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CVR Energy, Inc. (NYSE:CVI)

Q4 2008 Earnings Call Transcript

March 11, 2009, 2009 11:00 am ET

Executives

Stirling Pack – VP, IR

Jack Lipinski – Chairman, President and CEO

Tim Rens – CFO

Stan Riemann – COO

Analysts

Jeff Dietert – Simmons & Company

Vance Shaw – Credit Suisse Group

Paul Carpenter – Semaphore Management

Jon Evans [ph] – Wells Capital Management

Wayne Brown [ph]

Operator

Greetings and welcome to the CVR Energy year-end 2008 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, Stirling Pack, Vice President of Investor Relations for CVR Energy. Thank you. Mr. Pack, you may begin.

Stirling Pack

Thank you, Shay. And good morning, everyone. We appreciate very much your being on this conference call this morning to discuss our results. Prior to that discussion of our 2008 annual and fourth 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 our earnings release, which we filed earlier this morning.

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

Jack Lipinski

Stirling, thank you. And thank you all for joining us this morning for our fourth quarter and year-end 2008 earnings conference call. I’ll start by briefly giving my perspective on the current operating environment in our refining and nitrogen fertilizer businesses. Then I will summarize some of our key strategies that we focus on to take advantage of the current market conditions. Following my remarks, Tim Rens, our CFO, will review our financial results and provide additional context to today’s earnings release. Stan Riemann, our Chief Operating Officer, will then report on our operations.

Let me begin with our petroleum businesses. Refining industry as a whole continues to experience price and margin volatility with regional economics varying widely. Our refining economics in January and February of this quarter have benefited from relatively lower price WTI crude, coupled with strong cash refining margins in our area. Our Group 3 product basis differentials have been seasonally negative. But in aggregate, the contango crude market has more than offset this condition. We expect the contango market to adjust to more normal conditions over time.

All of this said, we benefited from these recent markets. As a reminder, we leased 2.7 million barrels of crude storage in Cushing, Oklahoma. This represents approximately 6% of the total crude oil storage located there. Cushing is a major trading and pricing hub for WTI crude. As a result of our storage capability, we have been able to take advantage of the contango market and lock in the differentials through derivatives.

2008 marked an important year for CVR, in which several legacy issues are now seen receiving in our rearview mirror. These include a long-term cash flow swap that is required under the lender agreement at the time of the initial acquisition, significant capital expenditures that were needed to improve our original asset base, and finally, the 2007 flood event that required us to defer certain payments owed to J. Aron under the cash flow swap.

At the end of June 2009, our cash flow swap ramps down from 6.2 million barrels a quarter to 1.5 million barrels a quarter, or at that point, about 15% of our production. One year later on June 30, 2010, our swap obligations would fully satisfy. As this swap rolls off, the noise in our earnings statements, realized and unrealized gains and losses will lessen, and a clear picture of our earnings will emerge.

With respect to the 2007 flood, we incurred a significant liability related to the temporary shutdown of our facilities. J. Aron agreed to defer certain payments owed to them under the cash flow swap, thus allowing us to use that cash to recover from the flood. One year ago this liability totaled $123.7 million. We have now completely paid off the deferral balance prior to its July 2009 due date. We satisfied this deferral with a combination of cash flow from operations, insurance proceeds, and ad valorem taxes returned to us under our property tax settlement with the local taxing authority.

Also in December 2008, the company amended its credit agreement to eliminate some of the potential issues of covenant compliance associated with the sharp drop in crude oil and product prices and the company’s resulting FIFO loss. In December, we also executed a new two-year intermediation agreement – crude intermediation agreement with Vitol that provides enhanced operating flexibility for purchasing and managing physical barrels of crude oil. This agreement provides for subsequent renewals with the consent of both parties.

Gathered crude provides a base supply of feedstock for our refinery. Year-over-year we have grown our crude gathering business by 27% to nearly 26,000 barrels a day. These base barrels serve as an attractive alternative to other crudes we normally process. We look at every opportunity to improve our access to this favorable crude supply and to optimize our gathering operations.

In today’s operating environment, our strategy centers on safely and efficiently operating our refinery, crude gathering and terminal [ph] businesses. We will remain flexible in our approach to operating levels given market volatility.

Let me now address fertilizers. Our nitrogen fertilizer business experienced an unprecedented pricing cycle in 2008. Prices for Mid Cornbelt and Southern Plains nitrogen-based fertilizers rose steadily during the year reaching a peak in late summer, before eventually declining sharply through the end of the year. Ammonia and urea ammonium nitrate solution, or UAN, prices have come off their December lows ahead of the spring season.

