10-Q 1 cvrrq22018form10-q.htm 10-Q Document

 

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 June 30, 2018
 
 
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: 001-35781
CVR Refining, LP
(Exact name of registrant as specified in its charter)

Delaware
37-1702463
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
2277 Plaza Drive, Suite 500
 
Sugar Land, Texas
(Address of principal executive offices)
77479 
(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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
 
 
  (Do not check if a smaller reporting company)
  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 147,600,000 common units outstanding at July 24, 2018.
 



CVR REFINING, LP AND SUBSIDIARIES

INDEX TO QUARTERLY REPORT ON FORM 10-Q
For The Quarter Ended June 30, 2018
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2



PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

CVR REFINING, LP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
 
June 30, 2018
 
December 31, 2017
 
(unaudited)
 
 
 
(in millions, except unit data)
ASSETS
 
Current assets:
 
 
 
Cash and cash equivalents
$
258

 
$
174

Accounts receivable, net of allowance for doubtful accounts of $1 at June 30, 2018 and December 31, 2017
162

 
169

Inventories
384

 
331

Prepaid expenses and other current assets, including $1 and $2 due from affiliates at June 30, 2018 and December 31, 2017, respectively
39

 
26

Total current assets
843

 
700

Property, plant, and equipment, net of accumulated depreciation
1,434

 
1,479

Other long-term assets
89

 
91

Total assets
$
2,366

 
$
2,270

LIABILITIES AND PARTNERS' CAPITAL
 
 
 
Current liabilities:
 
 
 
Note payable and capital lease obligations
$
2

 
$
2

Accounts payable, including $6 and $5 due to affiliates at June 30, 2018 and December 31, 2017, respectively
335

 
312

Accrued expenses and other current liabilities, including $12 and $15 due to affiliates at June 30, 2018 and December 31, 2017, respectively
115

 
168

Total current liabilities
452

 
482

Long-term liabilities:
 
 
 
Long-term debt and capital lease obligations, net of current portion
538

 
539

Other long-term liabilities
6

 
2

Total long-term liabilities
544

 
541

Commitments and contingencies


 


Partners’ capital
1,370

 
1,247

Total liabilities and partners' capital
$
2,366

 
$
2,270


See accompanying notes to the condensed consolidated financial statements.

3



CVR REFINING, LP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
 
(unaudited)
 
(in millions, except per unit data)
Net sales
$
1,824

 
$
1,338

 
$
3,282

 
$
2,762

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of materials and other
1,553

 
1,208

 
2,771

 
2,409

Direct operating expenses (exclusive of depreciation and amortization as reflected below)
94

 
86

 
187

 
188

Depreciation and amortization
32

 
31

 
65

 
65

   Cost of sales
1,679

 
1,325

 
3,023

 
2,662

Selling, general and administrative expenses (exclusive of depreciation and amortization as reflected below)
22

 
19

 
38

 
40

Depreciation and amortization
1

 
1

 
2

 
1

Loss on asset disposals
5

 

 
5

 

Operating income (loss)
117

 
(7
)
 
214

 
59

Interest expense, net
(11
)
 
(12
)
 
(22
)
 
(23
)
Gain on derivatives, net
10

 

 
70

 
12

Other income, net
2

 

 
3

 

Net income (loss)
118

 
(19
)
 
265

 
48

 
 
 
 
 
 
 
 
Net income (loss) per common unit - basic and diluted
$
0.80

 
$
(0.13
)
 
$
1.80

 
$
0.32

 
 
 
 
 
 
 
 
Weighted-average common units outstanding:
 
 
 
 
 
 
 
Basic and diluted
147.6

 
147.6

 
147.6

 
147.6


See accompanying notes to the condensed consolidated financial statements.


4



CVR REFINING, LP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
(unaudited)
 
(in millions)
Cash flows from operating activities:

Net income
$
265

 
$
48

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

 
66

Share-based compensation
9

 
5

Other non-cash items
5

 
2

Income from equity method investments, net of distributions
(1
)
 

Changes in assets and liabilities:
 
 
 
Current assets and liabilities
(91
)
 
131

Non-current assets and liabilities
4

 

Net cash provided by operating activities
258

 
252

Cash flows from investing activities:
 
 
 
Capital expenditures
(32
)
 
(48
)
Other investing activities
1

 
(1
)
Net cash used in investing activities
(31
)
 
(49
)
Cash flows from financing activities:
 
 
 
 
 
 
 
Distributions to common unitholders – affiliates
(99
)
 

Distributions to common unitholders – non-affiliates
(43
)
 

Other financing activities
(1
)
 
(1
)
Net cash used in financing activities
(143
)
 
(1
)
Net increase in cash and cash equivalents
84

 
202

Cash and cash equivalents, beginning of period
174

 
314

Cash and cash equivalents, end of period
$
258

 
$
516


See accompanying notes to the condensed consolidated financial statements.

5


CVR REFINING, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
(unaudited)


(1) Organization and Nature of Business

CVR Refining, LP and subsidiaries ("CVR Refining" or the "Partnership") is a refiner that does not have crude oil exploration or production operations (an "independent petroleum refiner") and is a marketer of high value transportation fuels. The Partnership owns a complex full coking medium-sour crude oil refinery in Coffeyville, Kansas and a complex crude oil refinery in Wynnewood, Oklahoma. As of June 30, 2018, Coffeyville Resources, LLC ("CRLLC"), a wholly-owned subsidiary of CVR Energy, Inc. ("CVR Energy"), owned 100% of the Partnership's noneconomic general partner interest and approximately 66% of the Partnership's outstanding limited partner interests. As of June 30, 2018, Icahn Enterprises L.P. ("IEP") and its affiliates owned approximately 82% of CVR Energy's outstanding shares. CVR Refining's common units, which are listed on the New York Stock Exchange ("NYSE"), began trading on January 17, 2013 under the symbol "CVRR."

On June 18, 2018, CVR Energy commenced an offer to exchange up to 37,154,236 common units of CVR Refining for shares of CVR Energy common stock at an exchange ratio of one common unit for 0.6335 shares of CVR Energy common stock. The offer and withdrawal rights will expire on July 27, 2018 at 5:00 pm, unless the offer is extended by CVR Energy.

Management and Operations

The Partnership is party to a services agreement pursuant to which the Partnership and its general partner obtain certain management and other services from CVR Energy. The Partnership's general partner manages the Partnership's activities subject to the terms and conditions specified in CVR Refining's partnership agreement. The operations of the general partner, in its capacity as general partner, are managed by its board of directors. Actions by the general partner that are made in its individual capacity are made by CVR Refining Holdings, LLC ("CVR Refining Holdings"), a subsidiary of CRLLC, as the sole member of the Partnership's general partner and not by the board of directors of the general partner. The members of the board of directors of the Partnership's general partner are not elected by the Partnership's unitholders and are not subject to re-election on a regular basis. The officers of the general partner manage the day-to-day affairs of the business. The Partnership also has agreements with a subsidiary of CVR Partners, LP ("CVR Partners"), an indirect subsidiary of CVR Energy, under which the Partnership sells petroleum coke and hydrogen to CVR Partners Coffeyville Facility. Additionally, the two parties provide feedstock and other services to one another at the Coffeyville Facility. See Note 14 ("Related Party Transactions") for further discussion.

