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CVR Refining LP (NYSE:CVRR)

Q1 2014 Earnings Conference Call

May 1, 2014 12:00 AM ET

Executives

Jay Finks - Director of IR

Jack Lipinski - CEO

Susan Ball - CFO

Stan Riemann - COO

Analysts

Jeff Dietert - Simmons

Mohit Bhardwaj - Citigroup

Rakesh Advani - Credit Suisse

Operator

Greetings and welcome to the CVR Refining First Quarter 2014 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Jay Finks, Director of Investor Relations. Thank you, sir. You may now begin.

Jay Finks

Thank you, Kevin. Good morning, everyone. We very much appreciate you joining us this morning for CVR Refining first quarter 2014 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 2014 first 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, beliefs, anticipate, plans, expects and similar expressions are intended to identify forward-looking statements.

You are cautioned that these statements may be affected 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 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 reconciliations to the most directly comparable GAAP financial measures are included in our 2014 first quarter earnings release that we filed with the SEC this morning before the opening of the market.

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

Jack Lipinski

Thank you, Jay, and good morning everyone, thank you for joining us. I’ll talk a little bit of recap of our earnings and let Susan speak more on that when she discusses them. This morning we released our 2014 first quarter results in which we reported consolidated net income of $255.4 million as compared to $275.4 million in net income in the first quarter of 2013. Our first quarter 2014 consolidated adjusted EBITDA was $194.1 million as compared to $309.9 million in the same quarter a year ago.

This morning, we also declared a first quarter distribution of $0.98 per common unit. The distribution will be paid on May 19 to unit holders on record of May 12. In the first quarter of 2014, our realized refining margin adjusted for FIFO was $15.98 per barrel, as compared to $26.44 for the same period of 2013. Driving this decrease was an overall lower NYMEX 2-1-1 crack spreads and negative product basis. Operationally, both plants ran exceptionally well during the first quarter, resulting a record crude throughput for the period. Our total crude throughput was approximately 201,900 barrels a day. Coffeyville processed approximately 124,000 barrels a day of crude and Wynnewood processed approximately 77,900 barrels a day of crude. This exceeds our first quarter estimate of 185,000 to 200,000 barrels a day of crude throughput.

As I mentioned on the previous call, we experienced minimal pipeline shipment curtailments in Q1. Historically, these curtailments occurred during December, January, February, and March because of declined product demand or limited pipeline and shipment capability. Although, we saw seasonal declines in demand we’re able to compensate by shipping more products on connecting to both Magellan South and Explore Chicago System. This allowed us to one of our refineries at higher rates. During the first quarter, the experience of unplanned downtime at our Wynnewood Refinery which makes this record quarterly accrued run even more exceptional.

At Wynnewood we took FCC for approximately 10 days due to on schedule maintenance. As we normally do, when we have unplanned maintenance, we look to accelerate no maintenance and that’s exactly what we did. Therefore, we did some maintenance on our ROSE unit, residual and supercritical extraction unit at Wynnewood and that had been planned for the second quarter. We also gathered a little over 54,600 barrels a day of crude in the quarter and that compares to little over 54,400 barrels a day in the first quarter of ’13.

I'll turn the call over to Susan and let her discuss the financials in more detail.

Susan Ball

Thank you, Jack. Good morning, everyone. As Jack previously mentioned, in the 2014 first quarter, our adjusted EBITDA was $194.1 million, as compared to $309.9 million in the same quarter of 2013. In the first quarter of 2014, the more significant adjustments to net income to drive adjusted EBITDA or adjustments related to the increase or decrease in our inventory values that are realized under the first-in first-out or FIFO inventory accounting method and gains on derivatives not yet settled. We realized a favorable FIFO inventory impact of $21.6 million and a gain on derivatives not settled during the period of $88.3 million.

Adjusted EBITDA is reduced by certain annual reserves that are pro-rated on a quarterly basis to derive available cash for distribution. These annual reserves are set aside for future cash needs in regards to maintenance and environmental CapEx of which $125 million is set aside annually and $35 million being set aside annually for major scheduled turnaround expenses.

Additionally, adjusted EBITDA is reduced for cash needs associated with debt service and other future operating and capital needs as maybe determined. Available cash for the distribution for the first quarter was approximately $144 million or $0.98 per common unit. As we’ve said in the past, we are in variable distribution master limited partnership. As a result, our quarterly distributions, if any, will vary from quarter-to-quarter due to several factors including but not limited to operating performance; fluctuations in the prices paid for crude oil and other feedstock’s as well as the prices received for finished products; and other cash reserves that maybe deemed necessary or appropriate by the board of directors of its general partner.