Prices are down from the comparable period in 2008, but are in line with those of early 2007. Projections from the USDA are that corn acreage for the 2009-2010 crop year will be approximately 86 million acres, which is similar to the 2008-2009 crop year. Despite the recession, farmers will plan to satisfy demand for food and biofuels.

With respect to our operating strategy, we continue to focus on the same metrics as we do in refining, namely operating safely and efficiently. We are benefiting from a very successful turnaround last fall. Our maximum hydrogen output from our gas fire complex has increased approximately 5%. And we are pleased with our operating rates since the turnaround.

Now let me summarize my overview of CVR by saying that the last two years have presented us with many challenges in both our businesses. Decisions made, actions taken, and plans for the future that we are executing have positioned us to operate profitably even in low-margin environments. At present, we have no cash drawn on our revolving credit facility. We have $30.2 million of cash on hand. And as a result of market contango, we are carrying higher levels of crude inventory, which will immensely be monetized.

We do fully recognize the uncertainties of the commodity markets and the operating risk inherent in our businesses. Last November we embarked our plan to strengthen our balance sheet. We believe the capital expenditures made over this past few years now give us the opportunity to be more selective with capital for the next few years. Consequently, we deferred the completion of our UAN expansion project as well as other small discretionary projects.

As a result of additional maintenance work performed during the 2007 flood recovery and subsequent maintenance outages, we have now moved our 2010 refinery turnaround into 2011. We are focused on minimizing our costs, aggressively managing our capital expenditures; our overriding creed is to do it safely in an environmentally responsible manner.

Tim Rens will next report on our financial results. Tim, if you will?

Tim Rens

Thank you, Jack. I’m going to recap our annual results and then discuss in more detail our fourth quarter financials and our balance sheet. As stated in our press release, we reported consolidated net income of $163.9 million or $1.90 per fully diluted share for the full-year 2008 versus a loss of $67.9 million or $0.78 per fully diluted share for the full-year 2007.

Net income adjusted for the annualized impact for the cash flow swap, share-based compensation, and a goodwill impairment charge for the full-year 2008 was $21.6 million or $0.25 per adjusted fully diluted share compared to adjusted net income for the full year 2007 of $31.2 million or an adjusted pro forma income of $0.36 per fully diluted share.

Our adjusted net income results for 2008 and the comparable period in 2007 were impacted by our FIFO inventory accounting method. For the year 2008 our FIFO loss was $102.5 million compared to a gain in 2007 of $69.9 million. We have also not adjusted net income for realized losses on the cash flow swap of $110.4 million and $157.2 million in 2008 and 2007 respectively. As Jack mentioned, our exposure to the swap drop significantly at the end of 2009 and falls away completely – at the end of June 2009 and falls away completely at the end of June 2010.

Our fourth quarter and annual petroleum segment results for 2008 were impacted by a $42.8 million goodwill impairment, which has already been adjusted out in determination of adjusted net income. In addition, we experienced $10 million in expense associated with amending our credit agreement.

For the quarter ended December 31, 2008, we reported net income of $11.1 million or $0.13 per fully diluted share compared to a net loss of $24.5 million or $0.28 per fully diluted share for the comparable period in 2007. Net income adjusted for the annualized impact of the cash flow swap, share-based compensation and the goodwill impairment charge for the fourth quarter was an adjusted net loss of $60.8 million, which is not adjusted for the unfavorable FIFO impact of $117.1 million. The adjusted diluted loss per share was $0.70 before the FIFO adjustment.

The fourth quarter 2007 adjusted income was $7.7 million on adjusted pro forma income of $0.09 per fully diluted share, excluding a favorable FIFO impact of $33.1 million. Realized losses on the cash flow swap, which have not been adjusted for in adjusted net income, were $2.6 million in the fourth quarter of 2008 and $14.7 million for the comparable period in 2007.

Petroleum segment operating income for the fourth quarter of 2008 adjusted for the FIFO loss of $117.1 million and the goodwill impairment of $42.8 million was $6.1 million compared to an operating loss of $10.5 million for the fourth quarter of 2007. Refining margin before the FIFO impact for the fourth quarter of $62.5 million or $6.96 per barrel of crude oil throughput compared to $84.8 million or $8.35 per barrel of crude oil throughput for the fourth quarter 2007. The variance to 2007 was the result of the combination of lower consumed crude prices, differentials to WTI, lower crack spreads, and lower throughput volume.

