NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(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.
CVR
is a diversified holding company primarily engaged in the petroleum refining and nitrogen fertilizer manufacturing industries through its holdings in CVR Refining, LP ("CVR
Refining" or the "Refining Partnership") and CVR Partners, LP ("CVR Partners" or the "Nitrogen Fertilizer Partnership"). The Refining Partnership is an independent petroleum refiner and
marketer of high value transportation fuels. The Nitrogen Fertilizer Partnership produces nitrogen fertilizers in the form of ammonia and UAN. The Company reports in two business segments: the
petroleum segment (the operations of CVR Refining) and the nitrogen fertilizer segment (the operations of CVR Partners).
CVR's
common stock is listed on the NYSE under the symbol "CVI." On May 7, 2012, IEP Energy LLC and certain of its affiliates (collectively, "IEP") announced that they had
acquired control of CVR pursuant to a tender offer for all of the Company's common stock (the "IEP Acquisition"). As of June 30, 2013, IEP owned approximately 82% of all of the outstanding
shares of CVR. Prior to the IEP Acquisition, the Company was owned 100% by the public. Pursuant to the Transaction Agreement (the "Transaction Agreement") as a result of the IEP Acquisition, the
settlement terms of all employee restricted share awards were modified. See further discussion in Note 3 ("Share-Based Compensation").
On April 13, 2011, the Nitrogen Fertilizer Partnership completed its initial public offering of 22,080,000 common units (the
"Nitrogen Fertilizer Partnership IPO") priced at $16.00 per unit. The common units, which are listed on the NYSE, began trading on April 8, 2011 under the symbol "UAN". In connection with the
Nitrogen Fertilizer 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 Nitrogen
Fertilizer Partnership at the time of the Nitrogen Fertilizer Partnership IPO and through May 27, 2013.
On
May 28, 2013, Coffeyville Resources, LLC ("CRLLC") completed a registered public offering (the "Secondary Offering") whereby it sold 12,000,000 Nitrogen Fertilizer
Partnership common units to the public at a price of $25.15 per unit. Additionally, the underwriters were granted an option to purchase 1,800,000 common units at the public offering price, which
expired unexercised at the end of the option period. The net proceeds to CRLLC from the Secondary Offering were approximately $292.6 million, after deducting approximately $9.2 million
in underwriting discounts and commissions. The Nitrogen Fertilizer Partnership did not receive any of the proceeds from the sale of common units by CRLLC. In connection with the Secondary Offering,
the Nitrogen Fertilizer Partnership incurred approximately $0.5 million in offering costs.
Subsequent
to the closing of the Secondary Offering and as of June 30, 2013, the Nitrogen Fertilizer Partnership had 73,074,945 common units outstanding, consisting of 34,154,945
common units owned by the public, representing approximately 47% of the total Nitrogen Fertilizer Partnership units, and 38,920,000 common units owned by CRLLC, representing approximately 53% of the
total Nitrogen Fertilizer Partnership units. In addition, CRLLC owns 100% of the Nitrogen Fertilizer Partnership's
11
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(1) Organization and History of the Company and Basis of Presentation (Continued)
general
partner, CVR GP, LLC, which only holds a non-economic general partner interest. The noncontrolling interest reflected on the Condensed Consolidated Balance Sheets of CVR is
impacted by the net income of, and distributions from, the Nitrogen Fertilizer Partnership.
The
Nitrogen Fertilizer Partnership has adopted a policy pursuant to which the Nitrogen Fertilizer 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 Nitrogen Fertilizer Partnership's general partner following the end of such quarter. The partnership agreement does
not require that the Nitrogen Fertilizer Partnership make cash distributions on a quarterly basis or at all, and the board of
directors of the general partner of the Nitrogen Fertilizer Partnership can change the Nitrogen Fertilizer Partnership's distribution policy at any time.
The
Nitrogen Fertilizer 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 Nitrogen Fertilizer Partnership. The Nitrogen Fertilizer Partnership's general partner, CVR GP, LLC, manages the operations and activities of the Nitrogen Fertilizer
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 are made by CRLLC as the sole member of the general partner and not by the board of directors of the general partner. The
members of the board of directors of the general partner are not elected by the common unitholders and are not subject to re-election on a regular basis. The officers of the general partner manage the
day-to-day affairs of the business of the Nitrogen Fertilizer Partnership. CVR, the Nitrogen Fertilizer Partnership, their respective subsidiaries and the general partner are parties to a number of
agreements to regulate certain business relations between them. Certain of these agreements were amended in connection with the Nitrogen Fertilizer Partnership IPO.
In contemplation of an initial public offering, in September 2012, CRLLC formed CVR Refining Holdings, LLC ("CVR Refining
Holdings"), which in turn formed CVR Refining GP, LLC. CVR Refining Holdings and CVR Refining GP, LLC formed the Refining Partnership, which issued them a 100% limited
partnership interest and a non-economic general partner interest, respectively. CVR Refining Holdings formed CVR Refining, LLC ("Refining LLC") and CRLLC contributed its petroleum and
logistics subsidiaries, as well as its equity interests in Coffeyville Finance Inc. ("Coffeyville Finance") to Refining LLC in October 2012. CVR Refining Holdings contributed
Refining LLC to the Refining Partnership in December 2012.
On
January 23, 2013, the Refining Partnership completed the initial public offering of its common units representing limited partner interests (the "Refining Partnership IPO").
The Refining Partnership sold 24,000,000 common units to the public at a price of $25.00 per unit. Additionally, on January 30, 2013, the Refining Partnership sold an additional 3,600,000
common units to the public at a price of $25.00 per common unit in connection with the underwriters' exercise of their option to purchase additional common units. The common units, which are listed on
the NYSE, began trading on January 17, 2013 under the symbol "CVRR." In connection with the Refining Partnership IPO, the Company recorded a noncontrolling interest for the common units sold
into the public market which
12
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(1) Organization and History of the Company and Basis of Presentation (Continued)
represented
an approximate 19% interest in the Refining Partnership at the time of the Refining Partnership IPO. Prior to the Refining Partnership IPO, CVR owned 100% of the Refining Partnership and
net income earned during this period was fully attributable to the Company.
On
May 20, 2013, the Refining Partnership completed an underwritten offering (the "Underwritten Offering") by selling 12,000,000 common units to the public at a price of $30.75
per unit. American Entertainment Properties Corporation ("AEPC"), an affiliate of Icahn Enterprises LP, also purchased an additional 2,000,000 common units at the public offering price in a
privately negotiated transaction with a subsidiary of CVR Energy, which was completed on May 29, 2013. In connection with the Underwritten Offering, on June 10, 2013, the Refining
Partnership sold an additional 1,209,236 common units to the public at a price of $30.75 per unit in connection with a partial exercise by the underwriters of their option to purchase additional
common units. The transactions described in this paragraph are collectively referred to as the "Transactions." In connection with the Transactions, the Refining Partnership paid approximately
$12.2 million in underwriting fees and approximately $0.4 million in offering costs.
The
Refining Partnership utilized proceeds of approximately $394.0 million from the Underwritten Offering (including the underwriters' option) to redeem 13,209,236 common units
from CVR Refining Holdings, an indirect wholly-owned subsidiary of CVR Energy. The net proceeds to a subsidiary of CVR Energy from the sale of 2,000,000 common units to AEPC were approximately
$61.5 million. The Refining Partnership did not receive any of the proceeds from the sale of common units by CVR Energy to AEPC.
Subsequent
to the closing of the Transactions and as of June 30, 2013, the Refining Partnership had 147,600,000 common units outstanding, consisting of 42,809,236 common units
owned by the public representing approximately 29% of the total Refining Partnership units (including 6,000,000 units owned by affiliates of Icahn Enterprises representing 4% of the total Refining
Partnership units) and 104,790,764 common units owned by CVR Refining Holdings, representing approximately 71% of the total Refining Partnership units. In addition, CVR Refining Holdings, an indirect
wholly-owned subsidiary of CVR Energy, owns 100% of the Refining Partnership's general partner, CVR Refining GP, LLC, which holds a non-economic general partner interest. The
noncontrolling interest reflected on the Condensed Consolidated Balance Sheets of CVR is impacted by the net income of, and distributions from, the Refining Partnership.
The
Refining Partnership's general partner, CVR Refining GP, LLC, manages the Refining Partnership's activities subject to the terms and conditions specified in the
Refining Partnership's partnership agreement. The Refining Partnership's general partner is owned by CVR Refining Holdings. The operations of its general partner, in its capacity as general partner
are managed by its board of directors. Actions by its general partner that are made in its individual capacity are made by CVR Refining Holdings as the sole member of the Refining Partnership's
general partner and not by the board of directors of its general partner. The members of the board of directors of the Refining
Partnership's general partner are not elected by the Refining Partnership's unitholders and are not subject to re-election on a regular basis. The officers of the general partner manage the day-to-day
affairs of the business of the Refining Partnership.
13
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(1) Organization and History of the Company and Basis of Presentation (Continued)
The
Refining Partnership has adopted a policy pursuant to which it 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 Refining Partnership's general partner following the end of such quarter. The partnership agreement does not require that the Refining Partnership make cash
distributions on a quarterly basis or at all, and the board of directors of the general partner of the Refining Partnership can change the distribution policy at any time.
The
Refining Partnership entered into a services agreement on December 31, 2012, pursuant to which the Refining Partnership and its general partner obtain certain management and
other services from CVR Energy. In addition, by virtue of the fact that the Refining Partnership is a controlled affiliate of CVR Energy, the Refining Partnership is bound by an omnibus agreement
entered into by CVR Energy, CVR Partners and the general partner of CVR Partners, pursuant to which the Refining Partnership may not engage in, whether by acquisition or otherwise, the production,
transportation or distribution, on a wholesale basis, of fertilizer in the contiguous United States, or a fertilizer restricted business, for so long as CVR Energy and certain of its affiliates
continue to own at least 50% of the Nitrogen Fertilizer Partnership's outstanding units.