In the first quarter of 2014, our realized refining margin adjusted for FIFO was $18.98 per barrel, as compared to $26.44 in the same quarter of 2013. The NYMEX 2-1-1 crack spread averaged $23.04 per barrel in the first quarter of 2014, as compared to $32.33 per barrel in the first quarter of 2013. The PADD II Group 3 2-1-1 product basis averaged a negative $3.41 per barrel, as compared to a negative $2.74 per barrel in 2013. The PADD II Group 3 2-1-1 crack spread averaged $19.63 per barrel in the 2014 first quarter, as compared to $29.39 in the same period of 2013.

Our first quarter 2014 RINs expense was $34.7 million, as compared to $32.1 million in first quarter of 2013. We estimate our full year 2014 RINs expense will be between $75 million and $150 million. Our consumed crude discount to WTI for the first quarter was $2.68 per barrel as compared to $4.98 per barrel in 2013.

The Coffeyville refinery reported a refining margin, adjusted for the FIFO impact of $196.9 million in the first quarter 2014, or $17.65 per crude throughput barrel as compared to $290.7 million, or $26.12 per crude throughput barrel in 2013. In the first quarter of 2014, the Wynnewood refinery reported a refining margin adjusted for FIFO impact of $92.5 million or $13.17 per crude throughput barrel as compared to $172.1 million or $26.87 per crude throughput barrel in the first quarter of 2013.

Total direct operating expenses excluding turnaround expenses were $5.46 per barrel of crude oil throughput in the first quarter of 2014, as compared to $4.91 in the first quarter of 2013. Coffeyville’s direct operating expenses excluding turnaround were $4.78 per barrel of crude throughput in the first quarter of 2014, as compared to $4.69 per barrel in the 2013 first quarter. This year-over-year increase was primarily due to increase cost of natural gas.

Wynnewood’s direct operating expenses excluding turnaround expenses were $6.49 per barrel of crude oil throughput for the first quarter of 2014 as compared to $5.29 per barrel in the first quarter of 2013. This year-over-year increase for Wynnewood was due to the increased natural gas cost as well as expenses associated with FCU and merge unit outages during March. Assuming the same rate of consumption of natural gas for both refineries during 2014 first quarter a dollar change in natural gas prices would have increased or decreased our natural cost by approximately $2.8 million.

We ended 2014 first quarter with cash and cash equivalents of approximately $413 million. Our $400 million ABL had $27 million issued standby letters of credit resulting in availability under the ABL facility of $373 million. As of April 30, our current cash balance was $453 million and we had $373 million available under our ABL.

Our total long-term debt outstanding was $583 million. This was comprised of the $500 million 6.5% unsecured notes, $50 million of capital leases and approximately $32 million drawn against the $150 million in our company revolver provided by our parent, CVR Energy. And as a reminder, the revolver was put in place to fund profit and gross cap expenditures at the time of the IPO in January of 2013.

As of March 31, we had open commodity derivative positions of 18.1 million barrels. The weighted average fixed price associated with these open positions is $27.76 per barrel. Our open commodity derivative positions are comprised of 72% of distillate crack swaps and approximately 28% of gasoline cracks swaps. First quarter 2014 capital expenditures totaled $57.9 million. Of the total capital expenditures in the first quarter $42.2 million was related to maintenance and environmental capital and $15.7 million was related to growth capital. In 2014, we estimate total capital spending to be between $340 million and $350 million of which approximately $235 million to $245 million is estimated for environmental and maintenance capital. We expect our growth capital to be approximately $105 million.

Our 2014 estimated environmental and maintenance capital expenditures will be funded with the annual cash reserves that we do satisfy of $125 million as well as the cash remaining on hand that was satisfied at the time of the IPO. As you recall at the time of the IPO, we did leave a $160 million of IPO proceeds on the balance sheet to prefund known environmental and maintenance capital projects. The growth capital will be funded through the remaining balance available on the intercompany revolver.

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

Jack Lipinski

Okay, thank you, Susan. And again looking at April operations, April operations continued to be excellent and as a result of what we’ve seen for April, we are going to raise our expected crude throughput for the second quarter to 190,000 to 205,000 barrels a day. That maybe a little bit of wide range to most of you, but we do give ourselves a little bit of cushion for unexpected outages which can bring down our crude rates. And like I mentioned before, we did have an outage at Wynnewood during the quarter which actually did impact our overall rates and our cost structures.

So with that, I’ll turn it back you Jay for questions.

Jay Finks

Operator, we ready to take Q&A.

Question-and-Answer Session

Operator

Sure. (Operator Instructions) Our first question today comes from Jeff Dietert from Simmons. Please proceed with your question.