Refinery direct operating expenses, exclusive of depreciation and amortization, were $31.3 million for the fourth quarter of 2008 compared to $38.8 million in 2007. A $9.95 million variance resulted in the settlement of the 2007/2008 property taxes bill and it was also a reversal of share-based compensation of $3.9 million. These benefits were somewhat offset by a $4.2 million expense associated with unscheduled maintenance on the FCC unit and the crude unit.

Operating income for the fertilizer segment was $21.2 million or about 31% of net sales for the fourth quarter of 2008 compared to about $11.7 million or 23% of sales for the fourth quarter of 2007. For the entire year 2008, operating income was 44% of sales compared to 28% in 2007. Higher prices and lower SG&A accounted for substantially all of the increase versus 2007. Somewhat offsetting benefits were lower sales volumes and higher operating expenses.

Direct operating expenses were $26.7 million for the quarter compared to $18.5 million in 2007, with the increase primarily the result of property taxes in the 2008 schedule turnaround. Consolidated SG&A expense, excluding depreciation and amortization and adjusted for the benefit from share-based compensation, was $20.3 million for the fourth quarter of 2008 compared to $22.7 million in the fourth quarter of 2007, as adjusted.

The decrease was substantially the result of a $10.5 million decrease in management fees due to our IPO in the fourth quarter of 2007, offset by $2.9 million increase in consulting work associated with our SOX readiness effort, legal expenses, and our debt offering, and a $4.1 million loss for the retirement of assets. Currently, we expect consolidated SG&A expense, exclusive of depreciation and amortization and share-based compensation, to run approximately $15 million per quarter, excluding any unique events.

I will now turn to some brief comments regarding cash flow and our current liquidity. As Jack mentioned, operating performance coupled with strong Mid-Continent refining margins, the impact of shipping higher priced fertilizer orders, the collection of insurance proceeds and the recovery from property tax and income tax returns have enabled us to pay off J. Aron deferral while increasing our unrestricted cash on hand.

As of this morning, we have $30.2 million of cash on hand despite higher than customary inventory volumes as a result of our decision to take advantage of contango in the crude oil market. Outstanding term debt is $483.1 million and we do not have any funds drawn on our revolving credit facility resulting in availability of $116 million after recognition of $34 million of outstanding letters of credit.

As a result of paying off the J. Aron deferral, postponing the completion of the UAN project and delaying where possible capital expenditures, we do not have any significant non-operational cash obligations in the near term. Income tax expense for the quarter ended December 31, 2008 was $12.6 million. When taken in combination with the previous three quarters, this yields an annual income tax expense of $63.9 million and an annual effective tax rate for 2008 at 28.05%. The company anticipates the annual effective tax rate for 2009 to be between 27% and 30%, including the recognition of approximately $7.3 million in tax credits for additional ultra-low sulfur diesel production and $4.5 million in Kansas (inaudible) credit.

Stan Riemann, our COO, will next review our fourth quarter operations.

Stan Riemann

Thank you, Tim. In an effort to provide some additional context for our reported financial results, I would now like to review key operating metrics of the nitrogen fertilizer business as well as our petroleum business. In our fertilizer business, it is important in understanding reported results and forecasting future expected earnings that we do sell forward our urea ammonium nitrate solutions or UAN production. This is reflected in our fertilizer order book.

Realized prices in any given quarter reflect both stock prices and historical contracts. For example, the first quarter of 2009 reflects the stronger prices experienced last year combined with the current prices in orders. Our current order book for UAN is approximately 90,000 tons at an average price of just over $380 per ton. Since year-end, ammonia prices have rebounded off their lows, but are still currently weighted to industrial as opposed to agricultural demand. We are, however, seeing and expect to see further price strengthening as agricultural applications begin. As you know, agricultural ammonia commends a price premium over industrial ammonia sales prices.

We have completed a scheduled turnaround of our fertilizer plant in October 2008. Production of (inaudible) is now in excess of 85 million standard cubic feet a day, which is a substantial improvement over pre-turnaround rates. High on-stream times have also allowed us to increase production since the turnaround and our key operating statistics in our fixed-cost fertilizer operation. Our on-stream times in recent months for gas fire have been nearly 100%. Hydrogen from the gas fires in further process to form ammonia and later UAN. Again, on-stream factors for these units reflect a primary measure of utilization in these operations.