The accompanying 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 Securities and Exchange Commission (the "SEC"). The condensed consolidated financial statements include the accounts of CVR
and its majority-owned direct and indirect subsidiaries including the Nitrogen Fertilizer Partnership, the Refining Partnership and their respective subsidiaries. The ownership interests of
noncontrolling investors in CVR's 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 condensed consolidated financial statements should be read in conjunction with the December 31, 2012 audited consolidated financial statements and notes thereto included in
CVR's Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the SEC on March 14, 2013.
The
Nitrogen Fertilizer Partnership and the Refining Partnership are both consolidated based upon the fact that their general partners are owned by CVR and, therefore, CVR has the
ability to control their activities. The general partners of the Nitrogen Fertilizer Partnership and the Refining Partnership manage their respective operations and activities subject to the terms and
conditions specified in their respective partnership agreements. The operations of each general partner in its capacity as general partner are managed by its board of directors. The limited rights of
the common unitholders of the Nitrogen Fertilizer Partnership and the Refining Partnership are demonstrated by the fact that the common unitholders have no right to elect either general partner or
either general partner's directors on an annual or other continuing basis. Each 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 CVR) voting together as a single class. Actions by the general partner that are made in its individual
capacity are made by the CVR subsidiary that serves as
14
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(1) Organization and History of the Company and Basis of Presentation (Continued)
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 both general partners are also officers of CVR. Based upon the general partner's role and rights as afforded by the partnership agreements 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 Nitrogen Fertilizer Partnership and the Refining
Partnership.
In
the opinion of the Company's management, the accompanying 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 June 30, 2013 and December 31, 2012, the results of operations and comprehensive income for the three and six
month periods ended June 30, 2013 and 2012, changes in equity for the six month period ended June 30, 2013 and cash flows of the Company for the six month periods ended June 30,
2013 and 2012.
Results
of operations and cash flows for the interim periods presented are not necessarily indicative of the results that will be realized for the year ending December 31, 2013 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.
(2) Recent Accounting Pronouncements
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 GAAP with those prepared under
IFRS. On January 31, 2013, the FASB issued ASU No. 2013-01, "
Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities"
("ASU 2013-01"). ASU 2013-01 limits the scope of the new balance sheet offsetting disclosures to derivatives, repurchase agreements and securities lending transactions. Both standards are effective
for interim and annual periods beginning January 1, 2013 and are to be applied retrospectively. The Company adopted these standards as of January 1, 2013. The adoption of these standards
expanded the Company's condensed consolidated financial statement footnote disclosures.
In
February 2013, the FASB issued ASU No. 2013-02,
"Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive
Income"
("ASU 2013-02"). ASU 2013-02 requires the Company to present information about reclassification adjustments from accumulated other comprehensive income in the financial
statements in a single footnote or parenthetically on the face of the financial statements based on the source and the income statement line items affected by the reclassification. The standard is
effective for interim and annual periods beginning January 1, 2013 and is to be applied prospectively. The Company adopted this standard as of January 1, 2013. The adoption of this
standard did not materially expand the Company's condensed consolidated financial statement footnote disclosures.
15
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(3) Share-Based Compensation
CVR has a Long-Term Incentive Plan ("LTIP"), which permits the grant of options, stock appreciation rights, restricted stock,
restricted stock units, dividend equivalent rights, share awards and performance awards (including performance share units, performance units and performance-based restricted stock). As of
June 30, 2013, only grants of restricted stock units under the LTIP remain outstanding. Individuals who are eligible to receive awards and grants under the LTIP include the Company's employees,
officers, consultants, advisors and directors. The LTIP authorizes a share pool of 7,500,000 shares of the Company's common stock, 1,000,000 of which may be issued in respect of incentive stock
options. A summary of the principal features of the LTIP is provided below.
A summary of restricted stock units grant activity and changes during the six months ended June 30, 2013 is presented below:
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average
Grant-Date
Fair Value
|
|
Non-vested at January 1, 2013
|
|
|
1,145,611
|
|
$
|
23.24
|
|
Granted
|
|
|
2,600
|
|
|
54.75
|
|
Vested
|
|
|
(3,198
|
)
|
|
27.51
|
|
Forfeited
|
|
|
(15,089
|
)
|
|
22.76
|
|
|
|
|
|
|
|
Non-vested at June 30, 2013
|
|
|
1,129,924
|
|
$
|
23.31
|
|
|
|
|
|
|
|
Through
the LTIP, restricted shares have been granted to employees of the Company. Prior to the change of control as discussed in Note 1, 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 in May 2012 triggered a modification to outstanding awards under the LTIP. Pursuant to the Transaction Agreement, all restricted
shares scheduled to vest in 2012 were converted to restricted stock units whereby the recipient received cash settlement of the offer price of $30.00 per share in cash plus one non-transferable
contingent cash payment ("CCP") upon vesting. Restricted shares scheduled to vest in 2013, 2014 and 2015 were converted to restricted stock units whereby the awards will be settled in cash upon
vesting in an amount equal to 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 the three and
six months ended June 30, 2012. 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-classified awards to liability-classified awards.
16
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(3) Share-Based Compensation (Continued)
In
December 2012 and subsequent periods, restricted stock units were granted to certain employees of CVR. The non-vested restricted stock units are scheduled to vest over three years,
with one-third of the award vesting each year on the anniversary of the grant date, with the exception of awards granted to certain executive officers that vest over one year. Each restricted stock
unit represents the right to receive, upon vesting, a cash payment equal to (a) the fair market value of one share of the Company's common stock, plus (b) the cash value of all dividends
declared and paid by the Company per share of the Company's common stock from the grant date to and including the vesting date. The awards, which are liability-classified, will be remeasured at each
subsequent reporting date until they vest.
Additionally,
the Company approved a discretionary award of up to 62,920 restricted stock units to Mr. Lipinski, Chief Executive Officer and President of the Company, on or before
December 31, 2013. This discretionary award remains subject to the review and recommendation of the Compensation Committee and approval of the board of directors of the Company, and is
conditioned on Mr. Lipinski continuing to be employed by the Company through December 31, 2013. As such, no expense related to this discretionary award was recorded during the three and
six months ended June 30, 2013. To the extent awarded, the discretionary award will vest immediately, and include dividend equivalent rights for the time period commencing on
December 28, 2012 through the date of the award.
As
of June 30, 2013, there was approximately $13.4 million of total unrecognized compensation cost related to restricted stock units and associated dividends to be
recognized over a weighted-average period of approximately 0.5 years. Total compensation expense for the three months ended June 30, 2013 and 2012 was approximately $3.7 million
and $17.3 million, respectively, related to the LTIP. Total compensation expense for the six months ended June 30, 2013 and 2012 was approximately $9.1 million and
$20.8 million, respectively, related to the LTIP. As of June 30, 2013 and December 31, 2012, the Company has a liability of $28.6 million and $19.5 million,
respectively, for unvested restricted stock unit awards and associated dividends, which is recorded in personnel accruals on the Condensed Consolidated Balance Sheets.
In April 2011, the board of directors of CVR Partners' 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 (1) employees of the Nitrogen Fertilizer Partnership and its subsidiaries,
(2) employees of its general partner, and (3) members of the board of directors of its general partner. 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 Nitrogen Fertilizer Partnership and its general partner and to members of the board of
directors of its general partner. In December 2012, the board of directors of the general partner of the Nitrogen Fertilizer Partnership approved an amendment to modify the terms of certain phantom
unit awards previously granted to employees of the Nitrogen Fertilizer Partnership and its subsidiaries. Prior to the amendment, the phantom units, when granted, were valued at the closing market
price of the Nitrogen
17
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(3) Share-Based Compensation (Continued)
Fertilizer
Partnership's common units on the date of issuance and amortized to compensation expense on a straight-line basis over the vesting period of the units. These units generally vest over a
three-year period.
The
amendment triggered a modification to the awards by providing that the phantom units would be settled in cash rather than common units of the Nitrogen Fertilizer Partnership. For
awards vesting subsequent to the amendment, the awards will be remeasured at each subsequent reporting date until they vest. As a result of the modification of the awards to employees of the Nitrogen
Fertilizer Partnership, the classification changed from an equity-classified award to a liability-classified award.
A
summary of common units and phantom units (collectively "units") activity and changes under the CVR Partners LTIP during the six months ended June 30, 2013 is presented below:
|
|
|
|
|
|
|
|
|
|
Units
|
|
Weighted-Average
Grant-Date
Fair Value
|
|
Non-vested at January 1, 2013
|
|
|
201,812
|
|
$
|
23.70
|
|
Granted
|
|
|
|
|
|
|
|
Vested
|
|
|
(16,886
|
)
|
|
19.74
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at June 30, 2013
|
|
|
184,926
|
|
$
|
24.06
|
|
|
|
|
|
|
|
As
of June 30, 2013, there was approximately $2.1 million of total unrecognized compensation cost related to the awards under the CVR Partners LTIP to be recognized over a
weighted-average period of 1.2 years. Compensation expense recorded for the three months ended June 30, 2013 and 2012 related to the awards under the CVR Partners LTIP was approximately
$0.6 million and $0.5 million, respectively. Compensation expense recorded for the six months ended June 30, 2013 and 2012 related to the awards under the CVR Partners LTIP was
approximately $1.2 million and $1.1 million, respectively. As of June 30, 2013 and December 31, 2012, the Company has a liability of $0.4 million and
$0.2 million, respectively, for unvested phantom unit awards, which is recorded in personnel accruals on the Condensed Consolidated Balance Sheets.
