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Executives

Stirling Pack – VP, IR

Jack Lipinski – Chairman, President and CEO

Ed Morgan – CFO and Treasurer

Stan Riemann – COO

Analysts

Paul Sankey – Deutsche Bank

Julie Coutou – Simmons & Company

CVR Energy, Inc. (CVI) Q4 2009 Earnings Call Transcript March 2, 2010 11:00 AM ET

Operator

Greetings and welcome to the CVR Energy fourth quarter and year end 2009 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, Jackie. We very much appreciate being here. We appreciate everyone being on the call this morning. There are a large number of you who are there and some are still dialing in, but we are going to start as close to the proposed starting time as we can. Again, we very much appreciate you being here for our call this morning.

With me this morning is Jack Lipinski, our Chief Executive Officer; Ed Morgan, our Chief Financial Officer; and Stan Riemann, our Chief Operating Officer.

Prior to discussion of our 2009 fourth quarter and year-end 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 noted in our filings with the Securities and Exchange Commission.

This presentation includes various non-GAAP financial measures. The disclosures related to such non-GAAP measures, including reconciliation to the most directly comparable GAAP financial measures are included in our fourth quarter and year-end 2009 earnings release, which we filed yesterday after the close of the market.

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

Jack Lipinski

Thank you, Stirling; and good morning, all. Thanks for joining us on our fourth quarter and year-end earnings call. I will begin by talking about our results and then speak briefly about the operating and economic environments we find ourselves in. After my comments, Ed Morgan will provide a more information regarding our reported financials and Stan Riemann, our Chief Operating Officer, will then join Ed and I in taking your questions.

As Stirling said, after the market closed yesterday, we reported fourth-quarter net income of $9.5 million, or $0.11 per basic share, bringing our full-year net income to $69.4 million or $0.80 per share. As you all know, we have two diversified but complementary businesses, our Petroleum business is comprised of a 115,000 barrel per day complex full-coking sour refinery, and a 30,000 barrel per day crude gathering system. We also have a Nitrogen Fertilizer business that utilizes gasification technology, with low-cost petroleum coke as its feedstock. Ours is the only such plant in North America. The refinery supplies transportation fuels to the Southwest portion of PAD II, which is commonly referred to as Group 3. And our Nitrogen Fertilizer business supplies two products, anhydrous ammonia, and urea ammonium nitrate solution to America’s agricultural horde.

Over the past five years, we made the necessary investments to structure our companies is alive in the low-margin environment. Our refinery operating costs are lower in aggregate than many of our peers, even considering our high complexity. In addition, we have the lowest cost nitrogen fertilizer plant in North America at current natural gas prices. As a result, we have cost advantages and operational flexibilities that let us react competitively in the volatile markets we face today.

When accessing our quarterly results, it is important to consider what factors helped us along in the fourth quarter. Operationally, our plants ran well, we had no significant unplanned outages at the refinery for the fertilizer plant. Throughput at the refineries in the fourth quarter totaled 125,966 per day, which includes crude, feedstocks and blendstocks. Our nitrogen fertilizer plant performed equally well. We maintained a 98.9% on-stream position for the gasification units, and we were on-stream 98.1% of the time in our ammonia census loop and 96.7% of the time in our UAN facility.

In addition, we benefited from the continuing contango in the crude oil market, as we have for most of the year. Late in the fourth quarter, the contango spread, while still positive, declined to a point where it became less than the beneficial ones. Starting in January, we began to reduce inventories, held in our contango play, and applied some of the cash proceeds to pay down $25 million of our long-term corporate debt. That is part of our ongoing focus using our cash where it is most effective, but the goal is strengthening our balance sheet. Anticipating tough environmental conditions, we took actions to minimize costs and ran in capital, as long as it did not compromise our environmental health and safety performance. The remaining required capital project this year is the addition of an ultra-low sulfur gasoline unit. This unit will come online during the second quarter.