Reviewing these metrics for comparison purposes, on-stream factors adjusted for the turnaround for the full year 2008 were gasification 91.7%, ammonia 90.2%, and UAN 87.4%. Comparable numbers for the 2007 period adjusted for flood were gasification 94.6%, ammonia 92.4%, and UAN 83.9%. On-stream factors adjusted for the turnaround for the fourth quarter of 2008 were gasification 93.8%, ammonia 92.1%, and UAN 90.4%. Comparable numbers for the 2007 period adjusted for flood were gasification 97.7%, ammonia 96.7%, and UAN 79.4%.

Nitrogen fertilizer production comparisons provide another metric for analyzing our operational effectiveness. For the full year of 2008, gross ammonia production was 359,100 tons, net ammonia for sale was 112,500 tons, UAN production was 599,200 tons. For the 2007 full year, ammonia production was 326,700 tons, with 91,800 tons available for sale. Total UAN production was 576,900 tons.

Ammonia plant gate realized product price for the full year 2008 was $557 a ton versus $376 a ton for 2007. UAN realized prices for 2008 were $303 a ton compared to $211 a ton in 2007. Ammonia plant gate realized prices for the fourth quarter 2008 were $536 a ton versus $408 a ton in 2007. Realized UAN prices for 2008 fourth quarter were $324 a ton versus $236 a ton in 2007. At present, we expect to see prices lower than last year’s historical highs, but above long-term averages.

On the refining side, the key operating statistics for our refinery are throughput volumes and production. Full-year 2008 crude oil throughput volumes averaged 105,800 barrels per day versus 76,300 barrels a day in 2007. Total throughput, including feed and blendstocks, averaged 117,700 barrels a day in 2008 compared with 82,100 barrels a day in 2007. Again, please recall that 2007 was impacted by a turnaround and a flood.

For the fourth quarter of 2008, crude throughput averaged 97,700 barrels a day versus 110,300 barrels a day in 2007. Total throughput, including feed and blendstocks, in the fourth quarter averaged 110,700 barrels a day in 2008 versus 122,400 barrels a day in 2007. These lower throughput numbers reflect downtime associated with maintenance in the fourth quarter on (inaudible).

Refinery production primarily gasoline and diesel [ph] totaled 118,500 barrels a day for the 2008 period versus 82,400 barrels a day in 2007. The fourth quarter production for 2008 was 111,200 barrels a day compared with 124,500 barrels a day in 2007’s fourth quarter. We expect first quarter 2009 refining crude throughputs to average approximately 103,000 barrels a day. Total throughput, including feed and blendstocks, should total approximately 117,000 barrels a day.

I will now ask Jack for any concluding remarks.

Jack Lipinski

Thank you, both Stan and Tim. As a team, we are focused on operational excellence. This goes not only to how we run our hardware, but how we buy and manage our crude and feedstocks, how we market our products, and how we react to market opportunities. We are clearly a stronger company today than we have been in the past. We believe if we do our jobs better everyday, the results will show up on our bottom line.

We thank you all for joining us today. And I’ll now turn the call back to Stirling who will start the Q&A.

Stirling Pack

Thank you very much, gentlemen. Shay, we are prepared at this point to take questions. And so we will just turn it back over to you and take them as they come.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Jeff Dietert from Simmons & Company.

Jeff Dietert – Simmons & Company

Good morning. Jeff Dietert with Simmons & Company.

Jack Lipinski

Good morning, Jeff.

Jeff Dietert – Simmons & Company

I was wondering if you could provide some information. On the third quarter you had almost $340 million of swap payable on the balance sheet. Could you give us an update as to what that looks like at the end of the fourth Q?

Jack Lipinski

Tim, I’ll let you tell –

Tim Rens

Yes. Jeff, at the end of the quarter, the mark is a liability of approximately 30 – $38 million, and that includes approximately $2.6 million from the fourth quarter.

Jeff Dietert – Simmons & Company

Okay. And so that liability has gone down substantially. And was that marked at 12/31?

Tim Rens

Yes.

Jeff Dietert – Simmons & Company

Okay. And if you were to mark it today –?

Tim Rens

Well, obviously there is a lot of volatility. I did not mark it this morning, but clearly it’s improved from that particular mark.

