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Executives

Stirling Pack, Jr. - VP of IR

John "Jack" Lipinski - Chairman, CEO and President

James T. Rens - CFO

Stanley A. Riemann - COO

Analysts

Jeff Dietert - Simmons & Company

CVR Energy, Inc. (CVI) Q3 FY08 Earnings Call November 6, 2008 11:00 AM ET

Operator

Greetings and welcome to the CVR Energy Third Quarter Conference Call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Stirling Pack, Vice President of Investor Relations for CVR Energy. Thank you Mr. Pack, you may begin.

Stirling Pack, Jr. - Vice President of Investor Relations

Thank you Manny, good morning everyone. We appreciate your patients while we gather everyone on line.

Prior to discussion of our 2008 third quarter results, we are required to make the following Safe Harbor statement. In accordance with federal securities laws the statements in this earnings call relating to matters that are not historical facts are forward-looking statements based on management's belief and assumptions using currently available information and expectations as of this date and are not guarantees of future performance and do involve certain risks and uncertainties including those filed with the Securities and Exchange Commission. This presentation includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures required by Regulation G can be located on our website at www.cvrenergy.com or on Form 8-K which we filed earlier today.

Now we'll first hear from Mr. Jack Lipinski, our Chief Executive Officer. Jack?

John "Jack" Lipinski - Chairman, Chief Executive Officer and President

Okay thank you Stirling and thank you all for joining us this morning where we are going to report third quarter results.

In the year we came near [indiscernible] unprecedented in terms of financial and commodity market volatility. Before moving into the reported quarterly result I'd like to take this opportunity to comment briefly on our two business segments. We are an independent refiner and marketer of high value transportation fuels and, through a limited partnership, a producer of ammonia and Urea Ammonium Nitrate solutions or UAN fertilizers.

Industry positioning is key to understanding our reported results and future outlook. We have two businesses that compliment each other operationally but serve two different markets. With that said everyone is keenly aware that the refining industry has experienced unprecedented volatility in crude oil and refined product pricing. Long established relationships between oil prices and differentials, crack spreads and bases differentials have been skewed over the past year.

As context significant market aberrations with the norm rather than the occasional accession. And industry funded forecast has been all over the map. This funded forecast of crude prices is $300 a barrel have been replaced with a natural WTI price this morning of about $61 a barrel and a 12 months 2009 strip that is currently under $66 a barrel.

Revised forecast of worldwide economic growth have been replaced with predictions of the recession and diminished oil demand growth. In this weekend outlook, project economics are more difficult to estimate with any certainty and many companies throughout the energy industry are delaying or deferring previously announced capital expansion plan. Credit market tightening has complicated return on investment calculations, and some companies are left standing on the sidelines reevaluating future plans for growth plans.

With respect to my earlier remark on our industry positioning. We have already competitively positioned CVR Energy refining operations and we've done that through a series of investments made from June 2005 though mid year 2008.

During that time we've invested over $500 million to expand and modernize our oil refineries and to meet environmental, health and safety requirements. As a result of these investments we are now better positioned to operate profitably in a wide range of oil price and margin environment.

Refining complexity as a measure of the facilities ability to process lower quality crudes and feedstock into higher value refined product. Since 2005 our refinery and complexity has increased substantially from 10.3 to 12.1, allowing us to optimize yields of higher value distillate and gasoline in the product short Midwest market.

We now access a wide variety domestic and foreign crude oils including low cost having Canadian crew. Operationally we've achieved significant increase on our true throughput from an average of about 90,000 barrels a day in 2005 to 114,700 barrels a day in the third quarter of 2008.

Crude oil and feedstock throughput totaled 126,400 barrels a day in the third quarter which for us is a record. We successfully negotiated a four-year extension to our collected working agreement with our refining employees. This represents a significant milestone in our continuing long-term relationship with our valued workforce. We are now negotiating with several counterparties to reach agreement on a crude oil intermediation contract. When executed this agreement will replace the existing J. Aron intermediation.

Our cash flow swap volume began to trend down from 6.2 million barrels in this quarter to 5.9 million barrels for the quarter and the first half of 2009. A drop it's just under 1.5 million barrels a quarter at the beginning of the third quarter in 2009 and completely rolls off at the end of the second quarter in 2010. With respect to positioning the fertilizer business we continue to focus on operation and efficiency gain. Remember, we are the only dual train Petsco [ph] gas fire producer of nitrogen fertilizers in North America.

