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CVR Energy, Inc. (NYSE:CVI)

Q3 2013 Earnings Call

November 1, 2013, 2:30 PM ET

Executives

Jay Finks - Director, Investor Relations

John Lipinski - Chief Executive Officer and President

Susan Ball - Chief Financial Officer and Treasurer

Stanley Riemann - Chief Operating Officer

Analysts

Jeff Dietert - Simmons & Company

Chi Chow - Macquarie Research Capital

Operator

Greetings, and welcome to the CVR Energy third quarter 2013 conference call. (Operator Instructions) It is now my pleasure to introduce your host, Jay Finks, Director of Investor Relations for CVR Energy. Thank you, Mr. Finks. You may begin.

Jay Finks

Thank you, Kevin. Good afternoon. We very much appreciate you joining us this afternoon for our CVR Energy third quarter 2013 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 2013 third quarter results, let me remind you that 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 outlook, believes, anticipates, plans, expects and similar expressions are identified as forward-looking statements. You are cautioned that these statements maybe effected by important factors set forth in our filings with the Securities and Exchange Commission and in our latest 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 result of new information, future events or otherwise. This call also includes various non-GAAP financial measures, disclosures related to such non-GAAP measures, including reconciliations to the most directly comparable GAAP financial measures are included in our 2013 third quarter earnings release that we filed with the SEC this morning prior to the open of the market.

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

John Lipinski

Thank you, Jay, and thank you all for joining us this afternoon. Hopefully, you had the opportunity to listen into the CVR Partners' call hosted by Byron Kelley, the CEO, and then my earlier call as well on CVR Refining LP. A lot more information has been discussed about those two entities in those two calls and I'll recap them on this call.

But today we reported, we, CVR Energy in this case, reported third quarter consolidated adjusted net income of $5.2 million or $0.06 per diluted share as compared to $260.2 million or $3 per diluted share in the third quarter of 2012.

Again, have you listened in earlier, our third quarter results were impacted primarily by the unprecedented downtime associated with failure of a major piece of equipment on our cat cracker at Coffeyville. That outage began on the July 17, and the unit was back up on September 11, and during that 53 day period we were significantly cutback in operations.

Additional cost and just simply cost of operations were very much higher, because we were at very much reduced rates. Wynnewood on the other hand did quite well, but overall margins to the quarter had contracted significantly quarter-over-quarter.

CVR Partners, also during the quarter had some downtime. It was about seven days and I'll talk a little bit about that, as that related to a power failure and some shutdowns that caused us to change some shifts, convert our catalyst and took us down for about seven days.

As a company, we continue to return cash to our shareholders. This morning, CVR Energy announced its quarterly cash dividend of $0.75 per share, which will be paid on November 18 to shareholders on record on November 11. So far this year, including this quarter's dividend, we have returned $14.25 per share to our stockholders.

Let me talk a little bit about each of our businesses. CVR Refining's third quarter distribution of $0.30 per common unit will be paid on November 18 to unitholders of record on November 11. CVR Energy owns approximately 71% of the common units of CVR Refining, and therefore receives a proportional amount of distributions from CVR Refining.

This brings the cumulative cash distributions from CVR Refining for the year 2013, since CVR Refining's IPO, which occurred in January, to $2.23 per common unit. CVR Refining's 2013 third quarter consolidated adjusted EBITDA was $33.9 million as compared to $447.1 million a year ago. CVR Refining's overall realized refining margin adjusted for FIFO was $8.21 per barrel as compared to $33.44 in the same quarter a year ago.

Impacting our third quarter results were reduced crack spreads, significantly weakened product basis; and again to qualify what that means, it's the product realization in our area versus what the New York Mercantile Exchange prints for gasoline cracks or gasoline per se or diesel.

We've seen in the quarter significant tightening of crude differentials. We see them moving back out again, but for Q3 they have significantly come in. And as I mentioned, the unexpected and extended downtime at Coffeyville cat cracker, which again significantly impacted results. Wynnewood actually ran more barrels over the quarter than Coffeyville.

And I'll just give you some stats, just looking on here. Coffeyville ran approximately 79,400 barrels a day of crude, while Wynnewood ran 81,300. Total throughput for the quarter was 160,700 barrels a day.