Looking at petroleum operations, the throughput at the refineries for the full year totaled 120,239 barrels per day, up from 117,719 per day in 2008. Although we posted higher throughput for the quarter and the year, that is not our main focus. We optimize our refinery, not for maximum throughput, but for maximum economic results. In determining how we run our plant, we balance significant factors, including product demand, yields, crude differentials, and feedstock costs. Our refinery (inaudible) we built and sourced a wide variety of crudes in Cushing, Oklahoma, and from our proprietary crude gathering system. Having access to a wide range of crudes enhances our ability to select the most cost effective plant.

During recent months, sweet sour and heavy light crude differentials have been compressed, making our locally gathered barrels as well as WTI relatively more attractive to us. Five years ago, our crude transportation group gathered about 7,000 barrels per day. In the fourth quarter, we gathered an average of 28,400 barrels per day, despite being impacted by several winter storms. Today, we have the capacity to gather over 30,000 barrels per day of crude. And when our new injection station in Osage County, Oklahoma, comes online later this month, our capacity will jump to 35,000 barrels per day. Access to these early price gathered barrels represents an important portion of our realized refinery margin.

Refining margins, meanwhile, have remained weak. You may recall that in the first quarter of 2009, we saw crack spreads that were higher than seasonal norms. So far this year, we are seeing crack spreads that are lower than these.

Let me talk a moment about nitrogen fertilizers. As I mentioned earlier, our on-stream rates were higher in the fourth quarter, than in the corresponding period last year. Ammonia and UAN production for 2009 set a new record for our facility, which began operation in 2000. We are a high fixed cost, low variable cost operation, and reliability is key to our profitability. In the fourth quarter, we produced 111,800 tons of ammonia. Of that, 39,300 tons were available for sale, and the remainder was converted into 176,600 tons of UAN. For the year, we produced 435,200 tons of ammonia compared to 359,100 tons in 2008. And 677,700 tons of the UAN in 2009, compared to 599,200 tons in the previous year. At these production levels of UAN, we represent approximately 6.5% of the production in the United States.

As you know, nitrogen fertilizer prices fell dramatically nationwide in the last half of 2008, and the first half of 2009. But they have shown a steady, stable recovery over the past eight months. Most of our fertilizer is sold on a delivered basis, and I normally speak in terms of realized prices. Recently, we have taken orders for second-quarter delivery in the range of $220 to $230 per ton net back, equal to prices we saw in the 2006-2007 timeframe. That is a substantial increase from the levels seen eight months ago, and it has been pretty much a straight line improvement. Since we carry a barely substantial book of forward orders, changes in current prices take time to roll through our financials. So the low priced orders taken last summer affected our fourth quarter results, and to a lesser degree, will affect our first quarter. With the steady improvement in nitrogen fertilizer prices, we will see a corresponding steady improvement in our results in future quarters.

Looking forward, we anticipate some economic growth in 2010. We are operating our business as if this year will be no better than 2009. We continue to control costs and discretionary capital expenditures, and keep our focus on strengthening our balance sheet. One reason the refining industry is struggling right now is the large overhang of product inventory. This is similar to what we experienced last year in our fertilizer business. Fertilizer inventories have cleaned up, and margins have improved. We expect the same to happen to our refinery margin, when demand improves.

Given the strength of our fertilizer business, the flexibility of our refining operations and the technical strength of our management team, we believe we are well positioned to weather the current downturn in the petroleum sector.

With that, I will now turn the call over to Ed Morgan, who will discuss financial highlights as we head into 2010. Ed?

Ed Morgan

Thanks, Jack. Overall, we were pleased with the 2009 operating results, and my comments today will be limited to a brief discussion of matters pertaining to our capital structure, capital spending, and an understanding of what is impacting our effective tax rate.

As Jack mentioned, the long-term debt under our credit agreement totaled approximately $479 million at the end of year, of which $25 million had been paid down in the first two months of 2010, again primarily as a result of a partial reduction in our contango play inventory. Our focus will be to continue our efforts to utilize the free cash flow in our business to deleverage our company through the downturn in the economic climate.

