CVR Energy(CVI) - 2018 Q4 - Annual Report

PART I Business CVR Energy is a holding company primarily engaged in petroleum refining and nitrogen fertilizer manufacturing, subject to extensive environmental regulations like the RFS, with Icahn Enterprises L.P. owning approximately 71% of its common stock - CVR Energy is a diversified holding company primarily engaged in petroleum refining (via CVR Refining) and nitrogen fertilizer manufacturing (via CVR Partners)[44] - As of December 31, 2018, the company owned approximately 81% of CVR Refining and 34% of CVR Partners, while Icahn Enterprises L.P. and its affiliates owned about 71% of CVR Energy's outstanding common stock[45] - In January 2019, the company purchased all remaining publicly held common units of CVR Refining, leading to its delisting from the NYSE[46] Petroleum Segment The Petroleum Segment operates two refineries with a combined capacity of 206,500 bpd, showing a slight decrease in 2018 throughput, and strategically shifted towards regional and lighter crude sourcing Refinery Throughput (bpd) | Throughput (bpd) | 2018 | 2017 | | :--- | :--- | :--- | | Total Crude Throughput | 199,158 | 204,749 | | All Other Feedstock & Blendstock | 13,437 | 13,432 | | Total Throughput | 212,595 | 218,181 | Refinery Production (bpd) | Production (bpd) | 2018 | 2017 | | :--- | :--- | :--- | | Gasoline | 107,382 | 111,089 | | Diesel Fuels | 89,749 | 90,409 | | Other Refined Products | 14,993 | 16,818 | | Total Production | 212,124 | 218,316 | - In 2018, the segment shifted its crude slate towards more regional and lighter crudes, with regional crudes increasing from 31% to 43% of total throughput and WTI decreasing from 49% to 35%[76][77] - The segment's gathering system supplied approximately 40% of the Coffeyville refinery's and 89% of the Wynnewood refinery's crude oil demand in 2018[68] Nitrogen Fertilizer Segment The Nitrogen Fertilizer Segment operates two facilities, one using pet coke gasification and the other natural gas, primarily producing UAN and ammonia, which accounted for 72% and 20% of 2018 net sales, respectively - The Coffeyville facility is the only nitrogen fertilizer plant in North America using a pet coke gasification process, sourcing its largest raw material from the adjacent Coffeyville Refinery and third parties[87] - The East Dubuque facility uses natural gas as its primary feedstock, resulting in a more variable cost structure compared to the Coffeyville facility[88] - For the year ended December 31, 2018, UAN and ammonia accounted for approximately 72% and 20% of the segment's net sales, respectively[99] - The segment's top five customers represented 32% of its net sales in 2018, with the single largest customer accounting for 14%[102] Environmental, Health, and Safety Matters The company's operations are subject to extensive and evolving EHS laws, including the Clean Air Act and RFS, posing significant compliance costs and potential liabilities for environmental remediation and worker safety - The company is subject to the EPA's Renewable Fuel Standard (RFS), requiring the purchase of volatile and significant cost Renewable Identification Numbers (RINs) on the open market as blending alone is insufficient[117] - The EPA regulates Greenhouse Gas (GHG) emissions under the Clean Air Act, requiring monitoring and reporting, with potential future regulations increasing operating and capital costs[123] - The company is subject to RCRA requirements for hazardous waste management and has ongoing corrective action obligations at the Coffeyville Refinery and the closed Phillipsburg terminal[128][129] - The company is subject to OSHA regulations and maintains a comprehensive safety program, though a 2012 incident at the Wynnewood refinery resulted in contested OSHA citations and placement in its Severe Violators Enforcement Program[136][138] Risk Factors The company faces significant risks from volatile commodity prices, intense competition, extensive environmental regulations (especially RFS), operational disruptions, indebtedness, and the substantial influence of its controlling stockholder, Mr. Carl C. Icahn - Both the petroleum and nitrogen fertilizer businesses are highly cyclical and volatile, with financial results heavily dependent on commodity price margins beyond the company's control[142][143][147] - Compliance with the EPA's Renewable Fuel Standard (RFS) presents a significant risk due to the volatility and high cost of purchasing RINs, with RFS compliance expenses of $60 million, $249 million, and $206 million for 2018, 2017, and 2016, respectively[165][203] - The company is a holding company dependent on cash flows