Let me talk a little about our fertilizer business. CVR Partners announced a 2013 third quarter cash distribution of $0.36 per common unit to be paid on November 18 to unitholders on record on November 11. CVR Energy owns approximately 53% of the common units of CVR Partners, and just like CVR Refining LP, receives a proportionate amount of distribution from CVR Partners.

This brings the cumulative cash distributions from partners for 2013 to $1.55 per common unit. CVR Partners' third quarter adjusted EBITDA was $28.2 million as compared to $39 million in the same period last year. As I mentioned earlier, we did have some downtime associated with the replacement of some catalyst.

As a result, our gas fire ran 91% of the time as compared to 99% of the time in 2012. Our ammonia synthesis loop operated at 90% as compared to 97% a year ago. And the UAN plant ran at 90% as compared to 98% in 2012. Again, the reduced rates were a result of planned downtime. If we exclude the effect of this downtime, the onstream factors would have been 99% for gasification, 98% for ammonia synthesis and 98% for UAN.

And please, all recall, that this year, we are getting the full benefit of our UAN expansion. So a year ago, we were running the UAN plant that was significantly smaller in size this year. We basically have the capability of turning 100% of our ammonia into urea ammonium nitrate solution or UAN.

With that, I'll turn it over to Susan to talk more about the financial. Susan?

Susan Ball

Thank you, Jack, and good afternoon, everyone. Let me provide just a brief overview of the CVR Energy consolidated financial results. Consolidated net income attributable to CVR Energy stockholders was $44 million in the third quarter 2013 as compared to net income attributable to CVR Energy stockholders of approximately $209 million in the third quarter of 2012.

Non-controlling interest, which contributed to the reduction in the 2013 third quarter's net income attributable to CVR Energy's stockholders, was $34.2 million as compared to $9.6 million in the same period of last year. This increase is due to the IPO of CVR Refining in January 2013 as well as the completion of the secondary offerings for both CVR Partners and CVR Refining in May 2013, resulting in the reduction of CVR Energy's ownership in each of these entities.

Adjusted net income for the third quarter 2013 was $5.2 million as compared to $260.2 million in the third quarter 2012. In the third quarter of 2013, the most significant adjustments to net income to derive adjusted net income attributable to CVR Energy's stockholders or adjustments related to the increase or decrease in our inventory values to better realize under the first-in first-out FIFO inventory accounting method, we realized a favorable FIFO impact of $54.3 million in the third quarter of 2013.

Additional significant adjustments or gains on derivatives that are not settled during the period, which were $38.6 million. These gross adjustments to net income are reduced for the portion that's just associated to the non-controlling interest unitholders or holders and are further adjusted for the net tax impact associated with them.

For the third quarter of 2013, our effective tax rate was 27.4% as compared to 36.9% for the third quarter of 2012. The significant reduction in the effective tax rate is due to the increased percentage and pre-tax income in 2013 that is attributable to the increased non-controlling interest.

Income associated with non-controlling interest is non-taxable to CVR Energy. CVR Refining's adjusted net income for the quarter was $33.9 million as compared to $447.1 million in the same third quarter of 2012.

Impacting these overall results was a higher cost associated with RINs, decreased crude throughput rates associated with the FCCU outage that Jack previously spoke about. This also resulted in higher repair cost during the third quarter. Additionally, weakened product basis and crack spreads in the tightening of crude differentials played a significant role on reduced margins and operating income in the third quarter.

As of September 30, CVR Refining had open commodity derivative positions of 20.6 million barrels, of which 4.7 million barrels were at an average fixed cost of $28.01, and these particular positions will be settled in 2013.

The weighted average fixed price associated with all open positions was $27.94. This covers both 2013 and 2014 positions. Our open commodity derivative positions were comprised of approximately 73% for distillate cracks and approximately 27% for gasoline cracks.

CVR Refining, as Jack mentioned, announced the third quarter distribution of $0.30 per common unitholder to be paid on November 18, to unitholders of record on November 11. As a result of this, approximately $44 million will be paid, which includes $12.9 million that will be paid out to public unitholders with $31.4 million being paid to CVR Energy.

Moving to our fertilizer business. As Jack mentioned earlier, CVR Partners third quarter adjusted EBITDA was $28.2 million as compared to $39 million in the same period last year. The primarily contributors to the decrease were lower sales prices for UAN and ammonia in the third quarter of 2013, as compared to third quarter 2012, and lower sales volumes for ammonia. This lower sales volume in ammonia is associated with the UAN expansion going online in February of this year. Partially offsetting overall decreases in these impacts to net sales were the higher UAN sales volumes and related freight revenue.