Jeff Dietert – Simmons & Company

Yes. So that liability is potentially going to be an asset –

Tim Rens

That’s right. And when you look at today’s forward strip, obviously again it moves every day. And clearly there has been a lot of volatility in the market. But based on the forward strip today, that’s right, it would be in the money.

Jeff Dietert – Simmons & Company

Good. And Jack, you’ve talked previously about having some flexibility on those swaps. What’s your current view? Do you plan to hold on to those cash flow swaps or would you consider monetizing were they to become an asset at some point?

Jack Lipinski

Under our credit agreement, we have certain limitations about how much of this we can take or not take, just with our recent amendment. The volatility in the marketplace is – I'm not sure I’m smarter than the market if I'm looking at a chart here, we put together over the last four months, as the back strip rolls off, it has been rising in the front line. If you look at January and February, three months ago, it was never at the levels that we actually experienced in January and February, for two reasons. One, I’m not smart enough to know whether or not I should take it off; second, (inaudible) under our credit agreement.

Tim Rens

Jack is exactly right, Jeff. We cannot change the position under the terms of our credit agreement.

Jeff Dietert – Simmons & Company

Okay. And question for Stan, on the fertilizer book, could you talk about what prices you are seeing for UAN and what prices you are locking in and what periods you are locking them in for?

Stan Riemann

At this time, Jeff, we are really not locking in any forward price. We are taking prompt orders because we’re getting into our spring business. So most of the product is either being pulled that was previously contracted or going directly on the ground. But to answer your question on ammonia prices, the agricultural demand last week has been going out in the $350 range – $350 a ton range and UAN was going out in the $220 to $230 range. And those numbers have been creeping up as we get closer to the spring season.

Jeff Dietert – Simmons & Company

Very good. Thanks for your comments, guys.

Operator

Thank you. Our next question is coming from Vance Shaw - Credit Suisse Group. Please pose your question.

Vance Shaw – Credit Suisse Group

Hi. Yes, good morning. Credit Suisse on the buy side. Well, thanks for answering one question actually. The cash flow is so low because you guys have basically totally paid off of the J. Aron liability, which is great.

Jack Lipinski

Thank you. Again, our focus is balance sheet related. Anything we could do to clean up our balance sheet, strengthen it or just even look forward to building a little cushion, never know where the market is going to go. We’d rather be sitting on something than looking for something.

Vance Shaw – Credit Suisse Group

Sure. I think Tim might have given the number, but you sort of broke up a little bit. Can you tell us what the term loan balance was as of the end of December and also what the draw on the revolver was as of the end of December?

Tim Rens

Yes. Actually at the end of December there was no net draw on the revolver.

Vance Shaw – Credit Suisse Group

Okay. And – but you just saw LCs against that are probably rough.

Tim Rens

About $34 million of LCs left with about $116 million of total capacity. And our outstanding debt on the term loan at the end of the year was $483 million.

Vance Shaw – Credit Suisse Group

Okay, thanks. In terms of the swap, it looks like for Q4 I guess the 211 crack was 782. So you guys have paid in Q4 under the swap –

Tim Rens

No, we didn’t because it doesn’t mark on the last day. Right? It would be the average value that the 211 was over the entire fourth quarter. So we actually paid about $2.6 million.

Vance Shaw – Credit Suisse Group

Okay, I understand. I thought you had given the averages in the press release. I understand. Okay, thanks on that. Do you guys have a – I know you changed your EBITDA calculation to sort of knock out FIFO effects. Do you guys have a number for what you think EBITDA was under the new covenants for Q4 and also for the full year?

Tim Rens

We actually do publish the credit EBITDA for the full year under the new – I don’t have that in front of me right now. I will get that for you and respond here in just a little bit. If we want to move on, I’ll come back to that question.

Vance Shaw – Credit Suisse Group

Okay, sure. I’ll just ask another real quick one. Any capitalized interest in the quarter?

Tim Rens

No. No material capitalized interest with the conclusion of all the large projects.

Vance Shaw – Credit Suisse Group

Okay, cool. And I guess the final – just a final couple questions. One is, on the swap going forward, there is no requirement in the credit agreement that you need to be a certain percentage hedged.

Tim Rens

No, the agreement really comes from our – that we cannot amend material agreements, and the swap is a material agreement. So right now, I mean, the conclusion is under the credit agreement, given our current leverage ratio that we are not free to move substantially our hedge volume. We can respond to market conditions or plant-related conditions such that if we felt like the production is going to be down for some reason, we could make a position to not have the swap on against a position that we won’t generate in physical production. But we cannot just remove the swap right now as the market calls.

