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CVR Energy, Inc. (NYSE:CVI)

Q2 2008 Earnings Call

August 14, 2008 3:00 pm ET

Executives

Stirling Pack, Jr. - Vice President of Investor Relations

John J. Lipinski - Chairman of the Board, President, Chief Executive Officer

James T. Rens - Chief financial Officer, Treasurer

Stanley A. Riemann - Chief Operating Officer

Analysts

Jeff Dietert - Simmons & Company International

Vance Shaw - Credit Suisse Group

[Veejay Presott - Lions Capital Management]

Peter Park - Park West Asset Management

[Brinet Swirloff] – Sigma Capital Group

Operator

Welcome to the CVR Energy second quarter conference call. (Operator Instructions) It is now my pleasure to introduce your host, Stirling Pack, Vice President of Investor Relations for CVR Energy.

Stirling Pack, Jr.

Thank you for joining us on this conference. We appreciate very much your time this afternoon and hope you’ll find this to be a very useful conference call and reporting session.

Prior to the call I want to introduce the participants. We have with us this afternoon Jack Lipinski, the CEO of CVR Energy, Stan Riemann, the Chief Operating Officer of CVR Energy, and Tim Rens, the Chief Financial Officer of CVR Energy, and of course myself.

Prior to discussion of our 2008 second quarter results, we are required to make the following Safe Harbor statement. In accordance with federal securities laws the statements in this earnings call relating the matters that are not historical facts are forward-looking statements based on management’s belief and assumptions using currently available information and expectations as of this date and are not guarantees of future performance and do involve certain risks and uncertainties including those filed with the Securities and Exchange Commission. This presentation also includes non-GAAP financial measures. The disclosures related to such non-GAAP measures required by Regulation G can be located on our website at www.cvrenergy.com or on Form 8-K which we filed today.

Now we’ll first hear from Jack Lipinski our Chief Executive Officer.

John J. Lipinski

This afternoon we’ll provide some additional context to CVR’s second quarter earnings release and respond to your questions.

Before moving into the quarter results I’d like to take this opportunity to comment on our business. We have two sound business segments: Petroleum and nitrogen fertilizers.

Our petroleum business is centered around our revamped Coffeyville, Kansas refinery with its associated crude gathering, storage and product distribution assets. We produce primarily high value transportation fuels in a product short region.

We also own substantially all of the interest in a limited partnership which holds our adjacent nitrogen fertilizer operation. It is the newest and lowest-cost producer and market of ammonia and UAN, a urea ammonia nitrogen solution in North America. It receives its principal feedstock, petroleum coke, directly from our refinery.

Our goal is to enhance the value of these assets. They are in different phases of their respective business cycles and they trade in equity markets under different valuation metrics. But our goal is to enhance each asset we have.

During today’s call Tim Rens will review CVR’s financials and Stan Riemann will discuss the operating results of our fertilizer business. I’ll follow Stan with an overview of refining and conclude with additional perspective on the second half of this year and an initial look into the first half of 2009 for our consolidated company.

I’d like to turn it over to Tim at this point.

James T. Rens

As reported CVR Energy second quarter net income was $31 million or $0.36 per diluted share compared to $101 million or $1.16 per share pro forma for the second quarter of 2007. Losses on derivatives for the second quarter include a non-realized loss from the cash flow swap net of taxes of about $9.6 million or $0.11 per share compared to a pre-tax unrealized loss of $41.4 million or $0.48 per share pro forma for the second quarter of 2007. The quarterly results also include a realized loss on the cash flow swap of $52.4 million compared to $88.7 million in the same period of 2007.

Consolidated operating income for the second quarter, which I’ll discuss in more detail by segment, was $123 million compared to $177.8 million for the comparable period in 2007.

Starting with the petroleum segment, operating income was $101.9 million for the second quarter of 2008 compared to $166.3 million for the second quarter of 2007. Refining margins per barrel including the FICO impact for the quarter was $18.23 compared to $27.67 for the second quarter of 2007. Adjusted for the impact of a $74 million FICO gain, refining margins for the quarter were $10.46 per barrel compared to $26.11 per barrel for 2007 excluding a FICO gain of $13.5 million. Refining margins per barrel adjusted for the FICO impact were negatively impacted by higher crude prices and lower crack spreads in the comparable period in 2007 offset somewhat by an increase in crude oil throughput. We realized the benefit of the capital invested in our expansion program which was completed in the spring of 2007 and we’re not burdened by the impact of a turnaround as we were in the second quarter of 2007. For the current quarter crude oil throughput was 9.5 million barrels which is about a 10% increase over the 8.6 million barrels processed in the second quarter of 2007.

