Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
(Mark One)
þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended March 31, 2019
 
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from               to              

Commission file number: 001-33492
CVR ENERGY, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
https://cdn.kscope.io/e22c562c96d1bc781d00f57bba931628-cvilogoa07.jpg
 
61-1512186
(I.R.S. Employer
Identification No.)
2277 Plaza Drive, Suite 500, Sugar Land, Texas 77479
(Address of principal executive offices) (Zip Code)
(281) 207-3200
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
  Large accelerated filer o
  Accelerated filer þ
  Non-accelerated filer o

                                                           
 
 
  Smaller reporting company o
                                      
  Emerging growth company o
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o     No þ

There were 100,530,599 shares of the registrant’s common stock outstanding at April 23, 2019.
 

 
 
 
March 31, 2019 | 1

Table of Contents

TABLE OF CONTENTS
CVR Energy - Quarterly Report on Form 10-Q
March 31, 2019






PART I. Financial Information
 
 
PART II. Other Information
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets - March 31, 2019 and December 31, 2018
 
 
 
 
Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2019 and 2018
 
 
 
 
 
 
 
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This Quarterly Report on Form 10-Q (including documents incorporated by reference herein) contains statements with respect to our expectations or beliefs as to future events. These types of statements are “forward-looking” and subject to uncertainties. See “Important Information Regarding Forward-Looking Statements” section of this filing.



 
 
 
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Important Information Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including, but not limited to, those under Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. All statements other than statements of historical fact, including without limitation, statements regarding future operations, financial position, estimated revenues and losses, growth, capital projects, impacts of legal proceedings, projected costs, prospects, plans and objectives are forward-looking statements. The words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “may,” “continue,” “predict,” “potential,” “project,” and similar terms and phrases are intended to identify forward-looking statements. Although we believe our assumptions concerning future events are reasonable, a number of risks, uncertainties and other factors could cause actual results and trends to differ materially from those projected or forward-looking, including but not limited to:

volatile margins in the refining and nitrogen fertilizer industries and exposure to risks associated with the pricing and availability of crude oil, other feedstocks, pet coke, utilities, refined products, urea ammonium nitrate (“UAN”), ammonia, Renewable Identification Numbers (“RIN”) and environmental credits;
the availability of adequate cash, credit and other sources of liquidity including volatility in the capital and credit markets and changes to our capital requirements;
changes in the expected value of, benefits derived from, and our ability to successfully implement, business strategies, transactions and capital projects;
the effects of transactions involving forward and derivative instruments;
changes in (and in the application of) local, state and federal laws, rules, regulations and policies, including with respect to environmental matters (including climate change), health and safety, exports, transportation (including pipeline and trucking transportation of crude oil and other products), alternative energy or fuel sources, the end-use and application of fertilizers and taxes (including the tax status of CVR Partners);
changes in economic conditions impacting our business and the business of our suppliers, customers, counterparties and lenders;
interruption of or changes in the cost, availability or regulation of pipelines, vessels, trucks and other means of transporting crude oil, feedstocks, refined products, pet coke, UAN, ammonia and other products relating to our businesses;
changes in competition in the petroleum and nitrogen fertilizer businesses including to our competitive advantages;
the cyclical and/or seasonal nature of the nitrogen fertilizer and petroleum businesses;
weather conditions, fires, tornadoes, floods or other natural disasters affecting our operations or the areas in which our feedstocks or refined products and fertilizers are marketed or sold;
risks associated with governmental policies affecting the agricultural and petroleum refining industries;
direct or indirect effects from actual or threatened terrorist incidents, security or cyber-security breaches or acts of war;
dependence on significant customers and suppliers and the creditworthiness and performance by counterparties;
our ability to license the technology used in or secure permits required for the petroleum business and nitrogen fertilizer business operations;
adverse rulings, judgments or settlements in litigation or other legal or tax matters, including unexpected environmental remediation costs in excess of any reserves;
refinery and nitrogen fertilizer facilities’ operating hazards and interruptions or production declines, including unscheduled maintenance or downtime and the availability and recoverability of adequate insurance coverage; and
the factors described in greater detail under “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018 and our other filings with the SEC.

All forward-looking statements contained in this Report only speak as of the date of this Report. We undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that occur after the date of this Report, or to reflect the occurrence of unanticipated events, except to the extent required by law.


 
 
 
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PART I. FINANCIAL INFORMATION
Item 1.  Financial Statements

CVR Energy, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in millions)
March 31, 2019
 
December 31, 2018
ASSETS
Current assets:
 
 
 
Cash and cash equivalents (CVR Partners LP (“CVR Partners”): $97 and $62, respectively)
$
467

 
$
668

Accounts receivable (CVR Partners: $17 and $62, respectively)
193

 
169

Due from parent
4

 
4

Inventories (CVR Partners: $72 and $64, respectively)
403

 
380

Prepaid expenses and other current assets
58

 
72

Total current assets
1,125

 
1,293

Property, plant and equipment, net of accumulated depreciation (CVR Partners: $997 and $1,015, respectively)
2,418

 
2,430

Other long-term assets
331

 
277

Total assets
$
3,874

 
$
4,000

LIABILITIES AND EQUITY
Current liabilities:
 
 
 
Accounts payable (CVR Partners: $23 and $27, respectively)
$
359

 
$
320

Other current liabilities (CVR Partners: $102 and $96, respectively)
221

 
176

Total current liabilities
580

 
496

Long-term liabilities:
 
 
 
Long-term debt and finance lease obligations, net of current portion (CVR Partners: $630 and $629, respectively)
1,191

 
1,167

Deferred income taxes
395

 
380

Other long-term liabilities
50

 
14

Total long-term liabilities
1,636

 
1,561

Commitments and contingencies (See Note 12)

 

Equity:
 
 
 
CVR stockholders’ equity:
 
 
 
Common stock $0.01 par value per share, 350,000,000 shares authorized, 100,629,209 shares issued
1

 
1

Additional paid-in-capital
1,506

 
1,474

Retained deficit
(162
)
 
(187
)
Treasury stock, 98,610 shares at cost
(2
)
 
(2
)
Total CVR stockholders’ equity
1,343

 
1,286

Noncontrolling interest
315

 
657

Total equity
1,658

 
1,943

Total liabilities and equity
$
3,874

 
$
4,000


The accompanying notes are an integral part of these condensed consolidated financial statements.

 
 
 
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CVR Energy, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
 
Three Months Ended March 31,
(in millions, except per share data)
 
2019
 
2018
Net sales
 
$
1,486

 
$
1,537

Operating costs and expenses:
 
 
 
 
Cost of materials and other
 
1,101

 
1,180

Direct operating expenses (exclusive of depreciation and amortization as reflected below)
 
126

 
130

Depreciation and amortization
 
65

 
64

Cost of sales
 
1,292

 
1,374

Selling, general and administrative expenses (exclusive of depreciation and amortization as reflected below)
 
30

 
24

Depreciation and amortization
 
2

 
3

Loss on asset disposals
 
2

 

Operating income
 
160

 
136

Other income (expense):
 
 
 
 
Interest expense, net
 
(26
)
 
(27
)
Other income, net
 
3

 
2

Income before income tax expense
 
137

 
111

Income tax expense
 
35

 
18

Net income
 
102

 
93

Less: Net income attributable to noncontrolling interest
 
1

 
33

Net income attributable to CVR Energy stockholders
 
$
101

 
$
60

 
 
 
 
 
Basic and diluted earnings per share
 
$
1.00

 
$
0.69

Dividends declared per share
 
$
0.75

 
$
0.50

 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
Basic and diluted
 
100.5

 
86.8


The accompanying notes are an integral part of these condensed consolidated financial statements.