As the end of the year, we had cash and cash equivalents of $36.9 million, and aggregate availability at our revolver totaled $86.2 million, which included a letter of credit to Veedol for the purchase of crude oil over the extended holiday weekend. Our usual and customary practice would be to pre-pay for these barrels, but due to the additional business day holidays at the end of year, we chose to backstop this working capital with an LC instead. Currently, our availability on the revolver stands at $114.2 million, and our current cash balance, as of today, is approximately $26 million.

Our capital expenditures for 2009 totaled $48.8 million, which is approximately $11.5 million then what we had communicated to the market at the first of 2009. Majority of our capital spending in 2009 related to our efforts to meet the Tier 2 gasoline standards on which we spend a total of $21.2 million during the course of the year. It is expected that we will spend another $22 million in 2010 to bring (inaudible) online, sometime during the second quarter. Once we have completed our sulfur gasoline projects this year, the majority of our near term regulatory capital spending requirements will have been completed. The total capital spending budget for both businesses combined for 2010 is going to be $68.4 million. We believe the flexibility we have in our capital spending program will allow us to meet our goal of focusing our excess cash flow from operations and reducing our overall total outstanding debt.

Now turning to our cash rate for 2009, which approximated 29.7%, compared to an effective full year tax rate in 2008 of 28.1%, the overall increase in the effective tax rate for 2009 is primarily attributable to a higher level of federal and state income tax credits that were generated in 2008 as compared to this past year. One of the largest differences is that we reached the maximum level of federal tax credits available in the first quarter of 2009, related to the production of ultra-low sulfur diesel. In 2009, these federal tax credits approximated $4.8 million, versus $23.7 million in 2008.

The income tax benefit for the fourth quarter of 2009 was approximately $3.7 million on a pre-tax income of $5.8 million. As I mentioned in all of our previous earnings calls, this benefit was primarily a result of the company receiving in the fourth quarter, our 2009 certifications in Kansas, under the High-Performance Incentive Programs that are commonly known as HPIP. The gross HPIP benefit recorded related to the 2009 certifications was approximately $4.3 million.

While our realized cash rate has historically shown some significant swings from quarter to quarter, it is reasonable to assume that with the final recognition of ultra low sulfur diesel credits in 2009, our 2010 effective tax rate will increase, and you may expect to see an effective tax rate in 2010 between 34% and 36%.

Now, Jack, let me turn the call back over to you for some final remarks.

Jack Lipinski

Okay. Thank you, Ed. Just in closing, we pride ourselves on having very good assets, but the real strength of our company lies within our employees. Too often, many companies fail to recognize the value of their workforce, and ours is exceptional and we applaud their efforts. We work together very well as a team, and as a team, we will give forward and improve our company everyday as we can.

I will turn the call over to Stirling for questions.

Stirling Pack

Thank you, Jack and Ed, excellent presentation. Jackie, we are prepared to take questions now. So if you want to switch to that mode, that will be fine.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question and answer session. (Operator Instructions).

Stirling Pack

Thank you.

Operator

Thank you. Our first question is coming from Paul Sankey of Deutsche Bank.

Paul Sankey – Deutsche Bank

Hi, guys.

Jack Lipinski

Hello, Paul; how are you?

Paul Sankey – Deutsche Bank

Good. Jack, could you just give us a little roadmap of how you see the rest of this year playing out? Firstly, from a seasonal point of view, you know, any unusual or interesting effects that you are seeing, firstly in refining, you know, I am thinking obviously about things like the snow cover and what is going on perhaps in the agriculture industry? Secondly, on a secular basis, how you think the refining industry in general is going to play out here, given the inventory overhangs, given the excess capacity that you seem to have, how you see your own position and you know, the secular shift that we might see in the industry, even global industry over the rest of the year. And then finally, and I know this is kind of an enormous question, but you have gone some way to answering it already in your comments, but finally, just the outlook for (inaudible) itself, refining itself in terms of any major changes that you may anticipate in ownership in debt restructuring or whatever it might be, just for the rest of the year? Thanks.

