CVR ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
December 31,
2011
|
|
|
|
(unaudited)
|
|
|
|
|
|
(in thousands, except
share data)
|
|
ASSETS
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
988,197
|
|
$
|
388,328
|
|
Accounts receivable, net of allowance for doubtful accounts of $1,858 and $1,282, respectively
|
|
|
280,620
|
|
|
182,619
|
|
Inventories
|
|
|
524,359
|
|
|
636,221
|
|
Prepaid expenses and other current assets
|
|
|
32,517
|
|
|
117,509
|
|
Insurance receivable
|
|
|
1,233
|
|
|
1,939
|
|
Deferred income taxes
|
|
|
36,880
|
|
|
|
|
Income tax receivable
|
|
|
2,011
|
|
|
30,167
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,865,817
|
|
|
1,356,783
|
|
Property, plant, and equipment, net of accumulated depreciation
|
|
|
1,722,019
|
|
|
1,672,961
|
|
Intangible assets, net
|
|
|
291
|
|
|
312
|
|
Goodwill
|
|
|
40,969
|
|
|
40,969
|
|
Deferred financing costs, net
|
|
|
15,487
|
|
|
20,319
|
|
Insurance receivable
|
|
|
4,076
|
|
|
4,076
|
|
Other long-term assets
|
|
|
3,718
|
|
|
23,871
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,652,377
|
|
$
|
3,119,291
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Note payable and capital lease obligations
|
|
$
|
1,127
|
|
$
|
9,880
|
|
Accounts payable
|
|
|
425,632
|
|
|
466,559
|
|
Personnel accruals
|
|
|
49,614
|
|
|
20,849
|
|
Accrued taxes other than income taxes
|
|
|
31,890
|
|
|
35,147
|
|
Income taxes payable
|
|
|
14,999
|
|
|
2,400
|
|
Due to parent
|
|
|
44,455
|
|
|
|
|
Deferred income taxes
|
|
|
|
|
|
9,271
|
|
Deferred revenue
|
|
|
10,373
|
|
|
9,026
|
|
Other current liabilities
|
|
|
149,985
|
|
|
34,427
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
728,075
|
|
|
587,559
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
Long-term debt and capital lease obligations, net of current portion
|
|
|
850,937
|
|
|
853,903
|
|
Accrued environmental liabilities, net of current portion
|
|
|
1,331
|
|
|
1,459
|
|
Deferred income taxes
|
|
|
408,943
|
|
|
357,473
|
|
Other long-term liabilities
|
|
|
36,979
|
|
|
19,194
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
1,298,190
|
|
|
1,232,029
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
CVR stockholders' equity:
|
|
|
|
|
|
|
|
Common stock $0.01 par value per share, 350,000,000 shares authorized, 86,929,660 and 86,906,760 shares issued as of September 30, 2012 and
December 31, 2011, respectively
|
|
|
869
|
|
|
869
|
|
Additional paid-in-capital
|
|
|
582,534
|
|
|
587,199
|
|
Retained earnings
|
|
|
905,283
|
|
|
566,855
|
|
Treasury stock, 98,610 shares as of September 30, 2012 and December 31, 2011, at cost
|
|
|
(2,303
|
)
|
|
(2,303
|
)
|
Accumulated other comprehensive loss, net of tax
|
|
|
(1,266
|
)
|
|
(1,008
|
)
|
|
|
|
|
|
|
Total CVR stockholders' equity
|
|
|
1,485,117
|
|
|
1,151,612
|
|
|
|
|
|
|
|
Noncontrolling interest
|
|
|
140,995
|
|
|
148,091
|
|
|
|
|
|
|
|
Total equity
|
|
|
1,626,112
|
|
|
1,299,703
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
3,652,377
|
|
$
|
3,119,291
|
|
|
|
|
|
|
|
See accompanying notes to the condensed consolidated financial statements.
6
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
|
(unaudited)
(in thousands, except share data)
|
|
Net sales
|
|
$
|
2,409,624
|
|
$
|
1,351,964
|
|
$
|
6,686,573
|
|
$
|
3,966,945
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sold (exclusive of depreciation and amortization)
|
|
|
1,702,452
|
|
|
1,026,040
|
|
|
5,211,817
|
|
|
3,086,237
|
|
Direct operating expenses (exclusive of depreciation and amortization)
|
|
|
109,929
|
|
|
74,615
|
|
|
319,542
|
|
|
209,256
|
|
Insurance recoverybusiness interruption
|
|
|
|
|
|
(490
|
)
|
|
|
|
|
(3,360
|
)
|
Selling, general and administrative expenses (exclusive of depreciation and amortization)
|
|
|
30,390
|
|
|
17,584
|
|
|
147,779
|
|
|
69,017
|
|
Depreciation and amortization
|
|
|
33,109
|
|
|
22,025
|
|
|
97,411
|
|
|
66,079
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
1,875,880
|
|
|
1,139,774
|
|
|
5,776,549
|
|
|
3,427,229
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
533,744
|
|
|
212,190
|
|
|
910,024
|
|
|
539,716
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and other financing costs
|
|
|
(18,962
|
)
|
|
(13,757
|
)
|
|
(57,189
|
)
|
|
(41,152
|
)
|
Interest income
|
|
|
292
|
|
|
93
|
|
|
515
|
|
|
578
|
|
Realized gain (loss) on derivatives, net
|
|
|
(53,271
|
)
|
|
66
|
|
|
(80,426
|
)
|
|
(18,298
|
)
|
Unrealized loss on derivatives, net
|
|
|
(115,699
|
)
|
|
(9,991
|
)
|
|
(196,980
|
)
|
|
(6,801
|
)
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
(2,078
|
)
|
Other income, net
|
|
|
(32
|
)
|
|
243
|
|
|
794
|
|
|
720
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(187,672
|
)
|
|
(23,346
|
)
|
|
(333,286
|
)
|
|
(67,031
|
)
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
346,072
|
|
|
188,844
|
|
|
576,738
|
|
|
472,685
|
|
Income tax expense
|
|
|
127,618
|
|
|
68,603
|
|
|
208,971
|
|
|
172,460
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
218,454
|
|
|
120,241
|
|
|
367,767
|
|
|
300,225
|
|
Less: Net income attributable to noncontrolling interest
|
|
|
9,558
|
|
|
10,976
|
|
|
29,339
|
|
|
20,307
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to CVR Energy stockholders
|
|
$
|
208,896
|
|
$
|
109,265
|
|
$
|
338,428
|
|
$
|
279,918
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
2.41
|
|
$
|
1.26
|
|
$
|
3.90
|
|
$
|
3.24
|
|
Diluted earnings per share
|
|
$
|
2.41
|
|
$
|
1.25
|
|
$
|
3.86
|
|
$
|
3.19
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
86,831,050
|
|
|
86,549,846
|
|
|
86,820,181
|
|
|
86,462,668
|
|
Diluted
|
|
|
86,831,050
|
|
|
87,743,600
|
|
|
87,580,588
|
|
|
87,772,169
|
|
See accompanying notes to the condensed consolidated financial statements.
7
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
|
(unaudited)
(in thousands)
|
|
Net income
|
|
$
|
218,454
|
|
$
|
120,241
|
|
$
|
367,767
|
|
$
|
300,225
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on available-for-sale securities, net of tax of $1, $0, $1 and $(2)
|
|
|
5
|
|
|
(1
|
)
|
|
7
|
|
|
(2
|
)
|
Change in fair value of interest rate swap, net of tax of $(103), $(703), $(367) and $(703)
|
|
|
(268
|
)
|
|
(1,849
|
)
|
|
(965
|
)
|
|
(1,849
|
)
|
Reclass of gain/loss to income on settlement of interest rate swap, net of tax of $66, $39, $194 and $39
|
|
|
174
|
|
|
104
|
|
|
511
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss)
|
|
|
(89
|
)
|
|
(1,746
|
)
|
|
(447
|
)
|
|
(1,747
|
)
|
Comprehensive income
|
|
|
218,365
|
|
|
118,495
|
|
|
367,320
|
|
|
298,478
|
|
|
|
|
|
|
|
|
|
|
|
Less: Comprehensive income attributable to noncontrolling interest
|
|
|
9,519
|
|
|
10,247
|
|
|
29,150
|
|
|
19,578
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to CVR stockholders
|
|
$
|
208,846
|
|
$
|
108,248
|
|
$
|
338,170
|
|
$
|
278,900
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
8
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stockholders
|
|
|
|
|
|
|
|
Shares
Issued
|
|
$0.01 Par
Value
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
|
|
Treasury
Stock
|
|
Accumulated
Other
Comprehensive
Income (loss)
|
|
Total CVR
Stockholders'
Equity
|
|
Noncontrolling
Interest
|
|
Total
Equity
|
|
|
|
(unaudited)
(in thousands, except share data)
|
|
Balance at December 31, 2011
|
|
|
86,906,760
|
|
$
|
869
|
|
$
|
587,199
|
|
$
|
566,855
|
|
$
|
(2,303
|
)
|
$
|
(1,008
|
)
|
$
|
1,151,612
|
|
$
|
148,091
|
|
$
|
1,299,703
|
|
Distributions to noncontrolling interest holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,839
|
)
|
|
(37,839
|
)
|
Share-based compensation
|
|
|
|
|
|
|
|
|
4,976
|
|
|
|
|
|
|
|
|
|
|
|
4,976
|
|
|
1,593
|
|
|
6,569
|
|
Modification and reclassification of equity share-based compensation award to a liability based award
|
|
|
|
|
|
|
|
|
(9,924
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,924
|
)
|
|
|
|
|
(9,924
|
)
|
Excess tax benefit from share-based compensation
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
(12
|
)
|
Exercise of stock options
|
|
|
22,900
|
|
|
|
|
|
413
|
|
|
|
|
|
|
|
|
|
|
|
413
|
|
|
|
|
|
413
|
|
Redemption of common units
|
|
|
|
|
|
|
|
|
(118
|
)
|
|
|
|
|
|
|
|
|
|
|
(118
|
)
|
|
|
|
|
(118
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
338,428
|
|
|
|
|
|
|
|
|
338,428
|
|
|
29,339
|
|
|
367,767
|
|
Net unrealized gain on available-for-sale securities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
7
|
|
|
|
|
|
7
|
|
Net loss on interest rate swaps, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(265
|
)
|
|
(265
|
)
|
|
(189
|
)
|
|
(454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2012
|
|
|
86,929,660
|
|
$
|
869
|
|
$
|
582,534
|
|
$
|
905,283
|
|
$
|
(2,303
|
)
|
$
|
(1,266
|
)
|
$
|
1,485,117
|
|
$
|
140,995
|
|
$
|
1,626,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
9
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
2011
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
367,767
|
|
$
|
300,225
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
97,411
|
|
|
66,079
|
|
Allowance for doubtful accounts
|
|
|
575
|
|
|
190
|
|
Amortization of deferred financing costs
|
|
|
5,862
|
|
|
3,277
|
|
Amortization of original issue discount
|
|
|
410
|
|
|
382
|
|
Amortization of original issue premium
|
|
|
(2,573
|
)
|
|
|
|
Deferred income taxes
|
|
|
13,816
|
|
|
40,920
|
|
Excess tax benefit from share-based compensation
|
|
|
(12
|
)
|
|
(1,475
|
)
|
Loss on disposition of assets
|
|
|
1,070
|
|
|
2,234
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
2,078
|
|
Share-based compensation
|
|
|
28,469
|
|
|
23,636
|
|
Unrealized loss on derivatives, net
|
|
|
196,980
|
|
|
6,801
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(98,031
|
)
|
|
(3,391
|
)
|
Inventories
|
|
|
111,862
|
|
|
(61,757
|
)
|
Prepaid expenses and other current assets
|
|
|
13,700
|
|
|
(17,590
|
)
|
Insurance receivable
|
|
|
(810
|
)
|
|
(12,325
|
)
|
Business interruption insurance proceeds
|
|
|
|
|
|
3,360
|
|
Insurance proceeds for Refinery incident
|
|
|
490
|
|
|
4,000
|
|
Other long-term assets
|
|
|
835
|
|
|
(1,116
|
)
|
Accounts payable
|
|
|
(42,800
|
)
|
|
10,822
|
|
Due to parent
|
|
|
44,455
|
|
|
|
|
Accrued income taxes
|
|
|
40,755
|
|
|
(17,323
|
)
|
Deferred revenue
|
|
|
1,347
|
|
|
1,880
|
|
Other current liabilities
|
|
|
2,344
|
|
|
(531
|
)
|
Accrued environmental liabilities
|
|
|
(128
|
)
|
|
(952
|
)
|
Other long-term liabilities
|
|
|
8
|
|
|
(3,506
|
)
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
783,802
|
|
|
345,918
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(145,053
|
)
|
|
(46,631
|
)
|
Proceeds from sale of assets
|
|
|
421
|
|
|
37
|
|
Insurance proceeds for UAN reactor rupture
|
|
|
1,026
|
|
|
2,745
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(143,606
|
)
|
|
(43,849
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
Principal payments on long-term debt
|
|
|
(149
|
)
|
|
(2,700
|
)
|
Payment of capital lease obligations
|
|
|
(630
|
)
|
|
(4,876
|
)
|
Payment of financing costs
|
|
|
(2,016
|
)
|
|
(10,695
|
)
|
Purchase of managing general partner interest and incentive distribution rights
|
|
|
|
|
|
(26,001
|
)
|
Proceeds from issuance of CVR Partners long-term debt
|
|
|
|
|
|
125,000
|
|
Proceeds from CVR Partners initial public offering, net of offering costs
|
|
|
|
|
|
324,880
|
|
Payment of treasury stock
|
|
|
|
|
|
(1,757
|
)
|
Exercise of stock options
|
|
|
413
|
|
|
|
|
Redemption of common units
|
|
|
(118
|
)
|
|
|
|
Excess tax benefit of share-based compensation
|
|
|
12
|
|
|
1,475
|
|
Distribution to CVR Partners' noncontrolling interest holders
|
|
|
(37,839
|
)
|
|
(8,988
|
)
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(40,327
|
)
|
|
396,338
|
|
|
|
|
|
|
|
Net cash increase in cash and cash equivalents
|
|
|
599,869
|
|
|
698,407
|
|
Cash and cash equivalents, beginning of period
|
|
|
388,328
|
|
|
200,049
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
988,197
|
|
$
|
898,456
|
|
|
|
|
|
|
|
Supplemental disclosures
|
|
|
|
|
|
|
|
Cash paid for income taxes, net of refunds
|
|
$
|
109,939
|
|
$
|
152,117
|
|
Cash paid for interest net of capitalized interest of $7,134 and $2,493 in 2012 and 2011, respectively
|
|
$
|
37,238
|
|
$
|
25,180
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
Accrual of construction in progress additions
|
|
$
|
1,873
|
|
$
|
19,511
|
|
See accompanying notes to the condensed consolidated financial statements.
