Attached files
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EX-23.2 - EX-23.2 - CVR ENERGY INC | y93739exv23w2.htm |
EX-23.1 - EX-23.1 - CVR ENERGY INC | y93739exv23w1.htm |
EX-99.3 - EX-99.3 - CVR ENERGY INC | y93739exv99w3.htm |
EX-99.2 - EX-99.2 - CVR ENERGY INC | y93739exv99w2.htm |
EX-99.4 - EX-99.4 - CVR ENERGY INC | y93739exv99w4.htm |
EX-99.5 - EX-99.5 - CVR ENERGY INC | y93739exv99w5.htm |
EX-99.6 - EX-99.6 - CVR ENERGY INC | y93739exv99w6.htm |
8-K - FORM 8-K - CVR ENERGY INC | y93739e8vk.htm |
Exhibit 99.1
Our
Company
We are an independent petroleum refiner and marketer of high
value transportation fuels in the mid-continental United States.
In addition, we own the general partner and approximately 70% of
the common units of CVR Partners, LP, a publicly-traded limited
partnership that is an independent producer and marketer of
upgraded nitrogen fertilizers in the form of ammonia and urea
ammonia nitrate, or UAN.
Our petroleum business includes a 115,000-barrel per day, or
bpd, complex full coking medium-sour crude oil refinery in
Coffeyville, Kansas and, following consummation of the
Acquisition, a 70,000 bpd refinery in Wynnewood, Oklahoma.
In addition, we own and operate supporting businesses that
include:
| a crude oil gathering system, serving Kansas, Oklahoma, western Missouri and southwestern Nebraska, that has gathered as much as approximately 37,500 bpd in September 2011; | |
| a 145,000 bpd pipeline system that transports crude oil to our Coffeyville refinery with 1.2 million barrels of associated company-owned storage tanks and an additional 2.7 million barrels of leased storage capacity located at Cushing, Oklahoma (with an additional 1.0 million barrels of company-owned storage tanks in Cushing under construction, which are expected to be completed in the first quarter of 2012); and | |
| a rack marketing division supplying product through tanker trucks directly to customers located in close geographic proximity to Coffeyville and to customers at throughput terminals on refined products distribution systems run by Magellan Midstream Partners L.P., or Magellan, and NuStar Energy, LP, or NuStar. |
Our Coffeyville refinery is situated approximately
100 miles from Cushing, Oklahoma, one of the largest crude
oil trading and storage hubs in the United States, which
provides us with access to virtually any crude oil variety in
the world capable of being transported by pipeline. We sell our
products through rack sales (sales which are made at terminals
into third-party tanker trucks) and bulk sales (sales through
third-party pipelines) into the mid-continent region via
Magellan and into Colorado and other destinations utilizing the
product pipeline networks owned by Magellan, Enterprise Products
Operating, L.P., or Enterprise, and NuStar.
CVR Partners nitrogen fertilizer business operates a
dual-train coke gasifier plant that produces high-purity
hydrogen, most of which is subsequently converted to ammonia and
upgraded to urea ammonium nitrate, or UAN. The nitrogen
fertilizer business is the only operation in North America that
utilizes a pet coke gasification process to produce ammonia
(based on data provided by Blue, Johnson & Associates,
or Blue Johnson). The nitrogen fertilizer manufacturing facility
includes a 1,225
ton-per-day
ammonia unit, a 2,025
ton-per-day
UAN unit, and a gasifier complex with built-in redundancy having
a capacity of 84 million standard cubic feet per day. In
addition, CVR Partners is building 10,000 tons of UAN storage
tank capacity in Phillipsburg, Kansas which is expected to be
completed in the third quarter of 2012. A majority of the
ammonia which the nitrogen fertilizer business produces is
upgraded to higher margin UAN fertilizer, an aqueous solution of
urea and ammonium nitrate which has historically commanded a
premium price over ammonia. In 2010, the nitrogen fertilizer
1
business produced 392,745 tons of ammonia, of which
approximately 60% was upgraded into 578,272 tons of UAN. During
the past five years, over 70% of the pet coke utilized by the
nitrogen fertilizer plant was produced and supplied by CVR
Energys crude oil refinery pursuant to a renewable
long-term agreement.
Gary-Williams
Energy Corporation (GWEC) Acquisition
On November 2, 2011, we entered into a Stock Purchase and
Sale Agreement (the Purchase Agreement) to acquire
all of the issued and outstanding shares of GWEC for
$525.0 million in cash, plus an adjustment for inventory
and other working capital on the closing date (currently
estimated to be $69.0 million as of the date hereof). GWEC owns
a 70,000 bpd refinery in Wynnewood, Oklahoma that includes
approximately 2.0 million barrels of company-owned storage
tanks. Located in the PADD II Group 3 distribution area, the
Wynnewood refinery is a dual crude unit facility that processes
a variety of crudes and produces high-value fuel products
(including gasoline, ultra-low sulfur diesel, jet fuel and
solvent) as well as liquefied petroleum gas and a variety of
asphalts.
We believe the acquisition of GWEC will provide us with the
following benefits:
| We are acquiring high quality, recently upgraded assets. We believe the Wynnewood refinery is in excellent operating condition after significant recent capital improvements. Since January 1, 2007, GWEC has invested over $250.0 million for maintenance projects and improvements to the safety, complexity and operational performance of the Wynnewood refinery. The Wynnewood refinery is fully compliant with current ultra-low sulfur diesel and gasoline regulations. | |
| The acquisition will increase our scale and operational diversity. After the acquisition, we will have 185,000 bpd of crude throughput capacity across two facilities located in two different states. | |
| We expect to generate significant operating synergies. We have identified over $30.0 million in annual processing synergies that we expect to generate from operating the two refineries together. | |
| The acquired business should contribute significant operating cash flow. The GWEC acquisition is also expected to contribute significant operating cash flow to our combined business. We believe expanding our processing capacity and diversifying our asset base will improve our credit profile. |
Pro forma for the Acquisition debt financing and the GWEC Acquisition, we would
have had net sales, operating income, net income and Adjusted
EBITDA of $7,755.5 million, $826.3 million,
$382.2 million and $892.1 million for the twelve
months ended September 30, 2011 and ratios of pro forma net
debt to Adjusted EBITDA and Adjusted EBITDA to pro forma
interest expense of 0.95x and 11.41x, respectively, during such
period. See Summary Pro Forma Condensed Consolidated
Financial Information.
Key Market
Trends
We have identified several key factors that we believe influence
the long-term outlook for the refining and nitrogen fertilizer
industries generally and in the areas where we operate and sell
our products.
For the refining industry, these factors include the following:
| Reduced refining capacity. High capital costs, historical excess refining capacity and incremental regulatory requirements have limited the construction of new refineries in |
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the United States over the past 30 years. Although certain regions in the U.S. continue to have excess capacity, consolidation and closure of existing domestic and international refineries accelerated beginning in 2009 and is expected to continue, which we believe should reduce refining capacity as compared to current levels. |
| Higher Brent crude prices. Currently, the spread between Brent crude oil and West Texas Intermediate, or WTI crude oil, is in excess of historical norms. This higher spread is caused by increasing Asian crude demand, global political uncertainty and lower supplies of Brent crude oil, which have driven up its price, as well as by increased Canadian and US Bakken crude flowing to Cushing without pipeline access to the U.S. Gulf Coast, which has put downward pressure on WTI pricing. As refined products are priced off of a Brent crude oil base, refined product margins for refineries that use WTI crude and can capture the Brent-WTI differential, such as CVR Energy, have increased. This trend may be mitigated in the future as a result of Enbridges purchase of 50% of the Seaway pipeline and intent to reverse the pipeline to make it flow from Cushing to the U.S. Gulf Coast, as well as from other potential projects planned for the coming years. | |
| Net importing of refined products in PADD II Group 3. Even in a cyclically low demand environment, refining capacity in the mid-continent region where both our existing refinery in Coffeyville, Kansas and GWECs refinery in Wynnewood, Oklahoma operate is insufficient to meet required product demand in this region. As a result, the region has historically required U.S. Gulf Coast imports to meet demand. We believe that this should result in PADD II Group 3 refiners earning higher margins on mid-continent product sales than their U.S. Gulf Coast competitors by virtue of their lower transportation costs. | |
| Increasing demand for sweet crude. Increasing demand for sweet crude oils and higher incremental production of lower-cost sour crude are expected to provide a cost advantage to sour crude processing refiners. | |
| U.S. fuel specifications. U.S. fuel specifications, including reduced sulfur content and reduced vapor pressure, which accommodates ethanol blending and reduces fuel volatility, should benefit refiners who are able to efficiently produce fuels that meet these specifications. |
For the nitrogen fertilizer industry, these factors include the
following:
| Increased global fertilizer and grain demand. Global demand for fertilizers is driven primarily by population growth, dietary changes in the developing world and increased consumption of bio-fuels. According to the International Fertilizer Industry Association, or IFA, from 1972 to 2010, global fertilizer demand grew 2.1% annually. Fertilizer use is projected to increase by 45% between 2005 and 2030 to meet global food demand, according to a study funded by the Food and Agriculture Organization of the United Nations. Additionally, over the five-year period ending December 31, 2010, world grain demand increased 11%, leading to a tight grain supply environment and significant increases in grain prices, which is highly supportive of fertilizer prices. | |
| U.S. demand for fertilizer. The United States is the worlds largest exporter of coarse grains, accounting for 46% of world exports and 31% of total world production, according to the USDA. The United States is also the worlds third largest consumer of nitrogen fertilizer and historically the worlds largest importer of nitrogen fertilizer, importing approximately 48% of its nitrogen fertilizer needs. North American producers have a significant and sustainable cost advantage over European producers that export to the United States. | |
| Increased demand for UAN. The convenience of UAN fertilizer has led to an 8.5% increase in its consumption from 2000 through 2010 (estimated) on a nitrogen content |
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basis, whereas ammonia fertilizer consumption decreased by 2.4% for the same period, according to data supplied by Blue Johnson. Unlike ammonia and urea, UAN can be applied throughout the growing season and can be applied in tandem with pesticides and fungicides, providing farmers with flexibility and cost savings. UAN is not widely traded globally because it is costly to transport (it is approximately 68% water). As a result of these factors, UAN commands a premium price to urea and ammonia, on a nitrogen equivalent basis. |
Both of our businesses are cyclical and volatile and have
experienced downturns in the past. See Risk Factors
filed as Exhibit 99.6 to this Current Report on Form 8-K.
Our
Strengths
Regional Advantage and Supply/Demand
Imbalance. The Coffeyville and Wynnewood
refineries are both located in the PADD II Group 3 distribution
area. Because refined product demand in this area exceeds
production, the region has historically required U.S. Gulf
Coast imports to meet demand. We estimate that this favorable
supply/demand imbalance has allowed refineries in PADD II Group
3 to generate higher refining margins, measured by the
2-1-1 crack
spread, as compared to U.S. Gulf Coast refineries on
average during the last four years. The 2-1-1 crack spread is a
general industry standard that approximates the per barrel
refining margin resulting from processing two barrels of crude
oil to produce one barrel of gasoline and one barrel of heating
oil.
Access to Advantaged WTI Priced
Crudes. Refineries in the PADD II Group 3
region, where both the Coffeyville and Wynnewood refineries are
located, are advantaged over U.S. coastal refiners due to
their access to WTI benchmarked crudes. These crudes are
currently trading at a historically wide differential to coastal
or imported crudes such as Brent and LLS. This spread has
increased due to rising Asian crude demand, global political
uncertainty, and increased Canadian and U.S. Bakken crude
flowing to Cushing without similar pipeline access to the
U.S. Gulf Coast. As refined products are priced off of a
Brent crude oil base, refined product margins for refineries
that use WTI crude and can capture the Brent-WTI differential,
such as CVR Energy, have increased.
Access to and Ability to Process Multiple Crude
Oils. In recent years, CVR Energy has
significantly expanded the variety of crude grades processed in
any given month to optimize the profitability of and enhance
security of supply to the Coffeyville refinery. The Wynnewood
refinery has a complexity of 9.3 and is also capable of
processing a variety of crudes, including West Texas Sour, West
Texas Intermediate, sweet and sour Canadian and United States
Gulf Coast crudes. CVR Energy maintains capacity on the
Spearhead pipeline, which connects Chicago to the Cushing hub.
We maintain leased storage in Cushing to facilitate optimal
crude purchasing and blending and own and operate a crude
gathering system serving Kansas, Oklahoma, western Missouri and
southwestern Nebraska, which allows us to acquire quality crudes
at a discount to West Texas Intermediate crude oil, or WTI,
which is used as a benchmark for other crude oils. The
Coffeyville and Wynnewood refineries also have the ability to
receive crude oil directly by rail.
High Quality, Upgraded Refineries with Solid Track
Record. For the year ended December 31,
2010, approximately 89% of the Coffeyville and Wynnewood
refineries liquid production consisted of higher value
transportation fuels (gasoline and distillate). Substantial
investments have been made in both refineries to increase their
complexity, which is a measure of a refinerys ability to
process lower quality crude in an economic manner. From 2005
through September 2011, CVR Energy has invested over
$685.0 million to modernize the Coffeyville oil refinery
and to meet more stringent U.S. environmental, health and
safety requirements. As a result, the Coffeyville
refinerys complexity increased from approximately 10.0 in
2005 to its current complexity of 12.9, we significantly
improved our assets reliability
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and redundancy and we enhanced the profitability of the
Coffeyville refinery during periods of high crack spreads while
enabling the refinery to operate more profitably at lower crack
spreads than was previously possible. In addition, we achieved
significant increases in our refinerys total throughput,
from an average of approximately 98,300 bpd in June 2005 to
an average in excess of 120,000 bpd for the year ended
December 31, 2010. Similarly, in 2007 and 2008, the
Wynnewood refinery completed approximately $100.0 million
in capital projects and an approximately $60.0 million
four-year turnaround, which increased crude throughput capacity
27% to 70,000 bpd and sour crude processing capacity by
approximately 80%.
Nitrogen Fertilizer Cost Advantage Through Use of Pet Coke
Gasification Process. CVR Partners operates
the only nitrogen fertilizer production facility in North
America that uses pet coke gasification to produce nitrogen
fertilizer, which has historically given it a cost advantage
over competitors that use natural gas-based production methods.
Its costs are approximately 86% fixed and relatively stable,
which allows it to benefit directly from increases in nitrogen
fertilizer prices, and its variable costs consist primarily of
pet coke. Pet coke costs have historically remained relatively
stable, averaging $26 per ton since a pet coke supply and
pricing agreement was put in place between CVR Partners and CVR
Energy in October 2007, with an annual high of $31 per ton in
2008 and an annual low of $17 per ton in 2010. Third-party pet
coke is readily available, and CVR Partners has paid an average
cost of $43 per ton for third-party pet coke during the five
years ended September 30, 2011. Substantially all of the
nitrogen fertilizer business competitors use natural gas
as their primary raw material feedstock (with natural gas
constituting approximately
85-90% of
their production costs based on historical data) and are
therefore heavily impacted by changes in natural gas prices.
