | $ | 51 |
| | $ | 54 |
| | $ | 159 |
| | $ | 159 |
|
Capital expenditures | | | | | | | |
Petroleum | $ | 18 |
| | $ | 19 |
| | $ | 50 |
| | $ | 66 |
|
Nitrogen Fertilizer | 6 |
| | 3 |
| | 15 |
| | 11 |
|
Other | 2 |
| | 1 |
| | 3 |
| | 3 |
|
Total | $ | 26 |
| | $ | 23 |
| | $ | 68 |
| | $ | 80 |
|
The following table summarizes total assets by segment:
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
|
| | | | | | | |
(in millions) | As of September 30, 2018 | | As of December 31, 2017 |
Total assets | | | |
Petroleum | $ | 2,505 |
| | $ | 2,270 |
|
Nitrogen Fertilizer | 1,219 |
| | 1,234 |
|
Other | 278 |
| | 303 |
|
Total | $ | 4,002 |
| | $ | 3,807 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes and with the statistical information and financial data appearing in this Report, as well as our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission (“SEC”) on February 26, 2018 (the “2017 Form 10-K”). Results of operations and cash flows for the three and nine months ended September 30, 2018 are not necessarily indicative of results to be attained for any other period. Refer to the section outlined “Forward looking statements”.
Company Overview
CVR Energy, Inc. (“CVR Energy,” “CVR,” “we,” “us,” “our” or the “Company”) is a diversified holding company primarily engaged in the petroleum refining and nitrogen fertilizer manufacturing industries through our holdings in CVR Refining and CVR Partners. CVR Refining is a refiner that does not have crude oil exploration or production operations (an “independent petroleum refiner”) and is a marketer of high value transportation fuels. CVR Partners produces nitrogen fertilizers in the form of ammonia and urea ammonium nitrate (“UAN”). Ammonia is a direct application fertilizer and is primarily used as a building block for other nitrogen products for industrial applications and finished fertilizer products. UAN is an aqueous solution of urea and ammonium nitrate. At September 30, 2018, we owned the general partner and approximately 81% and 34% respectively, of the outstanding common units representing limited partner interests in each of CVR Refining and CVR Partners. As of September 30, 2018, Icahn Enterprises L.P. and its affiliates owned approximately 71% of our outstanding common stock.
During August 2018, CVR Energy completed an exchange offer whereby public unitholders tendered a total of 21,625,106 CVR Refining common units in exchange for a total of 13,699,549 shares of CVR Energy common stock. In connection with this exchange offer, we incurred $0.6 million, and CVR Refining Holdings incurred $0.1 million of costs, which were capitalized to additional paid-in-capital. Further, additional paid-in-capital was increased by $276 million associated with a non-controlling interest adjustment from this exchange offer. As of September 30, 2018, and following this exchange offer, Icahn Enterprises L.P. (“IEP”) and its affiliates owned approximately 71% of the Company’s outstanding shares.
We operate under two business segments: petroleum and nitrogen fertilizer, which are referred to in this document as our “petroleum business” and our “nitrogen fertilizer business,” respectively.
Major Influences on Results of Operations
Petroleum Business
The earnings and cash flows for the petroleum business are primarily affected by the relationship between refined product prices and the prices for crude oil and other feedstocks that are processed and blended into petroleum products, such as gasoline, diesel fuel and jet fuel, that are produced by a refinery (“refined products”). The cost to acquire crude oil and other feedstocks and the price for which refined products are ultimately sold depend on factors beyond the petroleum business’ control, including the supply of and demand for crude oil, as well as gasoline and other refined products which, in turn, depend on, among other factors, changes in domestic and foreign economies, weather conditions, domestic and foreign political affairs, production levels, the availability of imports, the marketing of competitive fuels and the extent of government regulation. Because the petroleum business applies first-in, first-out (“FIFO”) accounting to value its inventory, crude oil price movements may impact net income in the short term fluctuations in the market price of inventory. The effect of changes in crude oil prices on the petroleum business’ results of operations is influenced by the rate at which the prices of refined products adjust to reflect these changes.
