Fax: 212.859.4000
michael.levitt@friedfrank.com
September 6, 2007
Roger Schwall
Assistant Director
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Dear Mr. Schwall:
This letter sets forth the response of CVR Energy, Inc. (the “Company” or “CVR Energy”) to the comment letter, dated June 28, 2007, of the staff of the Division of Corporation Finance (the “Staff”). In order to ease your review, we have repeated each comment in its entirety in the original numbered sequence. All references herein to page numbers are to page numbers in Amendment No. 8 to the Registration Statement (the “Registration Statement”). This letter is being filed with Amendment No. 8 to the Company’s Registration Statement.
The pricing information included in Amendment No. 7, which the Company filed on June 5, 2007, assumed a price per share of $20.00 per share. Amendment No. 8 continues to make this same assumption. However, the ultimate pricing is subject to market conditions and deliberations between the Company and the underwriters, and may be higher or lower than the pricing included in the current amendment. If the assumptions underlying the pricing change subsequent to the date hereof, due to market conditions or otherwise, the Company may change the pricing assumption in a later amendment.
Prospectus Summary
Nitrogen Fertilizer Limited Partnership, page 5
Response: The Company has added additional cross references to definitions of technical or unfamiliar terms. See the revised disclosures related to the terms “adjusted operating surplus” (on pages 5 and 44), “master limited partnership” (on page 6), “operating surplus” (on page 45) and “phantom points” (on page 42). In addition, see the revised disclosure relating to the terms “netback” (on page 81), “blendstocks” and “feedstocks” (both on page 97), and “coker unit” and “crude unit” (both on page 98).
Response: The Company has revised the disclosure on page 5 in order to explain what the quarterly distribution of $0.4313 per unit represents.
The $0.4313 amount is principally a contractual arrangement used to determine when the Partnership’s managing general partner’s incentive distribution rights become payable. As disclosed on page 5, the Partnership has not yet established a distribution policy. Any distribution policy likely will be established at the time the Partnership consummates an initial public or private offering (if any) and the initial quarterly distribution level at that time may be set at a level higher or lower than $0.4313, depending on market conditions at the time of the initial offering (if any) and Partnership cash flows expected at such time. Before the earlier of (a) a sale by us or the Partnership of units and (b) such time as the managing general partner begins receiving distributions on the IDRs, the Partnership will distribute all available cash to the Company. However, the Partnership’s limited partnership agreement provides that the managing general partner will be entitled to payments on its incentive distribution rights only after the Company has received a quarterly distribution of $0.4313 per unit. Accordingly, the $0.4313 quarterly distribution amount is a contractual arrangement between the Company and the managing general partner which serves to establish the Company’s and the managing general partners’ relative rights to quarterly distributions from the Partnership.
Response: The Company has added additional disclosure on page 224 indicating how the number of shares to be issued to Mr. Lipinski will be determined. A cross reference to this additional disclosure has been added in the footnote on page 10.
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Response: The Company has added a footnote to the chart on page 11 in order to clarify the nature of CVR GP, LLC’s interest in CVR Partners, LP. CVR GP, LLC, which the Company refers to as “Fertilizer GP,” is the managing general partner of CVR Partners, LP (the Partnership) and owns all of the incentive distribution rights in the Partnership which, over time, provide CVR GP, LLC with the right to receive increasing percentages of the Partnership’s cash flow. The incentive distribution rights held by CVR GP, LLC constitute its equity ownership interest in CVR Partners, LP.
Response: The Company has revised the chart on page 11 to show that three entities have economic interests in CVR Partners, LP. As indicated in the chart, these three entities are: CVR GP, LLC, which is the Partnership’s managing general partner and owns all of the incentive distribution rights; CVR Special GP, LLC, which is a special general partner and owns special GP units (99.9% of all special units); and Coffeyville Resources, LLC, which is the Partnership’s limited partner and owns special LP units (0.1% of all special units).
Response: The Company has expanded the disclosure on pages 42-3 in response to the Staff’s comment.
Response: The Company has clarified the disclosure on page 43 in response to the Staff’s comment.
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Response: The Company has revised the disclosure on pages 48-9 in response to the Staff’s comment.
Response: The Company has modified the disclosure on page 51 to indicate that the material risk related to the benefits of the limited partnership structure relate to the Partnership’s status, for federal income tax purposes, as a partnership following such time as the Partnership is publicly traded and that the Partnership will be required to obtain an opinion of counsel regarding such status at the time, if any, when the Partnership undertakes an initial public offering.
Response: The Company has revised the disclosure on page 53 in response to the Staff’s comment.
Response: The Company has revised the disclosure on page 62 in response to the Staff’s comment. As modified, the disclosure in the table gives effect to the two distributions.
Response: The Company has revised the unaudited pro forma condensed consolidated statement of operations on pages 65-6 to remove the pro forma adjustment.
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Response: The Company has revised the unaudited pro forma condensed consolidated statement of operations on pages 65-6 to remove the pro forma adjustment.
