The recent flood at Coffeyville Resources is expected to cost approximately $125 million once all the variables are added together, according to a recent filing with the SEC. The company detailed the impact of the June 30/July 1 flood on its facilities in Coffeyville, Kan., saying actual physical damage to facility should have a third party cost of approximately $85 million. Of this, only $4 million is attributed to the nitrogen plant, while $81 million is for the oil refinery.
The river crested more than 10 feet above flood stage, setting a new record for the river. Approximately 2,000 citizens and more than 300 homes were affected. Nearly 1,000 extra contract workers were hired to help repair and replace damaged equipment at the refinery. Substantially all units at the refinery were back up by Aug. 20. The nitrogen plant initiated startup on July 13.
Coffeyville said its employees had to shut down and secure the refinery in six to seven hours, rather than the 24 hours typically needed to do so. It estimates that 1,919 barrels (80,600 gallons) of crude oil and 226 barrels of crude oil fractions were discharged from the refinery into the Verdigris River.
The majority of the refinery’s process units were under four-to-six feet of water, and portions of the refinery’s tank farms and wastewater treatment area were covered with eight-to-ten feet of water. As a result, both the refinery and nitrogen plant sustained major damage and required extensive repairs.
The refinery sustained damage to a large number of pumps, motors, tanks, control rooms and other buildings, electrical equipment, and electronic controls, and required significant clean-up in areas surrounding the water and wastewater treatment plants.
The nitrogen plant, situated on slightly higher ground, sustained less damage than the refinery. Bringing the nitrogen plant back online involved replacing or repairing 30 percent of all electric drives, repairing 60 percent of the plant’s motor control centers, refurbishing 100 percent of distributive control systems and programmable logic controllers, and repairing the main control room.
On July 10, Coffeyville entered into a consent order with the U.S. Environmental Protection Agency. The company agreed to perform specified remedial actions to respond to the discharge. The company said it has worked with EPA throughout and noted that it may be required to reimburse EPA’s costs under the federal Oil Pollution Act. It expects remediation to continue through December 2007.
Coffeyville estimates the total costs of oil remediation will be between $7-$10 million. Resolution of third-party property damage claims is estimated to cost $25-$30 million. As a result, the total is expected to be $32-$40 million. This does not include possible fines or costs from class action lawsuits.
On July 19, Coffeyville began a program to purchase approximately 380 homes and certain other properties impacted by the flood and the oil discharge. It offered to purchase the property of approximately 330 residential landowners for 110 percent of their pre-flood appraised value without release or other waiver of any rights by the landowners, and without deduction for the greater harm caused to these properties by the flood itself. It estimates that this program will cost approximately $16 million, excluding certain costs associated with remediation.
It also noted that two class action suits have been filed, one in federal and one in state court. It plans to vigorously defend both and doesn’t believe the resolution of either will have a significant adverse effect on business.
Coffeyville gave more insight into its insurance. It believes that its property insurance should cover substantially all of the estimated physical damage to the property, noting that insurers have cited potential coverage limitations and defenses. The company expects the matter will eventually be settled by negotiation or litigation. While the company had business interruption insurance, there was a 45-day waiting period for business interruption loss. However, both plants came back up within that period.
In addition, Coffeyville has another $50 million in environmental liability insurance and $100 million in umbrella insurance, both with limitations and deductibles.
Coffeyville maintains property damage insurance, which includes damage caused by a flood of up to $300 million per occurrence, subject to deductibles and other limitations. The deductible for property damage is $2.5 million.
Going forward, Coffeyville says the flood and crude oil discharge will have a significant adverse impact on third quarter 2007 results. It expects reduced revenue due to the closure of its facilities, as well as significant costs related to the flood as a result of the necessary repairs to the facilities and environmental remediation.
For the first half ending June 30, 2007, Coffeyville results include pretax costs of $2.1 million associated with the flood, primarily including write-offs of property and inventories that are uninsured due to insurance deductibles. Additional costs will be recorded in future periods as they are increased, primarily related to the repair and clean-up efforts.