(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, 2017 audited consolidated financial statements and notes thereto included in CVR Refining's Annual Report on Form 10-K for the year ended December 31, 2017, which was filed with the SEC on February 26, 2018 (the "2017 Form 10-K").

The condensed consolidated financial statements include certain selling, general and administrative expenses (exclusive of depreciation and amortization) and direct operating expenses (exclusive of depreciation and amortization) that CVR Energy and its affiliates incurred on behalf of and charged to the Partnership. These related party transactions are governed by the services agreement. See Note 14 ("Related Party Transactions") for additional discussion of the services agreement and billing of certain costs.

In the opinion of the Partnership's management, the accompanying condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary to fairly present the financial position of the Partnership as of June 30, 2018 and December 31, 2017, the results of operations of the Partnership for the three and six month periods ended June 30, 2018 and 2017 and the cash flows of the Partnership for the six month periods ended June 30, 2018 and 2017. Certain information has been reclassified to present historical information in a manner consistent 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, 2018 or any other interim or annual period.

6


CVR REFINING, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2018
(unaudited)


(3) Recent Accounting Pronouncements

Adoption of New Revenue Standard

On January 1, 2018, the Partnership adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 606, "Revenue from Contracts with Customers" (“ASC 606”) using the modified retrospective method applied to contracts which were not completed as of January 1, 2018. The standard was applied prospectively and the comparative information for 2017 has not been restated and continues to be reported under the accounting standards in effect for the prior period. The Partnership did not identify any material differences in its existing revenue recognition methods that require modification under the new standard and, as such, a cumulative effect adjustment of applying the standard using the modified retrospective method was not recorded.

Impact on Financial Statements

The Partnership identified a presentation change associated with a fee collected from certain customers that were previously recorded as a reduction to cost of materials and other. The particular fee, the Oil Spill Liability Tax, relates to taxes imposed on refineries as part of the crude oil procurement process, and is charged to certain of the Partnership’s customers on product sales and is required under the new standard to be included in the transaction price. The impact of the change in presentation was an increase of $1 million to net sales and cost of materials and other for the three and six months ended June 30, 2018.

New Accounting Standards Issued But Not Yet Implemented

In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02, “Leases” (“ASU 2016-02”) creating a new topic, FASB ASC Topic 842, "Leases," 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 an asset representing its right to use the underlying asset for the lease term in the balance sheet. Quantitative and qualitative disclosures, including disclosures regarding significant judgments made by management, will be required. The standard is effective for the first interim and annual periods beginning after December 15, 2018, with early adoption permitted. At adoption, ASU 2016-02 will be applied using the modified retrospective application method and allows for certain practical expedients. The Partnership has begun its assessment and implementation plan for its planned adoption effective January 1, 2019. The Partnership expects the impact of the new lease standard to be material with respect to its balance sheet and further expect impacts to disclosures and changes in internal lease accounting processes.

(4) Revenue

The following table presents the Partnership’s revenue disaggregated by major product.     
 
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
 
(in millions)
Major Product
 
 
 
 
Gasoline
 
$
896

 
$
1,607

Distillates (a)
 
832

 
1,484

Freight revenue
 
6

 
11

Other (b)
 
89

 
177

Revenue from product sales
 
1,823

 
3,279

 
 
 
 
 
Other revenue (c)
 
1

 
3

Total revenue
 
$
1,824

 
$
3,282

 
(a)
Distillates consist primarily of diesel fuel, kerosene and jet fuel.


7

CVR REFINING, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2018
(unaudited)

(b)
Other product sales primarily include crude oil, feedstocks and asphalt sales. Feedstocks are petroleum products, such as crude oil and natural gas liquids, that are processed and blended into refined products, such as gasoline, diesel fuel and jet fuel, during the refining process.
(c)
Other revenue consists primarily of Cushing, OK storage tank lease revenue.

The Partnership’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 Partnership 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 Partnership’s contracts have index-based pricing which is considered variable consideration that should be estimated in determining the transaction price. The Partnership 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 Partnership may incur broker commissions or transportation costs prior to product transfer on some of its sales. The Partnership 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 Partnership’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 Partnership’s contracts with customers commonly include a provision which states that the Partnership 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 Partnership has determined that product returns or refunds are very rare and will account for them as they occur. The Partnership 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 Partnership is primarily tariff and line loss charges that are rebilled to customers to reimburse the Partnership for expenses incurred from a pipeline operator. An offsetting expense is included in cost of materials and other.

Transaction price allocated to remaining performance obligations

As of June 30, 2018, approximately $41 million of revenue from remaining performance obligations is expected to be recognized from a contract with an initial duration of greater than one year. The Partnership will recognize revenue ratably each month through 2036 as the take-or-pay obligations under the Hydrogen Purchase and Sale Agreement are satisfied or expire.

The Partnership has elected an optional exemption to not disclose the amount of transaction price allocated to remaining performance obligations for contracts with an original expected duration of less than one year.

The Partnership does not disclose variable consideration related to index-based or market-based pricing as it qualifies for the variable consideration allocation exception under the new revenue standard. The variable consideration relates specifically to the Partnership’s efforts to transfer each unit of product to the customer in which the pricing is directly related to the period to which the sale occurs.




8

CVR REFINING, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2018
(unaudited)

(5) Share-Based Compensation

There have been no material new awards or changes in existing awards during 2018. A summary of share-based compensation expense during the three and six months ended June 30, 2018 and 2017 are presented below:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
CVR Refining LTIP - Phantom Units
$
6

 
$
1

 
$
7

 
$
2

Other Awards (a)
2

 
1

 
2

 
3

Total Share-Based Compensation Expense
$
8

 
$
2

 
$
9

 
$
5

 
(a)
Other awards include compensation expense for certain employees of CVR Energy who perform services for the Partnership under the services agreement with CVR Energy and participate in equity compensation plans of CVR Refining affiliates.

(6) Inventories

 
June 30, 2018
 
December 31, 2017
 
(in millions)
Raw materials and precious metals
$
138

 
$
108

In-process inventories
29

 
22

Finished goods
174

 
158

Parts and supplies
43

 
43

     Total Inventories
$
384

 
$
331


(7) Property, Plant and Equipment

 
June 30, 2018
 
December 31, 2017
 
(in millions)
Land and improvements
$
30

 
$
30

Buildings
64

 
64

Machinery and equipment
2,387

 
2,375

Other
87

 
79

 
2,568

 
2,548

Less: Accumulated depreciation
1,134

 
1,069

Total property, plant and equipment, net
$
1,434

 
$
1,479


Capitalized interest recognized as a reduction in interest expense was nominal for the three and six months periods ended June 30, 2018 and 2017.



9

CVR REFINING, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2018
(unaudited)

(8) Long-Term Debt

Debt Balance, Net of Current Maturities and Unamortized Issuance Costs
 
 
 
 
June 30, 2018
 
December 31, 2017
 
(in millions)
6.5% Senior Notes due 2022 (a)
$
500

 
$
500

Capital lease obligations
44

 
45

Total long-term debt, before debt issuance costs and discount
544

 
545

Less:
 
 
 
Unamortized debt issuance costs
(4
)
 
(4
)
Current portion of capital lease obligations
(2
)
 
(2
)
Total long-term debt, net of current portion
$
538

 
$
539

 
(a)
The estimated fair value of total long-term debt outstanding was approximately $510 million as of June 30, 2018.