10
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2012
(unaudited)
(1) Organization and History of the Company and Basis of Presentation
The "Company" or "CVR" are used in this report to refer to CVR Energy, Inc. and, unless the context otherwise requires, its
subsidiaries.
The
Company, through its wholly-owned subsidiaries, acts as an independent petroleum refiner and marketer of high value transportation fuels in the mid-continental United
States. In addition, the Company, through its majority-owned subsidiaries, owns the general partner and a majority of the common units of CVR Partners, LP, an independent producer and marketer
of upgraded nitrogen fertilizer products in North America. 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 under the symbol "CVI." On May 7, 2012, Carl C. Icahn and certain of his affiliates (collectively, "Icahn") announced
that they had acquired control of CVR pursuant to a tender offer for all of the Company's common stock. As of September 30, 2012, Icahn owned approximately 82% of all outstanding shares. Prior
to Icahn's acquisition, the Company was owned 100% by the public. See further discussion at Note 3 ("Change of Control").
As
of December 31, 2010, approximately 40% of CVR's outstanding shares were beneficially owned by GS Capital Partners V, L.P. and related entities ("GS" or "Goldman Sachs
Funds") and Kelso Investment Associates VII, L.P. and related entities ("Kelso" or "Kelso Funds"). On February 8, 2011, GS and Kelso completed a registered public offering, whereby GS
sold into the public market its remaining ownership interests in CVR and Kelso substantially reduced its interest in the Company. On May 26, 2011, Kelso completed a registered public offering,
whereby Kelso sold into the public market its remaining ownership interest in CVR Energy.
On
December 15, 2011, CVR acquired all of the issued and outstanding shares of Gary-Williams Energy Corporation (subsequently converted to Gary-Williams
Energy Company, LLC or "GWEC" and now known as Wynnewood Energy Company, LLC). Assets acquired include a 70,000 bpd refinery in Wynnewood, Oklahoma and approximately 2.0 million
barrels of company-owned storage tanks. See Note 4 ("Wynnewood Acquisition") for additional information regarding the Wynnewood Acquisition.
In conjunction with the consummation of CVR's initial public offering in 2007, CVR transferred Coffeyville Resources Nitrogen
Fertilizers, LLC ("CRNF"), its nitrogen fertilizer business, to CVR Partners, LP, a Delaware limited partnership ("CVR Partners" or the "Partnership"), which at the time was a newly
created limited partnership, in exchange for a managing general partner interest ("managing GP interest"), a special general partner interest ("special GP interest," represented by
special GP units) and a de minimis limited partner interest ("LP interest," represented by special LP units). CVR concurrently sold the managing GP interest, including the
associated incentive distribution rights ("IDRs"), to Coffeyville Acquisition III LLC ("CALLC III"), an entity owned by CVR's then
controlling stockholders and senior management, for $10.6 million. On April 13, 2011, the Partnership completed its initial public offering (the "Partnership IPO"), selling 22,080,000
common units at $16.00
11
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(1) Organization and History of the Company and Basis of Presentation (Continued)
per
unit. The common units trade on the New York Stock Exchange under the symbol "UAN". In connection with the Partnership IPO, the IDRs were purchased by the Partnership for $26.0 million and
subsequently extinguished. In addition, the noncontrolling interest representing the managing GP interest was purchased by Coffeyville Resources, LLC ("CRLLC"), a subsidiary of CVR for a
nominal amount. The consideration for the IDRs was paid to the owners of CALLC III, which included the Goldman Sachs Funds, the Kelso Funds and members of CVR senior management. In connection with the
Partnership IPO, the Company recorded a noncontrolling interest for the common units sold into the public market which represented an approximately 30% interest in the Partnership at the time of the
Partnership IPO. The Company's noncontrolling interest reflected on the condensed consolidated balance sheet of CVR is impacted by the net income of, and distributions from, the Partnership.
At
September 30, 2012, the Partnership had 73,046,498 common units outstanding, consisting of 22,126,498 common units owned by the public, representing approximately 30% of the
total Partnership units, and 50,920,000 common units owned by CRLLC, representing approximately 70% of the total Partnership units. In addition, CRLLC owns 100% of the Partnership's general partner,
CVR GP, LLC, which only holds a non-economic general partner interest.
In
connection with the Partnership IPO, the Partnership's limited partner interests were converted into common units, the Partnership's special general partner interests were converted
into common units, and the Partnership's special general partner was merged with and into CRLLC, with CRLLC continuing as the surviving entity. In addition, as discussed above, the managing general
partner sold its IDRs to the Partnership for $26.0 million, these interests were extinguished, and CALLC III sold the managing general partner to CRLLC for a nominal amount. As a result of the
Partnership IPO, the Partnership has two types of partnership interests outstanding:
-
-
common units representing limited partner interests; and
-
-
a general partner interest, which is not entitled to any distributions, and which is held by the Partnership's general
partner.
The
Partnership has adopted a policy pursuant to which the Partnership will distribute all of the available cash it generates each quarter. The available cash for each quarter will be
determined by the board of directors of the Partnership's general partner following the end of such quarter. The partnership agreement does not require that the Partnership make cash distributions on
a quarterly basis or at all, and the board of directors of the general partner of the Partnership can change the Partnership's distribution policy at any time.
The
Partnership is operated by CVR's senior management (together with other officers of the general partner) pursuant to a services agreement among CVR, the general partner and the
Partnership. The Partnership's general partner, CVR GP, LLC, manages the operations and activities of the Partnership, subject to the terms and conditions specified in the partnership
agreement. The operations of the general partner in its capacity as general partner are managed by its board of directors. Actions by the general partner that are made in its individual capacity will
be made by CRLLC as the sole member of the general partner and not by the board of directors of the general partner. The general partner is not elected by the common unitholders and is not subject to
re-election
12
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(1) Organization and History of the Company and Basis of Presentation (Continued)
on
a regular basis. The officers of the general partner manage the day-to-day affairs of the business of the Partnership. CVR, the Partnership, their respective subsidiaries
and the general partner are parties to a number of agreements which regulate certain business relations between them. Certain of these agreements were amended in connection with the Partnership IPO.
On
August 29, 2012, the Partnership's registration statement on Form S-3 (initially filed on August 17, 2012), was declared effective by the Securities
and Exchange Commission ("SEC") enabling CRLLC to offer and sell from time to time, in one or more public offerings or direct placements, up to 50,920,000 common units.
The accompanying unaudited condensed consolidated financial statements were prepared in accordance with U.S. generally accepted
accounting principles ("GAAP") and in accordance with the rules and regulations of the SEC. The condensed consolidated financial statements include the accounts of CVR and its majority-owned direct
and indirect subsidiaries including the Partnership and its subsidiary. The ownership interests of noncontrolling investors in its subsidiaries are recorded as a noncontrolling interest included as a
separate component of equity for all periods
presented. All intercompany account balances and transactions have been eliminated in consolidation. Certain information and footnotes required for complete financial statements under GAAP have been
condensed or omitted pursuant to SEC rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the December 31, 2011 audited
consolidated financial statements and notes thereto included in CVR's Annual Report on Form 10-K for the year ended December 31, 2011, which was filed with the SEC on
February 29, 2012.
The
Partnership is consolidated on the Company's financial statements based upon the fact that the general partner is owned by CRLLC, a wholly-owned subsidiary of CVR; and, therefore,
CVR has the ability to control the activities of the Partnership. Additionally, the Partnership's general partner manages the operations and activities of the Partnership, subject to the terms and
conditions specified in the partnership agreement. The operations of the general partner in its capacity as general partner are managed by its board of directors. The limited rights of the common
unitholders of the Partnership are demonstrated by the fact that the common unitholders have no right to elect the general partner or the general partner's directors on an annual or other continuing
basis. The general partner can only be removed by a vote of the holders of at least 66
2
/
3
% of the outstanding common units, including any common units owned by the general partner and
its affiliates (including CRLLC, a wholly-owned subsidiary of CVR) voting together as a single class. Actions by the general partner that are made in its individual capacity will be made by CRLLC as
the sole member of the general partner and not by the board of directors of the general partner. The officers of the general partner manage the day-to-day affairs of the
business. The majority of the officers of the general partner are also officers of CVR. Based upon the general partner's role and rights as afforded by the partnership agreement and the limited rights
afforded to the limited partners, the condensed consolidated financial statements of CVR will include the assets, liabilities, cash flows, revenues and expenses of the Partnership.
13
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(1) Organization and History of the Company and Basis of Presentation (Continued)
In
the opinion of the Company's management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring
adjustments) that are necessary to fairly present the financial position of the Company as of September 30, 2012 and December 31, 2011, the results of operations and comprehensive income
for the three and nine months ended September 30, 2012 and 2011, changes in equity for the nine months ended September 30, 2012 and cash flows for the nine months ended
September 30, 2012 and 2011.
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 ended December 31, 2012 or
any other interim period. The preparation of financial statements in conformity with GAAP requires management to make 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. Certain prior year amounts have been reclassified to conform to
current year presentation.
The
Company evaluated subsequent events, if any, that would require an adjustment or would require disclosure to the Company's condensed consolidated financial statements through the
date of issuance of these condensed consolidated financial statements. See Note 20 ("Subsequent Events").
(2) Recent Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-04,
"Fair Value Measurements
(Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS,"
("ASU 2011-04"). ASU 2011-04
changed the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between
U.S. GAAP and International Financial Reporting Standards ("IFRS"). ASU 2011-04 also expanded the disclosures for fair value measurements that are estimated using significant
unobservable (Level 3) inputs. This new guidance was to be applied prospectively. The provisions of ASU 2011-04 are effective for interim and annual periods beginning after
December 15, 2011. The Company adopted this ASU as of January 1, 2012. The adoption of this standard did not impact the condensed consolidated financial statement footnote disclosures.
In
June 2011, the FASB issued ASU No. 2011-05, "
Comprehensive Income (ASC Topic 220): Presentation of Comprehensive
Income
," ("ASU 2011-05") which amends current comprehensive income guidance. This ASU eliminates the option to present the components of other comprehensive income
as part of the statement of stockholders' equity. Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net
income and other comprehensive income, or in two separate but consecutive statements. In December 2011, the FASB issued Accounting Standards Update 2011-12 which defers the requirement in
ASU 2011-05 that companies present reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income on the face
of the financial statements. Both amendments are effective for interim and annual periods beginning after December 15, 2011 and should be applied retrospectively. The Company adopted this
14
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(2) Recent Accounting Pronouncements (Continued)
standard
as of January 1, 2012. The adoption of this standard expanded the Company's condensed consolidated financial statements and related footnote disclosures.
In
December 2011, the FASB issued ASU No. 2011-11,
"Disclosures about Offsetting Assets and Liabilities"
("ASU
2011-11"). ASU 2011-11 retains the existing offsetting requirements and enhances the disclosure requirements to allow investors to better compare financial statements prepared
under U.S. GAAP with those prepared under IFRS. This new guidance is to be applied retrospectively. ASU 2011-11 will be effective for interim and annual periods beginning
January 1, 2013. The Company believes this standard will expand its condensed consolidated financial statement footnote disclosures.
(3) Change of Control
On April 18, 2012, IEP Energy LLC ("IEP Energy"), a majority owned subsidiary of Icahn Enterprises, L.P. ("Icahn Enterprises"), and certain other affiliates of Icahn
Enterprises and Carl C. Icahn (collectively, the "IEP Parties"), entered into a Transaction Agreement (the "Transaction Agreement") with CVR, with respect to IEP Energy's tender offer (the "Offer") to
purchase all of the issued and outstanding shares of CVR's common stock for a price of $30 per share in cash, without interest, less any applicable withholding taxes, plus one
non-transferable contingent payment right for each share of CVR common stock (the "CCP"), which represents the contractual right to receive an additional cash payment per share if a
definitive agreement for the sale of CVR is executed on or prior to August 18, 2013 and such transaction closes. On May 7, 2012, the IEP Parties announced that a majority of CVR's common
stock had been acquired through the Offer. As a result of the shares tendered into the Offer and subsequent additional purchases, the IEP Parties owned approximately 82% of CVR's outstanding common
stock at September 30, 2012.
Pursuant
to the Transaction Agreement, for a period of 60 days CVR Energy solicited proposals or offers from third parties to acquire CVR Energy. The 60-day period
began on May 24, 2012 and ended on July 23, 2012 without any qualifying offers.
Pursuant
to the Transaction Agreement, all employee restricted stock awards ("awards") that vest in 2012 will vest in accordance with the current vesting terms and upon vesting will
receive the offer price of $30 per share in cash plus one CCP. For all such awards that vest in accordance with their terms in 2013, 2014 and 2015, the holders of the awards will receive the lesser of
the offer price or the fair market value as determined at the most recent valuation date of December 31 of each year. Additional share-based compensation was incurred due to the modification of
the awards and the fair value upon the date of modification. For awards vesting subsequent to 2012, the awards will be remeasured at each subsequent reporting date until they vest. See further
discussion at Note 5 ("Share-Based Compensation").
(4) Wynnewood Acquisition
On December 15, 2011, the Company completed the acquisition of all the issued and outstanding shares of GWEC, including its two wholly-owned subsidiaries (the "Wynnewood
Acquisition") from The Gary-Williams Company, Inc. (the "Seller"). The preliminary purchase price of $592.3 million, as recorded at December 31, 2011, was increased by
$1.1 million in March 2012 as a result of further
15
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(4) Wynnewood Acquisition (Continued)
discussions
and review of the working capital and associated post-closing statement provided to the Seller. The adjusted purchase price allocation resulted in immaterial differences to
property, plant and equipment in the Condensed Consolidated Balance Sheet. The Company received settlement in the second quarter of 2012 of approximately $14.7 million associated with cash paid
at closing for estimated working capital in excess of actual working capital.
For
the three months and nine months ended September 30, 2012, the Company incurred approximately $2.0 million and $10.3 million, respectively, of transaction fees
and integration expenses that are included in selling, general and administrative expense in the Condensed Consolidated Statement of Operations. These costs primarily relate to accounting and other
professional consulting fees incurred associated with post-closing transaction matters and continued integration of various processes, policies, technologies and systems of GWEC.