Refinery direct operating expenses exclusive of depreciation and amortization were $42.7 million or $4.49 per barrel of crude throughput for the current quarter compared to $44.5 million or $5.17 per barrel for the same period in 2007. The positive variance was primarily the result of a lack of the refinery turnaround expense that was flowing through the second quarter of 2007 partially offset by increases in repairs and maintenance, utilities, and some energy related expenses.

Moving to the fertilizer segment, revenue for the quarter increased by about 64.2% to $58.8 million compared to $35.8 million for the comparable quarter in 2007. Approximately $2.6 million of this increase in revenue resulted from an accounting change related to hydrogen transfers to the refinery. In 2007 hydrogen transfers were recognized as a byproduct credit and cost of product sold instead of as intercompany sales as they are in 2008. Operating income was $23.1 million for the nitrogen segment for the second quarter of 2008 compared to $11.7 million for the second quarter of 2007. Higher prices for ammonia and UAN contributed favorably to the fertilizer segment results. For the quarter ammonia and UAN prices were $528 per ton and $303 per ton respectively compared to $366 per ton for ammonia and $218 per ton for UAN in the comparable period of 2007.

Direct operating expenses were $19.7 million for the quarter compared to $16.5 million in 2007 with the increase primarily the result of property taxes and catalyst expense. SG&A expense for the quarter was $14.8 million compared to $14.9 million for the second quarter of 2007.

I will now speak briefly regarding cash flow and current liquidity. As of June 30, 2008 total outstanding debt under our credit facility was $508.2 million which includes $21.5 million from our revolving credit facility but excludes the $123.7 million owed to Jay Aarons under the terms of a one-year deferral agreement entered in connection with the flood and the estimated unrealized mark on our long-term cash flow swap of $242.2 million.

To provide additional liquidity in the volatile crude market we announced a convertible debt offering and revised the settlement to defer to Jay Aarons. The proposed convertible issue includes the option to satisfy the obligation in cash or shares and at this time offers the best financial option to meet our needs and any currently foreseeable crude oil price. We hope to complete this offering by the end of the third quarter subject of course to market conditions and clearing with the SEC. The devised settlement deferral with Jay Aarons will defer $87.5 million that is currently owed on August 31 until December 15, 2008 or until July 31, 2009 if the company consummates its proposed convertible debt offering.

As of August 11, 2008 total outstanding debt under our credit facility was $485.5 million and the company had $44.5 million of cash on hand resulting in a net debt balance of about $441 million.

Capital expenditures for the second quarter of 2008 were $23.5 million compared to $106.7 million in the second quarter of 2007. The reduction is the result of completing much of the company’s $522 million capital plan that was started in July of 2005.

We still anticipate a significant insurance recovery related to the flood damage and lost production as represented by the $80.9 million accounts receivable that was recorded on our balance sheet as of June 30, 2008. We have signed a settlement agreement on coverage with property insurance carriers representing about 32.5% of the property insurance claim and are working through the adjustment process with those carriers. On July 10, 2008 we filed two lawsuits against some of our insurance carriers. One of the lawsuits was filed against the property carriers that were not part of the settlement agreement and the second lawsuit was filed against the environmental carriers.

Turning to income taxes, income tax expense for the quarter ended June 30, 2008 was $4.1 million or 11.68% of income before income taxes as compared to an income tax benefit of $93.7 million for the three months ended June 30, 2007. The company under GAAP accounting requirements is required to calculate income tax expense for quarterly periods on an expected annual effective tax rate for the full year. Under this method the company calculates its effective tax rate based upon its expected pre-tax income with modifications for non-deductible and other items and with inclusion of some expected tax credits that we anticipate earning for the year. Total estimated gross tax credits for 2008 are approximately $59 million. The estimated annual effective tax rate is applied to the actual pre-tax quarterly earnings to derive quarterly income tax expense. In the end, on an annualized basis the company expects to recognize tax expenses at a statutory rate of approximately 40% on pre-tax earnings and then benefit from tax credits of approximately $59 million.

Finally, with respect to some recent developments [Singroup LP] a customer of our petroleum segment filed for Chapter 11 bankruptcy. We had potential exposure to [Singroup] of about $3.7 million and we do plan to seek repayment. We had fully reserved that amount in our second quarter results.

Stan Riemann, our COO, will now discuss quarterly results for our nitrogen fertilizer segment.