Response: The Company has clarified the disclosure on page 66 in note (f) to the unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2006. The 17,500 non-vested, restricted shares to be issued to two of the Company’s directors at the time of the offering are not considered outstanding at the time of the offering, as the shares are not vested and the directors will not have the power to vote or dispose of such shares. Therefore, the directors will not have beneficial ownership of such shares, and they are not included in the 81,641,591 shares outstanding as disclosed in the capitalization table on page 60. This is consistent with the pro forma weighted average shares, basic, as disclosed in the unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2006 on page 65, which does not include the 17,500 shares as outstanding. The difference between the pro forma weighted average shares, basic, and the pro forma weighted average shares, diluted, on page 65 is that the pro forma weighted average shares, diluted, includes the 17,500 non-vested, restricted shares.
Response: The Company has revised the Selected Historical Consolidated Financial Data on page 73 to include the balance sheet data at June 30, 2006.
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Response: The Company’s analysis of the primary beneficiary was performed considering the conditions which will exist under the terms of the Partnership at the time of CVR Energy’s initial public offering. As noted in the Company’s response to prior comment 19, those conditions indicate that the special general partner will be the primary beneficiary. The Company’s analysis supporting the conclusion that the special general partner will be the primary beneficiary did not consider future events, including those events that would require a reconsideration of the primary beneficiary noted in paragraph 15 of FIN 46R, that would change the conditions which will exist at the time of CVR Energy’s initial public offering. The Company recognizes that future events such as the managing general partner causing the Partnership to pursue an initial public offering and the restructuring of the Company’s interest in the Partnership through the dilution of the Company’s special units to a subordinated status in connection with an offering by the Partnership will be events that will require the Company to reconsider the analysis of the primary beneficiary. However, had the Company considered the potential future impacts of an offering by the Partnership to the primary beneficiary analysis, the Company does not believe that the Partnership’s offering is an event that would cause the special general partner to fall below the level of absorbing the majority of the expected losses.
Response: As a result of the Company’s determination that the Cash Flow Swap does not qualify as a hedge for hedge accounting purposes under current generally accepted accounting principles in the United States, the Company’s periodic statements of operations reflect material amounts of unrealized gains and losses based on the increases or decreases in market value of the unsettled position under the Cash Flow Swap. As the crack spreads in the forward markets increase, indicating a positive impact for the economic outlook of the Company, the Company is required to record an unrealized loss in the Company’s statement of operations and, conversely, as the crack spreads in the forward markets decline, indicating a negative impact for the economic
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outlook of the Company, the Company is required to record an unrealized gain in the statement of operations.
It is this inverse relationship between the economic outlook for the underlying business (as represented by the forward market crack spread levels) and the income impact of the unrecognized gains and losses that is referred to as the “inherent nature of the Cash Flow Swap.” As a result of being less than 60% hedged for future periods, assuming that the refinery is operating commercially reasonably, the Company will benefit in periods of high crack spreads on 100% of its physical production of which less than 60% is impacted by the Cash Flow Swap. For this reason, if the economic climate which results in the Company recording an unrealized loss on the Cash Flow Swap persists through the maturity of the Cash Flow Swap, the Company will benefit from the high crack spreads on significantly more volume than is negatively impacted by the Cash Flow Swap.
Response: The Company has expanded the disclosure on page 192 in response to the Staff’s comment.
Response: The Company has expanded the disclosure of the named executive officers’ individual performances on pages 193-4 in response to the Staff’s comment.
Response: The Company has clarified on page 194 that the industry practice information is the peer group review.
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Response: The Company has expanded the disclosure of individual performance of the named executive officers on pages 193-4 and has added disclosure regarding 2006 expectations on page 195.
Response: The Company has expanded the disclosure on page 195 under “Annual Bonus” in response to the Staff’s comments.
Response: The Company has modified the disclosure on page 196 in response to the Staff’s comments.
Response: The Company has modified the disclosure on page 196 in response to the Staff’s comments.
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Response: The Company has expanded the disclosure on pages 196-7 in response to the Staff’s comments.
Response: The Company has modified the disclosure on page 197 in response to the Staff’s comments.
Response: The Company has modified the disclosure on page 200 to clarify that the Partnership will reimburse the Company, in accordance with the services agreement, for compensation and benefits attributed to services provided to the Partnership. In addition, the Company has modified the disclosure on page 200 to clarify the Company’s involvement in the Profit Bonus Plan.
Response: The dollar amounts included in the Summary Compensation Table for the phantom points reflect the compensation expense recognized for financial statement purposes in 2006 in accordance with FAS 123®. The dollar amounts included in the Grants of Plan-Based Awards Table for phantom points reflect the full estimated fair value as of December 31, 2006 in accordance with FAS 123® related to the points granted in 2006.
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Response: The Company has revised the disclosure on page 230 in response to the Staff’s comment. All of the entities described on page 230 are now also included in the chart on page 11. In addition, rather than having the limited partner interests held by CVR LP, LLC, a subsidiary of Coffeyville Resources, LLC, the Company has elected to have the limited partner interests held directly by Coffeyville Resources, LLC and will not form CVR LP, LLC. Therefore, the Company has removed all references to CVR LP, LLC from the Registration Statement.