Fertilizer Business Transportation Cost
Advantage. The nitrogen fertilizer business
and other competitors located in the U.S. farm belt share a
transportation cost advantage when compared to
out-of-region
competitors in serving the U.S. farm belt agricultural
market. As a result, the nitrogen fertilizer business is able to
cost-effectively sell substantially all of its products in the
higher margin agricultural market, whereas, according to
publicly available information prepared by competitors, a
significant portion of the nitrogen fertilizer business
competitors revenues are derived from the lower margin
industrial market. Because the U.S. farm belt consumes more
nitrogen fertilizer than is produced in the region, it must
import nitrogen fertilizer from the U.S. Gulf Coast and
international producers. Accordingly, U.S. farm belt
producers may offer nitrogen fertilizers at prices that factor
in those
out-of-region
transportation costs without incurring such costs. In addition,
the nitrogen fertilizer business products leave the plant
either in trucks for direct shipment to customers (in which case
no transportation costs are incurred) or in railcars for
destinations located principally on the Union Pacific Railroad.
Accordingly, the nitrogen fertilizer business does not incur any
intermediate transfer, storage, barge freight or pipeline
freight charges.
Highly Reliable Pet Coke Gasification Fertilizer Plant
with Low Capital Requirements. The nitrogen
fertilizer plant was completed in 2000 and is the newest
fertilizer plant built in North America. Prior to the
plants construction in 2000, the last ammonia plant built
in the United States was constructed in 1977. The nitrogen
fertilizer facility was built with the dual objectives of being
low cost and reliable. It has low maintenance costs, with
maintenance capital expenditures ranging between approximately
$3 million and $9 million per year from 2007 through
2010, and has been configured to have a dual-train gasifier
complex to provide redundancy and improve reliability.
Experienced Management Team. Our senior
management team averages over 29 years of refining and
fertilizer industry experience and, in coordination with our
broader management team, has successfully improved the overall
reliability and production capabilities of our businesses. John
J. Lipinski, CVR Energys Chief Executive Officer and CVR
Partners Executive Chairman, has over 38 years of
experience in the refining and chemicals industries, and prior
to joining us in June 2005 was in charge of a 550,000 bpd
refining system and a multi-plant
5
fertilizer system. Byron R. Kelley, CVR Partners Chief
Executive Officer, has over 41 years of experience in
energy-related companies, including executive, management and
engineering positions in natural gas and pipeline companies.
Stanley A. Riemann, our Chief Operating Officer, has over
37 years of experience, and prior to joining us in March
2004, was in charge of one of the largest fertilizer
manufacturing systems in the United States. Edward A. Morgan,
our Chief Financial Officer, has over 19 years of finance
experience, including 9 years in the energy industry, and
prior to joining us in May 2009, was the chief financial officer
of a New York Stock Exchange-listed downstream energy company.
CVR Partners is managed by CVR Energys management pursuant
to a services agreement and, other than Mr. Kelley, CVR
Energys management team divides its time between both
businesses.
Our
Strategy
The primary business objective for our refining business is to
strengthen our position as an independent refiner and marketer
of refined fuels in our markets by maximizing the throughput and
efficiency of our petroleum refining assets. In addition, the
primary business objective of the nitrogen fertilizer business
is to maximize the production and efficiency of its nitrogen
fertilizer facilities as well as to add complementary assets. We
intend to accomplish these objectives through the following
strategies:
Maintain and increase cash flow with minimal need for
significant capital expenditure projects. Our
Coffeyville refinery and the Wynnewood refinery are located in a
region of the United States in which refined product demand
exceeds production. In recent years, significant investments
have been made to modernize both refineries and to increase the
volume and quality of their output. In addition, there is high
demand for the products produced by the nitrogen fertilizer
business, which operates the newest fertilizer plant in North
America. We believe our significant capital expenditures to date
combined with demand for our products will allow us to maintain
a recurring stream of revenue with minimal need for significant
large capital projects. We continually evaluate likely levels of
future demand and will endeavor to make future capital
expenditures in order to increase future recurring revenues and
cash flow.
Capitalize on low operating cost
advantage. Increasing demand for sweet crude
oils and higher incremental production of lower-cost sour crude
are expected to provide a cost advantage to sour crude
processing refiners and the location of our Coffeyville refinery
and the Wynnewood refinery provides us or is expected to provide
us with a reliable supply of crude oil and a transportation cost
advantage over other refiners. In addition, we believe the
nitrogen fertilizer business is one of the lowest cost producers
and marketers of ammonia and UAN fertilizers in North America.
We continually review on an ongoing basis efficiency-based and
other projects that could reduce overall operating costs.
Continue productivity improvements and capacity
optimization. We continually strive to
improve our operating efficiency. We completed the greenfield
construction of a new continuous catalytic reformer in 2008 to
increase the profitability of our petroleum business through
increased refined product yields and the elimination of
scheduled downtime associated with the catalytic reformer that
was replaced. In addition, this project reduced the dependence
of our Coffeyville refinery on hydrogen supplied by the
fertilizer facility, thereby allowing the nitrogen fertilizer
business to generate higher margins by increasing its capacity
to produce ammonia and UAN rather than hydrogen.
We have increased utilization of our crude oil gathering system.
Our gathered barrels have increased from approximately
7,000 bpd in 2005 to approximately 37,500 bpd in
September 2011. This increased capacity has provided higher
margins and a base supply of feedstock for the Coffeyville
refinery that is an attractive and competitive supply of crude
oil. We plan to continue to increase the capacity of our crude
oil gathering system so that we may eventually
6
utilize this asset to provide crude oil to other buyers of crude
oil, including the Wynnewood refinery.
Increase UAN production at the nitrogen fertilizer
business. In 2011, the nitrogen fertilizer
business began a significant expansion project to increase its
UAN production capacity by approximately 400,000 tons, or 50%,
per year. Approximately $35.7 million had been spent on
this project through September 30, 2011, and we estimate an
additional $95.0 million will be spent through completion,
which is currently forecasted to occur by the end of 2012. This
project is expected to provide the flexibility to upgrade all of
CVR Partners ammonia production when market conditions
favor UAN. It is expected that this additional UAN production
capacity will improve fertilizer business margins, as UAN has
historically been a higher margin product than ammonia.
Focus on safe, reliable and environmentally responsible
operations. Our petroleum business, the
nitrogen fertilizer business and GWEC have all made substantial
investments in our respective facilities to improve their safety
and reduce their environmental impact. In addition, we
continually strive to maximize the production of our oil
refining and nitrogen fertilizer facilities in order to meet
demand, and we seek to minimize downtime at our facilities
through a diligent planning process that takes into account the
margin environment, the availability of resources to perform the
needed maintenance, feedstock logistics and other factors.
Provide high level of customer
service. We focus on providing our customers
with the highest level of service. Both refineries have
significantly expanded the variety of crude grades they can
process, allowing us to offer customers consistent and reliable
service across a wide range of products. The fertilizer plant
has demonstrated consistent levels of production while operating
at close to full capacity. Substantially all of the fertilizer
plants product shipments are targeted to freight
advantaged destinations located in the U.S. farm belt,
allowing the fertilizer business to quickly and reliably service
customer demand. We believe a continued focus on customer
service will allow us to maintain relationships with existing
customers and grow our business.
Selectively consider strategic
acquisitions. We intend to continue to
selectively consider strategic acquisitions within the energy
industry. We will seek acquisition opportunities in our existing
areas of operation that have the potential for operational
efficiencies. We may also examine opportunities in the energy
industry outside of our existing areas of operation and in new
geographic regions. In addition, working on behalf of the
Partnership, management may pursue strategic acquisitions within
the fertilizer industry, including opportunities in different
geographic regions, and where appropriate will seek to acquire
complementary assets divested by larger, diversified
enterprises. While we are continuously engaged in discussions
with respect to potential transactions, at the present time,
other than the GWEC acquisition, we have no agreements or
understandings with respect to any acquisitions.
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Summary Pro Forma
Condensed Consolidated Financial Information
The summary pro forma condensed consolidated financial
information presented below for the year ended December 31,
2010 and the nine and twelve months ended September 30,
2011 and as of September 30, 2011 have been derived from
the pro forma condensed consolidated statements of operations
for the year ended December 31, 2010 and the nine and
twelve months ended September 30, 2011 and the pro forma
condensed consolidated balance sheet as of September 30,
2011 appearing elsewhere in Exhibit 99.5 to this Current Report on Form 8-K. The pro
forma statements of operations give effect to the Acquisition-related debt financing and
the Acquisition (including the acquisition of GWECs
working capital) as if they had occurred at the beginning of the
periods presented, and the pro forma balance sheet as of
September 30, 2011 gives effect to the Acquisition-related debt financing and the
Acquisition (including the acquisition of GWECs working
capital) as if they had occurred on September 30, 2011. The
pro forma adjustments are based upon available information and
certain assumptions that we believe are reasonable. The summary
pro forma condensed consolidated financial information is for
informational purposes only and does not purport to represent
what our results of operation or financial position actually
would have been if the Acquisition had occurred at any date, and
such data does not purport to project our financial position as
of any future date or our results of operations for any future
period. See Exhibit 99.5 for a complete description of the
adjustments and assumptions underlying this summary pro forma
consolidated financial information. The summary pro forma
consolidated financial information should be read in conjunction
with the financial statements and related notes of both CVR
Energy and GWEC and Managements Discussion and Analysis of Financial
Condition and Results of Operations for CVR Energy.
Twelve |
||||||||||||
Months |
||||||||||||
Year Ended |
Nine Months Ended |
Ended |
||||||||||
December 31, |
September 30, |
September 30, |
||||||||||
2010 | 2011 | 2011 | ||||||||||
(in millions) |
||||||||||||
(Unaudited) | ||||||||||||
Statements of Operations Data:
|
||||||||||||
Net sales
|
$ | 6,220.8 | $ | 6,008.2 | $ | 7,755.5 | ||||||
Cost of product sold
|
5,536.7 | 4,785.6 | 6,313.1 | |||||||||
Direct operating expenses
|
329.9 | 284.3 | 372.0 | |||||||||
Insurance recovery-business interruption
|
| (3.4 | ) | (3.4 | ) | |||||||
Selling, general and administrative expenses
|
106.9 | 82.1 | 129.1 | |||||||||
Depreciation and amortization
|
117.0 | 88.8 | 118.4 | |||||||||
Operating income
|
130.3 | 770.8 | 826.3 | |||||||||
Other income (expense), net
|
1.3 | 0.6 | 0.5 | |||||||||
Interest expense, net
|
(72.7 | ) | (58.9 | ) | (78.2 | ) | ||||||
Loss on extinguishment of debt
|
(16.6 | ) | (2.1 | ) | (3.7 | ) | ||||||
Gain (loss) on derivatives, net
|
(1.5 | ) | (85.9 | ) | (95.2 | ) | ||||||
Income (loss) before income taxes and noncontrolling interest
|
40.8 | 624.5 | 649.7 | |||||||||
Income tax (expense) benefit
|
(18.8 | ) | (232.7 | ) | (247.2 | ) | ||||||
Net income attributable to noncontrolling interest
|
| 20.3 | 20.3 | |||||||||
Net income (loss)
|
22.0 | 371.5 | 382.2 |
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Twelve |
||||||||||||
Months |
||||||||||||
Year Ended |
Nine Months Ended |
Ended |
||||||||||
December 31, |
September 30, |
September 30, |
||||||||||
2010 | 2011 | 2011 | ||||||||||
(in millions) |
||||||||||||
(Unaudited) | ||||||||||||
Other Financial Data:
|
||||||||||||
Adjusted EBITDA (1)
|
$ | 241.7 | $ | 837.3 | $ | 892.7 | ||||||
Pro forma debt (2)
|
851.0 | |||||||||||
Pro forma interest expense (3)
|
78.2 | |||||||||||
Ratio of pro forma debt to Adjusted
EBITDA |
0.95x | |||||||||||
Ratio of Adjusted EBITDA to pro forma
interest expense |
11.41x |
As of September 30, |
||||
2011 | ||||
(in millions) |
||||
(Unaudited) | ||||
Balance Sheet Data:
|
||||
Cash and cash equivalents
|
$ | 438.6 | ||
Working capital
|
729.2 | |||
Total assets
|
2,984.6 | |||
Total debt, including current portion
|
851.0 | |||
Noncontrolling interest
|
148.0 | |||
Total CVR Energy stockholders equity
|
1,076.7 |
(1) | For all periods presented, pro forma Adjusted EBITDA is equal to the sum of (1) CVR Energys historical Adjusted EBITDA plus (2) GWECs historical Adjusted EBITDA plus (3) costs associated with GWECs airplane that will not be an ongoing expense as a result of the distribution of the airplane to GWECs stockholders prior to the closing of the Acquisition. See Summary Consolidated Financial InformationCVR Energy, Inc., Summary Consolidated Financial InformationGWEC, and the Unaudited Pro Forma Condensed Consolidated Financial Statements filed as Exhibit 99.5 to this Current Report on Form 8-K. | |
(2) | Pro forma debt reflects CVR Energys total debt as of September 30, 2011, as adjusted to give pro forma effect to the debt financing and the Acquisition (including the acquisition of GWECs working capital). | |
(3) | Pro forma interest expense reflects CVR Energys total cash interest expense as of September 30, 2011, net of interest income, as adjusted to give pro forma effect to the debt financing and the Acquisition (including the acquisition of GWECs working capital). |
9
Summary
Consolidated Financial InformationCVR Energy,
Inc.
This financial information should be read in conjunction with,
and is qualified in its entirety by reference to, CVR Energy's financial
statements and related notes and Managements Discussion
and Analysis of Financial Condition and Results of Operations.
