JOHN R. THOMAS
Direct (503) 294-9448
jrthomas@stoel.com
May 25, 2006
VIA EDGAR AND OVERNIGHT COURIER
Ms. Pamela A. Long
Assistant Director
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Mail Stop 7010
Washington, D.C. 20549
RE: VERASUN ENERGY CORPORATION
AMENDMENT NO. 2 TO FORM S-1
FILED MAY 23, 2006
FILE NO. 333-132861
Dear Ms. Long:
This letter is the response of VeraSun Energy Corporation (the "Company") to the
Staff's comments to the above-referenced Amendment No. 2 to Form S-1. The
Company has included each of the Staff's comments from its comment letter dated
May 24, 2006 and the Company's responses below.
Dilution, page 25
1. PLEASE DISCLOSE AND TELL US HOW YOU CALCULATED YOUR ADJUSTED NET
TANGIBLE BOOK VALUE OF $352.9 MILLION AS OF MARCH 31, 2006.
The Company has made the requested revisions. Please refer to page 25
of Amendment No. 3 to the Company's Registration Statement on Form S-1
("Amendment No. 3").
Principal and Selling Shareholders, page 78
2. WITH RESPECT TO TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA,
WE RE-ISSUE COMMENT NUMBER 39 FROM OUR LETTER DATED APRIL 27, 2006.
PLEASE DISCLOSE THE FOLLOWING:
Pamela A. Long
May 25, 2006
Page 2
o THAT THE SELLING SHAREHOLDER PURCHASED IN THE ORDINARY COURSE OF
BUSINESS; AND
o THAT, AT THE TIME OF PURCHASE OF THE SECURITIES TO BE RESOLD, THE
SELLER HAD NO AGREEMENTS OR UNDERSTANDINGS, DIRECTLY OR
INDIRECTLY, WITH ANY PERSON TO DISTRIBUTE THE SECURITIES.
IF THIS SELLING SHAREHOLDER IS UNABLE TO MAKE THESE REPRESENTATIONS,
PLEASE STATE THAT THEY ARE UNDERWRITERS.
The selling shareholder represented to the Company that the selling
shareholder purchased the warrant in the ordinary course of business
and, at the time of purchase, had no agreements or understandings,
directly or indirectly, with any person to distribute the warrant or
the underlying common stock.
Financial Statements for the Quarter Ended March 31, 2006
Note 4 -- Stock-Based Compensation, page F-36
3. WE HAVE REVIEWED YOUR RESPONSE TO COMMENT NINE. PLEASE PROVIDE US WITH
A MORE DETAILED ANALYSIS TO HELP US UNDERSTAND THE TIMING OF THE
INCREASE IN THE VALUE OF YOUR COMMON STOCK FROM $5.16 PER SHARE IN
LATE JANUARY 2006 TO THE LOW END OF THE OFFERING RANGE OF $18 AS OF
MAY 23. PLEASE IDENTIFY THE TIMING OF SPECIFIC EVENTS INDICATING THE
INCREASE IN VALUE. PLEASE ALSO TELL US THE DATE OF THE INITIAL MEETING
WITH YOUR UNDERWRITERS AND YOUR DECISION TO UNDERTAKE AN INITIAL
PUBLIC OFFERING.
The $5.16 exercise price used for the January 27, 2006 option award
was equal to the per share purchase price received in the November 30,
2005 offering of $90.3 million of common stock. The use of the same
price also reflected continuing uncertainty at that time regarding the
emergence of the ethanol industry, the extent to which blenders and
refiners would adopt ethanol as a replacement for MTBE and volatility
of ethanol prices.
At its meeting on January 27, 2006, the Board of Directors received
its first formal presentation from Morgan Stanley & Co. Incorporated
and Lehman Brothers Inc., the managing underwriters, about the
possibility of making a public equity offering. On March 22, 2006, the
Board authorized the filing of the registration statement and other
steps relating to the proposed public offering.