Credit Facilities Outstanding
 
 
 
 
 
 
 
 
 
 
Total Capacity
 
Amount Borrowed as of June 30, 2018
 
Outstanding Letters of Credit
 
Available Capacity as of June 30, 2018
 
Maturity Date
 
 
Amended and Restated Asset Based (ABL) Credit Facility (b)
$
400

 
$

 
$
6

 
$
394

 
November 14, 2022
Intercompany Credit Facility (c)
150

 

 

 
150

 
January 23, 2019
 
(b)
Loans under the asset based 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.
(c)
The intercompany credit facility bears interest at a rate of LIBOR plus 3% per annum, payable quarterly.

The Partnership is in compliance with all covenants of the ABL credit facility and the 6.50% senior notes as of June 30, 2018.

(9) Partners' Capital and Partnership Distributions

The Partnership had two types of partnership interests outstanding at June 30, 2018, common units and general partner interest, which is not entitled to any distributions, and which is held by the general partner. At June 30, 2018, the Partnership had a total of 147,600,000 common units issued and outstanding, of which 97,315,764 common units were owned by CVR Refining Holdings, representing approximately 66% of the total Partnership common units outstanding.

Distributions

The board of directors of the Partnership's general partner has adopted a policy for the Partnership to distribute all available cash generated on a quarterly basis. Cash distributions will be made to the common unitholders of record on the applicable record date, generally within 60 days after the end of each quarter. Available cash for distribution for each quarter will be determined by the board of directors of the general partner following the end of such quarter.



10

CVR REFINING, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2018
(unaudited)

The following is a summary of cash distributions paid to the Partnership's unitholders during 2018 for the respective quarters to which the distributions relate:

 
December 31, 2017
 
March 31, 2018
 
Total Cash Distributions Paid in 2018
 
(in millions, except per unit data)
Amount paid to CVR Refining Holdings, LLC and affiliates
$
47

 
$
52

 
$
99

Amounts paid to non-affiliates
20

 
23

 
43

Total amount paid
$
67

 
$
75

 
$
142

 
 
 
 
 
 
Per common unit
$
0.45

 
$
0.51

 
$
0.96

Common units outstanding
147.6

 
147.6

 
 

On July 25, 2018, the board of directors of the Partnership's general partner declared a cash distribution for the second quarter of 2018 to the Partnership's unitholders of $0.66 per common unit, or $97 million in aggregate. The cash distribution will be paid on August 13, 2018 to unitholders of record at the close of business on August 6, 2018.

(10) Supplemental Cash Flow Information

Cash flows related to interest and construction in process were as follows:

 
Six Months Ended
June 30,
 
2018
 
2017
 
(in millions)
Supplemental disclosures:
 
 
 
Cash paid for interest
$
22

 
$
23

Non-cash investing and financing activities:
 
 
 
Construction in process additions included in accounts payable
$
4

 
$
8

Change in accounts payable related to construction in process additions
(3
)
 
(2
)

(11) Commitments and Contingencies

There have been no material changes in our commitments and contingencies disclosed in our 2017 Form 10-K. In the ordinary course of business, we 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 we accrue liabilities for these matters if we have 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, we believe there would be no material impact on our consolidated financial statements.

Crude Oil Supply Agreement

On August 31, 2012, Coffeyville Resource Refining & Marketing, LLC ("CRRM") and Vitol Inc. ("Vitol") entered into an Amended and Restated Crude Oil Supply Agreement (as amended, the "Vitol Agreement"). Under the Vitol Agreement, Vitol supplies the petroleum business with crude oil and intermediation logistics, which helps to reduce the Partnership's inventory position and mitigate crude oil pricing risk. The Vitol Agreement will automatically renew 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. The Vitol Agreement currently extends through December 31, 2019.



11

CVR REFINING, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2018
(unaudited)

Renewable Fuel Standards

CVR Refining is subject to the Renewable Fuel Standard ("RFS") of the Environmental Protection Agency ("EPA"), which requires 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. Due to mandates in the RFS requiring increasing volumes of renewable fuels to replace petroleum products in the U.S. transportation fuel market, there may be a decrease in demand for petroleum products. CVR Refining is not able to blend the substantial majority of its transportation fuels and has to purchase RINs on the open market, as well as waiver credits for cellulosic biofuels from the EPA, in order to comply with the RFS.

The price of RINs has been extremely volatile over the last year. The cost of RINs is dependent upon a variety of factors, which include the availability of RINs for purchase, the price at which RINs can be purchased, transportation fuel production levels, the mix of CVR Refining's petroleum products, as well as the fuel blending performed at our refineries and downstream terminals, all of which can vary significantly from period to period.

The net cost of RINs for the three months ended June 30, 2018 and 2017 was $50 million and $106 million, respectively. The net cost of RINs for the six months ended June 30, 2018 and 2017 was $27 million and $99 million, respectively. The net cost of RINs is included in cost of materials and other in the Condensed Consolidated Statements of Operations. RINs expense includes the purchased cost of RINs, the impact of recognizing the Partnership’s uncommitted biofuel blending obligation at fair value based on market prices at each reporting date and is reduced by the valuation change of RINs purchases in excess of the Partnership's RFS obligation as of the reporting date. As of June 30, 2018 and December 31, 2017, CVR Refining's biofuel blending obligation was approximately $16 million and $28 million, respectively, which is recorded in accrued expenses and other current liabilities in the Condensed Consolidated Balance Sheets. The Partnership included a RINs asset within prepaid and other current assets in the Condensed Consolidated Balance Sheet of $14 million, representing excess RINs primarily due to a reduction in its RFS obligation during the first quarter of 2018.

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 Renewable Fuel Standard ("RFS") and Mr. Icahn's role as an advisor to the President. CVR Refining is cooperating with the request and is providing information in response to the subpoena. The U.S. Attorney's office has not made any claims or allegations against CVR Refining or Mr. Icahn. CVR Refining maintains a strong compliance program and, while no assurances can be made, CVR Refining does not believe this inquiry will have a material impact on its business, financial condition, results of operations or cash flows.

(12) Fair Value Measurements

In accordance with ASC Topic 820 — Fair Value Measurements and Disclosures ("ASC 820"), the Partnership 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 CVR Refining's own assumptions in determining the fair value)



12

CVR REFINING, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2018
(unaudited)

The following tables set forth the assets and liabilities measured at fair value on a recurring basis, by input level, as of June 30, 2018 and December 31, 2017:

 
June 30, 2018
Location and Description
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
Other current assets (commodity derivatives)
$

 
$
1

 
$

 
$
1

Total Assets
$

 
$
1

 
$

 
$
1

Other current liabilities (commodity derivatives)

 
(27
)
 

 
(27
)
Other current liabilities (biofuel blending obligation)

 
(11
)
 

 
(11
)
Total Liabilities
$

 
$
(38
)
 
$

 
$
(38
)

 
December 31, 2017
Location and Description
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
Other current liabilities (commodity derivatives)
$

 
$
(64
)
 
$

 
$
(64
)
Other current liabilities (biofuel blending obligation)

 
(1
)
 

 
(1
)
Total Liabilities
$

 
$
(65
)
 
$

 
$
(65
)

As of June 30, 2018 and December 31, 2017, the only financial assets and liabilities that are measured at fair value on a recurring basis are CVR Refining's derivative instruments and uncommitted biofuel blending obligation. Additionally, the fair value of the debt issuances is disclosed in Note 8 ("Long-Term Debt"). The commodity derivative contracts and the uncommitted biofuel blending obligation, which use fair value measurements and are valued using broker quoted market prices of similar instruments, are considered Level 2 inputs. CVR Refining had no transfers of assets or liabilities between any of the above levels during the six months ended June 30, 2018.