Twelve |
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Months |
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Nine Months Ended |
Ended |
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Year Ended December 31, | September 30, | September 30, | ||||||||||||||||||||||
2008 | 2009 | 2010 | 2010 | 2011 | 2011 | |||||||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
(in millions, except for production data) | ||||||||||||||||||||||||
Statements of Operations Data:
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Net sales
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$ | 5,016.1 | $ | 3,136.3 | $ | 4,079.8 | $ | 2,931.6 | $ | 3,966.9 | $ | 5,115.1 | ||||||||||||
Cost of product sold (1)
|
4,461.8 | 2,547.7 | 3,568.1 | 2,584.4 | 3,086.2 | 4,069.9 | ||||||||||||||||||
Direct operating expenses (1)
|
237.5 | 226.0 | 240.8 | 176.5 | 209.3 | 273.6 | ||||||||||||||||||
Insurance recovery-business interruption
|
| | | | (3.4 | ) | (3.4 | ) | ||||||||||||||||
Selling, general and administrative expenses (1)
|
35.2 | 68.9 | 92.0 | 48.6 | 69.0 | 112.4 | ||||||||||||||||||
Net costs associated with flood (2)
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7.9 | 0.6 | (1.0 | ) | (1.0 | ) | | | ||||||||||||||||
Depreciation and amortization
|
82.2 | 84.9 | 86.8 | 64.8 | 66.1 | 88.1 | ||||||||||||||||||
Goodwill impairment (3)
|
42.8 | | | | | | ||||||||||||||||||
Operating income
|
$ | 148.7 | $ | 208.2 | $ | 93.1 | $ | 58.3 | $ | 539.7 | $ | 574.5 | ||||||||||||
Other income (expense), net (4)
|
(5.9 | ) | (0.1 | ) | (13.2 | ) | (12.7 | ) | (0.7 | ) | (1.2 | ) | ||||||||||||
Interest expense
|
(40.3 | ) | (44.2 | ) | (50.3 | ) | (36.6 | ) | (41.2 | ) | (54.9 | ) | ||||||||||||
Gain (loss) on derivatives, net
|
125.3 | (65.3 | ) | (1.5 | ) | 7.8 | (25.1 | ) | (34.4 | ) | ||||||||||||||
Income (loss) before income taxes and noncontrolling interest
|
$ | 227.8 | $ | 98.6 | $ | 28.1 | 16.8 | 472.7 | 484.0 | |||||||||||||||
Income tax (expense) benefit
|
(63.9 | ) | (29.2 | ) | (13.8 | ) | (4.8 | ) | (172.5 | ) | (181.5 | ) | ||||||||||||
Noncontrolling interest
|
| | | | (20.3 | ) | (20.3 | ) | ||||||||||||||||
Net income (loss) (5)
|
$ | 163.9 | $ | 69.4 | 14.3 | 12.0 | 279.9 | 282.2 |
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Twelve |
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Months |
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Nine Months Ended |
Ended |
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Year Ended December 31, | September 30, | September 30, | ||||||||||||||||||||||
2008 | 2009 | 2010 | 2010 | 2011 | 2011 | |||||||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
(in millions, except for production data) | ||||||||||||||||||||||||
Other Financial Data:
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Net cash flow provided by (used in):
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Operating activities
|
83.2 | 85.3 | 225.4 | 151.1 | 345.9 | 420.2 | ||||||||||||||||||
Investing activities
|
(86.5 | ) | (48.3 | ) | (31.3 | ) | (23.0 | ) | (43.8 | ) | (52.1 | ) | ||||||||||||
Financing activities
|
(18.3 | ) | (9.0 | ) | (31.0 | ) | (2.6 | ) | 396.3 | 367.9 | ||||||||||||||
Capital expenditures for property, plant and equipment
|
86.5 | 48.8 | 32.4 | 23.0 | 46.6 | 56.0 | ||||||||||||||||||
Adjusted EBITDA (6)
|
220.1 | 212.4 | 193.8 | 142.7 | 603.5 | 657.0 | ||||||||||||||||||
Production Data:
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NYMEX 2-1-1 crack spread (dollars per barrel)
|
$ | 12.50 | $ | 8.54 | $ | 10.07 | $ | 9.76 | $ | 27.27 | $ | 23.16 | ||||||||||||
Coffeyville refinery total throughput (barrels per day)
|
117,719 | 120,239 | 123,715 | 121,316 | 112,741 | 117,264 | ||||||||||||||||||
Refining margin (per crude oil throughput barrel) (7)
|
8.39 | 10.65 | 8.84 | 7.63 | 23.77 | 20.71 | ||||||||||||||||||
Ammonia production (gross produced) (thousand tons)
|
359.1 | 435.2 | 392.7 | 322.9 | 310.4 | 380.3 | ||||||||||||||||||
Ammonia production (net available for sale) (thousand tons)
|
112.5 | 156.6 | 155.6 | 117.9 | 89.3 | 127.0 | ||||||||||||||||||
UAN Production (thousand tons)
|
599.2 | 677.7 | 578.3 | 500.5 | 535.8 | 613.6 | ||||||||||||||||||
Product Pricing (plant gate) (dollars per ton)
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Ammonia
|
$ | 557.0 | $ | 314.0 | $ | 361.0 | $ | 305.0 | $ | 569.0 | $ | 540.0 | ||||||||||||
UAN
|
$ | 303.0 | $ | 198.0 | $ | 179.0 | $ | 180.0 | $ | 266.0 | $ | 255.0 | ||||||||||||
Balance Sheet Data:
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Cash and cash equivalents
|
$ | 8.9 | $ | 36.9 | $ | 200.0 | $ | 162.4 | $ | 898.5 | $ | 898.5 | ||||||||||||
Working capital
|
128.5 | 235.4 | 333.6 | 309.8 | 1,059.4 | 1,059.4 | ||||||||||||||||||
Total assets
|
1,610.5 | 1,614.5 | 1,740.2 | 1,684.1 | 2,508.3 | 2,508.3 | ||||||||||||||||||
Total debt, including current portion
|
495.9 | 491.3 | 477.0 | 506.1 | 591.8 | 591.8 | ||||||||||||||||||
Noncontrolling interest (8)
|
10.6 | 10.6 | 10.6 | 10.6 | 148.0 | 148.0 | ||||||||||||||||||
Total CVR Energy stockholders equity
|
579.5 | 653.8 | 689.6 | 671.0 | 1,083.6 | 1,083.6 |
(1) | Amounts are shown exclusive of depreciation and amortization. | |
(2) | Represents the write-off of approximate net costs associated with the June/July 2007 flood and crude oil discharge that are not probable of recovery for all periods presented other than the year ended December 31, 2010, and a recovery of $1.0 million for the year ended December 31, 2010. | |
(3) | Upon applying the goodwill impairment testing criteria under existing accounting rules during the fourth quarter of 2008, we determined that the goodwill in the petroleum segment was impaired, which resulted in a goodwill impairment loss of $42.8 million. This represented a write-off of the entire balance of the petroleum segments goodwill. | |
(4) | During the years ended December 31, 2008, 2009 and 2010 we recognized losses of $10.0 million, $2.1 million and $16.6 million respectively, on early extinguishment of debt. |
11
(5) | The following are certain charges and costs incurred in each of the relevant periods that are meaningful to understanding our net income and in evaluating our performance due to their unusual or infrequent nature: |
Twelve |
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Months |
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Year Ended |
Nine Months Ended |
Ended |
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December 31, | September 30, | September 30, | ||||||||||||||||||||||
2008 | 2009 | 2010 | 2010 | 2011 | 2011 | |||||||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Loss on extinguishment of debt (a)
|
$ | 10.0 | $ | 2.1 | $ | 16.6 | $ | 15.1 | $ | 2.1 | $ | 3.6 | ||||||||||||
Letter of credit expense and interest rate swap not included in
interest expense (b)
|
7.4 | 13.4 | 4.7 | 4.3 | 1.3 | 1.7 | ||||||||||||||||||
Major scheduled turnaround expense (c)
|
3.3 | | 4.8 | 0.6 | 12.2 | 16.5 | ||||||||||||||||||
Unrealized (gain) loss from Cash Flow Swap
|
(253.2 | ) | 40.9 | | | | | |||||||||||||||||
Share-based compensation (d)
|
(42.5 | ) | 8.8 | 37.2 | 8.4 | 23.6 | 52.4 | |||||||||||||||||
Goodwill impairment (e)
|
42.8 | | | | | |
(a) | Represents the write-off of: (1) $10.0 million of deferred financing costs in connection with the second amendment to our then-existing first priority credit facility on December 22, 2008; (2) $2.1 million of deferred financing costs in connection with the reduction, effective June 1, 2009, and eventual termination of the funded letter of credit facility on October 15, 2009; and (3) $16.6 million for the year ended December 31, 2010, made up of (a) $9.6 million in premium paid and a $5.4 million write-off of previously deferred costs associated with the unscheduled payment of our tranche D term loan, and (b) $1.6 million associated with a 3% premium paid on a principal prepayment on our senior secured notes along with a partial write-off of previously deferred financing costs, underwriting discount and original issue discount. | |
(b) | Consists of fees which are expensed to selling, general and administrative expenses in connection with the funded letter of credit facility issued in support of certain swap agreements we entered into with J. Aron & Company in June 2005 (the Cash Flow Swap) and other letters of credit outstanding. We reduced the funded letter of credit facility from $150.0 million to $60.0 million, effective June 1, 2009. As a result of the termination of the Cash Flow Swap effective October 8, 2009, we were able to terminate the remaining $60.0 million funded letter of credit facility effective October 15, 2009. Although not included as interest expense in our Consolidated Statements of Operations, these fees are treated as such in the calculation of Adjusted EBITDA in our ABL Credit Facility and in the indentures governing the notes and the existing second lien notes. | |
(c) | Represents expense associated with major scheduled turnarounds. | |
(d) | Represents the impact of share-based compensation awards. | |
(e) | Upon applying the goodwill impairment testing criteria under existing accounting rules during the fourth quarter of 2008, we determined that the goodwill in the petroleum segment was impaired, which resulted in a goodwill impairment loss of $42.8 million. This represented a write-off of the entire balance of the petroleum segments goodwill. |
(6) | We define Adjusted EBITDA as CVR Energy net income (loss) adjusted to eliminate (a) income tax expense (benefit), (b) unfavorable (favorable) FIFO impact, (c) interest expense, net, (d) depreciation and amortization, (e) unrealized (gain) loss related to hedging obligations, (f) charges relating to the 2007 flood, (g) share-based compensation, (h) goodwill impairment and (i) other items of expense. | |
We present Adjusted EBITDA because we believe it is a useful indicator of our operating performance. We believe this for the following reasons: |
| Adjusted EBITDA is widely used by investors to measure a companys operating performance without regard to items, such as interest expense, income tax expense, and depreciation and amortization, that can vary substantially from company to company depending upon their financing and accounting methods, the book value of their assets, their capital structures and the method by which their assets were acquired; | |
| securities analysts use Adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of a company; and |
12
| Adjusted EBITDA measures our operational performance without regard to certain non-recurring, non-cash and/or transaction-related expenses. |
However, Adjusted EBITDA should not be considered as an
alternative to net income, cash flow from operations, or any
other measure of financial performance calculated and presented
in accordance with GAAP. Our Adjusted EBITDA may not be
comparable to similar measures reported by other companies
because other companies may not calculate Adjusted EBITDA in the
same manner as we do. Although we use Adjusted EBITDA as a
measure to assess the operating performance of our business,
Adjusted EBITDA has significant limitations as an analytical
tool because it excludes certain material costs. For example, it
does not include interest expense, which has been and will
continue to be a necessary element of our costs. Because we use
capital assets, depreciation expense is a necessary element of
our costs and our ability to generate revenue. In addition, the
omission of the amortization expense associated with our
intangible assets further limits the usefulness of this measure.
Adjusted EBITDA as presented herein is the Adjusted EBITDA of
CVR Energy. CVR Energy is not a guarantor of the new notes.
Because of these limitations management does not view Adjusted
EBITDA in isolation or as a primary performance measure and also
uses other measures, such as net income and sales, to measure
operating performance. Adjusted EBITDA as set forth herein is
not equal to Consolidated Cash Flow as calculated under the
indentures governing the notes and the existing second lien
notes.