The prices of crude oil and other feedstocks and refined products are also affected by other factors, such as product pipeline capacity, local market conditions and the operating levels of competing refineries. Crude oil costs and the prices of refined products have historically been subject to wide fluctuations. Widespread expansion or upgrades of competitors’ facilities, price volatility, international political and economic developments and other factors are likely to continue to play an important role in refining industry economics. These factors can impact, among other things, the level of inventories in the market, resulting in price volatility and a reduction in product margins. Moreover, the refining industry typically experiences seasonal fluctuations in demand for refined products, such as increases in the demand for gasoline during the summer driving season and for volatile seasonal exports of diesel from the United States Gulf Coast markets.
In addition to current market conditions, there are long-term factors that may impact the demand for refined products. These factors include mandated renewable fuels standards, proposed climate change laws and regulations and increased mileage standards for vehicles. The petroleum business is also subject to the Renewable Fuel Standard (“RFS”) of the Environmental Protection Agency (“EPA”), which requires blending “renewable fuels” with transportation fuels or purchase renewable identification numbers (“RINs”), in lieu of blending, by March 31, 2019 or otherwise be subject to penalties. The cost of RINs is dependent upon a variety of factors, which include the availability of RINs for purchase, the price at which RINs can be purchased, transportation fuel production levels, the mix of our products, as well as the fuel blending performed at our refineries and downstream terminals, all of which can vary significantly from period to period. Based upon recent market prices of RINs and current estimates related to the other variable factors, we currently estimate that the net cost of RINs will be approximately $60 to 65 million for the year ending December 31, 2018.
The petroleum business’ refineries generally require a facility turnaround every four to five years. The length of the turnaround is contingent upon the scope of work to be completed. The next turnaround scheduled for the Wynnewood refinery is being performed as a two phase turnaround. The first phase of its current turnaround was completed in November 2017 at a total cost of approximately $67 million. The second phase of the Wynnewood turnaround is expected to occur in the first half of 2019. Turnaround expenses associated with the second phase of the Wynnewood turnaround are estimated to be approximately $25 million. In addition to the two phase turnaround, certain planned turnaround activities at Wynnewood were accelerated in the first quarter of 2017 on the hydrocracker unit for a catalyst change-out resulting in expense of approximately $13 million. The next turnaround scheduled for the Coffeyville refinery is expected to be performed in the first half of 2020.
Nitrogen Fertilizer Business
In the nitrogen fertilizer business, earnings and cash flows from operations are primarily affected by the relationship between nitrogen fertilizer product prices, on-stream factors and operating costs and expenses.
The price at which nitrogen fertilizer products are ultimately sold depends on numerous factors, including the global supply and demand for nitrogen fertilizer products which, in turn, depends on, among other factors, world grain demand and production levels, changes in world population, the cost and availability of fertilizer transportation infrastructure, weather conditions, the availability of imports and the extent of government intervention in agriculture markets. Nitrogen fertilizer prices are also affected by local factors, including local market conditions and the operating levels of competing facilities.
Consistent, safe and reliable operations are critical to the financial performance and results of operations of CVR Partners. In addition, operations at the Linde air separation unit, which supplies oxygen, nitrogen and compressed dry air to the CVR Partners’ nitrogen fertilizer manufacturing facility located in Coffeyville, Kansas (“Coffeyville Fertilizer Facility”), is critical to CVR Partners’ financial performance and results of operations. Downtime at either of the facilities of CVR Partners or at the Linde facility may result in lost margin opportunity, increased maintenance expense and a temporary increase in working capital investment and related inventory position. Production levels in the first quarter of 2018 were negatively impacted by 12 days of unplanned downtime due to a boiler feed water coil leak at the CVR Partners’ nitrogen fertilizer manufacturing facility located in East Dubuque, Illinois (“East Dubuque Facility”). The Linde air separation unit experienced a shut down during the second quarter of 2017. Following the Linde outage, the Coffeyville Fertilizer Facility UAN unit experienced a number of operational challenges, resulting in approximately 11 days of UAN downtime during the three months ended June 30, 2017.
Historically, the nitrogen fertilizer business facilities have each undergone a full facility turnaround approximately every two to three years. The Coffeyville Fertilizer Facility underwent a full facility turnaround in the second quarter of 2018, and the East Dubuque Facility underwent a full facility turnaround during the third quarter of 2017.