(13) Derivative Financial Instruments

CVR Refining is 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, CVR Refining from time to time enters into various commodity derivative transactions. CVR Refining does not apply hedge accounting with respect to derivative instruments held. Gains or losses related to the change in fair value and periodic settlements of these derivative instruments are classified as gain (loss) on derivatives, net in the Condensed Consolidated Statements of Operations.

CVR Refining has adopted accounting standards which impose extensive record-keeping requirements in order to designate a derivative financial instrument as a hedge. CVR Refining 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.

CVR Refining enters into commodity swap contracts in order to fix the margin on a portion of future production. Additionally, CVR Refining may enter into price and basis swaps in order to fix the price on a portion of its commodity purchases and product sales. The physical volumes are not exchanged and these contracts are net settled with cash. The contract fair value of the commodity swaps is reflected on the Condensed Consolidated Balance Sheets with changes in fair value currently recognized in the Condensed Consolidated Statements of Operations. Quoted prices for similar assets or liabilities in active markets (Level 2) are considered to determine the fair values for the purpose of marking to market the hedging instruments at each period end. A change of $1.00 per barrel in the fair value of the benchmark crude or product basis would result in an increase or decrease in the related fair value of the commodity instruments and forward purchase and sale commitments of $2.0 million.


13

CVR REFINING, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2018
(unaudited)

Gain (loss) on derivatives
 
 
 
 
 
 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Realized gain on commodity derivatives
$
19

 
$

 
$
33

 
$
1

Realized loss on margin account
(2
)
 

 
(2
)
 

Total realized gain on derivatives, net
$
17

 
$

 
$
31

 
$
1

Open Commodity Derivative Instruments
 
 
 
 
June 30, 2018
 
December 31, 2017
 
(in millions of barrels)
Commodity Swap Instruments:
 
 
 
2-1-1 Crack spreads

 
7

Distillate Crack spreads

 
4

Gasoline Crack spreads

 
4

Purchase and Sale Commitments:
 
 
 
Canadian crude oil
4

 
6

Fair Value of Commodity Derivatives
 
 
 
 
June 30, 2018
 
December 31, 2017
 
(in millions)
Net unrealized loss on outstanding commodity derivative contracts
$
(26
)
 
$
(64
)
Offsetting Assets and Liabilities

The commodity swap agreements discussed above include multiple derivative positions with a number of counterparties for which CVR Refining has entered into agreements governing the nature of the derivative transactions. Each of the counterparty agreements provides for the right to setoff each individual derivative position to arrive at the net receivable due from the counterparty or payable owed by CVR Refining. As a result of the right to setoff, CVR Refining's recognized assets and liabilities associated with the outstanding commodity swap derivative positions have been presented net in the Condensed Consolidated Balance Sheets. The tables below outline the gross amounts of the recognized assets and liabilities and the gross amounts offset in the Condensed Consolidated Balance Sheets for the various types of open derivative positions.



14

CVR REFINING, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2018
(unaudited)

The offsetting assets and liabilities for CVR Refining's derivatives as of June 30, 2018 and December 31, 2017 are recorded as current assets and current liabilities in prepaid expenses and other current assets and accrued expenses and other current liabilities, respectively, in the Condensed Consolidated Balance Sheets as follows:
 
As of June 30, 2018
Description
Gross Current Assets
 
Gross
Amounts
Offset
 
Net Current Assets
Presented
 
Cash
Collateral
Not Offset
 
Net
Amount
 
(in millions)
Commodity Derivatives
$
6

 
$
(5
)
 
$
1

 
$

 
$
1

Total
$
6

 
$
(5
)
 
$
1

 
$

 
$
1

 
 
 
 
 
 
 
 
 
 
 
As of June 30, 2018
Description
Gross Current Liabilities
 
Gross
Amounts
Offset
 
Net Current Liabilities
Presented
 
Cash
Collateral
Not Offset
 
Net
Amount
 
(in millions)
Commodity Derivatives
$
32

 
$
(5
)
 
$
27

 
$

 
$
27

Total
$
32

 
$
(5
)
 
$
27

 
$

 
$
27

 
As of December 31, 2017
Description
Gross Current Assets
 
Gross
Amounts
Offset
 
Net Current Assets
Presented
 
Cash
Collateral
Not Offset
 
Net
Amount
 
(in millions)
Commodity Derivatives
$
7

 
$
(7
)
 
$

 
$

 
$

Total
$
7

 
$
(7
)
 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2017
Description
Gross Current Liabilities
 
Gross
Amounts
Offset
 
Net Current Liabilities
Presented
 
Cash
Collateral
Not Offset
 
Net
Amount
 
(in millions)
Commodity Derivatives
$
71

 
$
(7
)
 
$
64

 
$

 
$
64

Total
$
71

 
$
(7
)
 
$
64

 
$

 
$
64




15

CVR REFINING, LP AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2018
(unaudited)

(14) Related Party Transactions

There have been no material changes in related party transactions from those disclosed in our 2017 Form 10-K. A summary of activity associated with the Partnership's related party arrangements during the three and six month periods ending June 30, 2018 and 2017 is summarized below:
Expenses from related parties
 
 
 
 
 
 
 
 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2018
 
2017
 
2018
 
2017
 
Related Party
(in millions)
Sales
 
 
 
 
 
 
 
 
Hydrogen Purchase and Sale Agreement
CRNF (1)
$
1

 
$
1

 
$
2

 
$
2

Coke Supply Agreement
CRNF
1

 
1

 
1

 
1

 
 
 
 
 
 
 
 
 
Direct operating expenses (exclusive of depreciation and amortization)

 
 
 
 
 
 
 
 
Services Agreement
CVR Energy
$
3

 
$
2

 
$
6

 
$
5

 
 
 
 
 
 
 
 
 
Selling, general and administrative expenses (exclusive of depreciation and amortization)

 
 
 
 
 
 
 
 
Services Agreement
CVR Energy
$
13

 
$
12

 
$
23

 
$
25

 Limited Partnership Agreement
CVR Refining GP
4

 
2

 
6

 
4

 
(1)
Coffeyville Resources Nitrogen Fertilizers, LLC

Amounts due to and from related parties
 
 
 
 
 
 
June 30, 2018
 
December 31, 2017
 
Related Party
(in millions)
Prepaid and Other Current Assets
 
 
 
 
Feedstock and Shared Services Agreement:
CRNF
$
1

 
$
1

 
 
 
 
 
Accounts Payable
 
 
 
 
Service Agreement:
CVR Energy
4

 
3

 
 
 
 
 
Accrued expenses and other current liabilities
 
 
 
 
Service Agreement:
CVR Energy
$
11

 
$
14


Intercompany Credit Facility

The Partnership has an intercompany credit facility with CRLLC with a borrowing capacity of $150 million. As of June 30, 2018, the Partnership had no borrowings outstanding under the intercompany credit facility. For both the three months ended June 30, 2018 and 2017, the Partnership paid no interest to CRLLC. For both the six months ended June 30, 2018 and 2017, the Partnership paid no interest to CRLLC.