 
 
 
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CVR Energy, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

 
Three Months Ended March 31,
(in millions)
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
102

 
$
93

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
67

 
67

Deferred income tax expense (benefit)
15

 
(2
)
Other non-cash items
8

 
2

Changes in assets and liabilities:
 
 
 
Current assets and liabilities
34

 
(133
)
Non-current assets and liabilities
2

 
(1
)
Net cash provided by operating activities
228

 
26

Cash flows from investing activities:
 
 
 
Capital expenditures
(29
)
 
(20
)
Turnaround expenditures
(13
)
 
(1
)
Net cash used in investing activities
(42
)
 
(21
)
Cash flows from financing activities:
 
 
 
Acquisition of CVR Refining common units
(301
)
 

Dividends to CVR Energy’s stockholders
(75
)
 
(43
)
Distributions to CVR Refining or CVR Partners’ noncontrolling interest holders
(9
)
 
(23
)
Other financing activities
(2
)
 
(1
)
Net cash used in financing activities
(387
)
 
(67
)
Net decrease in cash and cash equivalents
(201
)
 
(62
)
Cash and cash equivalents, beginning of period
668

 
482

Cash and cash equivalents, end of period
$
467

 
$
420


The accompanying notes are an integral part of these condensed consolidated financial statements.




 
 
 
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



(1) Organization and Nature of Business

Organization

CVR Energy, Inc. (“CVR Energy,” “CVR,” or the “Company”) is a diversified holding company primarily engaged in the petroleum refining and nitrogen fertilizer manufacturing industries through its holdings in CVR Refining, LP (“The Petroleum Segment” or “CVRR”) and CVR Partners. CVR Refining is an independent petroleum refiner and marketer of high value transportation fuels. CVR Partners produces and markets nitrogen fertilizers in the form of urea ammonium nitrate (“UAN”) and ammonia. The Company’s operations include two business segments: the petroleum segment and the nitrogen fertilizer segment. CVR’s common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “CVI.”

Icahn Enterprises L.P. (“IEP”) and its affiliates owned approximately 71% of the Company’s outstanding common shares as of March 31, 2019.

CVR Refining, LP

On January 17, 2019, the general partner of CVRR assigned to the Company its right to purchase all of the issued and outstanding CVRR common units not already owned by CVRR’s general partner or its affiliates. On January 29, 2019, the Company purchased all remaining CVRR common units not already owned by the Company or its affiliates for a cash purchase price of $10.50 per unit (the “Call Price”), or approximately $241 million in the aggregate (the “Public Unit Purchase”). In conjunction with the exercise of its call right for all CVRR common units not already owned by the Company or its affiliates, the Company entered into a purchase agreement with American Entertainment Properties Corporation (“AEP”) and IEP, pursuant to which, on January 29, 2019, all of the Common Units held by AEP and IEP were purchased by the Company for a cash price per unit equal to the Call Price, or approximately $60 million in the aggregate (the “Affiliate Unit Purchase” together with the Public Unit Purchase, the “CVRR Unit Purchase”). The total purchase price of $301 million was funded with approximately $105 million in borrowings under a new credit agreement entered into by the Company on January 29, 2019 with the remaining amount being funded from the Company’s cash on hand. Amounts drawn under the new credit agreement were fully repaid in February 2019. See Note 7 (“Long-Term Debt”) for further information on the credit agreement. The consolidated results of operations and financial position of CVR Refining are reflected as CVR’s petroleum segment (the “Petroleum Segment”). Following this transaction, CVRR became a wholly-owned subsidiary of the Company and therefore is no longer accounted for as a variable interest entity.

Effective February 8, 2019, CVRR’s reporting obligations under the Exchange Act were suspended. Upon the closing of the CVRR Unit Purchase, the Company, and certain of the Company’s subsidiaries, executed a full and unconditional guarantee of CVRR’s senior notes due 2022 (the “2022 Senior Notes”). Pursuant to SEC regulations, the Company has elected to provide condensed consolidating financial statements in lieu of providing standalone CVRR financial statements. See Note 16 (“Guarantor Financial Information”) for further discussion and the condensed consolidating financial statements.

CVR Partners, LP

As of March 31, 2019, public security holders held approximately 66% of CVR Partners’ outstanding common units, and Coffeyville Resources, LLC (“CRLLC”), a wholly-owned subsidiary of CVR Energy, held approximately 34% of CVR Partners’ outstanding common units. In addition, CRLLC owns 100% of CVR Partners’ general partner, CVR GP, LLC, which holds a non-economic general partner interest. The noncontrolling interest reflected on the condensed consolidated balance sheets of CVR is impacted by the net income of, and distributions from, CVR Partners.


(2) Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”). These condensed consolidated financial statements should be read in conjunction with the December 31, 2018 audited consolidated financial statements and notes thereto included in CVR Energy’s Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on February 21, 2019 the

 
 
 
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

(the “2018 Form 10-K”). Our condensed consolidated financial statements include the consolidated results of CVR Partners, which is defined as a variable interest entity.

In the opinion of the Company’s management, the accompanying condensed consolidated financial statements reflect all adjustments that are necessary to fairly present the financial position of the Company as of March 31, 2019 and December 31, 2018, the results of operations of the Company for the three month periods ended March 31, 2019 and 2018 and the cash flows of the Company for the three month periods ended March 31, 2019 and 2018. Such adjustments are of a normal recurring nature, unless otherwise disclosed.

Certain reclassifications have been made within the condensed consolidated statements of operations for the three months ended March 31, 2018 to include gain (loss) on derivatives within the Cost of Materials and Other financial statement line item to conform with current presentation.

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Results of operations and cash flows for the interim periods presented are not necessarily indicative of the results that will be realized for the year ending December 31, 2019 or any other interim or annual period.

(3) Recent Accounting Pronouncements and Accounting Changes

Recent Accounting Pronouncement - Adoption of New Lease Standard

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases” (“ASU 2016-02”), creating a new topic, FASB ASC Topic 842, “Leases” (“Topic 842”), which supersedes lease requirements in FASB ASC Topic 840, “Leases.” The new standard revises accounting for operating leases by a lessee, among other changes, and requires a lessee to recognize a liability related to future lease payments and a right-of-use (“ROU”) asset representing its right to use of the underlying asset for the lease term on the condensed consolidated balance sheet. The ROU asset is classified as Other long-term assets on the condensed consolidated balance sheet. The current and long-term lease liabilities are classified as Other current liabilities and Other long-term liabilities, respectively on the condensed consolidated balance sheet.
 
We adopted Topic 842 as of January 1, 2019, electing the option to apply the transition provisions at the adoption date instead of the earliest comparative period presented in the financial statements. In connection with the adoption of Topic 842, we made the following elections:

Under the short-term lease exception provided for in Topic 842, only ROU assets and related lease liabilities for leases with a term greater than one year were and will be recognized;
The accounting treatment for existing land easements was carried forward;
Lease and non-lease components were and will not be bifurcated for all of the Company’s asset groups, respectively; and
The portfolio approach was and will be used in the selection of the discount rate used to calculate minimum lease payments and the related ROU asset and operating lease liability amounts.