In connection with the Refining Partnership IPO, on January 16, 2013, the board of directors of the general partner of the
Refining Partnership adopted the CVR Refining, LP Long-Term Incentive Plan (the "CVR Refining LTIP"). Individuals who are eligible to receive awards under the CVR Refining LTIP include
employees, officers, consultants and directors of CVR Refining and its general partner and their respective subsidiaries and parents. The CVR Refining LTIP provides for the grant of options, unit
appreciation rights, restricted units, phantom units, unit awards, substitute awards, other-unit based awards, cash awards, performance awards, and distribution equivalent rights, each in respect of
common units. The maximum number of common units issuable under the CVR Refining LTIP is 11,070,000. As of June 30, 2013, no awards have been granted under the plan.
18
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(4) Inventories
Inventories consist primarily of domestic and foreign crude oil, blending stock and components, work-in-progress, fertilizer products, and refined fuels and by-products. Inventories are
valued at the lower of the first-in, first-out ("FIFO") cost or market for fertilizer products, refined fuels and by-products for all periods presented. Refinery unfinished and finished products
inventory values were determined using the ability-to-bear process, whereby raw materials and production costs are allocated to work-in-process and finished products based on their relative fair
values. Other inventories, including other raw materials, spare parts, and supplies, are valued at the lower of moving-average cost, which approximates FIFO, or market. The cost of inventories
includes inbound freight costs.
Inventories
consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2013
|
|
December 31,
2012
|
|
|
|
(in millions)
|
|
Finished goods
|
|
$
|
317.4
|
|
$
|
275.2
|
|
Raw materials and precious metals
|
|
|
170.3
|
|
|
164.3
|
|
In-process inventories
|
|
|
56.8
|
|
|
42.8
|
|
Parts and supplies
|
|
|
44.3
|
|
|
45.8
|
|
|
|
|
|
|
|
|
|
$
|
588.8
|
|
$
|
528.1
|
|
|
|
|
|
|
|
(5) Property, Plant, and Equipment
A summary of costs for property, plant, and equipment is as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2013
|
|
December 31,
2012
|
|
|
|
(in millions)
|
|
Land and improvements
|
|
$
|
33.3
|
|
$
|
31.0
|
|
Buildings
|
|
|
41.3
|
|
|
40.6
|
|
Machinery and equipment
|
|
|
2,261.0
|
|
|
2,089.5
|
|
Automotive equipment
|
|
|
16.4
|
|
|
15.0
|
|
Furniture and fixtures
|
|
|
14.0
|
|
|
13.7
|
|
Leasehold improvements
|
|
|
2.5
|
|
|
2.5
|
|
Railcars
|
|
|
8.0
|
|
|
2.5
|
|
Construction in progress
|
|
|
103.3
|
|
|
189.2
|
|
|
|
|
|
|
|
|
|
|
2,479.8
|
|
|
2,384.0
|
|
Accumulated depreciation
|
|
|
669.9
|
|
|
601.1
|
|
|
|
|
|
|
|
Total net, property, plant and equipment
|
|
$
|
1,809.9
|
|
$
|
1,782.9
|
|
|
|
|
|
|
|
Capitalized
interest recognized as a reduction in interest expense for the three months ended June 30, 2013 and 2012 totaled approximately $0.4 million and
$2.3 million, respectively. Capitalized interest recognized as a reduction in interest expense for the six months ended June 30, 2013 and 2012 totaled approximately $1.2 million
and $4.3 million, respectively. Land, buildings and equipment that are under a capital lease obligation had an original carrying value of approximately $25.1 million as of
19
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(5) Property, Plant, and Equipment (Continued)
June 30,
2013 and December 31, 2012. Amortization of assets held under capital leases is included in depreciation expense.
(6) Cost Classifications
Cost of product sold (exclusive of depreciation and amortization) includes cost of crude oil, other feedstocks, blendstocks, pet coke expense, renewable identification numbers ("RINs")
expense and freight and distribution expenses. Cost of product sold excludes depreciation and amortization of approximately $1.3 million and $0.9 million for the three months ended
June 30, 2013 and 2012,
respectively. For the six months ended June 30, 2013 and 2012, cost of product sold excludes depreciation and amortization of approximately $2.4 million and $1.6 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 $33.2 million and
$30.7 million for the three months ended June 30, 2013 and 2012, respectively. For the six months ended June 30, 2013 and 2012, direct operating expenses exclude depreciation and
amortization of approximately $65.7 million and $61.5 million, respectively.
Selling,
general and administrative expenses (exclusive of depreciation and amortization) consist primarily of legal expenses, treasury, accounting, marketing, human resources and
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 $0.6 million for the three months ended June 30, 2013 and 2012, respectively. For the six months ended June 30, 2013 and 2012, selling,
general and administrative expenses exclude depreciation and amortization of approximately $1.1 million and $1.2 million, respectively.
(7) Income Taxes
On May 19, 2012, CVR became a member of the consolidated federal tax group of 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
June 30, 2013, the Company has recorded a liability of $118.9 million for federal income taxes due to AEPC under the Tax Allocation Agreement. During the three months ended
June 30, 2013 the Company paid $54.0 million and $85.0 million for the first and second quarter estimated federal income tax payments, respectively, due 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 June 30, 2013, the Company had unrecognized tax benefits of approximately
$42.0 million, of which $17.0 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
20
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(7) Income Taxes (Continued)
months
are included in other long-term liabilities in the Condensed Consolidated Balance Sheets; 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 $1.1 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 June 30, 2013, 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, 2012 and in various individual states for the tax years ended December 31, 2008 through
December 31, 2012.
The
Company's effective tax rate for the three and six months ended June 30, 2013 was 26.8% and 28.5%, respectively, as compared to the Company's combined federal and state
expected statutory tax rate of 39.2%. The Company's effective tax rate for the three and six months ended June 30, 2013 is lower than the statutory rate primarily due to the reduction of income
subject to tax associated with the noncontrolling ownership interests of CVR Refining's and CVR Partners' earnings, as well as benefits for domestic production activities and state income tax credits.
The Company's effective tax rate for the three and six months ended June 30, 2012 was 35.5% and 35.3%, 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 six months ended June 30, 2012 was lower than the statutory rate primarily due to the reduction of income subject to tax
associated with the noncontrolling ownership interest of CVR Partners' earnings, as well as benefits for domestic production activities.
Prior
to the Refining Partnership IPO, CVR's deferred taxes were recorded based upon each separate component of the book versus tax basis difference of CVR's assets and liabilities,
including CVR Refining's assets and liabilities. Subsequent to the Refining Partnership IPO, deferred taxes related to the net book versus tax basis difference associated with the investment in CVR
Refining are recorded as a noncurrent deferred tax liability.
(8) Long-Term Debt
Long-term debt was as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2013
|
|
December 31,
2012
|
|
|
|
(in millions)
|
|
10.875% Senior Secured Notes, due 2017, net of unamortized discount of $1.8 million as of December 31, 2012
|
|
$
|
|
|
$
|
220.9
|
|
6.5% Senior Notes, due 2022
|
|
|
500.0
|
|
|
500.0
|
|
CRNF credit facility
|
|
|
125.0
|
|
|
125.0
|
|
Capital lease obligations
|
|
|
50.6
|
|
|
51.2
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
675.6
|
|
$
|
897.1
|
|
|
|
|
|
|
|
On April 6, 2010, CRLLC and its then wholly-owned subsidiary, Coffeyville Finance (together the "Issuers") completed a private
offering of $275.0 million aggregate principal amount of 9.0% First Lien
21
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(8) Long-Term Debt (Continued)
Senior
Secured Notes due 2015 (the "2010 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 "Old Notes"). The 2010 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. 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 ("Additional First Lien Notes" and
together with the 2010 First Lien Notes, the "First Lien Notes"). The Additional First Lien 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 $10.0 million for the Additional First Lien Notes was amortized to interest expense and other financing costs over the term of the
Additional First Lien Notes.
The
First Lien Notes were scheduled to mature on April 1, 2015, unless earlier redeemed or repurchased by the Issuers. See further discussion below related to the tender for and
subsequent redemption of all the outstanding First Lien Notes in the fourth quarter of 2012. The Second Lien Notes were scheduled to mature on April 1, 2017, unless earlier redeemed or
repurchased by the Issuers. On January 23, 2013, $253.0 million of the proceeds from the Refining Partnership's IPO were utilized to satisfy and discharge the indenture governing the
Second Lien Notes. The amounts were used to (i) repay the face amount of all $222.8 million aggregate principal amount of Second Lien Notes then outstanding, (ii) pay the
redemption premium of approximately $20.6 million and (iii) settle accrued interest with respect thereto in an amount of approximately $9.5 million. The repurchase of the Second
Lien Notes resulted in a loss on extinguishment of debt of approximately $26.1 million for the six months ended June 30, 2013, which includes the write-off of previously deferred
financing fees of $3.7 million and unamortized original issue discount of $1.8 million.
On October 23, 2012, Refining LLC and Coffeyville Finance completed a private offering of $500.0 million aggregate
principal amount of 6.5% 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 were secured by substantially the same assets that secured
the then outstanding Second Lien Notes, subject to exceptions, until such time that the outstanding Second Lien Notes were satisfied and discharged in full, which occurred on January 23, 2013.
The 2022 Notes are fully and unconditionally guaranteed by CVR Refining and each of Refining LLC's existing domestic subsidiaries on a joint and several basis. CVR Refining has no independent
assets or operations and Refining LLC is a 100% owned finance subsidiary of CVR Refining. Prior to the satisfaction and discharge of the Second Lien Notes, which occurred on January 23,
2013, the 2022 Notes were also guaranteed by CRLLC. CVR Energy, the Nitrogen Fertilizer Partnership and Coffeyville Resources Nitrogen Fertilizers, LLC ("CRNF"), a wholly owned subsidiary of
the Nitrogen Fertilizer Partnership, are not guarantors.