Jack Lipinski

Okay, Paul. Well, to start out, the fourth quarter was seasonally weak. If you look back, and I will quote the numbers, just you can resurrect these in a couple of domains. The Group 3 crack, for example, in the fourth quarter averaged about 576, that is daily average of plants reported cracks. And against crude, we used to use, you know, a percent of crack as a percent of crude, that is historically low, but even so, the fourth quarter was weak. In general, in the Group, January and February tend to be the weakest months. Interestingly, they are not much weaker than the entirety as the fourth quarter and in history, we have seen March turn, where margins hit their lows, typically in February and then they turn as we approach the end of March, activity picks up in our area. You know, farmers start moving into the fields, they start plowing, they start doing, you know, work in the fields and we see, you know, spring does finally come and we see a resurgence of activity.

If you take a look at the current quarter, and if the cracks hold, the Group cracks hold, as of what we are seeing on the screen and the margin is only a few days old here, we will probably see something between $0.25 and $0.50 improvement in overall 211 Group crack, first quarter over fourth quarter. And again, this is less than what we have seen in times past and part of it is due to this inventory overhead. But again, in the Group, we see two major seasons, spring and the fall, when demand picks up. On a more global level, inventories were down and you know, inventories are high and demand is down. A lot of that has to do with basically two factors.

One is unemployment. People don’t drive when they are unemployed. I am not sure there is an absolute numerical correlation, but it is pretty easy to see that as unemployment has risen, miles driven has dropped. We are starting to see that turn. One of the major truck-stop operators published some information that based that you read it, basically said that from 2007 to 2009, their distillate sales, diesel sales dropped almost 20%. But Q4 was the first time basically, so there is light at the end of the tunnel. When we see manufacturing pick up, we expect to see the inventory overhang somewhat clear up. We also expect to see some more rationalization in the marketplace. I mean, if you are in the Group, one of the benefits we have is an operating cost at or below $4 a barrel. That is kind of hard to match. Everybody else in our Group is seeing these same numbers, plus you know, our crude gathering and being a sour plant, we are able to deliver crude and run it below WTI.

I think in our view, we believe 2010 would look a lot like 2009 with improvement coming in late third or early fourth quarter. We expect the fourth quarter next year to be better than fourth quarter of 2009 – fourth quarter of 2010 to be better than the fourth quarter of 2009, but until we see some direction of changes in unemployment and changes in actual manufacturing, you know, the overall GDP increase doesn’t seem to be moving into the products markets.

I don’t know if I answered you question.

Paul Sankey – Deutsche Bank

Well, that is the kind of seasonal stuff. Does the – I mean, I was saying that you are somewhat less exposed, because you are more interested in how much farming activity is going on, right? Isn’t that the primary driver for you guys?

Jack Lipinski

That is absolutely correct. You know, generally, the spring and fall are our best periods. Summer is if driving season kicks in, we benefit with everybody else. You know, we are in a niche market, where probably, if not the low cost, one of the lowest cost refining operations, and we also have the fertilizer business, that you know, at least continues to improve. That business provides a great source of cash for the company, and it buffers the rough road we see in refining prices.

Paul Sankey – Deutsche Bank

Yes, well, at least answer the second part of your question, which was kind of a long question, but to do with anything major over the course of the year that you anticipate either regarding how you handle cash, regarding the structure, regarding ownership?

Jack Lipinski

Ed, would you want to?

Ed Morgan

Sure. From an ownership perspective, Paul, we have talked about it historically on previous calls that we don’t have any additional guidance with regards to what our shareholders will choose to do or not do. In regards to structure, you know, one key difference from the fourth quarter is we have – actually all of last year, we have – the contango market has not been there for us as much as it was historically, so we have exited that position. We have either used partial proceeds to pay down some debt in the first quarter so far. We mentioned $25 million today. You know, you could expect to see that continue, but we will continue to also try and manage our business with a high level of cash on the balance as well kind of going forward, given the uncertainties in the market.

Paul Sankey – Deutsche Bank

Okay. So the main thing is going to be kind of paying down debt but also retaining cash.