Stanley A. Riemann

As Tim reported in the financial review, the nitrogen fertilizer business is benefiting from extremely strong demand from agricultural production. This demand is driven both by food supply demand as well as increased use of bio fuels. We benefit not only from those overall market conditions but also from our use of low-cost petroleum coke as a feedstock in lieu of natural gas which is a more typical feedstock for fertilizer production. Our petroleum coke competitive cost advantage is further amplified by the higher natural gas price for the quarter. The second quarter 2008 NYMEX natural gas prices averaged $11.47 per million BTU compared to $7.66 for the same period in 2007. This rise in natural gas price implies a minimum increase of $120 per ton of production costs in the second quarter for the North American producer in an environment in which our production costs remain substantially unchanged. Additionally, our Midwest location provides prompt direct access with freight advantage to our primary markets and minimized shipping costs.

With respect to the 2008 quarterly results we reported ammonia production of 79,500 tons versus 82,800 tons for the second quarter of 2007. The second quarter of 2008 UAN production was 139,100 tons compared with 138,900 tons in 2007. This production was below expectations in the second quarter of 2008 due to catalyst change-outs and unscheduled down times in the main as well as the spare gas fires. This occurred mainly in late May and early June in the timeframe. Ammonia sales during the quarter totaled 119,100 tons in the second quarter versus 13,400 tons in the 2007 period. UAN sales were 138,600 tons compared to 126,800 tons in the second quarter of 2007.

To give further indication as to current prices that we are seeing in the market and provide additional context to the strength of the business I can state that current ammonia orders are exceeding $800 per ton for prop shipment and $1,000 per ton for spring delivery, and UAN orders are exceeding $500 per ton. Independent third party industry price forecasts indicate continued strength for the next several years. As an example a major delivery market for CVR is the Mid Corn Belt. Mid Corn Belt spot forecast for the second half of 2008 and for the first half of 2009 for ammonia are in the $1,075 per ton range. Forecast for UAN during the same period are in the $540 per ton range. For the future we continue to plans for conversion of our ammonia production to UAN and for expansion of total UAN capacity from 2,000 to 3,000 tons per day.

In conclusion, we see this business segment as a very solid contributor to CVR’s overall growth strategy.

Jack will now provide additional perspective on CVR as a consolidated entity and discuss the refining business before we move into your questions.

John L. Lipinski

As reported consolidated results for CVR Energy in the second quarter this year reflect the changing business cycles in our fertilizer and petroleum businesses. As Stan noted our nitrogen fertilizer business is benefiting from an operating environment of historically high fertilizer prices. These realized prices have provided considerable offset to weak refining margins in our petroleum business and should continue to do so based on our current fertilizer order book for the remainder of 2008 and into 2009.

Conversely our petroleum business has been impacted by lower refining margins, reduced demand, and our cash flow slump. While improving somewhat from their recent lows, Midcontinent refining margins remained below historical metrics when factoring in the high cost of crude. Increased throughput at our recently expanded refinery provides offset to these factors. Historically the strongest refining margins occur in the second and third quarters based on gasoline and diesel demand. And while crude oil prices have declined sharply from their recent highs crack spreads have not improved in line with the crude price declines due to continuing gasoline demand weakness.

Our Midcontinent location has historically provided higher margins than the Gulf Coast and East Coast markets. Even so the operating environment for CVR’s petroleum segment during the second quarter of 2008 was challenging. Our historical advantage remained to a large degree but globally lower margins and higher crude costs impacted our results.

Relatively strong middle distillate cracks provide an offset to weak gasoline margins. About 40% of our total production is distillate which also provides us in tax credits under the 2004 America Jobs Creation Act. We continue to maximize distillate production which comprises 40.3% of our production versus 38.7% of our production in the first quarter of 2008. Gasoline production makes up about 44% of our production which is down slightly from 47.5% in the first quarter of 2008.

Other products including petroleum coke and LPGs comprised the remaining production. Pet coke is the principal feedstock for our adjacent nitrogen fertilizer. This provides a secure outlet for the refinery pet coke and a significant end product upgrading capability at the fertilizer plant.

Selected industry metrics provide further context for CVR’s refining performance. WTI crude averaged $65.02 a barrel in the second quarter of last year and in the second quarter of this year that averaged $123.80 a barrel a significant increase. NYMEX 211 cracks as a percentage of crude price were calculated about 34% at WTI in the second quarter of 2007 compared with only 14% in the second quarter of 2008.

The Group 3 Basis differential averaged $0.28 a barrel in the second quarter of 2008. Comparatively this was $7.83 a barrel in the same period in 2007. The Group 3 Basis has returned to positive territory after being negative recently and was $4.15 per barrel positive on August 12. This $4.15 value is in line with the three year average basis for our area.