The Company’s adoption of Topic 842 resulted in the recognition of additional ROU assets and lease liabilities of approximately $56 million as of January 1, 2019, in addition to the recognition of a finance lease asset of $26 million with an obligation of $23 million. There were no impacts to our condensed consolidated statements of operations or cash flows. See Note 6 (“Leases”) for further discussion.

Accounting Change - Turnaround Expenses

Effective January 1, 2019, the Company revised its accounting policy method for the costs of planned major maintenance activities (turnarounds) specific to the Petroleum Segment from being expensed as incurred (the direct expensing method) to the deferral method. Turnarounds are planned shutdowns of refinery processing units for significant overhaul and refurbishment. Under the deferral method, the costs of turnarounds are deferred and amortized on a straight-line basis over a four-year period

 
 
 
March 31, 2019 | 8

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

of time, which represents the estimated time until the next turnaround occurs. The new method of accounting for turnarounds is considered preferable as it is more consistent with the accounting policy of our peer companies and better reflects the economic substance of the benefits earned from turnaround expenditures. The condensed consolidated balance sheet for the period ended December 31, 2018 and condensed consolidated statement of operations and cash flows for the three months period ended March 31, 2018 have been retrospectively adjusted to apply the new method retrospectively. These turnaround costs, and related accumulated amortization, are included in the condensed consolidated balance sheet as Other long-term assets. The amortization expense related to turnaround costs is included in depreciation and amortization in the condensed consolidated statement of operations. CVR Partners will continue to follow the direct expensing method, therefore this change had no impact on CVR Partners’ current condensed consolidated financial statements.

The policy change for turnaround expenses retrospectively impacted the Company’s December 31, 2018 condensed consolidated balance sheet as presented in these condensed consolidated financial statements. The adoption of Topic 842 on January 1, 2019 incrementally impacted the Company’s consolidated balance sheet as of that date. The following presents the financial statement line items impacted by the turnaround accounting change and the Company’s Topic 842 adoption as of the respective dates.

Effect of Turnaround Accounting Change on Condensed Consolidated Balance Sheet as of December 31, 2018
(in millions)
As Previously Reported
 
Effect of Turnaround Accounting Change
(Unaudited)
 
As Stated (Unaudited)
Property, plant and equipment, net of accumulated depreciation (CVR Partners: $997 and $1,015, respectively)
$
2,445

 
$
(15
)
 
$
2,430

Other long-term assets
169

 
108

(1)
277

Total assets
$
3,907

 
$
93

 
$
4,000

Long-term liabilities:
 
 
 
 
 
Deferred income taxes
$
362

 
$
18

(2)
$
380

Total long-term liabilities
1,543

 
18

 
1,561

Equity:
 
 
 
 

CVR stockholders’ equity:

 
 
 

Additional paid-in-capital
1,473

 
1

 
1,474

Retained deficit
(226
)
 
39

 
(187
)
Total CVR stockholders’ equity
1,246

 
40

 
1,286

Noncontrolling interest
622

 
35

 
657

Total equity
1,868

 
75

 
1,943

Total liabilities and equity
$
3,907

 
$
93

 
$
4,000

 
(1) This represents the capitalized turnaround asset recognized due to the turnaround policy change.
(2) This represents the increase in deferred tax liability due to the recognition of the capitalized turnaround asset.

 
 
 
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


Effect of Topic 842 Adoption on Condensed Consolidated Balance Sheet as of January 1, 2019
(in millions)
December 31, 2018
As Stated (1)
(Unaudited)
 
Effect of Adoption of
Topic 842 - Leases (Unaudited)
 
January 1, 2019
As Adjusted
Current assets:
 
 
 
 
 
Prepaid expenses and other current assets
$
72

 
$
(3
)
(2)
$
69

Total currents assets
1,293

 
(3
)
 
1,290

Property, plant and equipment, net of accumulated depreciation (CVR Partners: $997 and $1,015, respectively)
2,430

 
26

(3)
2,456

Other long-term assets
277

 
56

(4)
333

Total assets
$
4,000

 
$
79

 
$
4,079

Current liabilities:
 
 
 
 
 
Other current liabilities (CVR Partners: $102 and $96, respectively)
$
176

 
$
16

(5)
$
192

Total current liabilities
496

 
16

 
512

Long-term liabilities:
 
 
 
 
 
Long-term debt and finance lease obligations, net of current portion (CVR Partners: $630 and $629, respectively)
1,167

 
23

(3)
1,190

Other long-term liabilities
14

 
40

(5)
54

Total long-term liabilities
1,561

 
63

 
1,624

Equity:
 
 
 
 

Total liabilities and equity
$
4,000

 
$
79

 
$
4,079

 
(1)
Represents the retrospectively adjusted balance sheet amounts upon reflection of the turnaround accounting change prior to the adoption of Topic 842.
(2)
Represents lease prepayments reclassified to right-of-use assets.
(3)
The additional $26 million right-of-use asset and $23 million in lease liability represents a lease with a third-party that met the definition of a finance lease under ASC 842 as compared to an operating lease under ASC 840.
(4)
Represents recognition of initial right-of-use assets for operating leases, including the reclassification of certain lease prepayments as noted above.
(5)
Represents the initial recognition of lease liabilities.

Due to the retrospective adjustments for the turnaround accounting change, the condensed consolidated statement of operations and condensed consolidated statement of cash flows for the three months ended March 31, 2018 have adjusted. The impacts to previously reported amounts are shown below only for those line items impacted.


 
 
 
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


Effect of Turnaround Accounting on Condensed Consolidated Statement of Operations and Condensed Consolidated Statement of Cash Flows for Three Months Ended March 31, 2018

(in millions)
As Previously Reported
 
Effect of Turnaround Accounting Change (Unaudited)
 
As Stated
Condensed Consolidated Statement of Operations
 
 
 
 
 
Direct operating expenses (exclusive of depreciation and amortization as reflected below)
$
132

 
$
(2
)
 
$
130

Depreciation and amortization
49

 
15

 
64

Income tax expense
21

 
(3
)
 
18

Net income
103

 
(10
)
 
93

Less: Net income attributable to noncontrolling interest
37

 
(4
)
 
33

Net income attributable to CVR Energy stockholders
$
66

 
$
(6
)
 
$
60

 
 
 
 
 
 
Condensed Consolidated Statement of Cash Flows
 
 
 
 
 
Net cash provided by operating activities
$
24

 
$
2

 
$
26

Net cash used by investing activities
$
(20
)
 
$
(1
)
 
$
(21
)

New Accounting Standards Issued But Not Yet Implemented

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). The ASU eliminates such disclosures as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. Certain disclosures are required to be applied on a retrospective basis and others on a prospective basis. The ASU is effective for the Company beginning January 1, 2020, with early adoption permitted. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption will have a material impact on the Company’s disclosures.

(4) Inventories

Inventories consisted of the following:
(in millions)
March 31, 2019
 
December 31, 2018
Finished goods
$
184

 
$
186

Raw materials
103

 
105

In-process inventories
36

 
12

Parts, supplies and other
80

 
77

Total inventories
$
403

 
$
380



 
 
 
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

(5) Property, Plant and Equipment

Property, plant and equipment consisted of the following:
(in millions)
March 31, 2019
 
December 31, 2018
Machinery and equipment
$
3,830

 
$
3,785

Buildings
83

 
82

Construction in progress
73

 
102

Land and improvements
44

 
43

Furniture and fixtures
33

 
33

ROU finance leases
27

 

Other
17

 
22

 
4,107

 
4,067

Less: Accumulated depreciation
1,689

 
1,637

Total property, plant and equipment, net
$
2,418

 
$
2,430


At March 31, 2019, the Company continued to actively market assets with a carrying value of $33 million. The carrying value of these assets held for sale were included in other long-term assets on our Condensed Consolidated Balance Sheets. No loss had been recognized associated with these held for sale assets.

