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CVR Refining, LP (NYSE:CVRR)

Q4 2012 Earnings Conference Call

March 12, 2013 11:00 AM ET

Executives

John J. Lipinski - CEO and President

Susan M. Ball - CFO and Treasurer

Stanley A. Riemann - Chief Operating Officer

Jay Finks – Investor Relations

Analysts

Mohit Bhardwaj - Citigroup Inc, Research Division

Operator

Greetings and welcome to the CVR Refining, LP Fourth Quarter 2012 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 Jay Finks, Director of Finance. Thank you, Mr. Finks. You may now begin.

Jay Finks

Thank you, Jessie. Good morning, everyone. We very much appreciate you joining us this morning for CVR Refining year-end 2012 earnings call. With me are Jack Lipinski, our Chief Executive Officer; Susan Ball, our Chief Financial Officer; and Stan Riemann, our Chief Operating Officer.

Prior to discussing our 2012 fourth quarter and full-year results, let me remind you this conference call may contain forward-looking statements, as that term is defined under Federal Securities Laws. For this purpose, any statements made during this call that are not statements of historical facts may be deemed to be forward-looking statements, without limiting the foregoing, the words believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements.

You’re cautioned that these statements may be affected by important factors set forth in our filings with the Securities and Exchange Commission and are related to this earnings release. As a result, actual operations or results may differ materially from the results discussed in the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise.

This call also includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures, including reconciliation to the most directly comparable GAAP financial measure are included in our 2012 fourth quarter and full-year earnings release that we filed with the SEC this morning prior to the opening of the market.

With that said, I'll turn the call over to Jack Lipinski, our Chief Executive Officer. Jack?

John J. Lipinski

Thank you, Jay, and good morning everyone, and thanks for joining us. We reported that CVR Refining for the first time and these results were reported as if CVR Refining was in place for the entire year 2012.

As I always do, I will provide a recap of the fourth quarter and full-year results and operational related impacts. Susan will then provide more detail around the numbers reported this morning, and I will finish with some closing remarks.

Firstly, before I get to our results, there are some key milestones we achieved during the year. In October, we issued $500 million of new notes to refinance our first lien senior secured notes, which were fully redeemed in November. In December, we entered into the Amended and Restated ABL Facility for the Company. On January 23, we closed our initial public offering of CVR Refining, LP. This was the largest IPO of a master limited partnership to-date.

I would like to take some time to thank our employees for the countless hours and tremendous effort they spent over the months making this happen. I'm also proud to report the strong earnings for both the fourth quarter and full-year. For the fourth quarter, consolidated adjusted EBITDA was $196.2 million versus $44.3 million in the fourth quarter of 2011. For the full-year 2012, our adjusted EBITDA was $1.2 billion versus $577 million during the full-year 2011. Some of the drivers of our earnings were strong crack spreads, our access to price-advantaged crudes, and high operating throughputs.

In the fourth quarter of 2012, the NYMEX 2-1-1 Crack Spread averaged $33.32 a barrel. With the Brent WTI spread averaging $22.09 over the quarter. For the year, the NYMEX 2-1-1 Crack Spread averaged $30.75 per barrel and Brent WTI averaged about $17.35. In the fourth quarter, we realized seasonally weaker product basis in the group, the PADD II Group 3 product basis was a negative $1.13 a barrel as compared to a positive $0.05 a barrel in the same quarter last year.

Our overall realized refining margin adjusted for FIFO was $25.93 a barrel compared to $11.05 a barrel in the same quarter last year. On an operational basis, we completed the major scheduled turnaround at our Wynnewood Refinery in December. During the quarter, our turnaround expenses totaled approximately $89 million. The total cost for the Wynnewood turnaround was about a $102.5 million.

Overall, CVR Refining incurred approximately $124 million in turnaround expenses for the entire year, which included the completion of the Coffeyville bifurcated turnaround in the first quarter of 2012.

In the fourth quarter, we ran 147,800 barrels per day of crude. That's roughly a 125,000 -- 124,600 barrels at Coffeyville and 23,250 barrels at Wynnewood. Our actual results were below – just below the low end of our guidance that I provided at our last earnings call, and it was directly due to the extended turnaround lasting into December.

Like most mid-continent refiners, we continue to benefit from attractively priced crudes. At Coffeyville, our purchased crude oil to discount for the fourth quarter was a $1.74 per barrel as compared to a $1.92 a barrel in the fourth quarter of 2011. For the full-year 2012, Coffeyville’s purchased crude to discount to WTI was $2.56 per barrel as compared to $3.95 per barrel in 2011.