In the third quarter, our gas fire operated at an abnormal 98.5% on-stream factor and our ammonia plant operated at 97.8%. The UAN facility operated at just under 95%. In the past week we had completed the successful turnaround for fertilizer facility and we've begun full operation. This turnaround was planned. There have been some recent weaknesses in the fertilizer markets led by urea process. We'll discuss this later and Stan will discuss the fertilizer business results and outlook in his remark.

Regardless, we continue to benefit from the substantial competitive advantage from our production process and it's low-cost feedstock. As you know we've announced our withdrawal... and leave withdrawal of our proposed convertible debt offering. With our approach to adding a layer in liquidity during the period of rapidly rising crude oil price.

The company will always endeavor to keep a reasonable amount of liquidity sufficient to run its business. Tim Rens, our CFO, will next provide a review of the third quarter financial results and a discussion of our liquidity.

I will summarize our business outlook later in the call after which you will have some time for questions. Jim?

James T. Rens - Chief Financial Officer

Thank you Jack. As reported CVR Energy third quarter net income was $99.7 million or $1.16 per diluted share compared to $11.2 million or $0.13 per share pro forma for the third quarter of 2007. Gain losses on derivatives for the third quarter included unrealized gain from the cash flow swap net of taxes of $59.5 million or $0.69 per share compared to a gain of $54.2 million or $0.63 per share for the comparable period of 2007.

Net income adjusted for the unrealized gains on the Cash Flow Swap reached $40.2 million or $0.47 per share for the third quarter of 2008 compared to a net loss of 43 million or $0.50 per share for the third quarter of 2007. Income for the third quarter of 2007 was negatively impacted by the flood that occurred in July of 2007. The quarterly results include realized losses on the cash flow swap of 33.8 million compared to a loss of 45.4 million for the same quarter in 2007.

Financial results for the third quarter of 2008 were also negatively impacted by the climbing oil prices due to our first-in/first-out accounting method for inventory cost. Although our earnings are negatively impacted in the declining world market with the opposite impact and the rising crude oil market, it's important to note that under FIFO or LIFO cash flow is the same. With respect to FIFO our operating income was negatively impacted by FIFO losses of 59.3 million from the third quarter of 2008.

In contrast we experienced a FICO gain of $22.6 million for the comparable period of 2007. This translates to an $81.9 million change in operating income over the comparable period due to the changing oil price environment.

Consolidated operating income for the third quarter, which will be discussed in more detail by segments were $72 million compared to $31.6 million for the comparable period in 2007.

Starting with the petroleum segment, operating income was $20.2 million for the third quarter of 2008, compared to $19.4 million for the third quarter of 2007. Refinery margins per barrel including the impact of FICO accounting were $6.88 per barrel compared to $19.81 per barrel in the third quarter of 2007.

Adjusted for the impact of FICO losses or gains refining margins for the third quarter of 2008 were $12.50 per barrel compared to $15.14 per barrel for the comparable period in 2007. The reduced margin per barrel primarily results from crude oil prices increasing more than finished products prices is in the refining process and yield less a 100% transportation fuel.

The trend of amplified Mid Continent where we experienced a reduction in the price advantage versus the NYMEX posted price in the third quarter of 2008 compared to the third quarter of 2007. Refinery direct operating expenses exclusive of depreciation and amortization of $37.1 million or $3.52 per barrel of crude oil throughput for the current quarter compared to $29.5 million or $6.11 per barrel for the same period in 2007.

The positive variance was primarily the result of the impact for flood in 2007.

Moving to the fertilizer segment, revenue for the quarter increased to 74.2 million compared to $40.8 million for the comparable period in 2007.

Operating income was $46.5 million for the third quarter of 2008 compared to $13.8 million for the third quarter of 2007. Higher prices for ammonia and UAN contributed favorably to the fertilizer segment results. For the quarter ammonia and UAN prices were $685 per ton and $324 per ton respectively compared to $363 per ton for ammonia and $234 per ton for UAN in the comparable period in 2007.

The third quarter of 2007 was significantly impacted by the flood that completely idled the facility for 16 days, direct operating expenses excluding depreciation and amortization was $19.4 million for the quarter compared to $14.9 million in 2007 with the increase primarily the result of increases in property tax and sulfur processing costs.