A
portion of the net proceeds from the offering of the 2022 Notes 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
22
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(8) Long-Term Debt (Continued)
related
fees and expenses. Tendered notes were purchased at a premium of approximately $23.2 million in aggregate amount. CRLLC used the remaining proceeds from the offering to redeem the
remaining $124.1 million of outstanding First Lien Notes and to settle accrued interest of approximately $1.6 million through November 23, 2012. Redeemed notes were purchased at a
premium of approximately $8.4 million in aggregate amount.
Previously
deferred financing charges and unamortized original issuance premium related to the First Lien Notes totaled approximately $8.1 million and $6.3 million,
respectively. As a result of the repayment of the First Lien Notes, a loss on extinguishment of debt of $33.4 million was recorded in the fourth quarter of 2012, which included the total
premiums paid of $31.6 million and write-off of previously deferred financing charges of $8.1 million, partially offset by the write-off of the unamortized original issuance premium of
$6.3 million.
The
debt issuance costs of the 2022 Notes totaled approximately $8.7 million and are being amortized over the term of the 2022 Notes as interest expense using the
effective-interest amortization method. On May 29, 2013, Refining LLC filed a registration statement on Form S-4 to satisfy its obligations contained in the registration right
agreement entered into in connection with the issuance of the 2022 Notes. The Refining Partnership has incurred approximately $0.3 million of debt registration costs related to this
registration, which are being 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 issuers. Interest is payable on the 2022 Notes semi-annually on May 1 and
November 1 of each year, commencing on May 1, 2013.
The
2022 Notes contain 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, the ability to dispose of assets, the ability to make certain payments on contractually subordinated debt, the ability to merge, consolidate with or into another entity and the
ability to enter into certain affiliate transactions. The 2022 Notes provide that the Refining Partnership can make distributions to holders of its common units provided, among other things, it has a
minimum fixed charge coverage ratio and there is no default or event of default under the 2022 Notes. As of June 30, 2013, the Refining Partnership was in compliance with the covenants
contained in the 2022 Notes.
At
June 30, 2013, the estimated fair value of the 2022 Notes was approximately $490.0 million. 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.
On December 20, 2012, CRLLC, the Refining Partnership, Refining LLC and each of the operating subsidiaries of
Refining LLC (collectively, the "Credit Parties") entered into an amended and restated ABL credit agreement (the "Amended and Restated ABL Credit Facility") with a group of lenders and Wells
Fargo Bank, National Association ("Wells Fargo"), as administrative agent and collateral agent. The Amended and Restated ABL Credit Facility, which replaced the prior ABL credit facility, is scheduled
to mature on December 20, 2017. Under the amended and restated facility, the
23
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(8) Long-Term Debt (Continued)
Refining
Partnership assumed the Company's position as borrower and the Company's obligations under the facility upon the closing of the Refining Partnership's IPO on January 23, 2013.
The
Amended and Restated ABL Credit Facility is a senior secured asset based revolving credit facility in an aggregate principal amount of up to $400.0 million with an incremental
facility, which permits an increase in borrowings of up to $200.0 million subject to receipt of additional lender commitments and certain other conditions. The proceeds of the loans may be used
for capital expenditures and working capital and general corporate purposes of the Credit Parties and their subsidiaries. The Amended and Restated ABL Credit Facility provides for loans and letters of
credit in an amount up to the aggregate availability under the facility, subject to meeting certain borrowing base conditions, with sub-limits of 10% of the total facility commitment for swingline
loans and 90% of the total facility commitment for letters of credit.
Borrowings
under the Amended and Restated ABL Credit Facility bear interest at either a base rate or LIBOR plus an applicable margin. The applicable margin is (i) (a) 1.75% for
LIBOR borrowings and (b) 0.75% for prime rate borrowings, in each case if quarterly average excess availability exceeds 50% of the lesser of the borrowing base and the total commitments and
(ii) (a) 2.00% for LIBOR borrowings and (b) 1.00% for prime rate borrowings, in each case if quarterly average excess availability is less than or equal to 50% of the lesser of
the borrowing base and the total commitments. The Amended and Restated ABL Credit Facility also requires the payment of customary fees, including an unused line fee of (i) 0.40% if the daily
average amount of loans and letters of credit outstanding is less than 50% of the lesser of the borrowing base and the total commitments and (ii) 0.30% if the daily average amount of loans and
letters of credit outstanding is equal to or greater than 50% of the lesser of the borrowing base and the total commitments. The Refining Partnership will also be required to pay customary letter of
credit fees equal to, for standby letters of credit, the applicable margin on LIBOR loans on the maximum amount available to be drawn under and, for commercial letters of credit, the applicable
margin on LIBOR loans less 0.50% on the maximum amount available to be drawn under, and customary facing fees equal to 0.125% of the face amount of, each letter of credit.
The
Amended and Restated ABL Credit Facility also contains customary covenants for a financing of this type that limit the ability of the Credit Parties and their respective subsidiaries
to, among other things, incur liens, engage in a consolidation, merger, purchase or sale of assets, pay dividends, incur indebtedness, make advances, investment and loans, enter into affiliate
transactions, issue equity interests, or create subsidiaries and unrestricted subsidiaries. The amended and restated facility also contains a fixed charge coverage ratio financial covenant, as defined
therein. The Credit Parties were in compliance with the covenants of the Amended and Restated ABL Credit Facility as of June 30, 2013.
Lender
and other third-party costs associated with the Amended and Restated ABL Credit Facility of $2.1 million were deferred and are being amortized to interest expense and other
financing costs using a straight-line method over the term of the amended facility. In accordance with guidance provided by the FASB regarding the modification of revolving debt arrangements, a
portion of the unamortized deferred financing costs associated with the prior ABL credit facility of approximately $2.8 million will continue to be amortized over the term of the Amended and
Restated ABL Credit Facility.
24
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(8) Long-Term Debt (Continued)
As
of June 30, 2013, the Refining Partnership and its subsidiaries had availability under the Amended and Restated ABL Credit Facility of $372.9 million and had letters of
credit outstanding of approximately $27.1 million. There were no borrowings outstanding under the Amended and Restated ABL Credit Facility as of June 30, 2013.
On April 13, 2011, CRNF, as borrower, and the Nitrogen Fertilizer Partnership, as guarantor, entered into a 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
June 30, 2013. There is no scheduled amortization of the credit facility, which matures in April 2016. The carrying value of the Nitrogen Fertilizer Partnership's debt approximates fair value.
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 perfected, first
priority security interest (subject to certain customary exceptions) in substantially all of the assets of CRNF and the Nitrogen Fertilizer Partnership.
The
credit facility requires the Nitrogen Fertilizer 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, the ability to dispose of assets, the
ability to make restricted payments, investments and acquisitions, or enter into sale-leaseback transactions and affiliate transactions. The credit facility provides that the Nitrogen Fertilizer
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 June 30, 2013, CRNF was in compliance with the covenants contained in the credit
facility and there were no borrowings outstanding under the credit facility.
As a result of the acquisition of the Wynnewood refinery, the Refining Partnership acquired certain lease assets and assumed related
capital lease obligations related to Magellan Pipeline Terminals, L.P. and Excel Pipeline LLC. The underlying assets and related depreciation were included in property, plant and
equipment. The capital lease relates to a sales-lease back agreement with Sunoco Pipeline, L.P. for its membership interest in the Excel Pipeline. The lease has 196 months remaining
through September 2029. The financing agreement relates to the Magellan Pipeline terminals, bulk terminal and loading facility. The lease has 195 months remaining and will expire in September
2029.
25
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(9) Dividends
On January 24, 2013, the board of directors of the Company adopted a quarterly cash dividend policy. Subject to declaration by its board of directors, CVR Energy's initial
quarterly dividend is expected to be $0.75 per share, or $3.00 per share on an annualized basis, which the Company began paying in the second quarter of 2013. Additionally, the Company declared and
paid two special cash dividends during the six months ended June 30, 2013.
The
following is a summary of the quarterly and special dividends paid to stockholders during the six months ended June 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 19,
2013
|
|
May 17,
2013
|
|
June 10,
2013
|
|
Total Dividends
Paid in 2013
|
|
|
|
($ in millions, expect per share amounts)
|
|
Dividend type
|
|
|
Special
|
|
|
Quarterly
|
|
|
Special
|
|
|
|
|
Amount paid IEP
|
|
$
|
391.6
|
|
$
|
53.4
|
|
$
|
462.8
|
|
$
|
907.8
|
|
Amounts paid to public stockholders
|
|
|
86.0
|
|
|
11.7
|
|
|
101.6
|
|
|
199.3
|
|
|
|
|
|
|
|
|
|
|
|
Total amount paid
|
|
$
|
477.6
|
|
$
|
65.1
|
|
$
|
564.4
|
|
$
|
1,107.1
|
|
|
|
|
|
|
|
|
|
|
|
Per common share
|
|
$
|
5.50
|
|
$
|
0.75
|
|
$
|
6.50
|
|
$
|
12.75
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding
|
|
|
86.8
|
|
|
86.8
|
|
|
86.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10) 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 June 30,
|
|
For the Six Months
Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
(in millions, except per share data)
|
|
Net income attributable to CVR Energy stockholders
|
|
$
|
183.4
|
|
$
|
154.7
|
|
$
|
348.4
|
|
$
|
129.5
|
|
Weighted-average number of shares of common stock outstanding
|
|
|
86.8
|
|
|
86.8
|
|
|
86.8
|
|
|
86.8
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested common stock
|
|
|
|
|
|
1.6
|
|
|
|
|
|
1.7
|
|
Stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares of common stock outstanding assuming dilution
|
|
|
86.8
|
|
|
88.4
|
|
|
86.8
|
|
|
88.5
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
2.11
|
|
$
|
1.78
|
|
$
|
4.01
|
|
$
|
1.49
|
|
Diluted earnings per share
|
|
$
|
2.11
|
|
$
|
1.75
|
|
$
|
4.01
|
|
$
|
1.46
|
|
All
outstanding stock options totaling 22,900 were exercised in May 2012. There were no dilutive awards outstanding during the three and six months ended June 30, 2013 as all
unvested awards under the LTIP were liability-classified awards. See Note 3 ("Share-Based Compensation").