Vance Shaw – Credit Suisse Group

No, I understand, Tim. But when this rolls off middle of 2010, you guys don’t have to have any hedges in place to –

Tim Rens

No, absolutely no. Beyond the current amounts that are on our swap agreement, there is no additional obligation.

Vance Shaw – Credit Suisse Group

Got you. And just another sort of an obvious question, but – I guess Goldman and Kelso are looking to sell quite a bit of the stock of CVR. There is no proceeds coming –

Jack Lipinski

I’m sorry, could you –

Tim Rens

I missed that question.

Vance Shaw – Credit Suisse Group

I’m sorry. Are there any proceeds coming to the company from the Kelso and Goldman sale? In other words, is the company selling some equity as well or is it just Kelso and Goldman? I think that’s S-3 and S-4 [ph] –

Tim Rens

Right now, the shelf was basically filed. But there are no immediate plans to sell any shares. And the way their S-3 is constructed, it would give us the right to sell our primary offering or raise debt. Or on the converse, it would allow our shareholders to sell shares and those proceeds would not come into CVR Energy.

Vance Shaw – Credit Suisse Group

Okay. So it could go either – so it could go either way, but you seem to be saying that there is nothing –

Tim Rens

There is nothing imminent. The opportunity past the one year market, which we could issue the shelf registration and it’s a fairly broad document that gives a lot of different opportunity. But there is nothing imminent.

Vance Shaw – Credit Suisse Group

I understand. It’s just a renewal then.

Tim Rens

Yes.

Vance Shaw – Credit Suisse Group

Okay. Thank you very much, guys. Appreciate it.

Jack Lipinski

It’s basically as to how extreme as you could get giving the company as much flexibility as it may need in the future.

Vance Shaw – Credit Suisse Group

Got you. Thank you.

Operator

Thank you. Our next question is coming from Saw Ingle [ph] from Semaphore Management.

Paul Carpenter – Semaphore Management

Good morning. It’s actually Paul Carpenter asking the question. Just a couple questions if I could. Do you have a capital spending number in mind for 2009? And if you could, could you break it out as to how much might be expense and run through the income statement and how much would not be or just be normal CapEx running up on the cash flow statement?

Tim Rens

Yes. The CapEx number that we are managing here in 2009 is approximately $92 million.

Paul Carpenter – Semaphore Management

And that’s all going to hit the cash flow statement, that’s not including what might be run through the income statement as maintenance?

Jack Lipinski

Our maintenance is – I mean, we budget for maintenance, but there would be nothing extraordinary in quarter-to-quarter maintenance.

Tim Rens

Yes. And there is really – if you are trying to look at the way we disclose it, there is no turnaround right now scheduled for 2009, which is kind of in some of our liquidity tables as capital and rolls through the income statement. And there is no material turnaround scheduled for 2009.

Paul Carpenter – Semaphore Management

Okay. And to that end, would you mind giving a little more clarity in terms of hard numbers and what you might expect going forward on a quarterly basis for SG&A and refinery OpEx and fertilizer OpEx, because some of the numbers at least for the fourth quarter, you have reversals of share comp, you have some of these tax issues, which are somewhat one-off in nature? Any more clarity that you give or a sort of normalized number for those three? I understand that the OpEx will – there are some issues that are out of plan and control, but there is such a large number of unusual items in the more recent data, let alone having to deal with the flood from ‘07 that it’s hard to get a consistent handle on what it might look like going forward.

Jack Lipinski

Well, Tim, in his discussion, our SG&A has run rate of approximately $15 million a quarter. The refinery operating cost is normally about $4 a barrel. And the fertilizer operations, including feedstock, is somewhere in the range of approximately $85 million a year. And if you want – I mean, that is the range. If you look at the refinery operating expense over time, you see that number go up. Our refinery went from a low-90s – 90,000 barrel a day plant with a low 10 complexity to 115,000 barrels a day with a 12.1 complexity. And when you actually do the calculation on dollars operating cost per complexity barrel, even in an environment of rising cost, we’ve held our cost constant or actually slightly dropped them. And the fertilizer operation is always within a few million dollars a year of that mid $80 million a year.

Stan Riemann

High 70s, low 80s.

Jack Lipinski

High 70s, low 80s. I hope that’s helpful.