The increase in the property tax accrual is primarily the result of an exploration of a 10-year property tax abatement afforded to the fertilizer facility when it was constructed. We have yet to agree on the current year property year tax assessment.

SG&A expense excluding depreciation and amortization for the quarter was actually negative at $7.8 million which included a benefit at $22.1 million for share based compensation in connection with the reduction of our share price compared to $14 million for the third quarter of 2007, which was negatively impacted by $4.1 million of share based compensation.

Adjusting for the share based compensation, SG&A expense for the third quarter of 2008 was $14.3 million compared to $9.9 million for the same quarter in 2007. The change was significantly impacted by labor charges, which were charged to net flood expense in 2007 as part of decline as well as increases in payroll expense related to additional headcount to support accounting, consulting work in association with our soft compliance requirement and legal expense.

I'll now speak briefly regarding cash flow and current liquidity. As of September the 30th 2008, total outstanding debt was $485.5 million which excluded $87.5 million owed to J. Aron under the terms of the deferral agreement related to the cash flow swap yields an estimated unrealized mark on the cash flow swap of $143.2 million.

So I would like to point to the close of the quarter. The J. Aron deferral was amended to extend the maturity date until July the 31st 2009 subject to a $5 million per quarter amortization beginning March 31, 2009. The agreement further obligates us to pay down the deferral with any further related insurance proceeds.

As of October 31, 2008, we have repaid $60.4 million of the original $123.7 million deferral balance was holding at an unpaid principle balance as of October 31, 2008 of $63.3 million.

As of October 31st, total outstanding debt under our credit facility was $484.3 million. The company had $47.2 million in cash and cash equivalents resulting in a net balance of... net debt balance of $437.1 million and availability under the revolving credit facility of $160 million.

In light of approximately $160 million of current liquidity and a decline in the outlook for crude oil prices, as we reported on Wednesday, we have withdrawn our registration statement with the SEC in connection with the proposed offering of $125 million aggregate principal amounts of CVR's convertible senior notes. The company is confident it has adequate liquidity over the intermediate term and will work to maintain a cushion of liquidity.

We surely anticipate significant insurance recovery related to the flood damage as represented by the $54.7 million insurance receivable that was reported on our balance sheet as of September the 30th 2008.

During the quarter we received $13 million in proceeds under our property insurance policy and an additional $15 million proceeds from the one insurance carrier and the settlement of our total expected obligations under the environmental policy. Subsequent to the end of the quarter we have received an additional $9.8 million in proceeds under our property policy, which we used to pay down the J. Aron obligation. Income tax expense for the quarter ended September 30, 2008 was $40.4 million or 28.9% of income before income taxes are compared to $42.7 million or $79.2% of income before income taxes for the three months ended September 30, 2007.

Under GAAP accounting, the company has required to calculate income tax expense for quarterly periods on an expected 18-year old effective tax rate for the full year. Under this requirement, the company calculates its effective tax rate based on anticipated pre-tax income with the inclusion of expected credits we earned for the year. Total estimated gross tax credits for 2008 are approximately $60.4 million. The estimated annual effective rate is applied to the actual pre-tax quarterly earnings derived on quarterly income tax expense.

In the end on an annualized basis, the company will recognize tax expense as a statutory rate of 39.9% on pre-tax earnings and then benefit from tax credits of approximately $60.4 million. Stan Riemann,our COO will now discuss quarterly results for nitrogen fertilizer segment.

Stanley A. Riemann - Chief Operating Officer

Thank you Jim. As Jim reported in the financial review our nitrogen fertilizer business benefited from strong demand for crop production. Agricultural demand is driven by food supply demand as well as increased use of bio fuels. We benefited not only from these overall market conditions but also from our use of low-cost petroleum coke as a feedstock in our dual current [ph] gasification process. Natural gas is a more typical feedstock for fertilizer productions.

In order to understand the profitability of our nitrogen fertilizer business, one must understand the operating expense structure. The current gasification process resulted in a higher threat to fixed cost and a traditional natural gas producer but significantly lower feedstock cost. In addition, geographically our Midwest location provides prompt and direct rail access with freight advantage to our primary markets and minimized shipping costs.

With respect to the 2008 quarterly results we reported ammonia production of 110,300 tons versus 75,900 tons for the third quarter of 2007. The third quarter of 2008 UAN production was 172,800 tons compared with 128,000 tons in 2007. Ammonia sales totaled 21,900 tons in the third quarter versus 24,700 tons in the 2007 period. UAN sales were 165,400 tons compared with 120,600 tons in the third quarter of 2007.