CVR Partners, as Jack mentioned also announced a cash distribution of $0.36 per common unit for the third quarter to be paid on November 18, to unitholders on record on November 11. As the approximate $26.3 million to be paid, approximately $12.3 million will be paid to non-controlling interest. CVR Energy will receive approximately $14 million.

We ended the quarter with cash and cash equivalents of approximately $887.1 million on a consolidated basis, which includes $87.2 million of cash at CVR Partners and $250.5 million of cash at CVR Refining. Excluding the cash of CVR Refining and CVR Partners, we held cash of $549.4 million as of September 30, 2013. In the third quarter 2013, we incurred approximately $69 million in capital expenditures on a consolidated basis, bringing our full year capital spend for the nine months to approximately $184 million.

With the nine months ended September 30, 2013, the petroleum business accounted for approximately $141 million of these capital expenditures as fertilizer business accounted for approximately $36 million and the remaining was related to corporate projects. Including the amounts already spent in 2013, we estimate that 2013 full year capital expenditures will approximate between $238 million and $273 million.

The petroleum business expects to spend between $190 million and $215 million with the fertilizer business estimating to spend between $40 million and $48 million. The remaining capital spend is associated with corporate related projects.

Total consolidated debt, including current portions as of September 30 was approximately $676 million. CVR Energy has no debt exclusive with the debt that resides at CVR Refining and CVR Partners. We have a strong consolidated balance sheet that is well positioned for continued growth with our business segment also well positioned for continued growth with strong balance sheets.

With that Jack, I will turn the call back to you.

John Lipinski

Thank you, Susan. And again, everyone, as we discussed on our business segment conference calls earlier today, both CVR Refining and CVR Partners updated their full year 2013 distribution outlook. CVR Refining's updated full year distribution, that's 2013 full year distribution outlook, is $3.45 to $3.70 per common unit, which includes the pre-IPO period. CVR Partners updated its 2013 full year distribution outlook to $1.85 to $2 per common unit.

And also at CVR Partners earlier today, we made the announcement that Byron Kelley, who has been our CEO for almost three years has elected to return to retirement. There as many of you who know Byron or know of Byron, I was very pleased to talk him out of retirement about three years ago, to come work for us. And time has come for him to spend more time with this family, his wife [ph] Melva, his new grandson and it's going to be pretty interesting for him. He has gotten a whole new set of things to do, but we're certainly going to miss him. He has done a great job for us. He and his team have seen a big change in UAN or CVR Partners and we are all going to miss him.

And in the interim, I will once again and I don't want to use the word interim solely, it's the board decision, but for the meantime, I will take back over the position I held before of CEO and President. I will continue to remain Executive Chairman. And we will see for the long-term whether I stay in that position or we fill it with someone else as we go along, but I want to wish Byron and his family all the best.

And with that, I thank each of you for joining our call today, and will be happy to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from Jeff Dietert from Simmons & Company.

Jeff Dietert - Simmons & Company

At Coffeyville or for the FCC outage, what was the opportunity you lost? The EBITDA you would have generated, had it been in operations during the quarter?

John Lipinski

Susan, do you have an estimate of that?

Susan Ball

We haven't really disclosed that due to the significant changes going on in the period associated with crack spreads and basis adjustments and everything with that significantly declining in late August. We really haven't provided that estimate.

John Lipinski

It's significant, it's really the loss that, if you think about it, Jeff, if we don't have a number that we're prepared to put out, you think about it, that we would have expected Coffeyville to have run somewhere at or at this time the year above its nameplate capacity. And we ended up running at instead of running 115 or 120, we ran 70. So it's not only a matter of the loss of volumes times the margin, the margin capture was even worse because our operating expenses were higher.

There was a period there, we operate in the mid-continent. We don't have the ability and that to any large degree to ship off intermediates, so it makes a big difference whether the outage was going to be two weeks or four weeks or in this case 53 days. Initially we thought we had a [indiscernible] that was going to take us seven to 10 days to get up, then we found a few more and then we realized that if we didn't fix it, when we did, we could have had multiple shutdowns.

And it pretty much takes anywhere from five to seven days to shutdown that unit and restore that unit, even if you don't do any maintenance work to clean it out, that's where it full shutdown. So the significant part, yes, we haven't planted a number on it because like Susan said, there have been so many moving parts. But the biggest part was the fact that we had to cut rates to the point where the refinery would not have even been profitable running at those rates.