Response: The Company has removed references to the third party valuation firm from the Registration Statement. Rather than referring to a third party valuation firm, the Company has included additional disclosure on pages 231-2 regarding the methodology used to value the managing general partner interest. The Company has also filed the consent of Blue Johnson Associates as exhibit 23.4 to the Registration Statement.
Response: The Company has supplementally provided the Staff with copies of the price projections as requested.
Response: The Company has expanded the disclosure on pages 232 and 239 in response to the Staff’s comment.
In addition, the Company supplementally advises the Staff that the quarterly distribution of $0.375 and the triggering point of $0.4313 per unit were set by the Company and the Partnership after estimating sustainable cash distribution levels by the Partnership and discussion with investment bankers regarding current market standards for master limited partnerships. With 30,333,333 units outstanding, a quarterly distribution of $0.375 would require cash available for distribution of approximately $45 million annually. The Company determined that this level of
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distributions is consistent with its nitrogen fertilizer business’s historical cash flow and in line with distribution levels of other master limited partnerships. The triggering point of $0.4313 is 115% of $0.375. The Company understands that the market standard in master limited partnerships is that the initial triggering point is 115% of the initial distribution level.
Response: The Company has modified the disclosure on page 11 to clarify that Fertilizer GP refers to CVR GP, LLC, the managing general partner of the Partnership.
Response: The Company has not completely considered the conversion of the special units into subordinated units because the conversion has not yet occurred and it is not expected to occur prior to or at the time of CVR Energy’s initial public offering. The Company has not, therefore, included any disclosures about the effect of the conversion in the footnotes to the Company’s financial statements. Also, as noted in the Company’s response to comment 16 above, the Company does not believe that an offering by the Partnership requiring the restructuring of CVR Energy’s interest in the Partnership through the change of the units to a subordinated status will be an event that would cause the Company’s interest to fall below the level of absorbing the majority of the expected losses.
The contribution of the fertilizer assets to the Partnership was considered as a transaction between entities under common control. The conversion potential was not considered relevant to that transaction as it had no impact or relevance to the determination that the entities were under common control.
The Company’s response to comment 38 below addresses how this conversion feature was considered in the determination of fair value of the interest to be sold to the managing general partner.
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Response: The response to prior comment number 38 used the term “dividends” because that response was addressing a corporation, CVR Energy, Inc., and corporations pay dividends. The disclosure on page 238 used the term “formal distribution policy” because that disclosure was discussing a partnership, CVR Partners, LP, and partnerships make distributions rather than pay dividends. A “distribution” for a partnership is equivalent to a “dividend” for a corporation.
Response: The Company has added additional disclosure on pages F-11 and F-12 in response to the Staff’s comment. The Company has not included a reference in the new disclosure to footnote (5) regarding the Company’s accounting for put and call rights, because the accounting for put and call rights described in that footnote are not applicable to the put and call rights relating to the managing general partner interest.
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Response: The Company has included additional disclosure on page F-11 in response to the Staff’s comment. The Company also deleted the reference to the third party valuation firm.
Response: The purchase price of $10.6 million for the managing general partner was principally determined by evaluating the projected cash distributions resulting from the managing general partner’s incentive distribution rights. Accretion of incremental value to the managing general partner will result from future actions of the managing general partner such as acquiring additional assets for the Partnership or in other ways increasing the cash flow generated by the Partnership. With respect to the four items specified in the Staff’s comment:
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Response: The outstanding shares of two of the Company’s subsidiaries held by an executive management member will be exchanged for shares in the Company’s stock at an equivalent fair value immediately prior to the consummation of this offering in accordance with the original terms of the award. Upon this exchange, the ownership of the shares will be in the Company rather than in subsidiary stock and, accordingly, will be reclassified from minority interest in subsidiaries to stockholders’ equity. The value recorded in stockholders’ equity will be the fair market value of the Company’s shares, as determined upon the offering price at the projected $20 per share. For purposes of the pro forma balance sheet, the estimated fair market value of these outstanding shares are included in stockholder’s equity as upon the effective date they will be shares owned of the reporting entity. Also, in order to apply the purchase method of accounting for the step-acquisition of the subsidiaries’ interests, the adjustments recorded in permanent equity for changes in fair value to the minority interest will be reversed out of permanent equity and the entries necessary to account for the appreciation in the net assets acquired will be recorded. For purposes of the pro forma balance sheet, we have accounted for the estimated appreciation of the respective percentages in the net assets acquired as a step-up in the basis of property, plant, and equipment.
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Should you have any questions or comments with respect to this filing, please call me at (212) 859-8735 or Stuart Gelfond at (212) 859-8272.
Sincerely,
/s/ Michael A. Levitt
Michael A. Levitt
cc: | Carmen Moncada-Terry (Securities and Exchange Commission) Jill Davis (Securities and Exchange Commission) Jennifer Goeken (Securities and Exchange Commission) John J. Lipinski (CVR Energy, Inc.) James T. Rens (CVR Energy, Inc.) Susan Ball (CVR Energy, Inc.) Edmund S. Gross (CVR Energy, Inc.) Peter J. Loughran (Debevoise & Plimpton LLP) Kevin Kaufman (KPMG LLP) |
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