The following table reconciles the consolidated net income
(loss) of CVR Energy to Adjusted EBITDA for the periods
presented below:
Twelve |
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Months |
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Year Ended |
Ended |
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December 31, | Nine Months Ended September 30, |
September 30, |
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2008 | 2009 | 2010 | 2010 | 2011 | 2011 | |||||||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
CVR Energy net income (loss)
|
$ | 163.9 | $ | 69.4 | $ | 14.3 | $ | 12.0 | $ | 279.9 | $ | 282.2 | ||||||||||||
Plus:
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Income tax expense (benefit)
|
63.9 | 29.2 | 13.8 | 4.8 | 172.5 | 181.5 | ||||||||||||||||||
Unfavorable (favorable) FIFO impact (a)
|
102.5 | (67.9 | ) | (31.7 | ) | 2.6 | 1.5 | (30.4 | ) | |||||||||||||||
Interest expense, net
|
37.6 | 42.5 | 48.1 | 34.9 | 40.6 | 53.8 | ||||||||||||||||||
Unrealized (gain) loss relating to derivative transactions
|
(253.8 | ) | 42.8 | 2.2 | (0.8 | ) | 6.8 | 9.8 | ||||||||||||||||
Depreciation and amortization
|
82.2 | 84.9 | 86.8 | 64.8 | 66.1 | 88.1 | ||||||||||||||||||
Net costs associated with flood (b)
|
7.9 | 0.6 | (1.0 | ) | (1.0 | ) | | | ||||||||||||||||
Share-based compensation (c)
|
(42.5 | ) | 8.8 | 37.2 | 8.4 | 23.6 | 52.4 | |||||||||||||||||
Goodwill impairment (d)
|
42.8 | | | | | | ||||||||||||||||||
Major scheduled turnaround expense (e)
|
3.3 | | 4.8 | 0.6 | 12.2 | 16.5 | ||||||||||||||||||
EBITDA adjustments included in non-controlling interest (f)
|
| | | | (3.4 | ) | (3.4 | ) | ||||||||||||||||
Other expenses (g)
|
12.3 | 2.1 | 19.3 | 16.4 | 3.6 | 6.5 | ||||||||||||||||||
Adjusted EBITDA
|
$ | 220.1 | $ | 212.4 | $ | 193.8 | $ | 142.7 | $ | 603.4 | $ | 657.0 | ||||||||||||
(a) | The Company uses the first in, first out (FIFO) methodology as a basis to determine inventory value in accordance with GAAP. Changes in crude oil prices can cause fluctuations in inventory value of our crude oil, work in process and finished goods, thereby resulting in favorable FIFO impacts when crude prices increase and unfavorable FIFO impacts when crude prices decrease. The FIFO impact is calculated based upon inventory values at the beginning of the accounting period and at the end of the accounting period. | |
(b) | Represents the write-off of approximate net costs associated with the June/July 2007 flood and crude oil discharge that are not probable of recovery for all periods presented other than the year ended December 31, 2010, and a recovery of $1.0 million for the year ended December 31, 2010. | |
(c) | Represents the impact of all share-based compensation awards. | |
(d) | Upon applying the goodwill impairment testing criteria under existing accounting rules during the fourth quarter of 2008, we determined that the goodwill in the petroleum segment was impaired, which |
13
resulted in a goodwill impairment loss of $42.8 million. This represented a write-off of the entire balance of the petroleum segments goodwill. | ||
(e) | Represents expense associated with major scheduled turnarounds. | |
(f) | Represents adjustments made to EBITDA attributable to non-controlling interests. | |
(g) | Other expenses consists of the following (in millions): |
Twelve |
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Months |
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Year Ended |
Nine Months Ended |
Ended |
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December 31, | September 30, | September 30, | ||||||||||||||||||||||
2008 | 2009 | 2010 | 2010 | 2011 | 2011 | |||||||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Loss on extinguishment of debt
|
10.0 | 2.1 | 16.6 | 15.1 | 2.1 | 3.6 | ||||||||||||||||||
Loss on disposal of certain fixed assets
|
2.3 | | 2.7 | 1.3 | 1.5 | 2.9 | ||||||||||||||||||
Other expenses
|
12.3 | 2.1 | 19.3 | 16.4 | 3.6 | 6.5 |
The following table reconciles the operating income of the
petroleum and nitrogen fertilizer segments to Petroleum Adjusted
EBITDA and Fertilizer Adjusted EBITDA, respectively, for the
periods presented below (certain corporate activities and
intercompany transactions are not allocated to either of our two
segments and, therefore, CVR Energys Adjusted EBITDA
is not a sum of the operating results of the petroleum and
nitrogen fertilizer segments):
Twelve |
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Months |
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Year Ended |
Ended |
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December 31, | September 30, | |||||||||||||||
2008 | 2009 | 2010 | 2011 | |||||||||||||
(Unaudited) | ||||||||||||||||
(in millions) | ||||||||||||||||
Petroleum Segment:
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Petroleum segment operating income
|
$ | 31.9 | $ | 170.2 | $ | 104.6 | $ | 529.5 | ||||||||
Plus:
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FIFO impact (favorable) unfavorable
|
102.5 | (67.9 | ) | (31.7 | ) | (30.4 | ) | |||||||||
Share-based compensation
|
(10.8 | ) | (3.7 | ) | 11.5 | 17.1 | ||||||||||
Loss on disposal of fixed assets
|
| | 1.3 | 1.5 | ||||||||||||
Major scheduled turnaround
|
| | 1.2 | 12.8 | ||||||||||||
Realized gain (loss) on derivatives, net
|
(121.0 | ) | (21.0 | ) | 0.7 | (24.7 | ) | |||||||||
Goodwill impairment
|
42.8 | | | | ||||||||||||
Depreciation and amortization
|
62.7 | 64.4 | 66.4 | 67.8 | ||||||||||||
Other income (expense)
|
1.0 | 0.3 | 0.7 | 0.5 | ||||||||||||
Petroleum Adjusted EBITDA
|
$ | 109.1 | $ | 142.3 | $ | 154.7 | $ | 574.1 | ||||||||
Nitrogen Fertilizer Segment:
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Nitrogen Fertilizer segment operating income
|
$ | 116.8 | $ | 48.9 | $ | 20.4 | $ | 84.0 | ||||||||
Plus:
|
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Share-based compensation
|
(10.6 | ) | 3.2 | 9.0 | 14.1 | |||||||||||
Loss on disposal of fixed assets
|
2.3 | | 1.4 | 1.4 | ||||||||||||
Major scheduled turnaround
|
3.3 | | 3.5 | 3.5 | ||||||||||||
Depreciation and amortization
|
18.0 | 18.7 | 18.5 | 18.5 | ||||||||||||
Other income (expense)
|
0.1 | | | 0.2 | ||||||||||||
Fertilizer Adjusted EBITDA
|
$ | 129.9 | $ | 70.8 | $ | 52.8 | $ | 121.7 | ||||||||
(7) | Refining margin is a measurement calculated as the difference between net sales and cost of product sold (exclusive of depreciation and amortization). Refining margin is a non-GAAP measure that we believe is |
14
important to investors in evaluating our refinerys performance as a general indication of the amount above our cost of product sold that we are able to sell refined products. Each of the components used in this calculation (net sales and cost of product sold (exclusive of depreciation and amortization)) is taken directly from our Statements of Operations. Our calculation of refining margin may differ from similar calculations of other companies in our industry, thereby limiting its usefulness as a comparative measure. In order to derive the refining margin per crude oil throughput barrel, we utilize the total dollar figures for refining margin as derived above and divide by the applicable number of crude oil throughput barrels for the period. We believe that refining margin and refining margin per crude oil throughput barrel is important to enable investors to better understand and evaluate our ongoing operating results and for greater transparency in the review of our overall business, financial, operational and economic financial performance. | ||
(8) | Noncontrolling interest at December 31, 2008, 2009 and 2010 reflects Coffeyville Acquisition IIIs interest in the Partnerships then-existing incentive distribution rights (IDRs). In connection with the Partnerships initial public offering in April 2011, the IDRs were eliminated and the general partner was sold to CRLLC. |
15
Summary
Consolidated Financial InformationGWEC
This financial information should be read in conjunction with,
and is qualified in its entirety by reference to, GWEC's financial
statements and related notes.
Twelve |
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Months |
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Ended |
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Year Ended December 31, | Nine Months Ended September 30, | September 30, | ||||||||||||||||||||||
2008 | 2009 | 2010 | 2010 | 2011 | 2011 | |||||||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
(in millions, other than production data) | ||||||||||||||||||||||||
Consolidated Statements of Operations Data:
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Operating revenue
|
$ | 2,142.8 | $ | 1,649.6 | $ | 2,141.0 | $ | 1,542.0 | $ | 2,041.3 | $ | 2,640.3 | ||||||||||||
Operating expenses
|
2,248.8 | 1,566.5 | 2,086.8 | 1,512.3 | 1,857.2 | 2,431.8 | ||||||||||||||||||
Gross Profit (loss)
|
(106.0 | ) | 83.1 | 54.2 | 29.7 | 184.1 | 208.5 | |||||||||||||||||
General and administrative expenses
|
20.6 | 17.9 | 15.7 | 12.0 | 13.9 | 17.6 | ||||||||||||||||||
Operating income (loss)
|
(126.6 | ) | 65.2 | 38.5 | 17.7 | 170.2 | 190.9 | |||||||||||||||||
Interest and investment income
|
1.0 | 0.1 | | | 0.1 | 0.1 | ||||||||||||||||||
Interest expense
|
(7.4 | ) | (13.0 | ) | (22.4 | ) | (16.6 | ) | (22.9 | ) | (28.6 | ) | ||||||||||||
Gain on disposal of assets
|
1.9 | 0.2 | | | 0.2 | 0.2 | ||||||||||||||||||
Fire-related gain (loss), net
|
2.8 | | | | | | ||||||||||||||||||
Other-net
|
0.1 | 0.3 | | 0.7 | (0.3 | ) | (1.0 | ) | ||||||||||||||||
Total other expense
|
(1.6 | ) | (12.4 | ) | (22.4 | ) | (15.9 | ) | (22.9 | ) | (29.3 | ) | ||||||||||||
Net income (loss) from continuing operations
|
(128.2 | ) | 52.8 | 16.1 | 1.8 | 147.3 | 161.6 | |||||||||||||||||
Net loss from discontinued operations
|
(1.6 | ) | (0.3 | ) | | | | | ||||||||||||||||
Net income (loss)
|
(129.8 | ) | 52.5 | 16.1 | $ | 1.8 | $ | 147.3 | $ | 161.6 |
16
Twelve |
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Months |
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Ended |
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Year Ended December 31, | Nine Months Ended September 30, | September 30, | ||||||||||||||||||||||
2008 | 2009 | 2010 | 2010 | 2011 | 2011 | |||||||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
(in millions, other than production data) | ||||||||||||||||||||||||
Other Financial Data:
|
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Net cash flows provided by (used in):
|
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Operating activities (including discontinued operations)
|
$ | (94.1 | ) | $ | 87.4 | $ | 86.4 | $ | 2.7 | $ | 85.3 | 169.0 | ||||||||||||
Investing activities
|
$ | (30.9 | ) | $ | (11.2 | ) | $ | (43.7 | ) | $ | (36.0 | ) | $ | (13.5 | ) | (21.2 | ) | |||||||
Financing activities
|
$ | 105.8 | $ | (71.8 | ) | $ | (14.6 | ) | $ | 28.1 | $ | (77.0 | ) | (119.7 | ) | |||||||||
Capital expenditures: refinery and pipeline
|
$ | (37.5 | ) | $ | (49.4 | ) | $ | (43.3 | ) | $ | (36.5 | ) | $ | (14.0 | ) | (20.8 | ) | |||||||
Adjusted EBITDA (1)
|
$ | (17.8 | ) | $ | 36.9 | $ | 47.3 | $ | 38.5 | $ | 233.3 | $ | 235.1 | |||||||||||
Production Data:
|
||||||||||||||||||||||||
NYMEX 2-1-1 crack spread (per barrel)
|
$ | 12.50 | $ | 8.54 | $ | 10.07 | $ | 9.76 | $ | 27.27 | $ | 23.16 | ||||||||||||
Wynnewood refinery crude oil throughput (barrels per day)
|
45,548 | 59,836 | 63,025 | 62,598 | 60,789 | 61,277 | ||||||||||||||||||
Refining margin (per crude oil throughput barrel)
|
$ | 0.89 | $ | $9.43 | $ | 7.50 | $ | 6.86 | $ | 20.60 | $ | 17.76 | ||||||||||||
Operating expenses (per crude oil throughput barrel)
|
$ | 6.07 | $ | 4.34 | $ | 3.92 | $ | 4.53 | $ | 4.43 | $ | 4.33 | ||||||||||||
Balance Sheet Data:
|
||||||||||||||||||||||||
Cash and cash equivalents
|
1.9 | 6.0 | 34.0 | 0.8 | 29.0 | 29.0 | ||||||||||||||||||
Total assets
|
429.9 | 531.9 | 586.5 | 564.8 | 652.2 | 652.2 | ||||||||||||||||||
Total liabilities
|
289.2 | 339.7 | 378.1 | 370.8 | 354.8 | 354.8 | ||||||||||||||||||
Total shareholders equity
|
140.7 | 192.2 | 208.4 | 194.0 | 297.4 | 297.4 |
(1) | We define Adjusted EBITDA as GWECs net income (loss) plus (a) income tax expense (benefit), (b) interest expense, (c) depreciation and amortization, (d) unrealized (gain) loss related to hedging obligations, (e) turnaround amortization, (f) non-cash inventory (gain) loss and (g) other unusual items. |
We present Adjusted EBITDA for GWEC because it is a useful
indicator of GWECs operating performance. We believe this
for the following reasons:
| Adjusted EBITDA is widely used by investors to measure a companys operating performance without regard to items, such as interest expense, income tax expense, and depreciation and amortization, that can vary substantially from company to company depending upon their financing and accounting methods, the book value of their assets, their capital structures and the method by which their assets were acquired; | |
| securities analysts use Adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of a company; and | |
| Adjusted EBITDA measures GWECs operational performance without regard to certain non-recurring, non-cash and/or transaction-related expenses. |
However, Adjusted EBITDA should not be considered as an
alternative to net income, cash flow from operations, or any
other measure of financial performance calculated and presented
in accordance with GAAP. Our Adjusted EBITDA may not be
comparable to similar measures reported by other companies
because other companies may not calculate Adjusted EBITDA in the
same manner as we do. Although we use Adjusted EBITDA as a
measure to assess the operating performance of our businesses,
Adjusted EBITDA has significant limitations as an analytical
tool because it excludes certain material costs. For example, it
does not include interest expense, which has been and will
continue to be a necessary element of our costs. Because we use
capital assets, depreciation expense is a necessary element of
our costs and our business ability to generate revenue. In
addition, the omission of the amortization expense associated
with our intangible assets further limits the usefulness of this
measure. Because of these limitations management does not view
Adjusted EBITDA in isolation or as a primary performance measure
and also uses other measures, such as net income and sales, to
measure operating performance.
17
The following table reconciles the consolidated net income
(loss) of GWEC to Adjusted EBITDA for the periods presented
below:
Twelve |
||||||||||||||||||||||||
Months |
||||||||||||||||||||||||
Year Ended |
Nine Months Ended |
Ended |
||||||||||||||||||||||
December 31, | September 30, | September 30, | ||||||||||||||||||||||
2008 | 2009 | 2010 | 2010 | 2011 | 2011 | |||||||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||||||
GWEC net income (loss)
|
$ | (129.8 | ) | $ | 52.5 | $ | 16.1 | $ | 1.8 | $ | 147.3 | $ | 161.6 | |||||||||||
Plus:
|
||||||||||||||||||||||||
Income tax expense (benefit)
|
| | | | | | ||||||||||||||||||
Interest expense, net
|
6.4 | 13.0 | 22.4 | 16.6 | 22.8 | 28.6 | ||||||||||||||||||
Depreciation and amortization
|
13.3 | 13.8 | 14.7 | 10.6 | 13.1 | 17.2 | ||||||||||||||||||
Unrealized (gain) loss related to hedging obligations
|
| | | | 37.9 | 37.9 | ||||||||||||||||||
Amortization of turnaround costs
|
9.4 | 15.4 | 13.7 | 10.5 | 9.8 | 13.1 | ||||||||||||||||||
Non-cash inventory (gain) loss
|
82.6 | (57.8 | ) | (19.6 | ) | (1.0 | ) | 2.6 | (23.1 | ) | ||||||||||||||
Other unusual items (a)
|
0.3 | | | | (0.2 | ) | (0.2 | ) | ||||||||||||||||
Adjusted EBITDA
|
$ | (17.8 | ) | $ | 36.9 | $ | 47.3 | $ | 38.5 | $ | 233.3 | $ | 235.1 | |||||||||||
(a) | Principally represents losses from discontinued operations and gains on sales of assets. |
18
History
Our refinery, which began operations in 1906, and the nitrogen
fertilizer plant, built in 2000, were operated as components of
Farmland Industries, Inc., or Farmland, an agricultural
cooperative, until March 3, 2004.
Coffeyville Resources, a subsidiary of Coffeyville Group
Holdings, LLC, which was owned by a private equity firm, won a
bankruptcy court auction for Farmlands petroleum business
and the nitrogen fertilizer plant and completed the purchase of
these assets on March 3, 2004. On June 24, 2005,
Coffeyville Acquisition, which was formed by certain funds
affiliated with Goldman, Sachs & Co. and
Kelso & Company acquired all of the subsidiaries of
Coffeyville Group Holdings, LLC. Coffeyville Acquisition
operated our business from June 24, 2005 until CVR
Energys initial public offering in October 2007.