At our Wynnewood Refinery, our purchased crude premium for the fourth quarter was $4.05 a barrel, a lot of that has to do with timing and everything around our turnaround. For the year, Wynnewood’s purchase crude discount was $1.38 a barrel. Our gathering system continues to perform very well. We gathered over 50,000 barrels a day for the quarter, an average of 46,000 barrels a day for the entire year.

I'll turn the call over to Susan now to talk about the financials, and then I will have some closing remarks. Susan?

Susan M. Ball

Thank you, Jack, and good morning, everyone. As Jack previously mentioned, CVRR posted strong quarterly and annual financial results. Net income was $54.6 million in the fourth quarter of 2012 as compared to net income of $77.5 million in the fourth quarter of last year. For the full-year of 2012, our net income was $595.3 million as compared to $480.3 million in 2011.

Adjusted EBITDA for the quarter was $196.2 million versus $44.3 million in the fourth quarter of 2011. For the full-year 2012, adjusted EBITDA was $1.2 billion as compared to $577 million in 2011. The primary drivers for the year-over-year increase were the acquisition of Wynnewood with the inclusion of their full-year results in 2012, but additionally the increased crude throughputs and higher refining margins in the 2012 year.

In 2012, our Wynnewood refinery contributed $235.5 million in gross profit; excluding the major scheduled turnaround expenses of $102.5 million, Wynnewood contributed approximately $338 million in 2012.

2012 was a very solid year of results from Wynnewood. We are very pleased with Wynnewood’s performance. Crude throughputs for both refineries were 169,400 barrels per day in 2012 as compared to approximately 103,700 barrels in 2011. On a more comparative note, Coffeyville ran at approximately 114,800 barrels of crude in 2012 as compared to approximately 100,600 barrels per day in 2011.

In the fourth quarter of 2012, crude throughputs for both refineries were 147,800 barrels per day and 93,700 barrels per day in 2011. On a realized refining margin basis, we posted a strong quarterly result of $25.93 per crude oil throughput barrel, which is adjusted for the unfavorable FIFO impact as compared to $11.05 per barrel in the fourth quarter of 2011, which also was adjusted, but for a favorable FIFO impact.

At the refinery level, Coffeyville’s refining margins adjusted for FIFO impact was $28.08 per barrel in the fourth quarter of 2012 as compared to $12.19 per barrel for the same period a year ago. Wynnewood’s refining margin adjusted for FIFO impact was $14.67 per barrel in the fourth quarter of this year. Our realized hedge loss for the quarter was $57.1 million as compared to a gain of $11.1 million a year ago. For the fourth quarter, we had approximately 5.9 million barrels hedged which was comprised of gasoline, heating oil and 2-1-1 hedges.

Moving to capital expenditures, the fourth quarter of 2012 totaled $37.4 million of CapEx as compared to $35.2 million for the same period in 2011. Total 2012 capital spending was $120.2 million versus $68.8 million in 2011. On December 20, 2012 we entered into the Amended and Restated ABL Credit agreement with a group of lenders in Wells Fargo. The ABL is a senior secured asset backed revolving credit facility with an aggregate principal amount of up to $400 million with an incremental facility, which permits an increase in borrowing of up to $200 million subject to additional lender commitments and other conditions.

As Jack mentioned earlier, we completed the initial public offering of CVR Refining on January 23, 2013, as a variable rate distribution MLP. The distribution policy of CVR Refining is to generally pay it's distributions within 60 days after each quarter end beginning with the first quarter ending March 31, 2013. The first quarter will be adjusted to exclude the period prior to the IPO date of January 23.

As of the close of business March 11, we had $562 million in cash and cash equivalents and $372 million available under our ABL putting our liquidity at $934 million. Included in the $562 million in cash and cash equivalents is a $160 million reserve for environmental and maintenance capital that was established at the close of the IPO.

Total long-term debt outstanding was $550 million, which is comprised of the $500 million, 6.5% unsecured notes and $50 million of capital leases. With our liquidity and debt levels, we’re positioned to support our current business and future growth.

With that, I’ll turn the call back over to, Jack.

John J. Lipinski

All right. Thank you, Susan. Let me spend a few minutes talking about the first quarter.– and I’m talking 2013, historically the first quarter crude throughputs in the Group 3 have been limited by product allocations on the Magellan pipeline system, in the wintertime, ag demand falls off, driving drops off, and every year we tend to see a fall off in demand that results in allocations on the pipeline. This year was no different, but the allocations were significantly less pronounced than in prior years. We did take down our fluid catalytic cracking unit at Coffeyville for 12 days and crude runs were reduced during this period, but the impact was not as severe as it would have been as we were preparing to reduce rates due to the product constraints anyhow.