(5) Share-Based Compensation
Prior to CVR's initial public offering, CVR's subsidiaries were held and operated by Coffeyville Acquisition LLC ("CALLC"). Management of CVR held an equity interest in CALLC.
CALLC issued non-voting override units to certain management members who held common units of CALLC. There were no required capital contributions for the override operating units. In
connection with CVR's initial public offering in October 2007, CALLC was split into two entities: CALLC and Coffeyville Acquisition II LLC ("CALLC II"). In connection with this split,
management's equity interest in CALLC, including both their common units and non-voting override units, was split so that half of management's equity interest was in CALLC and half was in
CALLC II. In addition, in connection with the transfer of the managing general partner of the Partnership to CALLC III in October 2007, CALLC III issued non-voting override units to
certain management members of CALLC III.
CVR,
CALLC and CALLC II account for share-based compensation in accordance with standards issued by the FASB regarding the treatment of share-based compensation, as well as guidance
regarding the accounting for share-based compensation granted to employees of an equity method investee. CVR was allocated non-cash share-based compensation expense from CALLC, CALLC II
and CALLC III.
In
February 2011, CALLC and CALLC II sold 11,759,023 shares and 15,113,254 shares, respectively, of CVR's common stock pursuant to a registered public offering. In May 2011, CALLC sold
7,988,179 shares of CVR's common stock pursuant to a registered public offering.
As
a result, CALLC and CALLC II ceased to be stockholders of the Company. Subsequent to CALLC II's divestiture of its ownership interest in the Company in February 2011 and CALLC's
divestiture of its ownership interest in the Company in May 2011, no additional share-based compensation expense has been incurred with respect to override units and phantom units after each
respective divestiture date. The final fair values of the override units of CALLC and CALLC II were derived based upon the values resulting from the proceeds received in connection with each entity's
respective divestiture of its ownership in CVR. These values were utilized to determine the related compensation expense for the unvested units.
16
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(5) Share-Based Compensation (Continued)
The
final fair value of the CALLC III override units was derived based upon the value resulting from the proceeds received by the general partner upon the purchase of the IDR's by the
Partnership. These proceeds were subsequently distributed to the owners of CALLC III which includes the override unitholders. This value was utilized to determine the related compensation expense for
the unvested units. No additional share-based compensation has been or will be incurred with respect to override units of CALLC III subsequent to June 30, 2011 due to the complete distribution
of the value prior to July 1, 2011.
The
following table provides key information for the share-based compensation plans related to the override units of CALLC, CALLC II and CALLC III.
|
|
|
|
|
|
|
|
|
|
|
|
|
Award Type
|
|
Benchmark
Value
(per Unit)
|
|
Original
Awards
Issued
|
|
Grant Date
|
|
Compensation
Expense for the
Nine Months Ended
September 30, 2011
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Override Value Units
|
|
$
|
11.31
|
|
|
1,839,265
|
|
June 2005
|
|
$
|
4,960
|
|
Override Value Units
|
|
$
|
34.72
|
|
|
144,966
|
|
December 2006
|
|
|
451
|
|
Override Units
|
|
$
|
10.00
|
|
|
642,219
|
|
February 2008
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,595
|
|
Due
to the divestiture of all ownership in CVR by CALLC and CALLC II and due to the purchase of the IDRs from the general partner and the distribution of all proceeds to CALLC III, there
was no associated unrecognized compensation expense as of September 30, 2012.
CVR, through a wholly-owned subsidiary, has two Phantom Unit Appreciation Plans (the "Phantom Unit Plans") whereby directors,
employees, and service providers may be awarded phantom points at the discretion of the board of directors or the compensation committee. Holders of service phantom points have rights to receive
distributions when holders of override operating units of CALLC and CALLC II receive distributions. Holders of performance phantom points have rights to receive distributions when holders of override
value units of CALLC and CALLC II receive distributions. There are no other rights or guarantees and the plans expire on July 25, 2015, or at the discretion of the compensation committee of the
board of directors. In November 2010, CALLC and CALLC II sold common shares of CVR through a registered offering. As a result of this offering, the Company made a payment to phantom unit holders
totaling approximately $3.6 million. In November 2009, CALLC II completed a sale of common shares of CVR through a registered offering. As a result of this sale, the Company made a payment to
phantom unit holders totaling approximately $0.9 million. As described above, in February 2011, CALLC and CALLC II completed a sale of CVR common stock pursuant to a registered public offering.
As a result of this offering, the Company made a payment to phantom unitholders of approximately $20.1 million in the first quarter of 2011. As described above, in May 2011, CALLC completed an
additional sale of CVR common stock pursuant to a registered public offering. As a result of this offering, the Company made a payment to phantom unitholders of
17
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(5) Share-Based Compensation (Continued)
approximately
$9.2 million in the second quarter of 2011. Due to the divestiture of all ownership of CVR by CALLC and CALLC II in 2011 and the associated payments to the holders of service and
phantom performance points, there is no unrecognized compensation expense at September 30, 2012. There was no compensation expense for the three months ended September 30, 2012 and 2011
related to the Phantom Unit Plans. Compensation expense for the nine months ended September 30, 2012 and 2011 related to the Phantom Unit Plans was approximately $0 and $10.6 million,
respectively.
CVR has a Long-Term Incentive Plan ("LTIP"), which permits the grant of options, stock appreciation rights,
non-vested shares, non-vested share units, dividend equivalent rights, share awards and performance awards (including performance share units, performance units and
performance-based restricted stock). As of September 30, 2012, only restricted shares of CVR common stock and stock options had been granted under the LTIP. Individuals who are eligible to
receive awards and grants under the LTIP include the Company's employees, officers, consultants, advisors and directors. A summary of the principal features of the LTIP is provided below.
In May 2012, all outstanding stock options equaling an equivalent of 22,900 common shares were exercised. No unexercised stock options
remain as of the third quarter 2012.
A summary of restricted stock and restricted stock units grant activity and changes during the nine months ended September 30,
2012 is presented below:
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Grant-Date
Fair Value
|
|
Non-vested at January 1, 2012
|
|
|
1,634,154
|
|
$
|
14.61
|
|
Granted
|
|
|
50,837
|
|
|
22.52
|
|
Vested
|
|
|
(268,012
|
)
|
|
8.38
|
|
Forfeited
|
|
|
(62,040
|
)
|
|
16.68
|
|
|
|
|
|
|
|
Non-vested at September 30, 2012
|
|
|
1,354,939
|
|
$
|
16.05
|
|
|
|
|
|
|
|
Through
the LTIP, restricted shares have been granted to employees of the Company. Prior to the change of control as discussed in Note 3, the restricted shares, when granted, were
valued at the closing market price of CVR's common stock on the date of issuance and amortized to compensation expense on a straight-line basis over the vesting period of the stock. These
shares generally vest over a three-year period.
The
change of control and related Transaction Agreement discussed in Note 3 triggered a modification to the LTIP. Pursuant to the Transaction Agreement, all employee restricted
stock awards
18
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(5) Share-Based Compensation (Continued)
that
vest in 2012 will vest in accordance with the current vesting terms and upon vesting will receive the offer price of $30 per share in cash plus one CCP. For all such awards that vest in
accordance with their terms in 2013, 2014 and 2015, the holders of the awards will receive the lesser of the offer price or the fair market value as determined at the most recent valuation date of
December 31 of each year. As a result of the modification, additional share-based compensation of approximately $12.4 million was incurred to revalue the unvested shares to the fair
value upon the date of modification. For awards vesting subsequent to 2012, the awards will be remeasured at each subsequent reporting date until they vest. As a result of the modification of the
awards, the classification changed from equity awards to liability awards.
As
of September 30, 2012, there was approximately $17.0 million of total unrecognized compensation cost related to restricted shares to be recognized over a
weighted-average period of approximately two years. Compensation expense for the three months ended September 30, 2012 and 2011 related to the restricted shares and stock options was
approximately $6.0 million and $2.0 million, respectively. Compensation expense recorded for the nine months ended September 30, 2012 and 2011 related to the restricted shares and
stock options was approximately $26.8 million and $6.7 million, respectively.
In connection with the Partnership IPO, the board of directors of the general partner adopted the CVR Partners, LP
Long-Term Incentive Plan ("CVR Partners LTIP"). Individuals who are eligible to receive awards under the CVR Partners LTIP include employees, officers, consultants and directors of CVR
Partners and its general partner and their respective subsidiaries' parents. The CVR Partners LTIP provides for the grant of options, unit appreciation rights, distribution equivalent rights,
restricted units, phantom units and other unit-based awards, each in respect of common units. The maximum number of common units issuable under the CVR Partners LTIP is 5,000,000.
Through
the CVR Partners LTIP, phantom and common units have been awarded to employees of the Partnership and the general partner. Units, when granted, are valued at the closing market
price of CVR Partners' common units on the date of issuance and amortized to compensation expense on a straight-line basis over the vesting period of the award. These units generally vest
over a three year period. As of September 30, 2012, there was approximately $1.7 million of total unrecognized compensation cost related to the units to be recognized over a
weighted-average period of two years. Compensation expense recorded for the three months ended September 30, 2012 and 2011 related to the units was approximately $0.5 million and
$0.5 million, respectively. Compensation expense recorded for the nine months ended September 30, 2012 and 2011 related to the units was approximately $1.6 million and
$0.8 million, respectively.
19
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(5) Share-Based Compensation (Continued)
A
summary of the CVR Partners LTIP activity during the nine months ended September 30, 2012 is presented below:
|
|
|
|
|
|
|
|
|
|
Units
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
|
|
(in thousands)
|
|
Non-vested at January 1, 2012
|
|
|
164,571
|
|
$
|
22.99
|
|
Granted
|
|
|
|
|
|
|
|
Vested
|
|
|
(21,159
|
)
|
|
20.09
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at September 30, 2012
|
|
|
143,412
|
|
$
|
23.42
|
|
|
|
|
|
|
|
(6) Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
December 31,
2011
|
|
|
|
(in thousands)
|
|
Finished goods
|
|
$
|
263,571
|
|
$
|
323,315
|
|
Raw materials and precious metals
|
|
|
177,615
|
|
|
157,931
|
|
In-process inventories
|
|
|
36,450
|
|
|
115,372
|
|
Parts and supplies
|
|
|
46,723
|
|
|
39,603
|
|
|
|
|
|
|
|
|
|
$
|
524,359
|
|
$
|
636,221
|
|
|
|
|
|
|
|
20
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(7) Property, Plant, and Equipment
A summary of costs for property, plant, and equipment is as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
December 31,
2011
|
|
|
|
(in thousands)
|
|
Land and improvements
|
|
$
|
28,520
|
|
$
|
26,136
|
|
Buildings
|
|
|
38,824
|
|
|
37,289
|
|
Machinery and equipment
|
|
|
2,018,529
|
|
|
1,967,269
|
|
Automotive equipment
|
|
|
12,441
|
|
|
10,217
|
|
Furniture and fixtures
|
|
|
13,365
|
|
|
12,349
|
|
Leasehold improvements
|
|
|
2,469
|
|
|
1,445
|
|
Railcars
|
|
|
2,496
|
|
|
2,496
|
|
Construction in progress
|
|
|
177,858
|
|
|
94,085
|
|
|
|
|
|
|
|
|
|
|
2,294,502
|
|
|
2,151,286
|
|
Accumulated depreciation
|
|
|
572,483
|
|
|
478,325
|
|
|
|
|
|
|
|
|
|
$
|
1,722,019
|
|
$
|
1,672,961
|
|
|
|
|
|
|
|
Capitalized
interest recognized as a reduction in interest expense for the three months ended September 30, 2012 and 2011 totaled approximately $2.8 million and
$1.6 million. Capitalized interest recognized as a reduction in interest expense for the nine months ended September 30, 2012 and 2011 totaled approximately $7.1 million and
$2.5 million. Land, buildings and equipment that are under a capital lease obligation had an original carrying value of approximately $25.1 million and $0.3 million as of
September 30, 2012 and 2011. Amortization of assets held under capital leases is included in depreciation expense.
(8) Cost Classifications
Cost of product sold (exclusive of depreciation and amortization) includes cost of crude oil, other feedstocks, blendstocks, pet coke expense and freight and distribution expenses. Cost
of product sold excludes depreciation and amortization of approximately $1.0 million and $0.6 million for the three months ended September 30, 2012 and 2011, respectively. For the
nine months ended September 30, 2012 and 2011, cost of product sold excludes depreciation and amortization of approximately $2.6 million and $1.9 million, respectively.
Direct
operating expenses (exclusive of depreciation and amortization) includes direct costs of labor, maintenance and services, energy and utility costs, property taxes, environmental
compliance costs, as well as chemicals and catalysts and other direct operating expenses. Direct operating expenses exclude depreciation and amortization of approximately $31.6 million and
$21.0 million for the three months ended September 30, 2012 and 2011, respectively. For the nine months ended September 30, 2012 and 2011, direct operating expenses exclude
depreciation and amortization of approximately $93.1 million and $62.8 million, respectively.
Selling,
general and administrative expenses (exclusive of depreciation and amortization) consist primarily of legal expenses, treasury, accounting, marketing, human resources and costs
associated with
21
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(8) Cost Classifications (Continued)
maintaining
the corporate and administrative office in Texas and the administrative offices in Kansas and Oklahoma. Selling, general and administrative expenses exclude depreciation and amortization
of approximately $0.5 million and $0.4 million for the three months ended September 30, 2012 and 2011, respectively. For the nine months ended September 30, 2012 and 2011,
selling, general and administrative expenses exclude depreciation and amortization of approximately $1.7 million and $1.4 million, respectively.
(9) Note Payable and Capital Lease Obligations
The Company entered into an insurance premium finance agreement in November 2011 to finance a portion of the purchase of its 2011/2012 property insurance policies. The original balance
of the note provided by the Company under such agreement was $9.9 million. The Company began to repay this note in equal installments commencing December 1, 2011. As of
September 30, 2012 and December 31, 2011, the Company owed $0 and approximately $8.8 million, respectively, related to this note.
The
Company also entered into a capital lease for real property used for corporate purposes on May 29, 2008. The lease had an initial lease term of one year with an option to
renew for three additional one-year periods. During the second quarter of 2010, the Company renewed the lease for a one-year period commencing June 5, 2010. The Company
had the option to purchase the property during the term of the lease, including the renewal periods. In March 2011, the
Company exercised its purchase option and paid approximately $4.7 million to satisfy the lease obligation.