CVR Energy was formed in September 2006 as a subsidiary of
Coffeyville Acquisition in order to consummate an initial public
offering of the businesses operated by Coffeyville Acquisition.
CVR Energys initial public offering was consummated in
October 2007 and CVR Energy currently trades on the New York
Stock Exchange under the ticker symbol CVI. Prior to
CVR Energys initial public offering it transferred the
nitrogen fertilizer business to the Partnership in exchange for
all of the partnership interests in the Partnership and sold all
of the interests of the general partner of the Partnership to an
entity owned by our controlling stockholders and senior
management at fair market value on the date of the transfer.
In April 2011, in connection with the Partnerships initial
public offering, CVR Partners was restructured, the
Partnerships general partner was sold back to CVR Energy,
and approximately 30.3% of the Partnerships common units
were sold to the public. CVR Partners initial
19
public offering was consummated in April 2011, and CVR Partners
currently trades on the New York Stock Exchange under the
ticker symbol UAN. CVR Energy owns the
Partnerships general partner and 69.7% of the
Partnerships common units, and its senior management
manages the Partnership pursuant to a services agreement. See
Certain Relationships and Related Party
TransactionsInitial Public Offering of CVR Partners,
LPIntercompany AgreementsAmended and Restated
Services Agreement in our most recent proxy statement.
Petroleum
Business
We operate a 115,000 bpd complex full coking medium-sour
crude oil refinery in Coffeyville, Kansas. Our refinerys
production capacity represents approximately 15% of our
regions output. The facility is situated on approximately
440 acres in southeast Kansas, approximately 100 miles
from Cushing, Oklahoma, a major crude oil trading and storage
hub.
For the year ended December 31, 2010, our refinerys
product yield included gasoline (mainly regular unleaded) (49%),
diesel fuel (primarily ultra low sulfur diesel) (41%), and pet
coke and other refined products such as NGC (propane, butane),
slurry, sulfur and gas oil (10%). Pro forma for the Acquisition,
during the twelve months ended September 30, 2011, our
product yield would have included gasoline (50%), diesel (36%)
and other (14%).
Our petroleum business also includes the following auxiliary
operating assets:
| Crude Oil Gathering System. We own and operate a crude oil gathering system serving Kansas, Oklahoma, western Missouri and southwestern Nebraska. The system has field offices in Bartlesville, Oklahoma and Plainville and Winfield, Kansas. The system is comprised of approximately 300 miles of feeder and trunk pipelines, 95 trucks, and associated storage facilities for gathering sweet Kansas, Nebraska, Oklahoma and Missouri crude oils purchased from independent crude oil producers. We also lease a section of a pipeline from Magellan, which is incorporated into our crude oil gathering system. Gathered crude oil provides a base supply of feedstock for our refinery and serves as an attractive and competitive supply of crude oil. During the first nine months of 2011, we gathered an average of approximately 35,000 bpd. | |
| Pipelines and Storage Tanks. We own a proprietary pipeline system capable of transporting approximately 145,000 bpd of crude oil from Caney, Kansas to our refinery. Crude oils sourced outside of our proprietary gathering system are delivered by common carrier pipelines into various terminals in Cushing, Oklahoma, where they are blended and then delivered to Caney, Kansas via a pipeline owned by Plains Pipeline L.P., or Plains. We also own associated crude oil storage tanks with a capacity of approximately 1.2 million barrels located outside our refinery and lease an additional 2.7 million barrels of storage capacity located at Cushing, Oklahoma (with an additional 1.0 million barrels of company-owned storage tanks in Cushing under construction, which are expected to be completed in the first quarter of 2012). |
Our refinerys complexity allows us to optimize the yields
(the percentage of refined product that is produced from crude
oil and other feedstocks) of higher value transportation fuels
(gasoline and diesel). Complexity is a measure of a
refinerys ability to process lower quality crude oil in an
economic manner. As a result of key investments in our refining
assets, our refinerys complexity score has increased to
12.9 from 12.2 at the beginning of 2010, and we have achieved
significant increases in our refinery crude oil throughput rate
over historical levels. Our higher complexity provides us the
flexibility to increase our refining margin over comparable
refiners with lower complexities.
20
Feedstocks
Supply
Our refinery has the capability to process blends of a variety
of crude oil ranging from heavy sour to light sweet crude oil.
Currently, our refinery processes crude oil from a broad array
of sources. We have access to foreign crude oil from Latin
America, South America, West Africa, the Middle East, the North
Sea and Canada. We purchase domestic crude oil from Kansas,
Oklahoma, Nebraska, Texas, North Dakota, Missouri, and offshore
deepwater Gulf of Mexico production. While crude oil has
historically constituted over 90% of our feedstock inputs during
the last five years, other feedstock inputs include normal
butane, natural gasoline, alky feed, naphtha, gas oil and vacuum
tower bottoms.
Crude oil is supplied to our refinery through our wholly-owned
gathering system and by pipeline. We have continued to increase
the number of barrels of crude oil supplied through our crude
oil gathering system. In September 2011, our gathering system
supplied approximately 37,500 bpd of crude oil to the
refinery. For the nine months ended September 30, 2011, the
gathering system supplied approximately 33% of the
refinerys crude oil demand. Locally produced crude oils
are delivered to the refinery at a discount to WTI, and although
slightly heavier and more sour, offer good economics to the
refinery. These crude oils are light and sweet enough to allow
us to blend higher percentages of lower cost crude oils such as
heavy sour Canadian crude oil while maintaining our target
medium sour blend with an API gravity of between 28 and 36
degrees and between 0.9% and 1.2% sulfur. Crude oils sourced
outside of our proprietary gathering system are delivered to
Cushing, Oklahoma by various pipelines including Seaway, Basin
and Spearhead and subsequently to Coffeyville via the Plains
pipeline and our own 145,000 bpd proprietary pipeline
system. Beginning in March 2011, crude oils were also delivered
through the Keystone pipeline. In November 2011, the owners of
the Seaway pipeline announced their intention to change the
pipelines direction so that the pipeline would flow from
the crude storage hub at Cushing, to the U.S. Gulf Coast.
For the nine months ended September 30, 2011, our crude oil
supply blend was comprised of approximately 80% light sweet
crude oil and 20% heavy sour crude oil. The light sweet crude
oil includes our locally gathered crude oil.
For the nine months ended September 30, 2011, we obtained
approximately 67% of the crude oil for our refinery under a
Crude Oil Supply Agreement, as amended (the Supply
Agreement) with Vitol Inc. (Vitol) that
expires on December 31, 2013. Under the Supply Agreement,
Vitol supplies us with crude oil and intermediation logistics,
which helps us reduce our inventory position and mitigate crude
oil pricing risk.
Pro forma for the Acquisition, during the twelve months ended
September 30, 2011, our feedstocks would have included
sweet crude (75%), sour crude (19%), and others (6%).
Marketing and
Distribution
We focus our petroleum product marketing efforts in the central
mid-continent and Rocky Mountain areas because of their relative
proximity to our refinery and their pipeline access. We engage
in rack marketing, which is the supply of product through tanker
trucks directly to customers located in close geographic
proximity to our Coffeyville refinery and to customers at
throughput terminals on Magellans and NuStars
refined products distribution systems. For the year ended
December 31, 2010, approximately 36% of the refinerys
products were sold through the rack system directly to retail
and wholesale customers while the remaining 64% was sold through
pipelines via bulk spot and term contracts. We make bulk sales
(sales into third-party pipelines) into the mid-continent region
via Magellan and into Colorado and other destinations utilizing
the product pipeline networks owned by Magellan, and NuStar.
21
Customers
Customers for our petroleum products include other refiners,
convenience store companies, railroads and farm cooperatives. We
have bulk term contracts in place with many of these customers,
which typically extend from a few months to one year in length.
For the year ended December 31, 2010, QuikTrip Corporation
and Growmark, Inc. accounted for approximately 14% and 11%,
respectively, of our petroleum business sales and approximately
66% of our petroleum sales were made to our ten largest
customers. We sell bulk products based on industry market
related indices such as Platts, Oil Price Information Service
(OPIS) or at a spot market price based on a Group 3
differential to the New York Mercantile Exchange
(NYMEX). Through our rack marketing division, the
rack sales are at daily posted prices which are influenced by
the NYMEX, competitor pricing and Group 3 spot market
differentials.
Competition
Our petroleum business competes primarily on the basis of price,
reliability of supply and availability of multiple grades of
products. The principal competitive factors affecting our
refining operations are cost of crude oil and other feedstock
costs, refinery complexity, refinery efficiency, refinery
product mix and product distribution and transportation costs.
The location of our refinery provides us with a reliable supply
of crude oil and a transportation cost advantage over other
refineries. We compete against refineries operated in the
mid-continent region, trading companies and other refineries
located outside the region that are linked to the mid-continent
region through an extensive product pipeline system. These
competitors include refineries located near the U.S. Gulf
Coast and the Texas panhandle region. Our refinery competition
also includes branded, integrated and independent oil refining
companies.
Seasonality
Our petroleum business experiences seasonal effects as demand
for gasoline products is generally higher during the summer
months than during the winter months due to seasonal increases
in highway traffic and road construction work. Demand for diesel
fuel during the winter months also decreases due to winter
agricultural work declines. As a result, our results of
operations for the first and fourth calendar quarters are
generally lower than for those for the second and third calendar
quarters. In addition, unseasonably cool weather in the summer
months
and/or
unseasonably warm weather in the winter months in the areas in
which we sell our petroleum products can impact the demand for
gasoline and diesel fuel.
Nitrogen
Fertilizer Business
The nitrogen fertilizer business operates the only nitrogen
fertilizer plant in North America that utilizes a pet coke
gasification process to produce nitrogen fertilizer. The
nitrogen fertilizer facility was built in 2000 with two separate
gasifiers to provide redundancy and reliability. It uses a
gasification process licensed from General Electric to convert
pet coke to high purity hydrogen for subsequent conversion to
ammonia. Following a turnaround completed in October 2010, the
nitrogen fertilizer plant is capable of processing approximately
1,300 tons per day of pet coke from CVR Energys crude oil
refinery and third-party sources such as other Midwestern
refineries or pet coke brokers and converting it into
approximately 1,200 tons per day of ammonia. A majority of the
ammonia is converted to approximately 2,000 tons per day of UAN.
Typically 0.41 tons of ammonia are required to produce one ton
of UAN.
Strategic
Location with Transportation Advantage
The nitrogen fertilizer business believes that selling products
to customers in close proximity to the UAN plant and reducing
transportation costs are keys to maintaining its profitability.
Due to the plants favorable location relative to end users
and high product
22
demand relative to production volume all of the product
shipments are targeted to freight advantaged destinations
located in the U.S. farm belt. The available ammonia
production at the nitrogen fertilizer plant is small and easily
sold into truck and rail delivery points. The products leave the
plant either in trucks for direct shipment to customers or in
railcars for principally Union Pacific Railroad destinations.
The nitrogen fertilizer business does not incur any intermediate
transfer, storage, barge freight or pipeline freight charges.
Consequently, because these costs are not incurred, we estimate
that the plant enjoys a distribution cost advantage over those
competitors who are U.S. Gulf Coast ammonia and UAN
importers, assuming in each case freight rates and pipeline
tariffs for U.S. Gulf Coast importers as recently in effect.
On-Stream
Factor
The on-stream factor is a measure of how long the units
comprising the nitrogen fertilizer facility have been
operational over a given period. We expect that efficiency of
the nitrogen fertilizer plant will continue to improve with
operator training, replacement of unreliable equipment, and
reduced dependence on contract maintenance.
Nine Months |
||||||||||||||||
Year Ended December 31, | Ended September 30, | |||||||||||||||
2008 (1) | 2009 (1) | 2010 (1) | 2011 | |||||||||||||
Gasifier
|
87.8 | % | 97.4 | % | 89.0 | % | 99.5 | % | ||||||||
Ammonia
|
86.2 | % | 96.5 | % | 87.7 | % | 98.0 | % | ||||||||
UAN
|
83.4 | % | 94.1 | % | 80.8 | % | 95.9 | % |
(1) | On-stream factor is the total number of hours operated divided by the total number of hours in the reporting period. Excluding the turnaround performed in 2008, the on-stream factors would have been 91.7% for gasifier, 90.2% for ammonia and 87.4% for UAN for the year ended December 31, 2008. Excluding the Linde air separation unit outage in 2009, the on-stream factors would have been 99.3% for gasifier, 98.4% for ammonia and 96.1% for UAN for the year ended December 31, 2009. Excluding the impact of the Linde air separation unit outage, the rupture of the high-pressure UAN vessel and the major scheduled turnaround, the on-stream factors for the year ended December 31, 2010 would have been 97.6% for gasifier, 96.8% for ammonia and 96.1% for UAN. |
Raw Material
Supply
The nitrogen fertilizer facilitys primary input is pet
coke. During the past five years, over 70% of the nitrogen
fertilizer business pet coke requirements on average were
supplied by our adjacent crude oil refinery. Historically the
nitrogen fertilizer business has obtained the remainder of its
pet coke requirements from third parties such as other
Midwestern refineries or pet coke brokers at spot prices. If
necessary, the gasifier can also operate on low grade coal as an
alternative, which provides an additional raw material source.
There are significant supplies of low grade coal within a
60-mile
radius of the nitrogen fertilizer plant.
Pet coke is produced as a by-product of the refinerys
coker unit process. In order to refine heavy or sour crude oils,
which are lower in cost and more prevalent than higher quality
crude oil, refiners use coker units which enable refiners to
further upgrade heavy crude oil.
The nitrogen fertilizer business plant is located in
Coffeyville, Kansas. Sales of pet coke in the Midwest are not
subject to the same level of pet coke price variability as is
the Texas Gulf Coast where daily production exceeds 40,000 tons
per day. Given the fact that the majority of the nitrogen
fertilizer business third-party pet coke suppliers are
located in the Midwest, the nitrogen fertilizer business
geographic location gives it (and other similarly located
producers) a transportation cost advantage over U.S. Gulf
Coast refineries. The nitrogen fertilizer business average
daily pet coke demand from
2008-2010
was less than 1,300 tons per day.
Linde, Inc., or Linde, owns, operates, and maintains the air
separation plant that provides contract volumes of oxygen,
nitrogen, and compressed dry air to the nitrogen fertilizer
plants
23
gasifiers for a monthly fee. The nitrogen fertilizer business
provides and pays for all utilities required for operation of
the air separation plant. The air separation plant has not
experienced any long-term operating problems. CVR Energy
maintains, for CVR Partners benefit, contingent business
interruption insurance coverage with a $50 million limit
for any interruption that results in a loss of production from
an insured peril. The agreement with Linde provides that if the
nitrogen fertilizer business requirements for liquid or
gaseous oxygen, liquid or gaseous nitrogen or clean dry air
exceed specified instantaneous flow rates by at least 10%, it
can solicit bids from Linde and third parties to supply
incremental product needs. It is required to provide notice to
Linde of the approximate quantity of excess product that it will
need and the approximate date by which it will need it; the
nitrogen fertilizer business and Linde will then jointly develop
a request for proposal for soliciting bids from third parties
and Linde. The bidding procedures may be limited under specified
circumstances. The agreement with Linde expires in 2020.
