Petroleum Business
We operate one of the seven fuels refineries located in the mid-continental
U.S. We produce at a throughput of 100,000 barrels per day (bpd), which accounts
for approximately 15% of those fuels refineries' production. Our cracking/coking
refinery has a modified Solomon complexity of approximately 8.8 and Nelson
complexity of approximately 9.7, making ours one of the most complex refineries
in our region. Our refinery's high level of complexity allows us to process
heavier, less expensive, crude oil compared to competitors with less complex
facilities, and still produce a high percentage of high-value, clean
transportation fuels such as gasoline and diesel. The current excess
availability of heavy crude oil in world markets provides us a significant cost
advantage over our less complex peers. During the nine months ended
September 30, 2004, our heavy and medium sour crude processing capacity was
approximately 40% to 50% of our throughput, and high-value products represented
approximately a 94% product yield on a crude oil basis.
We primarily target a diverse customer base in the Midwestern states where
regional demand for petroleum products has exceeded regional refining
production. As a result of our geographic location, we do not incur the high
cost of transporting refined products to customers in the Midwest compared to
refiners located outside the Midwest. Consequently, we estimate our region's
refining margins have exceeded Gulf Coast refining margins by approximately
$1.93 per barrel on average for the last four years. All of our non-gathered
crude is purchased through a credit intermediation agreement, which mitigates
crude pricing risks and allows us to reduce our inventory position. We also
derive additional
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revenue by leasing storage and charging for terminalling services at
Phillipsburg, Kansas, on a throughput basis to third parties in need of asphalt
and refined fuels.
Nitrogen Fertilizer Business
We operate the only nitrogen fertilizer plant in North America utilizing a
coke gasification process to generate hydrogen feedstock that is further
converted to ammonia for the production of nitrogen fertilizers. By using
petroleum coke rather than natural gas as a raw material, we currently have a
significant cost advantage over other North American natural gas based
fertilizer producers. In addition, we benefit economically from high prevailing
natural gas prices because fertilizer prices tend to rise with natural gas
prices. We estimate that our cost advantage over natural gas based fertilizer
producers is realized when natural gas prices are in the range of $1.50 to $2.50
per million Btu and above. This level is generally low by historical industry
prices and our cost advantage is more pronounced at current natural gas prices,
which have generally fluctuated between $5.00 and $8.00 per million Btu since
the end of 2003.
We obtain approximately 80% of the petroleum coke we use at our nitrogen
fertilizer plant from our adjacent refinery. The use of coke as a raw material
in our fertilizer plant also provides a superior value to our refinery's coke,
which would otherwise be sold at significantly lower economic value, as is the
current practice in the industry. Any coke not obtained from our oil refinery is
readily available and purchased on the open market. Our plant produces
approximately 370,000 tons per annum of ammonia. We upgrade approximately
two-thirds of our ammonia into approximately 638,000 tons per annum of high
value UAN, bringing salable tonnage to approximately 755,000 tons per annum of
finished product. As the largest single train UAN production facility in North
America, our UAN production represents 5.6% of U.S. demand. Our nitrogen
products are delivered by trucks and our own fleet of rail cars to retailers and
distributors in the mid-continental agricultural and industrial markets and to
certain locations served by the Union Pacific (UP) railroad. Our nitrogen
fertilizer customers are located in close proximity to us, enabling us to avoid
intermediate, transfer, storage, barge freight, or pipeline freight charges. As
a result, we believe we enjoy a freight advantage over U.S. Gulf Coast ammonia
importers of approximately $65 per ton and over U.S. Gulf Coast UAN importers of
approximately $37 per ton. Such cost differentials represent a significant
portion of the market price of these commodities. For example, since the end of
2003, ammonia prices have fluctuated between $268 and $329 per ton, and UAN
prices have fluctuated between $156 and $195 per ton.
Market Trends
We have identified several key factors we believe lead to a favorable
outlook for the refining and nitrogen fertilizer industries for the next several
years.
For the refining industry, these factors include:
º •
º The supply and demand fundamentals of the domestic refining industry
have improved since the 1990s, and are expected to continue as the
demand for refined products continues to exceed increases in refining
capacity in the U.S.
º •
º Continued excess availability of lower cost sour and heavy sour crude
oil is expected to continue to provide a cost advantage to complex
refiners with the ability to process these crude oils.