(6) Leases

Lease Overview

We lease certain pipelines, storage tanks, railcars, office space, land, and equipment across our refining, fertilizer and corporate operations. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to 20 years or more. The exercise of lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements is limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Certain of our lease agreements include rental payments adjusted periodically for factors such as inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. Additionally, we do not have any material lessor or sub-leasing arrangements.

The adoption of Topic 842 impacted our January 1, 2019 condensed consolidated balance sheet as shown below only for those line items impacted.

Effect of Initial Adoption of Topic 842 - January 1, 2019

ROU Assets. As of January 1, 2019, upon initial recognition, our ROU assets for operating and finance leases were comprised of the following:
(in millions)
January 1, 2019
(initial recognition)
Pipeline and storage agreements (1)
$
29

Railcar leases (2)
15

Real Estate and other leases (3)
35

Total ROU assets
$
79

 
(1) Includes finance leased assets of $1 million as of January 1, 2019.
(2) Includes $14 million of railcar leases recognized by CVR Partners.
(3) Includes finance leased assets of $25 million as of January 1, 2019.


 
 
 
March 31, 2019 | 12

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Lease Liabilities. As of January 1, 2019, upon initial recognition, our lease liabilities for operating and finance leases were comprised of the following:
(in millions)
Consolidated Balance Sheet Classification
January 1, 2019
(initial recognition)
Current liabilities:
 
 
Operating leases
Other current liabilities
$
14

Finance leases
Other current liabilities
2

Long-term liabilities:
 
 
Operating leases
Other long-term liabilities
40

Finance leases
Long-term debt and finance lease obligations, net of current portion
23

Total lease liabilities
 
$
79


Balance Sheet Summary as of March 31, 2019

The following tables summarize the right of use asset and lease liability balances for the Company’s operating and finance leases at March 31, 2019:
(in millions)
March 31, 2019
Operating Leases:
 
ROU assets, net
 
Pipeline and storage
$
26

Railcars
14

Real estate and other
11

Lease liability
 
Pipelines and storage
$
27

Railcars
14

Real estate and other
9

(in millions)
March 31, 2019
Financing Leases:
 
ROU assets, net
 
Pipeline and storage
$
31

Real estate and other
27

Lease liability
 
Pipelines and storage
$
42

Real estate and other
27


Lease Expense Summary for the Three-Month Period Ended March 31, 2019

We recognize lease expense for these leases on a straight-line basis over the lease term. For the three months ended March 31, 2019, we recognized net lease expense comprised of the following components:
(in millions)
March 31, 2019
Operating lease expense
$
4

Financing lease expense:
 
Amortization of ROU
$
2

Interest expense on lease liability
2


 
 
 
March 31, 2019 | 13

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


Short-term lease expense, recognized within direct operating expenses, was $2 million for the three-month period ended March 31, 2019.

Lease Terms and Discount Rates

The following outlines the remaining lease terms and discount rates used in the measurement of the Company’s ROU assets and liabilities:
 
March 31, 2019
 
January 1, 2019
Weighted-average remaining lease term (years)
 
 
 
Operating Leases
4

 
4

Finance Leases
10

 
10

Weighted-average discount rate
 
 
 
Operating Leases
5.8
%
 
5.8
%
Finance Leases
9.6
%
 
9.8
%

Maturities of Lease Liabilities

The following summarizes the remaining minimum lease payments through maturity of the Company’s right-of-use assets and liabilities at March 31, 2019:
(in millions)
Operating Leases
 
Financing
Leases
Remainder of 2019
$
13

 
$
8

2020
14

 
11

2021
12

 
11

2022
9

 
11

2023
6

 
10

Thereafter
4

 
53

Total lease payments
58

 
104

Less: imputed interest
(8
)
 
(35
)
Total lease liability
$
50

 
$
69




 
 
 
March 31, 2019 | 14

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


(7) Long-Term Debt

Long-term debt consists of the following:
(in millions)
March 31, 2019
 
December 31, 2018
CVR Partners:
 
 
 
9.25% Senior Secured Notes due 2023 (1)
$
645

 
$
645

6.50% Senior Notes due 2021
2

 
2

Unamortized discount and debt issuance costs
(17
)
 
(18
)
Total CVR Partners Debt
$
630

 
$
629

 


 


6.50% Senior Notes due 2022 (2)
$
500

 
$
500

Finance lease obligations
69

 
44

Unamortized debt issuance cost
(3
)
 
(3
)
Current portion of finance lease obligations
(5
)
 
(3
)
Total Other Debt
$
561

 
$
538

 
 
 
 
Total Long-Term Debt
$
1,191

 
$
1,167

 
(1)
This debt was issued at a $16 million discount which is being amortized, as interest expense, over the remaining term of the debt. Debt issuance costs associated with this debt totaled $9 million.
(2)
Debt issuance costs associated with this debt totaled $9 million. On January 29, 2019, the 2022 Senior Notes were amended such that the CVR Refining was replaced by CVR Energy Inc. as the primary guarantor, on a senior unsecured basis, of the 2022 Senior Notes. The CVR Energy Inc. guarantee is full and unconditional and joint and several. See Note 14 ("Supplemental Cash Flow Information") for further discussion and implications of this change to guarantor.

Credit Facilities
 
 
 
 
 
 
 
 
 
 
(in millions)
Total Capacity
 
Amount Borrowed as of March 31, 2019
 
Outstanding Letters of Credit
 
Available Capacity as of March 31, 2019
 
Maturity Date
 
 
Amended and Restated Asset Based (ABL) Credit Facility (3)
$
400

 
$

 
$
7

 
$
393

 
November 14, 2022
Asset Based (ABL) Credit Facility (4)
50

 

 

 
50

 
September 30, 2021
 
(3)
Loans under the Amended and Restated ABL Credit Facility initially bear interest at an annual rate equal to (i) 1.50% plus LIBOR or (ii) 0.50% plus a base rate, subject to quarterly excess availability.
(4)
Loans under the ABL Credit Facility initially bear interest at an annual rate equal to (i) 2.00% plus LIBOR or (ii) 1.00% plus a base rate, subject to a 0.50% step-down based on the previous quarter’s excess availability.

Credit Agreement

On January 29, 2019, the Company entered into a credit agreement (the “Credit Agreement”) with Jefferies Finance LLC to provide a term loan credit facility with a maturity date of March 10, 2019. Borrowings under the Credit Agreement were used to fund a portion of the CVRR Unit Purchase. All amounts borrowed were repaid on February 11, 2019.

Covenant Compliance

The Company is in compliance with all covenants of the ABL credit facilities and the senior notes as of March 31, 2019.



 
 
 
March 31, 2019 | 15

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


(8) Shareholders Equity

The following table summarizes the shareholders equity and non-controlling interest balances for the three months ended March 31, 2019 and March 31, 2018.