16


Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes and with the statistical information and financial data appearing in this Report, as well as our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the Securities and Exchange Commission ("SEC") on February 26, 2018 ("2017 Form 10-K"). Results of operations and cash flows for the three and six months ended June 30, 2018 are not necessarily indicative of results to be attained for any other period. Refer to the section entitled "Forward-Looking Statements".

Partnership Overview

CVR Refining, LP ("CVR Refining," the "Partnership," "we," "us" or "our") is an independent downstream energy limited partnership with refining and related logistics assets that operates two of only seven refineries in Group 3 of the PADD II region of the United States. We own and operate a complex full coking medium-sour crude oil refinery in Coffeyville, Kansas with a capacity of 132,000 barrels per calendar day ("bpcd") and a complex crude oil refinery in Wynnewood, Oklahoma with a capacity of 74,500 bpcd capable of processing 20,000 bpcd of light sour crude oils (within its capacity of 74,500 bpcd). In addition, we also control and operate supporting logistics assets throughout our operational area. Refer to our Annual Report on Form 10-K for the year ended December 31, 2017 for further information on our assets and related operations.

On June 18, 2018, CVR Energy commenced an offer to exchange up to 37,154,236 common units of CVR Refining for shares of CVR Energy common stock at an exchange ratio of one common unit for 0.6335 shares of CVR Energy common stock. The offer and withdrawal rights will expire on July 27, 2018 at 5:00 pm, unless the offer is extended by CVR Energy.

Major Influences on Results of Operations

Our earnings and cash flows are primarily affected by the relationship between refined product prices and the prices for crude oil and other feedstocks that are processed and blended into petroleum products, such as gasoline, diesel fuel and jet fuel, that are produced by a refinery ("refined products"). The cost to acquire crude oil and other feedstocks and the price for which refined products are ultimately sold depend on factors beyond our control, including the supply of and demand for crude oil, as well as gasoline and other refined products which, in turn, depend on, among other factors, changes in domestic and foreign economies, weather conditions, domestic and foreign political affairs, production levels, the availability of imports, the marketing of competitive fuels and the extent of government regulation. Because we apply first-in, first-out ("FIFO") accounting to value our inventory, crude oil price movements may impact net income in the short term because of changes in the value of our unhedged on-hand inventory. The effect of changes in crude oil prices on our results of operations is influenced by the rate at which the prices of refined products adjust to reflect these changes.

The prices of crude oil and other feedstocks and refined products are also affected by other factors, such as product pipeline capacity, local market conditions and the operating levels of competing refineries. Crude oil costs and the prices of refined products have historically been subject to wide fluctuations. Widespread expansion or upgrades of our competitors' facilities, price volatility, international political and economic developments and other factors are likely to continue to play an important role in refining industry economics. These factors can impact, among other things, the level of inventories in the market, resulting in price volatility and a reduction in product margins. Moreover, the refining industry typically experiences seasonal fluctuations in demand for refined products, such as increases in the demand for gasoline during the summer driving season and for volatile seasonal exports of diesel from the United States Gulf Coast markets.

In addition to current market conditions, there are long-term factors that may impact the demand for refined products. These factors include mandated renewable fuels standards, proposed climate change laws and regulations and increased mileage standards for vehicles. We are also subject to the Renewable Fuel Standard ("RFS") of the Environmental Protection Agency ("EPA"), which requires us to either blend "renewable fuels" in with our transportation fuels or purchase renewable identification numbers ("RINs"), in lieu of blending, by March 31, 2019 or otherwise be subject to penalties. The cost of RINs is dependent upon a variety of factors, which include the availability of RINs for purchase, the price at which RINs can be purchased, transportation fuel production levels, the mix of our products, as well as the fuel blending performed at our refineries and downstream terminals, all of which can vary significantly from period to period. Based upon recent market prices of RINs and current estimates related to other variable factors, we currently estimate that the net cost of RINs will be approximately $60 million for the year ending December 31, 2018.
    


17


Our refineries generally require a facility turnaround every four to five years. The length of the turnaround is contingent upon the scope of work to be completed. The next turnaround scheduled for the Wynnewood refinery is being performed as a two phase turnaround. The first phase of its current turnaround was completed in November 2017 at a total cost of approximately $67 million. The second phase of the Wynnewood turnaround is expected to occur in the first half of 2019. Turnaround expenses associated with the second phase of the Wynnewood turnaround are estimated to be approximately $25 million. In addition to the two phase turnaround, we accelerated certain planned turnaround activities in the first quarter of 2017 on the hydrocracker unit for a catalyst change-out. We incurred approximately $13 million of major turnaround expenses for the hydrocracker. The next turnaround scheduled for the Coffeyville refinery is expected to be performed in the second half of 2020.

Non-GAAP Measures

Our management uses certain non-GAAP performance measures to analyze operating segment performance and non-GAAP financial measures to evaluate past performance and prospects for the future to supplement our GAAP financial information presented in accordance with U.S. GAAP. These financial and operational non-GAAP measures are important factors in assessing our operating results and profitability and include performance and liquidity measures along with certain key operating metrics.

Performance and Liquidity Measures

We use the following performance and liquidity measures:

EBITDA. EBITDA is a performance measure representing net income (loss) before (i) interest expense and other financing costs, net of interest income, (ii) income tax expense and (iii) depreciation and amortization.

Adjusted EBITDA. Adjusted EBITDA is a performance measure representing EBITDA adjusted for (i) (favorable) unfavorable FIFO impacts associated with our crude oil and refined product inventories, (ii) major turnaround expenses (that many of our competitors capitalize and thereby exclude from their measures of EBITDA and adjusted EBITDA), (iii) (gain) loss on derivatives, net and (iv) current period settlements on derivative contracts. Adjusted EBITDA represents the starting point for determining of available cash for distribution. Refer to discussion below for the Refining margin, adjusted for FIFO impact non-GAAP measure for discussion of why management adjusted for the FIFO impact of our inventories. We exclude major turnaround expenses because these amounts are required expenditures for our refineries, are not closely related to current period operations, and many of our peer companies capitalize these amounts thereby excluding these amounts from their EBITDA-related measures. For derivatives, we adjust EBITDA to exclude the unrealized or non-cash portion of our derivative gain or loss from our results in order to arrive at our starting point for available cash for distribution.

Refining margin. This performance measure represents the difference between net sales and cost of materials and other as reported on our Condensed Consolidated Statements of Operations.

Refining margin, adjusted for FIFO impact. This performance measure represents our refining margin adjusted to exclude the impact of price changes in our crude oil and refined products inventories. Under our FIFO accounting method for crude oil and refined products, changes in crude oil prices can cause fluctuations in the inventory valuation of our raw material, work in process and finished good inventories, thereby resulting in a favorable FIFO impact when crude oil prices increase and an unfavorable FIFO impact when crude oil prices decrease. In periods of significant price volatility, these price changes have a significant impact on the valuation on our inventories and thus our results.