Jack Lipinski

Well, we have the liquidity. Again, we basically have $114 million of undrawn capacity on our revolver, and 20-some odd million in cash right now. We have not fully exited our contango play. We still have some barrels. We are not in any great rush, there is still a little contango in the market, still pays us a little bit to it, but given the fact that you know, companies are viewed by the strength of their balance sheet, that is what we are focusing on. You know, we have the lowest cost nitrogen fertilizer operation in North America and one of the lowest cost refineries on a complexity basis, and we continue to focus on that. There is you know, we will grow our gathering business, but there is not a whole lot else we could do other than focus on the balance sheet, try to build shareholder value that way.

Paul Sankey – Deutsche Bank

Okay, Jack. Fair enough. Thanks very much for your complete answers. Thanks.

Operator

Thank you. (Operator Instructions).

Thank you. Our next question is coming from Julie Coutou of Simmons & Company.

Julie Coutou – Simmons & Company

Hi, guys, good morning.

Jack Lipinski

Good morning.

Ed Morgan

Good morning.

Julie Coutou – Simmons & Company

Just two quick questions from me. On the refining side, as far as maintenance goes, are there any major turnarounds coming in 2010, and if so, what is the impact and otherwise for the rest of the year you are looking still around 110,000 to 115,000 barrels per day?

Jack Lipinski

Okay, as far as turnarounds, our scheduled turnarounds, we are taking partial plant turnarounds. One is scheduled late in the year in 2011 and the other, early in the year in 2012. We are not taking the whole plant down at one time. That is one of the benefits that we can now claim from our expansion projects, so we have cash flow during both turnaround periods. And as far as – Ed?

Ed Morgan

There is no other major capital. And our rate shift should be, as you articulated, in that 110,000 to 115,000 range.

Jack Lipinski

I think this quarter, you could probably expect to see somewhere between 100,000 and 105,000. We did, with margins being as thin as they are, we opportunistically took some unit outages for short periods of time to do unit cleanups, but it seems like we do that you know, almost every year at this time, when margins get a little soft. It is the best time of the year to do it, you know, and you know, frankly, we have no major maintenance plans. Our ultra low sulfur gasoline unit will be coming up. Capital is, you know, we don’t have any exceptional capital requirements at the company. Stan?

Stan Riemann

The only turnaround we have for this year is in fertilizer operation, which is significantly smaller in terms of cost and scope and on the refining side, will be down for 16 to 17 days and growing from $5 million to $7 million. (inaudible). We will do that this fall. The capital requirements are relatively flat. With the completion of renewals here in about five weeks, and we will start off on working on our scrubber which isn’t really due till 2012, and that is really it as far as inclines get, although progress will be relatively flat as far as sustaining capital on both sides of the footprint.

Jack Lipinski

And the fertilizer, this is every other year event.

Stan Riemann

Correct.

Jack Lipinski

So you know, even if you look back at our historical production, these turnarounds don’t have a major impact on our overall annual production.

Julie Coutou – Simmons & Company

Okay, great. I appreciate it. On the fertilizer side, just curious; can you talk a bit about how are seeing Q1 deliveries shape up, is weather cooperating or are you seeing any delay in deliveries, or how is Q1 going so far?

Stan Riemann

This is Stan Riemann. No, we ship on a ratable basis on the UAN ammonia. If there is any slow-up, it may be on truck ammonia, but it is still early. We are not losing any sleep over it as we go there. Our real season kicks off in mid-March and we expect it will, spring will come, but we ship ratably every day, so no, our inventories are where we long to be and part of it is moving as we expected.

Jack Lipinski

You know, to that point, we generally have, you know, this time of the year, 150,000 tons or more of UAN in the forward book, which is almost three months of production. The way we run our business and most fertilizer companies do as well on the nitrogen side, you maintain a large forward book, and you deliver ratably as you produce the material, we don’t have any substantial storage on site. We continuously move it out using our real fleet, as ammonia cars and UAN cars.

Julie Coutou – Simmons & Company

Okay, thank you.

Jack Lipinski

Thank you, Julie.

Operator

Thank you, ladies and gentlemen. (Operator Instructions).

Stirling Pack

Okay, Jackie. I think that concludes our comments and we appreciate all those who have attended us on our call this day and are certainly available for any follow-up questions that people may think of during the course of the day. So, thank you everyone again for being here and we appreciate your interest in CVR. Thank you, all.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you.

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