Our plants continue to run very well. In the first quarter, we estimate that our total crude throughputs for both plants to be in the range of 190,000 to 195,000 barrels a day. With Coffeyville at 120,000 to 125,000 barrels a day and Wynnewood in the range of 70,000 barrels a day.

As mentioned before, we closed on the IPO of CVR Refining on January 23; in our prospectus we estimated a full first quarter 2013 distribution of $1.21 per unit. Basically what we did is when we took the year we did an estimate, we used for the whole year a crack spread of approximately $27.50 with other assumptions, but front-end was slightly higher and the back-end was lower as the forward strips are typically backward dated. But basically what we’re finding is today we’re seeing cracks in the mid 30’s on a 2-1-1 basis. Our throughputs for the first quarter were estimated to be 155,000 barrels a day because of product constraints, which is pretty much where we’ve found ourselves in prior years. As I just mentioned, we expect to be in the 190,000 barrel a day range. And our crude differentials for the year were estimated – for the entire year were estimated to be just slightly over $2 a barrel for the aggregate in both refineries. In the first quarter, we see that number closer to 350.

Based on the current refining environment, we now estimate our first quarter distribution to unitholders to be between $1.10 to $1.35 per unit, that is going to be the actual adjusted distribution for the quarter, and the reason for that is that the IPO closed on January 23rd, so the first 22 days of operating income does not accrue to CVR Refining. The full quarter’s distribution, not adjusted, is estimated to be between $1.30 and $1.55 per unit.

If we look at the full-year, we included a forecasted distribution of $4.72 per unit in our prospectus. Again, we’re seeing higher crack spreads. We anticipate higher operations in a wider crude differential, and based on the current market conditions and the forward strip, we estimate that full-year 2013 distribution to be between $5.50 a unit and $6.50 per unit. This was disclosed in our earnings release earlier this morning.

And again the increase in our first quarter in 2013 distributions are driven by continuing strong crack spreads, strength in the crude differentials, and higher operating rates. And when we look across – when we started doing our estimates for our prospectus, we did not anticipate the Brent WTI differential to be in the range it is today $18 to $20. It is holding in longer than we anticipated, and we’re benefiting from that. As new pipeline projects come on, we anticipate that the spread between Brent and WTI will tighten and as new crude production in the mid-continent increases, we’re likely to see an ongoing glut of mid-continent light sweet crudes. Our belief is that once the Gulf Coast fills it's appetite for light sweet crudes, the mid-continent light sweets will start backing up, and we’re going to see a widening differential regionally.

So with that, I’d like to thank you all for joining us on this first call. It's really nice to be here in this new structure, very shareholder friendly with all our available cash being distributed. And with that, operator I’d like to turn it over for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Thank you. The first question comes from the line of Faisel Khan with Citi. Please proceed with your question.

Mohit Bhardwaj - Citigroup Inc, Research Division

Hi, this is actually Mohit Bhardwaj for Faisel Khan. Jack, I have a question regarding RINs, and I was just wondering how exposed are you guys to the whole RIN issue right now and how are you guys looking at it?

John J. Lipinski

Okay. Obviously everybody is seeing RINs skyrocket from a few cents RINs to about a $1 per RIN recently. One of the things we’ve also seen is that the -- a lot of this is being reflected in the NYMEX contract, so there was a big jump the other day as RINs expanded. It's not as transparent as you would like, certainly RINs are expensive. But we believe that ultimately this will get passed on to the consumer, and I also believe that the NYMEX-RBOB contract is starting to reflect that already. I just hope that at some point we have adults in Washington who realize that this RIN issue is going to be raising consumer gasoline prices significantly and something is done with the RFS.

Mohit Bhardwaj - Citigroup Inc, Research Division

Is there a value that you have disclosed in terms of how much you guys blend versus how much is meant to the RINs purchase?

John J. Lipinski

No. We haven’t done that. Obviously if this continues to be a major issue we’ll give a little bit more clarity on that. We do generate our own RINs at our proprietary racks.

Mohit Bhardwaj - Citigroup Inc, Research Division

Thank you.

John J. Lipinski

Okay. Thanks.

Operator

Thank you. (Operator Instructions) It appears there are no additional questions at this time. I would like to turn the floor back over to Mr. Finks for any closing comments.

Jay Finks

Thank you, Jessie. And again, we’d like to thank everyone for joining us today for our inaugural call for CVR Refining, LP. Thank you.

Operator

Thank you ladies and gentlemen. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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