26
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(11) 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 millions)
|
|
Six months ending December 31, 2013
|
|
$
|
4.8
|
|
$
|
99.2
|
|
Year Ending December 31,
|
|
|
|
|
|
|
|
2014
|
|
|
9.1
|
|
|
112.9
|
|
2015
|
|
|
7.7
|
|
|
101.2
|
|
2016
|
|
|
6.7
|
|
|
94.0
|
|
2017
|
|
|
4.0
|
|
|
92.8
|
|
Thereafter
|
|
|
8.0
|
|
|
951.4
|
|
|
|
|
|
|
|
|
|
$
|
40.3
|
|
$
|
1,451.5
|
|
|
|
|
|
|
|
-
(1)
-
This
amount includes approximately $979.8 million payable ratably over eighteen years pursuant to petroleum transportation service agreements between
CRRM and TransCanada Keystone Pipeline, LP ("TransCanada"). Under the agreements, CRRM receives transportation of at least 25,000 barrels per day of crude oil with a delivery point at Cushing,
Oklahoma for a term of twenty 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 which expire at various dates. For the three months ended
June 30, 2013 and 2012, lease expense totaled approximately $2.2 million and $1.4 million, respectively. For the six months ended June 30, 2013 and 2012, lease expense
totaled approximately $4.5 million and $2.7 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.
On August 31, 2012, CRRM, 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. Under the Vitol Agreement, Vitol supplies the
petroleum business with crude oil and intermediation logistics, which helps to reduce the Refining Partnership's inventory position and mitigate crude oil pricing risk.
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
the expiration of the Initial Term or any Renewal Term.
27
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CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(11) Commitments and Contingencies (Continued)
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 other litigation matters is not expected to have a material adverse effect on the accompanying condensed consolidated financial statements. There can be no
assurance that management's beliefs or opinions with respect to liability for potential litigation matters are accurate.
In
May 2010, separate groups of plaintiffs (the "Anstine and Arrow cases") filed two lawsuits against CRRM and other defendants in state court in Oklahoma and Kansas. Both lawsuits were
removed to federal court and were then transferred to the Bankruptcy Court for the United States District Court for the District of Delaware. The Anstine and Arrow cases alleged the respective
plaintiffs sold crude oil to a group of companies, which generally are known as SemCrude or SemGroup (collectively, "Sem"), which later declared bankruptcy and that Sem did not pay such plaintiffs for
all of the crude oil purchased by Sem. Both lawsuits sought the same remedy, the imposition of a trust, an accounting and the return of crude oil or the proceeds therefrom. In February 2013, CRRM
agreed to a settlement in the Anstine and Arrow cases, which was finalized with the plaintiffs in June 2013, and CRRM has been dismissed with prejudice. The settlement did not have a material adverse
effect on the condensed consolidated financial statements.
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 IEP and certain of its affiliates. CVR believes it has meritorious defenses
and intends to vigorously defend against the suit. This amount has been fully accrued as of June 30, 2013.
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 IEP and certain of its affiliates. CVR believes it has meritorious defenses and intends to vigorously defend against
the suit. This amount has been fully accrued as of June 30, 2013.
On
December 17, 2012, Gary Community Investment Company, F/K/A The Gary-Williams Company and GWEC Holding Company, Inc. (referred to herein collectively as "Gary-Williams")
filed a lawsuit in the Supreme Court of New York, New York County (Gary Community Investment Co. v. CVR Energy, Inc., No. 654401/12) against CVR and CRLLC (referred to
collectively for purposes of this paragraph as "CVR"). The action arises out of claims relating to CVR's purchase of the
28
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CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(11) Commitments and Contingencies (Continued)
Wynnewood,
Oklahoma refinery pursuant to the Purchase and Sale Agreement entered into by the parties on November 2, 2011 (the "Purchase Agreement"). Specifically, CVR provided notice to
Gary-Williams that it sought indemnification for various breaches of the Purchase Agreement and subsequently made a claim notice for payment of the entire escrow property pursuant to the Escrow
Agreement by and among Gary-Williams, CRLLC, and the escrow agent, dated as of December 15, 2011. Gary-Williams, in its lawsuit, alleges that CVR breached the Purchase Agreement and the Escrow
Agreement, and is seeking a declaratory judgment that CVR's claims are without any legal basis, damages in an unspecified amount, and release of the full amount of the escrow property to
Gary-Williams.
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 reclassified and reassessed CRNF's nitrogen fertilizer plant for property tax purposes. The reclassification and 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 2009, $11.7 million
for the year ended December 31, 2010, $11.4 million for the year ended December 31, 2011, and $11.3 million for the year ended December 31, 2012. CRNF protested the
classification and resulting valuation for each of those years to the Kansas Court of Tax Appeals ("COTA"), followed by an appeal to the Kansas Court of Appeals. However, CRNF fully accrued and paid
the property taxes the county claimed were owed for the years ended December 31, 2008 through 2012.
On
February 25, 2013, Montgomery County and CRNF agreed to a settlement for tax years 2009 through 2012, which will lower CRNF's property taxes by about $10.5 million per
year for tax years 2013 through 2016 based on current mill levy rates. In addition, the settlement provides that Montgomery County will support CRNF's application before COTA for a ten year tax
exemption for the UAN expansion. Finally, the settlement provides that CRNF will continue its appeal of the 2008 reclassification and reassessment.
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 May 2008, in connection with the discharge, the Company received 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 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.
29
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CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(11) Commitments and Contingencies (Continued)
On
October 25, 2010, the Company received a letter from the United States Coast Guard on behalf of the U.S. Environmental Protection Agency (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 recovery
from CRRM related to alleged non-compliance with the Clean Air Act's Risk Management Program ("RMP"), the Clean Water Act ("CWA") and the OPA. CRRM has reached an agreement with the DOJ resolving its
claims under the CWA and the OPA. The agreement is memorialized in a Consent Decree that was filed with and approved by the Court on February 12, 2013 and March 25, 2013, respectively
(the "2013 Consent Decree"). On April 19, 2013, CRRM paid a civil penalty plus accrued interest in the amount of $0.6 million for the CWA violations and reimbursed the Coast Guard for
oversight costs under OPA in the amount of $1.7 million. The 2013 Consent Decree also requires CRRM to make small capital upgrades to the Coffeyville refinery crude oil tank farm, develop flood
procedures and provide employee training. The parties also reached an agreement to settle DOJ's RMP claims. The agreement was filed with and approved by the Court on May 21, 2013 and
July 2, 2013, respectively, and provided for a civil penalty of $0.3 million. On July 29, 2013, CRRM paid the civil penalty related to the RMP settlement agreement.
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 $25.0 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.
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
The petroleum and nitrogen fertilizer businesses 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, Coffeyville Resources Crude Transportation, LLC ("CRCT"), Wynnewood Refining Company, LLC ("WRC") and Coffeyville Resources Terminal, LLC ("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
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CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(11) Commitments and Contingencies (Continued)
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 clean-up 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 June 30, 2013
and December 31, 2012, environmental accruals of approximately $1.9 million and $2.3 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 $0.5 million and $0.7 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 June 30, 2013 and December 31, 2012, respectively. The accruals include estimated closure and post-closure costs of approximately
$0.8 million for two landfills at both June 30, 2013 and December 31, 2012. The estimated future payments for these required obligations are as follows:
|
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Amount
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|
|
(in millions)
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Six months ending December 31, 2013
|
|
$
|
0.4
|
|
Year Ending December 31,
|
|
|
|
|
2014
|
|
|
0.3
|
|
2015
|
|
|
0.2
|
|
2016
|
|
|
0.1
|
|
2017
|
|
|
0.1
|
|
Thereafter
|
|
|
1.1
|
|
|
|
|
|
Undiscounted total
|
|
|
2.2
|
|
Less amounts representing interest at 2.24%
|
|
|
0.3
|
|
|
|
|
|
Accrued environmental liabilities at June 30, 2013
|
|
$
|
1.9
|
|
|
|
|
|
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
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CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(11) Commitments and Contingencies (Continued)
storage,
handling, use and transportation of petroleum and nitrogen products, and the characteristics and composition of gasoline and diesel fuels. The ultimate impact 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. However, the change in control resulting from the IEP Acquisition in 2012 triggered the loss of small
refiner status. Accordingly, the MSAT II projects have been accelerated by three months. Capital expenditures to comply with the rule are expected to be approximately $59.0 million for CRRM and
$98.0 million for WRC.