Key events in the ethanol industry over the past ten months include:
Pamela A. Long
May 25, 2006
Page 3
o August 8, 2005 -- President Bush signs the Energy Policy Act of
2005 (the "Energy Policy Act") into law. The Energy Policy Act
provides for, among other things, Renewable Fuels Standards that
create stated minimums for renewable fuel usage beginning in
2006. The Energy Policy Act also eliminates the mandated use of
oxygenates and does not provide any liability protection for
blenders to ward off liability concerns regarding the use of
methyl-tertiary butyl ether ("MTBE"), but does not ban the use of
MTBE.
o January 29, 2006 -- In his State of the Union address, President
Bush announces his support for renewable fuels and particularly
ethanol. Shortly thereafter, several national publications issue
articles about the ethanol industry.
o February 2006 -- Colonial Pipeline, a supplier of gasoline to the
east coast, announces it will not ship MTBE-blended gasoline past
May 5, 2006. Later this month, Colonial Pipeline reverses its
decision and declares it will continue to support the shipment of
MTBE-blended gasoline. This reflects the continuing uncertainty
regarding the phase-out of MTBE.
o March 2006 -- Some Northeast gasoline suppliers announce they
will continue to use MTBE rather than ethanol beyond May 5, 2006,
again reflecting continuing uncertainty regarding the phase-out
of MTBE.
o April 25, 2006 -- President Bush addresses the Renewable Fuels
Association on the importance of the ethanol industry to the
United States' energy policy. Significant positive press ensues.
o May 5, 2006 -- As part of the Energy Policy Act, the oxygenate
requirement expires. As a result, blenders begin using ethanol as
a replacement for MTBE nationwide because of health and liability
concerns while still meeting various state and federal emissions
standards. While the ethanol industry had expected the phase-out
of MTBE and increased usage of ethanol after the passage of the
Energy Policy Act, there was an abrupt shift by blenders and
refiners in favor of ethanol over MTBE.
o May 19, 2006 -- The top three U.S. automakers address Congress in
favor of the increased production of flexible fuel vehicles
(which operate on E85 fuel) and endorse a plan that would require
renewable fuels to constitute 25% of the U.S. transportation
energy needs by 2025.
Pamela A. Long
May 25, 2006
Page 4
The net result of the events described above has been a steep increase
in the price of ethanol between March 31, 2006 and May 24, 2006. The
following chart shows the Chicago Board of Trade futures prices for
June 2006 delivery contracts in recent periods:
[CHART]
As illustrated above in the CBOT data, ethanol futures prices
increased dramatically in May 2006. As a result of high prices and
strong demand for ethanol, the Company significantly increased its
forecasted results for the year. This increase, combined with
increased investor interest in ethanol, resulted in the higher
expected valuation and, consequently, the anticipated price range for
the offering.
4. PLEASE TELL US HOW YOU DETERMINED THE CHARGE RECORDED IN THE FIRST
QUARTER RELATED TO THE PUT WARRANT, INCLUDING THE VALUE OF THE
UNDERLYING STOCK USED IN THE CALCULATION OF THE VALUE OF THE PUT
WARRANT AS OF DECEMBER 31, 2005 AND MARCH 31, 2006. IN YOUR RESPONSE,
PLEASE ADDRESS THE IMPACT OF THE INCREASE IN THE VALUE OF YOUR COMMON
STOCK DURING 2006 ON YOUR ACCOUNTING FOR THE PUT WARRANT. IN THIS
REGARD, WE NOTE THAT DURING THE FIRST QUARTER OF 2006 YOU RECORDED A
CHARGE RELATED TO THE INCREASE IN THE VALUE OF YOUR COMMON STOCK OF
$0.051 PER SHARE.
Pamela A. Long
May 25, 2006
Page 5
As discussed yesterday with the Staff and as illustrated in the
materials submitted to the Staff yesterday, the valuation of the put
warrant at December 31, 2005 was based upon a third-party valuation of
our common stock of $6.33 per share (which does not include any
discount for liquidity of a private company stock). For the valuation
as of March 31, 2006, the Company used the same valuation methodology
and updated pricing assumptions to estimate the value of the common
stock at $6.38 per share, with a corresponding increase in forecasted
EBITDA and resulting increase in the valuation of the put warrant.
This relatively minor change in value reflects improving market
conditions, but also takes into account uncertainty around that
timeframe regarding the emergence of the ethanol industry, the extent
to which blenders and refiners would adopt ethanol as a replacement
for MTBE and volatility in ethanol prices, as discussed in the
Company's response to comment no. 3 above.
5. PLEASE TELL US WHAT PORTION OF THE NOVEMBER 30, 2005 OFFERING OF YOUR
COMMON STOCK WAS TO RELATED PARTIES.