As
a result of the Wynnewood Acquisition, the Company assumed two leases accounted for as capital leases related to the Magellan Pipeline Terminals, L.P. and Excel
Pipeline LLC. The two arrangements have remaining terms of 204 and 205 months, respectively. As of September 30, 2012, the outstanding obligation associated with these
arrangements totaled approximately $52.5 million. See Note 13 ("Long-Term Debt") for additional information.
(10) Other Current Liabilities
Other current liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
December 31,
2011
|
|
|
|
(in thousands)
|
|
Other derivative agreements (realized)
|
|
$
|
17,725
|
|
$
|
|
|
Other derivative agreements (unrealized)
|
|
|
89,304
|
|
|
|
|
Accrued interest
|
|
|
34,119
|
|
|
17,867
|
|
Partnership interest rate swap
|
|
|
828
|
|
|
905
|
|
Other liabilities
|
|
|
8,009
|
|
|
15,655
|
|
|
|
|
|
|
|
|
|
$
|
149,985
|
|
$
|
34,427
|
|
|
|
|
|
|
|
22
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(11) Insurance Claims
On September 30, 2010, the nitrogen fertilizer plant experienced an interruption in operations due to a rupture of a
high-pressure UAN vessel. Total costs due to the incident were approximately $11.5 million for repairs and maintenance and other associated costs, of which approximately
$4.7 million was capitalized. Approximately $0.1 million and $0.8 million of these costs were recognized during the nine months ended September 30, 2012 and 2011,
respectively, and are included in direct operating expenses (exclusive of depreciation and amortization). Amounts recognized for the three months ended September 30, 2012 and 2011 were not
material.
Approximately
$8.0 million of insurance proceeds were received under the property damage insurance claim related to this incident. Approximately $1.0 million and
$2.5 million of these proceeds were received during the three months ended September 30, 2012 and 2011, respectively. Approximately $1.0 million and $2.7 million of these
proceeds were received during the nine months ended September 30, 2012 and 2011, respectively. The recording of the insurance proceeds resulted in a reduction of direct operating expenses
(exclusive of depreciation and amortization) when received.
Total
proceeds received for insurance indemnity under the business interruption insurance related to the incident were approximately $3.4 million, of which approximately
$0.5 million and $3.4 million was recorded for the three and nine months ending September 30, 2011, respectively. Business interruption insurance proceeds were included in the
Consolidated Statements of Operations, under Insurance Recovery-business interruption.
As
of September 30, 2012, all property damage and business interruption claims related to the nitrogen fertilizer incident have been fully settled with all claims closed.
On December 28, 2010 the Coffeyville crude oil refinery experienced an equipment malfunction and small fire in connection with
its fluid catalytic cracking unit ("FCCU"), which led to reduced crude oil throughput. The refinery returned to full operations on January 26, 2011. This interruption adversely impacted the
production of refined products for the petroleum business in the first quarter of 2011. Total gross repair and other costs recorded related to the incident as of December 31, 2011 were
approximately $8.0 million. No costs have been recorded in 2012. The Company maintains property damage insurance policies which have an associated deductible of $2.5 million. The Company
anticipates that substantially all of the costs in excess of the deductible should be covered by insurance. As of December 31, 2011, the Company had received $4.0 million of insurance
proceeds and has recorded an insurance receivable related to the incident of approximately $1.2 million as of September 30, 2012. The insurance receivable is included in other current
assets in the Condensed Consolidated Balance Sheet.
The
Coffeyville crude oil refinery experienced a small fire at its continuous catalytic reformer ("CCR") in May 2011. Total gross repair and other costs related to the incident, as of
September 30, 2012, were approximately $3.2 million. No costs have been recorded in 2012. Approximately $0.5 million of insurance proceeds were received during the three months
ended September 30, 2012.
23
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(11) Insurance Claims (Continued)
As
of September 30, 2012, the Company has recorded an insurance receivable of approximately $0.2 million. During October 2012, the remaining insurance proceeds of $0.2 million
were received and all claims associated with the fire at the CCR have been fully settled and closed. Substantially all costs incurred in excess of the associated $2.5 million deductible were
recovered by insurance.
(12) Income Taxes
On May 19, 2012, CVR became a member of the consolidated federal tax group of American Entertainment Properties Corporation ("AEPC"), a wholly-owned subsidiary of Icahn
Enterprises, and subsequently entered into 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.
As
of September 30, 2012, the Company owes approximately $44.5 million for federal income taxes due to AEPC under the Tax Allocation Agreement, is to be paid during the
fourth quarter of 2012. During the quarter ended September 30, 2012, the Company paid $65.1 million to AEPC under the Tax Allocation Agreement.
The
Company recognizes liabilities, interest and penalties for potential tax issues based on its estimate of whether, and the extent to which, additional taxes may be due as determined
under ASC Topic 740
Income Taxes
. As of September 30, 2012, the Company had unrecognized tax benefits of approximately
$26.1 million, of which $8.0 million, if recognized, would impact the Company's effective tax rate. Unrecognized tax benefits that are not expected to be settled within the next twelve
months are included in other long-term liabilities in the condensed consolidated balance sheet; unrecognized tax benefits that are expected to be settled within the next twelve months are
included in income taxes payable. The Company has accrued interest of $0.2 million and penalties of $0.1 million related to uncertain tax positions. The Company's accounting policy with
respect to interest and penalties related to tax uncertainties is to classify these amounts as income taxes.
CVR
and its subsidiaries file U.S. federal and various state income and franchise tax returns. At September 30, 2012, the Company's tax filings are generally open to
examination in the United States for the tax years ended December 31, 2009 through December 31, 2011 and in various individual states for the tax years ended December 31, 2008
through December 31, 2011.
The
Company's effective tax rate for the three and nine months ended September 30, 2012 was 36.9% and 36.2%, respectively, as compared to the Company's combined federal and state
expected statutory tax rate of 39.4%. The Company's effective tax rate for the three and nine months ended September 30, 2012 is lower than the statutory rate primarily due to the reduction of
income subject to tax associated with the noncontrolling ownership interest of CVR Partners, LP, as well as benefits for domestic production activities. The Company's effective tax rate for the
three and nine months ended September 30, 2011 was 36.3% and 36.5%, respectively, as compared to the Company's combined federal and state expected statutory tax rate of 39.7%. The Company's
effective tax rate for the three and nine months ended September 30, 2011 was lower than the statutory rate primarily due to the
24
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(12) Income Taxes (Continued)
reduction
of income subject to tax associated with the noncontrolling ownership interest of CVR Partners' earnings, as well as benefits for domestic production activities.
(13) Long-Term Debt
Long-term debt was as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2012
|
|
December 31,
2011
|
|
|
|
(in thousands)
|
|
9.0% Senior Secured Notes, due 2015, net of unamortized premium of $6,604(1) and $9,003(2) as of September 30, 2012 and December 31, 2011,
respectively
|
|
$
|
453,654
|
|
$
|
456,053
|
|
10.875% Senior Secured Notes, due 2017, net of unamortized discount of $1,923 and $2,159 as of September 30, 2012 and December 31, 2011,
respectively
|
|
|
220,827
|
|
|
220,591
|
|
CRNF credit facility
|
|
|
125,000
|
|
|
125,000
|
|
Capital lease obligations
|
|
|
51,456
|
|
|
52,259
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
850,937
|
|
$
|
853,903
|
|
|
|
|
|
|
|
-
(1)
-
Net
unamortized premium of $6.6 million represents an unamortized discount of $0.7 million on the original First Lien Notes and an
$7.3 million unamortized premium on the additional First Lien Notes issued in December 2011.
-
(2)
-
Net
unamortized premium of $9.0 million represents an unamortized discount of $0.9 million on the original First Lien Notes and a
$9.9 million unamortized premium on the additional First Lien Notes issued in December 2011.
Senior Secured Notes
On April 6, 2010, CRLLC and its wholly-owned subsidiary, Coffeyville Finance Inc. (together the "Issuers"), completed a
private offering of $275.0 million aggregate principal amount of 9.0% First Lien Senior Secured Notes due 2015 (the "First Lien Notes") and $225.0 million aggregate principal amount of
10.875% Second Lien Senior Secured Notes due 2017 (the "Second Lien Notes" and together with the First Lien Notes, the "Notes"). The First Lien Notes were issued at 99.511% of their principal amount
and the Second Lien Notes were issued at 98.811% of their principal amount. The associated original issue discount of the Notes is amortized to interest expense and other financing costs over the
respective term of the Notes. On December 30, 2010, CRLLC made a voluntary unscheduled principal payment of approximately $27.5 million on the First Lien Notes that resulted in a premium
payment of 3.0% and a partial write-off of previously deferred financing costs and unamortized original issue discount totaling approximately $1.6 million. On May 16, 2011,
CRLLC repurchased $2.7 million of the Notes at a purchase price of 103.0% of the outstanding principal amount, which resulted in a premium payment of 3.0% and a partial write-off of
previously deferred financing costs and unamortized issue discount.
25
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(13) Long-Term Debt (Continued)
On
December 15, 2011, the Issuers sold an additional $200.0 million aggregate principal amount of 9.0% First Lien Senior Secured Notes due 2015 ("New Notes"). The New Notes
were sold at an issue price of 105.0%, plus accrued interest from October 1, 2011 of $3.7 million. The associated original issue premium of the New Notes is amortized to interest expense
and other financing costs over the respective term of the New Notes. The New Notes were issued as "Additional Notes" pursuant to the indenture dated April 6, 2010 (the "Indenture") and,
together with the existing first lien notes, are treated as a single class for all purposes under the Indenture including, without limitation, waivers, amendments, redemptions and other offers to
purchase. Unless otherwise indicated, the New Notes and the existing first lien notes are collectively referred to herein as the "First Lien Notes."
The
change of control discussed in Note 3 required CVR to make an offer to repurchase all of the Issuers' outstanding Notes; and on June 4, 2012, the Issuers offered to
purchase all or any part of the Notes, at a cash purchase price of 101% of the aggregate principal amount of the Notes, plus accrued and unpaid interest, if any. The offer expired on July 5,
2012 with none of the outstanding Notes tendered.
The
First Lien Notes were scheduled to mature on April 1, 2015, unless earlier redeemed or repurchased by the Issuers. See Note 20 ("Subsequent Events") for further
discussion related to the recent tender of a portion of the First Lien Notes. The Second Lien Notes mature on April 1, 2017, unless earlier redeemed or repurchased by the Issuers. Interest is
payable on the Notes semi-annually on April 1 and October 1 of each year. At September 30, 2012, the estimated fair value of the First and Second Lien Notes was
approximately $484.3 million and $247.3 million, respectively. These estimates of fair value are Level 2 as they were determined by quotations obtained from a broker-dealer who
makes a market in these and similar securities. The Notes are fully and unconditionally guaranteed by each of CRLLC's subsidiaries other than the Partnership and CRNF.
ABL Credit Facility
On February 22, 2011, CRLLC entered into a $250.0 million asset-backed revolving credit agreement ("ABL credit facility")
with a group of lenders including Deutsche Bank Trust Company Americas as collateral and administrative agent. The ABL credit facility is scheduled to mature in August 2015 and replaced the
$150.0 million first priority credit facility which was terminated. The ABL credit facility will be used to finance ongoing working capital, capital expenditures, letters of credit issuance and
general needs of the Company and includes among other things, a letter of credit sublimit equal to 90% of the total facility commitment and a feature which permits an increase in borrowings of up to
$250.0 million (in the aggregate), subject to additional lender commitments. On December 15, 2011, CRLLC entered into an incremental commitment agreement to increase the borrowings under
the ABL credit facility to $400.0 million in the aggregate in connection with the New Notes issuance as discussed above. Terms of the ABL credit facility did not change as a result of the
additional availability. As of September 30, 2012, CRLLC had availability under the ABL credit facility of $372.8 million and had letters of credit outstanding of approximately
$27.2 million. There were no borrowings outstanding under the ABL credit facility as of September 30, 2012.
26
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(13) Long-Term Debt (Continued)
Borrowings
under the facility bear interest based on a pricing grid determined by the previous quarter's excess availability. The pricing for borrowings under the ABL credit facility can
range from LIBOR
plus a margin of 2.75% to LIBOR plus 3.0% or the prime rate plus 1.75% to prime rate plus 2.0% for Base Rate Loans. Availability under the ABL credit facility is determined by a borrowing base formula
supported primarily by cash and cash equivalents, certain accounts receivable and inventory.
The
ABL credit facility contains customary covenants for a financing of this type that limit, subject to certain exceptions, the incurrence of additional indebtedness, the incurrence of
liens on assets, and the ability to dispose of assets, make restricted payments, investments or acquisitions, enter into sales lease back transactions or enter into affiliate transactions. The ABL
credit facility also contains a fixed charge coverage ratio financial covenant that is triggered when borrowing base excess availability is less than certain thresholds, as defined under the facility.
As of September 30, 2012, CRLLC was in compliance with the covenants contained in the ABL credit facility.
In
connection with the ABL credit facility, CRLLC incurred lender and other third-party costs of approximately $9.1 million for the year ended December 31, 2011. These
costs will be deferred and amortized to interest expense and other financing costs using a straight-line method over the term of the facility. In connection with termination of the first
priority credit facility, a portion of the unamortized deferred financing costs associated with this facility, totaling approximately $1.9 million, was written off in the first quarter of 2011.
In accordance with guidance provided by the FASB regarding the modification of revolving debt arrangements, the remaining approximately $0.8 million of unamortized deferred financing costs
associated with the first priority credit facility will continue to be amortized over the term of the ABL credit facility.
In
connection with the closing of the Partnership's initial public offering in April 2011, the Partnership and CRNF were released as guarantors of the ABL credit facility.
In
connection with the change in control described in Note 3 above, CRLLC, Deutsche Bank Trust Company Americas, as Administrative Agent and Collateral Agent, the lenders and the
other parties thereto, entered into a First Amendment to Credit Agreement effective as of May 7, 2012 (the "ABL First Amendment"), pursuant to which the parties agreed to exclude Icahn's
acquisition of Shares from the definition of change of control as provided in the ABL credit facility. Absent the ABL First Amendment, the change in control of CVR described above would have triggered
an event of default pursuant to the ABL credit facility.