The nitrogen fertilizer business imports
start-up
steam for the nitrogen fertilizer plant from our crude oil
refinery, and then exports steam back to the crude oil refinery
once all units in the nitrogen fertilizer plant are in service.
Monthly charges and credits are recorded with steam valued at
the natural gas price for the month.
Nitrogen
Production and Plant Reliability
The nitrogen fertilizer plant was completed in 2000 and is the
newest nitrogen fertilizer plant built in North America. The
nitrogen fertilizer plant has two separate gasifiers to provide
redundancy and reliability. The plant uses a gasification
process to convert pet coke to high purity hydrogen for
subsequent conversion to ammonia. The nitrogen fertilizer plant
is capable of processing approximately 1,400 tons per day of pet
coke from our crude oil refinery and third-party sources and
converting it into approximately 1,225 tons per day of ammonia.
A majority of the ammonia is converted to approximately 2,025
tons per day of UAN. Typically 0.41 tons of ammonia is required
to produce one ton of UAN.
The nitrogen fertilizer business schedules and provides routine
maintenance to its critical equipment using its own maintenance
technicians. Pursuant to a Technical Services Agreement with
General Electric, which licenses the gasification technology to
the nitrogen fertilizer business, General Electric experts
provide technical advice and technological updates from their
ongoing research as well as other licensees operating
experiences. The pet coke gasification process is licensed from
General Electric pursuant to a license agreement that is fully
paid. The license grants the nitrogen fertilizer business
perpetual rights to use the pet coke gasification process on
specified terms and conditions.
Distribution,
Sales and Marketing
The nitrogen fertilizer business primarily sells its products in
Kansas, Missouri, Nebraska, Iowa, Illinois, Colorado and Texas.
The nitrogen fertilizer business markets its ammonia products to
industrial and agricultural customers and the UAN products to
agricultural customers. The demand for nitrogen fertilizers
occurs during three key periods. The highest level of ammonia
demand is traditionally in the spring pre-plant period, from
March through May. The second-highest period of demand occurs
during fall pre-plant period in late October and November. The
summer wheat pre-plant occurs in August and September. In
addition, smaller quantities of ammonia are sold in the
off-season to fill available storage at the dealer level.
Ammonia and UAN are distributed by truck or by railcar. If
delivered by truck, products are sold on a
freight-on-board
basis, and freight is normally arranged by the customer. The
nitrogen fertilizer business leases a fleet of railcars for use
in product delivery. The nitrogen fertilizer business also
negotiates with distributors that have their own leased railcars
to utilize these assets to deliver products. The nitrogen
fertilizer business owns all of the truck and rail
24
loading equipment at the nitrogen fertilizer facility. The
nitrogen fertilizer business operates two truck loading and four
rail loading racks for each of ammonia and UAN, with an
additional four rail loading racks for UAN.
The nitrogen fertilizer business markets agricultural products
to destinations that produce the best margins for the business.
UAN is often marketed near the Union Pacific Railroad lines or
destinations that can be supplied by truck and ammonia is
primarily marketed to locations near the Burlington Northern
Santa Fe or Kansas City Southern Railroad lines or
destinations that can be supplied by truck. By securing this
business directly, the nitrogen fertilizer business reduces its
dependence on distributors serving the same customer base, which
enables the nitrogen fertilizer business to capture a larger
margin and allows it to better control its product distribution.
Most of the agricultural sales are made on a competitive spot
basis. The nitrogen fertilizer business also offers products on
a prepay basis for in-season demand. The heavy in-season demand
periods are spring and fall in the Corn Belt and summer in the
wheat belt. The Corn Belt is the primary corn producing region
of the United States, which includes Illinois, Indiana, Iowa,
Minnesota, Missouri, Nebraska, Ohio and Wisconsin. The wheat
belt is the primary wheat producing region of the United States,
which includes Kansas, North Dakota, Oklahoma, South Dakota and
Texas. Some of the industrial sales are spot sales, but most are
on annual or multiyear contracts.
The nitrogen fertilizer business uses forward sales of
fertilizer products to optimize its asset utilization, planning
process and production scheduling. These sales are made by
offering customers the opportunity to purchase product on a
forward basis at prices and delivery dates that it proposes. The
nitrogen fertilizer business uses this program to varying
degrees during the year and between years depending on market
conditions and has the flexibility to increase or decrease
forward sales depending on managements view as to whether
price environments will be increasing or decreasing. Fixing the
selling prices of nitrogen fertilizer products months in advance
of their ultimate delivery to customers typically causes the
nitrogen fertilizer business reported selling prices and margins
to differ from spot market prices and margins available at the
time of shipment. Cash received as a result of prepayments is
recognized on the balance sheet upon receipt along with a
corresponding liability. Revenue, associated with prepaid sales,
is recognized at the time the product is delivered to the
customer.
Customers
The nitrogen fertilizer business sells ammonia to agricultural
and industrial customers. Based upon a three-year average, the
nitrogen fertilizer business has sold approximately 87% of the
ammonia it produces to agricultural customers primarily located
in the mid-continent area between North Texas and Canada, and
approximately 13% to industrial customers. Agricultural
customers include distributors such as MFA, United Suppliers,
Inc., Brandt Consolidated Inc., Gavilon Fertilizers LLC,
Transammonia, Inc., Agri Services of Brunswick, LLC, Interchem,
and CHS Inc. Industrial customers include Tessenderlo Kerley,
Inc., National Cooperative Refinery Association, and Dyno Nobel,
Inc. The nitrogen fertilizer business sells UAN products to
retailers and distributors. Given the nature of its business,
and consistent with industry practice, the nitrogen fertilizer
business does not have long-term minimum purchase contracts with
any of its customers.
For the years ended December 31, 2008, 2009 and 2010, the
top five ammonia customers in the aggregate represented 54.7%,
43.9% and 44.2% of the nitrogen fertilizer business
ammonia sales, respectively, and the top five UAN customers in
the aggregate represented 37.2%, 44.2% and 43.3% of the nitrogen
fertilizer business UAN sales, respectively. Approximately
13%, 15% and 12% of our aggregate sales for the year ended
December 31, 2008, 2009 and 2010 respectively, were made to
Gavilon Fertilizers LLC.
25
Competition
Competition in the nitrogen fertilizer industry is dominated by
price considerations. However, during the spring and fall
application seasons, farming activities intensify and delivery
capacity is a significant competitive factor. The nitrogen
fertilizer business maintains a large fleet of leased rail cars
and seasonally adjusts inventory to enhance its manufacturing
and distribution operations.
Domestic competition, mainly from regional cooperatives and
integrated multinational fertilizer companies, is intense due to
customers sophisticated buying tendencies and production
strategies that focus on cost and service. Also, foreign
competition exists from producers of fertilizer products
manufactured in countries with lower cost natural gas supplies.
In certain cases, foreign producers of fertilizer who export to
the United States may be subsidized by their respective
governments.
Based on Blue Johnson data regarding total U.S. demand for
UAN and ammonia, we estimate that the nitrogen fertilizer
plants UAN production in 2010 represented approximately
5.1% of total U.S. UAN use and that the net ammonia
produced and marketed by the nitrogen fertilizer business
represented less than 1% of the total U.S. ammonia use.
Seasonality
Because the nitrogen fertilizer business primarily sells
agricultural commodity products, its business is exposed to
seasonal fluctuations in demand for nitrogen fertilizer products
in the agricultural industry. As a result, the nitrogen
fertilizer business typically generates greater net sales in the
first half of each calendar year, which we refer to as the
planting season, and our net sales tend to be lower during the
second half of each calendar year, which we refer to as the fill
season. In addition, the demand for fertilizers is affected by
the aggregate crop planting decisions and fertilizer application
rate decisions of individual farmers who make planting decisions
based largely on the prospective profitability of a harvest. The
specific varieties and amounts of fertilizer they apply depend
on factors like crop prices, farmers current liquidity,
soil conditions, weather patterns and the types of crops planted.
Gary-Williams
Energy Corporation
History
In 1945, Kerr-McGee Corporation acquired an oil refinery in
Wynnewood, Oklahoma that had been operating since the 1920s.
Kerr-McGee expanded the Wynnewood operations by adding a second
crude unit in 1976, boosting total refining capacity to
45,000 bpd. In 1995, the refinery was sold to the
Gary-Williams Energy Corporation, which promptly began
de-bottlenecking and other expansion projects at the refinery,
with production capacity increasing to 55,000 bpd in the
late 1990s and then to its current 70,000 bpd following the
completion of approximately $100.0 million in capital projects
and an approximately $60.0 million four-year turnaround in 2007
and 2008. On November 2, 2011, GWEC agreed to sell the
Wynnewood refinery to CVR Energy for a cash purchase price of
$525 million plus an adjustment for inventory and other
working capital (which, as of the date hereof, is estimated at $69.0 million).
Business
Description
The Wynnewood operations consist of a 70,000 bpd refinery
in Wynnewood, Oklahoma and supporting businesses including
approximately 2.0 million barrels of company-owned storage
tanks. Located in the PADD II Group 3 distribution area, the
Wynnewood refinery is a dual crude unit facility that processes
a variety of crudes and produces high-value fuel products
(including gasoline, ultra-low sulfur diesel, jet fuel and
solvent) as well as liquefied
26
petroleum gas and a variety of asphalts. The facility is
situated on approximately 400 acres located approximately
65 miles south of Oklahoma City, Oklahoma and approximately
130 miles from Cushing, Oklahoma, a major crude oil trading
and storage hub.
For the twelve months ended September 30, 2011, the
Wynnewood refinerys product yield included gasoline (54%),
diesel fuel (primarily ultra low sulfur diesel) (28%), asphalt
(2%), jet fuel (6%) and other products (10%).
Feedstocks
Supply
The Wynnewood refinery has the capability to process blends of a
variety of crude oil ranging from medium sour to light sweet
crude oil, although isobutane, gasoline components, and normal
butane are also typically used. Following the Acquisition, we
intend to move the Wynnewood refinery to a blended crude slate
reflecting higher crude differentials. Historically most of the
Wynnewood refinerys crude oil has been acquired
domestically, mainly from Texas and Oklahoma.
Crude oil is supplied to the Wynnewood refinery by two separate
pipelines, and received into storage tanks at terminals located
on or near the refinery. For the twelve months ended
September 30, 2011, Wynnewoods crude oil supply blend
was comprised of approximately 77% sweet crude oil, 18% sour
crude oil and 5% other (including butane, mixed butane and
isobutane).
Marketing and
Distribution
The Wynnewood refinery ships its finished product via pipeline,
rail car, and truck. Approximately 60% of the Wynnewood
refinerys finished products sold are distributed in
Oklahoma. Non-Oklahoma gasoline and ultra-low sulfur diesel
volumes are distributed throughout the Mid-Continent region via
the Magellan Pipeline. Wynnewood distributes approximately
12,000 bpd of gasoline and ultra-low sulfur diesel via the
refinerys truck rack, and Wynnewood has the ability to
distribute volumes via the NuStar Energy pipeline system to
South Dakota, Nebraska, Iowa, and Kansas. Wynnewood also sells
jet fuel to the U.S. Department of Defense via the truck
rack. In addition, Wynnewood maintains exchange agreements with
five refineries in nearby states.
Customers
Customers for Wynnewoods petroleum products include other
refiners, convenience store companies and, pursuant to a
4,000 bpd jet fuel contract that GWEC has maintained since
1996, the United States government. Wynnewoods active
customer base includes approximately 235 accounts, none of which
accounts for more than 9% of its sales. While GWEC has several
supply contracts that allow larger customers to realize volume
discounts if they maintain regular sales over predetermined
volumes, no supply contract is individually material to
Wynnewoods sales.
Environmental
Matters
The petroleum and nitrogen fertilizer businesses are subject to
extensive and frequently changing federal, state and local,
environmental and health and safety laws and regulations
governing the emission and release of hazardous substances and
other materials into the environment, the treatment and
discharge of waste water, the management and disposal of wastes,
the storage, handling, use and transportation of petroleum and
nitrogen products, and the characteristics and composition of
gasoline and diesel fuels. These laws and regulations,
27
their underlying regulatory requirements and the enforcement
thereof impact our petroleum business and operations and the
nitrogen fertilizer business and operations by imposing:
| restrictions on operations and/or the need to install enhanced or additional controls; | |
| the need to obtain and comply with permits and authorizations; | |
| liability for the investigation and remediation of contaminated soil and groundwater at current and former facilities (if any) and off-site waste disposal locations; and | |
| specifications for the products marketed by our petroleum business and the nitrogen fertilizer business, primarily gasoline, diesel fuel, UAN and ammonia. |
Our operations require numerous permits and authorizations.
Failure to comply with these permits or environmental laws
generally could result in fines, penalties or other sanctions or
a revocation of our permits. In addition, the laws and
regulations to which we are subject are often evolving and many
of them have become more stringent or have become subject to
more stringent interpretation or enforcement by federal or state
agencies. The ultimate impact on our business of complying with
evolving laws and regulations is not always clearly known or
determinable due in part to the fact that our operations may
change over time and certain implementing regulations for laws,
such as the federal Clean Air Act and the Clean Water Act, have
not yet been finalized, are under governmental or judicial
review or are being revised. These laws and regulations could
result in increased capital, operating and compliance costs.
The principal environmental risks associated with our businesses
are outlined below.
The Federal Clean
Air Act
The federal Clean Air Act and its implementing regulations, as
well as the corresponding state laws and regulations that
regulate emissions of pollutants into the air, affect our
petroleum operations and the nitrogen fertilizer business both
directly and indirectly. Direct impacts may occur through the
federal Clean Air Acts permitting requirements
and/or
emission control requirements relating to specific air
pollutants, as well as the requirement to maintain a risk
management program to help prevent accidental releases of
certain hazardous substances. The federal Clean Air Act
indirectly affects our petroleum operations and the nitrogen
fertilizer business by extensively regulating the air emissions
of sulfur dioxide
(SO2),
volatile organic compounds, nitrogen oxides and other
substances, including those emitted by mobile sources, which are
direct or indirect users of our products.