from its subsidiaries, CVR Refining and CVR Partners, whose ability to make distributions is subject to their earnings, debt covenants, and legal restrictions[271] - Mr. Carl C. Icahn indirectly controls approximately 71% of the company's voting power, allowing him significant influence over corporate strategy and decisions, potentially conflicting with other stockholders' interests[272] Unresolved Staff Comments The company reports no material unresolved written comments from the SEC staff received 180 days or more before the fiscal year-end - There are no material unresolved written comments from the SEC staff[302] Properties The company's core properties include refineries and fertilizer plants detailed in Item 1, along with leased executive and other office spaces in Texas, Kansas, and Oklahoma - The company's primary properties are its refineries and fertilizer facilities, as described in Item 1, along with leased executive and other office spaces in Texas, Kansas, and Oklahoma[303] Legal Proceedings The company is involved in several legal and regulatory matters, including an RFS inquiry, alleged Clean Air Act violations, a property tax dispute, and lawsuits from former CVR Refining unitholders, while a business interruption claim was favorably resolved - The U.S. Attorney's office is seeking information regarding the company's RFS activities and Mr. Icahn's former role as a presidential advisor[305] - The DOJ and KDHE have alleged violations of the Clean Air Act and a 2012 Consent Decree at the Coffeyville refinery[306] - The company is facing six lawsuits from former CVR Refining unitholders alleging breach of contract related to the exercise of a call option to purchase their units[309] - A business interruption claim related to production issues in 2017 and early 2018 was favorably settled for CVR Partners in December 2018[310] Mine Safety Disclosures This item is not applicable to the company - Not applicable[311] PART II Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities CVR Energy's common stock is listed on the NYSE, and in August 2018, the company completed an exchange offer for CVR Refining units, resulting in Icahn Enterprises L.P. owning approximately 71% of outstanding shares - In August 2018, CVR Energy completed an exchange offer, acquiring 21,625,106 CVR Refining common units for 13,699,549 shares of CVR Energy common stock[317] - The company did not repurchase any of its common stock during the fiscal year ended December 31, 2018[319] Selected Financial Data The company presents selected consolidated financial data for the five-year period ending December 31, 2018, showing net sales of $7.124 billion and net income of $289 million in 2018 Selected Financial Data (in millions, except per share data) | | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales (in millions) | $7,124 | $5,988 | $4,782 | $5,433 | $9,110 | | Net income attributable to CVR Energy stockholders (in millions) | $289 | $235 | $25 | $170 | $174 | | Basic and diluted earnings per share ($) | $3.12 | $2.70 | $0.28 | $1.95 | $2.00 | | Dividends declared per share ($) | $2.50 | $2.00 | $2.00 | $2.00 | $5.00 | | Total assets (in millions) | $3,907 | $3,807 | $4,050 | $3,299 | $3,454 | | Total long-term debt and capital lease obligations (in millions) | $1,167 | $1,164 | $1,165 | $667 | $667 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's strategy and financial results, highlighting a significant increase in 2018 consolidated operating income to $587 million and cash flow from operations to $620 million, driven by improved refining margins and reduced RFS costs Consolidated Operating Income (in millions) | | 2018 (in millions) | 2017 (in millions) | 2016 (in millions) | | :--- | :--- | :--- | :--- | | Petroleum | $599 | $134 | $58 | | Nitrogen Fertilizer | $6 | $(10) | $26 | | Other | $(18) | $(17) | $(14) | | Consolidated | $587 | $107 | $70 | - Net income attributable to CVR Energy stockholders increased by $54 million in 2018, primarily due to a $479 million increase in segment operating income, partially offset by a $306 million increase in tax expense[374] - The Petroleum Segment's refining margin per total throughput barrel increased to $15.18 in 2018 from $9.92 in 2017, driven by higher crack spreads, wider crude differentials, and a $189 million reduction in RFS compliance costs[396] - The Nitrogen Fertilizer Segment's net sales increased by $20 million in 2018 due to favorable pricing contributing $37 million, partially offset by an $18 million reduction from lower sales volumes[417] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from volatile commodity prices, RINs prices, and