Jeff Dietert - Simmons

Congratulations on the strong results in quarter. Question on the some of the Permian supplies. I know you bring WTI crude on the basin pipeline and I was curious if you're seeing any deterioration of quality there, or API moving higher spend a lot of discussion, increased condensate production in the Permian and just trying to see if you're seeing any influence there?

Jack Lipinski

Right now, it’s very minimal. I mean, there are fractional changes in API. It’s not anything that others -- it depends I guess where your supply is coming in the Permian and who you are supplying it to. But we see more and more white crudes coming on in our gathering business and everything else and so we’re very-very tuned to API gravity changes of our plants. Obviously, the whiter crudes aren’t worthwhile as much but we have not seen the degradation in Midland quality, that perhaps all I would say.

Jeff Dietert - Simmons

And 50,000 barrels a day on your gathering system, is that predominately WTI type quality crude or is it a verity?

Jack Lipinski

It’s a variety but don’t forget we’ve started with a gathering system that has a core business in Kansas and Northern Oklahoma and parts of Southern Nebraska and Western Missouri. Those barrels haven’t changed. We are now gathering in Eastern Kansas and we are starting to see as we grow our gathering business further south into Oklahoma, we are starting to see lighter API crudes. So, we are very cautious about which one we buy and what we pay for them.

Jeff Dietert - Simmons

Got it. And I appreciate the natural gas sensitivity. I think you’ve mentioned $1 per MMBtu is 2.8 million of pretax expense. Is that cash operating cost or does that include fuel cost as well that would go through gross margin?

Susan Ball

That will just be the cash operating cost.

Jeff Dietert - Simmons

Got it.

Jack Lipinski

Now, Jeff. One of the things you’ve seen is obviously from Susan’s remarks; you can see that the significant increase of our operating expenses this quarter was because of current outage at Wynnewood. Well, Coffeyville was pretty much in line with where we expected it, but we’re seeing higher natural gas not only priced but usage. As we continue to improve our refinery operations and extract more and more liquids out of our fuel system, we have to replace that with natural gas. So one of the things we’re improving of course is our liquid volume recovery.

Jeff Dietert - Simmons

And should we assume you’re buying natural gas on a spot price basis?

Jack Lipinski

It varies but look it’s -- I have to look at the numbers but I think it’s actually less than Henry Hub right now or near Henry Hub. I have to get those numbers. It’s probably very close to parity because we buy gas at different locations for Wynnewood and for Coffeyville and the other thing is, as when our cat cracker was down particularly at Wynnewood we weren’t producing a bunch of internally produced fuel like cat crackers normally do. So, we have with rested refineries running, we have to buy more natural gas.

Operator

Thank you. Our next question today is coming from Mohit Bhardwaj from Citigroup. Please proceed with your question.

Mohit Bhardwaj - Citigroup

Yes, hi. Thanks for taking my question. Jack, I had a question on the comments that you made about placing more products through Explorer Chicago and Magellan South. And this is one of the concerns that you expressed, I think in 3Q last year that, as Gulf Coast runs higher, you will have to find more opportunities to place product from Group 3. Can you just give us a sense of what’s the difference from last year versus Q4 and Q1? How much more have you been able to place through Explorer and Magellan South?

Jack Lipinski

We don’t report those numbers but year-over-year if certainly increase, I won’t say this that Magellan inventories which usually drive. When Magellan shows up and demand falls off that’s when we have historically found curtailments of pipeline allocation. If you look the inventories this year, they have been in historical high level but liftings were even higher. So basically it was not only Coffeyville and Wynnewood that were moving product out of the areas, others were doing as well. So short answer is, yes, we move materially more products out. Generally, we move north to get better impact. The prices are typically more favorable the further north we go, but the reality is as we had a very-very strong refining margin, so anything that we can move out we need to keep our rates up. I don’t if that answers you questions, but we don’t specifically give shipments in any of our earnings or disclosures.

Mohit Bhardwaj - Citigroup

But, I think the other thing to ask the same question would be, have you been able to make a structural change in the way you guys in a market, your product or is it still very opportunistic and you have the capability even before?

Jack Lipinski

We have the capability at the first time last year to a lesser degree. So our look forward would be that, if we could do at this year hopefully we’ll be able to do it next year. And the reason question here is how much product will be driven into the Magellan system from the Gulf Coast refiners. Okay, because this year we were in historical high levels, everybody was able to run at higher rates and move the product around. I think, I believe, I heard that the Holly is also moving into the explorer system as well.

So, it’s not only the fact that we move product or other people move product which kept us from getting congested. I would believe that next year given the fact that we’ve been able to do this, two years a row that we would increase rates in our projections year-over-year for the first quarter. But again, the wild card is how much product will be moved south to north of explorer into Tulsa primarily. Fortunately for us, we’re able to do the lot of barrels south at Wynnewood.