The largest raw material expense used in the production of ammonia at the East Dubuque Facility is natural gas, which is purchased from third parties. Pet coke, a coal-like substance that is produced during the refining process, is required to operate the Coffeyville Fertilizer Facility. The majority of pet coke is purchased from CVR Refining, typically at a discount when compared to pet coke purchased from third parties. The price and availability of natural gas and pet coke can significantly impact the profitability of CVR Partners.
Non-GAAP Measures
Our management uses certain non-GAAP performance measures to evaluate past performance and prospects for the future to supplement our GAAP financial information presented in accordance with U.S. GAAP. These non-GAAP financial measures are important factors in assessing our operating results and profitability and include performance and liquidity measures along with certain key operating metrics.
Performance and Liquidity Measures
We use the following performance and liquidity measures:
EBITDA and Adjusted EBITDA. EBITDA represents net income attributable to CVR Energy stockholders before consolidated (i) interest expense and other financing costs, net of interest income; (ii) income tax expense (benefit); and (iii) depreciation and amortization, less the portion of these adjustments attributable to noncontrolling interest. Adjusted EBITDA represents EBITDA adjusted for consolidated (i) FIFO impact (favorable) unfavorable; (ii) major turnaround expenses (that many of our competitors capitalize and thereby exclude from their measures of EBITDA and adjusted EBITDA); (iii) (gain) loss on derivatives, net; and (iv) current period settlements on derivative contracts. EBITDA and Adjusted EBITDA are not recognized terms under GAAP and should not be substituted for net income or cash flow from operations. We believe that EBITDA and Adjusted EBITDA enable investors to better understand and evaluate our ongoing operating results and allow for greater transparency in reviewing our overall financial, operational and economic performance. EBITDA and Adjusted EBITDA presented by other companies may not be comparable to our presentation, since each company may define these terms differently. EBITDA and Adjusted EBITDA represent EBITDA and Adjusted EBITDA that is attributable to CVR Energy stockholders.
Petroleum EBITDA. EBITDA is a performance measure representing net income before (i) interest expense and other financing costs, net of interest income, (ii) income tax expense and (iii) depreciation and amortization.
Petroleum Adjusted EBITDA. Adjusted EBITDA is a performance measure representing EBITDA adjusted for (i) (favorable) unfavorable FIFO impacts associated with our crude oil and refined product inventories, (ii) major turnaround expenses (that many of our competitors capitalize and thereby exclude from their measures of EBITDA and adjusted EBITDA), (iii) (gain) loss on derivatives, net and (iv) current period settlements on derivative contracts. Adjusted EBITDA represents the starting point for determining available cash for distribution. Refer to discussion below for the Refining margin, adjusted for FIFO impact non-GAAP measure for discussion of why management adjusted for the FIFO impact of our inventories. We exclude major turnaround expenses because these amounts are required expenditures for our refineries, are not closely related to current period operations, and many of our peer companies capitalize these amounts thereby excluding these amounts from their EBITDA-related measures. For derivatives, we adjust EBITDA to exclude the unrealized or non-cash portion of our derivative gain or loss from our results in order to arrive at our starting point for available cash for distribution.
Nitrogen EBITDA. Nitrogen Fertilizer EBITDA represents nitrogen fertilizer net loss adjusted for (i) interest (income) expense; (ii) income tax expense; and (iii) depreciation and amortization expense. Adjusted Nitrogen Fertilizer EBITDA represents Nitrogen Fertilizer EBITDA adjusted for (i) major turnaround expenses, when applicable; (ii) gain or loss on extinguishment of debt; and (iii) business interruption insurance recovery, when applicable. We present Adjusted Nitrogen Fertilizer EBITDA because we have found it helpful to consider an operating measure that excludes expenses, such as major turnaround expense, gain or loss on extinguishment of debt, loss on disposition of assets, and business interruption insurance recovery, relating to transactions not reflective of CVR Partner’s core operations.
Nitrogen Adjusted EBITDA. We also present Adjusted Nitrogen Fertilizer EBITDA because it is the starting point for calculating CVR Partner’s available cash for distribution. Adjusted Nitrogen Fertilizer EBITDA is not a recognized term under GAAP and should not be substituted for net loss as a measure of performance. We believe that Nitrogen Fertilizer EBITDA and Adjusted Nitrogen Fertilizer EBITDA enable investors and analysts to better understand CVR Partner’s ability to make distributions to its common unitholders, help investors and analysts evaluate its ongoing operating results and allow for greater transparency in reviewing our overall financial, operational and economic performance by allowing investors to evaluate the same information used by management. Nitrogen Fertilizer EBITDA and Adjusted Nitrogen Fertilizer EBITDA presented by other companies may not be comparable to our presentation, since each company may define these terms differently.