Available cash for distribution. This performance and liquidity measure is equal to Adjusted EBITDA reduced for cash needed for (i) debt service, (ii) reserves for environmental and maintenance capital expenditures, (iii) reserves for major turnaround expenses and, to the extent applicable, (iv) reserves for future operating or capital needs that the board of directors of our general partner deems necessary or appropriate, if any. Available cash for distribution may be increased by the release of previously established cash reserves, if any, and other excess cash, at the discretion of the board of directors of our general partner.

Operating Metrics

During the second quarter of 2018, we changed the metrics discussed below from a crude oil throughput barrel basis to a total throughput barrel basis. Prior period information has been revised to conform to current presentation.



18


Refining margin and refining margin adjusted for FIFO impact per total throughput barrel. For both refining margin and refining margin adjusted for FIFO impact, we present these measures on a per total throughput barrel basis. In order to calculate these non-GAAP operating metrics, we utilize the total dollar figures for refining margin and refining margin adjusted for FIFO impact, as derived above and divide by the applicable number of total throughput barrels for the period.

Direct operating expenses, excluding major turnaround expenses, per total throughput barrel. We provide this performance measure to exclude major turnaround expenses from the reported amounts of direct operating expense during a given period. Major turnaround expenses are required are not directly correlated to our current period operations and thus excluding them provides investors and analysts with the current period cost, exclusive of depreciation and amortization, we incur to convert a barrel of crude oil into refined product.

We present these measures because we believe they may help investors, analysts, lenders and ratings agencies analyze our results of operations and liquidity in conjunction with our U.S. GAAP results, including but not limited to our operating performance as compared to other publicly traded companies in the refining industry, without regard to historical cost basis or financing methods and our ability to incur and service debt and fund capital expenditures. Non-GAAP measures have important limitations as analytical tools, because they exclude some, but not all, items that affect net earnings and operating income. These measures should not be considered substitutes for their most directly comparable U.S. GAAP financial measures.



19


Results of Operations

The following tables provide an overview of the results of operations, relevant market indicators and key operating statistics for CVR Refining and our subsidiaries for the three and six months ended June 30, 2018 and 2017. The following data should be read in conjunction with our condensed consolidated financial statements and the notes thereto included elsewhere in this Report. All information in "Management's Discussion and Analysis of Financial Condition and Results of Operations," except for the balance sheet data as of December 31, 2017, is unaudited.

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Consolidated Statements of Operations Data
 
 
 
 
 
 
 
Net sales
$
1,824

 
$
1,338

 
$
3,282

 
$
2,762

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of materials and other
1,553

 
1,208

 
2,771

 
2,409

Direct operating expenses(1)
94

 
86

 
187

 
188

Depreciation and amortization

32

 
31

 
65

 
65

Cost of sales
1,679

 
1,325


3,023


2,662

Selling, general and administrative expenses(1)
22

 
19

 
38

 
40

Depreciation and amortization
1

 
1

 
2

 
1

Loss on asset disposals
5

 

 
5

 

Operating income (loss)
117

 
(7
)

214


59

Interest expense, net
(11
)
 
(12
)
 
(22
)
 
(23
)
Gain on derivatives, net
10

 

 
70

 
12

Other income, net
2

 

 
3

 

Net income (loss)
$
118

 
$
(19
)
 
$
265

 
$
48

 
 
 
 
 
 
 
 
Gross profit
$
145


$
13


$
259


$
100

Refining margin(2)
$
271

 
$
130

 
$
511

 
$
353

Adjusted EBITDA(2)
$
147

 
$
43

 
$
273

 
$
158

Available cash for distribution(2)
$
97

 
$

 
$
173

 
$


 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
 
(dollars per barrel)
Key Operating Statistics (per total throughput barrel)
 
 
 
 
 
 
 
Gross profit
$
7.29

 
$
0.60

 
$
7.05

 
$
2.43

Refining margin(2)
$
13.71

 
$
6.45

 
$
13.93

 
$
8.64

FIFO impact, (favorable) unfavorable
(1.10
)
 
0.76

 
(1.15
)
 
0.39

Refining margin adjusted for FIFO impact(2)
$
12.61

 
$
7.21

 
$
12.78

 
$
9.03

Direct operating expenses (1)
$
4.76

 
$
4.27

 
$
5.10

 
$
4.62

Direct operating expenses excluding major turnaround expenses(1)(2)
$
4.76

 
$
4.13

 
$
5.10

 
$
4.23

 

(1)
Amounts are shown exclusive of depreciation and amortization.
(2)
See "Non-GAAP Reconciliations" section below for further information regarding these non-GAAP measures.



20


 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Market Indicators (dollars per barrel)
 
 
 
 
 
 
 
West Texas Intermediate (WTI) NYMEX
$
67.91

 
$
48.15

 
$
65.46

 
$
49.95

Crude Oil Differentials:
 
 
 
 
 
 
 
WTI less WTS (light/medium sour)
8.50

 
1.06

 
5.05

 
1.24

WTI less WCS (heavy sour)
18.02

 
10.00

 
21.81

 
11.88

WTI less condensate
0.46

 
0.15

 
0.42

 
0.12

Midland Cushing Differential
8.12

 
0.83

 
4.34

 
0.41

NYMEX Crack Spreads
 
 
 
 
 
 
 
Gasoline
20.63

 
18.07

 
18.06

 
16.39

Heating Oil
22.22

 
15.11

 
21.36

 
15.32

NYMEX 2-1-1 Crack Spread
21.43

 
16.59

 
19.71

 
15.85

PADD II Group 3 Basis:
 
 
 
 
 
 
 
Gasoline
(4.44
)
 
(3.95
)
 
(3.19
)
 
(2.96
)
Ultra Low Sulfur Diesel
(0.05
)
 
(0.62
)
 
(0.33
)
 
(1.10
)
PADD II Group 3 Product Crack Spread:
 
 
 
 
 
 
 
Gasoline
16.19

 
14.12

 
14.87

 
13.42

Ultra Low Sulfur Diesel
22.17

 
14.49

 
21.03

 
14.23

PADD II Group 3 2-1-1
19.18

 
14.30

 
17.95

 
13.82


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
%
 
 
 
%
 
 
 
%
 
 
 
%
Total Refining Throughput and Production Data (bpd)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Throughput:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Condensate
9,127