Another metric for evaluating our relative refining operating environment is to compare the WCS, Western Canadian Select, which is a heavy Canadian crude against WTI which is the market crude in the Midcontinent and look at that differential. The differential reflects the relative prices of heavy sour crude versus light sweet crude. In the second quarter of 2007 the differential was $17.99 a barrel below WTI and for the second quarter of 2008 the differential averaged $22.94 a barrel below WTI. On a percentage basis however this metric averaged 72% of WTI in the 2007 period versus 82% in the second quarter of 2008. Clearly as a percentage of crude heavy sours have gotten more expensive but they remain economically attractive. A full poking highly complex medium sour refinery such as ours benefits from the ability to process discounted heavy Canadian crudes in this low margin environment as Tim mentioned.

Our petroleum business generated operating income for the quarter of $101,900,000 compared with $166,300,000 in the same quarter last year. These results reflect in part refinery hardware expansions completed in the past year particularly the CCR addition and our coker expansion. The CCR produces significantly more hydrogen than the unit it replaced. As a result the refinery now produces little if any hydrogen from the fertilizer plant thus allowing the fertilizer plant in turn to use that hydrogen to produce very high value ammonia. The results also reflect various optimizing strategies such as substituting more economic backing tower bottoms for VTBs for some portion of our heavy crude inputs.

Our crude oil throughputs averaged 104,600 barrels a day during the second quarter. Our total production however was 119,500 barrels a day comprising approximately 52,000 barrels a day at gasoline, 48,200 barrels a day at distillate, and 19,300 equivalent barrels a day of other products which also include coke and sulfur. These total production volumes reflect the impact of feedstocks and blend stocks to fill our expanded refinery.

Our cash flow swap ramps down in mid-2009 when hedged oil volumes will decline from approximately 6.2 million barrels per quarter to 1.5 million barrels per quarter, and again that begins in the third quarter of 2009. This will improve our profitability.

Finally we overcame some continuing start-up issues with our CCR in late April and early May as discussed in last quarter’s conference call which caused some down time for that unit as well as associated units.

Our nitrogen fertilizer business reported an income of $23.1 million as compared to $11.7 million in the same period in 2007. Ammonia prices averaged $528 per ton in the quarter compared with $366 per ton in 2007. UAN prices averaged $303 a ton versus $218 per ton in the comparable period. We have taken orders recently for our first quarter 2009 order book in the $1,000 range for ammonia and $500 range for UAN. Our fertilizer segment operating environment is favorable and based on third party forecasts appears to be heading toward an even higher price environment.

The Board of Directors of the fertilizer GP have approved $120 million UAN expansion project which will convert all of our ammonia to UAN. This project is scheduled for completion in 2010.

We fully expect that as our long-term cash [inaudible] substantially reduces in mid-year 2009 and as higher fertilizer prices are realized from our order book we should see further improved results. We’ve reported a profitable second quarter in a challenging environment for our petroleum segment and as we discussed the importance of our fertilizer operations to CVRs consolidated earnings. With respect to refining even at the present margin levels we remain profitable and will strive to improve our operating performance and control our costs. Sustained recovery for the wider R&M industry will however require a period of more stable crude prices and the re-establishment of a market supply and demand equilibrium.

In closing, we believe we have the financial strength and operating flexibility to proceed with announced plans and attack opportunities as they arise in each of our businesses.

I’ll turn the call back to Stirling for any questions you may have.

Stirling Pack, Jr.

We are ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jeff Dietert - Simmons & Company International.

Jeff Dietert - Simmons & Company International

Within the constraints of your current filings could you provide some clarity associated with your financing strategy and plans for future corporate structure?

James T. Rens

If you’re talking about the current filing we have which is a convert, the company still is focused on adding some liquidity in the current period of very volatile crude prices and as on the good side we continue to put additional barrels through the refinery. We think it’s important that we add some additional liquidity out to what we see as kind of foreseeable high side crude prices. I guess on the other side of the debt equation when you talk about capital, I guess you look at the equity side of the balance sheet. And I think recently you’ve seen the announcement that a secondary had been pulled and beyond that there are really no current plans to do anything additional on the equity side. I think in the short run as we look forward at capital moves we think it’s important to add some additional liquidity and currently plan to do that in the form of a convert offering.

Jeff Dietert - Simmons & Company International

And your intention would be to do that sooner rather than later?

James T. Rens

It would be, yes.

Jeff Dietert - Simmons & Company International

On the fertilizer business, I appreciate the pricing information that you provided. In the third quarter and the fourth quarter, you’re substantially into pricing a lot of your products. Could you give us a feel for what product is priced already and how exposed you are to some of the spot pricing that you mentioned in your entry comments?

John J. Lipinski

I’ll kind of throw out some numbers. Our book on UAN is approximately $320 to $325 a ton going forward and Stan what is the book on ammonia for the second half of this year?

Stanley A. Riemann

It would be $750 range and the size of the book on UAN will be over $340,000 right now.