(in millions)
 
Total CVR
Stockholders’
Equity
 
Noncontrolling
Interest
 
Total
Equity
Balance at December 31, 2018
 
$
1,286

 
$
657

 
$
1,943

Net income
 
101

 
1

 
102

Dividends to CVR Energy stockholders
 
(75
)
 

 
(75
)
Distributions to CVR Partners’ public unitholders
 

 
(9
)
 
(9
)
Effect of turnaround accounting change
 
34

 

 
34

Acquisition of CVR Refining common units (1)
 
(1
)
 
(334
)
 
(335
)
Other
 
(2
)
 

 
(2
)
Balance at March 31, 2019
 
$
1,343

 
$
315

 
$
1,658

 
(1) Included within this amount is $34 million which reflects the impact of the change in accounting policy for turnaround expenditures.


(in millions)
 
Total CVR
Stockholders’
Equity
 
Noncontrolling
Interest
 
Total
Equity
Balance at December 31, 2017
 
$
919

 
$
785

 
$
1,704

Net income
 
60

 
33

 
93

Dividends to CVR Energy stockholders
 
(43
)
 

 
(43
)
Distributions to CVR Refining public unitholders
 

 
(23
)
 
(23
)
Effect of turnaround accounting change
 
68

 
50

 
118

Balance at March 31, 2018
 
$
1,004

 
$
845

 
$
1,849


Dividends to CVR Energy Stockholders

On February 20, 2019, the Company’s board of directors declared a cash dividend for the fourth quarter of 2018 to the Company’s stockholders of $0.75 per share, or $75 million in the aggregate. The dividend was paid on March 11, 2019. Of this amount, IEP received $54 million in respect of its ownership interest in the Company’s shares. Dividends are subject to change at the discretion of the board of directors.

For the first quarter of 2019, the Company, upon approval by the Company’s board of directors on April 24, 2019, declared a cash dividend of $0.75 per share, or $75 million payable, on May 13, 2019 to shareholders of record as of May 6, 2019. Of this amount, IEP will receive $54 million due to its ownership interest in the Company’s shares.

Distributions to CVR Partners’ Unitholders

For the fourth quarter of 2018, CVR Partners declared a cash distribution of $0.12 per common unit, or $13.9 million, which was paid on March 11, 2019. Of this amount, the Company received approximately $5 million, with the remaining amount payable to public unitholders.

For the first quarter of 2019, CVR Partners, upon approval by CVR GP’s board of directors on April 24, 2019, declared a distribution of $0.07 per common unit, or $8 million, payable on May 13, 2019 to unitholders of record as of May 6, 2019. Of

 
 
 
March 31, 2019 | 16

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

this amount, the Company will receive approximately $3 million, with the remaining amount payable to public unitholders. Distributions are subject to change at the discretion of the board of directors of CVR Partners’ general partner.

(9) Revenue

The following tables present the Company’s revenue disaggregated by major product. The following tables include a reconciliation of the disaggregated revenue with the Company’s reportable segments.
 
Three Months Ended March 31, 2019
(in millions)
Petroleum
 
Nitrogen Fertilizer
 
Other / Eliminations
 
Consolidated
Major Product
 
 
 
 
 
 
 
Gasoline
$
673

 
$

 
$

 
$
673

Distillates (1)
651

 

 

 
651

Ammonia

 
13

 

 
13

UAN

 
64

 

 
64

Other urea products

 
5

 

 
5

Freight revenue
6

 
8

 

 
14

Other (2)
43

 
2

 
(3
)
 
42

Revenue from product sales
1,373

 
92

 
(3
)
 
1,462

 
 
 
 
 
 
 
 
Crude oil sales
23

 

 

 
23

Other revenue (2)
1

 

 

 
1

Total revenue
$
1,397

 
$
92

 
$
(3
)
 
$
1,486


 
Three Months Ended March 31, 2018
(in millions)
Petroleum
 
Nitrogen Fertilizer
 
Other / Eliminations
 
Consolidated
Major Product
 
 
 
 
 
 
 
Gasoline
$
712

 
$

 
$

 
$
712

Distillates (1)
652

 

 

 
652

Ammonia

 
12

 

 
12

UAN

 
53

 

 
53

Other urea products

 
5

 

 
5

Freight revenue
5

 
9

 

 
14

Other (2)
56

 

 
(1
)
 
55

Revenue from product sales
1,425

 
79

 
(1
)
 
1,503

 
 
 
 
 
 
 
 
Crude oil sales
32

 

 

 
32

Other revenue
1

 
1

 

 
2

Total revenue
$
1,458

 
$
80

 
$
(1
)
 
$
1,537

 
(1)
Distillates consist primarily of diesel fuel, kerosene and jet fuel.
(2)
Other revenue consists primarily of feedstock and asphalt sales and Cushing, OK storage tank lease revenue. See Note 5 (“Property, Plant and Equipment”) for further discussion on the Cushing, OK storage tanks.




 
 
 
March 31, 2019 | 17

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Petroleum

The petroleum segment’s revenue from product sales is recorded upon delivery of the products to customers, which is the point at which title is transferred and the customer has assumed the risk of loss. This generally takes place as product passes into the pipeline, as a product transfer order occurs within a pipeline system, or as product enters equipment or locations supplied or designated by the customer. The petroleum segment has elected to apply the sales tax practical expedient, whereby qualifying excise and other taxes collected from customers and remitted to governmental authorities are not included in reported revenues.

Many of the petroleum segment’s contracts have index-based pricing which is considered variable consideration that should be estimated in determining the transaction price. The petroleum segment determined that it does not need to estimate the variable consideration because the uncertainty related to the consideration is resolved on the pricing date or the date when the product is delivered.

The petroleum segment may incur broker commissions or transportation costs prior to product transfer on some of its sales. The petroleum segment has elected to apply the practical expedient allowing it to expense the broker costs since the contract durations are less than a year in length. Transportation costs are accounted for as fulfillment costs and are expensed as incurred since they do not meet the requirement for capitalization.

The petroleum segment’s contracts with its customers state the terms of the sale, including the description, quantity, and price of each product sold. Depending on the product sold, payment from customers is generally due in full within 2 to 32 days of product delivery or invoice date. The petroleum segment’s contracts with customers commonly include a provision which states that the petroleum segment will accept customer returns of off-spec product, refund the customer (or provide on-spec product), and pay for damages to any customer equipment which resulted from the off-spec product. Typically, if the customer is not satisfied with the product, the price is adjusted downward instead of the product being returned or exchanged. The petroleum segment has determined that product returns or refunds are very rare and will account for them as they occur. The petroleum segment generally provides no warranty other than the implicit promise that goods delivered are free of liens and encumbrances and meet the agreed upon specification.

Freight revenue recognized by the petroleum segment is primarily tariff and line loss charges rebilled to customers to reimburse the petroleum segment for expenses incurred from a pipeline operator. An offsetting expense is included in cost of materials and other.

Nitrogen Fertilizer

The nitrogen fertilizer segment sells its products on a wholesale basis under a contract or by purchase order. The nitrogen fertilizer segment’s contracts with customers, including purchase orders, generally contain fixed pricing and most have terms of less than one year. The nitrogen fertilizer segment recognizes revenue at the point in time at which the customer obtains control of the product, which is generally upon delivery and acceptance by the customer. The customer acceptance point is stated in the contract and may be at one of the nitrogen fertilizer segment’s manufacturing facilities, at one of the nitrogen fertilizer segment’s off-site loading facilities, or at the customer’s designated facility. Freight revenue recognized by the nitrogen fertilizer segment represents the pass-through finished goods delivery costs incurred prior to customer acceptance and is reimbursed by customers. An offsetting expense for freight is included in cost of materials and other. Qualifying taxes collected from customers and remitted to governmental authorities are not included in reported revenues.