 
4.2
 
1,258

 
0.6
 
15,560

 
7.7
 
4,363

 
1.9
Sweet
190,595

 
88.0
 
200,812

 
90.4
 
172,969

 
85.4
 
195,610

 
86.9
Heavy sour
6,249

 
2.9
 
11,771

 
5.3
 
3,385

 
1.7
 
14,130

 
6.3
Total crude oil throughput
205,971

 
95.1
 
213,841

 
96.3
 
191,914

 
94.8
 
214,103

 
95.1
All other feedstocks and blendstocks
10,694

 
4.9
 
8,113

 
3.7
 
10,681

 
5.2
 
11,161

 
4.9
Total throughput
216,665

 
100.0
 
221,954

 
100.0
 
202,595

 
100.0
 
225,264

 
100.0
Production:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gasoline
106,431

 
49.1
 
112,284

 
50.4
 
99,279

 
49.0
 
115,600

 
51.2
Distillate
94,784

 
43.7
 
96,578

 
43.4
 
86,870

 
42.9
 
93,260

 
41.3
Other (excluding internally produced fuel)
15,609

 
7.2
 
13,775

 
6.2
 
16,495

 
8.1
 
17,019

 
7.5
Total refining production (excluding internally produced fuel)
216,824

 
100.0
 
222,637

 
100.0
 
202,644

 
100.0
 
225,879

 
100.0





21


 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
%
 
 
 
%
 
 
 
%
 
 
 
%
Coffeyville Refinery Throughput and Production Data (bpd)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Throughput:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Condensate
1,547

 
1.1
 
1,258

 
0.9
 
9,586

 
8.0
 
4,363

 
3.1
Sweet
120,975

 
89.3
 
120,790

 
86.4
 
100,863

 
84.2
 
113,804

 
80.9
Heavy sour
6,249

 
4.6
 
11,771

 
8.4
 
3,385

 
2.8
 
14,130

 
10.0
Total crude oil throughput
128,771

 
95.0
 
133,819

 
95.7
 
113,834

 
95.0
 
132,297

 
94.0
All other feedstocks and blendstocks
6,671

 
5.0
 
6,077

 
4.3
 
6,022

 
5.0
 
8,482

 
6.0
Total throughput
135,442

 
100.0
 
139,896

 
100.0
 
119,856

 
100.0
 
140,779

 
100.0
Production:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gasoline
66,577

 
48.6
 
70,032

 
49.3
 
57,565

 
47.5
 
72,271

 
50.5
Distillate
59,797

 
43.7
 
59,703

 
42.1
 
52,064

 
42.9
 
59,573

 
41.6
Other (excluding internally produced fuel)
10,500

 
7.7
 
12,146

 
8.6
 
11,657

 
9.6
 
11,246

 
7.9
Total refining production (excluding internally produced fuel)
136,874

 
100.0
 
141,881

 
100.0
 
121,286

 
100.0
 
143,090

 
100.0

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
%
 
 
 
%
 
 
 
%
 
 
 
%
Wynnewood Refinery Throughput and Production Data (bpd)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Throughput:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Condensate
7,580

 
9.3
 

 
 
5,974

 
7.2
 

 
Sweet
69,620

 
85.7
 
80,022

 
97.5
 
72,106

 
87.1
 
81,806

 
96.8
Total crude oil throughput
77,200

 
95.0
 
80,022

 
97.5
 
78,080

 
94.3
 
81,806

 
96.8
All other feedstocks and blendstocks
4,023

 
5.0
 
2,036

 
2.5
 
4,659

 
5.7
 
2,679

 
3.2
Total throughput
81,223

 
100.0
 
82,058

 
100.0
 
82,739

 
100.0
 
84,485

 
100.0
Production:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gasoline
39,854

 
49.8
 
42,252

 
52.3
 
41,714

 
51.3
 
43,329

 
52.3
Distillate
34,987

 
43.8
 
36,875

 
45.7
 
34,806

 
42.8
 
33,687

 
40.7
Other (excluding internally produced fuel)
5,109

 
6.4
 
1,629

 
2.0
 
4,838

 
5.9
 
5,773

 
7.0
Total refining production (excluding internally produced fuel)
79,950

 
100.0
 
80,756

 
100.0
 
81,358

 
100.0
 
82,789

 
100.0



22


Three Months Ended June 30, 2018 Compared to the Three Months Ended June 30, 2017

Refining Margin. For the three months ended June 30, 2018 our refining margin was $271 million, as compared to $130 million for the three months ended June 30, 2017 primarily due to the higher crack spreads experienced in the second quarter of 2018 compared to the same period in 2017. Refining margin was positively impacted by an increase in sales of $486 million, or 36.3%,which was largely the result of higher sales prices for our transportation fuels and by-products, partially offset by a decrease in sales volumes. Overall sales volumes decreased approximately 2.5% for the three months ended June 30, 2018, as compared to the three months ended June 30, 2017. Refining margin was negatively impacted by an increase in cost of material and other of $345 million, or 28.6%, which was primarily the result of increases in the cost of consumed crude oil, feedstocks, and refined products purchased for resale. The increase in consumed crude oil costs was due to an increase in crude oil prices, partially offset by a decrease in throughput volumes of crude oil. The WTI benchmark crude price for the three months ended June 30, 2018 increased approximately 41.0% and our crude oil throughput volume decreased by approximately 3.7% for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017. The increase in cost of other feedstocks was primarily due to an increase in purchase prices of NGL’s for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017. The increase in costs of refined products purchased for resale was due to increased volumes and higher prices for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017. Under the FIFO method of accounting, changes in crude oil prices can also cause fluctuations in the inventory valuation of our crude oil, work in process and finished goods, thereby resulting in a favorable or unfavorable FIFO inventory impact when crude oil prices increase or decrease. For the three months ended June 30, 2018, we had a favorable FIFO inventory impact of $22 million compared to an unfavorable FIFO inventory impact of $15 million for the comparable period of 2017.

Refining margin per barrel of total throughput increased to $13.71 for the three months ended June 30, 2018 from $6.45 for the three months ended June 30, 2017 reflecting a stronger margin environment in 2018. Refining margin adjusted for FIFO impact was $12.61 per total throughput barrel for the three months ended June 30, 2018, as compared to $7.21 per total throughput barrel for the three months ended June 30, 2017. The NYMEX 2-1-1 crack spread for the three months ended June 30, 2018 was $21.43 per barrel, an increase of approximately 29.2% over the NYMEX 2-1-1 crack spread of $16.59 per barrel for the three months ended June 30, 2017. However, the Group 3 gasoline and distillate basis remained largely similar period over period.

Selling, General and Administrative Expenses (Exclusive of Depreciation and Amortization). Selling, general and administrative expenses (exclusive of depreciation and amortization) were $22 million for the three months ended June 30, 2018 compared to $19 million for the three months ended June 30, 2017. The increase of approximately $3 million was primarily due to an increase in share-based compensation expense due to an increase in the market value of the Partnership's common units coupled with an increase in labor expense due to increased headcount.

Loss on asset disposals. For the three months ended June 30, 2018, we recorded a $5 million net loss on asset disposals related to the cancellation of certain incomplete, non-strategic capital projects.

Gain on Derivatives, net. For the three months ended June 30, 2018, we recorded a $10 million net gain on derivatives, as compared to no net gain (loss) on derivatives for the three months ended June 30, 2017. This change was primarily due to an increase in the volume of derivative positions in 2018 compared to the same period in 2017. Additionally, the market fluctuations associated with our derivative positions can materially impact our gain or loss on derivatives.