Mohit Bhardwaj - Citigroup

And you know you might have see that a lot of the Gulf Coast refiners have been acquiring additional stake in explorers, so it remains to be seen. My next question is on logistics. So you still continuing with that 10% kind of organic growth rate as far as your gathering system is concerned. The question remains kind of would you be looking at logistics MLP and is there something on your thinking as far as when an acquisition is concerned, said to come up about $50 million EBITDA number.

Jack Lipinski

Well, we are always looking at acquisition and I’ve said this before fortunately with CVR Energy above us or even CVR Energy inside Icahn Enterprises IEP. We have access to significant amounts of capital, if we decided to do an acquisition at either company. I’ll probably talk about CVR Energy’s call, but we are always looking and obviously it has to be at right price. Currently, we’re trading as a variable distribution MLP and we can’t overpay for assets but we are looking. And organically, yes, we’re growing at least 10% a year on our gathering business. And quite honestly, in order to supply Wynnewood at the higher rates its running, we’re now running somewhere 10,000 to 15,000 barrels a day into Wynnewood and three year ago that was virtually nothing. So the logistics business as a core competency, we plan on growing it, and yes, the short answer is as when we reach that magic number of about $50 million, our capability to spend another MLP.

Mohit Bhardwaj - Citigroup

Right and just final quick one from me on the update on the hydrocracker project and Wynnewood still set 3Q ‘14?

Jack Lipinski

That is exactly where we are heading. The work is progressing well on all our capital projects but we look forward to that one and as you recall, we did get some preliminary benefit by changing our catalyst sometime last year, but we’ll get full benefit of that project with entirely new (ph) plant everything as we move through the end of this year.

Operator

(Operator Instructions) our next question is coming from Rakesh Advani from Credit Suisse. Please proceed with you question.

Rakesh Advani - Credit Suisse

Thanks for taking my question. Sorry, I missed the first quarter RINs expense; can I grab that off you please?

Susan Ball

It was approximately 34 million.

Rakesh Advani - Credit Suisse

And do you guys have an opportunity cost for the FFC outage at Wynnewood for 1Q book (ph) now any chance?

Jack Lipinski

We have not disclosed this. Roughly, the cost was about $5 million and expenditures and there was lost opportunity cost probably about the same numbers of give or take $10 million.

Rakesh Advani - Credit Suisse

Okay and did that lead to I guess you guys running over medium crude at the Wynnewood?

Jack Lipinski

Well, not yet. Wynnewood, what we do with our crudes is we balance across both refineries to go over our substantial presence in cushioning. So, if one plant has a problem, we move crudes around to optimize. We did lose crude throughput at Wynnewood as a result of the outages of during that period. Initially, when we took upon we estimated the outages to be approximately 14 days and we were able to pull it up to actually 10 days. But during that 10-day period, we actually did reduce one somewhat.

Rakesh Advani - Credit Suisse

Okay, so, I guess, there you could expect mediums to come back to kind of what they normally range at?

Jack Lipinski

Yes. And again what we do is across our system, we balance where the most money is made. So necessarily look at each refinery and having a fixed crude slate because if the margin move one way or another or prices in the different products move, both plants are slightly different. You may see those crudes go Coffeyville or conversely out of Coffeyville to Wynnewood. The only difference is that Wynnewood we really don’t run heavy Canadian.

Rakesh Advani - Credit Suisse

Okay and I know you guys have exposure to Midland barrels, have you guys looked at possibly I guess hedging out any or locking certain differentials on those barrels?

Jack Lipinski

We need to that if you look the forward curves right now, I guess, this month if you were try to do something you can get fixed dollar to the month, we’re actually doing a little better than that in this stock market. And if you go out, the bid out spread gets pretty wide for the second half. But yes, we look at that all the time but we generally don’t go into any detail on that.

Rakesh Advani - Credit Suisse

And can you just remind us on what level of EBITDA your gathering business or your -- I guess logistics potential MLP business is currently at?

Jack Lipinski

I think our number is 30 million give or take. We don’t do a separate financial statement but given the fact that we know how much storage we have in the pipeline we have how much we earned on gathered crude. And if you were to do logistics MLP, obviously CVR would sell down some of the storages, its pipeline, and its vehicles and pay AP (ph) for gathering crude. So we’re still thinking that numbers give or take $30 million today.

Operator

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for any further or closing comment.

Jay Finks

Thank you, Kevin. I would like to thank everyone again for joining our conference call today. As a reminder, the call will be available for replay over the next 14 days. If you like the additional information, please contact Investor Relations or visit our Web site cvrrefining.com. Thank you.

Operator

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

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