Jeff Dietert - Simmons & Company

Secondly, I was hoping you could talk a little bit about the Keystone pipeline scheduled to start a line pack in November and then Seaway twin in the first quarter. Could you talk a little bit about what do you think the implication of those pipelines are going to be or how significant could they change the dynamics at Cushing? Could they impact of availability of the Canadian heavy? And for you specifically how do you move away from WTI base barrels and buy more Canadian barrels, more Bakken barrels, more West Texas Sour and WTI Midland barrels? Is WTI Cushing prices are going to be elevated relative to the other options?

John Lipinski

Well, if you think about it, our nameplate capacity is what we would expect in a normal operating year to run on a calendar basis. There are going to be times where when we run above it, and you certainly saw what happens when we have an outage, we run below it. So we have 185,000 barrels a day of crude to sell on any given day. We mentioned in the earlier call we're gathering a bit a little over 50,000 barrels a day. I think the number exactly was 54,000 barrels of day of gathered crude.

So in a way, the way you are to look at that is while that maybe WTI-based crude, it delivers to the plant somewhere between $1 and $2 barrel, $1 to $1.50 barrel under WTI, where a WTI barrel bought in Cushing would actually deliver above WTI, because of pipeline tariff, so where we get about 50 round numbers, 50,000 or 55,000 barrels a day of a premium to WTI from our in-house gathering business. We have pipeline space, normally, 40,000 barrels a day when it's full open, could be 35 to 37, when it's allocated on the basin pipeline.

So that brings Permian basin crude to primarily Wynnewood, but can also go into Cushing. So you look at that and say, okay, so right now I have 90,000 barrels a day of crude that's not linked to Cushing. Add to that another 25,000 barrels a day at contracted space on the existing Keystone pipeline and we bring all our heavy Canadian down. And then we have a 10,000 barrel a day contract, but excess shipper capacity because we're always shipping more; pick a number 14,000, 15,000 barrels a day down Spearhead.

So round numbers, let's just round it off, play horseshoes and hand grenades here, we have 40 out of Midland, we have 40 out of Canada, we have 50 out of our gathering business. So today you've got 135,000 barrels a day out of our 180 already directed away from Cushing barrels.

Jeff Dietert - Simmons & Company

On the screen today Canadian heavy is $40 under WTI, is it tempting to try to lock-in some barrels moving forward at these kind of discounts? Is that a possibility and is that something that you would consider doing?

John Lipinski

Well, number one there will be nobody will lock it in for any long period of time. These are bid ask. You get to do 5000 cubic meters, so the problem that's how they trade. I would say, we're buying a little bit of that. Its quick deliveries, one to two cycles out, so six to eight weeks out that crude will start showing up. And then we're also seeing weaknesses in the Canadian light and middle sours. And your question about what happens with the new pipes coming out of Cushing, number one there is going to be a draw on crude, while they pack the lines.

And then I don't know how they're going to fill them unless Keystone XL gets built, the northern portion. So what you're going to find is you're just going to see right now, we're going to see dislocations. And anybody that owns the right to ship any Canadian crude into Cushing is going to be the beneficiary. So we kind of think we're going to be the beneficiary of that 240,000 barrels of day. Whether we want or sell it more profitably than we run, it depends on where the market goes. If the guys on the Gulf Coast are so hungry for that heavy barrel, they may pay up for it.

Operator

Our next question is coming from Chi Chow from Macquarie Capital.

Chi Chow - Macquarie Research Capital

I want to ask you about the use of cash at CVI. Any updates, thoughts on acquisition opportunities or how you are think it about further special dividends from here?

John Lipinski

At CVR Energy obviously CVR Energy has no debt. And let me kind of lay out the whole scenario here, CVR Energy provides CVR Refining with up to a $150 million growth CapEx revolver. And we've drawn some funds on that from projects that have very, very high IRRs, hydrocracker projects at Wynnewood. As we continue to go down CVR Refining will provide CVRR with support for smaller projects.

Given the fact that some acquisitions, would best be made if it's a C-Corp, before it gets dropped down into an MLP, those would be done at CVR Energy. I am not at liberty to say right now, but obviously we're looking everyday at whatever is on the market. And the interesting thing is that having CVR Energy as a parent, we can actually look at non-qualifying assets that make money and leave them up to the parent and drop down the qualifying assets to the LP.