The value of the refracted nitrogen fertilizer products is important also in understanding our results. Our plant generally upgraded to about 230 of it's ammonium production in the UAN as part of a historically carried accretive value for ammonia. It takes about 0.4 tones of ammonia depletes 1 tone of 32% UAN. The order book as of September 30, 2008 which extends to first quarter of 2009 as an average net debt price of ammonia and UAN of $786 and $376 per ton respectively.

Forecasting pricings in today's volatile fertilizer markets is a difficult as forecasting oil prices with any certainty. Again as an unprecedented spike in real prices during this year resulted in other fertilizer prices rising to historic level.

With the result of an aberration in established fertilizer market relationships currently as the massive [ph] fertilizer markets are very thinly traded, pricing movements are often exaggerated and provide a little insight in forward price. Having said that we have currently sold the UAN at the level realized in our current reporting quarter.

And Ammonia as I said it's generally traded and we do see some softening in that market. Finally as Jack mentioned in his opening remarks in layout turbo we have successfully completed the facility turnaround, which normally takes place every two years.

In conclusion we see this business segment as a very solid contributor to CVR Energy. Jack will now provide additional perspective on CVR as a consolidated entity and discussed the refining business before we move to your questions. Jack

John "Jack" Lipinski - Chairman, Chief Executive Officer and President

Thank you Stan. I'd like to conclude with a few remarks and comments on our refinery operations and my view of prospects for both our businesses.

Our Mid Continent location in PAD II, Group 3 has historically provided us with higher refining and product margins than Gulf Coast and East Coast markets do to our logistical advantages. The difference between our Mid Continent price and those of the NYMEX are what we termed the basis or basis differential. This crude basis differential averaged $3.55 in the third quarter of 2008 and that compared to $9.46 a barrel in the comparable period in 2007.

Operationally our crude throughput averaged 114,680 barrels exact here in the quarter and other inputs totaled 11,750 barrels. Our total refinery inputs ... our total refinery output included, sorry 59,860 barrels a day of gasoline and 51,740 barrels a day of distillate. Gasoline production made up about 45% of our production with distillates coming in at about 39%. Now with respect to our gasoline production, we opportunistically blend low value gasoline component, which gives a favorable economics. That in turn gives us a higher gasoline yield and we would typically produce from the crude oil. So what I'm saying is our gasoline yield is higher due to the blending not due to the operation.

Distillate demand for transportation fuels in our market is further supported by agricultural yields. Other products including petroleum, coke and LPG comprise most of the remaining production. Pet coke is the principal feed stock for our adjacent nitrogen fertilizer plant. This provides a secure outlet for the refiner pet coke and a significant end product upgrading capability of the fertilizer.

Our nitrogen fertilizer business performed very well in the third quarter as Stan discussed in his remarks.

Going forward the demand in prices of nitrogen fertilizers will be driven by aggregate crop planting decisions and fertilizer application rates of individual farm. I'm optimistic that worldwide demand for Midwest produced agricultural products ranging from biofuels to fuels, will continue to grow over the long term, despite the current economic uncertainty. As a result of the turnaround at the fertilizer plant and maintenance that we've done on our refinery with a catalytic cracking unit, we will have some lower throughout in both of our business segments compared to the as of this current third quarter.

In closing we believe that the assets operating flexibility and positioning method and maintain announced plans and take advantage for opportunities as they arrive on each of our businesses.

We'll now turn it back to Stirling for any questions you may have.

Stirling Pack, Jr. - Vice President of Investor Relations

Thank you gentlemen we appreciate your comments. Manny we are prepared then to take questions from our listeners.

Question And Answer

Operator

Thank you. and ladies and gentlemen we will now be conducting a question and answer session. [Operator Instructions]. Thank you. And our first question is from the line of Jeff Dietert with Simmons & Company. Please go ahead.

Jeff Dietert - Simmons & Company

Good morning. I had a question, a follow-up question on your fertilizer business. In August you talked about selling some first quarter '09 product UAN at $550 and ammonia over $900 a ton. Could you give us an update on where you are selling product now?

John "Jack" Lipinski - Chairman, Chief Executive Officer and President

Yeah, absolutely. As recently over the last two weeks we've been selling UAN at current quarter levels of roughly $330 a ton and we did sold ammonia in the $500 ton range. This is at the moment.