Depending on the product sold and the type of contract, payments from customers are generally either due prior to delivery or within 15 to 30 days of product delivery.

The nitrogen fertilizer segment generally provides no warranty other than the implicit promise that goods delivered are free of liens and encumbrances and meet the agreed upon specifications. Product returns are rare, and as such, the nitrogen fertilizer segment does not record a specific warranty reserve or consider activities related to such warranty, if any, to be a separate performance obligation.

The nitrogen fertilizer segment has an immaterial amount of variable consideration for contracts with an original duration of less than a year. A small portion of the nitrogen fertilizer partnership’s revenue includes contracts extending beyond one year,

 
 
 
March 31, 2019 | 18

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

some of which contain variable pricing in which the majority of the variability is attributed to the market-based pricing. The nitrogen fertilizer segment’s contracts do not contain a significant financing component.

The nitrogen fertilizer segment has an immaterial amount of fee-based revenue, included in other revenue in the table above, that is recognized based on the net amount of the proceeds received, consistent with prior accounting practice.

Transaction price allocated to remaining performance obligations

As of March 31, 2019, CVR Partners had approximately $10 million of remaining performance obligations for contracts with an original expected duration of more than one year. CVR Partners expects to recognize approximately 39% of these performance obligations as revenue by the end of 2019, an additional 30% by 2020 and the remaining balance thereafter.

Contract balances

The CVR Partners’ deferred revenue is a contract liability that primarily relates to fertilizer sales contracts requiring customer prepayment prior to product delivery to guarantee a price and supply of nitrogen fertilizer. Deferred revenue is recorded at the point in time in which a prepaid contract is legally enforceable and the associated right to consideration is unconditional prior to transferring product to the customer. An associated receivable is recorded for uncollected prepaid contract amounts. Contracts requiring prepayment are generally short-term in nature and, as discussed above, revenue is recognized at the point in time in which the customer obtains control of the product.

A summary of CVR Partners’ deferred revenue activity during the three months ended March 31, 2019 is presented below:
(in millions)
 
Balance at December 31, 2018
$
69

Add:
 
New prepay contracts entered into during the period (1)
9

Less:
 
Revenue recognized that was included in the contract liability balance at the beginning of the period
12

Revenue recognized related to contracts entered into during the period
1

Balance at March 31, 2019
$
65


(10) Derivative Financial Instruments

Our segments are subject to price fluctuations caused by supply conditions, weather, economic conditions, interest rate fluctuations and other factors. To manage price risk on crude oil and other inventories and to fix margins on certain future production, the Petroleum Segment from time to time enters into various commodity derivative transactions. The Petroleum Segment holds derivative instruments, such as exchange-traded crude oil futures and certain over-the-counter forward swap agreements, which it believes provide an economic hedge on future transactions, but such instruments are not designated as hedges under GAAP. There are no premiums paid or received at inception of the derivative contracts and upon settlement. The Petroleum Segment may enter into forward purchase or sale contracts associated with RINs. As of March 31, 2019, the Petroleum Segment had open commitments to purchase 26 million RINs.

Commodity derivatives include commodity swaps and forward purchase and sale commitments. There were no outstanding commodity swap positions as of March 31, 2019.


 
 
 
March 31, 2019 | 19

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

The following outlines the gains (losses) recognized on the Company’s derivative activities, all of which are recorded in Cost of Materials and Other on the condensed consolidated statements of operations:
Gain (Loss) on Derivatives
 
 
 
 
Three Months Ended March 31,
(in millions)
2019
 
2018
Forward purchases
$
17

 
$
14

Swaps

 
45

Futures
(1
)
 

Total gain (loss) on derivatives, net
$
16

 
$
59


Open Commodity Derivative Instruments
 
Three Months Ended March 31,
(in millions of barrels)
2019
 
2018
Commodity Swap Instruments:
 
 
 
2-1-1 Crack spreads

 
2

Distillate Crack spreads

 
1

Gasoline Crack spreads

 
1

Purchase and Sale Commitments - Futures Contracts:
 
 
 
Canadian crude oil
2

 
4


Offsetting Assets and Liabilities

The Company elected to offset the fair value amounts recognized for multiple derivative contracts executed with the same counterparty. These amounts are recognized as current assets and current liabilities within the prepaid expenses and other current assets and accrued expenses and other current liabilities financial statement line items, respectively, in the condensed consolidated balance sheets as follows:

 
Derivative Assets
 
Derivative Liabilities
(in millions)
March 31, 2019
 
December 31, 2018
 
March 31, 2019
 
December 31, 2018
Commodity Derivatives
$
1

 
$
8

 
$

 
$
1

Less: Counterparty Netting

 
(1
)
 

 
(1
)
Total Net Fair Value of Derivatives
$
1

 
$
7

 
$

 
$


In accordance with FASB ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC 820”), the Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities or a group of assets or liabilities, such as a business.

ASC 820 utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

Level 1 — Quoted prices in active markets for identical assets or liabilities
Level 2 — Other significant observable inputs (including quoted prices in active markets for similar assets or liabilities)
Level 3 — Significant unobservable inputs (including the Company’s own assumptions in determining the fair value)


 
 
 
March 31, 2019 | 20

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

The following table sets forth the assets and liabilities measured or disclosed at fair value on a recurring basis, by input level, as of March 31, 2019 and December 31, 2018:

 
March 31, 2019
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Location and Description
 
 
 
 
 
 
 
Other current assets (investments)

 
1

 

 
1

Total Assets
$

 
$
1

 
$

 
$
1

Other current liabilities (Renewable Fuel Standard “RFS” obligation)

 
(16
)
 

 
(16
)
Total Liabilities
$

 
$
(16
)
 
$

 
$
(16
)
 
December 31, 2018
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
Location and Description
 
 
 
 
 
 
 
Other current assets (investments)

 
7

 

 
7

Total Assets
$

 
$
7

 
$

 
$
7

Other current liabilities (RFS obligation)

 
(2
)
 

 
(2
)
Total Liabilities
$

 
$
(2
)
 
$

 
$
(2
)

As of March 31, 2019 and December 31, 2018, the only financial assets and liabilities that are measured at fair value on a recurring basis are the Company’s cash equivalents, investments, derivative instruments, and RFS obligation. The Petroleum Segment’s commodity derivative contracts and RFS obligation, which use fair value measurements and are valued using broker quoted market prices of similar instruments, are considered Level 2 inputs. The Company had no transfers of assets or liabilities between any of the above levels during the year ended March 31, 2019.

(11) Share-Based Compensation

A summary of compensation expense during the three months ended March 31, 2019 and 2018 is presented below:
 
Three Months Ended March 31,
(in millions)
2019
 
2018
CVR Energy LTIP
 
 
 
Performance Unit Award
$

 
$
1

CVR Refining LTIP
 
 
 
Phantom Units Award
1

 
1

CVR Partners LTIP
 
 
 
Phantom Units Award
1

 
1

Incentive Unit Awards
3

 
(1
)
Total Share-Based Compensation Expense
$
5

 
$
2


(12) Commitments and Contingencies

Except as described below, there have been no material changes in the Company’s commitments and contingencies disclosed in the 2018 Form 10-K. In the ordinary course of business, the Company may become party to lawsuits, administrative proceedings and governmental investigations, including environmental, regulatory and other matters. The outcome of these matters cannot always be predicted accurately, but the Company accrues liabilities for these matters if the Company has determined that it is probable a loss has been incurred and the loss can be reasonably estimated. While it is not possible to predict the outcome of such proceedings, if one or more of them were decided against us, the Company believes there would be no material impact on its consolidated financial statements.