So the shorter answer is, as we believe because of the balance sheet and also the ability that CVR Energy has to partner or JV with Icahn Enterprises, which has an enormous balance sheet. We think we're well positioned and honestly we're going through a little bit of a trough right now. Every time this happens, it seems like a couple of the weaker sisters decide to sell and some of them maybe something that might attract us. I am not going buy junk, never have. Basically, look at 10 things to buy one, but we think as time moves along here, we'll start seeing changes in the marketplace.

Chi Chow - Macquarie Research Capital

And any thoughts on this, any special dividends from here?

John Lipinski

Right now, unless there are other secondaries done, my guess would be that the cash coming up from the LPs will fund our regular dividend and continue to do so. Obviously, Mr. Icahn and the folks at IEP are all over growing this company. So that's kind of my aim for our tour right now, is to go and see how much more we can grow this company.

Chi Chow - Macquarie Research Capital

Question on fundamentals, you alluded to this on the other call, earlier Jack, but the gasoline situation here both in the Gulf Coast and Mid-Con regions looks poor. And I think its good probability that might get worse for turnaround ending here soon and more supply coming on the market. What are your views on how this market here plays out through yearend and into '14 on gasoline?

Stan Riemann

When things are marginally bad, they take a long time to fix. When they're really bad they get corrected a lot sooner. I think what you're finding is, Coffeyville arguably is one of the highest distillate producing refineries in the United States, when you look only at what distillate made from crude. We've made significant improvements in the distillate output of Wynnewood, not only raising its rate, but also raising the ratio of distillate to gasoline, it's not as good as Coffeyville.

But when you look across the Gulf Coast, most of these plants are 3-2-1 plants; two parts gasoline, one part diesel. Some of the guys that have put a lot of capital in, that's not true, but a lot of the facilities are gasoline producing plant. If you're sitting there today and you have a couple dollar of barrel margin based on the NYMEX last year basis, when you're factoring RINs and operating cost, the gasoline is an afterthought.

And if you're 3-2-1 refinery how long can you survive or continue to run at high rates at those levels. So I would expect to see that, yes people will come at a turnaround, but I would also expect to see a couple of folks either coming back, and I'm not going to say shutdown, but significantly trim back the amount of gasoline they make or find a way to export it.

And if you listen to my earlier call, the one place I wouldn't want to be is Europe right now with all of these changes taking place, because the kind of crudes that are find in these brands for the Gulf Coast, and it's one man's opinion I think some times in 2014 everybody is going to scream, that they have enough of it because the crudes aren't 35 to 40 API crudes, you're seeing crudes of 50, 55; condensates at 60 and all of this makes gasoline.

So it's either got to be exported or not made because the crude discounts can fall, but at some point you just choke up and we have seen this happen in times past. I have been doing this for 41 years. I have seen times when we choke on gasoline only to find out six months later, we have a whole new paradigm. But my guess is that the guys in Europe are just holding the back. They don't have any gasoline demand there. They've always used the U.S. as a dumping ground for the gasoline.

The guys on the East Coast are getting access to more and more of Bakken by rail and pushing out foreign crudes, and the Gulf Coast refiners are just having a hay day making gasoline. So it maybe a little longer for the European guys to rationalize for lot of geopolitical reasons, I mean some of these countries won't let these plant shutdown because they have unions and they have semi-socialist governments, but at some point I would expect to see a major shift where U.S. refiners become the exporters for the world.

Chi Chow - Macquarie Research Capital

One final question, Susan, maybe this is for you. I was noticing on, you said total debt at CVR was $676 million. My total of what you report at the UAN and CVR level, the combined debt is higher. It's $688 million. Can you help us reconcile the difference?

Susan Ball

At CVR Refining, there is additional debt included in their number of $11.5 million, that's borrowings drawn down from the debt at the CVR Energy revolver.

Operator

Thank you. We have reached the end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments.

Jay Finks

Thank you, Kevin. I would like to thank everyone again for joining us this afternoon for our earnings call. Just as a reminder, you can get additional information on our website, cvrenergy.com or as always feel free to contact me via the Investor Relations section of the website. Thanks again Kevin.

Operator

Thank you. That does conclude today's teleconference. You may disconnect your line at this time. And have a wonderful day. We thank you for your participation today.

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