º •
º Increasing reliance on imports to satisfy refined products demand,
especially gasoline, and lower ability to deliver refined products due
in part to varying product specifications from state to state will
favor regional refiners with transportation cost advantages.
º •
º More products based on new and evolving fuel specifications, including
ultra-low sulfur content, reduced vapor pressure, and the addition of
oxygenates such as ethanol, will require refiners to blend and process
these boutique fuels and exert pressure on product availability.
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º •
º High capital costs, excess capacity, and environmental regulatory
requirements have limited the construction of new refineries in the
U.S. over the past thirty to forty years. No new major refinery has
been built in the U.S. since 1976. More than 150 small and
unsophisticated refineries, however, have been shut down in recent
years.
For the nitrogen fertilizer industry, these factors include:
º •
º Persistently high natural gas prices, a deficit in natural gas supply
and increased demand for natural gas in North America as an
environmentally friendly fuel are expected to result in reduced
production of natural gas based nitrogen fertilizer products in the
U.S. Imports of nitrogen fertilizer product will only partially
address this shortfall due to the lack of surplus of natural gas and a
shortage of fertilizer transportation infrastructure, such as
terminals, pipelines, barges and railcars. These factors will help
maintain high nitrogen fertilizer prices in the central Midwestern
U.S., or the U.S. farm belt, the largest market for nitrogen
fertilizer products in the U.S.
º •
º The combined impact of a growing world population, improving diets,
and low grain inventories will drive grain prices and productions
worldwide and consequently drive high nitrogen and nitrogen-based
fertilizer prices in order to stimulate increased grain production.
º •
º Continued high prices of petroleum and natural gas will result in a
cost preferential position for coke gasification technology.
Competitive Strengths
Strong Oil Refining Industry Fundamentals
We believe attractive demand and supply dynamics for refined products favor
us because of our ability to receive and process crude efficiently, produce
high-value products, and transport our refined products cost-effectively to our
customers. Throughout the U.S., expected annual increases in demand continue to
exceed estimated increases in refining capacity. There has also been a shortage
of refined products as evidenced by inventories of refined products, especially
gasoline, below their historical averages. These nationwide trends are more
pronounced in our marketing region, where demand for refined products has
exceeded refining production by approximately 38% since 1997.
Strong Nitrogen Fertilizer Industry Fundamentals
The combined impact of growing world population and low grain inventories
results in rising grain prices and strong projections for acres of corn and
wheat planted in North America, which we believe will drive the demand for
nitrogen fertilizer. Consequently, we expect high nitrogen fertilizer prices to
prevail in North America for the foreseeable future. This projection is further
supported by strong natural gas prices, a deficit in North American ammonia and
UAN production and a shortage of infrastructure, such as pipelines, barges, and
railcars that are needed to transport imported products into the mid-continent
market where nitrogen fertilizer is primarily consumed. The total UAN capacity
of our nitrogen fertilizer business is well suited to reach into premium
agricultural markets in Kansas, Missouri, Nebraska, Iowa, Illinois and Texas.
Regional Focus and Strategic Location
As one of the seven fuels refineries located in the Midwest, we are located
in close proximity to our customers and we benefit from favorable crude oil
supply and product distribution logistics, including access to pipelines. As a
result, we do not incur high transportation costs. We believe our low
transportation costs enable us to capture higher margins than similar refineries
outside the Midwest. We have ready and economical access to international crudes
available in the U.S. Gulf Coast through the Seaway pipeline, which currently
has excess capacity available, and potentially in Canada through a
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proposed future pipeline connection. In addition, our favorable plant location
relative to end users of ammonia and UAN, as well as high product demand
relative to production volume allow us to target freight-advantaged destinations
in the U.S. farm belt.
Efficient, Modern Asset Base
Since 1994, approximately $188 million has been invested to modernize our
oil refinery to make it one of the most advanced in our region and to meet
environmental regulations. Similarly, between 1999 and 2002, approximately
$370 million was invested to create our coke gasification facility. Our nitrogen
fertilizer plant's gasification process uses less than 1% of natural gas used by
natural gas based nitrogen fertilizer plants and emits significantly less
pollutants during normal operations compared to other nitrogen fertilizer
facilities.