Crude Oil Supply Agreement

On August 31, 2012, an indirect, wholly-owned subsidiary of the Petroleum Segment and Vitol Inc. (“Vitol”) entered into an Amended and Restated Crude Oil Supply Agreement (as amended, the “Crude Oil Supply Agreement”). Under the Crude Oil Supply Agreement, Vitol supplies the Petroleum Segment with crude oil and intermediation logistics helping to reduce the amount of inventory held at a certain point and mitigate crude oil pricing risk. Volumes contracted under the Crude Oil Supply Agreement, as a percentage of the total crude oil purchases (in barrels), was approximately 39% and 35% for the three months ended March 31, 2019 and 2018, respectively. The Crude Oil Supply Agreement automatically renews for successive one-year terms (each such term, a “Renewal Term”) unless either party provides the other with notice of nonrenewal at least 180 days prior to expiration of any Renewal Term.

Renewable Fuel Standards

The Petroleum Segment is subject to the RFS of the Environmental Protection Agency (“EPA”) that require refiners to either blend “renewable fuels” in with their transportation fuels or purchase renewable fuel credits, known as renewable identification numbers (“RINs”), in lieu of blending. The petroleum segment is not able to blend the substantial majority of its transportation fuels and has to purchase RINs on the open market, as well as obtain waiver credits for cellulosic biofuels from the EPA in order to comply with the RFS.

The Company recognized expense of approximately $13 million and a benefit of $23 million for the three months ended March 31, 2019 and 2018, respectively, for the Petroleum Segment’s compliance with RFS. The expense recognized was included within Cost of Materials and Other in the Consolidated Statements of Operations. The Company’s costs to comply with RFS include the purchased cost of RINs, the impact of recognizing the Petroleum Segment’s uncommitted biofuel blending obligation at fair value based on market prices at each reporting date and the valuation change of RINs purchases in excess of its RFS obligation as of the reporting date.

 
 
 
March 31, 2019 | 21

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)


Litigation

The U.S. Attorney’s office for the Southern District of New York contacted CVR Energy in September 2017 seeking production of information pertaining to CVR Refining’s, CVR Energy’s and Mr. Carl C. Icahn’s activities relating to the RFS and Mr. Icahn’s former role as an advisor to the President. CVR Energy is cooperating with the request and provided information in response to the subpoena. The U.S. Attorney’s office has not made any claims or allegations against CVR Energy or Mr. Icahn. CVR Energy maintains a strong compliance program and, while no assurances can be made, CVR Energy does not believe this inquiry will have a material impact on its business, financial condition, results of operations or cash flows.

On August 21, 2018, Coffeyville Resources Refining and Marketing LLC (“CRRM”), a subsidiary of CVRR, received a letter from the United States Department of Justice (“DOJ”) on behalf of the EPA and Kansas Department of Health and Environment (“KDHE”) alleging violations of the Clean Air Act (“CAA”) and a 2012 Consent Decree between CRRM, the United States (on behalf of EPA) and KDHE at CRRM’s Coffeyville refinery. In September 2018, CRRM executed a tolling agreement with the DOJ and KDHE extending time for negotiation regarding the agencies’ allegations through March 2019, and this tolling agreement was extended in March 2019 through November 30, 2019. At this time the Company cannot reasonably estimate the potential penalties, costs, fines or other expenditures that may result from this matter or any subsequent enforcement or litigation relating thereto and, therefore, the Company cannot determine if the ultimate outcome of this matter will have a material impact on the Company’s financial position, results of operations or cash flows.

In 2008, Coffeyville Resources Nitrogen Fertilizer LLC (“CRNF”), a subsidiary of CVR Partners LP, protested the reclassification and reassessment by Montgomery County, Kansas (the “County”) of CRNF’s nitrogen fertilizer plant following expiration of its ten-year property tax abatement that expired on December 31, 2007, which reclassification and reassessment resulted in an increase in CRNF’s annual property tax expense in excess of $10 million per year for the 2008 through 2012 tax years. Despite its protest, CRNF fully accrued and paid these property taxes.  In February 2013, the County and CRNF agreed to a settlement for tax years 2009 through 2012 which resulted in decreased property taxes through 2017, leaving 2008 in dispute. In 2013, the Kansas Court of Appeals overturned an adverse ruling of the Kansas Board of Tax Appeals (“BOTA”) and instructed BOTA to classify each CRNF asset on an asset-by-asset basis. In March 2015, BOTA concluded its classification and determined a substantial majority of CRNF’s assets in dispute were personal property for the 2008 tax year. In September 2018, the Kansas Court of Appeals upheld BOTA’s property tax determinations in CRNF’s favor.  In October 2018, the County petitioned the Kansas Supreme Court to review the Court of Appeals determination.  Subsequent briefs were filed by CRNF and the County.  The Kansas Supreme Court has not yet ruled on whether it will hear the County’s appeal. CVR Partners continues to monitor this matter. In April 2019, CRNF and the County executed an agreement under which the County agreed to withdraw its petition to the Kansas Supreme Court and CRNF is expected to recover $7.9 million through favorable property tax assessments from 2019 through 2028, subject to the terms of the settlement agreement.

During 2019, CVR Energy, CVR Refining, CVR Refining Holdings, IE, and certain directors and affiliates have been named in nine lawsuits filed in the Court of Chancery of the State of Delaware by purported former unitholders of CVR Refining, on behalf of themselves and an alleged class of similarly situated unitholders (the “Call Option Lawsuits”). The Call Option Lawsuits primarily allege breach of contract, tortious interference and breach of the implied covenant of good faith and fair dealing and seek monetary damages and attorneys’ fees, among other remedies, relating to the Company’s exercise of the call option under the CVR Refining Amended and Restated Agreement of Limited Partnership assigned to it by CVR Refining’s general partner. The Call Option Lawsuits are in the earliest stages of litigation. The Company believes the Call Option Lawsuits are without merit and intends to vigorously defend against them. 

(13) Business Segments

CVR Energy’s revenues are derived from two operating segments: the petroleum segment and the nitrogen fertilizer segment. The Company evaluates the performance of its segments based primarily on segment operating income and EBITDA. For the purposes of the operating segment disclosure, the company presents operating income as it is the most comparable measure to the amounts presented on the condensed consolidated statement of operations. The other amounts reflect intercompany eliminations, corporate cash and cash equivalents, income tax activities and other corporate activities that are not allocated to the operating segments.


 
 
 
March 31, 2019 | 22

Table of Contents

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

The following table summarizes certain operating results and capital expenditures information by segment:
 
Three Months Ended March 31,
(in millions)
2019
 
2018
Net sales
 
 
 
Petroleum
$
1,397

 
$
1,458

Nitrogen Fertilizer
92

 
80

Other
(3
)
 
(1
)
Total
$
1,486

 
$
1,537

Operating Income
 
 
 
Petroleum
$
156

 
$
143

Nitrogen Fertilizer
9

 
(3
)
Other
(5
)
 
(4
)
Total operating income
160

 
136

Interest expense, net
(26
)
 
(27
)
Other income, net
3

 
2

Income before income taxes
$
137

 
$
111

Depreciation and amortization
 
 
 
Petroleum
49

 
48

Nitrogen Fertilizer
16

 
16

Other
2

 
3

Total
$
67

 
$
67

Capital expenditures
 
 
 
Petroleum
$
20

 
$
14

Nitrogen Fertilizer
3

 
4

Other

 
1

Total
$
23

 
$
19


The following table summarizes total assets by segment:
(in millions)
March 31,
2019
 
December 31,
2018
Petroleum
$
2,714

 
$
2,452

Nitrogen Fertilizer
1,247

 
1,254

Other (1)
(87
)
 
294

Total Assets
$
3,874

 
$
4,000

 
 
 
 
 
(1)Includes elimination of intercompany assets.