Some or all of the standards promulgated pursuant to the federal
Clean Air Act, or any future promulgations of standards, may
require the installation of controls or changes to our petroleum
operations or the nitrogen fertilizer facilities in order to
comply. If new controls or changes to operations are needed, the
costs could be significant. These new requirements, other
requirements of the federal Clean Air Act, or other presently
existing or future environmental regulations could cause us to
expend substantial amounts to comply
and/or
permit our facilities to produce products that meet applicable
requirements.
The regulation of air emissions under the federal Clean Air Act
requires that we obtain various construction and operating
permits and incur capital expenditures for the installation of
certain air pollution control devices at our petroleum and
nitrogen fertilizer operations when regulations change or we
modify or add new equipment. Various regulations specific to our
operations have been implemented, such as National Emission
Standard for Hazardous Air Pollutants, New Source Performance
Standards and Prevention of Significant Deterioration
(PSD). We have incurred, and expect to continue to
incur, substantial capital expenditures to maintain compliance
with these and other air emission regulations that have been
promulgated or may be promulgated or revised in the future.
28
In March 2004, CRRM and CRT entered into the Coffeyville Consent
Decree with the EPA and the KDHE to resolve air compliance
concerns raised by the EPA and KDHE related to Farmlands
prior ownership and operation of our crude oil refinery and now
closed Phillipsburg terminal facilities. As a result of an
agreement to install certain controls and implement certain
operational changes, the EPA and KDHE agreed not to impose civil
penalties, and provided a release from liability for
Farmlands alleged noncompliance with the issues addressed
by the Coffeyville Consent Decree. Under the Coffeyville Consent
Decree, CRRM agreed to install controls to reduce emissions of
SO2,
nitrogen oxides and particulate matter from its fluid catalytic
cracking unit (FCCU) by January 1, 2011. In
addition, pursuant to the Coffeyville Consent Decree, CRRM and
CRT assumed cleanup obligations at the Coffeyville refinery and
the Phillipsburg terminal facilities. The remaining costs of
complying with the Coffeyville Consent Decree are expected to be
approximately $49 million, of which approximately
$47 million is expected to be capital expenditures which
does not include the cleanup obligations for historic
contamination at the site that are being addressed pursuant to
administrative orders issued under the Resource Conservation and
Recovery Act (RCRA). To date, CRRM and CRT have
materially complied with the Coffeyville Consent Decree. On
June 30, 2009, CRRM submitted a force majeure notice to the
EPA and KDHE in which CRRM indicated that it may be unable to
meet the Coffeyville Consent Decrees January 1, 2011
deadline related to the installation of controls on the FCCU
because of delays caused by the June/July 2007 flood. In
February 2010, CRRM and the EPA agreed to a fifteen month
extension of the January 1, 2011, deadline for the
installation of controls which was approved by the court as a
material modification to the existing Coffeyville Consent
Decree. Pursuant to this agreement, CRRM would offset any
incremental emissions resulting from the delay by providing
additional controls to existing emission sources over a set
timeframe.
In the meantime, CRRM has been negotiating with the EPA and KDHE
to replace the current Coffeyville Consent Decree, including the
fifteen month extension, with a global settlement under the
EPAs National Petroleum Refining Initiative. Over the
course of the last decade, the EPA has embarked on a national
Petroleum Refining Initiative alleging industry-wide
noncompliance with four marquee issues under the
Clean Air Act: New Source Review, Flaring, Leak Detection and
Repair, and Benzene Waste Operations NESHAP. The National
Petroleum Refining Initiative has resulted in most
U.S. refineries entering into consent decrees that impose
civil penalties and require substantial expenditures for
pollution control and enhanced operating procedures. The EPA has
indicated that it will seek to have all U.S. refineries
enter into global settlements pertaining to all
marquee issues. The current Coffeyville Consent
Decree covers some, but not all, of the marquee
issues. CRRM has been negotiating with EPA about expanding the
existing Coffeyville Consent Decree obligations to include all
of the marquee issues under the National Petroleum
Refining Initiative and has reached an agreement in principle on
most of the issues, including an agreement to further delay the
installation of controls on its FCCU. Under the global
settlement, CRRM would be required to pay civil penalties in
excess of $100,000; however, CRRM does not anticipate that the
civil penalties will be material. In addition, under the global
settlement, CRRM would be required to perform an environmentally
beneficial project, but its incremental capital expenditures
would not be material and would be limited primarily to the
retrofit and replacement of heaters and boilers over a five to
seven year timeframe.
The Wynnewood refinery has not entered into a global settlement
with the EPA and the ODEQ under the National Petroleum Refining
Initiative, although it had discussions with the EPA and ODEQ
about doing so. Instead, the Wynnewood Consent Order (entered
into with ODEQ in August 2011) addresses some, but not all,
of the traditional marquee issues under the National Petroleum
Refining Initiative and addresses certain historic Clean Air Act
compliance issues that are generally beyond the scope of a
traditional global settlement. Under the Wynnewood Consent
Order, WRC agreed to pay a civil penalty of $950,000, install
certain controls, enhance certain compliance programs, and
undertake additional testing and auditing. The costs of
29
complying with the Wynnewood Consent Order, other than costs
associated with a planned turnaround, are expected to be
approximately $1.5 million. In consideration for entering
into the Wynnewood Consent Order, WRC received a broad release
from liability from ODEQ. The EPA may later request that WRC
enter into a global settlement which, if WRC agreed to do so,
would necessitate the payment of a civil penalty and the
installation of additional controls.
On September 23, 2011, the United States Department of
Justice (DOJ), acting on behalf of the EPA and the
United States Coast Guard, filed suit against CRRM in the United
States District Court for the District of Kansas seeking civil
penalties and injunctive relief related to alleged non
compliance with the Clean Air Acts Risk Management Program
(RMP) (in addition to other matters described below
(see Environmental Remediation). CRRM is
currently in settlement negotiations with the EPA and
anticipates that civil penalties associated with the proceeding
will exceed $100,000; however, CRRM does not anticipate that
civil penalties or any other costs associated with the
proceeding will be material.
The Federal Clean
Water Act
The federal Clean Water Act and its implementing regulations, as
well as the corresponding state laws and regulations that
regulate the discharge of pollutants into the water, affect our
petroleum operations and the nitrogen fertilizer business.
Direct impacts occur through the federal Clean Water Acts
permitting requirements, which establish discharge limitations
based on technology standards, water quality standards, and
restrictions on the total maximum daily load (TMDL)
of pollutants that may be released to a particular water body
based on its use. In addition, water resources are becoming and
in the future may become more scarce, and many refiners,
including WRC, are subject to restrictions on their ability to
use water in the event of low availability conditions.
The Wynnewood refinerys Clean Water Act permit
(OPDES permit) has expired and has not yet been
re-issued by ODEQ. The refinery currently operates under a
permit shield, which authorizes permittees to continue
discharging under an expired permit until the ODEQ re-issues the
permit. The permit renewal process has begun, and ODEQ has
requested public comment on proposed modifications to
Oklahomas Water Quality Management Plan for the Wynnewood
refinery. Capital costs or expenses, if any, related to changes
to the permit are not expected to be material.
WRC has entered into a series of Clean Water Act consent orders
with ODEQ. The latest Consent Order (the CWA Consent
Order), which supersedes other consent orders, became
effective in September 2011. The CWA Consent Order addresses
alleged noncompliance by WRC with its OPDES permit limits. The
CWA Consent Order requires WRC to take corrective action steps,
including undertaking studies to determine whether the Wynnewood
refinerys wastewater treatment plant capacity is
sufficient. The Wynnewood refinery may need to install
additional controls or make operational changes to satisfy the
requirements of the CWA Consent Order. The cost of additional
controls, if any, cannot be predicted at this time. However,
based on our experience with wastewater treatment and controls,
we do not believe that the costs of the potential corrective
actions would be material.
Release
Reporting
Our facilities periodically experience releases of hazardous
substances and extremely hazardous substances. If we fail to
properly report the release or if the release violates the law
or our permits, it could cause us to become the subject of a
government enforcement action or third-party claims. For
example, the nitrogen fertilizer facility periodically
experiences minor releases of hazardous and extremely hazardous
substances from our equipment. It experienced more significant
releases in August 2007 due to the failure of a high pressure
pump and in August and September 2010 due to a heat exchanger
leak and a UAN vessel rupture. Such
30
releases are reported to the relevant federal, state and local
agencies. Government enforcement or third-party claims relating
to releases of hazardous or extremely hazardous substances could
result in significant expenditures and liability.
The release of hazardous substances or extremely hazardous
substances into the environment is subject to release reporting
requirements under federal and state environmental laws. On
February 24, 2010, we received a letter from the DOJ on
behalf of the EPA seeking a $900,000 penalty under the
Comprehensive Environmental Response, Compensation, and
Liability Act and the Emergency Planning and Community Right to
Know Act related to alleged late and incomplete reporting of air
releases by CRRM that occurred between June 13, 2004 and
April 10, 2008. We have entered into a tolling agreement
relating to EPAs allegations and are currently in
settlement discussions with the EPA. We anticipate that CRRM
will be required to pay a penalty in excess of $100,000 in
connection with these allegations, but do not anticipate that
the penalty will be material. The penalty will be included in
the global settlement, described above in
BusinessEnvironmental MattersThe Federal Clean
Air Act.
Fuel
Regulations
Tier II, Low Sulfur Fuels. In
February 2000, the EPA promulgated the Tier II Motor
Vehicle Emission Standards Final Rule for all passenger
vehicles, establishing standards for sulfur content in gasoline
that were required to be met by 2006. In addition, in January
2001, the EPA promulgated its on-road diesel regulations, which
required a 97% reduction in the sulfur content of diesel sold
for highway use by June 1, 2006, with full compliance by
January 1, 2010. Our refineries are in compliance with the
EPAs low sulfur gasoline and diesel fuel standards. The
EPA is expected to propose Tier 3 sulfur
standards in early 2012. If the EPA were to propose a standard
at the level recently being discussed by the EPA, CRRM will need
to make modifications to its equipment in order to meet the
anticipated new standard. WRC would not appear to require
additional capital to meet the anticipated new standard. We do
not believe that costs associated with the EPAs proposed
Tier 3 rule would be material.
Mobile Source Air Toxic II
Emissions. In 2007, the EPA promulgated the
Mobile Source Air Toxic II (MSAT II) rule that
requires the reduction of benzene in gasoline by 2011. CRRM and
WRC each are considered to be small refiners under
the MSAT II rule and compliance with the rule is extended until
2015 for small refiners. The EPA has confirmed that
the Acquisition of GWEC will not affect the companies
small refiner status because the combination of two
previously approved small refiners does not result
in the loss of small refiner status. Capital
expenditures to comply with the rule are expected to be
approximately $10.0 million for CRRM and $20.5 million
for WRC.
Renewable Fuel Standards. In 2007, the
EPA promulgated the Renewable Fuel Standard (RFS),
which requires refiners to blend renewable fuels in
with their transportation fuels or purchase renewable energy
credits, known as renewable identification numbers
(RINs) in lieu of blending. The EPA is required to
determine and publish the applicable annual renewable fuel
percentage standards for each compliance year by November 30 for
the previous year. The percentage standards represent the ratio
of renewable fuel volume to gasoline and diesel volume. Thus, in
2011, about 8% of all fuel used will be renewable
fuel. In 2012, the EPA has proposed to raise the renewable
fuel percentage standards to about 9%. Beginning on
January 1, 2011, CRRM was required to blend renewable fuels
into its gasoline and diesel fuel or purchase RINs, in lieu of
blending. For the three and nine months ended September 30,
2011, CRRM incurred approximately $6.6 million and
$15.1 million, respectively, of expense associated with
purchasing RINs, which expense was included in cost of product
sold in the Condensed Consolidated Statements of Operations. To
achieve compliance with the renewable fuel standard for the
remainder of 2011, CRRM is able to blend a small amount of
ethanol into gasoline sold at its refinery loading rack, but
otherwise will have to purchase RINs
31
to comply with the rule. CRRM has requested additional time to
comply in the form of hardship relief from the EPA
based on the disproportionate economic impact of the rule on
CRRM, but the EPA has not yet responded to CRRMs request.
WRC is a small refinery under the RFS and has received a two
year extension of time to comply. Therefore, WRC will have to
begin complying with the RFS in 2013 unless a further extension
is requested and granted.
Greenhouse Gas
Emissions
Various regulatory and legislative measures to address
greenhouse gas emissions (including
CO2,
methane and nitrous oxides) are in different phases of
implementation or discussion. In the aftermath of its 2009
endangerment finding that greenhouse gas emissions
pose a threat to human health and welfare, the EPA has begun to
regulate greenhouse gas emissions under the authority granted to
it under the Clean Air Act. In October 2009, the EPA finalized a
rule requiring certain large emitters of greenhouse gases to
inventory and report their greenhouse gas emissions to the EPA.
In accordance with the rule the refineries have begun monitoring
greenhouse gas emissions and reported the emissions to the EPA
beginning in 2011. In May 2010, the EPA finalized the
Greenhouse Gas Tailoring Rule, which established new
greenhouse gas emissions thresholds that determine when
stationary sources, such as the refineries and the nitrogen
fertilizer plant, must obtain permits under the PSD and
Title V programs of the federal Clean Air Act. The
significance of the permitting requirement is that, in cases
where a new source is constructed or an existing source
undergoes a major modification, the facility would need to
evaluate and install best available control technology
(BACT) for its greenhouse gas emissions. Beginning
in July 2011, a major modification resulting in a significant
increase in greenhouse gas emissions at our nitrogen fertilizer
plant or refineries may require the installation of BACT
controls. We do not believe that any currently anticipated
projects at our facilities will result in a significant increase
in greenhouse gas emissions triggering the need to install BACT
controls. The EPAs Greenhouse Gas Tailoring Rule and
certain other greenhouse gas emission rules have been challenged
and will likely be subject to extensive litigation. The EPA is
expected to revise certain existing New Source Performance
Standards (NSPS) applicable to refineries to include
performance standards for greenhouse gas emissions. The revised
regulations, under NSPS subpart J, are expected to be finalized
by November 2012.
At the federal legislative level, Congressional passage of
legislation adopting some form of federal mandatory greenhouse
gas emission reduction, such as a nationwide
cap-and-trade
program, does not appear likely at this time, although it could
be adopted at a future date. It is also possible that Congress
may pass alternative climate change bills that do not mandate a
nationwide
cap-and-trade
program and instead focus on promoting renewable energy and
energy efficiency.