Low Input and Operational Costs
Our refinery is capable of processing a broad array of crude oils from both
foreign and domestic sources, with approximately 40% to 50% of its feedstock
comprised of heavy and medium sour crude. As a result, we believe we are well
positioned to benefit from the increasing share of global crude oil production
represented by heavy sour crude oil, which tends to be less expensive than
lighter, sweeter types of crudes and contributes to higher margins. In addition,
we estimate that our fertilizer plant, which has lower feedstock costs and
capital requirements than natural gas based fertilizer plants, retains its
competitive advantage at natural gas prices in the range of $1.50 to $2.50 per
million Btu and above. This price level is generally low by historical industry
standards and our cost advantage is more pronounced at current natural gas
prices, which have generally fluctuated between $5.00 and $8.00 per million Btu
since the end of 2003.
Experienced Management Team
We have a highly experienced management team, each with an average of over
23 years of industry experience. Our management compensation is directly tied to
achieving certain performance objectives. Under the leadership of our chief
executive officer, Philip L. Rinaldi, we have made significant operational
improvements, which have reduced operating costs and increased stockholder
value.
Our Business Strategy
Our goal is to continue to be a premier independent refiner and marketer of
high-value, clean transportation fuels and producer of ammonia and UAN. We
believe that this offering will strengthen our ability to execute the following
strategic objectives:
º •
º We intend to continue to take advantage of favorable supply and demand
dynamics in the Midwest by capitalizing on our position as one of the
largest refiners in the mid-continental U.S. and growing organically.
º •
º We intend to improve our competitive position in our refining and
fertilizer operations by selectively investing in high-return projects
that enhance our operating efficiency and expand our capacity while
rigorously controlling costs.
º •
º We intend to increase our sales and supply capabilities of boutique
fuels, UAN, and other high-value products, while finding cheaper
sources of raw materials, such as crude oil from Canada.
º •
º We intend to maximize our location and transportation cost advantages
and continue to focus on being a reliable, low-cost supplier of our
products to our existing customers and identify new commercial
customers.
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º •
º We intend to continue to devote significant time and resources toward
improving the reliability, safety and environmental performance of our
operations and build on our status as a premier employer in
Southeastern Kansas, serving as a beneficial economic presence in our
communities and with our employees.
Our History
Prior to March 3, 2004, our assets were operated as a small component of
Farmland Industries, Inc. (Farmland), an agricultural cooperative. Farmland
filed for bankruptcy protection on May 31, 2002. Coffeyville Resources, LLC, a
subsidiary of Coffeyville Group Holdings, LLC, won the bankruptcy court auction
for Farmland's petroleum business and a nitrogen fertilizer plant and completed
the purchase of these assets on March 3, 2004. Throughout this prospectus we
refer to this purchase as the Transaction. Prior to consummation of the
Transaction, we expended significant time and money preparing for our proposed
post-closing implementation of several key strategic initiatives that we
believed would significantly enhance our competitive position and improve our
financial and operational performance following the Transaction. Specifically,
the following initiatives were implemented:
º •
º We contracted to construct a crude pipeline which would enable us to
control our crude oil supply chain from Cushing, Oklahoma, a major
mid-continental hub, to Coffeyville, at a favorable economic cost to
us.
º •
º We negotiated new collective bargaining agreements with the existing
unions which would enable us to improve the overall work force and
reward our employees for increasing productivity and diversifying
their skills.
º •
º We negotiated new agreements with respect to potential environmental
liabilities with the United States Environmental Protection Agency
(EPA) and the Kansas Department of Health and Environment (KDHE) and
significant insurance coverage for certain historical and potential
future liabilities.
º •
º We negotiated a long-term electric supply agreement with the City of
Coffeyville.
º •
º We renegotiated a number of key supplier contracts on favorable terms.
º •
º We identified a new management team, consisting of experienced
non-Farmland industry managers as well as certain key Farmland
employees.
Following the consummation of the Transaction, we significantly improved our
coke gasifiers' performance and optimized operations at our nitrogen fertilizer
plant, enabling us to be one of the top performers in our industry. We have also
reduced operating costs at our refinery.
Our Structure
All information in this prospectus assumes that prior to this offering,
Coffeyville Group Holdings, LLC will contribute the stock of its subsidiaries to
us and we will issue 74,852,941 shares of common stock to Coffeyville Group
Holdings, LLC. Prior to the contribution of stock by Coffeyville Group Holdings,
LLC and our issuance of common stock to Coffeyville Group Holdings, LLC, we
anticipate that we will seek a waiver from the lenders under our senior secured
credit facility permitting this transaction. See "Description of Our Senior
Secured Credit Facility."
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