Refining margin. This performance measure represents the difference between net sales and cost of materials and other as reported on our Condensed Consolidated Statements of Operations.
Refining margin, adjusted for FIFO impact. This performance measure represents our refining margin adjusted to exclude the impact of price changes in our crude oil and refined products inventories. Under our FIFO accounting method for crude oil and
refined products, changes in crude oil prices can cause fluctuations in the inventory valuation of our raw material, work in process and finished good inventories, thereby resulting in a favorable FIFO impact when crude oil prices increase and an unfavorable FIFO impact when crude oil prices decrease. In periods of significant price volatility, these price changes have a significant impact on the valuation on our inventories and thus our results.
Available cash for distribution. This performance and liquidity measure is equal to Adjusted EBITDA reduced for cash needed for (i) debt service, (ii) reserves for environmental and maintenance capital expenditures, (iii) reserves for major turnaround expenses and, to the extent applicable, (iv) reserves for future operating or capital needs that the board of directors of our general partner deems necessary or appropriate, if any. Available cash for distribution may be increased by the release of previously established cash reserves, if any, and other excess cash, at the discretion of the board of directors of our general partner.
Operating Metrics
During the second quarter of 2018, we changed the metrics discussed below from a crude oil throughput barrel basis to a total throughput barrel basis. Prior period information has been revised to conform to current presentation.
Refining margin and refining margin adjusted for FIFO impact per total throughput barrel. For both refining margin and refining margin adjusted for FIFO impact, we present these measures on a per total throughput barrel basis. In order to calculate these non-GAAP operating metrics, we utilize the total dollar figures for refining margin and refining margin adjusted for FIFO impact, as derived above and divide by the applicable number of total throughput barrels for the period.
Direct operating expenses, excluding major turnaround expenses, per total throughput barrel. We provide this performance measure to exclude major turnaround expenses from the reported amounts of direct operating expense during a given period. Major turnaround expenses are not directly correlated to our current period operations and thus excluding them provides investors and analysts with the current period cost, exclusive of depreciation and amortization, we incur to convert a barrel of crude oil into refined product.
We present these measures because we believe they may help investors, analysts, lenders and ratings agencies analyze our results of operations and liquidity in conjunction with our U.S. GAAP results, including but not limited to our operating performance as compared to other publicly traded companies in the refining industry, without regard to historical cost basis or financing methods and our ability to incur and service debt and fund capital expenditures. Non-GAAP measures have important limitations as analytical tools, because they exclude some, but not all, items that affect net earnings and operating income. These measures should not be considered substitutes for their most directly comparable U.S. GAAP financial measures.
Results of Operations
|
| | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
(in millions, except per share data) | 2018 | | 2017 | | 2018 | | 2017 |
Consolidated Statements of Operations Data | | | | | | | |
Net sales | $ | 1,935 |
| | $ | 1,454 |
| | $ | 5,386 |
| | $ | 4,395 |
|
Cost of materials and other | 1,561 |
| | 1,133 |
| | 4,370 |
| | 3,582 |
|
Direct operating expenses (1) | 121 |
| | 160 |
| | 394 |
| | 422 |
|
Depreciation and amortization | 49 |
| | 51 |
| | 151 |
| | 152 |
|
Cost of sales | 1,731 |
| | 1,344 |
| | 4,915 |
| | 4,156 |
|
Selling, general and administrative expenses (1) | 28 |
| | 27 |
| | 83 |
| | 82 |
|
Depreciation and amortization | 2 |
| | 3 |
| | 8 |
| | 7 |
|
Loss on asset disposals | — |
| | 1 |
| | 5 |
| | 2 |
|
Operating income | 174 |
| | 79 |
| | 375 |
| | 148 |
|
Interest expense, net | (26 | ) | | (28 | ) | | (79 | ) | | (81 | ) |
Gain (loss) on derivatives, net | 5 |
| | (17 | ) | | 75 |
| | (5 | ) |
Other income, net | 3 |
| | — |
| | 6 |
| | — |
|
Income before income tax expense | 156 |
| | 34 |
| | 377 |
| | 62 |
|
Income tax expense | 35 |
| | 9 |
| | 73 |
| | 18 |
|
Net income | 121 |
| | 25 |
| | 304 |
| | 44 |
|
Less: Net income attributable to noncontrolling interest | 31 |
| | 3 |
| | 97 |
| | 10 |
|
Net income attributable to CVR Energy stockholders | $ | 90 |
| | $ | 22 |
| | $ | 207 |
| | $ | 34 |
|
| | | | | | | |
Basic and diluted earnings per share | $ | 0.94 |
| | $ | 0.26 |
| | $ | 2.31 |
| | $ | 0.39 |
|
Dividends declared per share | $ | 0.75 |
| | $ | 0.50 |
| | $ | 2.00 |
| | $ | 1.50 |
|
Adjusted EBITDA (2) | $ | 172 |
| | $ | 91 |
| | $ | 361 |
| | $ | 209 |
|
| | | | | | | |
Weighted-average common shares outstanding: | | | | | | | |
Basic and diluted | 95.8 |
| | 86.8 |
| | 89.8 |
| | 86.8 |
|
(1) Amounts are shown exclusive of depreciation and amortization.