John J. Lipinski

We are essentially sold out. There are some spot barrels that we always hold to move into markets but we are essentially sold out through 2008 and have a reasonably sizable order book for the first quarter of 2009. As we mentioned starting in July we started taking ammonia orders for Q109 above $1,000 on ammonia and above $500 on UAN.

Jeff Dietert - Simmons & Company International

On the new CCR you mentioned in the first quarter call that there were some start-up issues but that it was running smoothly by the time of the call. How’s the performance of that unit been through the second quarter and to date?

John J. Lipinski

Just shortly after our first quarter call we had another problem with our regeneration section. This is a licensed unit. The licensor brought a whole team of folks in. It took us several days to work through. Ever since then the unit has been running essentially at capacity and as expected. For the most part since that bobble, and again it relates not to anything extraordinary other than just shaking out the unit, it’s been running near capacity and the refinery has been purchasing little if any hydrogen. And hopefully in the next quarter we may actually see a situation where we may be slightly net positive hydrogen on the refinery side and may have an opportunity to shift a million or two million cubic foot a day over to the fertilizer side.

Jeff Dietert - Simmons & Company International

Tim, on the $242 million of liabilities associated with the cash flow swap, did that include both short term and long term liabilities?

James T. Rens

Yes, it did. It did not include the realized portion which would have been about $52 million on our June 30 balance sheet. So it included the unrealized mark and that unrealized is split some in long term and some in short term.

Operator

Our next question comes from Vance Shaw - Credit Suisse Group.

Vance Shaw - Credit Suisse Group

What’s your draw on your revolver as of the end of the quarter?

James T. Rens

At the end of the quarter it was a little over $20 million. Let me flip back and I can get you that exact number. It was slightly over $20 million and then as of a couple days ago and as of today it is nothing.

Vance Shaw - Credit Suisse Group

And your availability? You have an LC facility though in addition?

James T. Rens

Yes. Availability’s basically $112 million; it’s $150 million facility with some LCs applied against it and brings the available draw down to about $112 million.

Vance Shaw - Credit Suisse Group

Was there any capitalized interest during the quarter?

James T. Rens

There was capitalized interest during the quarter. To be honest I don’t know what that number was off the top of my head but -

Vance Shaw - Credit Suisse Group

It was like a million bucks last quarter I think.

James T. Rens

Yes, it would probably be down a little bit because the CCR was closed out and we really don’t have any significant projects that we’re continuing to capitalize against.

Vance Shaw - Credit Suisse Group

So if anything it’s infinitesimal.

James T. Rens

Yes.

Vance Shaw - Credit Suisse Group

The FIFO accounting gain of $74 million, that’s basically computed by comparing what the situation would have been under LIFO versus FIFO?

James T. Rens

No, it’s not. What it really does is it takes our opening inventory volumes and multiplied those volumes times the change in inventory gap maturing value from the beginning of the period to the ending period. So what it’s really meant to do is identify and come back to a metric that we think is more comparable to and what management uses it for is to develop a metric that is more comparable to our refinery crack spread.

Vance Shaw - Credit Suisse Group

So you’re just saying that portion of our apparent gross margin is really due to the change in prices of inventory between the beginning of the period versus the end of the period.

James T. Rens

That’s correct.

John J. Lipinski

To give you a little more clarity also on our cash position, as of this morning we have a little over $75 million cash on hand.

Vance Shaw - Credit Suisse Group

It’s really good to hear that. Another question. What percentage of the stock does Goldman Sachs own at this point? Do you guys know?

John J. Lipinski

There are approximately 63 million shares outstanding and theirs is a little over 63 and those are equally owned by PIA Group of Goldman Sachs and Kelso & Company. So it’s 30 some odd percent but those are the numbers. It’s basically 63 million split between those two entities so it’s our controlling shareholders.

James T. Rens

Now on that, there is some management interest in that as well and there’s a beneficial ownership table that’s part of some of the filings that’s probably the best reference for the exact beneficial ownership of Goldman.

Vance Shaw - Credit Suisse Group

How much money did you guys owe to Jay Aaron now at this point? I know you said there was $87.5 million that you’re going to roll forward but how much is the total?

James T. Rens

I’m going to break it into three pieces. There’s the deferral which is a little over $123.5 million plus interest on that that’s due August 31 of which we’ve deferred $87.5 million. In addition to that, as of the end of June we owed them $52 million for the second quarter realized loss. We paid that money on July 5 so that’s no longer outstanding. And as of the same day we had the $242 million that was unrealized in (4) 00:44.6]. Now that is a variable obligation that continues to move around as forward crack spreads move.

Vance Shaw - Credit Suisse Group

So you won’t know what it is really till the end of the quarter?

James T. Rens

Till each quarter it settles.