The
petroleum business 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, known as RINs, 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. The EPA has not yet finalized the 2013 renewable fuel
percentage standard, but has proposed to raise it to 9.6%. Beginning in 2011, the Coffeyville refinery was required to blend renewable fuels into its gasoline and diesel fuel or purchase RINs in lieu
of blending, and in 2013, the Wynnewood refinery was required to comply. From time to time, the petroleum business may purchase RINs on the open market or waiver credits for cellulosic biofuels from
the EPA in order to comply with RFS. While the petroleum business cannot predict the future prices of RINs or waiver credits, the cost of purchasing RINs has been extremely volatile and has
significantly increased over the last year. The cost of RINs for the three and six month periods ended June 30, 2012 was approximately $6.0 million and $9.3 million, respectively,
and the cost of RINs for the three and six month periods ended June 30, 2013 was approximately $65.5 million and $97.6 million, respectively. As of June 30, 2013 and
December 31, 2012, the petroleum business' biofuel blending obligation was approximately $82.6 million and $1.1 million, respectively, which was recorded in other current
liabilities on the Condensed Consolidated Balance Sheets. The petroleum business expects that the cost of RINs will continue to be substantially higher in 2013 as compared to 2012. The ultimate cost
of RINs for the petroleum business in 2013 is difficult to estimate. In particular, the cost of RINs is dependent upon a variety of factors, which include the price at which RINs can be purchased,
transportation fuel production levels, the mix of the petroleum business' petroleum products, as well as the fuel blending performed at the its refineries, all of which can vary significantly from
quarter to quarter.
In
2013, the EPA proposed "Tier 3" gasoline sulfur standards. Based on the proposed standards, CRRM anticipates it will incur less than $20.0 million of capital
expenditures to install controls in order to meet the anticipated new standards. The project is expected to be completed during the Coffeyville refinery's
next scheduled turnaround in 2016. It is not anticipated that the Wynnewood refinery will require additional controls or capital expenditures to meet the anticipated new standard.
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
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CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(11) Commitments and Contingencies (Continued)
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 clean-up 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, as amended (other than certain financial assurance provisions associated
with corrective action at the refinery and terminal under RCRA). 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 non-compliance 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 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, add controls to certain heaters and boilers and enhance certain work practices relating to wastewater and fugitive emissions. The
remaining costs of complying with the Second Consent Decree are expected to be approximately $40.0 million. CRRM also agreed to complete a voluntary environmental project that will reduce air
emissions and conserve water at an estimated cost of approximately $1.2 million. Additional 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. A substantial portion of the costs of complying
with the Wynnewood Consent Order were expended during the last turnaround. The remaining costs are expected to be approximately $3.0 million. In consideration for entering into the Wynnewood
Consent Order, WRC received a release from liability from ODEQ for matters described in the ODEQ order.
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CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(11) Commitments and Contingencies (Continued)
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 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, the Company does not anticipate that the costs of any required additional controls or operational changes would be material.
Environmental
expenditures are capitalized when such expenditures are expected to result in future economic benefits. For the three months ended June 30, 2013 and 2012, capital
expenditures were approximately $15.8 million and $8.1 million, respectively, and were incurred to improve the environmental compliance and efficiency of the operations. For the six
months ended June 30, 2013 and 2012, capital expenditures were approximately $38.0 million and $11.0 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 during startup after a short outage as
part of the turnaround process. Two employees were fatally injured. Damage at the refinery was limited to the boiler. Additionally, there was no environmental impact. The refinery was in the final
stages of shutdown for turnaround maintenance at the time of the incident. The petroleum business completed an internal investigation of the incident and continues to cooperate with OSHA and Oklahoma
Department of Labor investigations. OSHA also conducted a general inspection of the facility during the boiler incident investigation. In March 2013, OSHA completed its investigation and communicated
its citations to WRC. OSHA also placed WRC in its Severe Violators Enforcement Program ("SVEP"). WRC has filed its notice of contest against the citations, and will
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CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(11) Commitments and Contingencies (Continued)
vigorously
defend against the citations and OSHA's placement of WRC in the SVEP. WRC is in the process of reviewing the citations and no settlement has been reached. Any penalties associated with
OSHA's citations are not expected to have a material adverse effect on the condensed consolidated financial statements.
Mr. Icahn, through certain affiliates, owns approximately 82% of the Company's capital stock. Applicable pension and tax laws
make each member of a "controlled group" of entities, generally defined as entities in which there is at least an 80% common ownership interest, jointly and severally liable for certain pension plan
obligations of any member of the controlled group. These pension obligations include ongoing contributions to fund the plan, as well as liability for any unfunded liabilities that may exist at the
time the plan is terminated. In addition, the failure to pay these pension obligations when due may result in the creation of liens in favor of the pension plan or
the Pension Benefit Guaranty Corporation ("PBGC") against the assets of each member of the controlled group.
As
a result of the more than 80% ownership interest in CVR Energy by Mr. Icahn's affiliates, the Company is subject to the pension liabilities of all entities in which
Mr. Icahn has a direct or indirect ownership interest of at least 80%. One such entity, ACF Industries LLC, is the sponsor of several pension plans. All the minimum funding requirements
of the Code and the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act of 2006, for these plans have been met as of June 30, 2013. If the ACF plans were
voluntarily terminated, they would be underfunded by approximately $125.4 million as of June 30, 2013. Subsequent to June 30, 2013, as a result of Mr. Icahn's affiliates
obtaining approximately 80.7% of the outstanding common stock of Federal-Mogul Corporation, ("Federal-Mogul") the Company is also subject to the pension liabilities of Federal-Mogul. If the plans of
Federal-Mogul and ACF were voluntarily terminated, as of June 30, 2013, they would collectively be underfunded by approximately $764.4 million. These results are based on the most recent
information provided by Mr. Icahn's affiliates based on information from the plans' actuaries. These liabilities could increase or decrease, depending on a number of factors, including future
changes in benefits, investment returns, and the assumptions used to calculate the liability. As members of the controlled group, CVR Energy would be liable for any failure of ACF, and subsequent to
June 30, 2013, Federal-Mogul to make ongoing pension contributions or to pay the unfunded liabilities upon a termination of their respective pension plans. In addition, other entities now or in
the future within the controlled group that includes CVR Energy may have pension plan obligations that are, or may become, underfunded, and the Company would be liable for any failure of such entities
to make ongoing pension contributions or to pay the unfunded liabilities upon a termination of such plans. The current underfunded status of the ACF and Federal-Mogul pension plans requires such
entities to notify the PBGC of certain "reportable events," such as if CVR Energy were to cease to be a member of the controlled group, or if CVR Energy makes certain extraordinary dividends or stock
redemptions. The obligation to report could cause the Company to seek to delay or reconsider the occurrence of such reportable events. Based on the contingent nature of potential exposure related to
these affiliate pension obligations, no liability has been recorded in the condensed consolidated financial statements.
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CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(11) Commitments and Contingencies (Continued)
Starfire
Holding Corporation ("Starfire") which is 99.4% owned by Mr. Icahn, has undertaken to indemnify CVR Energy from losses resulting from any imposition of certain pension
funding or termination liabilities that may be imposed the Company or its assets as a result of being a member of the Icahn controlled group. However, Starfire is not required to maintain a net worth
equal to the amounts by which ACF and Federal-Mogul are underfunded, and there can be no guarantee Starfire will be able to fund its indemnification obligations to the Company.
(12) 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, liabilities or a group of assets or liabilities, such as a business.
ASC
820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of
those three levels:
-
-
Level 1Quoted prices in active markets 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 June 30, 2013 and December 31, 2012:
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June 30, 2013
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
(in millions)
|
|
Location and Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
124.0
|
|
$
|
|
|
$
|
|
|
$
|
124.0
|
|
Other current assets (marketable securities)
|
|
|
20.9
|
|
|
|
|
|
|
|
|
20.9
|
|
Other current assets (other derivative agreements)
|
|
|
|
|
|
66.6
|
|
|
|
|
|
66.6
|
|
Other long-term assets (other derivative agreements)
|
|
|
|
|
|
5.0
|
|
|
|
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
144.9
|
|
$
|
71.6
|
|
$
|
|
|
$
|
216.5
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities (other derivative agreements)
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
(0.1
|
)
|
Other current liabilities (interest rate swap)
|
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
(0.9
|
)
|
Other current liabilities (biofuel blending obligation)
|
|
|
|
|
|
(43.1
|
)
|
|
|
|
|
(43.1
|
)
|
Other long-term liabilities (other derivative agreements)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities (interest rate swap)
|
|
|
|
|
|
(1.2
|
)
|
|
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
|
|
$
|
(45.3
|
)
|
$
|
|
|
$
|
(45.3
|
)
|
|
|
|
|
|
|
|
|
|
|
36
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(12) Fair Value Measurements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
(in millions)
|
|
Location and Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
134.0
|
|
$
|
|
|
$
|
|
|
$
|
134.0
|
|
Other current assets (other derivative agreements)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term assets (other derivative agreements)
|
|
|
|
|
|
0.9
|
|
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
134.0
|
|
$
|
0.9
|
|
$
|
|
|
$
|
134.9
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities (other derivative agreements)
|
|
|
|
|
|
(67.7
|
)
|
|
|
|
|
(67.7
|
)
|
Other current liabilities (interest rate swap)
|
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
(0.9
|
)
|
Other current liabilities (biofuel blending obligation)
|
|
|
|
|
|
(1.1
|
)
|
|
|
|
|
(1.1
|
)
|
Other long-term liabilities (other derivative agreements)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities (interest rate swap)
|
|
|
|
|
|
(1.9
|
)
|
|
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
|
|
$
|
(71.6
|
)
|
$
|
|
|
$
|
(71.6
|
)
|
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2013 and December 31, 2012, 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, derivative instruments and the uncommitted biofuel blending obligation. Additionally, the fair value of the Company's debt issuances is disclosed
in Note 8 ("Long-Term Debt"). The Refining Partnership's commodity derivative contracts and the uncommitted biofuel blending obligation which use fair value measurements are valued using broker
quoted market prices of similar instruments which are considered Level 2 inputs. The Nitrogen Fertilizer 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, as well as the
current LIBOR rate and a forward LIBOR curve, along with other observable market inputs. 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. As of June 30, 2013, the aggregate cost basis for the Company's available-for-sale securities is approximately $18.6 million.
The Company had no transfers of assets or liabilities between any of the above levels during the six months ended June 30, 2013.