Partnership Credit Facility
On April 13, 2011, CRNF, as borrower, and the Partnership, as guarantor, entered into a new credit facility with a group of
lenders including Goldman Sachs Lending Partners LLC, as administrative and collateral agent. The credit facility includes a term loan facility of $125.0 million and a revolving credit
facility of $25.0 million, with an uncommitted incremental facility of up to $50.0 million. No amounts were outstanding under the revolving credit facility at September 30,
2012. There is no scheduled amortization of the credit facility, which matures in April 2016. The carrying value of the Partnership's debt approximates fair value.
27
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(13) Long-Term Debt (Continued)
Borrowings
under the credit facility bear interest based on a pricing grid determined by the trailing four quarter leverage ratio. The initial pricing for Eurodollar rate loans under the
credit facility is the Eurodollar rate plus a margin of 3.50% or, for base rate loans, the prime rate plus 2.50%. Under its terms, the lenders under the credit facility were granted a first priority
security interest (subject to certain customary exceptions) in substantially all of the assets of CRNF and the Partnership.
The
credit facility requires the Partnership to maintain a minimum interest coverage ratio and a maximum leverage ratio and contains customary covenants for a financing of this type that
limit, subject to certain exceptions, the incurrence of additional indebtedness or guarantees, the creation of liens on assets and the ability of the Partnership to dispose of assets, to make
restricted payments, investments and acquisitions, or enter into sale-leaseback transactions and affiliate transactions. The credit facility provides that the Partnership can make
distributions to holders of its common units provided, among other things, it is in compliance with the leverage ratio and interest coverage ratio on a pro forma basis after giving effect to any
distribution and there is no default or event of default under the credit facility.
As
of September 30, 2012, CRNF was in compliance with the covenants contained in the credit facility.
In
connection with the credit facility, the Partnership incurred lender and other third-party costs of approximately $4.8 million. The costs associated with the credit facility
have been deferred and are being amortized over the term of the credit facility as interest expense using the effective-interest amortization method for the term loan facility and the
straight-line method for the revolving credit facility.
28
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(14) Earnings Per Share
Basic and diluted earnings per share are computed by dividing net income attributable to CVR stockholders by the weighted-average number of shares of common stock outstanding. The
components of the basic and diluted earnings per share calculation are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
Ended September 30,
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
|
(in thousands, except share data)
|
|
Net income attributable to CVR Energy stockholders
|
|
$
|
208,896
|
|
$
|
109,265
|
|
$
|
338,428
|
|
$
|
279,918
|
|
Weighted-average number of shares of common stock outstanding
|
|
|
86,831,050
|
|
|
86,549,846
|
|
|
86,820,181
|
|
|
86,462,668
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested common stock
|
|
|
|
|
|
1,188,297
|
|
|
757,480
|
|
|
1,305,096
|
|
Stock options
|
|
|
|
|
|
5,457
|
|
|
2,927
|
|
|
4,405
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares of common stock outstanding assuming dilution
|
|
|
86,831,050
|
|
|
87,743,600
|
|
|
87,580,588
|
|
|
87,772,169
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
2.41
|
|
$
|
1.26
|
|
$
|
3.90
|
|
$
|
3.24
|
|
Diluted earnings per share
|
|
$
|
2.41
|
|
$
|
1.25
|
|
$
|
3.86
|
|
$
|
3.19
|
|
All
outstanding stock options totaling 22,900 were exercised in May 2012. There were no equity awards outstanding during the three months ended September 30, 2012 as all unvested
awards under the LTIP were liability awards. See Note 5 ("Share-Based Compensation").
29
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(15) Commitments and Contingencies
The minimum required payments for CVR's lease agreements and unconditional purchase obligations are as follows:
|
|
|
|
|
|
|
|
|
|
Operating
Leases
|
|
Unconditional
Purchase
Obligations(1)
|
|
|
|
(in thousands)
|
|
Three months ending December 31, 2012
|
|
$
|
2,608
|
|
$
|
32,173
|
|
Year ending December 31, 2013
|
|
|
9,823
|
|
|
126,693
|
|
Year ending December 31, 2014
|
|
|
7,839
|
|
|
113,667
|
|
Year ending December 31, 2015
|
|
|
6,344
|
|
|
103,189
|
|
Year ending December 31, 2016
|
|
|
5,467
|
|
|
96,637
|
|
Thereafter
|
|
|
9,230
|
|
|
460,535
|
|
|
|
|
|
|
|
|
|
$
|
41,311
|
|
$
|
932,894
|
|
|
|
|
|
|
|
-
(1)
-
This
amount includes approximately $482.8 million payable ratably over nine years pursuant to petroleum transportation service agreements between
CRRM and TransCanada Keystone Pipeline, LP ("TransCanada"). Under the agreements, CRRM will receive transportation for at least 25,000 barrels per day of crude oil with a delivery point at
Cushing, Oklahoma for a term of ten years on TransCanada's Keystone pipeline system. CRRM began receiving crude oil under the agreements in the first quarter of 2011.
CVR
leases various equipment, including rail cars, and real properties under long-term operating leases expiring at various dates. For the three months ended
September 30, 2012 and 2011, lease expense totaled approximately $1.2 million and $1.3 million, respectively. For the nine months ended September 30, 2012 and 2011, lease
expense totaled approximately $3.9 million and $3.8 million, respectively. The lease agreements have various remaining terms. Some agreements are renewable, at CVR's option, for
additional periods. It is expected, in the ordinary course of business, that leases will be renewed or replaced as they expire. Additionally, in the normal course of business, the Company has
long-term commitments to purchase oxygen, nitrogen, electricity, storage capacity and pipeline transportation services.
CVR
Partners entered into a pet coke supply agreement with HollyFrontier Corporation which became effective on March 1, 2012. The initial term ends in 2013 and the agreement is
subject to renewal.
On August 31, 2012, CRRM, an indirect, wholly-owned subsidiary of CVR Energy, and Vitol Inc. ("Vitol"), entered into an
Amended and Restated Crude Oil Supply Agreement (the "Vitol Agreement"). The Vitol Agreement amends and restates the Crude Oil Supply Agreement between CRRM and Vitol dated March 30, 2011, as
amended (the "Previous Supply Agreement"). The terms of
30
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(15) Commitments and Contingencies (Continued)
the
Vitol Agreement provide that CRRM will obtain all of the crude oil for the Company's two oil refineries through Vitol, other than crude oil that CRRM gathers itself in Kansas, Missouri, North
Dakota, Oklahoma, Texas, Wyoming and all states adjacent to such states and crude oil that is
transported in whole or in part via railcar or truck. Pursuant to the Vitol Agreement, CRRM and Vitol work together to identify crude oil and pricing terms that meet CRRM's crude oil
requirements. CRRM and/or Vitol negotiate the cost of each barrel of crude oil that is purchased from third-party crude oil suppliers. Vitol purchases all such crude oil, executes all third-party
sourcing transactions and provides transportation and other logistical services for the subject crude oil. Vitol then sells such crude oil and delivers the same to CRRM. Title and risk of loss for all
crude oil purchased by CRRM via the Vitol Agreement passes to CRRM upon delivery to one of the Company's delivery points designated in the Vitol Agreement. CRRM pays Vitol a fixed origination fee per
barrel plus the negotiated cost (including logistics costs) of each barrel of crude oil purchased. The Vitol Agreement has an initial term commencing on August 31, 2012 and extending through
December 31, 2014 (the "Initial Term"). Following the Initial Term, 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 expiration of the Initial Term or any Renewal Term. Notwithstanding the foregoing, CRRM has an option
to terminate the Vitol Agreement effective December 31, 2013 by providing written notice of termination to Vitol on or before May 1, 2013.
From time to time, the Company is involved in various lawsuits arising in the normal course of business, including matters such as
those described below under, "Environmental, Health, and Safety ("EHS") Matters." Liabilities related to such litigation are recognized when the related costs are probable and can be reasonably
estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events
pertaining to a particular case. It is possible that management's estimates of the outcomes will change due to uncertainties inherent in litigation and settlement negotiations. In the opinion of
management, the ultimate resolution of any litigation matters is not expected to have a material adverse effect on the Company's results of operation or financial condition. There can be no assurance
that management's beliefs or opinions with respect to liability for potential litigation matters are accurate.
Samson
Resources Company, Samson Lone Star, LLC and Samson Contour Energy E&P, LLC (together, "Samson") filed fifteen lawsuits in federal and state courts in Oklahoma and
two lawsuits in state courts in New Mexico against CRRM and other defendants between March 2009 and July 2009. In addition, in May 2010, separate groups of plaintiffs filed two lawsuits (the "Anstine
and Arrow cases") against CRRM and other defendants in state court in Oklahoma and Kansas. All of the lawsuits filed in state court were removed to federal court. All of the lawsuits (except for the
New Mexico suits, which remained in federal court in New Mexico) were then transferred to the Bankruptcy Court for the United States District Court for the District of Delaware, where the Sem Group
bankruptcy resides. In March 2011, CRRM was dismissed without prejudice from the New Mexico suits. All of the lawsuits allege that Samson or other respective plaintiffs sold crude oil to a group of
31
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(15) Commitments and Contingencies (Continued)
companies,
which generally are known as SemCrude or SemGroup (collectively, "Sem"), which later declared bankruptcy and that Sem has not paid such plaintiffs for all of the crude oil purchased from
Sem. The Samson lawsuits further allege that Sem sold some of the crude oil purchased from Samson to J. Aron & Company ("J. Aron") and that J. Aron sold some of this crude oil to CRRM. All of
the lawsuits seek the same remedy, the imposition of a trust, an accounting and the return of crude oil or the proceeds therefrom. The amount of the plaintiffs' alleged claims is unknown since the
price and amount of crude oil sold by the plaintiffs and eventually received by CRRM through Sem and J. Aron, if any, is unknown. CRRM timely paid for all crude oil purchased from J. Aron. On
January 26, 2011, CRRM and J. Aron entered into an agreement whereby J. Aron agreed to indemnify and defend CRRM from any damage, out-of-pocket expense or loss in
connection with any crude oil involved in the lawsuits which CRRM purchased through J. Aron, and J. Aron agreed to reimburse CRRM's prior attorney fees and out-of-pocket
expenses in connection with the lawsuits. Samson and CRRM entered a stipulation of dismissal with respect to all of the Samson cases and the Samson cases were dismissed with prejudice on
February 8, 2012. The dismissal does not pertain to the Anstine and Arrow cases.
On
June 21, 2012, Goldman, Sachs & Co. ("GS") filed suit against CVR in state court in New York, alleging that CVR failed to pay GS approximately
$18.5 million in fees allegedly due to GS by CVR pursuant to an engagement letter dated March 21, 2012, which according to the allegations set forth in the complaint, provided that GS
was engaged by CVR to assist CVR and the CVR board of directors in connection with a tender offer for CVR's stock, made by Carl C. Icahn and certain of his affiliates. CVR believes it has meritorious
defenses and intends to vigorously defend against the suit. This amount has been fully accrued as of September 30, 2012.
On
August 10, 2012, Deutsche Bank ("DB") filed suit against CVR in state court in New York, alleging that CVR failed to pay DB approximately $18.5 million in fees allegedly
due to DB by CVR pursuant to an engagement letter dated March 23, 2012, which according to the allegations set forth in the complaint, provided that DB was engaged by CVR to assist CVR and the
CVR board of directors in connection with a tender offer for CVR's stock made by Carl C. Icahn and certain of his affiliates. CVR believes it has meritorious defenses and intends to vigorously defend
against the suit. This amount has been fully accrued as of September 30, 2012.
CRNF
received a ten year property tax abatement from Montgomery County, Kansas in connection with the construction of the nitrogen fertilizer plant that expired on December 31,
2007. In connection with the expiration of the abatement, the county reassessed CRNF's nitrogen fertilizer plant and classified the nitrogen fertilizer plant as almost entirely real property instead
of almost entirely personal property. The reassessment resulted in an increase in CRNF's annual property tax expense by an average of approximately $10.7 million per year for the years ended
December 31, 2008 and December 31, 2009, $11.7 million for the year ended December 31, 2010 and $11.4 million for the year ended December 31, 2011. CRNF did
not agree with the county's classification of its nitrogen fertilizer plant and protested the classification and resulting valuation for each of those years to the Kansas Court of Tax Appeals, or
COTA. However, CRNF has fully accrued and paid the property taxes the county claims are owed for the years ended December 31, 2011, 2010, 2009 and 2008 and has estimated
and accrued for property tax for the first nine months of 2012. This property tax expense is reflected as a direct operating expense in our financial results. In February 2011, CRNF tried the 2008
case to
32
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(15) Commitments and Contingencies (Continued)
COTA
and in January 2012, COTA issued its decision holding that CRNF's fertilizer plant was almost entirely real property instead of almost entirely personal property was appropriate. CRNF disagreed
with the ruling and filed a petition for reconsideration with COTA (which was denied) and then filed an appeal to the Kansas Court of Appeals. CRNF is also protesting the valuation of the CRNF
fertilizer plant for tax years 2009 through 2012, which cases remain pending before COTA. If CRNF is successful in having the nitrogen fertilizer plant reclassified as personal property, in whole or
in part, then a portion of the accrued and paid property tax expenses would be refunded to CRNF, which could have a material positive effect on our results of operations. If CRNF is not successful in
having the nitrogen fertilizer plant reclassified as personal property, in whole or in part, then CRNF expects that it will continue to pay property taxes at elevated rates.
On
July 25, 2011, Mid-America Pipeline Company, LLC ("MAPL") filed an application with the Kansas Corporation Commission ("KCC") for the purpose
of establishing higher rates ("New Rates") effective October 1, 2011 for pipeline transportation service on MAPL's liquids pipelines running between Conway, Kansas and
Coffeyville, Kansas ("Inbound Line") and between Coffeyville, Kansas and El Dorado, Kansas ("Outbound Line"). CRRM ships refined fuels on the Outbound Line and CRRM ships natural gas liquids on the
Inbound Line. On April 3, 2012, the parties entered into a Settlement Agreement which resolved the rate dispute both at the KCC and at the U.S. Federal Energy Regulatory Commission ("FERC").
Among other provisions, the Settlement Agreement provides for pipeage contracts to be entered into between the parties with rates ("Settlement Rates") to be established for an initial one year period.