Operator

Our next question comes from [Veejay Presott - Lions Capital Management].

[Veejay Presott - Lions Capital Management]

Just a follow up on the question that was asked before on the FIFO adjustment. The more appropriate refining margin to look at is the one without the FIFO?

James T. Rens

Honestly the most prominent number that we can show you is the refining margin that’s part of our financial statements but we can tell you that management thinks it’s important to look at numbers adjusted for the FIFO and that that most closely approximates what earnings we’re deriving from existing market conditions.

[Veejay Presott - Lions Capital Management]

On the cash flow swap, if the convertible didn’t go through before say end of the year, can you give me a sense for sufficient liquidity to pay the swap?

James T. Rens

Yes, and in our disclosure you’ll see that the company does feel like it has adequate liquidity through both cash on hand, the ability to manage its working capital position, and certain guarantees that have been offered by third parties.

John J. Lipinski

We cannot predict where crude is going to move. Just as it moved up rapidly, it recently moved down. We had intended for this convertible to cover any liquidity needs this company may have even at extraordinary crude prices and it’s better to have the liquidity before you actually need it than to go asking for it when you’re up against perhaps $200 crude prices.

[Veejay Presott - Lions Capital Management]

Your cash on hand was $20.6 million at the end of June 30 and you just mentioned that as of now cash is about $25 million so the increase is just from working down the working capital?

James T. Rens

I think one of the things you have to understand about our business is the cash account can move around substantially kind of inter-period. When you look at the way our business is set up, we only pay the cash flow swap quarterly and there are certain gathered crudes that you only pay for on the 20th of every month. So there are periods where you will see significant cash generation kind of prior to making monthly crude payments or quarterly swap payments.

[Veejay Presott - Lions Capital Management]

How much does on average your payable tend to be around the 20 of every month?

James T. Rens

It can vary. Last month I think it was approximately $75 million and that was relative to the crude price at that time. It would be slightly more this month and clearly as crude is coming off it would be less next month.

Operator

Our next question comes from Peter Park - Park West Asset Management.

Peter Park - Park West Asset Management

Could you help bridge cash from the $20 million at June 30 to the $75 million you have now? And can you do the same thing for debt again please?

James T. Rens

The cash number is a number that in our business you look daily. When crude was at $145 your daily expenditure for crude oil was in excess of $13 million a day. So I don’t know that there is an exact bridge that’s probably any better than the cash flow statement that will come out when we present the financial statements. As you look through the months to the monthly cycle we will generate significant cash up through the 20th and then we will pay for the prior month’s crude oil and then we will start to build cash again and that cycle will repeat itself monthly. Quarterly you will collect from the market the physical crack spread and then at the end of every quarter you will pay your counter-party for the realized hedge loss. So I don’t have an exact bridge from a single day to another day other than to point out one event would be that you’re looking at cash today at a better time in the month than looking at a month-end balance.

Peter Park - Park West Asset Management

But that cash includes the $52 million that you paid to Jay Aaron.

James T. Rens

Yes, we paid that around July 7.

Peter Park - Park West Asset Management

The amount of debt outstanding went down as well from the end of the second quarter.

James T. Rens

It’s really just that we were out of the revolver, so it’s really more again just part of that monthly cash cycle.

Peter Park - Park West Asset Management

The second question has to do with Midcontinent demand for diesel. Obviously the basis is coming our way again. Can you give us a sense of the impact of the floods and what you’re seeing in terms of general demand to put more color around that positive basis now?

John J. Lipinski

Early on the upper Midwest was impacted by the rains which even if they weren’t flooded it impacted to a certain degree how much work went on in the fields. We are still a generally product short market both for gasoline and for diesel. We have seen a return to normalcy of late. That’s our nominal $4.00 that we’re seeing currently above NYMEX 211. We see some stability in diesel demand now. Nationwide both gasoline and diesel are somewhat under pressure but in our group it seems that since we are product short and we know currently that there are some refinery problems in the Chicago area, that’s drawing product away from our area. Generally Gulf Coast refiners believe their move up to us or through Tulsa or move in through the Chicago area, right now those flows are going to the Chicago area. It’s hard to say exact numbers. We don’t try to track it. We pretty much track inventories in the Magellan system which we are a shipper on and they’re reasonably stable, not over supplied in our view right now.

Peter Park - Park West Asset Management

So from a farm use standpoint you’re seeing good normal demand.

John J. Lipinski

Right. And as you go into the harvest season you will see that again. Generally diesel runs for us primarily early when plantings are going on and late when harvesting is going on.