Jeff Dietert - Simmons & Company

And what period is that... are those sales for?

John "Jack" Lipinski - Chairman, Chief Executive Officer and President

Those particular sales are not half cropped and half into the first quarter, little bit of both Jeff.

Jeff Dietert - Simmons & Company

Okay, all right, good. Second question. We're seeing crude supply trade and steeper discounts relative to WTI. Could you talk about what you are seeing at coffee drill [ph] as far as both gathered crude and other crude purchases that you are making?

James T. Rens - Chief Financial Officer

Sure Jeff. I only answer that one. Let's start out by just crude discounts. It was almost anomalous that when crude prices went up, discounts between the fleets hours spread in the heavy sweet spread also come in front rather than one would expect to spread out. Now that crude have come down into the current level of $60 or $70 a barrel, we are seeing those returns significantly. We are buying Canadian crude discounted and buying it up in harvest fee in $21, $22 barrels lost at BCI and the $60, $70 crude that were met with those same crudes of eight months ago were $16 to $18.

So on a percentage basis which we look at the discounts are improving and we are focusing more on running heavy Canadians again. We also are buying more foreign harbors basically the arb [ph] was not open from West Africa or South America for several months. That arb is now open and we are purchasing foreign orders once again bringing them up, waiting and pushing them into the plant. We are seeing a widening of our crude differential; our discounted WTI as we are going forward.

As far as crude... our gathered crude, we have expanded our gathering operations. We currently gather over 30,000 barrels a day, I think it's very [indiscernible] 32,000, and then lose a little bit. That's up almost 10,000 barrels a day, 8,000 to 10,000 barrels a day to one of it was several months. Some of that it's directly related to the problems that Singroup had. We have picked up a number of their customers and we are processing on expanding our gathering operations as we move along because we think we have the unique advantage and that we gather and that we bring it to the refinery which gives us WTI quality crudes adding significant discounts for WTI.

Jeff Dietert - Simmons & Company

Are those discounts widening further on the gathered crudes?

James T. Rens - Chief Financial Officer

No we don't necessarily see them go on an absolute dollar basis widening. They may in the future pretty much these are all P plus type of arrangements postings plus. Those numbers haven't moved and it's a competitive market so it's a big market. We would expect that if the discounts continue to widen on the crude side, WCS or coolake [ph] or even foreign crudes there may be more pressure on that price and of course we would follow pretty much the others and again there are several postings in the area.

Jeff Dietert - Simmons & Company

Could...I apologize if this is in the release, but I didn't see it. Could you update us on the liability associated with risk management assets from both short-term and long-term liability, associated with cash flow hedge?

Stanley A. Riemann - Chief Operating Officer

Yes. I mean as of...what was currently is... as of the last mark that we had which was... where we closed on October. And at that point October was again of roughly $1.8 million and... on end of October the unrealized mark was about $35.2 million.

Jeff Dietert - Simmons & Company

Okay. Good. And Jack is there any change in the put that Goldman has on the GP, I guess Goldman council have on the GP ownership?

John "Jack" Lipinski - Chairman, Chief Executive Officer and President

Nothing has changed there. And just to understand there, there are several triggers for that GP including a time treasure which is at the end of next year and then also the fact that there is some covenant triggers that have... would have to come into play. In other words, we would have to renegotiate our debt package to take the collateral obligation of the fertilizer business out from underneath that debt package, you know what the debt markets are. So this is a kind of... this is often the future certainly.

Stanley A. Riemann - Chief Operating Officer

Yeah and there's been no amendment I guess Jeff for those agreements, so the put rise that was originally there is there and it's kind of October of '09 before that rise can affect.

Jeff Dietert - Simmons & Company

It seems like a number of assumptions were made with that negotiation that the MLP IPO was going to move forward and given the change in the environment, whether it seemed appropriate to terminate those capabilities?

James T. Rens - Chief Financial Officer

That responsive call [ph]. That's a credit, it's not a call on our part. So I can't speak to what's responsive to the quality.

Jeff Dietert - Simmons & Company

Okay. Thanks for your comments.

Operator

[Operator Instructions]. There are currently no questions in the queue at this time.

Stirling Pack, Jr. - Vice President of Investor Relations

Okay, thank you very much for joining us today. Thank you Manny.

Operator

Ladies and gentlemen, this does conclude today's teleconference; you may disconnect your lines at this time. Thank you for your participation. .

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