The Settlement Rates consist of two components, a base rate and a pipeline integrity cost recovery rate along with an annual take or pay minimum transportation quantity. The Settlement Rate on the
Inbound Line was effective April 1, 2012 and the Settlement Rate on the Outbound Line was effective June 1, 2012. Prior to the end of the initial one year term of the pipeage contracts,
and prior to the end of each annual period thereafter until the tenth anniversary of each of the two pipeage contracts, MAPL will provide its estimate of pipeline integrity costs for the upcoming
annual period and CRRM may either agree to pay a rate for such upcoming annual period which includes a recovery rate component sufficient to collect such pipeline integrity costs for such upcoming
annual period subject to true-up to actual costs at the end of the annual period. FERC rates will be the same as the KCC rates.
Flood, Crude Oil Discharge and Insurance
Crude oil was discharged from the Company's Coffeyville refinery on July 1, 2007, due to the short amount of time available to
shut down and secure the refinery in
preparation for the flood that occurred on June 30, 2007. In connection with the discharge, the Company received in May 2008 notices of claims from sixteen private claimants under the Oil
Pollution Act ("OPA") in an aggregate amount of approximately $4.4 million (plus punitive damages). In August 2008, those claimants filed suit against the Company in the United States District
Court for the District of Kansas in Wichita (the "Angleton Case"). In October 2009 and June 2010, companion cases to the Angleton Case were filed in the United States District Court for the District
of Kansas in Wichita, seeking a total of approximately $3.2 million (plus punitive damages) for three additional plaintiffs as a result of the July 1, 2007 crude oil discharge. The
Company has settled all of the claims with the plaintiffs from the Angleton Case and
33
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(15) Commitments and Contingencies (Continued)
has
settled all of the claims except for one of the plaintiffs from the companion cases. The settlements did not have a material adverse effect on the condensed consolidated financial statements. The
Company believes that the resolution of the remaining claim will not have a material adverse effect on the condensed consolidated financial statements.
As
a result of the crude oil discharge that occurred on July 1, 2007, the Company entered into an administrative order on consent (the "Consent Order") with the U.S. Environmental
Protection Agency (the "EPA") on July 10, 2007. As set forth in the Consent Order, the EPA concluded that the discharge of crude oil from the Company's Coffeyville refinery caused an imminent
and substantial threat to the public health and welfare. Pursuant to the Consent Order, the Company agreed to perform specified remedial actions to respond to the discharge of crude oil from the
Company's refinery. The substantial majority of all required remedial actions were completed by January 31, 2009. The Company prepared and provided its final report to the EPA in January 2011
to satisfy the final requirement of the Consent Order. In April 2011, the EPA provided the Company with a notice of completion indicating that the Company has no continuing obligations under the
Consent Order, while reserving its rights to recover oversight costs and penalties.
On
October 25, 2010, the Company received a letter from the United States Coast Guard on behalf of the EPA seeking approximately $1.8 million in oversight cost
reimbursement. The Company responded by asserting defenses to the Coast Guard's claim for oversight costs. On September 23, 2011, the United States Department of Justice ("DOJ"), acting on
behalf of the EPA and the United States Coast Guard, filed suit against CRRM in the United States District Court for the District of Kansas seeking (i) recovery from CRRM of the EPA's oversight
costs under the OPA, (ii) a civil penalty under the Clean Water Act (as amended by the OPA) and (iii) recovery from CRRM related to alleged non-compliance with the Clean Air
Act's Risk Management Program ("RMP"). (See "Environmental, Health and Safety ("EHS") Matters" below.) The Company has reached an agreement in principle with the DOJ to resolve the DOJ's claims. The
Company anticipates that civil penalties associated with the proceeding will exceed $100,000; however, the Company does not anticipate that civil penalties or any other costs associated with the
proceeding will be material. The lawsuit is stayed while the consent decree is finalized.
The
Company is seeking insurance coverage for this release and for the ultimate costs for remediation and third-party property damage claims. On July 10, 2008, the Company filed a
lawsuit in the United States District Court for the District of Kansas against certain of the Company's environmental insurance carriers requesting insurance coverage indemnification for the June/July
2007 flood and crude oil discharge losses. Each insurer reserved its rights under various policy exclusions and limitations and cited potential coverage defenses. Although the Court has now issued
summary judgment opinions that eliminate the majority of the insurance defendants' reservations and defenses, the Company cannot be certain of the ultimate amount or timing of such recovery because of
the difficulty inherent in projecting the ultimate resolution of the Company's claims. The Company has received $25 million of insurance proceeds under its primary environmental liability
insurance policy which constitutes full payment to the Company of the primary pollution liability policy limit.
34
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(15) Commitments and Contingencies (Continued)
The
lawsuit with the insurance carriers under the environmental policies remains the only unsettled lawsuit with the insurance carriers related to these events.
Environmental, Health, and Safety ("EHS") Matters
CRRM, Coffeyville Resources Crude Transportation, LLC ("CRCT"), Coffeyville Resources Terminal, LLC ("CRT"), and
Wynnewood Refining Company, LLC ("WRC"), all of which are wholly-owned subsidiaries of CVR, and CRNF are subject to various stringent federal, state, and local EHS rules and regulations.
Liabilities related to EHS matters are recognized when the related costs are probable and can be reasonably estimated. Estimates of these costs are based upon currently available facts, existing
technology, site-specific costs, and currently enacted laws and regulations. In reporting EHS liabilities, no offset is made for potential recoveries.
CRRM,
CRNF, CRCT, WRC and CRT own and/or operate manufacturing and ancillary operations at various locations directly related to petroleum refining and distribution and nitrogen
fertilizer manufacturing. Therefore, CRRM, CRNF, CRCT, WRC and CRT have exposure to potential EHS liabilities related to past and present EHS conditions at these locations. Under the Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA"), the Resource Conservation and Recovery Act ("RCRA"), and related state laws, certain persons may be liable for the release or
threatened release of hazardous substances. These persons include the current owner or operator of property where a release or threatened release occurred, any persons who owned or operated the
property when the release occurred, and any persons who disposed of, or arranged for the transportation or disposal of, hazardous substances at a contaminated property. Liability under CERCLA is
strict, and under certain circumstances, joint and several, so that any responsible party may
be held liable for the entire cost of investigating and remediating the release of hazardous substances. Similarly, the OPA generally subjects owners and operators of facilities to strict, joint and
several liability for all containment and cleanup costs, natural resource damages, and potential governmental oversight costs arising from oil spills into the waters of the United States.
CRRM
and CRT have agreed to perform corrective actions at the Coffeyville, Kansas refinery and the now-closed Phillipsburg, Kansas terminal facility, pursuant to
Administrative Orders on Consent issued under RCRA to address historical contamination by the prior owners (RCRA Docket No. VII-94-H-0020 and Docket
No. VII-95-H-011, respectively). As of September 30, 2012 and December 31, 2011, environmental accruals of approximately $1.6 million
and $1.9 million, respectively, were reflected in the Condensed Consolidated Balance Sheets for probable and estimated costs for remediation of environmental contamination under the RCRA
Administrative Orders, for which approximately $0.3 million and $0.5 million, respectively, are included in other current liabilities. The Company's accruals were determined based on an
estimate of payment costs through 2031, for which the scope of remediation was arranged with the EPA, and were discounted at the appropriate risk free rates at September 30, 2012 and
December 31, 2011, respectively. The accruals include estimated closure and post-closure costs of approximately $0.9 million and $0.9 million for two landfills at
35
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(15) Commitments and Contingencies (Continued)
September 30,
2012 and December 31, 2011, respectively. The estimated future payments for these required obligations are as follows:
|
|
|
|
|
Year Ending December 31,
|
|
Amount
|
|
|
|
(in thousands)
|
|
Three months ending December 31, 2012
|
|
$
|
147
|
|
2013
|
|
|
200
|
|
2014
|
|
|
162
|
|
2015
|
|
|
162
|
|
2016
|
|
|
105
|
|
Thereafter
|
|
|
1,055
|
|
|
|
|
|
Undiscounted total
|
|
|
1,831
|
|
Less amounts representing interest at 1.59%
|
|
|
193
|
|
|
|
|
|
Accrued environmental liabilities at September 30, 2012
|
|
$
|
1,638
|
|
|
|
|
|
Management
periodically reviews and, as appropriate, revises its environmental accruals. Based on current information and regulatory requirements, management believes that the accruals
established for environmental expenditures are adequate.
CRRM,
CRNF, CRCT, WRC and CRT are subject to extensive and frequently changing federal, state and local, environmental and health and safety laws and regulations governing the emission
and release of hazardous substances into the environment, the treatment and discharge of waste water, the storage,
handling, use and transportation of petroleum and nitrogen products, and the characteristics and composition of gasoline and diesel fuels. The ultimate impact on the Company's business of complying
with evolving laws and regulations is not always clearly known or determinable due in part to the fact that our operations may change over time and certain implementing regulations for laws, such as
the federal Clean Air Act, have not yet been finalized, are under governmental or judicial review or are being revised. These laws and regulations could result in increased capital, operating and
compliance costs.
In
2007, the EPA promulgated the Mobile Source Air Toxic II ("MSAT II") rule that requires the reduction of benzene in gasoline by 2011. CRRM and WRC are considered to be small refiners
under the MSAT II rule and compliance with the rule is extended until 2015 for small refiners. With the change in control by Icahn Enterprises in 2012, the MSATII projects have been accelerated by
three months due to the loss of small refiner status. Capital expenditures to comply with the rule are expected to be approximately $45.0 million for CRRM and $49.0 million for WRC.
CRRM's
refinery is subject to the Renewable Fuel Standard ("RFS") which requires refiners to blend "renewable fuels" in with their transportation fuels or purchase renewable energy
credits in lieu of blending. The EPA is required to determine and publish the applicable annual renewable fuel percentage standards for each compliance year by November 30 for the forthcoming
year. The percentage standards represent the ratio of renewable fuel volume to gasoline and diesel volume. In 2012, about 9% of all fuel used was required to be "renewable fuel." The EPA has not yet
proposed
36
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(15) Commitments and Contingencies (Continued)
the
renewable fuel percentage standards for 2013. Due to mandates in the RFS requiring increasing volumes of renewable fuels to replace petroleum products in the U.S. motor fuel market, there may be a
decrease in demand for petroleum products. In addition, CRRM may be impacted by increased capital expenses and production costs to accommodate mandated renewable fuel volumes to the extent that these
increased costs cannot be passed on to the consumers. CRRM's small refiner status under the original RFS expired on December 31, 2010. Beginning on January 1, 2011, CRRM was required to
blend renewable fuels into its gasoline and diesel fuel or purchase renewable energy credits, known as Renewable Identification Numbers ("RINs") in lieu of blending. To achieve compliance with the
renewable fuel standard for the remainder of 2012, CRRM is able to blend a small amount of ethanol into gasoline sold at its refinery loading rack, but otherwise will have to purchase RINs to comply
with the rule. CRRM requested "hardship relief" (an extension of the compliance deadline) from the EPA based on the disproportionate economic impact of the rule on CRRM, but the EPA denied CRRM's
request on February 17, 2012.
WRC's
refinery is a small refinery under the RFS and has received a two year extension of time to comply. Therefore, WRC will have to begin complying with the RFS beginning in 2013
unless a further extension is requested and granted.
The
EPA is expected to propose "Tier 3" gasoline sulfur standards in 2012 or 2013. If the EPA were to propose a standard at the level recently being discussed in the
pre-proposal phase by the EPA, CRRM will need to make modifications to its equipment in order to meet the anticipated new standard. It is not anticipated that the Wynnewood refinery would
require additional capital to meet the anticipated new standard. The Company does not believe that costs associated with the EPA's proposed Tier 3 rule will be material.
In
March 2004, CRRM and CRT entered into a Consent Decree (the "2004 Consent Decree") with the EPA and the Kansas Department of Health and Environment (the "KDHE") to resolve air
compliance concerns raised by the EPA and KDHE related to Farmland Industries Inc.'s prior ownership and operation of the Coffeyville crude oil refinery and the now-closed
Phillipsburg terminal facilities. Under the 2004 Consent Decree, CRRM agreed to install controls to reduce emissions of sulfur dioxide, nitrogen oxides and particulate matter from its FCCU by
January 1, 2011. In addition, pursuant to the 2004 Consent Decree, CRRM and CRT assumed cleanup obligations at the Coffeyville refinery and the now-closed Phillipsburg terminal
facilities.
In
March 2012, CRRM entered into a "Second Consent Decree" with the EPA, which replaces the 2004 Consent Decree (other than the RCRA provisions) and the First Material Modification. The
Second Consent Decree gives CRRM more time to install the FCCU controls from the 2004 Consent Decree and expands the scope of the settlement so that it is now considered a "global settlement" under
the EPA's "National Petroleum Refining Initiative." Under the National Petroleum Refining Initiative, the EPA identified industry-wide noncompliance with four "marquee" issues under the
Clean Air Act: New Source Review, Flaring, Leak Detection and Repair, and Benzene Waste Operations NESHAP. The National Petroleum Refining Initiative has resulted in most U.S. refineries (representing
more than 90% of the US refining capacity) entering into consent decrees imposing civil penalties and requiring the installation of pollution control equipment and enhanced operating procedures. Under
37
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(15) Commitments and Contingencies (Continued)
the
Second Consent Decree, the Company was required to pay a civil penalty of approximately $0.7 million and complete the installation of FCCU controls required under the 2004 Consent Decree,
the remaining costs of which are expected to be approximately $49.0 million, of which approximately $47.0 million is expected to be capital expenditures and complete a voluntary
environmental project that will reduce air emissions and conserve water at an estimated cost of approximately $1.2 million. The incremental capital expenditures associated with the Second
Consent Decree will not be material and will be limited primarily to the retrofit and replacement of heaters and boilers over a five to seven year timeframe. The Second Consent Decree was entered by
the U.S. District Court for the District of Kansas on April 19, 2012.
WRC's
refinery has not entered into a global settlement with the EPA and the Oklahoma Department of Environmental Quality (the "ODEQ") under the National Petroleum Refining Initiative,
although it had discussions with the EPA and the ODEQ about doing so. Instead, WRC entered into a Consent Order with the ODEQ in August 2011 (the "Wynnewood Consent Order"). The Wynnewood Consent
Order addresses some, but not all, of the traditional marquee issues under the National Petroleum Refining Initiative and addresses certain historic Clean Air Act compliance issues that are generally
beyond the scope of a traditional global settlement. Under the Wynnewood Consent Order, WRC paid a civil penalty of $950,000, and agreed to install certain controls, enhance certain compliance
programs, and undertake additional testing and auditing. The costs of complying with the Wynnewood Consent Order, other than costs associated with a planned turnaround, are not expected to be
material. In consideration for entering into the Wynnewood Consent Order, WRC received a release from liability from ODEQ for matters described in the ODEQ order. The EPA may later request that WRC
enter into a global settlement which, if WRC agreed to do so, would necessitate the payment of a civil penalty and the installation of additional controls.