Of the $90.3 million of common stock sold in the November 30, 2005
offering, approximately $58 million was purchased by the Company's
directors, officers, Bluestem Funds (an existing private equity
investor in the Company) and their affiliates. Eos Funds, a group of
funds managed by a private equity firm, after completing their own due
diligence, made their first investment in the Company, purchasing for
cash $30 million of the common stock offered. Teachers Insurance and
Annuity Association of America, a large institutional investor,
purchased substantially all of the remainder of the offered common
stock for cash.
6. PLEASE PROVIDE US WITH ADDITIONAL INFORMATION TO HELP US UNDERSTAND
HOW YOU DETERMINED THE AMOUNT OF THE $29.5 MILLION CHARGE TO BE
RECORDED IN CONNECTION WITH YOUR INITIAL PUBLIC OFFERING RELATED TO
THE MANAGEMENT BONUS, THE PUT WARRANT, AND THE ACCELERATION OF
OPTIONS, WARRANTS AND RESTRICTED STOCK. PLEASE ADDRESS EACH COMPONENT
OF THIS CHARGE INDIVIDUALLY.
The $29.5 million charge consists of the following three items:
o Put warrant expense of $14.9 million -- The Company estimates it
will incur $14.9 million in expense in connection with the put
warrant, which is exercisable for 1,180,000 shares of common
stock. This expense will be incurred to mark the put warrant to
the assumed initial public offering price of $19.00 per share. As
of March 31, 2006, the value of the put warrant was
Pamela A. Long
May 25, 2006
Page 6
estimated based upon a $6.38 per share valuation, as noted in the
Company's response to comment no. 4 above.
o Compensation expense of $1.3 million for the grant of shares to
non-management employees -- In connection with the completion of
the offering, the Compensation Committee has approved grants to
certain non-management employees, totaling $1.3 million of shares
of common stock. Based on an assumed initial public offering
price of $19.00 per common share, this would equate to 66,789
shares of common stock. The estimated compensation expense is
based upon the total dollar amount of the shares being granted.
o Compensation expense of $13.3 million for the vesting of
outstanding options and warrants -- In connection with the
completion of the offering, substantially all of the outstanding
options and warrants to purchase the Company's common stock will
become immediately exercisable due to accelerated vesting
provisions within those instruments. For options and warrants
which had a measurement date prior to March 31, 2006, the
remaining unrecognized compensation costs of $4.1 million, as
previously computed under FAS 123R as of March 31, 2006, was
included as the amount to be expensed at the initial public
offering date. For 640,041 stock options as to which the initial
public offering date will become the measurement date, the
Black-Scholes model was used to determine the fair value of the
options, based upon the assumed initial public offering price of
$19.00 per common share, resulting in an additional expense of
$11.3 million, for a total of $15.4 million in expense related to
accelerated vesting of options and warrants. A 35% tax benefit
related to the non-qualified stock options was included in the
computation, for a tax benefit of $2.1 million.
Exhibits
7. PLEASE NOTE THAT WE WILL REVIEW THE LEGALITY OPINION WHEN IT IS FILED
AND MAY HAVE COMMENTS. PLEASE ALLOCATE SUFFICIENT TIME TO PERMIT OUR
REVIEW PRIOR TO REQUESTING ACCELERATION OF EFFECTIVENESS.
The Exhibit 5.1 legal opinion has been filed with Amendment No. 3.
8. PLEASE FILE THE AGREEMENT WITH AMERICAN MILLING, LP AS AN EXHIBIT TO
THE REGISTRATION STATEMENT OR TELL US WHY SUCH AGREEMENT NEED NOT BE
FILED.
Pamela A. Long
May 25, 2006
Page 7
The Company does not believe the agreement with American Milling, LP
("American Milling") is a material contract for purposes of Form S-1
because the Company has no legal obligation to pay consideration to
American Milling unless the Company accepts a development site. The
Company is uncertain as to how many sites it will accept from American
Milling, if any.
The Company is eager to commence marketing of the offering this week prior to
the Memorial Day holiday weekend. Please address any questions or comments you
may have about this letter or Amendment No. 3 to me at (503) 294-9448.
Very truly yours,
/s/ JOHN R. THOMAS
John R. Thomas
cc: Mr. Chris Edwards, Special Counsel
Mr. Matt Franker, Staff Attorney
Mr. Ernest Greene, Staff Accountant
Mr. Scott Watkinson, Senior Staff Accountant
Mr. Donald L. Endres
Mr. Danny C. Herron
Mr. John M. Schweitzer
Mr. John J. Sabl