(2) See “Non-GAAP Reconciliations” section below for further information regarding this non-GAAP measure.
Consolidated Results of Operations
Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017 (Consolidated)
Net Sales. Consolidated net sales were $1,935 million for the three months ended September 30, 2018 compared to $1,454 million for the three months ended September 30, 2017. The increase in sales of $481 million was largely the result of an increase in the petroleum segment’s net sales of $471 million due to increased refined product sales volumes, partially offset by decreased refined products crack spreads. The petroleum segment’s overall sales volumes increased approximately 3.5% for the three months ended September 30, 2018, as compared to the three months ended September 30, 2017 primarily due to an inventory build in preparation for a fall turnaround at our Wynnewood refinery in the prior period. The nitrogen fertilizer segment’s net sales increased by approximately $11 million primarily as a result of increased UAN sales prices. The increase in UAN sales prices was primarily attributable to favorable market conditions.
Cost of Materials and Other. Consolidated cost of materials and other was $1,561 million for the three months ended September 30, 2018, as compared to $1,133 million for the three months ended September 30, 2017. The increase of $428 million was related to an increase of $430 million at the petroleum segment, partially offset by a 1 million decrease at the nitrogen fertilizer segment. The petroleum business’ consumed crude oil costs increased due to an increase in crude oil prices, coupled with a slight increase in throughput volumes of crude oil. The West Texas Intermediate (“WTI”) benchmark crude price increased approximately 44.0% and the petroleum business’ crude oil throughput volume increased by approximately 2.9% for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017. The nitrogen fertilizer segment’s cost of material and other was consistent at $19 million and $20 million for the three months ended September 30, 2018 and September 30, 2017, respectively.
Gain (loss) on derivatives, net. For the three months ended September 30, 2018, the petroleum segment recorded a $5 million net gain on derivatives, as compared to a net loss of $17 million for the three months ended September 30, 2017. This change was primarily due to a decrease in the volume of open derivative positions from 16 million barrels as of September 30, 2017 to 2 million barrels as of September 30, 2018. Additionally, the market fluctuations associated with our derivative positions can materially impact our gain or loss on derivatives.
Income tax expense. Income tax expense for the three months ended September 30, 2018 was $35 million, or 22.4% of income (loss) before income taxes, as compared to income tax expense for the three months ended September 30, 2017 of $9 million, or 26.5% of income (loss) before income taxes. The fluctuation in income tax expense was due primarily to the change in pretax income (loss) from the three months ended September 30, 2017 to the three months ended September 30, 2018. In addition, the change in the effective tax rate was largely due to the change in the federal statutory tax rate from 35% in 2017 to 21% in 2018.