Stanley A. Riemann

The flood activity although it impacted a lot of area it really didn’t impact our specific geography and we anticipate a good demand for harvest, the crop acres there; we expect a good demand for fall application. So I think Jack hit the nail on the head that our distillate demand for our area is pretty much normal and will be robust for the next 90 days as ag activity picks up for the harvest.

Peter Park - Park West Asset Management

In terms of the UAN and ammonia sales volumes, I thought I heard you say a number for tons for the rest of the year and that you were sold out. Could you say that number again? I must have heard it wrong.

John J. Lipinski

Stan go ahead if you want to say the number that we have remaining in our book, and we just have to be careful that we’re not talking our total book; we’re talking the ‘08 book versus the ‘09 book.

Stanley A. Riemann

Fundamentally if you look at our production of roughly 2,000 tons a day or 55,000 to 60,000 a month, we’re sold for at least the next five months. We’re sold into February of next year.

Operator

Our next question comes from [Brinet Swirloff] - Sigma Capital Group.

[Brinet Swirloff] – Sigma Capital Group

One of the questions I wanted to ask you is regarding, you mentioned some production downtime. How much did you hurt you guys in the second quarter? Would you guys quantify that if that’s possible?

John J. Lipinski

You have round numbers, lost opportunity was somewhere between $5 million and $10 million for the quarter, on the refining side. And on the fertilizer side we did take our unit down to change out what’s called a shift catalyst. That took about three days of production, three, three and a half days of production out and our third party supplier of oxygen and nitrogen was impacted by a couple of lightning strike power failures. So I would guess for the quarter we lost something on the order of 5% of our production might be a good number on the fertilizer side and on a dollar metric, somewhere between $5 million and $10 million on the refining side as lost opportunity.

[Brinet Swirloff] – Sigma Capital Group

And those are all running fine now so those are not expected to repeat?

John J. Lipinski

No, now that they’re running fine now, our second quarter operating rate was just under 105,000 barrels a day. We’re running above that rate right now. We’re running just shy; just a little over, call it 114,000 of crude. Total inputs are running in the range of 128,000 barrels a day. For the quarter we would expect those numbers to be something like 110,000 to 112,000 on crude and perhaps 120,000 to 125,000 on total inputs.

One of the things that we are doing is this new CCR which is now shook out and is running as we would have expected it to probably a few months earlier. It’s not only producing additional hydrogen; it is producing significant amounts of additional octane and we’re using that excess octane to buy gasoline blend stocks called natural gasoline which are highly discounted, low quality, low octane stocks and upgrade them to gasoline.

Our numbers right now are running, we’ll estimate somewhere between 5,000 and 7,000 barrels a day of that and we’re buying that material at $0.40 to $0.50 a gallon below gasoline. So our expanded refinery, we’re nicely surprised. Our delayed coker, the original design basis was approximately 21,000 to 21,500 barrels a day. On a stream day basis, we are running very close to 24,000 barrels a day.

That allows us then to do, one of the things we were buying is for the quarter, we were buying vacuum tower bottoms which helps fill out the coker directly and for the quarter, we purchased that feedstock approximately $50.00 a barrel under WTI. As we look forward operationally we think we’re right in the zone. We believe that our units are operating fine. As always you have blips and things that bring you down. Sometimes, it’s out of our control: third party electric, there’s lightning on the grid but we’re, both plants are operating near capacity.

[Brinet Swirloff] – Sigma Capital Group

And just going through the expansion plan, the decision to produce more ammonia from the increased, I’m sorry, UAN from the increased ammonia. With ammonia prices over $1,000 in the corn belt, what’s the trade off because I’d imagine the margins are extremely good in ammonia, even when considering where UAN prices are.

John J. Lipinski

If you were to take a look and say, “Let’s just use ammonia.” If you have $1,000 ammonia, the amount of ammonia that would go into a ton of UAN is approximately $420. If you say that you’re getting over $500 and if you believe in Blue Johnson or others who forecast filler prices and maybe that’s $525, maybe that’s $540, you’re approaching $100 premium per ton even after the high ammonia price. And that’s why we’re moving and the other thing is over the long haul there may, it’s going to get more expensive to ship anhydrous ammonia by rail. It’s just a gaseous product, it’s liquefied but it’s a little more difficult to ship. It’s going to get more expensive and the ultimate application, if these are apply UAN than it is ammonia. And we don’t expect by, we expect a shipping away from ammonia into products like UAN in the future.

James T. Rens

And an easy way to look at it, and you’re right, the margins are very good on ammonia but the premium over getting on a nitrogen basis is probably anywhere from $0.14 to $0.18 a pound on the nitrogen. So even though ammonia’s good, UAN is that much better.

[Brinet Swirloff] – Sigma Capital Group

On the forward order book for 09, when you look at that order that, how firm is it? Are players able to back away from things or when you say you’ve contracted it, sold out for ‘08 and then in going to 09, how firm are those orders is my real question?