37
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(13) Derivative Financial Instruments
Gain (loss) on derivatives, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
(in millions)
|
|
Realized gain (loss) on settlement of derivative agreements, net
|
|
$
|
14.7
|
|
$
|
(8.1
|
)
|
$
|
(37.8
|
)
|
$
|
(27.2
|
)
|
Change in unrealized gain (loss) on derivative agreements, net
|
|
|
105.8
|
|
|
46.9
|
|
|
138.3
|
|
|
(81.3
|
)
|
|
|
|
|
|
|
|
|
|
|
Total gain (loss) on derivatives, net
|
|
$
|
120.5
|
|
$
|
38.8
|
|
$
|
100.5
|
|
$
|
(108.5
|
)
|
|
|
|
|
|
|
|
|
|
|
The
Refining Partnership and Nitrogen Fertilizer Partnership are subject to price fluctuations caused by supply conditions, weather, economic conditions, interest rate fluctuations and
other factors. To manage price risk on crude oil and other inventories and to fix margins on certain future production, the Refining Partnership from time to time enters into various commodity
derivative transactions.
The
Refining Partnership has adopted accounting standards which impose extensive record-keeping requirements in order to designate a derivative financial instrument as a hedge. The
Refining Partnership 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.
The
Refining Partnership 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, the Refining Partnership may be required to deposit additional funds into this margin account. The fair value of the open commodity positions as of June 30,
2013 was a net loss of $0.1 million included in other current liabilities. For the three months ended June 30, 2013 and 2012, the Refining Partnership recognized a net loss of
$0.2 million and a net gain of $4.1 million, respectively, which are recorded in gain (loss) on derivatives, net in the Condensed Consolidated Statements of Operations. For the six
months ended June 30, 2013 and 2012, the Refining Partnership recognized net losses of $2.4 million and $3.9 million, respectively, which are recorded in gain (loss) on
derivatives, net in the Condensed Consolidated Statements of Operations.
The Refining Partnership enters into commodity swap contracts in order to fix the margin on a portion of future production. The
physical volumes are not exchanged and these contracts are net
38
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(13) Derivative Financial Instruments (Continued)
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 June 30, 2013 and December 31, 2012, the Refining Partnership had open commodity hedging instruments consisting of
20.0 million barrels and 23.3 million barrels of crack spreads, respectively, primarily to fix the margin on a portion of its future gasoline and distillate production. The fair value of
the outstanding contracts at June 30, 2013 was a net unrealized gain of $71.6 million, of which $66.6 million is included in current assets and $5.0 million is included in
non-current assets. For the three months ended June 30, 2013 and 2012, the Refining Partnership recognized net gains of $120.7 million and $34.7 million, respectively, which are
recorded in gain (loss) on derivatives, net in the Condensed Consolidated Statements of Operations. For the six months ended
June 30, 2013 and 2012, the Refining Partnership recognized a net gain of $102.9 million and a net loss of $104.6 million, respectively, which are recorded in gain (loss) on
derivatives, net in the Condensed Consolidated Statements of Operations.
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 the nitrogen fertilizer business' $125.0 million floating rate term debt which matures in April 2016. See Note 8 ("Long-Term
Debt"). The aggregate notional amount covered under these agreements, which commenced on August 12, 2011 and expires on February 12, 2016, totals $62.5 million (split evenly
between the two agreement dates). 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 calculated under the CRNF credit agreement. At June 30, 2013, the effective rate was approximately 4.58%. 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
Statements of Operations.
The
realized loss on the interest rate swap re-classed from AOCI into interest expense and other financing costs on the Condensed Consolidated Statements of Operations was
$0.3 million and $0.2 million for the three months ended June 30, 2013 and 2012, respectively. For the three months ended June 30, 2013 and 2012, the Nitrogen Fertilizer
Partnership recognized an increase in the fair value of the interest rate swap agreements of $0.2 million and a decrease in the fair value of the interest rate swap agreements of
$0.7 million, respectively, which was unrealized in accumulated other comprehensive income. The realized loss on the interest rate swap re-classed from AOCI into interest
39
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(13) Derivative Financial Instruments (Continued)
expense
and other financing costs on the Condensed Consolidated Statements of Operations was $0.5 million for each of the six months ended June 30, 2013 and 2012. For the six months
ended June 30, 2013 and 2012, the Nitrogen Fertilizer Partnership recognized an increase in fair value of the interest rate swap agreements of $0.2 million and a decrease in fair value
of the interest rate swap agreements of $1.0 million, respectively, which was unrealized in accumulated other comprehensive income.
The Refining Partnership's exchange-traded crude oil futures and certain over-the-counter forward swap agreements are potentially
exposed to concentrations of credit risk as a result of economic conditions and periods of uncertainty and illiquidity in the credit and capital markets. The Refining Partnership manages credit risk
on its exchange-traded crude oil futures by completing trades with an exchange clearinghouse, which subjects the trades to mandatory margin requirements until the contract settles. The Refining
Partnership also monitors the creditworthiness of its commodity swap counterparties and assesses the risk of nonperformance on a quarterly basis. Counterparty credit risk identified as a result of
this assessment is recognized as a valuation adjustment to the fair value of the commodity swaps recorded in the Condensed Consolidated Balance Sheets. As of June 30, 2013, the counterparty
credit risk adjustment was not material to the condensed consolidated financial statements. Additionally, the Refining Partnership does not require any collateral to support commodity swaps into which
it enters; however, it does have master netting arrangements that allow for the setoff of amounts receivable from and payable to the same party, which mitigates the risk associated with
nonperformance.
The commodity swaps and other commodity derivatives agreements discussed above include multiple derivative positions with a number of
counterparties for which the Refining Partnership has entered into agreements governing the nature of the derivative transactions. Each of the counterparty agreements provides for the right to setoff
each individual derivative position to arrive at the net receivable due from the counterparty or payable owed by the Refining Partnership. As a result of the right to setoff, the Refining
Partnership's recognized assets and liabilities associated with the outstanding derivative positions have been presented net in the Condensed Consolidated Balance Sheets. The interest rate swap
agreements held by the Nitrogen Fertilizer Partnership also provide for the right to setoff. However, as the interest rate swaps are in a liability position, there are no amounts offset in the
Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012. In accordance with guidance issued by the FASB related to "
Disclosures about
Offsetting Assets and Liabilities,"
the tables below outline the gross amounts of the recognized assets and liabilities and the gross amounts offset in the Condensed
Consolidated Balance Sheets for the various types of open derivative positions at the Refining Partnership.
The
offsetting assets and liabilities for the Refining Partnership's derivatives as of June 30, 2013 are recorded as current assets and non-current assets in prepaid expenses and
other current assets and
40
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(13) Derivative Financial Instruments (Continued)
other
long-term assets, respectively in the Condensed Consolidated Balance Sheets and as current liabilities in other current liabilities in the Condensed Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2013
|
|
Description
|
|
Gross
Current
Assets
|
|
Gross
Amounts
Offset
|
|
Net
Current
Assets
Presented
|
|
Cash
Collateral
Not Offset
|
|
Net
Amount
|
|
|
|
(in millions)
|
|
Commodity Swaps
|
|
$
|
68.3
|
|
$
|
(1.7
|
)
|
$
|
66.6
|
|
$
|
|
|
$
|
66.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
68.3
|
|
$
|
(1.7
|
)
|
$
|
66.6
|
|
$
|
|
|
$
|
66.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2013
|
|
Description
|
|
Gross
Non-
Current
Assets
|
|
Gross
Amounts
Offset
|
|
Net
Non-
Current
Assets
Presented
|
|
Cash
Collateral
Not Offset
|
|
Net
Amount
|
|
|
|
(in millions)
|
|
Commodity Swaps
|
|
$
|
5.0
|
|
$
|
|
|
$
|
5.0
|
|
$
|
|
|
$
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5.0
|
|
$
|
|
|
$
|
5.0
|
|
$
|
|
|
$
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2013
|
|
Description
|
|
Gross
Current
Liabilities
|
|
Gross
Amounts
Offset
|
|
Net
Current
Liabilities
Presented
|
|
Cash
Collateral
Not Offset
|
|
Net
Amount
|
|
|
|
(in millions)
|
|
Other Derivative Activity
|
|
$
|
0.1
|
|
$
|
|
|
$
|
0.1
|
|
$
|
(0.1
|
)
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.1
|
|
$
|
|
|
$
|
0.1
|
|
$
|
(0.1
|
)
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
offsetting assets and liabilities for the Refining Partnership's derivatives as of December 31, 2012 are recorded as non-current assets in other long-term assets in the
Condensed Consolidated Balance
Sheets and as current liabilities in other current liabilities in the Condensed Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012
|
|
Description
|
|
Gross
Non-
Current
Assets
|
|
Gross
Amounts
Offset
|
|
Net
Non-
Current
Assets
Presented
|
|
Cash
Collateral
Not Offset
|
|
Net
Amount
|
|
|
|
(in millions)
|
|
Commodity Swaps
|
|
$
|
0.9
|
|
$
|
|
|
$
|
0.9
|
|
$
|
|
|
$
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
0.9
|
|
$
|
|
|
$
|
0.9
|
|
$
|
|
|
$
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(13) Derivative Financial Instruments (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012
|
|
Description
|
|
Gross
Current
Liabilities
|
|
Gross
Amounts
Offset
|
|
Net
Current
Liabilities
Presented
|
|
Cash
Collateral
Not Offset
|
|
Net
Amount
|
|
|
|
(in millions)
|
|
Commodity Swaps
|
|
$
|
74.2
|
|
$
|
(6.5
|
)
|
$
|
67.7
|
|
$
|
|
|
$
|
67.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
74.2
|
|
$
|
(6.5
|
)
|
$
|
67.7
|
|
$
|
|
|
$
|
67.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14) Related Party Transactions
In May 2012, IEP announced that it 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 June 30, 2013, IEP owned approximately 82% of all common shares outstanding.