On
February 24, 2010, CRRM received a letter from the DOJ on behalf of the EPA seeking an approximately $0.9 million civil penalty related to alleged late and incomplete
reporting of air releases in violation of the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") and the Emergency Planning and Community
Right-to-Know Act ("EPCRA"). The Company reached an agreement with EPA to resolve these claims. The resolution was included in the Second Consent Decree described above
pursuant to which the Company has agreed to pay an immaterial civil penalty.
The
EPA has investigated CRRM's operation for compliance with the Clean Air Act's RMP. On September 23, 2011, the DOJ, acting on behalf of the EPA and the United States Coast
Guard, filed suit against CRRM in the United States District Court for the District of Kansas (in addition to the matters described above, see "Flood, Crude Oil Discharge and Insurance") seeking
recovery from CRRM related to alleged non-compliance with the RMP. The Company has reached an agreement to settle the claims. Civil penalties associated with the proceeding will exceed
$100,000; however, the Company does not anticipate that civil penalties or any other costs associated with the settlement will be material. The lawsuit is stayed while the parties attempt to finalize
and file the consent decree.
From
time to time, the EPA has conducted inspections and issued information requests to CRNF with respect to the Company's compliance with the RMP and the release reporting requirements
under
38
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(15) Commitments and Contingencies (Continued)
CERCLA
and the EPCRA. These previous investigations have resulted in the issuance of preliminary findings regarding CRNF's compliance status. In the fourth quarter of 2010, following CRNF's reported
release of ammonia from its cooling water system and the rupture of its UAN vessel (which released ammonia and other regulated substances), the EPA conducted its most recent inspection and issued an
additional request for information to CRNF. The EPA has not made any formal claims against the Company and the Company has not accrued for any liability associated with the investigations or releases.
WRC
has entered into a series of Clean Water Act consent orders with ODEQ. The latest Consent Order (the "CWA Consent Order"), which supersedes other consent orders, became effective in
September 2011. The CWA Consent Order addresses alleged noncompliance by WRC with its Oklahoma Pollutant Discharge Elimination System permit limits. The CWA Consent Order requires WRC to take
corrective action steps, including undertaking studies to determine whether the Wynnewood refinery's wastewater treatment plant capacity is sufficient. The Wynnewood refinery may need to install
additional controls or make operational changes to satisfy the requirements of the CWA Consent Order. The cost of additional controls, if any, cannot be predicted at this time. However, based on our
experience with wastewater treatment and controls, we do not believe that the costs of the potential corrective actions would be material.
Environmental
expenditures are capitalized when such expenditures are expected to result in future economic benefits. For the three months ended September 30, 2012 and 2011,
capital expenditures were approximately $7.7 million and $1.1 million, respectively, and were incurred to improve the environmental compliance and efficiency of the operations. For the
nine months ended September 30, 2012 and 2011, capital expenditures were approximately $18.7 million and $3.6 million, respectively, and were incurred to improve the environmental
compliance and efficiency of the operations.
CRRM,
CRNF, CRCT, WRC and CRT each believe it is in substantial compliance with existing EHS rules and regulations. There can be no assurance that the EHS matters described above or
other EHS matters which may develop in the future will not have a material adverse effect on the business, financial condition, or results of operations.
On September 28, 2012, the Wynnewood refinery experienced an explosion in a boiler unit that had been temporarily shut down as
part of the turnaround process. Two employees were fatally injured. Damage at the refinery was limited to the boiler; process units and other areas of the facility were unaffected. Additionally, there
has been no evidence of environmental impact. The refinery was shut down for turnaround maintenance at the time of the incident. The Company immediately launched an internal investigation of the
incident and continues to cooperate with U.S. Occupational Health and Safety Administration ("OSHA") and Oklahoma Department of Labor ("ODL") investigations.
39
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(16) Fair Value Measurements
In accordance with 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
or liabilities.
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 1Quoted prices in active market for identical assets and liabilities
-
-
Level 2Other significant observable inputs (including quoted prices in active markets for similar
assets or liabilities)
-
-
Level 3Significant unobservable inputs (including the Company's own assumptions in determining the
fair value)
The
following table sets forth the assets and liabilities measured at fair value on a recurring basis, by input level, as of September 30, 2012 and December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
(in thousands)
|
|
Location and Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
173,844
|
|
$
|
|
|
$
|
|
|
$
|
173,844
|
|
Other current assets (marketable securities)
|
|
|
36
|
|
|
|
|
|
|
|
|
36
|
|
Other current assets (other derivative agreements)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term assets (other derivative agreements)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
173,880
|
|
$
|
|
|
$
|
|
|
$
|
173,880
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities (other derivative agreements)
|
|
|
|
|
|
(107,028
|
)
|
|
|
|
|
(107,028
|
)
|
Other current liabilities (interest rate swap)
|
|
|
|
|
|
(828
|
)
|
|
|
|
|
(828
|
)
|
Other long-term liabilities (other derivative agreements)
|
|
|
|
|
|
(8,733
|
)
|
|
|
|
|
(8,733
|
)
|
Other long-term liabilities (interest rate swap)
|
|
|
|
|
|
(2,186
|
)
|
|
|
|
|
(2,186
|
)
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
|
|
$
|
(118,775
|
)
|
$
|
|
|
$
|
(118,775
|
)
|
|
|
|
|
|
|
|
|
|
|
40
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(16) Fair Value Measurements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
(in thousands)
|
|
Location and Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
187,327
|
|
$
|
|
|
$
|
|
|
$
|
187,327
|
|
Other current assets (marketable securities)
|
|
|
25
|
|
|
|
|
|
|
|
|
25
|
|
Other current assets (other derivative agreements)
|
|
|
|
|
|
63,051
|
|
|
|
|
|
63,051
|
|
Other long-term assets (other derivative agreements)
|
|
|
|
|
|
18,831
|
|
|
|
|
|
18,831
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
187,352
|
|
$
|
81,882
|
|
$
|
|
|
$
|
269,234
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities (interest rate swap)
|
|
|
|
|
|
(905
|
)
|
|
|
|
|
(905
|
)
|
Other long-term liabilities (interest rate swap)
|
|
|
|
|
|
(1,483
|
)
|
|
|
|
|
(1,483
|
)
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
|
|
$
|
(2,388
|
)
|
$
|
|
|
$
|
(2,388
|
)
|
|
|
|
|
|
|
|
|
|
|
As
of September 30, 2012 and December 31, 2011, the only financial assets and liabilities that are measured at fair value on a recurring basis are the Company's cash
equivalents, available-for-sale marketable securities and derivative instruments. Additionally, the fair value of the Company's Notes is disclosed in Note 13
("Long-Term Debt"). The Company's commodity derivative contracts are valued using broker quoted market prices of similar commodity contracts using Level 2 inputs. The Partnership
has an interest rate swap that is measured at fair value on a recurring basis using Level 2 inputs. The fair value of these interest rate swap instruments are based on discounted cash flow
models that incorporate the cash flows of the derivatives, net, as well as the current LIBOR rate and a forward LIBOR curve, along with other observable market inputs. The Company had no transfers of
assets or liabilities between any of the above levels during the nine months ended September 30, 2012.
The
Company's investments in marketable securities are classified as available-for-sale, and as a result, are reported at fair market value using quoted market
prices.
(17) Derivative Financial Instruments
Gain (loss) on derivatives, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
Realized gain (loss) on derivative agreements
|
|
$
|
(53,272
|
)
|
$
|
66
|
|
$
|
(80,426
|
)
|
$
|
(18,298
|
)
|
Unrealized (loss) on derivative agreements
|
|
|
(115,699
|
)
|
|
(9,991
|
)
|
|
(196,980
|
)
|
|
(6,801
|
)
|
|
|
|
|
|
|
|
|
|
|
Total gain (loss) on derivatives, net
|
|
$
|
(168,971
|
)
|
$
|
(9,925
|
)
|
$
|
(277,406
|
)
|
$
|
(25,099
|
)
|
|
|
|
|
|
|
|
|
|
|
CVR
is 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, the Company from time to time enters into various commodity derivative transactions.
41
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(17) Derivative Financial Instruments (Continued)
CVR
has adopted accounting standards which impose extensive record-keeping requirements in order to designate a derivative financial instrument as a hedge. CVR 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 for GAAP purposes. 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.
CVR
maintains a margin account to facilitate other commodity derivative activities. A portion of this account may include funds available for withdrawal. These funds are included in cash
and cash equivalents within the Condensed Consolidated Balance Sheets. The maintenance margin balance is included within other current assets within the Condensed Consolidated Balance Sheets.
Dependent upon the position of the open commodity derivatives, the amounts are accounted for as an other current asset or an other current liability within the Condensed Consolidated Balance Sheets.
From time to time, CVR may be required to deposit additional funds into this margin account. The fair value of the open commodity positions as of September 30, 2012 was a net loss of
$0.1 million included in accrued liabilities. For the three months ended September 30, 2012, the Company recognized a realized loss of $8.0 million and an unrealized gain of
$0.9 million which is recorded in loss on derivatives, net in the Condensed Consolidated Statement of Operations. For the nine months ended September 30, 2012, the Company recognized a
realized loss of $10.1 million and an unrealized loss of $0.8 million which is recorded in loss on derivatives, net in the Condensed Consolidated Statement of Operations.
Beginning September 2011, the Company entered into several commodity swap contracts with effective periods beginning in January 2012.
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. At September 30, 2012, the Company had open commodity hedging instruments consisting
of 26.3 million barrels of crack spreads primarily to fix the margin on a portion of its future gasoline and distillate production. The fair value of the outstanding contracts at
September 30, 2012 was a net loss of $115.6 million which was comprised of $106.9 million included in current liabilities and $8.7 million included in long-term
liabilities. For the three months ended September 30, 2012, the Company recognized a realized loss of $45.3 million and an unrealized loss of $116.5 million which are recorded in
loss on derivatives, net in the Condensed Consolidated Statements of Operations. For the nine months ended September 30, 2012,
the Company recognized a realized loss of $70.3 million and an unrealized loss of $196.1 million which are recorded in loss on derivatives, net in the Condensed Consolidated Statements
of Operations.
42
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(17) Derivative Financial Instruments (Continued)
On June 30 and July 1, 2011, CRNF entered into two floating-to-fixed interest rate swap
agreements for the purpose of hedging the interest rate risk associated with a portion of its $125.0 million floating rate term debt which matures in April 2016. The aggregate notional amount
covered under these agreements totals $62.5 million (split evenly between the two agreement dates) and commenced on August 12, 2011 and expires on February 12, 2016. Under the
terms of the interest rate swap agreement entered into on June 30, 2011, CRNF will receive a floating rate based on three month LIBOR and pay a fixed rate of 1.94%. Under the terms of the
interest rate swap agreement entered into on July 1, 2011, CRNF will receive a floating rate based on three month LIBOR and pay a fixed rate of 1.975%. Both swap agreements are settled every
90 days. The effect of these swap agreements is to lock in a fixed rate of interest of approximately 1.96% plus the applicable margin paid to lenders over three month LIBOR as governed by the
CRNF credit agreement. At September 30, 2012, the effective rate was approximately 4.59%. The agreements were designated as cash flow hedges at inception and accordingly, the effective portion
of the gain or loss on the swap is reported as a component of accumulated other comprehensive income (loss) ("AOCI"), and will be reclassified into interest expense when the interest rate swap
transaction affects earnings. The ineffective portion of the gain or loss will be recognized immediately in current interest expense on the Condensed Consolidated Statement of Operations. The realized
loss on the interest rate swap re-classed from AOCI into interest expense was $0.2 million and $0.1 million for the three months ended September 30, 2012 and 2011,
respectively. The realized loss on the interest rate swap re-classed from AOCI into interest expense was $0.7 million and $0.1 million for the nine months ended
September 30, 2012 and 2011, respectively.
(18) Related Party Transactions
On May 7, 2012, Carl C. Icahn and certain of his affiliates (collectively, "Icahn") announced that Icahn had acquired control of CVR pursuant to a tender offer to purchase all of
the issued and outstanding shares of the Company's common stock. As of September 30, 2012, Icahn owned approximately 82% of all common shares outstanding.
Until
February 2011, the Goldman Sachs Funds and Kelso Funds owned approximately 40% of CVR. On February 8, 2011, GS and Kelso completed a registered public offering, whereby GS
sold its remaining ownership interest in CVR and Kelso substantially reduced its interest in the Company. On May 26, 2011, Kelso completed a registered public offering in which Kelso sold its
remaining ownership interest in CVR. As a result of these sales, the Goldman Sachs Funds and Kelso Funds are no longer stockholders of the Company.
Since March 2009, the Company, through the Partnership, has leased 200 railcars from American Railcar Leasing LLC, a company
controlled by Mr. Carl Icahn, the Company's majority stockholder. The agreement is scheduled to expire on March 31, 2014. For the three and nine months ended September 30, 2012,
$0.3 million and $0.8 million, respectively, of rent expense was recorded related to
43
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(18) Related Party Transactions (Continued)
this
agreement and is included in cost of product sold (exclusive of depreciation and amortization) in the Condensed Consolidated Statements of Operations.
On May 19, 2012, CVR became a member of the consolidated federal tax group of American Entertainment Properties Corporation
("AEPC"), a wholly-owned subsidiary of Icahn Enterprises, and subsequently entered into 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.
As
of September 30, 2012, the Company owes approximately $44.5 million for federal income taxes due to AEPC under the Tax Allocation Agreement. During the quarter ended
September 30, 2012, the Company paid $65.1 million to AEPC under the Tax Allocation Agreement.
Icahn Sourcing, LLC ("Icahn Sourcing") is an entity formed and controlled by Carl C. Icahn in order to maximize the potential
buying power of a group of entities with which Mr. Icahn has a relationship in negotiating with a wide range of suppliers of goods, services and tangible and intangible property. CVR Energy is
a member of the buying group and, as such, is afforded the opportunity to purchase goods, services and property from vendors with whom Icahn Sourcing has negotiated rates and terms. Icahn Sourcing
does not guarantee that CVR Energy will purchase any goods, services or property from any such vendors and CVR Energy is under no obligation to do so. CVR Energy does not pay Icahn Sourcing any fees
or other amounts with respect to the buying group arrangement. CVR may purchase a variety of goods and services as members of the buying group at prices and terms that CVR believes would be more
favorable than those which could be achieved on a stand-alone basis.