John J. Lipinski

They’re firm.

James T. Rens

They’re firm.

John J. Lipinski

They’re taking orders. Some of them are even prepay where a portion of the price is paid to us up front.

[Brinet Swirloff] – Sigma Capital Group

Finally, you guys have always talked about unlocking the value. Obviously, I guess the market seems to think that there’s potentially an issue with the company, I don’t know, but obviously you’re not getting what you have felt full value for the fertilizer assets as well as the refining assets are, knowing that there’s a challenge time in refining. What kind of steps can you take to realize the value, because obviously the [FOP] route was undervaluing the asset and here we are, about 30% to 40% below those prices prior to the announcements. I’m just wondering what kind of proactive steps you might be able to take.

John J. Lipinski

We’re looking at numerous public market alternatives. There’s nothing that we won’t look at. Right now, what complicates everything and looking at just overall CVR Energy shareholders is refining is under pressure. When that stabilizes and we take a look at where fertilizers are going, you could do the math. You could take our production, just take our second quarter production and apply what we have given you for order taking and if they hold, the fertilizer business is going to carry this company more so than refining will carry this company. We just have to make sure as we move forward that we do the right thing so that we have adequate liquidity and be able to handle the capital needs of the refining company as we go forward. And again, we are looking at numerous alternatives. It’s one of the complicating factors, actually, is that the fertilizer market is moving so rapidly. We believe it has legs under it. We’d like to see it stay there before we stick a pin in the paper and say this is where we want to move from and to.

[Brinet Swirloff] – Sigma Capital Group

Just looking, there was obviously a transaction. [Inaudible] bought an asset, [inaudible], for replacement value cost well above the implied market cap on higher costed assets so I’m just wondering if I look at the way you’re being valued, is that something that’s comparable on a transaction basis regardless of whether the market is valuing it correctly or not.

John J. Lipinski

No. We believe, again look at them I did not spend a lot of time so I will caution everybody to take my comments and the fact that I didn’t spend a lot of time looking over our shoulder at some other transaction. Quite honestly we believe that we’re in a better position than that facility was when it was sold.

[Brinet Swirloff] – Sigma Capital Group

Then the last question I had is on the road show for the convert, I mean is there any sort of a firm timeline? I know that the financials I guess are stale now on the S1 so you’d have to refile those. I guess firming up a road show and timing for the convertible represents somewhat of an overhang on the stock right now?

John J. Lipinski

We are hoping to get that done in September, if we can do it. Again, that’s our current plan. We realize that there’s not a lot of float in our stock and the convertible if you were to take a look at the reasoning on it, on doing the convertible, it is that we have a very favorable $800 million credit facility right now. We did not want to re-open that and the fact that we can settle out this convertible with cash rather than stock, we believe it has minimal dilution even though the market seems to be factoring that in.

[Brinet Swirloff] – Sigma Capital Group

So you view this as sort of a bridge debt then?

John J. Lipinski

That’s the best option we have rather than refinancing an $800 million term loan and credit facility that we have that’s favorable.

[Brinet Swirloff] – Sigma Capital Group

And your expectation is that that excess stock will most likely never become stock.

John J. Lipinski

Our view is that given the opportunity and the right conditions and the company’s strengths, we will pay that off in cash.

Operator

We have a follow up question from [Veejay Presott - Lion Capital Management].

[Veejay Presott - Lion Capital Management]

Actually you answered my questions. Just an additional follow up. The $75 million of cash that you mentioned, that is after the $52 million payment on the realized settlement on the swap?

James T. Rens

Yes. Again that happened to be our cash balance as of the close of business yesterday and the $52 million was paid back the first week of July.

Operator

I would like to turn the call back over to management for closing comments.

Stirling Pack, Jr.

Thank you everyone for your attention during this call. It was a lot of information. We will make ourselves available to have any follow up questions answered over the next several days and move forward. Jack I don’t have anything else to add. Is there anything you’d like to add here at the very end?

John J. Lipinski

No. I’d just like to thank everyone for taking the time to listen. We have a rather unique story. We’re trading like a refining company but we’re an emerging fertilizer company as well. We have two sound businesses. We believe when our cash flow swap rolls off and you see the size of the mark on that we’re well positioned. We have a really well expanded refinery. Its complexity is significantly up from even where we expected it to be. Its capacity is up. The fertilizer plant has some wind in its sails. And we’re looking forward to the next several months.

Stirling Pack, Jr.

Thank you everyone for your attention today. And with that we will speak with you soon.

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Source: CVR Energy, Inc. Q2 2008 Earnings Call Transcript
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