In addition to potential federal legislation, a number of states
have adopted regional greenhouse gas initiatives to reduce
CO2
and other greenhouse gas emissions. In 2007, a group of
Midwestern states, including Kansas (where the Coffeyville
refinery and the nitrogen fertilizer facility are located),
formed the Midwestern Greenhouse Gas Reduction Accord, which
calls for the development of a
cap-and-trade
system to control greenhouse gas emissions and for the inventory
of such emissions. However, the individual states that have
signed on to the accord must adopt laws or regulations
implementing the trading scheme before it becomes effective, and
the timing and specific requirements of any such laws or
regulations in Kansas are uncertain at this time.
The implementation of EPA, state or regional regulations or
programs to reduce greenhouse gas emissions will result in
increased costs to (i) operate and maintain our facilities,
(ii) install new emission controls on our facilities and
(iii) administer and manage any greenhouse gas emissions
program. Increased costs associated with compliance with any
32
current or future legislation or regulation of greenhouse gas
emissions, if it occurs, may have a material adverse effect on
our results of operations, financial condition and cash flows.
In addition, climate change legislation and regulations may
result in increased costs not only for our business but also
users of our refined and fertilizer products, thereby
potentially decreasing demand for our products. Decreased demand
for our products may have a material adverse effect on our
results of operations, financial condition and cash flows.
RCRA
Our operations are subject to the RCRA requirements for the
generation, transportation, treatment, storage and disposal of
solid and hazardous wastes. When feasible, RCRA-regulated
materials are recycled instead of being disposed of
on-site or
off-site. RCRA establishes standards for the management of solid
and hazardous wastes. Besides governing current waste disposal
practices, RCRA also addresses the environmental effects of
certain past waste disposal practices, the recycling of wastes
and the regulation of underground storage tanks containing
regulated substances.
Waste
Management.
There are two closed hazardous waste units at CRRM and eight
other waste units in the process of being closed pending state
agency approval. In addition, one closed interim status
hazardous waste landfarm located at the Phillipsburg terminal is
under long-term post closure care.
WRC has a RCRA Part B permit, which regulates the operation
of a hazardous waste storage tank and requires post-closure
groundwater monitoring of a closed stormwater retention pond.
The hazardous waste storage tank will require closure after use
of the unit is no longer necessary to facility operations.
Financial assurance is currently in place for closure of the
hazardous waste storage tank and post-closure monitoring of the
closed stormwater retention pond.
We have issued letters of credit of approximately
$0.2 million in financial assurance for
closure/post-closure care for hazardous waste management units
at the now closed Phillipsburg terminal and the Coffeyville
refinery. We will have approximately $0.3 million in
financial assurance exposure for closure and post-closure care
of the hazardous waste management units at the Wynnewood
refinery.
Impacts of Past
Manufacturing
The 2004 Coffeyville Consent Decree that CRRM signed with the
EPA and KDHE required CRRM to assume two RCRA corrective action
orders issued to Farmland. We are subject to a 1994 EPA
administrative order related to investigation of possible past
releases of hazardous materials to the environment at the
Coffeyville refinery. In accordance with the order, we have
documented existing soil and groundwater conditions, which
require investigation or remediation projects. The now-closed
Phillipsburg terminal is subject to a 1996 EPA administrative
order related to investigation of releases of hazardous
materials to the environment at the Phillipsburg terminal, which
operated as a refinery until 1991. Remediation at both sites, if
necessary, will be based on the results of the investigations.
The Wynnewood refinery is required to conduct investigations and
monitoring to address potential off-site migration of
contaminants from the west side of the property. Other known
areas of contamination have been partially addressed but
corrective action has not been completed and portions of the
refinery have not yet been investigated to determine whether
corrective action is necessary.
33
The anticipated remediation costs through 2013 are estimated to
be as follows (in millions):
Total |
||||||||||||||||
Total O&M |
Estimated |
|||||||||||||||
Site |
Costs |
Costs |
||||||||||||||
Investigation |
Capital |
Through |
Through |
|||||||||||||
Facility
|
Costs | Costs | 2013 | 2013 | ||||||||||||
Coffeyville Refinery
|
$ | 0.2 | $ | | $ | 0.8 | $ | 1.0 | ||||||||
Phillipsburg Terminal
|
0.2 | | 1.0 | 1.2 | ||||||||||||
Wynnewood Refinery
|
0.1 | | 0.3 | 0.4 | ||||||||||||
Total Estimated Costs
|
$ | 0.5 | $ | | $ | 2.1 | $ | 2.6 | ||||||||
These estimates are based on current information and could go up
or down as additional information becomes available through our
ongoing remediation and investigation activities. At this point,
we have estimated that, over ten years starting in 2011, we will
spend $2.9 million to remedy impacts from past
manufacturing activity at the Coffeyville refinery and to
address existing soil and groundwater contamination at the
Phillipsburg terminal. We spent approximately $1.0 million
in 2010 associated with related remediation at the Coffeyville
refinery and Phillipsburg terminal. We have estimated that, over
ten years starting in 2011, we will spend $1.5 million to
remedy impacts from past manufacturing activity at the Wynnewood
refinery and to address existing soil and groundwater
contamination. It is possible that additional costs will be
required during or after this ten year period.
Financial
Assurance
We are required in the Coffeyville Consent Decree to establish
financial assurance to secure the projected
clean-up
costs posed by the Coffeyville and the now-closed Phillipsburg
facilities in the event we fail to fulfill our
clean-up
obligations. In accordance with the Coffeyville Consent Decree
as modified by a 2010 agreement between CRRM, CRT, the EPA and
the KDHE, this financial assurance is currently secured by a
bond in the amount of $5.0 million for
clean-up
obligations at the Phillipsburg terminal and additional
self-funded financial assurance of approximately
$1.7 million and $2.1 million for
clean-up
obligations at the Coffeyville refinery and Phillipsburg
terminal, respectively. Current RCRA financial assurance
requirements for the Wynnewood refinery total $0.3 million
for hazardous waste storage tank closure and post-closure
monitoring of a closed stormwater retention pond.
Environmental
Remediation
Under the Comprehensive Environmental Response, Compensation,
and Liability Act (CERCLA), RCRA, and related state
laws, certain persons may be liable for the release or
threatened release of hazardous substances. These persons
include the current owner or operator of property where a
release or threatened release occurred, any persons who owned or
operated the property when the release occurred, and any persons
who disposed of, or arranged for the transportation or disposal
of, hazardous substances at a contaminated property. Thus, in
addition to our currently owned and operated facilities, we
could be held liable for releases of hazardous substances at our
former facilities and third-party sites to which we sent our
waste. Liability under CERCLA is strict, retroactive and, under
certain circumstances, joint and several, so that any
responsible party may be held liable for the entire cost of
investigating and remediating the release of hazardous
substances. Similarly, the Oil Pollution Act of 1990
(OPA) subjects owners and operators of facilities to
strict, joint and several liability for all containment and
cleanup costs, natural resource damages, and potential
governmental oversight costs arising from oil spills into the
waters of the United States. On September 23, 2011, the
DOJ, acting on behalf of the EPA and the United States Coast
Guard, filed suit against CRRM in the United States District
Court for the District of Kansas seeking
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(i) recovery from CRRM of EPAs alleged oversight
costs of approximately $1.8 million in connection with the
cleanup of the oil spill resulting from the June/July 2007 flood
at our Coffeyville refinery, (ii) civil penalties under the
Clean Water Act (as amended by the Oil Pollution Act), and
(iii) civil penalties and injunctive relief with respect to
certain RMP allegations, which are described above under
The Federal Clean Air Act; and unrelated
claims under the Clean Air Acts Risk Management program.
We are currently in settlement negotiations with the EPA and
anticipate that civil penalties associated with the proceeding
will exceed $100,000; however, we do not anticipate that civil
penalties or any other costs associated with the proceeding will
be material. As is the case with all companies engaged in
similar industries, depending on the underlying facts and
circumstances we face potential exposure from future claims and
lawsuits involving environmental matters, including soil and
water contamination, personal injury or property damage
allegedly caused by crude oil or hazardous substances that we
manufactured, handled, used, stored, transported, spilled,
disposed of or released. We cannot assure you that we will not
become involved in future proceedings related to releases of
hazardous or extremely hazardous substances or crude oil or
that, if we were held responsible for damages in any existing or
future proceedings, such costs would be covered by insurance or
would not be material.
Safety, Health
and Security Matters
We operate a comprehensive safety, health and security program,
involving active participation of employees at all levels of the
organization. We have developed comprehensive safety programs
aimed at preventing recordable incidents. Despite our efforts to
achieve excellence in our safety and health performance, there
can be no assurances that there will not be accidents resulting
in injuries or even fatalities. We routinely audit our programs
and consider improvements in our management systems.
The Wynnewood refinery has been the subject of a number of OSHA
inspections since 2006. As a result of these inspections, WRC
has entered into four OSHA settlement agreements in 2008,
pursuant to which it has agreed to undertake certain studies,
conduct abatement activities, and revise and enhance certain
OSHA compliance programs. The costs associated with these
studies, abatement activities and program revisions are expected
to be approximately $9.3 million over the next five years.
Process Safety Management. We maintain
a Process Safety Management (PSM) program. This
program is designed to address all facets associated with OSHA
requirements for developing and maintaining a PSM program. We
will continue to audit our programs and consider improvements in
our management systems and equipment.
Emergency Planning and Response. We
have an emergency response plan that describes the organization,
responsibilities and plans for responding to emergencies in our
facilities. We will continue to audit our programs and consider
improvements in our management systems and equipment.
Security. We have a security program to
protect our facilities from unauthorized entry and exit from our
facilities and potential acts of terrorism. Recent changes in
the U.S. Department of Homeland Security rules and
requirements may require enhancements and improvements to our
current program.
Employees
At September 30, 2011, 494 employees were employed in
our petroleum business, 126 were employed by the nitrogen
fertilizer business and 90 employees were employed by the
Company and CRLLC at our offices in Sugar Land, Texas and Kansas
City, Kansas.
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As of September 30, 2011, approximately 61% of our
employees at the Coffeyville refinery were covered by a
collective bargaining agreement. These employees are affiliated
with six unions of the Metal Trades Department of the AFL-CIO
(Metal Trade Unions) and the United Steel,
Paper and Forestry, Rubber, Manufacturing, Energy, Allied
Industrial and Service Workers International Union, AFL-CIO-CLC
(United Steelworkers). The Metal Trade Unions
collective bargaining agreement (which covers union members who
work directly at the Coffeyville refinery) is effective through
March 2013, and the collective bargaining agreement with United
Steelworkers (which covers the balance of CVR Energys
unionized employees, who work in the terminalling and related
operations) is effective through March 2012, and automatically
renews on an annual basis thereafter unless a written notice is
received sixty days in advance of the relevant expiration date.
We believe that our relationship with our employees is good.
The Wynnewood refinery employs approximately 275 people,
about 65% of whom are represented by the International Union of
Operating Engineers. The collective bargaining agreement with
the International Union of Operating Engineers with respect to
the Wynnewood refinery expires in June 2012. GWEC employs
approximately 60 additional people in various other locations,
the majority of whom will not remain with us following the
Acquisition. GWEC believes that its relationship with its
employees is good.
Properties
The following table contains certain information regarding our
principal properties. Each of the properties listed below will
be mortgaged in favor of holders of the notes.
Location
|
Acres | Own/Lease | Use | |||||
Coffeyville, KS
|
440 | Own | Coffeyville Resources: oil refinery and office buildings Partnership: fertilizer plant | |||||
Phillipsburg, KS
|
200 | Own | Terminal facility | |||||
Montgomery County, KS (Coffeyville Station)
|
20 | Own | Crude oil storage | |||||
Montgomery County, KS (Broome Station)
|
20 | Own | Crude oil storage | |||||
Bartlesville, OK
|
25 | Own | Truck storage and office buildings | |||||
Winfield, KS
|
5 | Own | Truck storage | |||||
Cowley County, KS (Hooser Station)
|
80 | Own | Crude oil storage | |||||
Holdrege, NE
|
7 | Own | Crude oil storage | |||||
Stockton, KS
|
6 | Own | Crude oil storage |
We also lease property for our executive office, which is
located at 2277 Plaza Drive in Sugar Land, Texas. Additionally,
other corporate office space is leased in Kansas City, Kansas.
As of December 31, 2010, we had storage capacity for
767,000 barrels of gasoline, 1,062,000 barrels of
distillates, 928,000 barrels of intermediates and
3,920,000 barrels of crude oil. The crude oil storage
consisted of 674,000 barrels of refinery storage capacity,
536,000 barrels of field storage capacity and
2,710,000 barrels of storage at Cushing, Oklahoma. We
expect that our current owned and leased facilities will be
sufficient for our needs over the next twelve months.
Additionally, we own 183 acres of land in Cushing, Oklahoma
upon which we are proceeding to build approximately an
additional 1,000,000 barrels of crude oil storage capacity.
Wynnewood Refining Company (WRC), a subsidiary of
GWEC, owns and operates an oil refinery and associated crude oil
storage tanks located on approximately 400 acres in Wynnewood,
Oklahoma. As part of such operation it leases certain
improvements, equipment,
36
infrastructure and fixtures located at the refinery and pursuant
to that certain lease agreement dated as of September 9,
2009 between WRC and Magellan Pipeline Terminals, L.P., which
may, but only if consent of lessor is obtained, be mortgaged in
favor of the holders of the notes. Prior to
the acquisition, GWECs headquarters was located in Denver,
Colorado in a building leased by GWECs parent company.
Following the closing of the acquisition of GWEC by CVR Energy,
back office operations will be transitioned to CVR Energys
existing offices.
Legal
Proceedings
We are, and will continue to be, subject to litigation from time
to time in the ordinary course of our business, including
matters such as those described above under
Environmental Matters. We also incorporate by
reference into this section the information regarding the two
lawsuits in Note 14, Commitments and Contingent
Liabilities to the Companys Consolidated Financial
Statements as set forth below. Included in this note is a
description of the Samson litigation and the TransCanada
litigation, as well as other legal proceedings. In accordance
with U.S. GAAP, we record a liability when it is both
probable that a liability has been incurred and the amount of
the loss can be reasonably estimated. These provisions are
reviewed at least quarterly and adjusted to reflect the impacts
of negotiations, settlements, rulings, advice of legal counsel,
and other information and events pertaining to a particular
case. Although we cannot predict with certainty the ultimate
resolution of lawsuits, investigations or claims asserted
against us, we do not believe that any currently pending legal
proceeding or proceedings to which we are a party will have a
material adverse effect on our business, financial condition or
results of operations.
GWEC is, and will continue to be, subject to litigation from
time to time in the ordinary course of business, including
matters such as those described under Environmental
Matters. Although one cannot predict with certainty the
ultimate resolution of lawsuits, investigations or claims
asserted against us, it is not believed that any currently
pending legal proceeding or proceedings to which GWEC is a party
will have a material adverse effect on GWECs financial
condition, liquidity or results of operations.
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