First-half earnings saw another kind of flood – one of red ink from $292.4 million in derivative losses. Year-ago derivative losses were $126.5 million. First-quarter 2007 derivative losses were $137.0 million, versus the year-ago $17.6 million (GM June 25, p. 15). Coffeyville said the derivative losses were primarily attributable to its cash flow swap and the accounting treatment for all derivative transactions.
The increasing derivative losses, along with a first-quarter turnaround and a decline in petroleum and nitrogen results, caused a company-wide net loss of $54.3 million on sales of $1.23 billion for the first half, versus the year-ago net income of $41.8 million and sales of $1.55 billion. Current operating income was also off, at $123.8 million from the year-ago $214.9 million.
Company-wide net earnings for the calendar year ending Dec. 31, 2006, were $191.6 million on sales of $3.04 billion.
Petroleum operating income was down, at $102.9 million on sales of $1.16 billion, versus the year-ago $178.0 million and $1.46 billion, respectively.
Nitrogen operating income was $21.0 million on sales of $74.3 million for the six months ending June 30, 2007, versus the year-ago $37.1 million and $95.6 million. For the year ending Dec. 31, 2006, operating income was $36.8 million on sales of $162.5 million.
First-half ammonia production was off as well, with 169,000 st produced, down from 205,600 st. UAN production was 304,600 st, down from 328,300 st. For the year ending Dec. 31, 2006, the company produced 369,300 st of ammonia and 633,100 st of UAN.
First-half ammonia sales were 34,100 st at an average price of $354/st FOB, versus the year-ago 66,300 st and $376/st. UAN sales were 293,500 st at $190/st, versus the year-ago 339,300 st and $181/st, respectively.
Ammonia prices were off 6 percent, while UAN prices were up 5 percent. Coffeyville noted that year-ago fertilizer prices benefited from higher natural gas prices resulting from Hurricanes Katrina and Rita, as much product is sold on forward contracts.
Overall for nitrogen, decreased operating income resulted from reduced sales volumes, partially offset by higher plant gate prices and increased direct operating expenses – primarily the result of increases in labor, repair and maintenance, equipment rental, outside services, utilities, and insurance. The increase in repairs and maintenance was specifically related to preventative maintenance performed during a two-day air separation unit outage and repairs to the nitric acid plant during the past six months.
Coffeyville is still considering a $40 million expansion that would increase UAN capacity by 50 percent, to 1 million st.
Despite lower production in the first half, the company noted that overall its capacity utilization has been up in the past three years. For 2002-2004 the gasifier, ammonia, and UAN capacity was 87, 75.5, and 89.9 percent, respectively. For 2005-June 2007, it was 94.4, 94.9, and 117.2 percent, respectively. However, for the first half it was off, at 90.6, 84.9, and 112.2 percent, versus the year-ago 97.3, 103.2, and 120.9 percent.
For the calendar years 2005 and 2006, as well as the first six months of 2007, the top five ammonia customers represented 55.2, 51.9, and 74.3 percent of ammonia sales, while the top five UAN customers represented 43.1, 30.0, and 38.8 percent. During the first six months of 2007, the top two ammonia buyers were Brandt Consolidated Inc. at 20.1 percent and MFA Inc. at 20.8 percent, while the top UAN buyers were ConAgra Fertilizer at 19.5 percent and Interchem at 8.6 percent. For the year ending Dec. 31, 2006, Brandt and MFA accounted for 22.2 and 13.1 percent of ammonia purchases, while ConAgra and Agriliance accounted for 8.4 and 6.3 percent of UAN.
In the meantime, the owners of Coffeyville are in the midst of an IPO to sell $375 million shares of the company under the name CVR Energy Inc., based in Woodland, Texas (GM May 21, 2007, p. 1).
As for June 30, 2007, Coffeyville had $773.1 million in term loans and $150 million in funded letters of credit outstanding under its credit facility and availability of $76.2 million under revolving credit facility. In August, company subsidiaries entered into three additional credit facilities: a $25 million secured term facility and a $25 million unsecured term facility, both of which are fully drawn, and a $75 million unsecured facility, of which none was outstanding as of Aug. 31, 2007.