Nine Months Ended September 30, 2018 Compared to the Nine Months Ended September 30, 2017 (Consolidated)
Net Sales. Consolidated net sales were $5,386 million for the nine months ended September 30, 2018 compared to $4,395 million for the nine months ended September 30, 2017. The increase of $991 million was largely the result of an increase in the petroleum segment’s net sales of $991 million due to increased refined products crack spreads, partially offset by decreased sales volumes. The NYMEX 2-1-1 crack spread and Group 3 2-1-1 crack spread increased by $2.15 and $2.51 per barrel, respectively, compared to the same period last year driven largely by an improved distillate crack. Overall sales volumes decreased approximately 4.8% for the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2017, primarily due to decreased production as a result of the fluid catalytic cracking unit ("FCCU") outage at the Coffeyville refinery during the first quarter of 2018, offset by improved sales volume in the third quarter of 2018 as volume reduced in 2017 in preparation of the Wynnewood turnaround. The nitrogen fertilizer segment’s net sales remained consistent over the period, with net sales of $253 million for the nine months ended September 30, 2018 and 2017. Nitrogen fertilizer net sales was impacted by an increase in UAN and ammonia sales prices for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, which was primarily attributable to more favorable market conditions during the current period. This was offset by a decrease in UAN sales volumes due to lower production resulting from planned and unplanned downtime during the nine months ended September 30, 2018, coupled with a decrease in ammonia sales volumes resulting from less product available from lower inventory as of December 31, 2017.
Cost of Materials and Other. Consolidated cost of materials and other was $4,370 million for the nine months ended September 30, 2018, as compared to $3,582 million for the nine months ended September 30, 2017. The increase of $788 million primarily resulted from an increase of $791 million in the petroleum segment. The increase at the petroleum segment was primarily the result of increases in the cost of consumed crude oil, partially offset by a decrease in RINs costs. The increase in consumed crude oil costs was due to an increase in crude oil prices, partially offset by a decrease in crude oil throughput volume. The WTI benchmark crude price increased approximately 35.3% and crude oil throughput volume decreased by approximately 6.1% for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The net cost of RINs was favorably impacted by a reduction in the petroleum segment’s RFS obligation and reduced market pricing. The nitrogen fertilizer segment’s cost of materials and other decreased by approximately $2 million primarily due to a an overall decrease from lower sales volumes as well as a $1 million decrease in distribution costs to off-site inventory locations.
Gain (loss) on derivatives, net. For the nine months ended September 30, 2018, the petroleum segment recorded a $75 million net gain on derivatives. This compares to a $5 million net loss on derivatives for the nine months ended September 30, 2017. This change was primarily due to a decrease in the volume of open derivative positions from 16 million barrels as of September 30, 2017 to 2 million barrels as of September 30, 2018. Additionally, the market fluctuations associated with our derivative positions can materially impact our gain or loss on derivatives.
Income Tax Expense. Income tax expense for the nine months ended September 30, 2018 was $73 million, or 19.4% of income (loss) before income taxes, as compared to income tax expense for the nine months ended September 30, 2017 of $18 million, or 29.0% of income (loss) before income taxes. The fluctuation in income tax expense was due primarily to the change in pretax income from the nine months ended September 30, 2017 to the nine months ended September 30, 2018. In addition, the change in the effective tax rate was largely due to the change in the federal statutory tax rate from 35% in 2017 to 21% in 2018.