In connection with the Partnership IPO, an affiliate of GS received an underwriting fee of approximately $5.7 million for its
role as a joint book-running manager. In April 2011, CRNF entered into a credit facility as discussed further in Note 13 ("Long-Term Debt") whereby an affiliate of GS
was paid fees and expenses of approximately $2.0 million.
For
the three and nine months ended September 30, 2011, the Company recognized approximately $0 and $0.5 million, respectively, in expenses for the benefit of GS, Kelso,
the president and chief executive officer of CVR, in connection with CVR's Registration Rights Agreement. These amounts included registration and filing fees, printing fees, external accounting fees
and external legal fees.
44
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(19) Business Segments
The Company measures segment profit as operating income for Petroleum and Nitrogen Fertilizer, CVR's two reporting segments, based on the definitions provided in ASC Topic
280
Segment Reporting
. All operations of the segments are located within the United States.
Principal products of the Petroleum Segment are refined fuels, liquefied petroleum gas, asphalts, and petroleum refining
by-products, including pet coke. The Petroleum Segment's Coffeyville refinery sells pet coke to the Partnership for use in the manufacture of nitrogen fertilizer at the adjacent nitrogen
fertilizer plant. For the Petroleum Segment, a per-ton transfer price is used to record intercompany sales on the part of the Petroleum Segment and corresponding intercompany cost of
product sold (exclusive of depreciation and amortization) for the Nitrogen Fertilizer Segment. The per ton transfer price paid, pursuant to the pet coke supply agreement that became effective
October 24, 2007, is based on the lesser of a pet coke price derived from the price received by the Nitrogen Fertilizer Segment for UAN (subject to a UAN based price ceiling and floor) and a
pet coke price index for pet coke. The intercompany transactions are eliminated in the Other Segment. Intercompany sales included in petroleum net sales were approximately $2.4 million and
$3.9 million for the three months ended September 30, 2012 and 2011, respectively. Intercompany sales included in petroleum net sales were approximately $7.3 million and
$8.8 million for the nine months ended September 30, 2012 and 2011, respectively.
The
Petroleum Segment recorded intercompany cost of product sold (exclusive of depreciation and amortization) for the hydrogen purchases (sales) described below under "Nitrogen
Fertilizer" for the three months ended September 30, 2012 and 2011 of approximately $0.2 million and $5.5 million, respectively. For the nine months ended September 30,
2012 and 2011, the Petroleum Segment recorded intercompany cost of product sold (exclusive of depreciation and amortization) for the hydrogen purchases (sales) of approximately $5.8 million and
$10.8 million, respectively.
The principal product of the Nitrogen Fertilizer Segment is nitrogen fertilizer. Intercompany cost of product sold (exclusive of
depreciation and amortization) for the pet coke transfer described above was approximately $2.5 million and $3.4 million for the three months ended September 30, 2012 and 2011,
respectively. Intercompany cost of product sold (exclusive of depreciation and amortization) for the pet coke transfer described above was approximately $7.8 million and $7.0 million for
the nine months ended September 30, 2012 and 2011, respectively.
Pursuant
to the feedstock agreement, the Coffeyville refinery and nitrogen fertilizer plant have the right to transfer excess hydrogen (hydrogen determined not to be needed to meet the
current anticipated operational requirements of the facility transferring the hydrogen) to one another. Sales of hydrogen to the Petroleum Segment have been reflected as net sales for the Nitrogen
Fertilizer Segment. Receipts of hydrogen from the Petroleum Segment have been reflected in cost of product sold (exclusive of depreciation and amortization) for the Nitrogen Fertilizer Segment. For
the three months ended September 30, 2012 and 2011, the net sales generated from intercompany hydrogen sales
45
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(19) Business Segments (Continued)
were
$0.3 million and $5.7 million, respectively. For the nine months ended September 30, 2012 and 2011, the net sales generated from intercompany hydrogen sales were
$6.0 million and $11.8 million, respectively. For the three months ended September 30, 2012 and 2011, the Nitrogen Fertilizer Segment also recognized approximately
$0.1 million and $0.3 million, respectively, of cost of product sold related to the transfer of excess hydrogen. For the nine months ended September 30, 2012 and 2011, the
Nitrogen Fertilizer Segment also recognized approximately $0.2 million and $1.0 million, respectively, of cost of product sold related to the transfer of excess hydrogen. As these
intercompany sales and cost of product sold are eliminated, there is no financial statement impact on the condensed consolidated financial statements.
The Other Segment reflects intercompany eliminations, cash and cash equivalents, all debt related activities, 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,
|
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum
|
|
$
|
2,337,354
|
|
$
|
1,284,407
|
|
$
|
6,465,378
|
|
$
|
3,772,348
|
|
Nitrogen Fertilizer
|
|
|
75,013
|
|
|
77,203
|
|
|
234,720
|
|
|
215,253
|
|
Intersegment elimination
|
|
|
(2,743
|
)
|
|
(9,646
|
)
|
|
(13,525
|
)
|
|
(20,656
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,409,624
|
|
$
|
1,351,964
|
|
$
|
6,686,573
|
|
$
|
3,966,945
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sold (exclusive of depreciation and amortization)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum
|
|
$
|
1,694,019
|
|
$
|
1,024,509
|
|
$
|
5,190,839
|
|
$
|
3,077,555
|
|
Nitrogen Fertilizer
|
|
|
11,297
|
|
|
10,901
|
|
|
34,620
|
|
|
28,138
|
|
Intersegment elimination
|
|
|
(2,864
|
)
|
|
(9,370
|
)
|
|
(13,642
|
)
|
|
(19,456
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,702,452
|
|
$
|
1,026,040
|
|
$
|
5,211,817
|
|
$
|
3,086,237
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating expenses (exclusive of depreciation and amortization)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum
|
|
$
|
88,890
|
|
$
|
54,510
|
|
$
|
253,176
|
|
$
|
143,974
|
|
Nitrogen Fertilizer
|
|
|
21,063
|
|
|
20,083
|
|
|
66,424
|
|
|
65,373
|
|
Other
|
|
|
(24
|
)
|
|
22
|
|
|
(58
|
)
|
|
(91
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
109,929
|
|
$
|
74,615
|
|
$
|
319,542
|
|
$
|
209,256
|
|
|
|
|
|
|
|
|
|
|
|
Insurance recoverybusiness interruption
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Nitrogen Fertilizer
|
|
|
|
|
|
(490
|
)
|
|
|
|
|
(3,360
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
(490
|
)
|
$
|
|
|
$
|
(3,360
|
)
|
|
|
|
|
|
|
|
|
|
|
46
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(19) Business Segments (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
|
|
|
(in thousands)
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum
|
|
$
|
27,458
|
|
$
|
16,990
|
|
$
|
80,355
|
|
$
|
50,872
|
|
Nitrogen Fertilizer
|
|
|
5,230
|
|
|
4,663
|
|
|
15,826
|
|
|
13,948
|
|
Other
|
|
|
421
|
|
|
372
|
|
|
1,230
|
|
|
1,259
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
33,109
|
|
$
|
22,025
|
|
$
|
97,411
|
|
$
|
66,079
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum
|
|
$
|
507,470
|
|
$
|
179,815
|
|
$
|
891,222
|
|
$
|
469,042
|
|
Nitrogen Fertilizer
|
|
|
32,347
|
|
|
37,514
|
|
|
99,820
|
|
|
93,626
|
|
Other
|
|
|
(6,073
|
)
|
|
(5,139
|
)
|
|
(81,018
|
)
|
|
(22,952
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
533,744
|
|
$
|
212,190
|
|
$
|
910,024
|
|
$
|
539,716
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum
|
|
$
|
20,211
|
|
$
|
20,216
|
|
$
|
82,604
|
|
$
|
33,430
|
|
Nitrogen fertilizer
|
|
|
18,201
|
|
|
4,492
|
|
|
57,419
|
|
|
10,539
|
|
Other
|
|
|
1,482
|
|
|
944
|
|
|
5,030
|
|
|
2,662
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
39,894
|
|
$
|
25,652
|
|
$
|
145,053
|
|
$
|
46,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
2012
|
|
As of December 31,
2011
|
|
Total assets
|
|
|
|
|
|
|
|
Petroleum
|
|
$
|
2,188,950
|
|
$
|
2,322,148
|
|
Nitrogen Fertilizer
|
|
|
653,242
|
|
|
659,309
|
|
Other
|
|
|
810,185
|
|
|
137,834
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,652,377
|
|
$
|
3,119,291
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
Petroleum
|
|
$
|
|
|
$
|
|
|
Nitrogen Fertilizer
|
|
|
40,969
|
|
|
40,969
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
40,969
|
|
$
|
40,969
|
|
|
|
|
|
|
|
(20) Subsequent Events
Formation and Initial Public Offering of CVR Refining, LP
In contemplation of an initial public offering, CRLLC has formed CVR Refining Holdings, LLC, which in turn has formed CVR
Refining GP, LLC. CVR Refining Holdings, LLC and CVR Refining GP, LLC have formed CVR Refining, LP which has issued them a 100% limited partnership interest
and a non-economic general partner interest, respectively. CVR Refining Holdings, LLC has
47
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(20) Subsequent Events (Continued)
formed
CVR Refining, LLC and CRLLC contributed its petroleum and logistics subsidiaries, as well as its equity interests in Coffeyville Finance Inc., to CVR Refining, LLC in
October 2012.
On
October 1, 2012, CVR Refining, LP (the "Refining Partnership") filed a registration statement on Form S-1 to effect an initial public offering of its
common units representing limited partner interests (the "Offering"). The number of common units to be sold in the Offering has not yet been determined. The Offering is subject to numerous conditions
including, without limitation, market conditions, pricing, regulatory approvals, including clearance from the SEC, compliance with contractual obligations, and reaching agreements with the
underwriters and lenders.
Upon
consummation of the Offering, CVR will indirectly own the Refining Partnership's general partner and limited partnership interests in the form of common units. There can be no
assurance that any such offering will be consummated on the terms described in the registration statement or at all. Following the Offering, the Refining Partnership will have two types of partnership
interests outstanding:
-
-
common units representing limited partner interests, a portion of which the Refining Partnership will have sold in the
Offering; and
-
-
a general partner interest, which is not entitled to any distributions, and which will be held by the Refining
Partnership's general partner.
Following
the Offering, the Refining Partnership expects to make quarterly cash distributions to unitholders. The board of directors of the general partner will adopt a policy, which it
may change at any time, whereby distributions for each quarter will be in an amount equal to available cash generated in such quarter. Available cash will be determined by the board of directors of
the general partner.
The
general partner will manage and operate the Refining Partnership. Common unitholders will only have limited voting rights on matters affecting the Refining Partnership's business.
Common unitholders will have no right to elect the general partner or its directors on an annual or other continuing basis.
On October 23, 2012, CVR Refining LLC ("Refining LLC") and its wholly-owned subsidiary, Coffeyville
Finance Inc. (the "New Issuers"), completed a private offering of $500.0 million in aggregate principal amount of 6.500% Second Lien Senior Secured Notes due 2022
(the "2022 Notes"). The 2022 Notes were issued at par. Refining LLC received approximately $492.5 million of cash proceeds, net of the underwriting fees, but before deducting other
third-party fees and expenses associated with the offering. The 2022 Notes are secured by substantially the same assets that secure the outstanding Second Lien Notes, subject to exceptions, until such
time that the outstanding Second Lien Notes have been discharged in full.
A
portion of the net proceeds from the offering approximating $348.1 million were used to purchase approximately $323.0 million of the First Lien Notes pursuant to a tender
offer and to settle accrued interest of approximately $1.8 million through October 23, 2012 and to pay related fees and
48
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 30, 2012
(unaudited)
(20) Subsequent Events (Continued)
expenses.
Tendered notes were purchased at a premium of approximately $23.3 million in aggregate amount. CRLLC intends to use the remaining proceeds from the offering to either
(1) purchase the remaining $124.1 million of existing First Lien Notes, if any, tendered in the tender offer by November 5, 2012 or (2) redeem any remaining
non-tendered First Lien Notes on November 23, 2012 pursuant to a notice of redemption issued on October 23, 2012. Any remaining proceeds will be used for general corporate
purposes.
As
a result of these transactions, a write-off of previously deferred financing charges estimated at approximately $8.4 million will be recorded in the fourth quarter
of 2012. Additionally, the tendered and redeemed First Lien Notes have an unamortized original issuance premium of approximately $6.6 million, which will reduce the loss on extinguishment of
debt recorded in the fourth quarter. The total premiums expected to be paid in conjunction with both the tender offer and the redemption of the First Lien Notes are anticipated to be approximately
$31.7 million. This will be recorded as a loss on extinguishment of debt in the fourth quarter of 2012.
The
debt issuance costs of the 2022 Notes will be amortized over the term of the 2022 Notes as interest expense using the effective-interest amortization method. The 2022 Notes mature on
November 1, 2022, unless earlier redeemed or repurchased by the New Issuers. Interest is payable on the 2022 Notes semi-annually on May 1 and November 1 of each year,
commencing on May 1, 2013.
On October 26, 2012, the Board of Directors of the Partnership's general partner declared a cash distribution for the third
quarter of 2012 to the Partnership's unitholders of $0.496 per common unit. The cash distribution will be paid on November 14, 2012 to unitholders of record at the close of business on
November 7, 2012.
The Wynnewood refinery began turnaround maintenance in the fourth quarter of 2012. The Company expects to incur approximately
$100.0 million of expenses during 2012 related to the Wynnewood refinery's turnaround. The Wynnewood refinery has incurred $13.4 million of turnaround costs in the nine months ended
September 30, 2012. It is anticipated that the downtime associated with the Wynnewood refinery turnaround will approximate 50 to 55 days and will significantly impact the revenue for the
fourth quarter of 2012.
The nitrogen fertilizer facility's previously scheduled major turnaround began on October 3, 2012 with ammonia production
resuming on October 23, 2012 and UAN production resuming on October 25, 2012. Operating income is impacted negatively by both the expenses associated with the scheduled turnaround and
the lost revenue the Partnership would have generated had the nitrogen fertilizer plant not been shut down. Turnaround expenses are recognized as incurred as a component of direct operating expenses.
As of September 30, 2012, $0.2 million of turnaround expenses had been incurred. It is estimated that approximately $4.7 million of expenses were incurred in October 2012
associated with the turnaround.
49
Table of Contents