Since March 2009, the Company, through the Nitrogen Fertilizer Partnership, has leased 199 railcars from American Railcar
Leasing LLC ("ARL"), a company controlled by Mr. Carl Icahn, the Company's majority stockholder. The agreement was scheduled to expire on March 31, 2014. For the
three months ended June 30, 2013 and 2012, $0.1 million and $0.3 million, respectively, of rent expense was recorded related to this agreement and is included in cost of product
sold (exclusive of depreciation and amortization) in the Condensed Consolidated Statements of Operations. For the six months ended June 30, 2013 and 2012, rent expense of $0.4 million
and $0.5 million, respectively, was recorded related to this agreement. The Nitrogen Fertilizer Partnership negotiated an agreement with ARL to purchase the railcars under the lease for
approximately $5.0 million. On June 13, 2013, the Nitrogen Fertilizer Partnership completed the purchase of the railcars.
On May 19, 2012, CVR became a member of the consolidated federal tax group of 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 June 30, 2013, the Company has recorded approximately $118.9 million for federal income taxes due to AEPC under the Tax Allocation Agreement. During the three months
ended June 30, 2013 the Company paid $54.0 million and $85.0 million for the first and second quarter estimated federal income tax payments, respectively, due to AEPC under the
Tax Allocation Agreement.
42
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(14) Related Party Transactions (Continued)
Insight Portfolio Group LLC ("Insight Portfolio Group") is an entity formed by Mr. 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 at
negotiated rates. In January 2013 CVR Energy acquired a minority equity interest in Insight Portfolio Group and agreed to pay a portion of Insight Portfolio Group's operating expenses in 2013. The
Company paid Insight Portfolio Group approximately $0.1 million during each of the three and six months ended June 30, 2013, respectively. The Company may purchase a variety of goods and
services as members of the buying group at prices and terms that management believes would be more favorable than those which would be achieved on a stand-alone basis.
(15) 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, propane, and petroleum refining by-products, including pet coke. The
Petroleum Segment's Coffeyville refinery sells pet coke to the Nitrogen Fertilizer 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 $2.6 million and $2.4 million for the three months ended
June 30, 2013 and 2012, respectively. Intercompany sales included in petroleum net sales were approximately $5.3 million and $4.8 million for the six months ended June 30,
2013 and 2012, respectively.
The
Petroleum Segment recorded intercompany cost of product sold (exclusive of depreciation and amortization) for the net hydrogen purchases (sales) described below under "Nitrogen
Fertilizer" of approximately and $4.0 million and $(0.1) million for the three months ended June 30, 2013 and 2012, respectively. For the six months ended June 30, 2013 and 2012,
the Petroleum Segment recorded intercompany cost of product sold (exclusive of depreciation and amortization) for the hydrogen
purchases (sales) of approximately $4.0 million and $5.6 million, respectively. The Petroleum Segment recorded intercompany revenue for hydrogen sales of approximately
$0.1 million and $0 for the three months ended June 30, 2013 and 2012, respectively. For the six months ended June 30, 2013 and 2012,
43
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(15) Business Segments (Continued)
the
Petroleum Segment recorded intercompany revenue of approximately $0.3 million and $0, 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 $2.3 million for the three months ended June 30, 2013 and 2012
respectively. Intercompany cost of product sold (exclusive of depreciation and amortization) for the pet coke transfer described above was approximately $5.1 million and $5.2 million for
the six months ended June 30, 2013 and 2012, respectively.
Pursuant
to the feedstock agreement, the Company's segments have the right to transfer excess hydrogen between the Coffeyville refinery and nitrogen fertilizer plant. 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 June 30, 2013 and 2012, the net sales generated from intercompany hydrogen sales were
$4.0 million and $0, respectively. For the six months ended June 30, 2013 and 2012, the net sales generated from intercompany hydrogen sales were $4.0 million and
$5.7 million, respectively. For each of the three months ended June 30, 2013 and 2012, the nitrogen fertilizer segment also recognized approximately $0.1 million of cost of
product sold related to the transfer of excess hydrogen. For the six months ended June 30, 2013 and 2012, the Nitrogen Fertilizer Segment also recognized approximately $0.3 million and
$0.1 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, corporate cash and cash equivalents, income tax activities and other corporate
activities that are not allocated to the operating segments.
44
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(15) Business Segments (Continued)
The
following table summarizes certain operating results and capital expenditures information by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
|
|
(in millions)
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum
|
|
$
|
2,138.1
|
|
$
|
2,229.5
|
|
$
|
4,412.1
|
|
$
|
4,128.0
|
|
Nitrogen Fertilizer
|
|
|
88.8
|
|
|
81.4
|
|
|
170.2
|
|
|
159.7
|
|
Intersegment elimination
|
|
|
(6.6
|
)
|
|
(2.6
|
)
|
|
(9.6
|
)
|
|
(10.8
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,220.3
|
|
$
|
2,308.3
|
|
$
|
4,572.7
|
|
$
|
4,276.9
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product sold (exclusive of depreciation and amortization)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum
|
|
$
|
1,776.6
|
|
$
|
1,866.1
|
|
$
|
3,582.3
|
|
$
|
3,496.8
|
|
Nitrogen Fertilizer
|
|
|
15.6
|
|
|
10.7
|
|
|
26.2
|
|
|
23.3
|
|
Intersegment elimination
|
|
|
(6.8
|
)
|
|
(2.6
|
)
|
|
(9.5
|
)
|
|
(10.7
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,785.4
|
|
$
|
1,874.2
|
|
$
|
3,599.0
|
|
$
|
3,509.4
|
|
|
|
|
|
|
|
|
|
|
|
Direct operating expenses (exclusive of depreciation and amortization)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum
|
|
$
|
83.8
|
|
$
|
71.6
|
|
$
|
169.9
|
|
$
|
164.3
|
|
Nitrogen Fertilizer
|
|
|
24.4
|
|
|
22.4
|
|
|
47.0
|
|
|
45.3
|
|
Other
|
|
|
0.1
|
|
|
0.1
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
108.3
|
|
$
|
94.1
|
|
$
|
216.8
|
|
$
|
209.6
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum
|
|
$
|
28.4
|
|
$
|
26.6
|
|
$
|
56.4
|
|
$
|
52.9
|
|
Nitrogen Fertilizer
|
|
|
6.2
|
|
|
5.2
|
|
|
12.0
|
|
|
10.6
|
|
Other
|
|
|
0.4
|
|
|
0.4
|
|
|
0.8
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
35.0
|
|
$
|
32.2
|
|
$
|
69.2
|
|
$
|
64.3
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum
|
|
$
|
229.1
|
|
$
|
248.9
|
|
$
|
564.7
|
|
$
|
383.8
|
|
Nitrogen Fertilizer
|
|
|
37.1
|
|
|
36.1
|
|
|
73.9
|
|
|
67.5
|
|
Other
|
|
|
(3.5
|
)
|
|
(49.2
|
)
|
|
(8.3
|
)
|
|
(75.0
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
262.7
|
|
$
|
235.8
|
|
$
|
630.3
|
|
$
|
376.3
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Petroleum
|
|
$
|
35.5
|
|
$
|
27.0
|
|
$
|
80.1
|
|
$
|
62.4
|
|
Nitrogen fertilizer
|
|
|
13.8
|
|
|
16.9
|
|
|
31.9
|
|
|
39.2
|
|
Other
|
|
|
1.6
|
|
|
1.7
|
|
|
2.6
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
50.9
|
|
$
|
45.6
|
|
$
|
114.6
|
|
$
|
105.2
|
|
|
|
|
|
|
|
|
|
|
|
45
Table of Contents
CVR ENERGY, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2013
(unaudited)
(15) Business Segments (Continued)
|
|
|
|
|
|
|
|
|
|
As of June 30,
2013
|
|
As of December 31,
2012
|
|
|
|
(in millions)
|
|
Total assets
|
|
|
|
|
|
|
|
Petroleum
|
|
$
|
2,800.2
|
|
$
|
2,258.5
|
|
Nitrogen Fertilizer
|
|
|
619.2
|
|
|
623.0
|
|
Other
|
|
|
604.0
|
|
|
729.4
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,023.4
|
|
$
|
3,610.9
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
Petroleum
|
|
$
|
|
|
$
|
|
|
Nitrogen Fertilizer
|
|
|
41.0
|
|
|
41.0
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
41.0
|
|
$
|
41.0
|
|
|
|
|
|
|
|
(16) Subsequent Events
On July 31, 2013, the board of directors of the Company declared a cash dividend for the second quarter of 2013 to the Company's
stockholders of $0.75 per share, or $65.1 million in aggregate. The dividend will be paid on August 19, 2013 to stockholders of record at the close of business on August 12, 2013.
IEP will receive $53.4 million in respect of its 82% ownership interest in the Company's shares.
On July 26, 2013, the board of directors of the Nitrogen Fertilizer Partnership's general partner declared a cash distribution
for the second quarter of 2013 to the Nitrogen Fertilizer Partnership's unitholders of $0.583 per common unit, or $42.6 million in aggregate. The cash distribution will be paid on
August 14, 2013 to unitholders of record at the close of business on August 7, 2013. The Company will receive $22.7 million in respect of its Nitrogen Fertilizer Partnership
common units.
On July 26, 2013, the board of directors of the Refining Partnership's general partner declared a cash distribution for the
second quarter of 2013 to the Refining Partnership's unitholders of $1.35 per common unit, or $199.3 million in aggregate. The cash distribution will be paid on August 14, 2013 to
unitholders of record at the close of business on August 7, 2013. The Company will receive $141.5 million in respect of its Refining Partnership common units.
46
Table of Contents