 
 
 
March 31, 2019 | 23

Table of Contents

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

(14) Supplemental Cash Flow Information

Cash flows related to income taxes, interest and construction in process were as follows:
 
Three Months Ended March 31,
(in millions)
2019
 
2018
Supplemental disclosures:
 
Cash paid for interest
2

 
3

Non-cash investing activities:
 
 
 
Capital expenditure additions included in accounts payable
$
(6
)
 
$
(1
)
Turnaround expenditures included in accounts payable
(7
)
 



 
 
 
March 31, 2019 | 24

Table of Contents

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

(15) Related Party Transactions

Icahn Enterprises

The following is a summary of dividends paid to the Company’s stockholders, including IEP, for the respective quarters to which the distributions relate:
(in millions, except per share data)
December 31, 2018
 
Total Dividends Paid in 2019
Amount paid to IEP
$
54

 
$
54

Amount paid to public stockholders
21

 
21

Total amount paid
$
75

 
$
75

 
 
 
 
Per common share
$
0.75

 
$
0.75

Shares outstanding (in millions)
100.6

 
100.6


Activity associated with the Company’s related party arrangements for the three month periods ended March 31, 2019 and 2018 is summarized below:

Expenses with related parties
 
Three Months Ended March 31,
(in millions)
2019
 
2018
Cost of materials and other

 
 
 
Joint Venture Transportation Agreement:
 
 
 
Enable
$
2

 
$


Amounts due from related parties
(in millions)
March 31, 2019
 
December 31, 2018
Tax Allocation Agreement:
 
 
 
American Entertainment Properties Corporation (“AEPC”)
$
4

 
$
4


(16) Guarantor Financial Information

CVR Refining’s 2022 Senior Notes are guaranteed on a senior unsecured basis by the Company and certain wholly-owned subsidiaries, including CVR Refining and certain of its subsidiaries (the “Guarantors”). The guarantees are full and unconditional and joint and several among the Guarantors.

The information is presented in accordance with the requirements of Rule 3-10 under the SEC’s Regulation S-X and prepared on the equity basis of accounting. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the Guarantors operated as independent entities. The Company has not presented separate financial and narrative information for each of the Guarantors because it believes such financial and narrative information would not provide any additional information that would be material in evaluating the sufficiency of the Guarantors.



 
 
 
March 31, 2019 | 25

Table of Contents

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Condensed Consolidating Balance Sheet
 
March 31, 2019
(in millions)
Parent
 
Subsidiary Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Intercompany Elimination
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
8

 
$
306

 
$
54

 
$
99

 
$

 
$
467

Accounts receivable

 

 
176

 
17

 

 
193

Due to/from parent
4

 

 

 

 

 
4

Intercompany receivable
(65
)
 

 
13

 
73

 
(21
)
 

Inventories

 

 
331

 
72

 

 
403

Prepaid expenses and other current assets
26

 

 
30

 

 
2

 
58

Total current assets
(27
)
 
306

 
604

 
261

 
(19
)
 
1,125

Property, plant and equipment, net of accumulated depreciation

 

 
1,418

 
1,000

 

 
2,418

Investment in and advances from subsidiaries
1,444

 
1,696

 
166

 
1,726

 
(5,032
)
 

Other long-term assets

 
1

 
278

 
52

 

 
331

Total assets
$
1,417

 
$
2,003

 
$
2,466

 
$
3,039

 
$
(5,051
)
 
$
3,874

LIABILITIES AND PARTNERS’ CAPITAL
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
1

 
$

 
$
334

 
$
24

 
$

 
$
359

Intercompany payables

 

 
8

 
13

 
(21
)
 

Other current liabilities
49

 
14

 
76

 
80

 
2

 
221

Total current liabilities
50

 
14

 
418

 
117

 
(19
)
 
580

Long-term liabilities:
 
 
 
 
 
 
 
 
 
 
 
Long-term debt and finance lease obligations, net of current portion

 
496

 
64

 
631

 

 
1,191

Investment and advances from subsidiaries

 

 

 
16

 
(16
)
 

Deferred income taxes
20

 

 

 
375

 

 
395

Other long-term liabilities
4

 

 
35

 
11

 

 
50

Total long-term liabilities
24

 
496

 
99

 
1,033

 
(16
)
 
1,636

Commitments and contingencies


 


 


 


 


 


Equity:
 
 
 
 
 
 
 
 
 
 
 
Total CVR stockholders’ equity
1,343

 
1,493

 
1,949

 
1,574

 
(5,016
)
 
1,343

Noncontrolling interest

 

 

 
315

 

 
315

Total equity
1,343

 
1,493

 
1,949

 
1,889

 
(5,016
)
 
1,658

Total liabilities and equity
$
1,417

 
$
2,003

 
$
2,466

 
$
3,039

 
$
(5,051
)
 
$
3,874



 
 
 
March 31, 2019 | 26

Table of Contents

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Condensed Consolidating Balance Sheet
 
December 31, 2018
(in millions)
Parent
 
Subsidiary Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Intercompany Elimination
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
3

 
$
340

 
$
261

 
$
64

 
$

 
$
668

Accounts receivable

 

 
107

 
62

 

 
169

Due to/from parent
4

 

 

 

 

 
4

Intercompany receivable
6

 

 
4

 

 
(10
)
 

Inventories

 

 
316

 
64

 

 
380

Prepaid expenses and other current assets
27

 
1

 
49

 
4

 
(9
)
 
72

Total current assets
40

 
341

 
737

 
194

 
(19
)
 
1,293

Property, plant and equipment, net of accumulated depreciation

 

 
1,413

 
1,017

 

 
2,430

Investment in and advances from subsidiaries
1,228

 
1,601

 
172

 
1,440

 
(4,441
)
 

Other long-term assets

 
1

 
231

 
45

 

 
277

Total assets
$
1,268

 
$
1,943

 
$
2,553

 
$
2,696

 
$
(4,460
)
 
$
4,000

LIABILITIES AND PARTNERS’ CAPITAL
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
1

 
$

 
$
293

 
$
26

 
$

 
$
320

Intercompany payables

 

 

 
10

 
(10
)
 

Other current liabilities
6

 
7

 
74

 
97

 
(8
)
 
176

Total current liabilities
7

 
7

 
367

 
133

 
(18
)
 
496

Long-term liabilities:
 
 
 
 
 
 
 
 
 
 
 
Long-term debt and finance lease obligations, net of current portion

 
496

 
42

 
629

 

 
1,167

Investment and advances from subsidiaries

 

 
106

 

 
(106
)
 

Deferred income taxes
(24
)
 

 

 
404

 

 
380

Other long-term liabilities
3

 

 
7

 
4

 

 
14

Total long-term liabilities
(21
)
 
496

 
155

 
1,037

 
(106
)
 
1,561

Commitments and contingencies


 


 


 


 


 


Equity:
 
 
 
 
 
 
 
 
 
 
 
Total CVR stockholders’ equity
1,282

 
1,440

 
1,701

 
1,199