Petroleum Business Results of Operations
The petroleum business includes the operations of both the Coffeyville and Wynnewood refineries. The following tables provide an overview of the petroleum business’ results of operations, relevant market indicators and its key operating statistics for the three and nine months ended September 30, 2018 and 2017:
|
| | | | | | | | | | | | | | | |
| Three Months Ended
September 30, | | Nine Months Ended
September 30, |
(In millions) | 2018 | | 2017 | | 2018 | | 2017 |
Petroleum Segment Summary Financial Results | | | | | | | |
Net sales | $ | 1,857 |
| | $ | 1,386 |
| | $ | 5,139 |
| | $ | 4,148 |
|
Operating costs and expenses: | | | | | | | |
Cost of materials and other | 1,544 |
| | 1,114 |
| | 4,315 |
| | 3,524 |
|
Direct operating expenses (1) | 85 |
| | 120 |
| | 272 |
| | 308 |
|
Depreciation and amortization | 33 |
| | 32 |
| | 98 |
| | 97 |
|
Cost of sales | 1,662 |
| | 1,266 |
| | 4,685 |
| | 3,929 |
|
Selling, general and administrative expenses (1) | 18 |
| | 19 |
| | 56 |
| | 58 |
|
Depreciation and amortization | 1 |
| | 1 |
| | 3 |
| | 3 |
|
Loss on asset disposals | — |
| | 1 |
| | 5 |
| | 1 |
|
Operating income | 176 |
| | 99 |
| | 390 |
| | 157 |
|
Interest expense, net | (10 | ) | | (12 | ) | | (32 | ) | | (34 | ) |
Loss on derivatives, net | 5 |
| | (17 | ) | | 75 |
| | (5 | ) |
Other income, net | 3 |
| | — |
| | 6 |
| | — |
|
Net income | $ | 174 |
| | $ | 70 |
| | $ | 439 |
| | $ | 118 |
|
| | | | | | | |
Gross profit | $ | 195 |
| | $ | 120 |
| | $ | 454 |
| | $ | 219 |
|
Refining margin (2) | 313 |
| | 272 |
| | 824 |
| | 624 |
|
Adjusted Petroleum EBITDA (2) | 221 |
| | 139 |
| | 494 |
| | 296 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(In dollars per total throughput barrel) | 2018 | | 2017 | | 2018 | | 2017 |
Key Operating Statistics | | | | | | | |
Gross profit | $ | 9.70 |
| | $ | 6.07 |
| | $ | 7.99 |
| | $ | 3.61 |
|
Refining margin (2) | 15.54 |
| | 13.81 |
| | 14.50 |
| | 10.32 |
|
FIFO impact, unfavorable | (0.13 | ) | | (0.76 | ) | | (0.79 | ) | | 0.01 |
|
Refining margin adjusted for FIFO impact (2) | 15.41 |
| | 13.05 |
| | 13.71 |
| | 10.33 |
|
Direct operating expenses (1) | 4.23 |
| | 6.12 |
| | 4.79 |
| | 5.11 |
|
Direct operating expenses excluding major turnaround expenses (1)(2) | 4.17 |
| | 5.02 |
| | 4.77 |
| | 4.49 |
|
| |
(1) | Amounts are shown exclusive of depreciation and amortization. |
| |
(2) | See “Non-GAAP Reconciliations” section below for further information regarding these non-GAAP measures. |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(In dollars per barrel) | 2018 | | 2017 | | 2018 | | 2017 |
Market Indicators | | | | | | | |
West Texas Intermediate (WTI) NYMEX | $ | 69.43 |
| | $ | 48.20 |
| | $ | 66.79 |
| | $ | 49.36 |
|
Crude Oil Differentials: | | | | | | | |
WTI less WTS (light/medium sour) | 14.26 |
| | 0.97 |
| | 8.14 |
| | 1.15 |
|
WTI less WCS (heavy sour) | 27.76 |
| | 10.48 |
| | 23.77 |
| | 11.42 |
|
WTI less Condensate | 0.37 |
| | 0.12 |
| | 0.40 |
| | 0.12 |
|
Midland Cushing Differential | 14.33 |
| | 0.79 |
| | 7.69 |
| | 0.54 |
|
NYMEX Crack Spreads: | | | | | | | |
Gasoline | 16.96 |
| | 20.42 |
| | 17.69 |
| | 17.74 |
|
Heating Oil | 22.03 |
| | 21.05 |
| | 21.59 |
| | 17.24 |
|
NYMEX 2-1-1 Crack Spread | 19.50 |
| | 20.73 |
| | 19.64 |
| | 17.49 |
|
PADD II Group 3 Basis: | | | | | | | |
Gasoline | (0.13 | ) | | (1.18 | ) | | (2.16 | ) | | (2.37 | ) |
Ultra Low Sulfur Diesel | 0.89 |
| | 0.85 |
| | 0.08 |
| | (0.44 | ) |
PADD II Group 3 Product Crack Spread: | | | | | | | |
Gasoline | 16.83 |
| | 19.23 |
| | 15.53 |
| | 15.37 |
|
Ultra Low Sulfur Diesel | 22.92 |
| | 21.90 |
| | 21.67 |
| | 16.80 |
|
PADD II Group 3 2-1-1 | $ | 19.88 |
| | $ | 20.57 |
| | $ | 18.60 |
| | $ | 16.09 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| | | % | | | | % | | | | % | | | | % |
Total Refining Throughput and Production Data (bpd) | | | | | | | | | | | | | | | |
Throughput: | | | | | | | | | | | | | | | |
Condensate | 8,425 |
| | 3.8 | | 1 |
| | — | | 13,156 |
| | 6.3 | | 2,893 |
| | 1.3 |
|