Paul Carpenter – Semaphore Management

It does help. Maybe I didn't ask the question in the best way possible. I understand that the feedstock side cost may vary, and refinery OpEx you have to pay to run the plant and the price you might have to pay to run the plant could change based on the price of fuel. So I guess the way I was – what I was looking for is a little more clarity just on what is labor, what is maintenance, what are the more solvable inputs, knowing that some of those other inputs are going to fluctuate and are beyond your control.

Jack Lipinski

You know, I would suggest that – we sincerely don't have this just handy at our fingertips right now, but we do have that information. It probably would be worthwhile to touch base with Investor Relations and talk that through or with Tim.

Paul Carpenter – Semaphore Management

Okay, thank you.

Jack Lipinski

I’m sorry. It’s just we weren’t prepared for that detail right here.

Operator

Have your questions been answered?

Paul Carpenter – Semaphore Management

Yes, thank you.

Operator

Thank you. (Operator instructions) Our next question is coming from Jon Evans [ph] from Wells Capital Management.

Jon Evans – Wells Capital Management

Could you just talk a little bit about maybe your thought process on nitrogen and urea and ammonia? You sound like you are bullish for the spring season. Can you give some insights, maybe what you are seeing in the marketplace? Is the market tight? And maybe a little bit from the standpoint of demand and how much you think you can be able to capitalize and produce?

Jack Lipinski

Stan?

Stan Riemann

Well, I'll start with demand. We think demand is going to be very good. We are looking at roughly 86 million acres of corn. And keep in mind, we ship right to the heart of the Cornbelt. Whether corn acres go up or go down really doesn’t affect our market. Our market hasn’t changed that much. So, not that we are not affected by the variable acre, but the demand will be pretty consistent. We are bullish on the fertilizer prices. I guess I’d have to tell you. They are not going to be of a historical blowout type numbers that we saw in the summer and fall of last year, but the numbers we see in our ’07 and higher type numbers. And quite frankly, in our area on nitrogen, and I’m not speaking to phosphate or potash, but on nitrogen, we just have not seen producers cut back on the wheat or on the corn. They seem to be going after it with, as you would expect them to, to get bushels off the acres. So, yes, you're reading this right. We're feeling good about business on the nitrogen side.

Jon Evans – Wells Capital Management

There is a couple analysts that believe potentially that there is not going to be maybe enough nitrogen et cetera in those products out there because imports aren’t going to land here in time. I’m curious to get your thoughts on – can you just give us any kind of sense of what kind of inventory you see at the distribution channel? And do you think that is a probability?

Jack Lipinski

I wouldn’t say it’s a probability. It’s a possibility. I think the inventories on liquid nitrogen are pretty much in place for the spring season and obviously they will have to be replenished, which will be the challenge. I think the anhydrous ammonia is pretty much in place. I think urea may be somewhat lacking, which is what you're picking up on imports. There could very well be some logistical problems in getting product to the market. There is enough to get started, but at 86 million acres of corn, the last part of the planting season and fertilizer season could very well get interesting.

Jon Evans – Wells Capital Management

Okay. And then just a follow-up – two more follow-ups to that. Since they skipped the fall application, do they have to put down more than normal in the spring? And then the other question relative to that is, do you expect the fall application this year to be pretty robust since they skipped the fall in ’08?

Jack Lipinski

Well, in some areas they did have a good application. We had a pretty good movement into the Illinois market. I think Nebraska, Iowa market application was down somewhat. In terms of application rate, no. The applications rates for the spring would be the same as if they had put it down in the fall. So I don’t look at the application rate changing fall versus spring. The outlook for fall this year is really dependent on weather. If the weather allows, they will certainly do fall application where appropriate, but they are always limited by the timing of getting the harvest out and the reliability of weather to allow you to do so. So, ask me that question next October and I’ll try a little smarter, but it’s little hard to predict it.

Jon Evans – Wells Capital Management

Okay. And then just a last question. I mean, basically your plant – are you running full out right now kind of?

Jack Lipinski

We are. We are and have been.

Jon Evans – Wells Capital Management

Okay.

Jack Lipinski

Ever since the turnaround, we’ve had very, very good on-stream turns.

Jon Evans – Wells Capital Management

Got it. And I guess when did the turnaround end?

Jack Lipinski

October.

Jon Evans – Wells Capital Management

October. Fantastic. Okay, thank you for your time.

Jack Lipinski

Thank you.

Operator

Thank you. Our next question is coming from Wayne Brown [ph] who is a private investor.

Wayne Brown

Good morning, gentlemen.