interest rates, with the petroleum segment using intermediaries and hedging to mitigate some risks, while RINs price volatility remains a significant concern - The company's primary market risks are potential losses from adverse changes in commodity prices, RINs prices, and interest rates[478] - The Petroleum Segment uses Vitol as a crude oil purchasing intermediary to reduce risk from volatile commodity prices and employs hedging strategies to protect gross margins[480] - The company is exposed to significant market risk from the price volatility of Renewable Identification Numbers (RINs) required for RFS compliance[481] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2016-2018, including balance sheets, statements of operations, and cash flows, along with notes on accounting policies, debt, and segment information Consolidated Balance Sheet Highlights (in millions) | | Dec 31, 2018 (in millions) | Dec 31, 2017 (in millions) | | :--- | :--- | :--- | | Total Current Assets | $1,293 | $1,078 | | Total Assets | $3,907 | $3,807 | | Total Current Liabilities | $496 | $544 | | Total Long-Term Liabilities | $1,543 | $1,559 | | Total CVR Stockholders' Equity | $1,246 | $919 | | Total Equity | $1,868 | $1,704 | Consolidated Statement of Operations Highlights (in millions) | | 2018 (in millions) | 2017 (in millions) | 2016 (in millions) | | :--- | :--- | :--- | :--- | | Net Sales | $7,124 | $5,988 | $4,782 | | Operating Income | $587 | $107 | $70 | | Net Income | $411 | $217 | $9 | | Net Income attributable to CVR Energy Stockholders | $289 | $235 | $25 | Consolidated Statement of Cash Flows Highlights (in millions) | | 2018 (in millions) | 2017 (in millions) | 2016 (in millions) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $620 | $168 | $267 | | Net cash used in investing activities | $(100) | $(196) | $(201) | | Net cash used in financing activities | $(334) | $(226) | $(95) | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles, practices, or financial statement disclosure - None reported[674] Controls and Procedures As of December 31, 2018, management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective, with no material changes during the fourth quarter - Management concluded that as of December 31, 2018, the company's disclosure controls and procedures were effective at a reasonable assurance level[675] - Based on the 2013 COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2018[676] Other Information The company reports no other information for this item - None[677] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the definitive proxy statement for the 2019 annual meeting of stockholders - Information is incorporated by reference from the definitive proxy statement for the 2019 Annual Meeting of Stockholders[679] Executive Compensation Information regarding executive compensation is incorporated by reference from the definitive proxy statement for the 2019 annual meeting of stockholders - Information is incorporated by reference from the definitive proxy statement for the 2019 Annual Meeting of Stockholders[680] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information concerning security ownership and related matters is incorporated by reference from the definitive proxy statement for the 2019 annual meeting of stockholders - Information is incorporated by reference from the definitive proxy statement for the 2019 Annual Meeting of Stockholders[681] Certain Relationships and Related Transactions, and Director Independence Information detailing certain relationships, related transactions, and director independence is incorporated by reference from the definitive proxy statement for the 2019 annual meeting of stockholders - Information is incorporated by reference from the definitive proxy statement for the 2019 Annual Meeting of Stockholders[682] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the definitive proxy statement for the 2019 annual meeting of stockholders - Information is incorporated by reference from the definitive proxy statement for the 2019 Annual Meeting of Stockholders[683] PART IV Exhibits, Financial Statement Schedules This section lists the financial statements and a comprehensive index of exhibits filed with the Form 10-K, noting the omission of inapplicable financial statement schedules - This section provides an index of the financial statements (contained in Part II, Item 8) and a list of all exhibits filed with the annual report[686][688] - All financial statement schedules have been omitted because they are not required or are inapplicable[687] Form 10-K Summary The company has not provided a summary for this item - None[714]