Six Months Ended June 30, 2018 Compared to the Six Months Ended June 30, 2017

Refining Margin. For the six months ended June 30, 2018 our refining margin was $511 million, as compared to $353 million for the six months ended June 30, 2017 primarily due to the higher crack spreads experienced in the second quarter of 2018 compared to the same period in 2017. Refining margin was positively impacted by an increase in sales of $520 million, or 18.8%, which was largely the result of higher sales prices for our transportation fuels and by-products, partially offset by decreased sales volumes. Overall sales volumes decreased approximately 9.9% for the six months ended June 30, 2018, as compared to the six months ended June 30, 2017. Sales volumes for the six months ended June 30, 2018 were impacted by decreased production as a result of the fluid catalytic cracking unit ("FCCU") outage at the Coffeyville refinery for approximately 48 days during the first quarter of 2018. Refining margin was negatively impacted by an increase in cost of materials and other, of $362 million, or 15.0%, which was primarily the result of increases in the cost of consumed crude oil and refined products purchased for resale partially offset by decreases in the cost of other feedstocks and RINs. The increase in consumed crude oil costs was due to an increase in crude oil prices, partially offset by a decrease in crude oil throughput volume. The WTI benchmark crude price for the six months ended June 30, 2018 increased approximately 31.1% over the comparable period. Our crude oil throughput volume decreased by approximately 10.4% for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017 primarily to manage FCC feedstock inventory during the FCC unit


23


outage at the Coffeyville refinery. The increase in the costs of refined products purchased for resale was due to increased volumes of distillates and higher prices for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017. The decrease in the cost of other feedstocks was primarily due to a decrease in NGL volumes for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017. Under the FIFO method of accounting, changes in crude oil prices can also cause fluctuations in the inventory valuation of our crude oil, work in process and finished goods, thereby resulting in a favorable or unfavorable FIFO inventory impact when crude oil prices increase or decrease. For the six months ended June 30, 2018, we had a favorable FIFO inventory impact of $42 million compared to an unfavorable FIFO inventory impact of $16 million for the comparable period of 2017.

Refining margin per barrel of total throughput increased to $13.93 for the six months ended June 30, 2018 from $8.64 for the six months ended June 30, 2017 reflecting a stronger margin environment in 2018. Refining margin adjusted for FIFO impact was $12.78 per total throughput barrel for the six months ended June 30, 2018, as compared to $9.03 per total throughput barrel for the six months ended June 30, 2017. The NYMEX 2-1-1 crack spread for the six months ended June 30, 2018 was $19.71 per barrel, an increase of approximately 24.4% over the NYMEX 2-1-1 crack spread of $15.85 per barrel for the six months ended June 30, 2017. However, the Group 3 gasoline and distillate basis remained largely similar period over period.

Selling, General and Administrative Expenses (Exclusive of Depreciation and Amortization). Selling, general and administrative expenses (exclusive of depreciation and amortization) were $38 million for the six months ended June 30, 2018 compared to $40 million for the six months ended June 30, 2017. The decrease of approximately $2 million was primarily due to a decrease in management services allocations offset by an increase in share-based compensation expense.

Loss on asset disposals. For the six months ended June 30, 2018, we recorded a $5 million net loss on asset disposals related to the cancellation of certain incomplete, non-strategic capital projects.

Gain on Derivatives, net. For the six months ended June 30, 2018, we recorded a $70 million net gain on derivatives, as compared to a $12 million net gain on derivatives for the six months ended June 30, 2017. This change was primarily due to an increase in the volume of derivative positions in 2018 compared to the same period in 2017. Additionally, the market fluctuations associated with our derivative positions can materially impact our gain or loss on derivatives.



24


Non-GAAP Reconciliations

Reconciliation of Net Income (Loss) to EBITDA, Adjusted EBITDA and Available Cash for Distribution
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Net income (loss)
$
118

 
$
(19
)
 
$
265

 
$
48

Add:
 
 
 
 
 
 
 
Interest expense, net
11

 
12

 
22

 
23

Depreciation and amortization
33

 
32

 
67

 
66

EBITDA
162

 
25

 
354

 
137

Add:
 
 
 
 
 
 
 
FIFO impact, (favorable) unfavorable(a)
(22
)
 
15

 
(42
)
 
16

Major turnaround expenses(b)

 
3

 

 
16

Gain on derivatives, net
(10
)
 

 
(70
)
 
(12
)
Current period settlements on derivative contracts(c)
17

 

 
31

 
1

Adjusted EBITDA
$
147

 
$
43

 
$
273

 
$
158


(a)
FIFO is our basis for determining inventory value under GAAP. Changes in crude oil prices can cause fluctuations in the inventory valuation of our crude oil, work in process and finished goods, thereby resulting in a favorable FIFO impact when crude oil prices increase and an unfavorable FIFO impact when crude oil 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. In order to derive the FIFO impact per total throughput barrel, we utilize the total dollar figures for the FIFO impact and divide by the number of total throughput barrels for the period.

(b)
Represents expense associated with major turnaround activities at the Wynnewood refinery during 2017.

(c)
Represents the portion of gain on derivatives, net related to contracts that matured during the respective periods and settled with counterparties. There are no premiums paid or received at the inception of the derivative contracts and upon settlement, there is no cost recovery associated with these contracts.

 
Three Months Ended 
 June 30, 2018
 
Six Months Ended 
 June 30, 2018
 
(in millions, except per unit data)
Reconciliation of Adjusted EBITDA to Available cash for distribution
 
 
 
Adjusted EBITDA
$
147

 
$
273

Adjustments:
 
 
 
Less:
 
 
 
Cash needs for debt service
(10
)
 
(20
)
Reserves for environmental and maintenance capital expenditures
(25
)
 
(50
)
Reserves for major turnaround expenses
(15
)
 
(30
)
Available cash for distribution
$
97

 
$
173

 
 
 
 
Distribution declared, per common unit
$
0.66

 
$
1.17

Common units outstanding
147.6

 
147.6






25


Reconciliation of gross profit to Refining Margin, Refining Margin adjusted for FIFO Impact (in millions and on per total throughput barrel basis) and Direct operating expenses, excluding major turnaround expenses, per total throughput barrel.
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions)
Net sales
$
1,824

 
$
1,338

 
$
3,282

 
$
2,762

Cost of materials and other
1,553

 
1,208

 
2,771

 
2,409

Direct operating expenses (exclusive of depreciation and amortization expenses as reflected below)
94

 
86

 
187

 
188

Depreciation and amortization
32

 
31

 
65

 
65

Gross profit
145

 
13

 
259

 
100

Add:
 
 
 
 
 
 
 
Direct operating expenses (exclusive of depreciation and amortization expenses as reflected below)
94

 
86

 
187

 
188

Depreciation and amortization
32

 
31

 
65

 
65

Refining margin
271

 
130

 
511

 
353

FIFO impact, (favorable) unfavorable
(22
)
 
15

 
(42
)
 
16

Refining margin adjusted for FIFO impact
$
249

 
$
145

 
$
469

 
$
369


 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Total throughput barrels per day
216,665

 
221,954

 
202,595

 
225,264

Days in the period
91

 
91

 
181

 
181

Total throughput barrels
19,716,515

 
20,197,814

 
36,669,695

 
40,772,784


 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
 
(in millions, except for $ per barrel data)
Refining margin
$
271

 
$
130

 
$
511

 
$
353

Divided by: total throughput barrels
20

 
20

 
37

 
41

Refining margin per total throughput barrel
$
13.71

 
$
6.45

 
$
13.93

 
$
8.64