Jack Lipinski

Good morning.

Wayne Brown

I wanted to find out from you, now that you have a couple of months of the first quarter already under your belt, whether you can give some color as to the crack spreads that you’ve been enjoying as compared to possibly the fourth quarter, as well as looking forward as far as percentages above normal that you have been counting inventory now taking advantage of the contango situation.

Jack Lipinski

Okay. Well, as far as crack, January and February were reasonably exceptional and some of that was tied directly to what people term the super contango in the market. I’d probably go a little bit afield, but it bears some explanation. WTI effectively became the lowest price crude on the planet to be crude as a marker. The rest of the world’s crude such as plant or even Gulf Coast sweets and sours were trading significantly over WTI.

What that meant is that crack spreads tended to follow the contango. When contango rose, the crack spreads rose, because if someone say was running Louisiana light sweet crude at $7 a barrel over WTI, the crack had to expand literally to make it reasonable to run. So what happened is, in January and February the cracks were very robust. We’ve seen a dramatic fall-off – I don’t want to use the word dramatic because on a historical perspective they are still good. But they have dropped back into the $7 range as contango has left the front to back this morning. It was about $1.25. We had seen numbers front to back. So it’s $4, $5, $6, $7. Even at $1.25, historically this is a pretty steep contango and it still pays us to carry some volume.

Now, the thing we measure on cracks and not a lot of our peers and not all analysts do is we look at cracks as a percentage of crude. We basically take NYMEX 211 and relate it to WTI. For decades on an annual average, the crack spread would range somewhere between 17% and 20% of crude 95% or 96% of the time. So if you were to say you had $44 crude this morning, you would say you should have about an $8 crack – little over an $8 crack. However, seasonally this is the off-season. This isn’t a high season. So if you look back, these cracks that we are seeing today, in historical perspective, we would have been thrilled with.

Now, we do see seasonal adjustments due to our locations. The group tends to have lower relative prices to the NYMEX in the winter time and higher during the summer on an annual average. That’s a positive number to both Gulf and East Coast. But at this time of year, it’s offset by that. To answer your question about contango, we do store and bring on our crude through our crude intermediation agreement. We also have crude in our gathering system and in refinery tankage. Rough numbers we're carrying something immediately liquidateable [ph] of about 400,000 to 500,000 barrels of crude.

Wayne Brown

What is your capacity if you were to have 100% storage?

Jack Lipinski

We have a little – approximately 3.6 million barrels total storage of crude. 2.7 million of that is in Cushing, Oklahoma. But we do use a portion of that not for storage, but for throughput. We bring in all the various crudes we run, including Canadian crude, Gulf Coast sours. You name it, we can take crude just about from anywhere in the world. So a portion of that is used for blending and throughput.

Wayne Brown

And also – so you’ve been taking advantage of the Cushing pricing primarily for your light sweet then, right?

Jack Lipinski

That is correct. We have actually focused because of the contango spread and the ability to effectively lock it up in derivatives. If you were to look at the gravity and the sulfur of the crude slate we're running in the first quarter, it is lighter and it is sweeter than we’ve run before.

Wayne Brown

I was just curious as far as ’09 – you know, first quarter guidance, you didn’t have anything in writing in the press release.

Jack Lipinski

We generally – we will give operating statistics. We generally don’t give guidance on earnings per share.

Wayne Brown

Okay. I appreciate your help. Thank you very much.

Jack Lipinski

Thank you.

Operator

Thank you. At this time, we have no further questions. I’d like to turn the call back over to Mr. Pack for any closing remarks.

Tim Rens

Yes. Stirling, I would like to circle back to one question that I left open. And our credit agreement EBITDA for the year was $281.1 million. That included the FIFO adjustment of $102.5 million. We do no longer calculate the credit agreement EBITDA on a quarterly basis because of the mechanics of calculating the FIFO adjustment. We now only calculate it on an LTM basis. LTM ending December 31 or the annual 2008 number was $281.1 million.

Stirling Pack

Thank you very much, Tim. Thank you, everyone, for being on this call. Jack, anything do you want to say or should we go ahead and close the call?

Jack Lipinski

No, thank you. Thank you all for joining us. Look forward to talking to you when we report our first quarter earnings.

Stirling Pack

Okay. Thank you very much. Thank you, Shay. And we appreciate everyone being on the call. I’ll speak with you soon.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: CVR Energy, Inc. Q4 2008 Earnings Call Transcript
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